Hurco Companies, Inc.
Annual Report 2019

Plain-text annual report

Report to Shareholders 2019 Overview 2019 was the second highest revenue year in Hurco’s 51- year history. Sales in North America set a new record. Sales were lower in Europe and Asia. Our industry is cyclical and we anticipated a slowdown after peaking in 2018. Our experience has taught us how to manage downturns and we see them as an opportunity to continue to develop new machine tools and software so that we will be prepared to take the company to the next level as our industry recovers. As we look to grow our business organically and through acquisitions, we continuously evaluate emerging technologies (mechanical, control and software) and acquisition opportunities that will allow us to fulfill our mission of providing machines and software to our customers that will enable them to grow their businesses. The acquisition of ProCobots, a small, innovative collaborative robot integrator, in the fourth quarter, and other automation solutions we are designing, builds on that mission and provides new opportunities for Hurco’s growth. Our business in 2019 was and continues to be impacted by the uncertainty surrounding global trade. While we were not affected directly by tariffs, many of our customers around the world were, which ultimately contributed to the slowdown of our business. We are a global company and our supply chain is global. In order for us to be competitive, we need the ability to trade with companies all over the world. We believe in free trade, but it must be fair. Global free trade is important to our strategic plans. We want to grow our business not only by developing new products internally and acquiring new businesses, but also through geographic expansion. We are a small company located in Indianapolis, Indiana, the center of the heartland, and yet we sell machines all over the world. We compete with companies worldwide, some much larger than us, and with our innovative, high quality machine tools, we can and often do win the order. Customers We are committed to our customers’ success. While we are proud to have our machine tools in the facilities of well-known brands such as Harley-Davidson, Caterpillar, Apple, etc., most of our customers are small businesses, often family-owned businesses, who count on us to deliver products equipped with technologies that are easy to learn, easy to use, and help them increase their manufacturing productivity. The ingenuity, resilience, and industriousness of our customers inspires all of us to work harder each day to help their businesses thrive. The expansion of our product offering to include useful automation is just another way we can help them be even more successful in the ever-changing, competitive landscape of high-mix manufacturing. 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. The collaborative relationship we have with our customers is a core competency that can’t be understated. Hurco is a relatively small company competing against much larger entities and these collaborative customer relationships have been a critical part of our sustained success in a highly cyclical industry. Profitability While top line revenue was the second highest in the company’s history at approximately $263 million, the slower cycle in Europe and Asia had a negative impact on our bottom line with net income of $17 million, or $2.55 per diluted share, compared to $21 million, or $3.15 per diluted share, last year. Operating profit decreased from 11% in 2018 to 8.6% this year. Going Forward We will continue to innovate products equipped with meaningful technologies that help our customers increase productivity and profitability. With labor shortages around the world, we know practical automation for our customers is key to helping them eliminate obstacles and increase productivity. Not only will we showcase these products at the International Manufacturing Technology Show that is held every two years in the USA, we will roll out new products and features for all machine tools in our brand portfolio. On behalf of everyone at Hurco, thank you to our existing customers for their loyalty and support. Thank you to our shareholders for believing in Hurco. 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, and adaptability—all for required sustained success. characteristics Michael Doar Chairman and Chief Executive Officer BR ANDS | PRODUCTS | TECHNOLOGIES To Our Shareholders: It has been ten years since I was given the opportunity to lead the operations and technical direction of Hurco. I have an inherent sense of pride about our company – specifically, the nearly 800 employees we have around the world and the culture we have developed. While I provide the vision for the development of our products and technology roadmap from which Hurco derives its revenue, it’s the people that make the difference between a good company and a great company. And, that is what I genuinely believe we have – and are continuing to build – in Hurco. A Bold and Balanced Strategy As I reflect on our achievements during a period of significant change over the last decade – achievements ranging from geographic and product line expansion, re-inventing ourselves through cutting-edge technologies, implementing a tiered branding strategy tightly coupled to our targeted acquisitions, year-over-year financial results and record revenue generation – it is truly remarkable how much we have accomplished. Given the unpredictable and cyclical nature of our industry, we know the importance of maintaining a strong balance sheet seeded with both organic investments to continuously advance our technology offerings and inorganic investments to reinforce our growth strategy through strategic acquisitions. Digital Revolution 2.0 As we embark on a new decade of change, the digital revolution has evolved to encompass all aspects of our lives and to change how we interact with the world around us – through voice recognition, the Internet of Things (IoT), Industry 4.0, Artificial Intelligence (AI), Virtual Reality (VR), and even Augmented Reality (AR). Each of these technologies (and many more) will be an influential part of manufacturing processes of the future and, almost certainly, instrumental to machine tool capabilities. We embrace these changes and technologies and intend to use them as tools to help our customers create and produce in a more meaningful, productive, and profitable manner. Many of our employees have witnessed monumental changes over the years – not only with respect to the digital revolution but also changes to who we have become, who we strive to be, and the multiple ways we can integrate emerging technologies into our products. Whether they’ve been with our company for forty years or four months, our employees’ ability to embrace change in the ever-evolving digital world and to harness capabilities to innovate for our customers continues to inspire me. The powerful passion our employees possess for what they do and their dedication to our customers – along with our distributors and partners who remain steadfast and true – serves as the catalyst for the sense of pride I have each day as the President and COO of Hurco. Targeted Acquisitions In 2013, we initiated investments in products, services, and technology by acquiring LCM Precision Technology, an Italian company at the forefront of the design of advanced components for machine tools. These components now serve as the backbone of many of our more advanced products – products where electro-mechanical boundaries have become indistinguishable. These technologies provide unprecedented improvements in our machine tools’ accuracy and precision. We then broadened our commitment to our customers in 2015, by acquiring the Takumi and Milltronics brands of CNC machines. Through these acquisitions, we expanded our product portfolio with diverse controls and opened up new markets, all the while maintaining the high level of service and innovation for which Hurco is known. We continue to address ongoing customer demands seeking higher productivity in complex manufacturing environments. To that end, this year, we acquired ProCobots, a company that specializes in automation for the high-mix manufacturing environment with collaborative robotic machine-tending solutions. Each acquisition has contributed to our strong underlying performance across our businesses and minimizes dependencies associated with economic or political volatilities in a single geographic region. More importantly, they all reinforce our core value of providing customers with advanced, easy-to-use technologies. A New Decade of Opportunity As we enter a new decade, we will continue the execution of our long-term strategic plan by yielding new products and adaptive technologies. We will expand our brands geographically – namely, Milltronics into Europe and Takumi into the US – and we will develop a worldwide distribution channel for our collaborative robotic machine-tending systems. Of course, we will also continue to identify and acquire value-added companies that can bring high impact results to both grow our revenues and minimize the impact of our industry’s cyclicality. We will continue to invest in new products, technologies, and, most importantly, in people. We hire good people not when they are needed, but when we find them. We pay good people not what we can, but what they deserve. We offer unprecedented healthcare benefits not because we have to, but because we want to and because it is the right thing to do. We promote and provide opportunity throughout our organization for all individuals—today’s engineer can become tomorrow’s President. I was once asked, if I could change anything, what would it be. I responded that I wish I could have started at Hurco earlier in my career. Now, let’s make up for lost time and continue our pursuit of making manufacturing an easier and more profitable enterprise for our customers. Thank you to each and every one of you for your continued support of Hurco – and for allowing me the privilege to continue to experience the genuine sense of pride I have in our business, in our people, and in what we do each day. Gregory S. Volovic President and Chief Operating Officer Hurco – Mind Over Metal Hurco CNC machines are powered by proprietary technology that increases customer productivity and profitability. We provide customers with reliable machine tools equipped with sophisticated technologies that simplify complex processes. The integrated Hurco control is the most versatile in the industry, supporting both industry standard programming and conversational programming. The Hurco brand includes twelve product lines of advanced CNC mills and lathes. Machining Centers and Turning Centers Milltronics 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. The Milltronics line is designed for excellent value with more standard features for the price versus market leaders. Machining Centers and Turning Centers Takumi 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 and lathes. The Takumi line is designed for high speed, high efficiency milling. Machining and Turning Centers LCM Precision Technology LCM designs and manufactures advanced components for machine tools, such as rotary tables, tilt tables, swivel heads, and electrospindles. Components and Accessories ProCobots – CNC Automation Done Right ProCobots provides automation solutions for high-mix/low-volume production. Designed to be easy to use, safe, and flexible, ProCobots solutions are standardized systems that can be integrated with any machine tool. Integrations include robots, grippers, material handling, and Industry 4.0-capable software and controls. ProCobots has two lines of flexible cell solutions and portable systems in addition to a variety of automation peripherals. Automation Systems Annual Report 2019 HURCO COMPANIES, INC. LEADERSHIP Board of Directors Corporate Officers and Division Executives Thomas Aaro Marketing Consultant (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 and Chief Operating Officer Cory Miller General Manager, Hurco North America Michael Doar Chairman, Chief Executive Officer Hurco Companies, Inc. Cynthia Dubin Member, UK Competition and Markets Authority (CMA) (2) Timothy Gardner Managing Director, Akoya Capital (3) Jay Longbottom Operating Partner, BERKS Group (2) Andrew Niner President, Niner Wine Estates(1) Richard Porter Private Equity Manager (1, 2) Janaki Sivanesan Attorney, Sivanesan Law (2) Gregory S. Volovic President and Chief Operating Officer Hurco Companies, Inc. 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) Sanjib Chakraborty General Manager, Hurco India Private, Ltd. (India) Phillippe Chevalier General Manager, Hurco S.a.r.l. (France) Wai Yip Lee General Manager, Hurco (S.E. Asia) Pte Ltd. (Singapore) Brian Knopp General Manager, ProCobots 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) Scott Yao General Manager, Ningbo Hurco Trading Co., Ltd. (Shanghai, China) Martin Lee, Luke Wang Vice General Managers, Hurco Manufacturing Limited (Taiwan) and Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) 1 Nominating and Governance Committee 2 Audit Committee 3 Compensation Committee 4 Presiding Independent Director CORPORATE INFORMATION Annual Meeting All shareholders are invited to attend our annual meeting, which will be held on Thursday, March 12, 2020, at 10:00 a.m. Eastern Daylight Time at Hurco’s Corporate Offices, One Technology Way, Indianapolis, IN. Transfer Agent Computershare Investor Services 150 Royall Street, Canton, MA 02021 Legal Counsel Corporate Law: Faegre Baker Daniels LLP Patent Law: Faegre Baker Daniels LLP 600 E. 96th Street, Suite 600, Indianapolis, IN 46240 Independent Auditors RSM US LLP 1 American Square, Suite 2800, Indianapolis, IN 46282 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. 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 2019 2018 High Low High Low $44.99 $31.96 $50.33 $40.41 $44.05 $37.57 $49.29 $38.30 $40.65 $33.49 $50.50 $42.85 $35.02 $31.07 $45.95 $38.08 January 31 April 30 July 31 October 31 There were approximately 110 holders of record of Hurco Common Stock as of December 13, 2019. Disclosure Concerning Forward- Looking Statements Certain statements made in this annual report may constitute “forward-looking statements” within the meaning of federal securities laws. The 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 are identified in Item 1A of the annual report on form 10K. 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 2019 $ 263,377 22,540 $ 17,495 $ $ 2.55 $ 241,106 $ 207,229 $ — $ 240,245 785 34.79 44.99 31.07 $ $ $ 2018 $ 300,671 33,796 $ 21,490 $ $ 3.15 $ 305,845 $ 194,632 $ 1,434 $ 222,853 800 40.74 50.50 38.08 $ $ $ 350 300 250 200 150 100 50 0 $300.7 $243.7 $263.4 2018 2017 Sales and Service Fees (Millions) 2019 250 200 150 100 50 0 $222.9 $240.2 $203.1 2018 2017 Shareholders’ Equity (Millions) 2019 35 30 25 20 15 10 5 0 $33.8 $20.9 $22.5 2017 2018 2019 Operating Income (Millions) HURCO COMPANIES, INC. ELEVEN-YEAR SELECTED FINANCIAL DATA (In thousands except per share data and number of employees) 2019 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. $263,377 186,169 54,668 22,540 784 23,324 5,829 $17,495 6,759 6,815 $2.57 $2.55 4,870 3,745 27,131 29.3% 8.6% 6.6% 7.6% $44.99 $31.07 $34.79 2019 $207,229 4.79 $301,065 — 240,245 0.0% $35.25 $0.696 785 $0.47 Annual Report 2019 2018 $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 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 $ — Annual Report 2019 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 $ — 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 $ — A History of Innovation Hurco founded by Edward Humston and Gerald Roch 1968 Hurco becomes publicly held company (Nasdaq: HURC) 1971 Hurco invents Conversational Programming Hurco Europe established 1976 1979 BMC machining centers introduced 1986 Hurco Germany established 1988 DXF Transfer invented MAX single- screen control introduced 1992 1996 1969 First product introduced (Autobend). Hurco exhibits first computer controlled back gauge. 1974 Hurco demonstrates first computer numerically controlled (CNC) mill at IMTS 1978 First CNC mill Introduced (KM1) 1984 UltiMax control introduced 1987 UltiMax 2 control introduced 1991 Hurco France established 1995 IMS Technologies established to oversee patent licensing 1997 VMX machining centers introduced Hurco Southeast Asia established Hurco opens new international headquarters UltiMax 3 control introduced WinMax control software released TMM turning centers with live tooling introduced SR 5-axis machining centers introduced Record sales 2006 TM and TMX Series expanded to include heavy- duty turning and multi-axis Hurco invents UltiMotion® Hurco China established 2010 UltiMax 4 control introduced WinMax Desktop software released 1998 2000 TM turning centers introduced 2004 Hurco acquires LCM USA machine assembly operation established MAX5 control introduced Hurco acquires Milltronics and Takumi HM horizontal machining centers introduced Record sales Hurco acquires ProCobots 2013 2015 2017 2019 1999 Hurco Italy established 2003 VM machining centers introduced 2005 Record sales 2008 Hurco India established Hurco Manufacturing Ltd established First Hurco 5-axis machine introduced TMX turning centers introduced U-Series 5-Axis machining centers expanded DCX double column machining centers introduced 2014 HBMXi boring mills introduced 2016 Record sales BXi machining centers introduced 2018 50th Anniversary Nasdaq Closing Bell Ceremony 3D print head introduced Record sales 2012 Global rebranding initiative launched New “i” series machine design introduced HSi high speed machining centers introduced SRTi 5-axis machines introduced UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) year ended October 31, 2019 or Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal 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 Trading Symbol(s) Name of each exchange on which Common Stock, no par value HURC Nasdaq Global Select Market registered 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] Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 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 such 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 [ ] 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, 2019 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 Trading Symbol(s) Common Stock, no par value HURC Securities registered pursuant to Section 12(g) of the Act: None Name of each exchange on which registered Nasdaq Global Select Market 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 such 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 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, 2019 (the last business day of our most recently completed second quarter) was $266,155,000. The number of shares of the registrant’s common stock outstanding as of December 31, 2019 was 6,770,233. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2020 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, governmental actions and initiatives including import and export restrictions and tariffs, 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, 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, automation integration equipment and solutions for job shops, 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 Hurco brand computer control systems can be operated by both skilled and unskilled machine tool operators and, yet, are capable of instructing a machine to perform 3 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, 2019 (the last business day of our most recently completed second quarter) was $266,155,000. The number of shares of the registrant’s common stock outstanding as of December 31, 2019 was 6,770,233. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2020 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, governmental actions and initiatives including import and export restrictions and tariffs, 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, 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, automation integration equipment and solutions for job shops, 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 Hurco brand computer control systems can be operated by both skilled and unskilled machine tool operators and, yet, are capable of instructing a machine to perform 3 3 complex tasks. The combination of microprocessor technology and patented interactive, conversational programming software in our proprietary computer control systems enables operators on the production floor to quickly and easily create a program for machining a particular part from a blueprint or computer aided design file and immediately begin machining that part. Our executive offices and principal design and engineering operations are headquartered in Indianapolis, Indiana, U.S. Sales, application engineering and service subsidiaries are located in China, France, Germany, India, Italy, Poland, Singapore, 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, regardless of brand, 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. In the last six years, we have implemented a strategic plan to expand our market reach to more customers with more products on a global basis. While the Hurco-branded computer control systems have been, and continue to be, our premium flagship product line, we have added other products to our portfolio that provide product diversity and market penetration opportunity, while minimizing the impact of geographic cyclicality, with products priced from entry-level to high performance serving a variety of different industries. We have not changed our overall strategy to design, manufacture and sell a comprehensive line of computerized machine tools; rather, we have enhanced this strategy through growth both organically and through acquisitions to ensure long-term stability and overall profitability. 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 13% 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; and • 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 4 4 experience these changes in demand. Additionally, since our typical order backlog is approximately 45 days, it is difficult to estimate demand with any reasonable certainty. Therefore, we do not have the benefit of relying on the common leading indicators that other industries use for market analysis and forecasting purposes. Products Our core products consist of general-purpose, computerized machine tools for the metal cutting industry, principally, vertical machining centers (mills) and turning centers (lathes). The majority of our machine tools are equipped and integrated fully with our proprietary software and computer control systems, while the remaining machine tools are equipped with industry standard controls. Additionally, we produce and distribute software options, control upgrades, hardware accessories and replacement parts for our machine tool product lines, and we provide operator training and support services to our customers. We also produce computer control systems and related software for press brake applications that are sold as retrofit units for installation on existing or new press brake machines. In addition, we own an automation integration company that specializes in job shop automation. 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 $ 223,735 85% $ 261,710 87% $ 209,311 86% Computer Control Systems Year Ended October 31, 2019 2018 2017 2,818 27,854 8,970 1% 11% 3% 2,870 27,501 8,590 1% 9% 3% 2,324 24,255 7,777 1% 10% 3% $ 263,377 100% $ 300,671 100% $ 243,667 100% †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine 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 technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and mold, aerospace and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. ProCobots, LLC (“ProCobots”) is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool. In addition, through our wholly-owned subsidiary LCM Precision Technology S.r.l. (“LCM”), we produce high-value 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. 5 complex tasks. The combination of microprocessor technology and patented interactive, conversational programming software in our proprietary computer control systems enables operators on the production floor to quickly and easily create a program for machining a particular part from a blueprint or computer aided design file and immediately begin machining that part. 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. 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, 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, regardless of brand, 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. In the last six years, we have implemented a strategic plan to expand our market reach to more customers with more products on a global basis. While the Hurco-branded computer control systems have been, and continue to be, our premium flagship product line, we have added other products to our portfolio that provide product diversity and market penetration opportunity, while minimizing the impact of geographic cyclicality, with products priced from entry-level to high performance serving a variety of different industries. We have not changed our overall strategy to design, manufacture and sell a comprehensive line of computerized machine tools; rather, we have enhanced this strategy through growth both organically and through acquisitions to ensure long-term stability and overall profitability. Industry include: 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 13% 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; and • 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 4 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. In addition, we own an automation integration company that specializes in job shop automation. 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 and Software †† Service Parts Service Fees Total 2019 $ 223,735 85% Year Ended October 31, 2018 $ 261,710 87% 2017 $ 209,311 86% 2,818 27,854 8,970 $ 263,377 1% 11% 3% 100% 2,870 27,501 8,590 $ 300,671 1% 9% 3% 100% 2,324 24,255 7,777 $ 243,667 1% 10% 3% 100% †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. Product Portfolio by Brand We have three brands of CNC machine tools in our product portfolio: Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and mold, aerospace and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. ProCobots, LLC (“ProCobots”) is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool. In addition, through our wholly-owned subsidiary LCM Precision Technology S.r.l. (“LCM”), we produce high-value 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. 5 5 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 (“2D”) or three-dimensional (“3D”) machining programs directly from an engineering drawing or computer-aided design geometry file such as solid model. An operator with little or no machine tool programming experience can successfully create a program with minimal training and begin machining the part in a short period of time. The control features an operator console with active touch, and incorporates an upgradeable personal computer (PC) platform using a high- speed processor with solid rendering graphical programming. In addition, WinMax® has a Windows®†† based operating system that enables users to improve shop floor flexibility and software productivity. Companies using computer-controlled machine tools are better able to: • maximize the efficiency of their human resources; • make more advanced and complex parts from a wide range of materials using multiple processes; incorporate fast moving changes in technology into their operations to keep their competitive edge; • and integrate their business into the global supply chain of their customers by supporting small to medium lot sizes for “just in time” initiatives. • Our Windows® based Hurco 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. 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 (mill) or chuck (lathe) 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, while still offering the advantage of our advanced control and motion systems. 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. ________________________________ ††Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. 6 6 VMX Product Line The VMX product line is our flagship series of machining centers and consists of higher performing vertical machining centers aimed at manufacturers that require faster speeds and greater part accuracy. The small and medium size models are available with either belted or inline (direct) spindles and the larger models are offered as either #40 or #50 taper. 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. U Series Product Line This product line features five-axis trunnion tables integrated onto familiar C-frame style machines, making an easy entry into five-axis for first time users. U Series models are offered with 8, 10, 14 and 20-inch diameter rotary tables with both standard and high-speed spindles. SRT/SW Product Line The SRT Series of five-axis machines utilizes a swivel head and a C-axis rotary table embedded into and flush with the machine table, making them among the most flexible machines in the industry. The SW model utilizes the swivel head and a traditional machine table that can be then fitted with an A-axis rotary to machine long five-axis parts. These models are available in either 42 or 60-inch X-axis travels. VC/VCX Product Line The B-axis configuration of the VC/VCX Series provides greater undercut capability in both positive and negative directions, allowing users to access more part surface area for machining. These cantilever models are available in a 20-inch pallet moderately-priced model as well as a high speed, high performance model with a torque motor-driven 23.6-inch diameter rotary table. 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-travels (a three-axis version and a five-axis version), as well as 53-inch and 63-inch X-travel models. HM Product Line on competitive horizontal machines. HBMX 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- travels of 67 inches. These products are designed for high mix, low volume applications that benefit from a horizontal spindle configuration but don’t require an expensive pallet switching system typically found 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 7 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 (“2D”) or three-dimensional (“3D”) machining programs directly from an engineering drawing or computer-aided design geometry file such as solid model. 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: • • and • maximize the efficiency of their human resources; • make more advanced and complex parts from a wide range of materials using multiple processes; incorporate fast moving changes in technology into their operations to keep their competitive edge; 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 Hurco 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. 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 (mill) or chuck (lathe) 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, while still offering the advantage of our advanced control and motion systems. 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. ________________________________ ††Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. 6 VMX Product Line The VMX product line is our flagship series of machining centers and consists of higher performing vertical machining centers aimed at manufacturers that require faster speeds and greater part accuracy. The small and medium size models are available with either belted or inline (direct) spindles and the larger models are offered as either #40 or #50 taper. 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. U Series Product Line This product line features five-axis trunnion tables integrated onto familiar C-frame style machines, making an easy entry into five-axis for first time users. U Series models are offered with 8, 10, 14 and 20-inch diameter rotary tables with both standard and high-speed spindles. SRT/SW Product Line The SRT Series of five-axis machines utilizes a swivel head and a C-axis rotary table embedded into and flush with the machine table, making them among the most flexible machines in the industry. The SW model utilizes the swivel head and a traditional machine table that can be then fitted with an A-axis rotary to machine long five-axis parts. These models are available in either 42 or 60-inch X-axis travels. VC/VCX Product Line The B-axis configuration of the VC/VCX Series provides greater undercut capability in both positive and negative directions, allowing users to access more part surface area for machining. These cantilever models are available in a 20-inch pallet moderately-priced model as well as a high speed, high performance model with a torque motor-driven 23.6-inch diameter rotary table. 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-travels (a three-axis version and a five-axis version), as well as 53-inch and 63-inch X-travel models. HM 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- travels of 67 inches. These products are designed for high mix, low volume applications that benefit from a horizontal spindle configuration but don’t require an expensive pallet switching system typically found on competitive horizontal machines. 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 7 7 TM model in seven sizes, measured by chuck size: the TM6i, TM8i, TM10i, TM12i, TM18i, TM18Li, and TM18BBi. 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: TMM8i, TMM10i, and TMM12i. 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 who want to reduce part handling and complete complex components that require speed, accuracy and superior surface finish 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. They are the largest models offered by Hurco that feature the powerful and flexible WinMax® control. Product Development Since Hurco is the technology innovation brand of our corporate portfolio, we have focused our attention on product enhancements of existing models in an effort to align the Hurco brand with the newest engineering innovations and components available to compete with other premium brands in the marketplace. Examples of product enhancements completed in 2019 include the use of linear cross roller guideways, faster and more powerful motors, higher spindle speeds, and design refinements, such as new column designs and sheet metal enclosures to support our high standards for quality and reliability. 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 our CNC VK knee mills and the more advanced Series 9000 DGI offered on all other models. The Milltronics portfolio consists of the following product lines: New Products VK Series The VK is Milltronics’ CNC knee mill designed for prototype, R&D, maintenance and other general- purpose applications. It offers the easy table access of a conventional knee mill, with the power and flexibility of the Milltronics 8200-B CNC control and motion system. Unlike most competitive models, it is not a retrofit kit but rather designed from the ground up as a CNC. 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 on these machines 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 9000 DGI control. 8 8 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 DGI control. Customers can choose models with X-axis (horizontal) travels of 25, 30, 40 or 50 inches. There is also a model with extended spindle nose-to-table dimensions for large fourth-axis rotary applications. 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 DGI 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 heavy-duty 50-taper models are designed for applications that require more power and torque and feature the Series 9000 DGI control. Customers can choose from three different models with X-axis travels of 50, 60 or 84 inches. BR Product Line The BR product line consists of high-speed bridge mills that are used in pattern shops and the aerospace industry, in addition to job shops, due to the large table and travels that support a wide range of part sizes. BR machines have inline spindles and are available as six models in three sizes with X-axis travels of 100, 150 and 200 inches. BR machines offer the Series 9000 DGI 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 DGI SL Product Line control. ML Product Line The ML product line consists of combination lathes that the customer can configure for either tool room or production applications with the option to add live tooling. There are 17 models available in a variety of thru hole sizes and in the following six swing-over bed diameters: 17, 19, 23, 27, 36 and 39.7 inches. These flexible machines feature the Series 9000 DGI control. In fiscal 2019, Milltronics introduced the TRM 3016, a new value priced, enclosed tool room CNC. The machine features unique “drop down” side access doors that allow the accommodation of longer parts. The TRM is equipped with the Series 9000 DGI control. Also, in 2019, we introduced a new extra-large Milltronics XP model called the VM8434XP. This machine has 84 inches of X-axis travel, with a heavy duty #50-taper spindle, making it suitable for large, difficult to machine parts and materials. Takumi CNC Machine Tools The Takumi brand features machines designed for high speed, high efficiency milling. This includes key market segments such as die and mold, aerospace, medical and energy or any customer that needs to produce very high accuracy parts quickly. Takumi machines are available with a variety of industry standard CNC controls, including Fanuc®*, Siemens®, Mitsubishi® or Heidenhain®. Models include three- ____________ *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. 9 TM model in seven sizes, measured by chuck size: the TM6i, TM8i, TM10i, TM12i, TM18i, TM18Li, and TM18BBi. 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: TMM8i, TMM10i, and TMM12i. 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 who want to reduce part handling and complete complex components that require speed, accuracy and superior surface finish 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. They are the largest models offered by Hurco that feature the powerful and flexible WinMax® control. Product Development Since Hurco is the technology innovation brand of our corporate portfolio, we have focused our attention on product enhancements of existing models in an effort to align the Hurco brand with the newest engineering innovations and components available to compete with other premium brands in the marketplace. Examples of product enhancements completed in 2019 include the use of linear cross roller guideways, faster and more powerful motors, higher spindle speeds, and design refinements, such as new column designs and sheet metal enclosures to support our high standards for quality and reliability. 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 our CNC VK knee mills and the more advanced Series 9000 DGI offered on all other models. The Milltronics portfolio consists of the following product lines: VK Series The VK is Milltronics’ CNC knee mill designed for prototype, R&D, maintenance and other general- purpose applications. It offers the easy table access of a conventional knee mill, with the power and flexibility of the Milltronics 8200-B CNC control and motion system. Unlike most competitive models, it is not a retrofit kit but rather designed from the ground up as a CNC. 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 on these machines 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 9000 DGI control. 8 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 DGI control. Customers can choose models with X-axis (horizontal) travels of 25, 30, 40 or 50 inches. There is also a model with extended spindle nose-to-table dimensions for large fourth-axis rotary applications. 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 DGI 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 heavy-duty 50-taper models are designed for applications that require more power and torque and feature the Series 9000 DGI control. Customers can choose from three different models with X-axis travels of 50, 60 or 84 inches. BR Product Line The BR product line consists of high-speed bridge mills that are used in pattern shops and the aerospace industry, in addition to job shops, due to the large table and travels that support a wide range of part sizes. BR machines have inline spindles and are available as six models in three sizes with X-axis travels of 100, 150 and 200 inches. BR machines offer the Series 9000 DGI 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 DGI 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 9000 DGI control. New Products In fiscal 2019, Milltronics introduced the TRM 3016, a new value priced, enclosed tool room CNC. The machine features unique “drop down” side access doors that allow the accommodation of longer parts. The TRM is equipped with the Series 9000 DGI control. Also, in 2019, we introduced a new extra-large Milltronics XP model called the VM8434XP. This machine has 84 inches of X-axis travel, with a heavy duty #50-taper spindle, making it suitable for large, difficult to machine parts and materials. Takumi CNC Machine Tools The Takumi brand features machines designed for high speed, high efficiency milling. This includes key market segments such as die and mold, aerospace, medical and energy or any customer that needs to produce very high accuracy parts quickly. Takumi machines are available with a variety of industry standard CNC controls, including Fanuc®*, Siemens®, Mitsubishi® or Heidenhain®. Models include three- ____________ *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. 9 9 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. Takumi machines are hand built and fitted to exacting standards to produce high accuracies and surface finishes. The Takumi portfolio consists of the following product lines: suitable for large and heavy parts. VC Series The VC Series vertical machining centers are fast, three-axis linear guide machining centers designed for customers doing a variety of different parts, including die and mold, medical, automotive and other work. The VC machines are available in four sizes with X-axis travels of 34, 42 and 50 inches. An extended Y- axis travel version of the 42-inch model is offered for mold shops making square mold bases. Autobend® 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 six models, four of which offer trunnion table sizes of 10, 16, 24 and 31.5 inches. One additional model, the UB, is equipped with a B/C swivel head and an HSK100, 12,000 rpm built-in spindle. The UB’s double column design provides a spacious X-axis travel of 126 inches. A new model called the UR1000 has a two-axis head and a 39-inch rotary table integrated into a double column machine, designed for large and heavy five-axis parts such as those found in die and mold, aerospace and energy applications. 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 die and mold. This model includes a 6,000 rpm geared-head design with X-axis travels of 82 inches. SL Lathes SL slant-bed lathes are turning centers 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. 10 10 New Products In 2019, Takumi introduced a small, high-speed double column model called the H6 aimed at the electronics and medical markets. Featuring a 30,000 rpm spindle, the machine is capable of producing very high accuracy small components quickly and with exceptional surface finishes. Takumi also introduced the UR1000, a large capacity five-axis machine with a two-axis head and integrated 39-inch rotary table, 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 other original equipment manufacturers (“OEM”). Our 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. Solid Model Import with 3D DXF Technology allows the operator to import a solid model directly into the control and provides integrated CAD/CAM and tool path simulation. 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. 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. Designed to take advantage of the Internet of Things (“IoT”), 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 ____________ * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. 11 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. Takumi machines are hand built and fitted to exacting standards to produce high accuracies and surface finishes. The Takumi portfolio consists of the following product lines: New Products In 2019, Takumi introduced a small, high-speed double column model called the H6 aimed at the electronics and medical markets. Featuring a 30,000 rpm spindle, the machine is capable of producing very high accuracy small components quickly and with exceptional surface finishes. Takumi also introduced the UR1000, a large capacity five-axis machine with a two-axis head and integrated 39-inch rotary table, suitable for large and heavy parts. The VC Series vertical machining centers are fast, three-axis linear guide machining centers designed for customers doing a variety of different parts, including die and mold, medical, automotive and other work. The VC machines are available in four sizes with X-axis travels of 34, 42 and 50 inches. An extended Y- axis travel version of the 42-inch model is offered for mold shops making square mold bases. 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, VC Series V Series 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 six models, four of which offer trunnion table sizes of 10, 16, 24 and 31.5 inches. One additional model, the UB, is equipped with a B/C swivel head and an HSK100, 12,000 rpm built-in spindle. The UB’s double column design provides a spacious X-axis travel of 126 inches. A new model called the UR1000 has a two-axis head and a 39-inch rotary table integrated into a double column machine, designed for large and heavy five-axis parts such as those found in die and mold, aerospace and energy applications. 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. G Series BC Series SL Lathes 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 other original equipment manufacturers (“OEM”). Autobend® Our 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. Solid Model Import with 3D DXF Technology allows the operator to import a solid model directly into the control and provides integrated CAD/CAM and tool path simulation. 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. 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 die and mold. This model includes a 6,000 rpm 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. geared-head design with X-axis travels of 82 inches. SL slant-bed lathes are turning centers 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. Designed to take advantage of the Internet of Things (“IoT”), 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 ____________ * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. 10 11 11 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. CNC Tilt Tables 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. Parts and Service 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. ProCobots CNC Automation Located in the greater Pittsburgh, Pennsylvania area, ProCobots provides automation solutions that can be integrated with any machine tool. ProCobots integrations include robots, grippers, material handling and Industry 4.0-capable software and controls. Designed to be easy to use, safe and flexible, ProCobots solutions are standardized systems aimed at high-mix, low volume customers. Products include portable models such as ER5 and Profeeder Light, as well as flexible cell solutions, including the Profeeder and Profeeder Q. Non-Hurco Branded Products & Technologies While our three brands of CNC machine tools are responsible for the vast majority of our revenue, we have added other products to the lineup that have contributed to our top and bottom line growth and will provide product diversity, market penetration opportunity, while minimizing the impact of geographic cyclicality, 12 12 with products priced from entry-level to high performance serving a variety of different industries. We believe these non-Hurco branded products help us partially offset the cyclical nature of the machine tool market by diversifying our product offering. These non-Hurco branded products are comprised primarily of other general-purpose vertical machining centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machining centers, metal cutting saws and CNC swiss lathes. LCM Machine Tool Components and Accessories Based in Italy, LCM designs, manufactures and sells mechanical and electro-mechanical components and accessories for machine tools for a wide variety of machine tool OEMs. 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. 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 generally 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. We believe 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 (Ningbo Hurco Machine Tool Co. Ltd (“NHML”)), 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 13 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. 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. ProCobots CNC Automation Located in the greater Pittsburgh, Pennsylvania area, ProCobots provides automation solutions that can be integrated with any machine tool. ProCobots integrations include robots, grippers, material handling and Industry 4.0-capable software and controls. Designed to be easy to use, safe and flexible, ProCobots solutions are standardized systems aimed at high-mix, low volume customers. Products include portable models such as ER5 and Profeeder Light, as well as flexible cell solutions, including the Profeeder and Profeeder Q. Non-Hurco Branded Products & Technologies While our three brands of CNC machine tools are responsible for the vast majority of our revenue, we have added other products to the lineup that have contributed to our top and bottom line growth and will provide product diversity, market penetration opportunity, while minimizing the impact of geographic cyclicality, 12 with products priced from entry-level to high performance serving a variety of different industries. We believe these non-Hurco branded products help us partially offset the cyclical nature of the machine tool market by diversifying our product offering. These non-Hurco branded products are comprised primarily of other general-purpose vertical machining centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machining centers, metal cutting saws and CNC swiss lathes. LCM Machine Tool Components and Accessories Based in Italy, LCM designs, manufactures and sells mechanical and electro-mechanical components and accessories for machine tools for a wide variety of machine tool OEMs. 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). 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. 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 generally 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. We believe 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 (Ningbo Hurco Machine Tool Co. Ltd (“NHML”)), 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 13 13 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 190 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, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. Approximately 87% of the worldwide demand for computerized machine tools and computer control systems is outside of the U.S. In fiscal 2019, approximately 64% of our revenues were derived from customers outside of the U.S., which include customers located in Canada, Mexico and Central and South America. 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 OEMs 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 that 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., 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. Employees Backlog We had approximately 785 full-time employees at the end of fiscal 2019, none of whom are covered by a collective-bargaining agreement. 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, 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. 14 14 15 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 190 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, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. Approximately 87% of the worldwide demand for computerized machine tools and computer control systems is outside of the U.S. In fiscal 2019, approximately 64% of our revenues were derived from customers outside of the U.S., which include customers located in Canada, Mexico and Central and South America. 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 OEMs 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 that 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 14 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., 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. Employees We had approximately 785 full-time employees at the end of fiscal 2019, none of whom are covered by a collective-bargaining agreement. 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, 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. 15 15 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 2019, approximately 64% of our revenues were derived from sales to customers located outside of the U.S., which include customers located in Canada, Mexico and Central and South America. In addition, our main manufacturing facilities are located outside of the U.S. Our international operations are subject to a number of risks, including: trade barriers; regional economic uncertainty; • • • 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; • 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; foreign exchange controls that make it difficult to repatriate earnings and cash; 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 attempt 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 and/or that we might not be able to accomplish in a timely manner or at all. 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 16 16 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. Disruptions in our manufacturing operations or the supply of materials and components could adversely affect our business, results of operations and financial condition. We depend on our wholly-owned subsidiaries, HML, 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 business, 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, such as trade wars or tariffs, a natural disaster, such as an earthquake, typhoon, or tsunami, or vulnerabilities in our technology or cyber-attacks against our information systems, such as ransomware attacks. Also, any interruption in service by one of our key component suppliers, if prolonged, could have a material adverse effect on our business, 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 Americas, which generated approximately 63% of our revenues in fiscal 2019, 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 counterparty 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, and we may not be able to accomplish those actions on a timely basis or at all. If the technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would 17 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 2019, approximately 64% of our revenues were derived from sales to customers located outside of the U.S., which include customers located in Canada, Mexico and Central and South America. In addition, our main manufacturing facilities are located outside of the U.S. Our international operations are subject to a number of risks, including: • • • • • 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; • current and changing regulatory environments affecting the importation and exportation of • 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; foreign exchange controls that make it difficult to repatriate earnings and cash; 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 attempt 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 and/or that we might not be able to accomplish in a timely manner or at all. 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 16 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. Disruptions in our manufacturing operations or the supply of materials and components could adversely affect our business, results of operations and financial condition. We depend on our wholly-owned subsidiaries, HML, 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 business, 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, such as trade wars or tariffs, a natural disaster, such as an earthquake, typhoon, or tsunami, or vulnerabilities in our technology or cyber-attacks against our information systems, such as ransomware attacks. Also, any interruption in service by one of our key component suppliers, if prolonged, could have a material adverse effect on our business, 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 Americas, which generated approximately 63% of our revenues in fiscal 2019, 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 counterparty 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, and we may not be able to accomplish those actions on a timely basis or at all. If the technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would 17 17 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. 18 18 • • • • • • • • • 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 19 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 18 19 19 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, the U.S. passed the Tax Cuts and Jobs Act. 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, including adverse future regulatory guidance, could have a material adverse impact on our cash flows and results of operations. Other changes in the tax laws of the jurisdictions where we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the “base erosion and profit shifting” project undertaken by the Organisation for Economic Co-operation and Development (“OECD”). The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. These changes, as adopted by countries, could increase tax uncertainty and may adversely affect our provision for income taxes. 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. We are also subject to claims that we may be infringing certain patent or other intellectual property rights of third parties. While it is not possible to predict the outcome of patent and other intellectual property litigation, such litigation could result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, reduce the market value of our products and services, lower our profits, and could otherwise have an adverse effect on our business, financial condition and results of operations. 20 20 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. Failure to comply with data privacy and security laws and regulations could adversely affect our operating results and business. A number of U.S. states have enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of sensitive personal information, such as social security numbers, financial information and other personal information. For example, several U.S. territories and all 50 states now have data breach laws that require timely notification to individual victims, and at times regulators, if a company has experienced the unauthorized access or acquisition of sensitive personal data. Other state laws include the California Consumer Privacy Act (“CCPA”), which was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and affords those individuals new rights relating to their personal information that may affect our ability to use personal information or share it with our business partners. Regulations from the California Attorney General have not been finalized, and it is expected that additional amendments to the CCPA will be introduced in 2020. Meanwhile, over fifteen other states have considered privacy laws like the CCPA, We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow private class- action litigation and carry significant potential liability for our business. Outside of the U.S., data protection laws, including the EU General Data Protection Regulation (the “GDPR”), also apply to some of our operations. Legal requirements in these countries relating to the collection, storage, processing and transfer of personal data continue to evolve. The GDPR imposes, among other things, data protection requirements that include strict obligations and restrictions on the ability to collect, analyze and transfer EU personal data, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances, and possible substantial fines for any violations (including possible fines for certain violations of up to the greater of 20 million Euros or 4% of total company revenue). Other governmental authorities around the world are considering similar types of legislative and regulatory proposals concerning data protection. The interpretation and enforcement of the laws and regulations described above are uncertain and subject to change, and may require substantial costs to monitor and implement compliance with any additional requirements. Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include substantial civil and/or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business. 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. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, 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 21 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, the U.S. passed the Tax Cuts and Jobs Act. 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, including adverse future regulatory guidance, could have a material adverse impact on our cash flows and results of operations. Other changes in the tax laws of the jurisdictions where we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the “base erosion and profit shifting” project undertaken by the Organisation for Economic Co-operation and Development (“OECD”). The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. These changes, as adopted by countries, could increase tax uncertainty and may adversely affect our provision for income taxes. 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. We are also subject to claims that we may be infringing certain patent or other intellectual property rights of third parties. While it is not possible to predict the outcome of patent and other intellectual property litigation, such litigation could result in our payment of significant monetary damages and/or royalty payments, negatively impact our ability to sell current or future products, reduce the market value of our products and services, lower our profits, and could otherwise have an 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. Failure to comply with data privacy and security laws and regulations could adversely affect our operating results and business. A number of U.S. states have enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of sensitive personal information, such as social security numbers, financial information and other personal information. For example, several U.S. territories and all 50 states now have data breach laws that require timely notification to individual victims, and at times regulators, if a company has experienced the unauthorized access or acquisition of sensitive personal data. Other state laws include the California Consumer Privacy Act (“CCPA”), which was signed into law on June 28, 2018 and largely took effect on January 1, 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and affords those individuals new rights relating to their personal information that may affect our ability to use personal information or share it with our business partners. Regulations from the California Attorney General have not been finalized, and it is expected that additional amendments to the CCPA will be introduced in 2020. Meanwhile, over fifteen other states have considered privacy laws like the CCPA, We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigations and compliance, allow private class- action litigation and carry significant potential liability for our business. Outside of the U.S., data protection laws, including the EU General Data Protection Regulation (the “GDPR”), also apply to some of our operations. Legal requirements in these countries relating to the collection, storage, processing and transfer of personal data continue to evolve. The GDPR imposes, among other things, data protection requirements that include strict obligations and restrictions on the ability to collect, analyze and transfer EU personal data, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances, and possible substantial fines for any violations (including possible fines for certain violations of up to the greater of 20 million Euros or 4% of total company revenue). Other governmental authorities around the world are considering similar types of legislative and regulatory proposals concerning data protection. The interpretation and enforcement of the laws and regulations described above are uncertain and subject to change, and may require substantial costs to monitor and implement compliance with any additional requirements. Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include substantial civil and/or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business. 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. Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, 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 20 21 21 information technology systems. In addition, given their size and complexity, our information systems could be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties attempting to gain unauthorized access to our products, systems or confidential information. Like other public, multi-national corporations, we have and/or will continue to be subject to, instances of phishing attacks on our email systems, other cyber-attacks, including state-sponsored cyber-attacks, industrial espionage, insider threats, computer denial-of-service attacks, computer viruses, ransomware and other malware, wire fraud or other cyber incidents. 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, are becoming more sophisticated, frequent and adaptive, 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 or data restoration measures could be significant. Item 1B. UNRESOLVED STAFF COMMENTS 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 Indianapolis, Indiana, U.S. 165,000 Corporate headquarters, design and engineering, product testing, sales and marketing, application engineering, customer service, manufacturing and assembly Manufacturing, assembly, sales, application engineering and customer service Taichung, Taiwan Waconia, Minnesota, U.S. Castell’Alfero, Italy Manufacturing Ningbo, China Sales, application engineering, customer service, and warehousing 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. Pittsburg, Pennsylvania, U.S. 452,100 59,500 32,300 31,000 26,300 3,500 12,800 22,400 12,900 9,700 3,900 12,200 10,200 1,000 3,700 11,400 13,000 We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2020 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 significant difficulty in replacing any of the present facilities if any of our leases were not renewed at expiration. * The lease for our South Africa facility will expire in January 2020. 22 22 23 information technology systems. In addition, given their size and complexity, our information systems could be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties attempting to gain unauthorized access to our products, systems or confidential information. Like other public, multi-national corporations, we have and/or will continue to be subject to, instances of phishing attacks on our email systems, other cyber-attacks, including state-sponsored cyber-attacks, industrial espionage, insider threats, computer denial-of-service attacks, computer viruses, ransomware and other malware, wire fraud or other cyber incidents. 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, are becoming more sophisticated, frequent and adaptive, 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 or data restoration measures could be significant. Item 1B. UNRESOLVED STAFF COMMENTS 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, customer service, and warehousing 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. Pittsburg, Pennsylvania, U.S. 452,100 59,500 32,300 31,000 26,300 3,500 12,800 22,400 12,900 9,700 3,900 12,200 10,200 1,000 3,700 11,400 13,000 We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2020 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 significant difficulty in replacing any of the present facilities if any of our leases were not renewed at expiration. * The lease for our South Africa facility will expire in January 2020. 22 23 23 Item 3. LEGAL PROCEEDINGS PART II 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. Information about our Executive Officers 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, 2019, 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 64 55 48 Chairman of the Board and Chief Executive Officer Director, President and Chief Operating Officer 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. He was elected as our President in March 2013 and elected and appointed as a director and our Chief Operating Officer, respectively, in March 2019. Mr. Volovic held various positions within our company most recently Executive Vice President, Software and Engineering before becoming President in 2013. 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 our 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 by an international public accounting firm. Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Holders Dividend Policy Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. There were 110 holders of record of our common stock as of December 13, 2019. 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 from time to time. Our payment of dividends is limited by our U.S. credit agreement, as further described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 5 of Notes to Consolidated Financial Statements. Other Information During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. The disclosure under the caption “Equity Compensation Plan Information at 2019 Fiscal Year End” in our 2020 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. 24 24 25 Item 3. LEGAL PROCEEDINGS PART II 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 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 Item 4. MINE SAFETY DISCLOSURES There were 110 holders of record of our common stock as of December 13, 2019. 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 from time to time. Our payment of dividends is limited by our U.S. credit agreement, as further described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 5 of Notes to Consolidated Financial Statements. Other Information During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. The disclosure under the caption “Equity Compensation Plan Information at 2019 Fiscal Year End” in our 2020 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. policy coverages. None. Information about our Executive Officers 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, 2019, 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 64 55 48 Chairman of the Board and Chief Executive Officer Director, President and Chief Operating Officer 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. He was elected as our President in March 2013 and elected and appointed as a director and our Chief Operating Officer, respectively, in March 2019. Mr. Volovic held various positions within our company most recently Executive Vice President, Software and Engineering before becoming President in 2013. 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 our 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 by an international public accounting firm. 24 25 25 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, 2019 2018 2017 2016 2015 (In thousands, except per share amounts) $263,377 77,208 $300,671 91,806 $243,667 70,564 $227,289 70,440 $219,383 69,091 support. 54,668 22,540 784 17,495 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 $2.55 $3.15 $2.25 $1.99 $2.44 6,815 $0.47 6,771 $0.43 6,680 6,642 6,602 $0.39 $0.35 $0.31 Balance Sheet Data: Current assets Current liabilities Working capital Current ratio Total assets Non-current liabilities Total debt Shareholders’ equity 2019 2018 As of October 31, 2017 (Dollars in thousands) 2016 2015 $261,861 54,632 207,229 4.8 301,065 6,188 -- 240,245 $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 3.3 277,808 3,834 1,507 203,085 251,949 8,506 1,476 185,475 248,577 8,923 1,583 174,568 26 26 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., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications 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 2019, approximately 51% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines. Additionally, approximately 12% 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 technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die/mold, aerospace and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. ProCobots is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool. In addition, through our wholly-owned subsidiary LCM, we produce high value machine tool components and accessories. We principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly- owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM. Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and 27 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, 2019 2018 2017 2016 2015 (In thousands, except per share amounts) $263,377 77,208 $300,671 91,806 $243,667 70,564 $227,289 $219,383 70,440 69,091 54,668 22,540 784 17,495 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 $2.55 $3.15 $2.25 $1.99 $2.44 6,815 $0.47 6,771 $0.43 6,680 6,642 6,602 $0.39 $0.35 $0.31 Balance Sheet Data: (Dollars in thousands) 2019 2018 2017 2016 2015 As of October 31, Current assets Current liabilities Working capital Current ratio Total assets Non-current liabilities Total debt Shareholders’ equity $261,861 54,632 207,229 4.8 301,065 6,188 -- 240,245 $281,435 86,803 194,632 $246,415 70,889 175,526 $218,381 57,968 160,413 3.2 3.5 3.8 $216,112 65,086 151,026 3.3 315,407 5,751 1,434 222,853 277,808 3,834 1,507 203,085 251,949 8,506 1,476 185,475 248,577 8,923 1,583 174,568 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., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service 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 2019, approximately 51% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines. Additionally, approximately 12% 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 technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die/mold, aerospace and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. ProCobots is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool. In addition, through our wholly-owned subsidiary LCM, we produce high value machine tool components and accessories. We principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly- owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM. Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and 26 27 27 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 2018 2019 2017 100% 31% 100% 29% Year-to-Year % Change Increase/Decrease ’19 vs. ’18 -12% -16% ’18 vs. ’17 23% 30% 19% 11% 7% 20% 9% 6% -6% -33% -19% 17% 62% 42% Sales and service fees Gross profit Selling, general and administrative expenses Operating income Net income 100% 29% 21% 9% 7% Fiscal 2019 Compared to Fiscal 2018 Sales and Service Fees. Sales and service fees for fiscal 2019 were $263.4 million, a decrease of $37.3 million, or 12%, compared to fiscal 2018, and included an unfavorable currency impact of $8.5 million, or 3%, when translating foreign sales to U.S. Dollars for financial reporting purposes. America. 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, 2019 and 2018 (dollars in thousands): Americas Europe Asia Pacific Total 2019 Fiscal Year Ended October 31, 2018 $ 90,902 166,202 43,567 $ 300,671 37% 51% 12% 100% $ 99,064 133,675 30,638 $ 263,377 Increase/Decrease Amount % $ 8,162 (32,527) (12,929) $ (37,294) 9% -20% -30% -12% 30% 55% 15% 100% Sales in the Americas for fiscal 2019 increased by 9%, compared to fiscal 2018, primarily attributable to sales of vertical milling machines from a U.S. machine tool distributor in California acquired by Hurco in the fourth quarter of fiscal 2018. European sales for fiscal 2019 decreased by 20%, compared to fiscal 2018, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The decrease in European sales for fiscal 2019 was primarily attributable to a reduced volume of shipments of Hurco machines in Germany and the United Kingdom, as well as a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary in Italy, LCM. Asian Pacific sales for fiscal 2019 decreased by 30%, compared to fiscal 2018, and included an unfavorable currency impact of 2%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The decrease in Asian Pacific sales for fiscal 2019 was primarily attributable 28 28 to decreased shipments of Hurco vertical milling machines and Takumi bridge mill machines in China, partially offset by increased shipments of Hurco vertical milling machines in India. Net Sales and Service Fees by Product Category The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2019 and 2018 (dollars in thousands): Computerized Machine Tools $223,735 85% $261,710 Computer Control Systems Fiscal Year Ended October 31, Increase/ Decrease 2019 2018 Amount % 87% $(37,975) -15% 2,818 27,854 8,970 1% 11% 3% 2,870 27,501 8,590 1% 9% 3% (52) 353 380 $263,377 100% $300,671 100% $(37,294) -2% 1% 4% -12% †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized and Software †† Service Parts Service Fees Total machine systems. Sales of computerized machine tools and computer control systems and software for fiscal 2019 decreased by 15% and 2%, respectively, and each included an unfavorable currency impact of 3%, compared to fiscal 2018. The year-over-year decrease in sales of computerized machine tools and computer control systems and software were mainly due to decreased sales of Hurco and Takumi machines in Germany, the United Kingdom and China, as well as a decrease in sales of electro-mechanical components and accessories manufactured by LCM, partially offset by an increase in sales of vertical milling machines from the U.S. machine tool distributor in California acquired by Hurco in the fourth quarter of fiscal 2018. Sales of service parts and service fees for fiscal 2019 increased by 1% and 4%, respectively, compared to fiscal 2018, due primarily to an increase in aftermarket sales and aftermarket service of Hurco products in North Orders and Backlog. Orders for fiscal 2019 were $241.1 million, a decrease of $64.7 million, or 21%, compared to fiscal 2018, and included an unfavorable currency impact of $8.5 million, or 3%, 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, 2019 and 2018 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2019 $ 89,136 120,191 31,779 37% 50% 13% $ 241,106 100% 2018 $ 94,160 170,366 41,319 $ 305,845 31% 56% 13% 100% Increase/Decrease Amount % $ (5,024) (50,175) (9,540) $ (64,739) -5% -29% -23% -21% Orders in the Americas for fiscal 2019 decreased by 5%, compared to fiscal 2018, primarily due to the fact that fiscal 2018 reflected orders resulting from year-end promotional activities following the September 2018 International Manufacturing Technology Show (“IMTS”), which is held every two years. The decrease in orders for fiscal 2019, compared to fiscal 2018, was partially offset by increased customer demand for vertical milling machines from the distributor in California acquired in the fourth quarter of fiscal 2018 and increased customer demand for automation and integration systems from ProCobots, a U.S.- based automation integration company acquired by Hurco in the fourth quarter of fiscal 2019. European orders for fiscal 2019 decreased by 29%, compared to fiscal 2018, and included an unfavorable currency 29 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. to decreased shipments of Hurco vertical milling machines and Takumi bridge mill machines in China, partially offset by increased shipments of Hurco vertical milling machines in India. Net Sales and Service Fees by Product Category 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 – The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2019 and 2018 (dollars in thousands): 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 2019 2018 2017 Increase/Decrease ’19 vs. ’18 ’18 vs. ’17 Sales and service fees Gross profit Selling, general and administrative expenses Operating income Net income 100% 29% 21% 9% 7% 100% 31% 100% 29% 19% 11% 7% 20% 9% 6% -12% -16% -6% -33% -19% 23% 30% 17% 62% 42% Fiscal 2019 Compared to Fiscal 2018 Sales and Service Fees. Sales and service fees for fiscal 2019 were $263.4 million, a decrease of $37.3 million, or 12%, compared to fiscal 2018, and included an unfavorable currency impact of $8.5 million, or 3%, when translating foreign sales to U.S. Dollars for financial reporting purposes. Net Sales and Service Fees by Geographic Region The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2019 and 2018 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2019 $ 99,064 133,675 30,638 $ 263,377 37% 51% 12% 100% 2018 $ 90,902 166,202 43,567 $ 300,671 30% 55% 15% 100% Increase/Decrease Amount % $ 8,162 (32,527) (12,929) $ (37,294) 9% -20% -30% -12% Sales in the Americas for fiscal 2019 increased by 9%, compared to fiscal 2018, primarily attributable to sales of vertical milling machines from a U.S. machine tool distributor in California acquired by Hurco in the fourth quarter of fiscal 2018. European sales for fiscal 2019 decreased by 20%, compared to fiscal 2018, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The decrease in European sales for fiscal 2019 was primarily attributable to a reduced volume of shipments of Hurco machines in Germany and the United Kingdom, as well as a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary in Italy, LCM. Asian Pacific sales for fiscal 2019 decreased by 30%, compared to fiscal 2018, and included an unfavorable currency impact of 2%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The decrease in Asian Pacific sales for fiscal 2019 was primarily attributable 28 2019 Computerized Machine Tools $223,735 Computer Control Systems and Software †† Service Parts Service Fees Total 2,818 27,854 8,970 $263,377 85% 1% 11% 3% 100% Fiscal Year Ended October 31, 2018 $261,710 87% Increase/ Decrease Amount % $(37,975) -15% 2,870 27,501 8,590 $300,671 1% 9% 3% 100% (52) 353 380 $(37,294) -2% 1% 4% -12% †† 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 2019 decreased by 15% and 2%, respectively, and each included an unfavorable currency impact of 3%, compared to fiscal 2018. The year-over-year decrease in sales of computerized machine tools and computer control systems and software were mainly due to decreased sales of Hurco and Takumi machines in Germany, the United Kingdom and China, as well as a decrease in sales of electro-mechanical components and accessories manufactured by LCM, partially offset by an increase in sales of vertical milling machines from the U.S. machine tool distributor in California acquired by Hurco in the fourth quarter of fiscal 2018. Sales of service parts and service fees for fiscal 2019 increased by 1% and 4%, respectively, compared to fiscal 2018, due primarily to an increase in aftermarket sales and aftermarket service of Hurco products in North America. Orders and Backlog. Orders for fiscal 2019 were $241.1 million, a decrease of $64.7 million, or 21%, compared to fiscal 2018, and included an unfavorable currency impact of $8.5 million, or 3%, 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, 2019 and 2018 (dollars in thousands): Fiscal Year Ended October 31, 2018 2019 Americas Europe Asia Pacific Total $ 89,136 120,191 31,779 $ 241,106 37% 50% 13% 100% $ 94,160 170,366 41,319 $ 305,845 31% 56% 13% 100% Increase/Decrease Amount % $ (5,024) (50,175) (9,540) $ (64,739) -5% -29% -23% -21% Orders in the Americas for fiscal 2019 decreased by 5%, compared to fiscal 2018, primarily due to the fact that fiscal 2018 reflected orders resulting from year-end promotional activities following the September 2018 International Manufacturing Technology Show (“IMTS”), which is held every two years. The decrease in orders for fiscal 2019, compared to fiscal 2018, was partially offset by increased customer demand for vertical milling machines from the distributor in California acquired in the fourth quarter of fiscal 2018 and increased customer demand for automation and integration systems from ProCobots, a U.S.- based automation integration company acquired by Hurco in the fourth quarter of fiscal 2019. European orders for fiscal 2019 decreased by 29%, compared to fiscal 2018, and included an unfavorable currency 29 29 impact of 4%, when translating foreign orders to U.S. Dollars. The year-over-year decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany and Italy, as well as a decrease in customer demand for electro-mechanical components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2019 decreased by 23%, compared to fiscal 2018, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. Dollars, due mainly to decreased customer demand for Hurco and Takumi machines in China and India. Backlog at October 31, 2019 decreased to $32.7 million from $55.0 million at October 31, 2018, primarily due to a reduction in customer demand during fiscal 2019. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2019 are expected to be fulfilled in fiscal 2020. Gross Profit. Gross profit for fiscal 2019 was $77.2 million, or 29% of sales, compared to $91.8 million, or 31% of sales, for fiscal 2018. The year-over-year decrease in gross profit as a percentage of sales was primarily due to lower sales of more complex, higher-performance machines in the European sales region, the impact of fixed costs on lower sales and production volume, and competitive pricing pressures on a global basis. Operating Expenses. Selling, general and administrative expenses for fiscal 2019 were $54.7 million, or 21% of sales, compared to $58.0 million, or 19% of sales, in fiscal 2018, and included a favorable currency impact of $1.5 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses were primarily due to a decrease in tradeshow expenses associated with the September 2018 IMTS, decreased variable employee compensation and other operating expense reductions implemented during fiscal 2019, partially offset by increased operating expenses associated with the U.S. companies we acquired in the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2019. Operating Income. Operating income for fiscal 2019 was $22.5 million, or 9% of sales, compared to $33.8 million, or 11% of sales, in fiscal 2018. The year-over-year decrease in operating income was due to an overall reduction in sales volume year-over-year, particularly in Europe where our more complex, higher performance machines are primarily sold, as well as increased operating expenses associated with the U.S. companies we acquired in the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2019, partially offset by a reduction in other selling, general and administrative expenses . Other Expense, Net. Other expense, net for fiscal 2019 decreased by $1.8 million from fiscal 2018, due mainly to a reduction in foreign currency exchange losses in fiscal 2019, compared to fiscal 2018. Provision for Income Taxes. Our effective tax rate for fiscal 2019 was 25%, compared to 34% in fiscal 2018. The year-over-year decrease in the effective tax rate for fiscal 2019 principally resulted from the favorable impact of certain U.S. tax reform provisions available in the current fiscal year, including the full year impact of a lower U.S. corporate tax rate from 35% to 21%, a new deduction attributable to Foreign- Derived Intangible Income (“FDII”) and the benefit of foreign tax credits included in these tax reform provisions. In addition, the year-over year changes in the effective tax rates included a shift in geographic mix of income and loss among tax jurisdictions. The effective tax rate for fiscal 2018 included one-time charges of $2.9 million related to the U.S. Tax Cuts and Jobs Act that was enacted in December 2017. Net Income. Net income for fiscal 2019 was $17.5 million, or $2.55 per diluted share, a decrease of $4.0 million, or 19%, from fiscal 2018 net income of $21.5 million, or $3.15 per diluted share. 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. 30 30 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 (dollars 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 where our customers are located, particularly in China, the largest market for consumption of machines tools in the world. 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 (dollars 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 1% 9% 3% 2,324 24,255 7,777 and Software †† Service Parts Service Fees Total machine systems. Increase/Decrease Amount % $52,399 25% 546 3,246 813 23% 13% 10% 23% 86% 1% 10% 3% †† 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 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. 31 impact of 4%, when translating foreign orders to U.S. Dollars. The year-over-year decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany and Italy, as well as a decrease in customer demand for electro-mechanical components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2019 decreased by 23%, compared to fiscal 2018, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. Dollars, due mainly to decreased customer demand for Hurco and Takumi machines in China and India. Backlog at October 31, 2019 decreased to $32.7 million from $55.0 million at October 31, 2018, primarily due to a reduction in customer demand during fiscal 2019. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2019 are expected to be fulfilled in fiscal 2020. Gross Profit. Gross profit for fiscal 2019 was $77.2 million, or 29% of sales, compared to $91.8 million, or 31% of sales, for fiscal 2018. The year-over-year decrease in gross profit as a percentage of sales was primarily due to lower sales of more complex, higher-performance machines in the European sales region, the impact of fixed costs on lower sales and production volume, and competitive pricing pressures on a global basis. Operating Expenses. Selling, general and administrative expenses for fiscal 2019 were $54.7 million, or 21% of sales, compared to $58.0 million, or 19% of sales, in fiscal 2018, and included a favorable currency impact of $1.5 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses were primarily due to a decrease in tradeshow expenses associated with the September 2018 IMTS, decreased variable employee compensation and other operating expense reductions implemented during fiscal 2019, partially offset by increased operating expenses associated with the U.S. companies we acquired in the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2019. Operating Income. Operating income for fiscal 2019 was $22.5 million, or 9% of sales, compared to $33.8 million, or 11% of sales, in fiscal 2018. The year-over-year decrease in operating income was due to an overall reduction in sales volume year-over-year, particularly in Europe where our more complex, higher performance machines are primarily sold, as well as increased operating expenses associated with the U.S. companies we acquired in the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2019, partially offset by a reduction in other selling, general and administrative expenses . Other Expense, Net. Other expense, net for fiscal 2019 decreased by $1.8 million from fiscal 2018, due mainly to a reduction in foreign currency exchange losses in fiscal 2019, compared to fiscal 2018. Provision for Income Taxes. Our effective tax rate for fiscal 2019 was 25%, compared to 34% in fiscal 2018. The year-over-year decrease in the effective tax rate for fiscal 2019 principally resulted from the favorable impact of certain U.S. tax reform provisions available in the current fiscal year, including the full year impact of a lower U.S. corporate tax rate from 35% to 21%, a new deduction attributable to Foreign- Derived Intangible Income (“FDII”) and the benefit of foreign tax credits included in these tax reform provisions. In addition, the year-over year changes in the effective tax rates included a shift in geographic mix of income and loss among tax jurisdictions. The effective tax rate for fiscal 2018 included one-time charges of $2.9 million related to the U.S. Tax Cuts and Jobs Act that was enacted in December 2017. Net Income. Net income for fiscal 2019 was $17.5 million, or $2.55 per diluted share, a decrease of $4.0 million, or 19%, from fiscal 2018 net income of $21.5 million, or $3.15 per diluted share. 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. 30 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 (dollars 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 where our customers are located, particularly in China, the largest market for consumption of machines tools in the world. 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 (dollars in thousands): Fiscal Year Ended October 31, 2018 $ 261,710 2017 $ 209,311 Increase/Decrease Amount % 25% 87% Computerized Machine Tools Computer Control Systems 1% and Software †† Service Parts 9% Service Fees 3% 100% Total †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized 2,324 24,255 7,777 $ 243,667 2,870 27,501 8,590 $ 300,671 546 3,246 813 $57,004 1% 10% 3% 100% $52,399 23% 13% 10% 23% 86% 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. 31 31 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. 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 fiscal 2017. 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 fiscal 2017. 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 fiscal 2017. 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 U.S. 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. Liquidity and Capital Resources At October 31, 2019, we had cash and cash equivalents of $56.9 million, compared to $77.2 million at October 31, 2018. The decrease in cash and cash equivalents was primarily a result of a decrease in accounts receivable, partially offset by an increase in inventories year-over-year. Approximately 44% of our $56.9 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 $207.2 million at October 31, 2019, compared to $194.6 million at October 31, 2018. The increase in working capital was mostly driven by an increase in inventories and a reduction in accounts payable. Inventories were $148.9 million at October 31, 2019, compared to $137.6 million at October 31, 2018. Inventory turns at October 31, 2019 were 1.3, compared to 1.6 turns at October 31, 2018. Capital expenditures were $4.9 million in fiscal 2019, compared to $5.9 million in fiscal 2018. Capital expenditures for fiscal 2019 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions. We funded these expenditures with cash flows from operations. The purchase price for the ProCobots acquisition has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, which approximated $4.4 million. On December 7, 2012, we entered into a credit 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 terminated on its scheduled maturity date of December 31, 2018. On 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. 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 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%. 32 32 33 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 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. 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. 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 fiscal 2017. 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 fiscal 2017. 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 fiscal 2017. 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 U.S. 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 32 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. Liquidity and Capital Resources At October 31, 2019, we had cash and cash equivalents of $56.9 million, compared to $77.2 million at October 31, 2018. The decrease in cash and cash equivalents was primarily a result of a decrease in accounts receivable, partially offset by an increase in inventories year-over-year. Approximately 44% of our $56.9 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 $207.2 million at October 31, 2019, compared to $194.6 million at October 31, 2018. The increase in working capital was mostly driven by an increase in inventories and a reduction in accounts payable. Inventories were $148.9 million at October 31, 2019, compared to $137.6 million at October 31, 2018. Inventory turns at October 31, 2019 were 1.3, compared to 1.6 turns at October 31, 2018. Capital expenditures were $4.9 million in fiscal 2019, compared to $5.9 million in fiscal 2018. Capital expenditures for fiscal 2019 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions. We funded these expenditures with cash flows from operations. The purchase price for the ProCobots acquisition has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, which approximated $4.4 million. On December 7, 2012, we entered into a credit 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 terminated on its scheduled maturity date of December 31, 2018. On 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. 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 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%. 33 33 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. and credits… ...................... 6,188 133 639 506 4,911 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, our credit facility in China and (2) we terminated our United Kingdom credit facility. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”), respectively. Both the Taiwan and China credit facilities have a final maturity date of March 5, 2020. As a result, as of October 31, 2019, our existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. There were no borrowings under any of our credit facilities as of October 31, 2019, and we had $1.4 million of borrowings as of October 31, 2018. As of October 31, 2019, we were in compliance with the covenants contained in all of our credit facilities, and there was $51.2 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. In the last six years, we have implemented a strategic plan to expand our market reach to more customers with more products on a global basis. While the Hurco-branded computer control systems have been and continue to be our premium flagship product line, we have added other products to our portfolio that provide product diversity and market penetration opportunity, while minimizing the impact of geographic cyclicality, with products priced from entry-level to high performance serving a variety of different industries. We have not changed our overall strategy to design, manufacture and sell a comprehensive line of computerized machine tools; rather, we have enhanced this strategy through growth both organically and through acquisitions to ensure long-term stability and overall profitability. We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase. 34 34 Contractual Obligations and Commitments The following is a table of contractual obligations and commitments as of October 31, 2019 (in thousands): Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years $ 1,800 Operating leases .................... $ 13,401 $ 4,015 $ 5,373 $ 2,213 Accrued and deferred taxes Total ...................................... $ 19,589 $ 4,148 $ 6,012 $ 2,719 $ 6,711 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 2020 to be approximately $12.4 million, which includes investments for real estate development, software development, factory equipment and production facilities, as well as general software and equipment for selling facilities. We expect to fund these commitments with cash on hand and cash generated from operations. Off Balance Sheet Arrangements From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460). As of October 31, 2019, we had 21 outstanding third party payment guarantees totaling approximately $0.5 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 we believe to be reasonable under the circumstances. Revenue Recognition – We recognize revenues from the sale of machine tools, components and accessories and services and reflect the consideration to which we expect to be entitled. We record revenues based on 35 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 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, our credit facility in China and (2) we terminated our United Kingdom credit facility. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”), respectively. Both the Taiwan and China credit facilities have a final maturity date of March 5, 2020. As a result, as of October 31, 2019, our existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. There were no borrowings under any of our credit facilities as of October 31, 2019, and we had $1.4 million of borrowings as of October 31, 2018. As of October 31, 2019, we were in compliance with the covenants contained in all of our credit facilities, and there was $51.2 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. In the last six years, we have implemented a strategic plan to expand our market reach to more customers with more products on a global basis. While the Hurco-branded computer control systems have been and continue to be our premium flagship product line, we have added other products to our portfolio that provide product diversity and market penetration opportunity, while minimizing the impact of geographic cyclicality, with products priced from entry-level to high performance serving a variety of different industries. We have not changed our overall strategy to design, manufacture and sell a comprehensive line of computerized machine tools; rather, we have enhanced this strategy through growth both organically and through acquisitions to ensure long-term stability and overall profitability. 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, 2019 (in thousands): Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years $ 13,401 $ 4,015 $ 5,373 $ 2,213 More than 5 Years $ 1,800 6,188 133 639 506 4,911 Operating leases .................... Accrued and deferred taxes and credits… ...................... Total ...................................... $ 19,589 $ 4,148 $ 6,012 $ 2,719 $ 6,711 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 2020 to be approximately $12.4 million, which includes investments for real estate development, software development, factory equipment and production facilities, as well as general software and equipment for selling facilities. We expect to fund these commitments with cash on hand and cash generated from operations. Off Balance Sheet Arrangements From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460). As of October 31, 2019, we had 21 outstanding third party payment guarantees totaling approximately $0.5 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 we believe to be reasonable under the circumstances. Revenue Recognition – We recognize revenues from the sale of machine tools, components and accessories and services and reflect the consideration to which we expect to be entitled. We record revenues based on 34 35 35 a five-step model in accordance with FASB guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which is delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s 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. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. 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. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements. 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 federal, state and foreign 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 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 operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. 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. 36 36 37 a five-step model in accordance with FASB guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which is delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s 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. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. 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. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements. 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 federal, state and foreign tax laws. Our provision for income 36 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 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 operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. 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. 37 37 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, 2019, we had no borrowings outstanding under any of our credit facilities. Foreign Currency Exchange Risk In fiscal 2019, we derived approximately 63% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies. Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro. We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2019, 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): Notional Amount in Foreign Currency Weighted Avg. Forward Rate Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2019 Maturity Dates 14,675 1.1464 16,823 16,513 Nov 2019 - Oct 2020 4,150 1.3072 5,425 5,394 Nov 2019 - Oct 2020 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar 560,000 30.1610* 18,567 18,711 Nov 2019 - Oct 2020 *New Taiwan Dollars per U.S. Dollar Forward contracts for the sale or purchase of foreign currencies as of October 31, 2019, 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 2019 Maturity Dates 28,829 2,309 12,222 1.1308 1.2479 0.0675 32,599 2,882 825 32,457 Nov 2019 – Oct 2020 2,994 Nov 2019 – Jan 2020 804 Jan 2020 Forward Contracts Sale Contracts: Euro Sterling South African Rand Purchase Contracts: New Taiwan Dollar 856,033 30.6473* 27,932 28,247 Nov 2019 – Feb 2020 * 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 2018. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2019 and we entered into a new forward contract for the same notional amount that is set to mature in November 2020. As of October 31, 2019, we had $804,000 of realized gains and $129,000 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, 2019 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 2019 Maturity Date Forward Contracts Sale Contracts: Euro 3,000 1.1713 3,514 3,347 Nov 2019 38 38 39 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2019, we had no borrowings outstanding under any of our credit facilities. Interest Rate Risk Foreign Currency Exchange Risk In fiscal 2019, we derived approximately 63% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies. Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro. We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2019, 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 2019 Maturity Dates 14,675 1.1464 16,823 16,513 Nov 2019 - Oct 2020 4,150 1.3072 5,425 5,394 Nov 2019 - Oct 2020 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar 560,000 30.1610* 18,567 18,711 Nov 2019 - Oct 2020 *New Taiwan Dollars per U.S. Dollar Forward contracts for the sale or purchase of foreign currencies as of October 31, 2019, 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 2019 Maturity Dates 28,829 2,309 12,222 1.1308 1.2479 0.0675 32,599 2,882 825 32,457 Nov 2019 – Oct 2020 2,994 Nov 2019 – Jan 2020 804 Jan 2020 856,033 30.6473* 27,932 28,247 Nov 2019 – Feb 2020 Forward Contracts Sale Contracts: Euro Sterling 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 2018. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2019 and we entered into a new forward contract for the same notional amount that is set to mature in November 2020. As of October 31, 2019, we had $804,000 of realized gains and $129,000 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, 2019 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, 2019 Contract Date Maturity Date Forward Contracts Sale Contracts: Euro 3,000 1.1713 3,514 3,347 Nov 2019 38 39 39 Management’s Annual Report on Internal Control over Financial Reporting 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. Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2019, 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, 2019, 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, 2019. 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 3, 2020 To the Shareholders and the 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended October 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2019, 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, 2019, 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 3, 2020 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. /s/ RSM US LLP Indianapolis, Indiana January 3, 2020 We have served as the Company's auditor since 2017. 40 40 41 Management’s Annual Report on Internal Control over Financial Reporting 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. Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2019, 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, 2019, 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, 2019. 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 3, 2020 Executive Vice President, Secretary, Treasurer and Chief Financial Officer To the Shareholders and the 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended October 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2019, 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, 2019, 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 3, 2020 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. /s/ RSM US LLP We have served as the Company's auditor since 2017. Indianapolis, Indiana January 3, 2020 40 41 41 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 3, 2020 Report of Independent Registered Public Accounting Firm To the Shareholders and the 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, 2019, 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, 2019, 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows, for the three years then ended, and the related notes and schedule listed in Item 15(a) of the Company, and our report dated January 3, 2020 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 Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We 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. 42 42 43 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 3, 2020 Report of Independent Registered Public Accounting Firm To the Shareholders and the 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, 2019, 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, 2019, 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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows, for the three years then ended, and the related notes and schedule listed in Item 15(a) of the Company, and our report dated January 3, 2020 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 Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We 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. 42 43 43 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME HURCO COMPANIES, INC. Year Ended October 31, 2019 (In thousands, except per share amounts) 2018 2017 Year Ended October 31, 2019 2018 2017 (In thousands) Sales and service fees Cost of sales and service Gross profit $263,377 $300,671 $243,667 Net Income $17,495 $21,490 $15,115 186,169 208,865 173,103 Other comprehensive income (loss): 77,208 91,806 70,564 Translation gain (loss) of foreign currency financial statements 550 (3,183) 4,916 Selling, general and administrative expenses 54,668 58,010 49,661 (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(70), $453, and $(745), respectively (235) 1,355 (1,354) Operating income Interest expense Interest income Investment income Income from equity investments Other expense, net Income before income taxes Provision for income taxes 22,540 33,796 20,903 62 100 91 Gain / (loss) on derivative instruments, net of tax of $183, $52, and $(390), respectively 462 189 41 Total other comprehensive income (loss) (1,673) 2,853 356 339 138 Comprehensive income $18,425 $19,817 $17,968 155 (709) 615 930 583 555 639 505 2,367 780 23,324 32,496 20,716 5,829 11,006 5,601 Net income $17,495 $21,490 $15,115 Income per common share – basic Weighted average common shares outstanding – basic Income per common share – diluted Weighted average common shares outstanding – diluted Dividends paid per share $2.57 6,759 $2.55 6,815 $0.47 $3.19 6,700 $3.15 6,771 $0.43 $2.27 6,615 $2.25 6,680 $0.39 The accompanying notes are an integral part of the consolidated financial statements. 44 44 The accompanying notes are an integral part of the consolidated financial statements. 45 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended October 31, 2019 2018 2017 (In thousands, except per share amounts) 2019 Year Ended October 31, 2018 (In thousands) 2017 $263,377 $300,671 $243,667 Net Income $17,495 $21,490 $15,115 186,169 208,865 173,103 Other comprehensive income (loss): 77,208 91,806 70,564 Translation gain (loss) of foreign currency financial statements 550 (3,183) 4,916 Selling, general and administrative expenses 54,668 58,010 49,661 (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(70), $453, and $(745), respectively (235) 1,355 (1,354) 22,540 33,796 20,903 62 100 91 Gain / (loss) on derivative instruments, net of tax of $183, $52, and $(390), respectively 462 189 41 Total other comprehensive income (loss) 615 930 155 (709) (1,673) 2,853 356 339 138 Comprehensive income $18,425 $19,817 $17,968 Sales and service fees Cost of sales and service Gross profit Operating income Interest expense Interest income Investment income Income from equity investments Other expense, net Income before income taxes Provision for income taxes Income per common share – basic Weighted average common shares outstanding – basic Income per common share – diluted Weighted average common shares outstanding – diluted Dividends paid per share Net income $17,495 $21,490 $15,115 583 555 639 505 2,367 780 23,324 32,496 20,716 5,829 11,006 5,601 $2.57 6,759 $2.55 6,815 $0.47 $3.19 6,700 $3.15 6,771 $0.43 $2.27 6,615 $2.25 6,680 $0.39 The accompanying notes are an integral part of the consolidated financial statements. 44 The accompanying notes are an integral part of the consolidated financial statements. 45 45 HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS ASSETS ASSETS Current assets: Current assets: Cash and cash equivalents Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts Current assets: Accounts receivable, less allowance for doubtful accounts of $891 in 2019 and $1,027 in 2018 Cash and cash equivalents of $891 in 2019 and $1,027 in 2018 Inventories, net Accounts receivable, less allowance for doubtful accounts Inventories, net Derivative assets of $891 in 2019 and $1,027 in 2018 Derivative assets Prepaid assets Inventories, net Prepaid assets Other Derivative assets Other Total current assets Prepaid assets Total current assets Property and equipment: Other Property and equipment: Land Total current assets Land Building Property and equipment: Building Machinery and equipment Land Machinery and equipment Leasehold improvements Building Leasehold improvements Machinery and equipment Less accumulated depreciation and amortization Leasehold improvements Less accumulated depreciation and amortization Total property and equipment, net Total property and equipment, net Less accumulated depreciation and amortization Non-current assets: Non-current assets: Total property and equipment, net Software development costs, less accumulated amortization Software development costs, less accumulated amortization Non-current assets: Goodwill Goodwill Software development costs, less accumulated amortization Intangible assets, net Intangible assets, net Goodwill Deferred income taxes Deferred income taxes Intangible assets, net Investments and other assets, net Investments and other assets, net Deferred income taxes Total non-current assets Total non-current assets Investments and other assets, net Total assets Total assets Total non-current assets Total assets Current liabilities: Current liabilities: Accounts payable Accounts payable Current liabilities: Accounts payable-related parties Accounts payable-related parties Accounts payable Accrued payroll and employee benefits Accrued payroll and employee benefits Accounts payable-related parties Accrued income taxes Accrued income taxes Accrued payroll and employee benefits Accrued expenses and other Accrued expenses and other Accrued income taxes Accrued warranty expenses Accrued warranty expenses Accrued expenses and other Derivative liabilities Derivative liabilities Accrued warranty expenses Short-term debt Short-term debt Derivative liabilities Total current liabilities Total current liabilities Short-term debt Non-current liabilities: Non-current liabilities: Total current liabilities Accrued tax liability Accrued tax liability Non-current liabilities: Deferred income taxes Accrued tax liability Deferred income taxes Deferred credits and other Deferred income taxes Deferred credits and other Total non-current liabilities Deferred credits and other Total non-current liabilities Shareholders’ equity: Total non-current liabilities Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued Shareholders’ equity: Shareholders’ equity: Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized, Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued 6,967,719 and 6,891,508 shares issued; and 6,767,237 and 6,723,160 shares Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized, Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized, outstanding, as of October 31, 2019 and October 31, 2018, respectively 6,967,719 and 6,891,508 shares issued; and 6,767,237 and 6,723,160 shares 6,967,719 and 6,891,508 shares issued; and 6,767,237 and 6,723,160 shares Additional paid-in capital outstanding, as of October 31, 2019 and October 31, 2018, respectively outstanding, as of October 31, 2019 and October 31, 2018, respectively Retained earnings Additional paid-in capital Additional paid-in capital Accumulated other comprehensive loss Retained earnings Retained earnings Total shareholders’ equity Accumulated other comprehensive loss Accumulated other comprehensive loss Total liabilities and shareholders’ equity Total shareholders’ equity Total shareholders’ equity Total liabilities and shareholders’ equity Total liabilities and shareholders’ equity LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY -- 677 66,350 677 677 182,151 66,350 66,350 (8,933) 182,151 182,151 240,245 (8,933) (8,933) $ 301,065 240,245 240,245 $ 301,065 $ 301,065 The accompanying notes are an integral part of the consolidated financial statements. 46 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 46 As of October 31, HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS 2018 $ 77,170 As of October 31, 2019 (In thousands, except share 2018 2019 As of October 31, (In thousands, except share and per share data) 2018 2019 and per share data) $ 56,943 (In thousands, except share $ 56,943 $ 77,170 and per share data) 43,279 $ 56,943 43,279 148,851 148,851 1,391 43,279 1,391 9,414 148,851 9,414 1,983 1,391 1,983 261,861 9,414 261,861 1,983 868 261,861 868 7,352 7,352 28,846 868 28,846 4,902 7,352 4,902 41,968 28,846 41,968 (28,055) 4,902 (28,055) 13,913 41,968 13,913 (28,055) 13,913 8,318 8,318 5,847 5,847 8,318 1,096 1,096 5,847 1,846 1,846 1,096 8,184 8,184 1,846 25,291 25,291 8,184 $ 301,065 $ 301,065 25,291 $ 301,065 54,414 $ 77,170 54,414 137,609 137,609 3,085 54,414 3,085 7,332 137,609 7,332 1,825 3,085 1,825 281,435 7,332 281,435 1,825 868 281,435 868 7,352 7,352 26,840 868 26,840 3,801 7,352 3,801 38,861 26,840 38,861 (25,902) 3,801 (25,902) 12,959 38,861 12,959 (25,902) 12,959 7,452 7,452 2,377 2,377 7,452 938 938 2,377 2,234 2,234 938 8,012 8,012 2,234 21,013 21,013 8,012 $ 315,407 $ 315,407 21,013 $ 315,407 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 income tax 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 Cash flows from financing activities: Proceeds from exercise of common stock options Dividends paid Taxes paid related to net settlement of restricted shares Repayment of short-term debt Net cash provided by (used for) financing activities Effect of exchange rate changes on cash and cash equivalents Year Ended October 31, 2019 $ 17,495 2018 (In thousands) $ 21,490 2017 $ 15,115 (136) 260 (583) 730 (388) 3,745 2,670 11,239 (10,499) (1,474) (23,780) (2,354) (3,259) (157) 330 (252) (6,413) 83 (3,169) (1,701) 243 (4,353) (8,897) -- (3,203) (499) (1,450) (5,152) 388 (530) (639) 755 456 3,713 2,504 (5,148) (20,386) 710 10,788 3,090 2,934 2,061 (1,178) 4 21,012 180 (3,537) (2,326) 233 (1,156) (25) 1,108 (505) (851) (411) 3,616 1,698 1,331 563 1,638 80 8,529 (704) (844) 964 (930) 30,372 -- (2,181) (2,264) 417 -- 847 (2,898) 534 (2,590) (502) -- (295) -- (2,553) (2,351) 235 (990) 1,097 Net cash provided by (used for) investing activities (6,606) (4,028) Net increase (decrease) in cash and cash equivalents (20,227) 10,863 25,090 Cash and cash equivalents at beginning of year 77,170 66,307 41,217 Cash and cash equivalents at end of year $ 56,943 $ 77,170 $ 66,307 Supplemental disclosures: Cash paid for: Interest Income taxes, net $ 11 $ 11,025 $ 64 $ 6,172 $ 66 $ 4,867 The accompanying notes are an integral part of the consolidated financial statements. 47 $ 54,131 $ 54,131 3,387 3,387 $ 54,131 14,032 14,032 3,387 5,180 5,180 14,032 4,122 4,122 5,180 2,497 2,497 4,122 2,020 2,020 2,497 1,434 1,434 2,020 86,803 86,803 1,434 86,803 2,194 2,194 -- 2,194 -- 3,557 -- 3,557 5,751 3,557 5,751 5,751 -- -- -- 672 64,185 672 672 167,859 64,185 64,185 (9,863) 167,859 167,859 222,853 (9,863) (9,863) $ 315,407 222,853 222,853 $ 315,407 $ 315,407 $ 33,031 $ 33,031 938 938 $ 33,031 11,564 11,564 938 1,936 1,936 11,564 5,015 5,015 1,936 1,760 1,760 5,015 388 388 1,760 -- -- 388 54,632 54,632 -- 54,632 2,036 2,036 160 2,036 160 3,992 160 3,992 6,188 3,992 6,188 6,188 -- -- HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS As of October 31, 2019 2018 (In thousands, except share and per share data) $ 56,943 $ 77,170 Accounts receivable, less allowance for doubtful accounts of $891 in 2019 and $1,027 in 2018 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 income taxes Deferred credits and other Total non-current liabilities Shareholders’ equity: 43,279 148,851 1,391 9,414 1,983 261,861 868 7,352 28,846 4,902 41,968 (28,055) 13,913 8,318 5,847 1,096 1,846 8,184 25,291 $ 301,065 $ 33,031 938 11,564 1,936 5,015 1,760 388 -- 54,632 2,036 160 3,992 6,188 677 66,350 182,151 (8,933) 240,245 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 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 income tax 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 Cash flows from financing activities: Proceeds from exercise of common stock options Dividends paid Taxes paid related to net settlement of restricted shares Repayment of short-term debt Net cash provided by (used for) financing activities Effect of exchange rate changes on cash and cash equivalents Year Ended October 31, 2019 $ 17,495 2018 (In thousands) $ 21,490 2017 $ 15,115 (136) 260 (583) 730 (388) 3,745 2,670 11,239 (10,499) (1,474) (23,780) (2,354) (3,259) (157) 330 (252) (6,413) 83 (3,169) (1,701) 243 (4,353) (8,897) -- (3,203) (499) (1,450) (5,152) 388 (530) (639) 755 456 3,713 2,504 (5,148) (20,386) 710 10,788 3,090 2,934 2,061 (1,178) 4 21,012 180 (3,537) (2,326) 233 (1,156) (6,606) 847 (2,898) (502) -- (2,553) (25) 1,108 (505) (851) (411) 3,616 1,698 563 1,638 80 8,529 1,331 (704) (844) 964 (930) 30,372 -- (2,181) (2,264) 417 -- (4,028) 534 (2,590) (295) -- (2,351) 235 (990) 1,097 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, 6,967,719 and 6,891,508 shares issued; and 6,767,237 and 6,723,160 shares outstanding, as of October 31, 2019 and October 31, 2018, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of the consolidated financial statements. $ 301,065 $ 315,407 46 Net increase (decrease) in cash and cash equivalents (20,227) 10,863 25,090 -- -- Cash and cash equivalents at beginning of year 77,170 66,307 41,217 Cash and cash equivalents at end of year $ 56,943 $ 77,170 $ 66,307 Supplemental disclosures: Cash paid for: Interest Income taxes, net $ 11 $ 11,025 $ 64 $ 6,172 $ 66 $ 4,867 The accompanying notes are an integral part of the consolidated financial statements. 47 47 Balances, October 31, 2016 Balances, October 31, 2016 Balances, October 31, 2016 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 Stock-based compensation Stock-based compensation Dividends paid expense expense Dividends paid Dividends paid Balances, October 31, 2017 Net income Balances, October 31, 2017 Balances, October 31, 2017 Other comprehensive income (loss) Net income Net income Exercise of common stock options Other comprehensive income Other comprehensive income Stock-based compensation (loss) (loss) expense, net of taxes withheld Exercise of common stock options Exercise of common stock options for vested restricted shares Dividends paid Stock-based compensation Stock-based compensation expense, net of taxes withheld expense, net of taxes withheld Balances, October 31, 2018 for vested restricted shares for vested restricted shares Dividends paid Dividends paid Balances, October 31, 2018 Balances, October 31, 2018 Net income Other comprehensive income (loss) Stock-based compensation Net income Net income expense, net of taxes withheld for vested restricted shares Other comprehensive income Other comprehensive income Dividends paid (loss) (loss) Stock-based compensation Stock-based compensation Balances, October 31, 2019 expense, net of taxes withheld expense, net of taxes withheld for vested restricted shares for vested restricted shares Dividends paid Dividends paid 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 (In thousands, except shares outstanding) outstanding) outstanding) Common Common Common Stock Stock Stock Shares Outstanding Shares Shares Outstanding Outstanding Common Common Common Stock Stock Stock Amount Amount Amount Accumulated Accumulated Accumulated Other Other Other Comprehensive Comprehensive Comprehensive Loss Loss Loss ($11,043) Retained Earnings Retained Retained Earnings Earnings $136,742 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Total Total Total $185,475 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 $4.2 million and $4.0 million as of October 31, 2019 and 2018, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Intercompany accounts and transactions have been $136,742 $136,742 15,115 ($11,043) ($11,043) -- $185,475 $185,475 15,115 eliminated. 15,115 15,115 -- -- -- -- -- -- -- (2,590) -- -- 15,115 15,115 2,853 -- 2,853 2,853 -- -- -- -- 2,853 534 1,698 (2,590) 2,853 2,853 534 534 -- -- (2,590) (2,590) $149,267 -- -- -- -- ($8,190) 1,698 1,698 (2,590) (2,590) $203,085 being hedged. Additional Additional Additional Paid-In Paid-In Paid-In Capital Capital Capital $59,119 $59,119 $59,119 -- -- -- -- 531 -- -- 531 531 1,694 -- 1,694 1,694 -- -- $61,344 6,573,103 6,573,103 6,573,103 -- -- -- -- 29,164 -- -- 29,164 29,164 38,930 -- 38,930 38,930 -- -- 6,641,197 $657 $657 $657 -- -- -- -- 3 -- -- 3 3 4 -- 4 4 -- -- $664 6,641,197 6,641,197 -- -- $664 $664 $61,344 $61,344 -- 21,490 $149,267 $149,267 -- ($8,190) ($8,190) 21,490 $203,085 $203,085 -- -- -- 41,680 -- -- 41,680 41,680 40,283 -- 6,723,160 40,283 40,283 -- -- 6,723,160 6,723,160 -- -- -- -- 44,077 -- -- -- 6,767,237 44,077 44,077 -- -- -- -- -- 4 -- -- 4 4 4 -- $672 4 4 -- -- -- $672 $672 -- -- -- 5 -- -- -- $677 5 5 -- -- -- 843 -- -- -- -- 843 843 1,998 -- $64,185 1,998 1,998 -- -- -- $64,185 $64,185 -- -- 21,490 21,490 -- -- -- -- -- -- (2,898) $167,859 -- -- (2,898) (2,898) 17,495 (1,673) -- -- -- (1,673) 847 21,490 21,490 (1,673) (1,673) -- -- -- -- (1,673) (1,673) 847 847 2,002 (2,898) ($9,863) -- -- -- -- $222,853 2,002 2,002 (2,898) (2,898) -- 17,495 $167,859 $167,859 -- ($9,863) ($9,863) 930 $222,853 $222,853 930 -- -- 2,165 -- -- -- 17,495 17,495 -- (3,203) -- -- $66,350 2,165 2,165 -- -- $182,151 -- -- (3,203) (3,203) -- -- 17,495 17,495 instruments is foreign currency risk. -- -- 930 930 2,170 (3,203) 930 930 ($8,933) $240,245 -- -- -- -- 2,170 2,170 (3,203) (3,203) Balances, October 31, 2019 Balances, October 31, 2019 6,767,237 6,767,237 $677 $677 $66,350 $66,350 $182,151 $182,151 ($8,933) ($8,933) $240,245 $240,245 The accompanying notes are an integral part of the consolidated financial statements. gain or loss is reported in earnings immediately. 48 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 48 48 48 Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation. This reclassification has no impact on previously reported net income or shareholders’ equity. Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items 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, 2019, were a net loss of $10.0 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net. Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative 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 For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks 49 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 (In thousands, except shares (In thousands, except shares outstanding) outstanding) Net income Net income (loss) (loss) Other comprehensive income Other comprehensive income Stock-based compensation Stock-based compensation expense expense Dividends paid Dividends paid Other comprehensive income Other comprehensive income Net income Net income (loss) (loss) Exercise of common stock options Exercise of common stock options Stock-based compensation Stock-based compensation expense, net of taxes withheld expense, net of taxes withheld for vested restricted shares for vested restricted shares Dividends paid Dividends paid Net income Net income (loss) (loss) Other comprehensive income Other comprehensive income Stock-based compensation Stock-based compensation expense, net of taxes withheld expense, net of taxes withheld for vested restricted shares for vested restricted shares Dividends paid Dividends paid -- -- -- -- 38,930 38,930 -- -- -- -- -- -- 41,680 41,680 40,283 40,283 -- -- -- -- -- -- -- -- Common Common Stock Stock Shares Shares Outstanding Outstanding Common Common Additional Additional Stock Stock Amount Amount Paid-In Paid-In Capital Capital Accumulated Accumulated Other Other Retained Retained Earnings Earnings Comprehensive Comprehensive Loss Loss Total Total Balances, October 31, 2016 Balances, October 31, 2016 6,573,103 6,573,103 $657 $657 $59,119 $59,119 $136,742 $136,742 ($11,043) ($11,043) $185,475 $185,475 Exercise of common stock options Exercise of common stock options 29,164 29,164 531 531 -- -- -- -- 3 3 4 4 -- -- -- -- -- -- 15,115 15,115 -- -- 15,115 15,115 -- -- -- -- 2,853 2,853 -- -- 2,853 2,853 534 534 1,694 1,694 -- -- -- -- (2,590) (2,590) -- -- -- -- 1,698 1,698 (2,590) (2,590) Balances, October 31, 2017 Balances, October 31, 2017 6,641,197 6,641,197 $664 $664 $61,344 $61,344 $149,267 $149,267 ($8,190) ($8,190) $203,085 $203,085 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 -- -- -- -- 4 4 4 4 -- -- -- -- -- -- 5 5 -- -- -- -- -- -- 843 843 1,998 1,998 -- -- -- -- -- -- 21,490 21,490 (2,898) (2,898) 17,495 17,495 -- -- -- -- -- -- -- -- -- -- 21,490 21,490 (1,673) (1,673) 847 847 2,002 2,002 (2,898) (2,898) 17,495 17,495 (1,673) (1,673) -- -- -- -- -- -- -- -- -- -- -- -- -- -- 930 930 930 930 44,077 44,077 2,165 2,165 -- -- (3,203) (3,203) 2,170 2,170 (3,203) (3,203) Balances, October 31, 2019 Balances, October 31, 2019 6,767,237 6,767,237 $677 $677 $66,350 $66,350 $182,151 $182,151 ($8,933) ($8,933) $240,245 $240,245 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 48 48 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 $4.2 million and $4.0 million as of October 31, 2019 and 2018, 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 the current year presentation. This reclassification has no impact on previously reported net income or shareholders’ equity. Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items being hedged. Translation of Foreign Currencies. All balance sheet accounts of non-U.S. subsidiaries are translated at the exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss in shareholders' equity. Income and expenses are translated at the average exchange rates during the year. Cumulative foreign currency translation adjustments, net of gains related to our net investment hedges, as of October 31, 2019, were a net loss of $10.0 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net. Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, 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 (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks 49 49 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts. Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts 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, 2019, in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from November 2019 through October 2020. The contract amount at forward rates in U.S. Dollars at October 31, 2019 for Euros and Pounds Sterling was $16.5 million and $5.4 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $18.7 million at October 31, 2019. At October 31, 2019, we had approximately $612,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $373,000 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 2020, 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 2018. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2019, and we entered into a new forward contract for the same notional amount that is set to mature in November 2020. As of October 31, 2019, we had a realized gain of $804,000 and an unrealized gain of $129,000, 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, 2019, in Euros, Pound Sterling, South African Rand and New Taiwan Dollars with set maturity dates ranging from November 2019 through October 2020. The contract amounts at forward rates in U.S. Dollars at October 31, 2019 for Euros, Pounds Sterling and South African Rand totaled $36.3 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $28.2 million at October 31, 2019. 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, 2019 and October 31, 2018, 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 2019 Balance Sheet Location Fair Value 2018 Balance Sheet Location Derivative assets Derivative liabilities $ 751 $ 99 Derivative assets Derivative liabilities Fair Value $ 2,654 $ 1,616 Not Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Derivative assets Derivative liabilities $ 640 Derivative assets $ 289 Derivative liabilities $ 431 $ 404 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, 2019, 2018, and 2017 (in thousands): Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) Location of Gain (Loss) Reclassified From Other Comprehensive Income (Loss) Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) 2019 2018 2017 2019 2018 2017 $ 615 $ 155 $ (709) $ 128 $ 136 $ (96) Cost of sales and service $ 235 $(1,355) $1,354 We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2019 and 2018. We recognized a gain of $18,000 during the fiscal year ended October 31, 2017 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 50 50 51 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, 2019, in Euros, Pound Sterling, South African Rand and New Taiwan Dollars with set maturity dates ranging from November 2019 through October 2020. The contract amounts at forward rates in U.S. Dollars at October 31, 2019 for Euros, Pounds Sterling and South African Rand totaled $36.3 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $28.2 million at October 31, 2019. 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, 2019 and October 31, 2018, 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 2019 Balance Sheet Location Fair Value 2018 Balance Sheet Location Derivative assets Derivative liabilities $ 751 $ 99 Derivative assets Derivative liabilities Fair Value $ 2,654 $ 1,616 Not Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Derivative assets Derivative liabilities $ 640 Derivative assets $ 289 Derivative liabilities $ 431 $ 404 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, 2019, 2018, and 2017 (in thousands): (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts. Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts 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, 2019, in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from November 2019 through October 2020. The contract amount at forward rates in U.S. Dollars at October 31, 2019 for Euros and Pounds Sterling was $16.5 million and $5.4 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $18.7 million at October 31, 2019. At October 31, 2019, we had approximately $612,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $373,000 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 2020, 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 2018. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2019, and we entered into a new forward contract for the same notional amount that is set to mature in November 2020. As of October 31, 2019, we had a realized gain of $804,000 and an unrealized gain of $129,000, 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 years ended October 31, 2019 and 2018. We recognized a gain of $18,000 during the fiscal year ended October 31, 2017 as a result of contracts closed early that were deemed ineffective for financial reporting and did not qualify as cash flow hedges. 50 51 51 Derivatives Designated as Hedging Instruments: (Effective Portion) Foreign exchange forward contracts – Intercompany sales/purchases – Net Investment $ 615 $ 155 $ (709) $ 128 $ 136 $ (96) Cost of sales and service $ 235 $(1,355) $1,354 Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) 2018 Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) 2018 Location of Gain (Loss) Reclassified From Other Comprehensive Income (Loss) 2019 2017 2019 2017 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, 2019, 2018, and 2017 on derivative instruments not designated as hedging instruments (in thousands): Derivatives Location of Gain (Loss) Recognized in Operations Amount of Gain (Loss) Recognized in Operations 2018 2019 2017 Not Designated as Hedging Instruments: Foreign exchange forward contracts Other expense, net $ 514 $ (963) $(1,001) The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2019 and 2018 (in thousands): Balance, October 31, 2017 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2018 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2019 Foreign Currency Translation $ (7,409) (3,183) -- $ (10,592) Cash Flow Hedges $ (781) 155 1,355 $ 729 550 -- $ (10,042) 615 (235) $ 1,109 Total $ (8,190) (3,028) 1,355 $ (9,863) 1,165 (235) $ (8,933) 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 $2.6 million for fiscal 2019 and $2.5 million for each of the fiscal years ended October 31, 2018 and 2017. Revenue Recognition. We design, manufacture and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support. 52 52 We adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”) on November 1, 2018, the start of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption. Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606. Therefore, the adoption of ASC 606 did not have an effect on our beginning retained earnings or our overall financial statements as of and for the twelve months ended October 31, 2019. We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which is delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s 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. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted. Product Warranty. Expected future product warranty claims are recorded to expense when the product is sold. Product warranty estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Warranty claims are influenced by factors such as new product introductions, technological developments, the competitive environment, and the costs of component parts. Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in future periods. See Note 12 of Notes to Consolidated Financial Statements for further discussion of warranties. 53 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, 2019, 2018, and 2017 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 2019 2018 2017 $ 514 $ (963) $(1,001) The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2019 and 2018 (in thousands): Other comprehensive income (loss) before reclassifications (3,183) Other comprehensive income (loss) before reclassifications Foreign Currency Translation Cash Flow Hedges $ (7,409) -- $ (10,592) 550 -- $ (781) 155 1,355 $ 729 615 (235) Total $ (8,190) (3,028) 1,355 $ (9,863) 1,165 (235) $ (10,042) $ 1,109 $ (8,933) 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 Balance, October 31, 2017 Reclassifications Balance, October 31, 2018 Reclassifications Balance, October 31, 2019 value. 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 $2.6 million for fiscal 2019 and $2.5 million for each of the fiscal years ended October 31, 2018 and 2017. Revenue Recognition. We design, manufacture and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support. 52 We adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”) on November 1, 2018, the start of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption. Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606. Therefore, the adoption of ASC 606 did not have an effect on our beginning retained earnings or our overall financial statements as of and for the twelve months ended October 31, 2019. We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which is delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s 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. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted. Product Warranty. Expected future product warranty claims are recorded to expense when the product is sold. Product warranty estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Warranty claims are influenced by factors such as new product introductions, technological developments, the competitive environment, and the costs of component parts. Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in future periods. See Note 12 of Notes to Consolidated Financial Statements for further discussion of warranties. 53 53 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 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 $4.4 million, $4.7 million, and $4.2 million, in fiscal 2019, 2018, and 2017, 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 $1.8 million in fiscal 2019, $2.3 million in fiscal 2018, and $2.3 million in fiscal 2017 related to software development projects. Amortization expense for software development costs was $1.0 million, $1.1 million, and $1.0 million, for the fiscal years ended October 31, 2019, 2018, and 2017, respectively. Accumulated amortization at October 31, 2019 and 2018 was $19.5 million and $18.5 million, respectively. Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands): Fiscal Year 2020 2021 2022 2023 2024 Amortization Expense $ 1,500 1,950 1,900 1,550 1,000 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, 2019. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. 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. The changes in the carrying amounts of goodwill for the fiscal year ended October 31, 2019 were as follows (in thousands): Balance as of October 31, 2018 Goodwill acquired Impact of foreign currency translation Balance as of October 31, 2019 $ 2,377 3,500 (30) $ 5,847 There were no impairments recognized with respect to the carrying value of goodwill or intangible assets for the years ended October 31, 2019, 2018 or 2017. “Earnings Per Share.” 54 54 55 As of October 31, 2019, the balances of intangible assets, other than goodwill, were as follows (in thousands): 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 6 years 8 years Weighted Average Amortization Period indefinite 13 years 15 years 13 years 6 years 8 years Gross Intangible Assets $ 60 408 372 683 2,972 375 $ 4,870 Gross Intangible Assets $ 60 238 255 692 2,973 377 $ 4,595 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Patents Other Total Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Patents Other Total Accumulated Amortization Net Intangible Assets $ -- $ 60 (114) (173) (333) (2,813) (341) $ (3,774) 294 199 350 159 34 $ 1,096 Accumulated Amortization Net Intangible Assets $ -- $ 60 (98) (148) (284) (2,790) (337) $ (3,657) 140 107 408 183 40 $ 938 Intangible asset amortization expense was $117,000, $107,000, and $136,000 for fiscal 2019, 2018 and 2017, respectively. Annual intangible asset amortization expense is estimated to be $132,000 per year for fiscal years 2020 through 2024. 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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 $4.4 million, $4.7 million, and $4.2 million, in fiscal 2019, 2018, and 2017, 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 $1.8 million in fiscal 2019, $2.3 million in fiscal 2018, and $2.3 million in fiscal 2017 related to software development projects. Amortization expense for software development costs was $1.0 million, $1.1 million, and $1.0 million, for the fiscal years ended October 31, 2019, 2018, and 2017, respectively. Accumulated amortization at October 31, 2019 and 2018 was $19.5 million and $18.5 million, respectively. Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands): Fiscal Year Amortization Expense 2020 2021 2022 2023 2024 $ 1,500 1,950 1,900 1,550 1,000 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, 2019. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. 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. The changes in the carrying amounts of goodwill for the fiscal year ended October 31, 2019 were as follows (in thousands): Balance as of October 31, 2018 Goodwill acquired Impact of foreign currency translation Balance as of October 31, 2019 $ 2,377 3,500 (30) $ 5,847 There were no impairments recognized with respect to the carrying value of goodwill or intangible assets for the years ended October 31, 2019, 2018 or 2017. As of October 31, 2019, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Average Amortization Period indefinite 13 years 15 years 13 years 6 years 8 years Gross Intangible Assets $ 60 408 372 683 2,972 375 $ 4,870 Accumulated Amortization $ -- (114) (173) (333) (2,813) (341) $ (3,774) Net Intangible Assets $ 60 294 199 350 159 34 $ 1,096 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Patents Other Total 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 6 years 8 years Gross Intangible Assets $ 60 238 255 692 2,973 377 $ 4,595 Accumulated Amortization $ -- (98) (148) (284) (2,790) (337) $ (3,657) Net Intangible Assets $ 60 140 107 408 183 40 $ 938 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Patents Other Total Intangible asset amortization expense was $117,000, $107,000, and $136,000 for fiscal 2019, 2018 and 2017, respectively. Annual intangible asset amortization expense is estimated to be $132,000 per year for fiscal years 2020 through 2024. 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.” 54 55 55 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. The following table presents a reconciliation of our basic and diluted earnings per share computation: (in thousands, except per share amounts) 2019 Fiscal Year Ended October 31, 2018 2017 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 $17,495 Diluted $17,495 Basic Diluted $21,490 $21,490 Basic Diluted $15,115 $15,115 (147) (147) (132) (132) (100) (100) $17,348 $17,348 $21,358 $21,358 $15,015 $15,015 2. BUSINESS OPERATIONS 6,759 6,759 6,700 6,700 6,615 6,615 -- 6,759 $2.57 56 6,815 $2.55 -- 6,700 $3.19 71 6,771 $3.15 -- 6,615 $2.27 65 6,680 $2.25 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. Net deferred tax assets and liabilities are classified as non- current in the consolidated financial statements. 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 federal, state and foreign 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 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 operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. 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. 56 56 57 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. Nature of Business. We design, manufacture and sell computerized CNC machine tools, computer control systems and software products, machine tool components, automation equipment and solutions for job shops, 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 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 190 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, Taiwan, the United Kingdom, and certain areas of the United condition. 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. The following table presents a reconciliation of our basic and diluted earnings per share computation: (in thousands, except per share amounts) 2019 2018 2017 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 $17,495 $17,495 $21,490 $21,490 $15,115 $15,115 (147) (147) (132) (132) (100) (100) 6,759 6,759 6,700 6,700 6,615 6,615 -- 6,759 $2.57 56 6,815 $2.55 -- 6,700 $3.19 71 6,771 $3.15 -- 6,615 $2.27 65 6,680 $2.25 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. Net deferred tax assets and liabilities are classified as non- current in the consolidated financial statements. 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 federal, state and foreign 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. affect these estimates. 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 We operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. 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. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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. $17,348 $17,348 $21,358 $21,358 $15,015 $15,015 2. BUSINESS OPERATIONS Nature of Business. We design, manufacture and sell computerized CNC machine tools, computer control systems and software products, machine tool components, automation equipment and solutions for job shops, 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 190 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, 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. 57 57 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 3. INVENTORIES Inventories as of October 31, 2019 and 2018 are summarized below (in thousands): Purchased parts and sub-assemblies Work-in-process Finished goods 2019 $ 32,074 20,901 95,876 $ 148,851 2018 $ 38,303 22,786 76,520 $ 137,609 Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia was $12.0 million and $9.9 million as of October 31, 2019 and 2018, respectively. 4. ACQUISITION OF BUSINESS On August 5, 2019, we (through a newly-formed subsidiary, ProCobots, LLC) acquired substantially all of the assets of a U.S.-based automation integration company for approximately $4.4 million. This acquired business provides automation solutions that can be integrated with any machine tool. The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, and approximated $4.4 million. The allocation of the opening balance sheet of ProCobots as of August 5, 2019 is as follows (in thousands): Current assets Property plant and equipment Intangibles Goodwill Total assets Current liabilities Total liabilities $ 349 452 148 3,500 4,449 96 96 Total purchase price and cash expended $ 4,353 The acquisition was accounted for in accordance with ASC Topic 805, Business Combinations. Accordingly, the total purchase price was allocated to tangible assets and liabilities based on their fair value and the intangibles and goodwill were allocated on a provisional basis at the date of acquisition. These allocations reflected various provisional estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are in the process of being finalized. The results of operations of ProCobots have been included in the consolidated financial statements from the date of acquisition. 5. CREDIT AGREEMENTS AND BORROWINGS On December 7, 2012, we entered into a credit 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 terminated on its scheduled maturity date of December 31, 2018. On 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 58 58 Agreement. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020. Borrowings under the 2018 Credit Agreement 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 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, our credit facility in China and (2) we terminated our United Kingdom credit facility. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”), respectively. Both the Taiwan and China credit facilities have a final maturity date of March 5, 2020. As a result, as of October 31, 2019, our existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. As of October 31, 2019, there were no borrowings under any of our credit facilities and there was $51.2 million of available borrowing capacity thereunder. 6. FINANCIAL INSTRUMENTS Estimated Fair Value of Financial Instruments FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs 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 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 3. INVENTORIES Inventories as of October 31, 2019 and 2018 are summarized below (in thousands): Purchased parts and sub-assemblies Work-in-process Finished goods 2019 $ 32,074 20,901 95,876 $ 148,851 2018 $ 38,303 22,786 76,520 $ 137,609 Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia was $12.0 million and $9.9 million as of October 31, 2019 and 2018, respectively. 4. ACQUISITION OF BUSINESS On August 5, 2019, we (through a newly-formed subsidiary, ProCobots, LLC) acquired substantially all of the assets of a U.S.-based automation integration company for approximately $4.4 million. This acquired business provides automation solutions that can be integrated with any machine tool. The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, and approximated $4.4 million. The allocation of the opening balance sheet of ProCobots as of August 5, 2019 is as follows (in thousands): Current assets Property plant and equipment Intangibles Goodwill Total assets Current liabilities Total liabilities $ 349 452 148 3,500 4,449 96 96 Total purchase price and cash expended $ 4,353 The acquisition was accounted for in accordance with ASC Topic 805, Business Combinations. Accordingly, the total purchase price was allocated to tangible assets and liabilities based on their fair value and the intangibles and goodwill were allocated on a provisional basis at the date of acquisition. These allocations reflected various provisional estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are in the process of being finalized. The results of operations of ProCobots have been included in the consolidated financial statements from the date of acquisition. 5. CREDIT AGREEMENTS AND BORROWINGS On December 7, 2012, we entered into a credit 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 terminated on its scheduled maturity date of December 31, 2018. On 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 58 Agreement. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020. Borrowings under the 2018 Credit Agreement 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 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, our credit facility in China and (2) we terminated our United Kingdom credit facility. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”), respectively. Both the Taiwan and China credit facilities have a final maturity date of March 5, 2020. As a result, as of October 31, 2019, our existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. As of October 31, 2019, there were no borrowings under any of our credit facilities and there was $51.2 million of available borrowing capacity thereunder. 6. FINANCIAL INSTRUMENTS Estimated Fair Value of Financial Instruments FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs 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 59 59 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 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. GILTI tax. measurement of its deferred taxes (the “deferred method”). We have elected the period cost method to account for 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, 2019 and 2018 (in thousands): The Tax Reform Act also created FDII for US companies that derive income from the export of tangible and intangible property and services effective for us in fiscal 2019. We have recorded a deduction attributable to FDII Assets Liabilities October 31, 2019 October 31, 2018 October 31, 2019 October 31, 2018 Level 1 Deferred compensation Level 2 Derivatives Recurring Fair Value Measurements $ 1,991 $ 1,391 $ 1,723 $ -- $ 3,085 $ 388 $ -- $ 2,020 Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices which are readily available. Included as Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying consolidated financial statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 1 of Notes to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these contracts was $108.6 million and $145.2 million at October 31, 2019 and 2018, 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. 7. INCOME TAXES In December 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, and implementing a modified territorial tax system from a global system by adding provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign- derived Intangible Income (”FDII”) among other provisions. The GILTI and FDII provisions under the Tax Reform Act became effective for the Company in fiscal 2019. The Tax Reform Act also imposed a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, which was recorded in fiscal 2018. In December 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. The Tax Reform Act created a new requirement that GILTI income earned by Controlled Foreign Corporations (“CFC’s”) must be included in the gross income of the CFC’s U.S. shareholder effective for us in fiscal 2019 for the Company. Under U.S. Generally Accepted Accounting Principles, we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s 60 HURCO COMPANIES, INC. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued measurement of its deferred taxes (the “deferred method”). We have elected the period cost method to account for GILTI tax. 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): Current: U.S. taxes Foreign taxes Deferred: U.S. taxes Foreign taxes 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 US tax on distributed and undistributed earnings US benefit of foreign intangible income Other Effective tax rate Year Ended October 31, 2019 $ 1,854 3,715 5,569 2018 $ 6,333 5,203 11,536 2017 $ 308 4,185 4,493 (31) 291 260 (326) (204) (530) 1,236 (128) 1,108 $ 5,829 $ 11,006 $ 5,601 Year Ended October 31, 2019 2018 2017 $ 9,793 13,531 $ 23,324 $ 14,101 18,395 $ 32,496 $ 5,477 15,239 $ 20,716 21% 4% 1% 1% (2%) 0% (1%) 3% (3%) 1% 25% 23% 34% 2% 0% 0% (1%) 4% 7% 0% 0% (1%) (5%) 1% 0% (3%) 0% 0% 0% 0% 0% 34% 27% based on our current operations. In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands): A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as follows (dollars in thousands): Current: U.S. taxes Foreign taxes Deferred: U.S. taxes Foreign taxes 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 US tax on distributed and undistributed earnings US benefit of foreign intangible income Other Effective tax rate Year Ended October 31, 2019 $ 1,854 3,715 5,569 2018 $ 6,333 5,203 11,536 2017 $ 308 4,185 4,493 (31) 291 260 (326) (204) (530) 1,236 (128) 1,108 $ 5,829 $ 11,006 $ 5,601 Year Ended October 31, 2019 2018 2017 $ 9,793 13,531 $ 23,324 $ 14,101 18,395 $ 32,496 $ 5,477 15,239 $ 20,716 21% 4% 1% 1% (2%) 0% (1%) 3% (3%) 1% 25% 23% 34% 2% 0% 0% (1%) 4% 7% 0% 0% (1%) (5%) 1% 0% (3%) 0% 0% 0% 0% 0% 34% 27% The Tax Reform Act also made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S federal income tax. At October 31, 2019, undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested. Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries since January 1, 2018. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax 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. Net deferred tax assets and liabilities are classified as non-current in the consolidated As of October 31, 2019, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.4 million, primarily related to certain states in the U.S. and foreign jurisdictions. We also had deferred tax assets for research and development tax credits of $0.8 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2019 and 2018, the balance of this valuation allowance was $2.2 million and $2.1 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2019 and 2018 are as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves Accrued warranty expenses Compensation related expenses Unrealized exchange gain/loss Other accrued expenses Net operating loss carryforwards Other credit carryforwards Other carryforwards Deferred tax assets Deferred Tax Liabilities: Net derivative instruments Other Net deferred tax assets Less: Valuation allowance - net operating loss and other credit Property and equipment and capitalized software development costs October 31, 2019 2018 $ 1,224 $ 1,325 363 2,723 143 170 1,380 766 293 7,062 499 2,644 159 170 1,316 686 350 7,149 (2,227) 4,835 (2,106) 5,043 (313) (2,632) (204) $ 1,686 (208) (2,370) (231) $ 2,234 As of October 31, 2019, we had net operating losses carryforwards for international and U.S. income tax purposes of $5.9 million, of which $5.2 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2020 and $0.7 million will expire between 5 and 20 years. We also had tax credits of $765,000 that will expire between years 2023 and 2030. The Tax Reform Act also created FDII for US companies that derive income from the export of tangible and intangible property and services effective for us in fiscal 2019. We have recorded a deduction attributable to FDII financial statements. based on our current operations. In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands): The Tax Reform Act also made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S federal income tax. At October 31, 2019, undistributed earnings of our foreign subsidiaries are expected to be 62 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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. measurement of its deferred taxes (the “deferred method”). We have elected the period cost method to account for GILTI tax. 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, 2019 and 2018 (in thousands): Assets Liabilities October 31, October 31, October 31, October 31, 2019 2018 2019 2018 $ 1,991 $ 1,391 $ 1,723 $ -- $ 3,085 $ 388 $ -- $ 2,020 Level 1 Deferred compensation 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 to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these contracts was $108.6 million and $145.2 million at October 31, 2019 and 2018, 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. 7. INCOME TAXES In December 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, and implementing a modified territorial tax system from a global system by adding provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign- derived Intangible Income (”FDII”) among other provisions. The GILTI and FDII provisions under the Tax Reform Act became effective for the Company in fiscal 2019. The Tax Reform Act also imposed a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, which was recorded in fiscal 2018. In December 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. The Tax Reform Act created a new requirement that GILTI income earned by Controlled Foreign Corporations (“CFC’s”) must be included in the gross income of the CFC’s U.S. shareholder effective for us in fiscal 2019 for the Company. Under U.S. Generally Accepted Accounting Principles, we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. measurement of its deferred taxes (the “deferred method”). We have elected the period cost method to account for GILTI tax. 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): Current: U.S. taxes Foreign taxes Deferred: U.S. taxes Foreign taxes 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 US tax on distributed and undistributed earnings US benefit of foreign intangible income Other Effective tax rate Year Ended October 31, 2019 $ 1,854 3,715 5,569 2018 $ 6,333 5,203 11,536 2017 $ 308 4,185 4,493 (31) 291 260 (326) (204) (530) 1,236 (128) 1,108 $ 5,829 $ 11,006 $ 5,601 Year Ended October 31, 2019 2018 2017 $ 9,793 13,531 $ 23,324 $ 14,101 18,395 $ 32,496 $ 5,477 15,239 $ 20,716 21% 4% 1% 1% (2%) 0% (1%) 3% (3%) 1% 25% 23% 34% 2% 0% 0% (1%) 4% 7% 0% 0% (1%) (5%) 1% 0% (3%) 0% 0% 0% 0% 0% 34% 27% The Tax Reform Act also created FDII for US companies that derive income from the export of tangible and intangible property and services effective for us in fiscal 2019. We have recorded a deduction attributable to FDII based on our current operations. 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, 2018 $ 6,333 5,203 11,536 2019 $ 1,854 3,715 5,569 2017 $ 308 4,185 4,493 (31) 291 260 (326) (204) (530) 1,236 (128) 1,108 $ 5,829 $ 11,006 $ 5,601 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): 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 US tax on distributed and undistributed earnings US benefit of foreign intangible income Other Effective tax rate Year Ended October 31, 2018 2019 2017 $ 9,793 13,531 $ 23,324 $ 14,101 18,395 $ 32,496 $ 5,477 15,239 $ 20,716 21% 4% 1% 1% (2%) 0% (1%) 3% (3%) 1% 25% 23% 34% 2% 0% 0% (1%) 4% 7% 0% 0% (1%) 34% (5%) 1% 0% (3%) 0% 0% 0% 0% 0% 27% The Tax Reform Act also made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S federal income tax. At October 31, 2019, undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested. Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries since January 1, 2018. 61 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 61 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. Net deferred tax assets and liabilities are classified as non-current in the consolidated As of October 31, 2019, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.4 million, primarily related to certain states in the U.S. and foreign jurisdictions. We also had deferred tax assets for research and development tax credits of $0.8 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2019 and 2018, the balance of this valuation allowance was $2.2 million and $2.1 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2019 and 2018 are as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves Accrued warranty expenses Compensation related expenses Unrealized exchange gain/loss Other accrued expenses Net operating loss carryforwards Other credit carryforwards Other carryforwards Deferred tax assets Deferred Tax Liabilities: Net derivative instruments Other Net deferred tax assets Less: Valuation allowance - net operating loss and other credit Property and equipment and capitalized software development costs October 31, 2019 2018 $ 1,224 $ 1,325 363 2,723 143 170 1,380 766 293 7,062 499 2,644 159 170 1,316 686 350 7,149 (2,227) 4,835 (2,106) 5,043 (313) (2,632) (204) $ 1,686 (208) (2,370) (231) $ 2,234 As of October 31, 2019, we had net operating losses carryforwards for international and U.S. income tax purposes of $5.9 million, of which $5.2 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2020 and $0.7 million will expire between 5 and 20 years. We also had tax credits of $765,000 that will expire between years 2023 and 2030. The Tax Reform Act also created FDII for US companies that derive income from the export of tangible and intangible property and services effective for us in fiscal 2019. We have recorded a deduction attributable to FDII financial statements. based on our current operations. In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands): The Tax Reform Act also made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S federal income tax. At October 31, 2019, undistributed earnings of our foreign subsidiaries are expected to be 62 61 permanently reinvested. Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries since January 1, 2018. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax 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. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements. As of October 31, 2019, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.4 million, primarily related to certain states in the U.S. and foreign jurisdictions. We also had deferred tax assets for research and development tax credits of $0.8 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2019 and 2018, the balance of this valuation allowance was $2.2 million and $2.1 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2019 and 2018 are as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves Accrued warranty expenses Compensation related expenses Unrealized exchange gain/loss Other accrued expenses Net operating loss carryforwards Other credit carryforwards Other Less: Valuation allowance - net operating loss and other credit carryforwards Deferred tax assets Deferred Tax Liabilities: Net derivative instruments Property and equipment and capitalized software development costs Other Net deferred tax assets October 31, 2019 2018 $ 1,224 363 2,723 143 170 1,380 766 293 7,062 (2,227) 4,835 (313) (2,632) (204) $ 1,686 $ 1,325 499 2,644 159 170 1,316 686 350 7,149 (2,106) 5,043 (208) (2,370) (231) $ 2,234 As of October 31, 2019, we had net operating losses carryforwards for international and U.S. income tax purposes of $5.9 million, of which $5.2 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2020 and $0.7 million will expire between 5 and 20 years. We also had tax credits of $765,000 that will expire between years 2023 and 2030. 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 2019 $ 180 36 -- (23) -- 2018 $ 1,101 37 (945) (18) 5 2017 $ 1,102 37 (20) (74) 56 $ 193 $ 180 $ 1,101 The entire balance of the unrecognized tax benefits and related interest at October 31, 2019, 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, 2019, the amount of interest accrued, reported in other liabilities, was approximately $32,000, 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 2020 and August 2023. We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions. A summary of open tax years by major jurisdiction is presented below: United States federal Fiscal 2016 through the current period Germany¹ Taiwan Fiscal 2017 through the current period Fiscal 2017 through the current period ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. 8. EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our employees, under which our matching contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment. Our contributions and related expense totaled $1.4 million, $1.2 million, $1.1 million, for the fiscal years ended October 31, 2019, 2018, and 2017, respectively. 9. STOCK-BASED COMPENSATION In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights, 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. 62 62 63 permanently reinvested. Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries since January 1, 2018. 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. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements. As of October 31, 2019, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.4 million, primarily related to certain states in the U.S. and foreign jurisdictions. We also had deferred tax assets for research and development tax credits of $0.8 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2019 and 2018, the balance of this valuation allowance was $2.2 million and $2.1 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2019 and 2018 are as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves Accrued warranty expenses Compensation related expenses Unrealized exchange gain/loss Other accrued expenses Net operating loss carryforwards Other credit carryforwards Other carryforwards Deferred tax assets Deferred Tax Liabilities: Net derivative instruments Other Net deferred tax assets October 31, 2019 2018 $ 1,224 $ 1,325 363 2,723 143 170 1,380 766 293 7,062 499 2,644 159 170 1,316 686 350 7,149 (2,227) 4,835 (2,106) 5,043 (313) (2,632) (204) $ 1,686 (208) (2,370) (231) $ 2,234 Property and equipment and capitalized software development costs As of October 31, 2019, we had net operating losses carryforwards for international and U.S. income tax purposes of $5.9 million, of which $5.2 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2020 and $0.7 million will expire between 5 and 20 years. We also had tax credits of $765,000 that will expire between years 2023 and 2030. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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 2019 $ 180 36 -- (23) -- $ 193 2018 $ 1,101 37 (945) (18) 5 $ 180 2017 $ 1,102 37 (20) (74) 56 $ 1,101 The entire balance of the unrecognized tax benefits and related interest at October 31, 2019, 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, 2019, the amount of interest accrued, reported in other liabilities, was approximately $32,000, 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 2020 and August 2023. We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions. A summary of open tax years by major jurisdiction is presented below: United States federal Germany¹ Taiwan Fiscal 2016 through the current period Fiscal 2017 through the current period Fiscal 2017 through the current period ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. Less: Valuation allowance - net operating loss and other credit 8. EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our employees, under which our matching contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment. Our contributions and related expense totaled $1.4 million, $1.2 million, $1.1 million, for the fiscal years ended October 31, 2019, 2018, and 2017, respectively. 9. STOCK-BASED COMPENSATION In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights, 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. 62 63 63 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 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 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. A summary of the status of the options as of October 31, 2019, 2018 and 2017 and the related activity for the year is as follows: date, which was $36.08 per share. Shares Under Option Weighted Average Grant Date Fair Value Balance October 31, 2016 Granted Cancelled Expired Exercised Balance October 31, 2017 Granted Cancelled Expired Exercised Balance October 31, 2018 Granted Cancelled Expired Exercised Balance October 31, 2019 107,889 -- -- -- (29,164) 78,725 -- -- -- (41,680) 37,045 -- -- -- -- 37,045 $20.25 -- -- -- $18.31 $20.97 -- -- -- $20.33 $21.69 -- -- -- -- $21.69 The total intrinsic value of stock options exercised during the twelve months ended October 31, 2019, 2018 and 2017 was approximately $0, $847,000 and $771,000, respectively. As of October 31, 2019, the total intrinsic value of stock options that are outstanding and exercisable was $485,000. Stock options outstanding and exercisable on October 31, 2019, 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 0.5 2.1 3.1 2.3 65 64 66 On March 14, 2019, the Compensation Committee granted a total of 11,824 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 $40.58 per share. On January 2, 2019, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2016-2018 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 2016. As a result, the Compensation Committee determined that a total of 32,559 performance shares were earned by our executive officers, which performance shares vested on January 2, 2019. The vesting date fair value of the performance shares was based on the closing sales price of our common stock on the vesting On January 2, 2019, 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 approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2019 through fiscal 2021. On that date, the Compensation Committee granted a total of 21,825 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 $36.08 per share. On January 2, 2019, the Compensation Committee also granted a total target number of 30,943 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2019 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 2019-2021, 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 $40.72 per PSU and was calculated using the Monte Carlo approach. On January 2, 2019, the Compensation Committee also granted a total target number of 30,557 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2019 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 2019-2021. 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 $36.08 per share. On November 14, 2018, the Compensation Committee granted a total of 7,200 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 $40.01 per share. 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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 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. A summary of the status of the options as of October 31, 2019, 2018 and 2017 and the related activity for the year is as follows: Shares Under Option 107,889 Weighted Average Grant Date Fair Value Balance October 31, 2016 Balance October 31, 2017 Granted Cancelled Expired Exercised Granted Cancelled Expired Exercised Granted Cancelled Expired Exercised Balance October 31, 2018 (29,164) 78,725 (41,680) 37,045 -- -- -- -- -- -- -- -- -- -- Balance October 31, 2019 37,045 $21.69 The total intrinsic value of stock options exercised during the twelve months ended October 31, 2019, 2018 and 2017 was approximately $0, $847,000 and $771,000, respectively. As of October 31, 2019, the total intrinsic value of stock options that are outstanding and exercisable was $485,000. Stock options outstanding and exercisable on October 31, 2019, were as follows: Shares Under Option Weighted Average Exercise Price Per Share 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 65 $20.25 $18.31 $20.97 -- -- -- -- -- -- -- -- -- -- $20.33 $21.69 0.5 2.1 3.1 2.3 On March 14, 2019, the Compensation Committee granted a total of 11,824 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 $40.58 per share. On January 2, 2019, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2016-2018 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 2016. As a result, the Compensation Committee determined that a total of 32,559 performance shares were earned by our executive officers, which performance shares vested on January 2, 2019. 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 $36.08 per share. On January 2, 2019, 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 approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2019 through fiscal 2021. On that date, the Compensation Committee granted a total of 21,825 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 $36.08 per share. On January 2, 2019, the Compensation Committee also granted a total target number of 30,943 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2019 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 2019-2021, 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 $40.72 per PSU and was calculated using the Monte Carlo approach. On January 2, 2019, the Compensation Committee also granted a total target number of 30,557 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2019 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 2019-2021. 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 $36.08 per share. On November 14, 2018, the Compensation Committee granted a total of 7,200 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 $40.01 per share. 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 66 65 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 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 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. 67 66 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. 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. A reconciliation of our restricted stock, performance share and PSU activity and related information is as follows: Number of Shares Grant Date Fair Value Weighted Average Unvested at October 31, 2018 Shares or units granted Shares or units vested Shares or units cancelled Shares withheld Unvested at October 31, 2019 168,348 102,349 (44,077) (12,462) (13,676) 200,482 $ 37.24 38.28 33.29 29.82 29.67 $ 39.62 During fiscal 2019, 2018, and 2017, we recorded approximately $2.7 million, $2.5 million, and $1.7 million, respectively, of stock–based compensation expense related to grants under the 2008 Plan and the 2016 Equity 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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 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. 67 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. 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. A reconciliation of our restricted stock, performance share and PSU activity and related information is as follows: Number of Shares Weighted Average Grant Date Fair Value Unvested at October 31, 2018 Shares or units granted Shares or units vested Shares or units cancelled Shares withheld Unvested at October 31, 2019 168,348 102,349 (44,077) (12,462) (13,676) 200,482 $ 37.24 38.28 33.29 29.82 29.67 $ 39.62 During fiscal 2019, 2018, and 2017, we recorded approximately $2.7 million, $2.5 million, and $1.7 million, respectively, of stock–based compensation expense related to grants under the 2008 Plan and the 2016 Equity 68 67 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. Plan. As of October 31, 2019, there was an estimated $3.2 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2022. 10. RELATED PARTY TRANSACTIONS As of October 31, 2019, 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 $4.2 million and $4.0 million at October 31, 2019 and 2018, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $8.5 million, $11.3 million and $10.0 million in fiscal 2019, 2018 and 2017, respectively. Sales of control component parts to HAL were $198,000, $197,000 and $139,000 for the fiscal years ended October 31, 2019, 2018 and 2017, respectively. Trade payables to HAL were $938,000 and $3.4 million at October 31, 2019 and 2018, respectively. Trade receivables from HAL were $22,000 and $68,000 at October 31, 2019 and 2018, respectively. 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 2019 2018 2017 $15,957 2,322 992 1,490 $12,019 5,560 3,674 $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 11. CONTINGENCIES AND LITIGATION From time to time, we are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. 12. GUARANTEES AND PRODUCT WARRANTIES From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of October 31, 2019, we had 21 outstanding third party payment guarantees totaling approximately $0.5 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. 69 68 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 2019 $ 2,497 2,246 (2,991) 8 $ 1,760 2018 $ 1,772 4,121 (3,326) (70) $ 2,497 2017 $ 1,523 3,379 (3,203) 73 $ 1,772 The decrease in our warranty reserve from fiscal 2018 to fiscal 2019 was primarily due to a decrease in the number of machines under warranty resulting from decreased sales volume. 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. 13. OPERATING LEASES We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through 2029. Future payments required under operating leases as of October 31, 2019, are summarized as follows (in thousands): 2020 ................................................................................................... $ 4,015 2021 ................................................................................................... 2022… ............................................................................................... 2023 ................................................................................................... 2024 and thereafter ............................................................................ 3,149 2,224 1,482 2,531 Total .................................................................................................. $ 13,401 Lease expense for the fiscal years ended October 31, 2019, 2018, and 2017 was $5.1 million, $4.5 million, and $4.4 million, respectively. 14. QUARTERLY FINANCIAL INFORMATION (Unaudited) 2019 (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 Quarter Quarter Quarter $ 70,674 21,637 31% 14,111 7,526 2,481 5,252 $ 0.77 $ 0.76 $ 58,501 17,189 29% 12,592 4,597 1,155 3,491 $ 59,989 16,240 27% 14,051 2,189 (260) 2,098 $ 0.51 $ 0.51 $ 0.31 $ 0.31 $ 74,213 22,142 30% 13,914 8,228 2,453 6,654 $ 0.98 $ 0.97 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued Plan. As of October 31, 2019, there was an estimated $3.2 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2022. 10. RELATED PARTY TRANSACTIONS As of October 31, 2019, 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 $4.2 million and $4.0 million at October 31, 2019 and 2018, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $8.5 million, $11.3 million and $10.0 million in fiscal 2019, 2018 and 2017, respectively. Sales of control component parts to HAL were $198,000, $197,000 and $139,000 for the fiscal years ended October 31, 2019, 2018 and 2017, respectively. Trade payables to HAL were $938,000 and $3.4 million at October 31, 2019 and 2018, respectively. Trade receivables from HAL were $22,000 and $68,000 at October 31, 2019 and 2018, respectively. 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 2019 2018 2017 $15,957 2,322 992 1,490 $12,019 5,560 3,674 $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 11. CONTINGENCIES AND LITIGATION From time to time, we are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. 12. GUARANTEES AND PRODUCT WARRANTIES From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of October 31, 2019, we had 21 outstanding third party payment guarantees totaling approximately $0.5 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. 69 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 2019 $ 2,497 2,246 (2,991) 8 $ 1,760 2018 $ 1,772 4,121 (3,326) (70) $ 2,497 2017 $ 1,523 3,379 (3,203) 73 $ 1,772 The decrease in our warranty reserve from fiscal 2018 to fiscal 2019 was primarily due to a decrease in the number of machines under warranty resulting from decreased sales volume. 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. 13. OPERATING LEASES We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through 2029. Future payments required under operating leases as of October 31, 2019, are summarized as follows (in thousands): 2020 ................................................................................................... 2021 ................................................................................................... 2022… ............................................................................................... 2023 ................................................................................................... 2024 and thereafter ............................................................................ Total .................................................................................................. $ 4,015 3,149 2,224 1,482 2,531 $ 13,401 Lease expense for the fiscal years ended October 31, 2019, 2018, and 2017 was $5.1 million, $4.5 million, and $4.4 million, respectively. 14. QUARTERLY FINANCIAL INFORMATION (Unaudited) 2019 (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 $ 70,674 21,637 31% 14,111 7,526 2,481 5,252 $ 0.77 $ 0.76 $ 58,501 17,189 29% 12,592 4,597 1,155 3,491 $ 0.51 $ 0.51 $ 59,989 16,240 27% 14,051 2,189 (260) 2,098 $ 0.31 $ 0.31 $ 74,213 22,142 30% 13,914 8,228 2,453 6,654 $ 0.98 $ 0.97 70 69 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 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 15. SEGMENT INFORMATION 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 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, automation equipment and solutions for job shops, 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 190 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, Taiwan, the United Kingdom, and certain areas of the United States, which are among the world's principal machine tool consuming countries. During fiscal 2019, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2019, approximately 64% of our revenues were from customers located outside of the U.S., including customers located in Canada, Mexico and Central and South America, 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 and services 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 Year ended October 31, 2018 2019 $ 223,735 2,818 27,854 8,970 $ 263,377 $ 261,710 2,870 27,501 8,590 $ 300,671 2017 $ 209,311 2,324 24,255 7,777 $ 243,667 †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 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 Year Ended October 31, 2018 2017 $ 87,231 $ 70,912 2,915 2,194 92,340 62,346 34,216 16,691 15,815 32,034 161,102 27,748 17,937 45,685 3,801 1,844 76,557 48,786 28,019 13,416 13,917 27,583 131,721 22,456 10,238 32,694 2019 $ 95,196 2,580 1,409 99,185 52,002 29,349 14,772 14,346 20,028 130,497 15,706 16,858 32,564 1,131 $ 263,377 1,544 $ 300,671 2,695 $ 243,667 Long-lived tangible assets, net by geographic area, were (in thousands): United States of America Foreign countries Net assets by geographic area were (in thousands): As of October 31, 2019 $ 7,967 8,006 $ 15,973 2018 $ 8,375 6,617 $ 14,992 2017 $ 7,599 6,185 $ 13,784 Americas Europe Asia Pacific 2019 $ 103,863 71,411 64,971 $ 240,245 As of October 31, 2018 $ 96,348 74,558 51,947 $ 222,853 2017 $ 86,432 70,536 46,117 $ 203,085 †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. 71 HURCO COMPANIES, INC. 70 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): 72 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 Year Ended October 31, 2018 2017 $ 87,231 $ 70,912 2,915 2,194 92,340 62,346 34,216 16,691 15,815 32,034 161,102 27,748 17,937 45,685 3,801 1,844 76,557 48,786 28,019 13,416 13,917 27,583 131,721 22,456 10,238 32,694 2019 $ 95,196 2,580 1,409 99,185 52,002 29,349 14,772 14,346 20,028 130,497 15,706 16,858 32,564 1,131 $ 263,377 1,544 $ 300,671 2,695 $ 243,667 Long-lived tangible assets, net by geographic area, were (in thousands): United States of America Foreign countries Net assets by geographic area were (in thousands): As of October 31, 2019 $ 7,967 8,006 $ 15,973 2018 $ 8,375 6,617 $ 14,992 2017 $ 7,599 6,185 $ 13,784 Americas Europe Asia Pacific 2019 $ 103,863 71,411 64,971 $ 240,245 As of October 31, 2018 $ 96,348 74,558 51,947 $ 222,853 2017 $ 86,432 70,536 46,117 $ 203,085 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. †† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued First Quarter Second Quarter Third Quarter Fourth Quarter The following table sets forth revenues by geographic area, based on customer location, for each of the past three fiscal years (in thousands): $ 68,444 $ 70,424 $ 78,752 $ 83,051 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 Year Ended October 31, 2018 $ 87,231 2,915 2,194 92,340 2019 $ 95,196 2,580 1,409 99,185 2017 $ 70,912 3,801 1,844 76,557 52,002 29,349 14,772 14,346 20,028 130,497 15,706 16,858 32,564 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 1,131 $ 263,377 1,544 $ 300,671 2,695 $ 243,667 Long-lived tangible assets, net by geographic area, were (in thousands): United States of America Foreign countries 2019 $ 7,967 8,006 $ 15,973 As of October 31, 2018 $ 8,375 6,617 $ 14,992 2017 $ 7,599 6,185 $ 13,784 Net assets by geographic area were (in thousands): Americas Europe Asia Pacific 2019 $ 103,863 71,411 64,971 $ 240,245 As of October 31, 2018 $ 96,348 74,558 51,947 $ 222,853 2017 $ 86,432 70,536 46,117 $ 203,085 72 71 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 15. SEGMENT INFORMATION 20,121 29% 12,966 7,155 4,500 2,937 19,313 27% 13,320 5,993 1,656 3,751 24,521 31% 15,160 9,361 2,511 6,500 27,851 34% 16,564 11,287 2,339 8,302 $ 0.44 $ 0.43 $ 0.55 $ 0.55 $ 0.96 $ 0.95 $ 1.24 $ 1.22 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, automation equipment and solutions for job shops, 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 190 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, Taiwan, the United Kingdom, and certain areas of the United States, which are among the world's principal machine tool consuming countries. During fiscal 2019, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2019, approximately 64% of our revenues were from customers located outside of the U.S., including customers located in Canada, Mexico and Central and South America, 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 and services to our total sales and service fees during each of the past three fiscal years (in thousands): Net Sales and Service Fees by Product Category Year ended October 31, 2019 $ 223,735 2,818 27,854 8,970 $ 263,377 2018 $ 261,710 2,870 27,501 8,590 $ 300,671 2017 $ 209,311 2,324 24,255 7,777 $ 243,667 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 71 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 Year Ended October 31, 2018 2017 $ 87,231 $ 70,912 2,915 2,194 92,340 62,346 34,216 16,691 15,815 32,034 161,102 27,748 17,937 45,685 3,801 1,844 76,557 48,786 28,019 13,416 13,917 27,583 131,721 22,456 10,238 32,694 2019 $ 95,196 2,580 1,409 99,185 52,002 29,349 14,772 14,346 20,028 130,497 15,706 16,858 32,564 1,131 $ 263,377 1,544 $ 300,671 2,695 $ 243,667 Long-lived tangible assets, net by geographic area, were (in thousands): United States of America Foreign countries Net assets by geographic area were (in thousands): As of October 31, 2019 $ 7,967 8,006 $ 15,973 2018 $ 8,375 6,617 $ 14,992 2017 $ 7,599 6,185 $ 13,784 Americas Europe Asia Pacific 2019 $ 103,863 71,411 64,971 $ 240,245 As of October 31, 2018 $ 96,348 74,558 51,947 $ 222,853 2017 $ 86,432 70,536 46,117 $ 203,085 72 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. 16. NEW ACCOUNTING PRONOUNCEMENTS We are also in the process of updating our systems, policies, and internal controls over financial reporting related Recently Adopted Accounting Pronouncements: Between May 2014 and December 2016, FASB issued Accounting Standards Update (“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 requires 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 supersedes most of the prior revenue recognition guidance, including industry specific guidance. We had 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. Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606. Therefore, the adoption of ASC 606 did not have an effect on our beginning retained earnings or our overall financial statements as of and for the twelve months ended October 31, 2019. In January 2017, FASB issued ASU No. 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test (i.e., the requirement for an entity to calculate the implied fair value of goodwill in measuring a goodwill impairment loss). ASU 2017- 04 provides that a company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and should recognize an impairment charge if the carrying value exceeds the fair value of the reporting unit, but only to the extent of the goodwill amount allocated to that reporting unit. Companies still have the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for our fiscal year 2021, including interim periods within the fiscal year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. We early adopted this standard in the fourth quarter of fiscal 2019. This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures. Between February 2016 and February 2019, FASB issued ASU No. 2016-02, Leases (Topic 842), and various related updates, which establish a comprehensive new lease accounting model. Topic 842 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. Under Topic 842, the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. Topic 842 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application. We adopted Topic 842 on November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information will not be adjusted for the effects of adopting Topic 842. No cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. We have substantially completed an assessment of the new standard’s impact and determined the new standards will not have a material impact on our Condensed Consolidated Statements of Income or Cash Flows; however, the estimated impact of adopting Topic 842 will result in the recognition of a right-of-use (“ROU”) asset and lease liability on the Condensed Consolidated Balance Sheets subsequent to October 31, 2019 in the range of approximately $12-14 million, based on the lease portfolio existing as of this date. While the ROU asset will be classified as a noncurrent asset, approximately one-third of the lease liability amount is expected to be classified as a current liability, with the remainder being classified as noncurrent. 73 72 to the adoption of this standard. Upon adoption of Topic 842, we utilized the following elections and practical expedients:  We have elected to combine non-lease components with lease components.  If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply Topic 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the  We have elected not to use the portfolio method if we enter into a large number of leases in the same updated footnote disclosures, if material. month with the same terms and conditions.  As we have applied the new transition method allowed per ASU 2018-11, we have elected to not reassess arrangements entered into prior to November 1, 2019 for whether an arrangement is or contains a lease, the lease classification applied or to separate initial direct costs.  We have elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended. We have no significant lease agreements in place for which we are a lessor, and substantially all of our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840 as of October 31, 2019. As such, due to the practical expedient election to not reassess lease classification, substantially all our leases will continue to be classified as operating leases under Topic 842. When available, we will utilize the rate implicit in the lease as the discount rate to determine the lease liability in accordance with Topic 842. However, if this rate is not available, we will use our incremental borrowing rate as the discount rate, which is the rate, at inception of the lease, we would incur to borrow over a similar term the funds needed to purchase the leased asset. Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment. Most of the leased production and assembly facilities have lease terms ranging from two to five years, although the terms and conditions of our leases can vary significantly from lease to lease. We have assessed the specific terms and conditions of each lease to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon lease commencement. In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain. There are no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a party. In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value. As of October 31, 2019, the weighted-average remaining term of our lease portfolio was approximately 3.1 years. New Accounting Pronouncements: In February 2018, 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 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 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued 16. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements: Between May 2014 and December 2016, FASB issued Accounting Standards Update (“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 requires 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 supersedes most of the prior revenue recognition guidance, including industry specific guidance. We had 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. Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606. Therefore, the adoption of ASC 606 did not have an effect on our beginning retained earnings or our overall financial statements as of and for the twelve months ended October 31, 2019. In January 2017, FASB issued ASU No. 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test (i.e., the requirement for an entity to calculate the implied fair value of goodwill in measuring a goodwill impairment loss). ASU 2017- 04 provides that a company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and should recognize an impairment charge if the carrying value exceeds the fair value of the reporting unit, but only to the extent of the goodwill amount allocated to that reporting unit. Companies still have the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for our fiscal year 2021, including interim periods within the fiscal year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. We early adopted this standard in the fourth quarter of fiscal 2019. This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures. Between February 2016 and February 2019, FASB issued ASU No. 2016-02, Leases (Topic 842), and various related updates, which establish a comprehensive new lease accounting model. Topic 842 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. Under Topic 842, the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. Topic 842 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application. We adopted Topic 842 on November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information will not be adjusted for the effects of adopting Topic 842. No cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. We have substantially completed an assessment of the new standard’s impact and determined the new standards will not have a material impact on our Condensed Consolidated Statements of Income or Cash Flows; however, the estimated impact of adopting Topic 842 will result in the recognition of a right-of-use (“ROU”) asset and lease liability on the Condensed Consolidated Balance Sheets subsequent to October 31, 2019 in the range of approximately $12-14 million, based on the lease portfolio existing as of this date. While the ROU asset will be classified as a noncurrent asset, approximately one-third of the lease liability amount is expected to be classified as a current liability, with the remainder being classified as noncurrent. 73 We are also in the process of updating our systems, policies, and internal controls over financial reporting related to the adoption of this standard. Upon adoption of Topic 842, we utilized the following elections and practical expedients:  We have elected to combine non-lease components with lease components.  If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply Topic 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material.  We have elected not to use the portfolio method if we enter into a large number of leases in the same month with the same terms and conditions.  As we have applied the new transition method allowed per ASU 2018-11, we have elected to not reassess arrangements entered into prior to November 1, 2019 for whether an arrangement is or contains a lease, the lease classification applied or to separate initial direct costs.  We have elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended. We have no significant lease agreements in place for which we are a lessor, and substantially all of our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840 as of October 31, 2019. As such, due to the practical expedient election to not reassess lease classification, substantially all our leases will continue to be classified as operating leases under Topic 842. When available, we will utilize the rate implicit in the lease as the discount rate to determine the lease liability in accordance with Topic 842. However, if this rate is not available, we will use our incremental borrowing rate as the discount rate, which is the rate, at inception of the lease, we would incur to borrow over a similar term the funds needed to purchase the leased asset. Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment. Most of the leased production and assembly facilities have lease terms ranging from two to five years, although the terms and conditions of our leases can vary significantly from lease to lease. We have assessed the specific terms and conditions of each lease to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon lease commencement. In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain. There are no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a party. In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value. As of October 31, 2019, the weighted-average remaining term of our lease portfolio was approximately 3.1 years. New Accounting Pronouncements: In February 2018, 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 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 74 73 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We are currently assessing the impact this new accounting guidance will have on our consolidated financial statements and disclosures. In August 2017, FASB issued ASU 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 new accounting guidance will have a material impact 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, 2019. 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, 2019, 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, 2019 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. Item 9B. OTHER INFORMATION During the fourth quarter of fiscal 2019, 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. The graph below compares the cumulative 5-Year total return provided shareholders on Hurco Companies, Inc.'s common stock relative to the cumulative total returns of the Russell 2000 index, the NASDAQ Global Select index and two customized peer groups of sixteen companies and eighteen companies respectively, whose individual companies are listed in footnotes (1) and (2) below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on 10/31/2014 and its relative performance is tracked through 10/31/2019. (1.) There are sixteen companies included in the company's first customized peer group which are: Ampco- Pittsburgh Corporation, DMC Global Inc., Douglas Dynamics Inc., The Eastern Company, FARO Technologies Inc., Graham Corporation, Kadant Inc., Key Tronic Corporation, The L. S. Starrett Company, Novanta Inc., Onto Innovation Inc., PDF Solutions Inc., Proto Labs Inc., QAD Inc., Helios Technologies and Transcat Inc. (2.) The eighteen companies included in the company's second customized peer group are: Ampco-Pittsburgh Corporation, DMC Global Inc., Douglas Dynamics Inc., The Eastern Company, FARO Technologies Inc., Graham Corporation, IEC Electronics Corp, Kadant Inc., Key Tronic Corporation, The L. S. Starrett Company, Novanta Inc., Onto Innovation Inc., Proto Labs Inc., QAD Inc., Helios Technologies, Transcat Inc., Twin Disc Incorporated and Vishay Precision Group Inc. 75 74 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We are currently assessing the impact this new accounting guidance will have on our consolidated financial statements None. and disclosures. In August 2017, FASB issued ASU 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 new accounting guidance will have a material impact 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, 2019. 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, 2019, 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, 2019 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. Item 9B. OTHER INFORMATION During the fourth quarter of fiscal 2019, 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. The graph below compares the cumulative 5-Year total return provided shareholders on Hurco Companies, Inc.'s common stock relative to the cumulative total returns of the Russell 2000 index, the NASDAQ Global Select index and two customized peer groups of sixteen companies and eighteen companies respectively, whose individual companies are listed in footnotes (1) and (2) below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on 10/31/2014 and its relative performance is tracked through 10/31/2019. (1.) There are sixteen companies included in the company's first customized peer group which are: Ampco- Pittsburgh Corporation, DMC Global Inc., Douglas Dynamics Inc., The Eastern Company, FARO Technologies Inc., Graham Corporation, Kadant Inc., Key Tronic Corporation, The L. S. Starrett Company, Novanta Inc., Onto Innovation Inc., PDF Solutions Inc., Proto Labs Inc., QAD Inc., Helios Technologies and Transcat Inc. (2.) The eighteen companies included in the company's second customized peer group are: Ampco-Pittsburgh Corporation, DMC Global Inc., Douglas Dynamics Inc., The Eastern Company, FARO Technologies Inc., Graham Corporation, IEC Electronics Corp, Kadant Inc., Key Tronic Corporation, The L. S. Starrett Company, Novanta Inc., Onto Innovation Inc., Proto Labs Inc., QAD Inc., Helios Technologies, Transcat Inc., Twin Disc Incorporated and Vishay Precision Group Inc. 75 76 75 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, 2018 Peer Group and 2019 Peer Group 2018 Peer Group and 2019 Peer Group $250 $250 $200 $200 $150 $150 $100 $100 $50 $50 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders except that the information required by Item 10 regarding our executive officers is included herein under a separate caption at the end of Part I. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES $0 10/14 $0 10/14 10/15 10/15 10/16 10/16 10/17 10/17 10/18 10/19 The information required by this item is incorporated herein by reference to the definitive proxy statement for our 10/18 10/19 2020 annual meeting of shareholders. Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2018 Peer Group Hurco Companies, Inc. 2019 Peer Group Russell 2000 NASDAQ Global Select 2018 Peer Group *$100 invested on 10/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2019 Russell Investment Group. All rights reserved. 2019 Peer Group *$100 invested on 10/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2019 Russell Investment Group. All rights reserved. Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2018 Peer Group 2019 Peer Group Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2018 Peer Group 2019 Peer Group 10/18 110.40 136.03 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 165.15 170.92 173.26 10/17 120.10 133.55 152.31 157.48 156.15 77 10/14 100.00 100.00 100.00 10/14 100.00 100.00 100.00 100.00 100.00 100.00 100.00 10/15 70.42 100.34 111.34 10/15 86.15 70.42 84.22 100.34 111.34 86.15 84.22 10/16 69.50 104.46 116.14 10/16 92.58 69.50 87.15 104.46 116.14 92.58 87.15 10/17 120.10 133.55 152.31 157.48 156.15 10/18 110.40 136.03 165.15 170.92 173.26 10/19 95.52 142.70 190.82 180.56 178.25 10/19 95.52 142.70 190.82 180.56 178.25 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 77 76 78 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, 2018 Peer Group and 2019 Peer Group $250 $200 $150 $100 $50 $0 10/14 10/15 10/16 10/17 10/18 10/19 Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2018 Peer Group 2019 Peer Group *$100 invested on 10/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2019 Russell Investment Group. All rights reserved. Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2018 Peer Group 2019 Peer Group 10/14 100.00 100.00 100.00 100.00 100.00 10/15 70.42 100.34 111.34 86.15 84.22 10/16 69.50 104.46 116.14 92.58 87.15 10/17 120.10 133.55 152.31 157.48 156.15 10/18 110.40 136.03 165.15 170.92 173.26 10/19 95.52 142.70 190.82 180.56 178.25 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 77 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders except that the information required by Item 10 regarding our executive officers is included herein under a separate caption at the end of Part I. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2020 annual meeting of shareholders. 78 77 PART IV (b) Exhibits Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBITS INDEX (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: Reports of Independent Registered Public Accounting Firm Consolidated Statements of Income – years ended October 31, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income – years ended October 31, 2019, 2018 and 2017 Consolidated Balance Sheets – as of October 31, 2019 and 2018 Consolidated Statements of Cash Flows – years ended October 31, 2019, 2018 and 2017 Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2019, 2018 and 2017 Notes to Consolidated Financial Statements Page 41 44 45 46 47 48 49 2. Financial Statement Schedule. The following financial statement schedule is included in this Item. Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended October 31, 2019, 2018 and 2017 (Dollars in thousands) Balance at Beginning of Period Charged to/ (Recovered from) Costs and Expenses Charged to Other Accounts Deductions Balance at End of Period Description Allowance for doubtful accounts for the year ended: October 31, 2019 $ 1,027 $ (136) $ -- $ -- (1) $ 891 2016. October 31, 2018 $ 639 $ 394 $ -- $ 6 (1) $ 1,027 October 31, 2017 $ 664 $ 46 $ -- $ 71 (1) $ 639 Income tax valuation allowance for the year ended: October 31, 2019 $ 2,106 $ 458 $ -- $ 337 $ 2,227 October 31, 2018 $ 2,282 $ 253 $ -- $ 429 $ 2,106 October 31, 2017 $ 2,067 $ 515 $ -- $ 300 $ 2,282 (1) Receivable write-offs. All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. 79 78 Exhibits Filed. The following exhibits are filed with this report: Description of the Company’s Common Stock. Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm, RSM US LLP. Certification by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. Exchange Act of 1934, as amended. Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002. 4.1 21.1 23.1 31.1 31.2 32.1 32.2 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: 3.1 3.2 Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. Amended and Restated By-Laws of the Registrant as amended through November 16, 2017, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 17, 2017. 10.1* Hurco Companies, Inc. 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 10, 2016. 10.2* Form of Restricted Stock Agreement (Director) under the 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 10, 10.3* Form of Restricted Stock Award Agreement (Employee) under the 2016 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 10-Q for the 10.4* Form of Performance Stock Unit Award Agreement (Employee) under the 2016 Equity Incentive Plan, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 10-Q for quarter ended January 31, 2017. the quarter ended January 31, 2017. 10.5* Hurco Companies, Inc. Cash Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 10, 2016. 10.6* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Michael Doar, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. filed March 16, 2012. filed March 16, 2012. 10.7* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Gregory S. Volovic, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K 10.8* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Sonja K. McClelland, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K 10.9* Hurco Companies, Inc. 2008 Equity Incentive Plan, incorporated by reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed January 28, 2008. 80 PART IV (b) Exhibits Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBITS INDEX (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: Reports of Independent Registered Public Accounting Firm Consolidated Statements of Income – years ended October 31, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income – years ended October 31, 2019, 2018 and 2017 Consolidated Balance Sheets – as of October 31, 2019 and 2018 Consolidated Statements of Cash Flows – years ended October 31, 2019, 2018 and 2017 Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2019, 2018 and 2017 Notes to Consolidated Financial Statements Page 41 44 45 46 47 48 49 2. Financial Statement Schedule. The following financial statement schedule is included in this Item. Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended October 31, 2019, 2018 and 2017 (Dollars in thousands) Balance at Beginning of Period Charged to/ (Recovered from) Costs and Expenses Charged to Other Accounts Deductions Balance at End of Period October 31, 2019 $ 1,027 $ (136) $ -- $ -- (1) $ 891 October 31, 2018 $ 639 $ 394 $ -- $ 6 (1) $ 1,027 October 31, 2017 $ 664 $ 46 $ -- $ 71 (1) $ 639 Description Allowance for doubtful accounts for the year ended: Income tax valuation allowance for the year ended: October 31, 2019 $ 2,106 $ 458 $ -- $ 337 $ 2,227 October 31, 2018 $ 2,282 $ 253 $ -- $ 429 $ 2,106 October 31, 2017 $ 2,067 $ 515 $ -- $ 300 $ 2,282 (1) Receivable write-offs. All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. 79 Exhibits Filed. The following exhibits are filed with this report: 4.1 21.1 23.1 31.1 Description of the Company’s Common Stock. Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm, RSM US LLP. Certification by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31.2 32.1 32.2 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: 3.1 3.2 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. Amended and Restated By-Laws of the Registrant as amended through November 16, 2017, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 17, 2017. Hurco Companies, Inc. 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 10, 2016. Form of Restricted Stock Agreement (Director) under the 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 10, 2016. Form of Restricted Stock Award Agreement (Employee) under the 2016 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 10-Q for the quarter ended January 31, 2017. Form of Performance Stock Unit Award Agreement (Employee) under the 2016 Equity Incentive Plan, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 10-Q for the quarter ended January 31, 2017. Hurco Companies, Inc. Cash Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 10, 2016. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Michael Doar, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Gregory S. Volovic, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Sonja K. McClelland, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Hurco Companies, Inc. 2008 Equity Incentive Plan, incorporated by reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed January 28, 2008. 80 79 10.10* 10.11 Form of restated split-dollar insurance agreement, incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2008. Credit Agreement, dated as of December 31, 2018, among Hurco Companies, Inc. and Hurco B.V., as the Borrowers, certain subsidiaries party thereto, as the Guarantors, and Bank of America, N.A., as the Lender, incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2018. * The indicated exhibit is a management contract, compensatory plan or arrangement required to be listed by Item 601 of Regulation S-K. SIGNATURES January, 2020. Item 16. FORM 10-K SUMMARY None. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 3rd day of HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Secretary, Treasurer and Chief Financial Officer 81 80 82 10.10* Form of restated split-dollar insurance agreement, incorporated by reference to Exhibit 10.2 to the SIGNATURES Registrant’s Annual Report on Form 10-K for the year ended October 31, 2008. 10.11 Credit Agreement, dated as of December 31, 2018, among Hurco Companies, Inc. and Hurco B.V., as the Borrowers, certain subsidiaries party thereto, as the Guarantors, and Bank of America, N.A., as the Lender, incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2018. * The indicated exhibit is a management contract, compensatory plan or arrangement required to be listed by Item 601 of Regulation S-K. Item 16. FORM 10-K SUMMARY None. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 3rd day of January, 2020. HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Secretary, Treasurer and Chief Financial Officer 81 82 81 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature and Title(s) Date Exhibit 4.1 DESCRIPTION OF HURCO COMPANIES, INC.’S COMMON STOCK /s/ Michael Doar Michael Doar, Chairman and Chief Executive Officer of Hurco Companies, Inc. (Principal Executive Officer) /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Secretary, Treasurer and Chief Financial Officer of Hurco Companies, Inc. (Principal Financial Officer and Principal Accounting Officer) /s/ Thomas A. Aaro Thomas A. Aaro, Director /s/ Robert W. Cruickshank Robert W. Cruickshank, Director /s/ Cynthia Dubin Cynthia Dubin, Director /s/ Jay C. Longbottom Jay C. Longbottom, Director /s/ Andrew Niner Andrew Niner, Director /s/ Richard Porter Richard Porter, Director /s/ Janaki Sivanesan Janaki Sivanesan, Director /s/ Gregory Volovic Gregory Volovic, Director January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 83 82 The following is a description of the common stock, no par value (the “Common Stock”), of Hurco Companies, Inc. (the “Company”), which is the only security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). General The Company is authorized to issue up to 12,500,000 shares of Common Stock. As of December 31, 2019, the Company had 6,770,233 shares of Common Stock outstanding. The following description summarizes selected information regarding the Common Stock, as well as relevant provisions of (i) the Company’s Amended and Restated Articles of Incorporation, as currently in effect (the “Articles”), (ii) the Company’s Amended and Restated By-Laws, as currently in effect (the “By-Laws”), and (iii) the Indiana Business Corporation Law (the “IBCL”). The following summary description of the Common Stock of the Company is qualified in its entirety by reference to the provisions of the Company’s Articles and By-Laws, copies of which have been filed as exhibits to the Company’s periodic reports under the Exchange Act, and the applicable provisions of the IBCL. Common Stock Voting Rights. The holders of shares of Common Stock are entitled to one vote per share on all matters submitted to shareholders for a vote. The holders of shares of Common Stock do not have cumulative voting rights with respect to the election of directors or any other matter. Dividend Rights. Subject to preferences to which holders of any preferred stock of the Company may be entitled, the holders of shares of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, from any assets legally available therefor. Liquidation Rights. Subject to the prior payment or provision for payment of the debts and other liabilities of the Company and any preferential amounts to be distributed to holders of any preferred stock of the Company, in the event of any liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock shall be entitled to share ratably in the remaining net assets of the Company. Other Rights and Preferences. The holders of shares of Common Stock have no preemptive rights to subscribe to or purchase any shares of Common Stock or other Company securities. There are no redemption, sinking fund or conversion provisions applicable to the Common Stock. The holders of shares of Common Stock are not subject to further calls or assessments by the Company. Transfer Agent and Registrar. The transfer agent and registrar for the Common Stock is Computershare Trust Company, N.A. Listing. The Common Stock is traded on the Nasdaq Global Select Market under the symbol “HURC.” Anti-Takeover Effects of Provisions of the Company’s Articles, By-Laws and the IBCL Under certain circumstances, certain provisions of the IBCL, the Company’s Articles and the Company’s By- Laws may render more difficult, or may discourage, a merger, a tender offer, a proxy contest, the assumption of control of the Company by a holder of a large block of the Common Stock or other person, or the removal of incumbent management, even if such actions may be beneficial to the Company’s shareholders generally. 84 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature and Title(s) Date Exhibit 4.1 DESCRIPTION OF HURCO COMPANIES, INC.’S COMMON STOCK /s/ Michael Doar Michael Doar, Chairman and Chief Executive Officer of Hurco Companies, Inc. (Principal Executive Officer) /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Secretary, Treasurer and Chief Financial Officer of Hurco Companies, Inc. (Principal Financial Officer and Principal Accounting Officer) /s/ Thomas A. Aaro Thomas A. Aaro, Director /s/ Robert W. Cruickshank Robert W. Cruickshank, Director /s/ Cynthia Dubin Cynthia Dubin, Director /s/ Jay C. Longbottom Jay C. Longbottom, Director /s/ Andrew Niner Andrew Niner, Director /s/ Richard Porter Richard Porter, Director /s/ Janaki Sivanesan Janaki Sivanesan, Director /s/ Gregory Volovic Gregory Volovic, Director January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 January 3, 2020 83 The following is a description of the common stock, no par value (the “Common Stock”), of Hurco Companies, Inc. (the “Company”), which is the only security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). General The Company is authorized to issue up to 12,500,000 shares of Common Stock. As of December 31, 2019, the Company had 6,770,233 shares of Common Stock outstanding. The following description summarizes selected information regarding the Common Stock, as well as relevant provisions of (i) the Company’s Amended and Restated Articles of Incorporation, as currently in effect (the “Articles”), (ii) the Company’s Amended and Restated By-Laws, as currently in effect (the “By-Laws”), and (iii) the Indiana Business Corporation Law (the “IBCL”). The following summary description of the Common Stock of the Company is qualified in its entirety by reference to the provisions of the Company’s Articles and By-Laws, copies of which have been filed as exhibits to the Company’s periodic reports under the Exchange Act, and the applicable provisions of the IBCL. Common Stock Voting Rights. The holders of shares of Common Stock are entitled to one vote per share on all matters submitted to shareholders for a vote. The holders of shares of Common Stock do not have cumulative voting rights with respect to the election of directors or any other matter. Dividend Rights. Subject to preferences to which holders of any preferred stock of the Company may be entitled, the holders of shares of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, from any assets legally available therefor. Liquidation Rights. Subject to the prior payment or provision for payment of the debts and other liabilities of the Company and any preferential amounts to be distributed to holders of any preferred stock of the Company, in the event of any liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock shall be entitled to share ratably in the remaining net assets of the Company. Other Rights and Preferences. The holders of shares of Common Stock have no preemptive rights to subscribe to or purchase any shares of Common Stock or other Company securities. There are no redemption, sinking fund or conversion provisions applicable to the Common Stock. The holders of shares of Common Stock are not subject to further calls or assessments by the Company. Transfer Agent and Registrar. The transfer agent and registrar for the Common Stock is Computershare Trust Company, N.A. Listing. The Common Stock is traded on the Nasdaq Global Select Market under the symbol “HURC.” Anti-Takeover Effects of Provisions of the Company’s Articles, By-Laws and the IBCL Under certain circumstances, certain provisions of the IBCL, the Company’s Articles and the Company’s By- Laws may render more difficult, or may discourage, a merger, a tender offer, a proxy contest, the assumption of control of the Company by a holder of a large block of the Common Stock or other person, or the removal of incumbent management, even if such actions may be beneficial to the Company’s shareholders generally. 84 83 Meetings of Shareholders. Under Chapter 29 of the IBCL and the Company’s Articles, any action required to be taken by the Company’s shareholders may be effected only at an annual meeting or special meeting of shareholders, and shareholders may act in lieu of such meetings only by unanimous written consent. The Company’s By-Laws provide that special meetings of shareholders may be called by the Company’s Board of Directors or President, or by the holders of a majority of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. The Company’s By-Laws also establish an advance notice procedure for the nomination, other than by or at the direction of the Company’s Board of Directors, of persons for election as directors as well as for other shareholder proposals to be considered at annual meetings of shareholders. In general, notice of intent to nominate a director or raise business at such meetings must be delivered to the Company by a shareholder not less than 60 days prior to such meeting. Such notice must contain certain specified information concerning the person to be nominated and the shareholder submitting the proposal. Amendment of By-Laws. The Company’s Articles and By-Laws provide that the Company’s Board of Directors has the exclusive authority to make, alter, amend or repeal the Company’s By-Laws. Special Transactions. The Company’s Articles require the affirmative vote of the holders of not less than three- fourths of the outstanding shares of Common Stock for certain proposed transactions, including, but not limited to: (i) the merger or consolidation of the Company and a “related corporation”; (ii) the sale or exchange of all or substantially all of the Company’s assets or business to or with a related corporation; (iii) the issue or delivery of Common Stock or any other Company securities in exchange or payment for property, assets or securities of a related corporation; and (iv) the merger of any of the Company’s affiliates with or into a related corporation or any of its affiliates. For purposes of the above provisions, the below definitions shall apply: (a) “affiliate” means any person (including a corporation, partnership, trust, estate or individual) who, directly or indirectly, controls, is controlled by, or is under common control with the person specified; and (b) “related corporation” means a corporation or entity or any of its affiliates, singly or in the aggregate, that are beneficial owners, directly or indirectly, of more than 5% of the total outstanding shares of Common Stock. The foregoing requirements shall not apply to any transaction that has been (i) approved by resolution of the Board of Directors adopted by the affirmative vote of not less than two-thirds of the then authorized number of directors; or (ii) approved by resolution of the Board of Directors prior to the acquisition of the beneficial ownership of more than 5% of the total voting power of all outstanding shares of Common Stock by such related corporation and its affiliates. Control Share Acquisitions. Under Chapter 42 of the IBCL, an acquiring person or group who makes a “control share acquisition” in an “issuing public corporation” may not exercise voting rights on any “control shares” unless these voting rights are conferred by a majority vote of the disinterested shareholders of the issuing public corporation at a special meeting of those shareholders held upon the request and at the expense of the acquiring person. If control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, all shareholders of the issuing public corporation have dissenters’ rights to receive the fair value of their shares pursuant to Chapter 44 of the IBCL. For purposes of Chapter 42 of the IBCL, the below definitions shall apply: (a) “control share acquisition” means, subject to specified exceptions, the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. For the purposes of determining whether an acquisition constitutes a control share acquisition, shares acquired within 90 days or under a plan to make a control share acquisition are considered to have been acquired in the same acquisition; (b) “control shares” means shares acquired by a person that, when added to all other shares of the issuing public corporation owned by that person or in respect to which that person may exercise or direct the exercise of voting power, would otherwise entitle that person to exercise voting power of the issuing public corporation in the election of directors within any of the following ranges: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority or more; and (c) “issuing public corporation” means a corporation which has (i) 100 or more shareholders, (ii) its principal place of business or its principal office in Indiana, or that owns or controls assets within Indiana having a fair market value of greater than $1,000,000, and (iii) (A) more than 10% of its shareholders resident in Indiana, (B) more than 10% of its shares owned of record or owned beneficially by Indiana residents, or (C) 1,000 shareholders resident in Indiana. The above provisions do not apply if, before a control share acquisition is made, an Indiana corporation’s articles of incorporation or by-laws, including a by-law adopted by the Indiana corporation’s board of directors, provide that they do not apply. The Company’s Articles and By-Laws do not exclude the Company from these provisions. Certain Business Combinations. Chapter 43 of the IBCL restricts the ability of a “resident domestic corporation” to engage in any business combinations with an “interested shareholder” for five years after the date the interested shareholder became such, unless the business combination or the purchase of shares by the interested shareholder on the interested shareholder’s share acquisition date is approved by the board of directors of the resident domestic corporation before the interested shareholder’s share acquisition date. If such prior approval is not obtained, the interested shareholder may effect a business combination after the five-year period only if such shareholder receives approval from a majority of the disinterested shareholders or the offer meets specified fair price criteria. For purposes of Chapter 43 of the IBCL, the below definitions shall apply: (a) “beneficial owner” means a person who, directly or indirectly, owns the subject shares, has the right to acquire or vote the subject shares (excluding voting rights under revocable proxies made in accordance with federal law), has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of the subject shares, or holds any derivative instrument that includes the opportunity to profit or share in any profit derived from any increase in the value of the subject shares; (b) “interested shareholder” means any person, other than the resident domestic corporation or its subsidiaries, that is (i) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (ii) an affiliate or associate of the resident domestic corporation, which at any time within the five-year period immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation; and (c) “resident domestic corporation” means an Indiana corporation that has 100 or more shareholders. The above provisions do not apply to corporations that elect not to be subject to Chapter 43 of the IBCL in an amendment to their articles of incorporation approved by a majority of the disinterested shareholders. That amendment, however, cannot become effective until 18 months after its passage and would apply only to share 85 84 86 Meetings of Shareholders. Under Chapter 29 of the IBCL and the Company’s Articles, any action required to be taken by the Company’s shareholders may be effected only at an annual meeting or special meeting of shareholders, and shareholders may act in lieu of such meetings only by unanimous written consent. The Company’s By-Laws provide that special meetings of shareholders may be called by the Company’s Board of Directors or President, or by the holders of a majority of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. The Company’s By-Laws also establish an advance notice procedure for the nomination, other than by or at the direction of the Company’s Board of Directors, of persons for election as directors as well as for other shareholder proposals to be considered at annual meetings of shareholders. In general, notice of intent to nominate a director or raise business at such meetings must be delivered to the Company by a shareholder not less than 60 days prior to such meeting. Such notice must contain certain specified information concerning the person to be nominated and the shareholder submitting the proposal. Amendment of By-Laws. The Company’s Articles and By-Laws provide that the Company’s Board of Directors has the exclusive authority to make, alter, amend or repeal the Company’s By-Laws. Special Transactions. The Company’s Articles require the affirmative vote of the holders of not less than three- fourths of the outstanding shares of Common Stock for certain proposed transactions, including, but not limited to: (i) the merger or consolidation of the Company and a “related corporation”; (ii) the sale or exchange of all or substantially all of the Company’s assets or business to or with a related corporation; (iii) the issue or delivery of Common Stock or any other Company securities in exchange or payment for property, assets or securities of a related corporation; and (iv) the merger of any of the Company’s affiliates with or into a related corporation or any of its affiliates. For purposes of the above provisions, the below definitions shall apply: (a) “affiliate” means any person (including a corporation, partnership, trust, estate or individual) who, directly or indirectly, controls, is controlled by, or is under common control with the person specified; and Stock. affiliates. The foregoing requirements shall not apply to any transaction that has been (i) approved by resolution of the Board of Directors adopted by the affirmative vote of not less than two-thirds of the then authorized number of directors; or (ii) approved by resolution of the Board of Directors prior to the acquisition of the beneficial ownership of more than 5% of the total voting power of all outstanding shares of Common Stock by such related corporation and its Control Share Acquisitions. Under Chapter 42 of the IBCL, an acquiring person or group who makes a “control share acquisition” in an “issuing public corporation” may not exercise voting rights on any “control shares” unless these voting rights are conferred by a majority vote of the disinterested shareholders of the issuing public corporation at a special meeting of those shareholders held upon the request and at the expense of the acquiring person. If control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, all shareholders of the issuing public corporation have dissenters’ rights to receive the fair value of their shares pursuant to Chapter 44 of the IBCL. For purposes of Chapter 42 of the IBCL, the below definitions shall apply: (a) “control share acquisition” means, subject to specified exceptions, the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. For the purposes of determining whether an acquisition constitutes a control share acquisition, shares acquired within 90 days or under a plan to make a control share acquisition are considered to have been acquired in the same acquisition; (b) “control shares” means shares acquired by a person that, when added to all other shares of the issuing public corporation owned by that person or in respect to which that person may exercise or direct the exercise of voting power, would otherwise entitle that person to exercise voting power of the issuing public corporation in the election of directors within any of the following ranges: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority or more; and (c) “issuing public corporation” means a corporation which has (i) 100 or more shareholders, (ii) its principal place of business or its principal office in Indiana, or that owns or controls assets within Indiana having a fair market value of greater than $1,000,000, and (iii) (A) more than 10% of its shareholders resident in Indiana, (B) more than 10% of its shares owned of record or owned beneficially by Indiana residents, or (C) 1,000 shareholders resident in Indiana. The above provisions do not apply if, before a control share acquisition is made, an Indiana corporation’s articles of incorporation or by-laws, including a by-law adopted by the Indiana corporation’s board of directors, provide that they do not apply. The Company’s Articles and By-Laws do not exclude the Company from these provisions. Certain Business Combinations. Chapter 43 of the IBCL restricts the ability of a “resident domestic corporation” to engage in any business combinations with an “interested shareholder” for five years after the date the interested shareholder became such, unless the business combination or the purchase of shares by the interested shareholder on the interested shareholder’s share acquisition date is approved by the board of directors of the resident domestic corporation before the interested shareholder’s share acquisition date. If such prior approval is not obtained, the interested shareholder may effect a business combination after the five-year period only if such shareholder receives approval from a majority of the disinterested shareholders or the offer meets specified fair price criteria. (b) “related corporation” means a corporation or entity or any of its affiliates, singly or in the aggregate, that are beneficial owners, directly or indirectly, of more than 5% of the total outstanding shares of Common For purposes of Chapter 43 of the IBCL, the below definitions shall apply: (a) “beneficial owner” means a person who, directly or indirectly, owns the subject shares, has the right to acquire or vote the subject shares (excluding voting rights under revocable proxies made in accordance with federal law), has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of the subject shares, or holds any derivative instrument that includes the opportunity to profit or share in any profit derived from any increase in the value of the subject shares; (b) “interested shareholder” means any person, other than the resident domestic corporation or its subsidiaries, that is (i) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (ii) an affiliate or associate of the resident domestic corporation, which at any time within the five-year period immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation; and (c) “resident domestic corporation” means an Indiana corporation that has 100 or more shareholders. The above provisions do not apply to corporations that elect not to be subject to Chapter 43 of the IBCL in an amendment to their articles of incorporation approved by a majority of the disinterested shareholders. That amendment, however, cannot become effective until 18 months after its passage and would apply only to share 85 86 85 acquisitions occurring after its effective date. The Company’s Articles do not exclude the Company from Chapter 43 of the IBCL. Mandatory Classified Board of Directors. Under Chapter 33 of the IBCL, an Indiana corporation with a class of voting shares registered with the U.S. Securities and Exchange Commission under Section 12 of the Exchange Act must have a classified board of directors unless the Indiana corporation adopts a by-law expressly electing not to be governed by this provision. The Company’s By-Laws contain a provision electing not to be subject to this mandatory requirement. Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF HURCO COMPANIES, INC. Name Hurco B.V Hurco Europe Limited Hurco GmbH Hurco India Private, Ltd. Hurco Manufacturing Limited Hurco S.a.r.l. Hurco S.r.l. Hurco (S.E. Asia) Pte Ltd. LCM Precision Technology S.r.l. Italy Machinery Sales Co. Milltronics USA, Inc. Ningbo Hurco Machine Tool Co., Ltd. China Jurisdiction of Incorporation The Netherlands United Kingdom Federal Republic of Germany India Taiwan R.O.C. France Italy Singapore United States United States Hurco Companies, Inc. is the Company’s headquarters in Indianapolis, Indiana, U.S.A. The foregoing list does not include other subsidiaries which, individually or in the aggregate, did not constitute a significant subsidiary as of October 31, 2019. 87 86 88 acquisitions occurring after its effective date. The Company’s Articles do not exclude the Company from Chapter Exhibit 21.1 43 of the IBCL. SUBSIDIARIES OF THE REGISTRANT Mandatory Classified Board of Directors. Under Chapter 33 of the IBCL, an Indiana corporation with a class of voting shares registered with the U.S. Securities and Exchange Commission under Section 12 of the Exchange Act must have a classified board of directors unless the Indiana corporation adopts a by-law expressly electing not to be governed by this provision. The Company’s By-Laws contain a provision electing not to be subject to this mandatory requirement. SUBSIDIARIES OF HURCO COMPANIES, INC. Name Hurco B.V Hurco Europe Limited Hurco GmbH Hurco India Private, Ltd. Hurco Manufacturing Limited Hurco S.a.r.l. Hurco S.r.l. Hurco (S.E. Asia) Pte Ltd. LCM Precision Technology S.r.l. Machinery Sales Co. Milltronics USA, Inc. Ningbo Hurco Machine Tool Co., Ltd. Jurisdiction of Incorporation The Netherlands United Kingdom Federal Republic of Germany India Taiwan R.O.C. France Italy Singapore Italy United States United States China Hurco Companies, Inc. is the Company’s headquarters in Indianapolis, Indiana, U.S.A. The foregoing list does not include other subsidiaries which, individually or in the aggregate, did not constitute a significant subsidiary as of October 31, 2019. 87 88 87 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE Exhibit 23.1 We consent to the incorporation by reference in the Registration Statement (No. 333-48204, 333-126036, 333- 149809 and 333-210072) on Form S-8 of Hurco Companies, Inc. of our reports dated January 3, 2020, relating to the consolidated financial statements, the financial statement schedule and the effectiveness of internal control over financial reporting of Hurco Companies, Inc. appearing in this Annual Report on Form 10-K of Hurco Companies, Inc. for the year ended October 31, 2019. /s/ RSM US LLP Indianapolis, Indiana January 3, 2020 Exhibit 31.1 ACT OF 1934, AS AMENDED I, Michael Doar, certify that: 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael Doar Michael Doar January 3, 2020 Chairman and Chief Executive Officer 89 88 90 Exhibit 23.1 Exhibit 31.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED We consent to the incorporation by reference in the Registration Statement (No. 333-48204, 333-126036, 333- 149809 and 333-210072) on Form S-8 of Hurco Companies, Inc. of our reports dated January 3, 2020, relating to the consolidated financial statements, the financial statement schedule and the effectiveness of internal control over financial reporting of Hurco Companies, Inc. appearing in this Annual Report on Form 10-K of Hurco Companies, Inc. for the year ended October 31, 2019. /s/ RSM US LLP Indianapolis, Indiana January 3, 2020 I, Michael Doar, certify that: 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael Doar Michael Doar Chairman and Chief Executive Officer January 3, 2020 89 90 89 Exhibit 31.2 Exhibit 32.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael Doar Michael Doar January 3, 2020 Chairman and Chief Executive Officer I, Sonja K McClelland, certify that: 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Secretary, Treasurer and Chief Financial Officer January 3, 2020 91 90 92 Exhibit 31.2 Exhibit 32.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael Doar Michael Doar Chairman and Chief Executive Officer January 3, 2020 I, Sonja K McClelland, certify that: 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Sonja K. McClelland Sonja K. McClelland January 3, 2020 Executive Vice President, Secretary, Treasurer and Chief Financial Officer 91 92 91 Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Secretary, Treasurer and Chief Financial Officer January 3, 2020 93 92 Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Sonja K. McClelland Sonja K. McClelland January 3, 2020 Executive Vice President, Secretary, Treasurer and Chief Financial Officer GLOBAL LOCATIONS Hurco Europe Ltd. (United Kingdom) Serving the United Kingdom, Ireland, Africa, the Middle East, and Scandinavia Hurco GmbH (Germany) Serving Germany, Austria, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Mazedonia, Montenegro, the Netherlands, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Switzerland, Turkey, and Ukraine Hurco B.V. (The Netherlands) Hurco Sp. z o.o. (Poland) Hurco India Private Ltd. Serving India, Pakistan, Bangladesh, and Sri Lanka Ningbo Hurco Trading Co., Ltd. (Shanghai, China) Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) Takumi (Taiwan) Hurco (S.E. Asia) Pte. Ltd. (Singapore) Serving Singapore, Malaysia, Thailand, Australia, New Zealand, Philippines, Indonesia, and Myanmar Hurco Manufacturing Ltd. (Taiwan) Hurco Automation Ltd. (Taiwan) Hurco Manufacturing Limited is responsible for the manufacturing and assembly of Hurco machine tools. Hurco Automation Limited is responsible for the manufacturing and assembly of Hurco controls. Milltronics USA (Waconia, Minnesota, USA) ProCobots (Rostraver Township, PA, USA) Hurco Companies, Inc. Hurco North America (Indianapolis, Indiana, USA) Serving the USA, Canada, Mexico, and South America Takumi USA (Indianapolis, Indiana, USA) Serving the USA Hurco S.a.r.l. (France) Serving France and Belgium (Wallonia) Hurco S.r.l. (Italy) LCM Precision Technology S.r.l. (Italy) 93 One Technology Way | PO Box 68180 | Indianapolis, IN 46268 800.634.2416 | Hurco.com/Investors P r i n t e d i n t h e U S A . H P G 1 . 2 M C 0 4 9 S K U : 0 0 1 C S N 4 0 A B 

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