Hurco Companies, Inc.
Annual Report 2021

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ANNUAL REPORT M A E HIP T S R E D A E L Gregory S. Volovic President and Chief Executive Officer Sonja McClelland Executive Vice President, Treasurer, and Chief Financial Officer Michael Doar Executive Chairman REPORT TO SHAREHOLDERS 2021 Overview 2021 was a year with unique and unprecedented challenges, and that is precisely when the benefits of experience, agility, and pragmatic strategic planning are realized. We managed to shift approximately $10.0 million in operating losses in fiscal 2020 to $10.0 million in operating profits in fiscal 2021. We delivered products in high demand to our customers as we navigated supply chain issues, inflationary cost increases, and competitive labor markets. We increased factory production, hired new employees, and reached an important technological milestone with the completion of our new software control platform for multi-axis, multi-spindle turning centers. Most importantly, we provided outstanding customer support and service, a signature part of our brands that sets us apart from the competition. When Michael Doar wrote his first letter to shareholders as CEO 20 years ago, Hurco had one brand of CNC machines with just 12 models, was $12 million in debt, and had posted a net loss. In that inaugural letter, he pledged to focus the company’s attention on three areas: profitability, customers, and core competencies. Hurco Companies, Inc., now has three brands of CNC machines in its portfolio with over 150 models in addition to an automation brand and a brand of electro-mechanical components for CNC machines. During the past 20 years, Hurco achieved record breaking sales and profits, eliminated its debt and emerged more resilient after each economic downturn precipitated by 9/11, the Great Recession, and the global pandemic. I am fortunate to have been a part of Michael’s team since 2005 and I appreciate his mentorship and the trust he bestowed on me that has allowed me to gain a wealth of experience in roles of increasing responsibility. While I’m a person who thrives on action and movement, a foundation of stability and consistency is essential to successfully commit to continuous innovation in the manufacturing technology space. Hurco has the perfect balance of stability and innovation with strong financials that allow us to minimize risk as we innovate for the future. Customers While we have plenty of Fortune 500 companies that use our products, the majority of our customers are small, often family- owned, businesses that have been operating for generations. They are smart, down to earth, pragmatic, entrepreneurial, and resilient. In short, our customers are why we exist and providing products and technologies that make them successful drives innovation at Hurco. 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. Customers rely on our technology to simplify complex processes due to the user-friendly attributes of our products. As we expand our product lines and develop new technologies, we continue to focus on products and software features that solve problems for our customers. Profitability Global sales for fiscal 2021 totaled $235.2 million and orders totaled $265.4 million, reflecting a year-over-year increase of 38% and 59%, respectively. The fourth quarter of fiscal 2021 was the strongest of the year for both sales and orders with all regions participating. Even more encouraging, all regions exceeded pre-pandemic order numbers for the fourth quarter of 2021 when compared to the pre-pandemic fourth quarter of 2019. For the fifth consecutive quarter, orders outpaced sales, which is a trend we typically see during a sustainable recovery. We will continue to be good stewards of our financial assets that provide the confidence and freedom to continuously innovate. Going Forward Whether in life or in business, reflection can help identify what’s truly important to make sure you move forward in the right direction. Technology continues to accelerate at warp speed and it is important to know how and where to focus our efforts for maximum impact and success. We reflected on the history of Hurco when our co-founder, Gerald V. Roch, was memorialized this summer in Indianapolis after his death at the age of 89. While he had numerous patents, his invention of Conversational Programming is considered the most significant for Hurco and our entire industry at large. It was responsible for countless machinists being able to successfully transition from manual machining to computerized technology. I feel fortunate that Gerry would call me and stop by periodically to see what was new even though he hadn’t been directly involved with Hurco for years. I always appreciated his enthusiasm when I would show him the latest control features. Gerald Roch’s passion to create technology that helps job shops increase efficiencies by simplifying complex and redundant processes, his dedication to customers, and his entrepreneurial spirit are an indelible part of our culture at Hurco. We will continue to honor the legacy of those who came before us by focusing on customers, profitability, and our core competencies, in order to continue growing this company for those who will come after us. Ultimately, we are here to serve. To serve our customers by providing manufacturing technologies that make them successful. To serve our shareholders by continuously striving to increase profitability. To serve our employees by providing opportunities for their talents to thrive. In closing, I would like to thank our customers, shareholders, board of directors, and employees for their dedication and support. We remain prepared to overcome unexpected challenges, poised for further growth, and focused on continuous innovation as we look forward to 2022! Gregory S. Volovic President and Chief Executive Officer Gregory S. Volovic President and Chief Executive Officer Sonja McClelland Executive Vice President, Treasurer, and Chief Financial Officer Michael Doar Executive Chairman 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. IN MEMORIAM Gerald V. Roch Hurco Co-Founder Inventor • Engineer • Pioneer May 11, 1931 – December 24, 2020 Mr. Roch acquired more than 40 patents, due in large part to his fascination with efficiency combined with his background at the family tool and die shop, his collaborative personality, and his drive to solve problems. His patents for interactive control technology, which we refer to as conversational programming, are considered the most significant. Despite all of his inventions and success, Mr. Roch was extremely humble, saying in an interview for the company’s anniversary, “I’ve never really been an expert in any one area. I know relatively little about software and electronics, but I’ve been fortunate enough that I conceptually understand how things should work. Then, it’s a matter of hiring capable engineers to make it happen.” Hurco.com/History MILLTRONICS – HASSLE-FREE CNC™ 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. TAKUMI – WHEN PRECISION MATTERS™ Takumi CNC machines are designed and built for high efficiency milling and high level precision. Equipped with control systems made by third parties, such as Fanuc ®, Siemens ®, Mitsubishi ®, and Heidenhain ®, the Takumi brand includes six product lines. LCM PRECISION TECHNOLOGY LCM designs and manufactures advanced components for machine tools, such as rotary tables, tilt tables, swivel heads, and electro-mechanical spindles. 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 automate redundant processes. ProCobots Systems 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. 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 2021 2020 $ 235,195 $ 170,627 $ $ $ 10,248 6,764 1.01 ($ 9,862) ($ 6,247) ($ 0.93) $ 265,421 $ 166,938 $ 208,700 $ 200,974 — $ 238,419 706 32.45 38.83 28.27 $ $ $ $ $ $ $ $ — 231,148 710 29.84 39.38 20.39 350 300 250 200 150 100 50 0 $263.4 $235.2 $170.6 2020 2019 Sales and Service Fees (Millions) 2021 250 200 150 100 50 0 $240.2 $231.1 $238.4 2020 2019 Shareholders’ Equity (Millions) 2021 25 20 15 10 5 0 -5 -10 $17.5 $6.8 2021 2019 2020 ($6.2) Net Income (Loss) (Millions) HURCO COMPANIES, INC., ELEVEN-YEAR SELECTED FINANCIAL DATA For the Fiscal Year Ended (In thousands except per share data and stock price) Sales and service fees Cost of sales and service Selling, general, and administrative expenses Goodwill impairment 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 2021 $235,195 178,946 46,001 — 10,248 (127) 10,121 3,357 $6,764 6,595 6,608 $1.01 $1.01 2,369 4,193 14,314 23.9% 4.4% 2.9% 2.9% $38.83 $28.27 $32.45 2020 $170,627 134,170 41,416 4,903 (9,862) (941) (10,803) (4,556) $(6,247) 6,670 6,670 $ (0.93) $ (0.93) 1,656 4,547 (6,256) 21.4% (5.8%) (3.7%) (2.7%) $39.38 $20.39 $29.84 At Fiscal Year End (In thousands except per share data and number of employees) 2021 2020 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. $208,700 3.57 $332,935 — 238,419 0.0% $36.08 $0.656 706 $0.55 $200,974 4.98 $295,655 — 231,148 0.0% $34.65 $1.016 710 $0.51 ANNUAL REPORT 2021 2019 $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 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 ANNUAL REPORT 2021 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 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 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 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 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 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 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 2017 2016 2015 2014 2013 2012 2011 $175,526 3.48 $277,808 1,507 203,085 0.7% $30.40 $0.568 749 $0.39 $160,413 3.77 $251,949 1,476 185,475 0.8% $27.92 $0.641 758 $0.35 $151,026 3.32 $248,577 1,583 174,568 0.9% $26.44 $0.551 769 $0.31 $141,888 3.12 $239,176 3,272 164,645 1.9% $25.18 $0.513 617 $0.26 $127,235 3.28 $212,804 3,665 151,491 2.4% $23.32 $0.583 625 $0.10 $122,828 3.49 $197,360 3,206 143,793 2.2% $22.22 $0.548 560 $ — $104,154 2.82 $186,870 865 126,212 0.7% $19.50 $0.455 520 $ — HURCO COMPANIES, INC., LEADERSHIP BOARD OF DIRECTORS CORPORATE OFFICERS AND DIVISION EXECUTIVES Thomas Aaro Marketing Consultant (1, 3) Michael Doar Executive Chairman 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 (1, 3) Richard Porter Private Equity Manager (1, 2, 4) Janaki Sivanesan Attorney, Sivanesan Law (2) Gregory S. Volovic President and Chief Executive Officer Hurco Companies, Inc. 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 10, 2022, at 10:00 a.m. Eastern Time.(A) TRANSFER AGENT Computershare Investor Services 462 South 4th Street, Louisville, KY 40202 LEGAL COUNSEL Corporate Law: Faegre Drinker Biddle & Reath LLP Patent Law: Faegre Drinker Biddle & Reath 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, Treasurer, and Chief Financial Officer One Technology Way Indianapolis, IN 46268 Telephone (317) 293-5309 Michael Doar Executive Chairman Gregory S. Volovic President and Chief Executive Officer Sonja K. McClelland Executive Vice President, Treasurer, and Chief Financial Officer HaiQuynh Jamison Corporate Controller and Principal Accounting Officer Jonathon D. Wright General Counsel and Corporate Secretary 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) Paul Gray Operations Manager, ProCobots 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 Stock Market LLC. FISCAL QUARTER ENDED 2021 2020 High Low High Low January 31 $33.85 $28.27 $39.38 $31.25 April 30 July 31 $38.83 $29.12 $33.89 $20.39 $38.80 $32.76 $34.97 $24.06 October 31 $35.38 $30.00 $31.87 $27.51 There were approximately 104 holders of record of Hurco Common Stock as of December 31, 2021. ANNUAL REPORT 2021 Roberto La Vista General Manager, LCM Precision Technology S.r.l. (Italy) Wai Yip Lee General Manager, Hurco (S.E. Asia) Pte. Ltd. (Singapore) Leanor Lin Vice General Manager, Takumi (Taiwan) Cory Miller General Manager, Hurco North America Jeff Nixon General Manager, Milltronics Europe, B.V. Louie Pavlakos General Manager, Milltronics USA David Waghorn General Manager, Hurco Europe Limited (United Kingdom) Scott Yao General Manager, Ningbo Hurco Trading Co., Ltd. (Shanghai, China) Charlie Tsai, Martin Lee, and Luke Wang General Managers, Hurco Manufacturing Limited (Taiwan) and Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) 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. (A) in virtual meeting format only, via webcast. For details please visit www.proxydocs.com/HURC. Yes  No  SECURITIES AND EXCHANGE COMMISSION UNITED STATES Washington, D.C. 20549 FORM 10-K ☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from (Mark One) 31, 2021 or ☐ _________ 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 registered Common Stock, no par value HURC The Nasdaq Stock Market LLC 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. 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  Yes  No  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. 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  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. 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, 2021 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 The Nasdaq Stock Market LLC Indicate by check mark if the registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  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  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  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  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  Non–accelerated filer  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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes ☐ No  The aggregate market value of the registrant’s voting stock held by non–affiliates as of April 30, 2021 (the last business day of our most recently completed second quarter) was $226,758,000. The number of shares of the registrant’s common stock outstanding as of December 31, 2021 was 6,613,699. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2022 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, among others, the impact of the COVID-19 pandemic and other public health epidemics and pandemics on the global economy, our business and operations, our employees and the business, operations and economies of our customers and suppliers; the cyclical nature of the machine tool industry; uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets; the risks of our international operations; governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to tax laws; the effects of changes in currency exchange rates; competition with larger companies that have greater financial resources; the United Kingdom’s withdrawal from the European Union (Brexit); our dependence on new product development; the need and/or ability to protect our intellectual property assets; the limited number of our manufacturing and supply chain sources; increases in the prices of raw materials, especially steel and iron products; the effect of the loss of members of senior management and key personnel; our ability to integrate acquisitions; acquisitions that could disrupt our operations and affect operating results; failure to comply with data privacy and security regulations; breaches of our network and system security measures; possible obsolescence of our technology and the need to make technological advances; impairment of our assets; negative or unforeseen tax consequences; uncertainty concerning our ability to use tax loss carryforwards; and changes in the LIBOR rate, SOFR rate, and/or other benchmarking interest rates; 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”). 3  Large accelerated filer  Non–accelerated filer  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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act).  Yes ☐ No  The aggregate market value of the registrant’s voting stock held by non–affiliates as of April 30, 2021 (the last business day of our most recently completed second quarter) was $226,758,000. The number of shares of the registrant’s common stock outstanding as of December 31, 2021 was 6,613,699. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2022 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, among others, the impact of the COVID-19 pandemic and other public health epidemics and pandemics on the global economy, our business and operations, our employees and the business, operations and economies of our customers and suppliers; the cyclical nature of the machine tool industry; uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets; the risks of our international operations; governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to tax laws; the effects of changes in currency exchange rates; competition with larger companies that have greater financial resources; the United Kingdom’s withdrawal from the European Union (Brexit); our dependence on new product development; the need and/or ability to protect our intellectual property assets; the limited number of our manufacturing and supply chain sources; increases in the prices of raw materials, especially steel and iron products; the effect of the loss of members of senior management and key personnel; our ability to integrate acquisitions; acquisitions that could disrupt our operations and affect operating results; failure to comply with data privacy and security regulations; breaches of our network and system security measures; possible obsolescence of our technology and the need to make technological advances; impairment of our assets; negative or unforeseen tax consequences; uncertainty concerning our ability to use tax loss carryforwards; and changes in the LIBOR rate, SOFR rate, and/or other benchmarking interest rates; 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”). 3 3 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, 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 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. We have sales, application engineering, and service subsidiaries in China, France, Germany, India, Italy, the Netherlands, 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. Our strategic plans focus on market expansion to reach more customers with more products on a global basis. We have made five acquisitions since 2013, and the products we have added through these acquisitions have given us more advanced products with unprecedented improvements in our machine tool accuracy and precision, allow us to seek higher productivity in complex manufacturing environments, provide automation for machine tending solutions, and minimize dependencies associated with volatilities from economic and 4 4 geographic cyclicality. 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 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 in an effort to attain long-term stability and profitability. During fiscal 2021, our sales and service fees were $235.2 million, an increase of $64.6 million, or 38%, compared to fiscal 2020 and included a favorable currency impact of $7.7 million, or 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes. For fiscal 2021, we reported net income of $6.8 million, or $1.01 per diluted share, compared to a net loss of $6.2 million, or $(0.93) per diluted share, for fiscal 2020. During fiscal 2021, sales increased year-over-year for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Industry been highly cyclical. Machine tool products are considered capital goods, which makes them part of an industry that has historically 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 the Association of Manufacturing Technology (“AMT”), calculates machine tool consumption annually by country. It is important to note that data for foreign countries are based on government reports that may lag 6 to 12 months behind real-time and, therefore, are unreliable for forecasting purposes. Demand for capital equipment can fluctuate significantly during periods of changing economic conditions. Manufacturers and suppliers of capital goods, such as our company, are often the first to experience these changes in demand. Additionally, since build to stock and 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 and horizontal machining centers (mills), turning centers (lathes) and toolroom machines. The majority of our machine tools are equipped with our fully integrated computer control systems that are 5 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, 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 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. We have sales, application engineering, and service subsidiaries in China, France, Germany, India, Italy, the Netherlands, 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. Our strategic plans focus on market expansion to reach more customers with more products on a global basis. We have made five acquisitions since 2013, and the products we have added through these acquisitions have given us more advanced products with unprecedented improvements in our machine tool accuracy and precision, allow us to seek higher productivity in complex manufacturing environments, provide automation for machine tending solutions, and minimize dependencies associated with volatilities from economic and 4 geographic cyclicality. 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 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 in an effort to attain long-term stability and profitability. During fiscal 2021, our sales and service fees were $235.2 million, an increase of $64.6 million, or 38%, compared to fiscal 2020 and included a favorable currency impact of $7.7 million, or 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes. For fiscal 2021, we reported net income of $6.8 million, or $1.01 per diluted share, compared to a net loss of $6.2 million, or $(0.93) per diluted share, for fiscal 2020. During fiscal 2021, sales increased year-over-year for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. 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 the Association of Manufacturing Technology (“AMT”), calculates machine tool consumption annually by country. It is important to note that data for foreign countries are based on government reports that may lag 6 to 12 months behind real-time and, therefore, are unreliable for forecasting purposes. Demand for capital equipment can fluctuate significantly during periods of changing economic conditions. Manufacturers and suppliers of capital goods, such as our company, are often the first to experience these changes in demand. Additionally, since build to stock and 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 and horizontal machining centers (mills), turning centers (lathes) and toolroom machines. The majority of our machine tools are equipped with our fully integrated computer control systems that are 5 5 powered by our proprietary software, 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 and 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 2021 Year Ended October 31, 2020 2019 $ 198,602 85 % $ 139,577 Computerized Machine Tools Computer Control Systems and Software † 1 % 11 % Service Parts 3 % Service Fees 100 % Total † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. 2,818 27,854 8,970 100 % $ 263,377 1,699 22,484 6,867 100 % $ 170,627 2,528 26,425 7,640 $ 235,195 1 % 13 % 4 % 1 % 11 % 3 % 82 % $ 223,735 85 % Product Portfolio by Brand We have three brands of CNC machine tools in our product portfolio. Hurco is the technology and 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 precision and very high speed, high efficiency performance, such as that required in the 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 practical automation solutions, such as feeders and collaborative robots (cobots). 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 CNC machine models. The combined machine tool product lines 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, we achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. Hurco CNC Machine Tools Hurco computerized machine tools are equipped with a fully integrated interactive computer control system that features our proprietary WinMax® software. Our computer control system enables a machine tool operator to create complex two-dimensional (“2D”) or three-dimensional (“3D”) machining programs directly from an engineering drawing or computer-aided design geometry file, such as a solid model. An operator with little or 6 6 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 a touch-screen, 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 (“CAD”) and computer aided manufacturing (“CAM”) programmers. With the ability to transfer most CAD data directly into a Hurco program, programming time can be significantly reduced. Machine tool products must be designed to meet customer demand to machine 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 and 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: VMi 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 eight models in three sizes with X-axis (horizontal) travels of 26 (four models), 40 (two models), and 50 inches (two models). VMXi 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 drive) spindles and the larger models are offered as either #40 or #50 taper. The VMX line consists of 14 models in eight sizes with X-axis travels of 24, 26, 30, 42, 50, 60, 64, and 84 inches. ___________________ ††Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. 7 powered by our proprietary software, 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 and 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 Year Ended October 31, 2021 2020 2019 $ 198,602 85 % $ 139,577 82 % $ 223,735 85 % 2,528 26,425 7,640 1 % 11 % 3 % 1,699 22,484 6,867 1 % 13 % 4 % 2,818 27,854 8,970 1 % 11 % 3 % $ 235,195 100 % $ 170,627 100 % $ 263,377 100 % † Amounts shown do not include computer control systems and software sold as an integrated component of computerized Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees Total machine systems. Product Portfolio by Brand We have three brands of CNC machine tools in our product portfolio. Hurco is the technology and 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 precision and very high speed, high efficiency performance, such as that required in the 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 practical automation solutions, such as feeders and collaborative robots (cobots). 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 CNC machine models. The combined machine tool product lines 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, we achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. Hurco CNC Machine Tools Hurco computerized machine tools are equipped with a fully integrated interactive computer control system that features our proprietary WinMax® software. Our computer control system enables a machine tool operator to create complex two-dimensional (“2D”) or three-dimensional (“3D”) machining programs directly from an engineering drawing or computer-aided design geometry file, such as a solid model. An operator with little or 6 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 a touch-screen, 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 (“CAD”) and computer aided manufacturing (“CAM”) programmers. With the ability to transfer most CAD data directly into a Hurco program, programming time can be significantly reduced. Machine tool products must be designed to meet customer demand to machine 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 and 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: VMi 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 eight models in three sizes with X-axis (horizontal) travels of 26 (four models), 40 (two models), and 50 inches (two models). VMXi 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 drive) spindles and the larger models are offered as either #40 or #50 taper. The VMX line consists of 14 models in eight sizes with X-axis travels of 24, 26, 30, 42, 50, 60, 64, and 84 inches. ___________________ ††Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. 7 7 HSi Product Line Due to the integral, motorized spindle with a maximum 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. Ui 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, and 14-inch diameter rotary tables with either standard (belted) or direct drive (inline) spindles. SRTi/SWi Product Line The SRT Series of five-axis machines utilizes motor spindles and a swivel head with 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 table to machine long five-axis parts. These models are available in either 42 or 60-inch X-axis travels. Customers can choose between standard and high-speed spindles. VCi/VCXi 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. BXi 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-axis travels (a three-axis version and a five-axis version), as well as 53-inch and 63-inch X-axis travel models. HMi 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-axis travels of 67 inches. These products are designed for high-mix, low-volume applications that benefit from a horizontal spindle configuration, but do not require an expensive pallet switching system typically found on competitive horizontal machines. machine equipped with an articulating head. DCX machines are the largest models offered by Hurco that feature the powerful and flexible WinMax® control. TMi/TM-Mi Product Line The TM/TM-M product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There is one TM model in four sizes, measured by chuck size: 6, 8, 10, and 12 inches. We added motorized tooling on the lathe turret to further enhance the capability of the TM turning centers and designated it as the TM-M 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 TM-M product line consists of three models: TM8Mi, TM10Mi, and TM12Mi. TMXi 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. They are available in either 8 or 10 inch main chuck sizes. Product Development Since Hurco is the technology and 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 2021 include a new feature for Solid Model Import, which allows customers to create Conversational Data Blocks with 3D attributes and new lathe programming features, such as radius wear offsets for live tools. New hardware options included expanded capacity automatic tool changers (60 ATC) and 24,000 rpm high-speed spindles for SRT/SW Series. New models include VMX42UDi and VMX60HSRTi. We also upgraded our Industry 4.0 websites for Hurco’s UltiMonitor and Milltronics Shop View (MSV) options. These tools allow users to collect data and optimize efficiency of their machine tools using the Internet of Things (“IoT”). Milltronics CNC Machine Tools Our Milltronics line of CNC machine tools is designed for excellent value with more standard features for the price versus competitors. We manufacture and sell these machine tools with a fully integrated interactive computer control system called the Milltronics 9000 Series DGI CNC. The control is compatible with G & M Code programs (generated from CAD/CAM software) and also features onboard conversational visual aid HBMXi 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. programming. VK Series The Milltronics portfolio consists of the following product lines: DCXi Product Line The double column DCX series includes six models in four sizes. Based on 2-meter, 3-meter, and 4-meter X- axis travels, these machining centers are designed to facilitate production of large parts and molds often required by the aerospace, energy, and custom machinery industries. The 3-meter model is available as a five-axis The VK is our 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 9000 DGI 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. 8 8 9 HSi Product Line Due to the integral, motorized spindle with a maximum 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. Ui 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, and 14-inch diameter rotary tables with either standard (belted) or direct drive (inline) spindles. SRTi/SWi Product Line The SRT Series of five-axis machines utilizes motor spindles and a swivel head with 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 table to machine long five-axis parts. These models are available in either 42 or 60-inch X-axis travels. Customers can choose between standard and high-speed spindles. VCi/VCXi 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. BXi 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-axis travels (a three-axis version and a five-axis version), as well as 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-axis travels of 67 inches. These products are designed for high-mix, low-volume applications that benefit from a horizontal spindle configuration, but do not require an expensive pallet switching system typically found on 53-inch and 63-inch X-axis travel models. HMi Product Line competitive horizontal machines. HBMXi 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. DCXi Product Line The double column DCX series includes six models in four sizes. Based on 2-meter, 3-meter, and 4-meter X- axis travels, these machining centers are designed to facilitate production of large parts and molds often required by the aerospace, energy, and custom machinery industries. The 3-meter model is available as a five-axis 8 machine equipped with an articulating head. DCX machines are the largest models offered by Hurco that feature the powerful and flexible WinMax® control. TMi/TM-Mi Product Line The TM/TM-M product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There is one TM model in four sizes, measured by chuck size: 6, 8, 10, and 12 inches. We added motorized tooling on the lathe turret to further enhance the capability of the TM turning centers and designated it as the TM-M 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 TM-M product line consists of three models: TM8Mi, TM10Mi, and TM12Mi. TMXi 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. They are available in either 8 or 10 inch main chuck sizes. Product Development Since Hurco is the technology and 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 2021 include a new feature for Solid Model Import, which allows customers to create Conversational Data Blocks with 3D attributes and new lathe programming features, such as radius wear offsets for live tools. New hardware options included expanded capacity automatic tool changers (60 ATC) and 24,000 rpm high-speed spindles for SRT/SW Series. New models include VMX42UDi and VMX60HSRTi. We also upgraded our Industry 4.0 websites for Hurco’s UltiMonitor and Milltronics Shop View (MSV) options. These tools allow users to collect data and optimize efficiency of their machine tools using the Internet of Things (“IoT”). Milltronics CNC Machine Tools Our Milltronics line of CNC machine tools is designed for excellent value with more standard features for the price versus competitors. We manufacture and sell these machine tools with a fully integrated interactive computer control system called the Milltronics 9000 Series DGI CNC. The control is compatible with G & M Code programs (generated from CAD/CAM software) and also features onboard conversational visual aid programming. The Milltronics portfolio consists of the following product lines: VK Series The VK is our 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 9000 DGI 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. 9 9 TRQ/TRM Product Line Products with the TRQ or TRM designation are part of the tool room bed mill category, which are machines that are available without an enclosure, also referred to as open bed machines, that provide easy access to the work table. Typical applications for 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. The 60 inch model is also available with a high-torque option. 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 spindles and are available in four different sizes. 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 die and mold, aerospace, and medical machining. Featuring heavier castings, faster motion, and inline spindles, these 40-taper machines 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. 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 with up to 200 inches in X-axis travel by 80 inches in Y-axis travel. 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. 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. These compact machines are available with chuck sizes of 6, 8, and 10 inches. New Products In fiscal 2021, Milltronics launched a new high torque version of its 60 inch TRM model called the TRM30HT. Hardware upgrades included a new semi-enclosure option for the BR Series and expanded capacity automatic tool changers (24 ATC) for the GP Series. 10 10 Takumi CNC Machine Tools The Takumi brand features machines designed for applications requiring precision and high speed, high efficiency milling. Market segments that require such applications include 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-axis vertical machining centers with linear guides; three-axis vertical machining centers with box ways; high-speed, double column vertical machining centers; and heavy-duty, double-column machining centers, five-axis machining centers and high-speed horizontal machining centers. Takumi machines are hand built and fitted to exacting standards to produce high accuracies and superior surface The Takumi portfolio consists of the following product lines: The PV Series are entry-level vertical machining centers, yet feature high-performance direct drive spindles and robust roller way technology. PV machines are available in two sizes with X-axis travels of either 26 or 41 inches. They are designed for general purpose and job shop applications. 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 job shops. The VC machines are available in three 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, 70, 78, 86, and 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 spindles, or built-in HSK spindles, with up to 20,000 rpm, in addition to spindle speed options of 24,000 rpm and 36,000 rpm. The H Series product line consists of 11 models with X-axis travels of 24, 40, 49, 63, 86, 126, 157, and 197 inches, with select models available with extended Y-axis travel and/or high-speed spindles. These machines are specifically targeted for die and mold and aerospace customers. Designed with trunnion tables or swivel heads, these five-axis simultaneous machining centers provide versatility, as well as reduce setup time and process time. Most models are offered with a double-column structure for superior stability and performance. The U Series product line consists of six models, four of which ________________________ *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. finishes. PV Series VC Series V Series 126 inches. H Series U Series 11 TRQ/TRM Product Line Products with the TRQ or TRM designation are part of the tool room bed mill category, which are machines that are available without an enclosure, also referred to as open bed machines, that provide easy access to the work table. Typical applications for 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. The 60 inch model is also available with a high-torque option. 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 spindles and are available in four different sizes. 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. Takumi CNC Machine Tools The Takumi brand features machines designed for applications requiring precision and high speed, high efficiency milling. Market segments that require such applications include 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-axis vertical machining centers with linear guides; three-axis vertical machining centers with box ways; high-speed, double column vertical machining centers; and heavy-duty, double-column machining centers, five-axis machining centers and high-speed horizontal machining centers. Takumi machines are hand built and fitted to exacting standards to produce high accuracies and superior surface finishes. The Takumi portfolio consists of the following product lines: 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 die and mold, aerospace, and medical machining. Featuring heavier castings, faster motion, and inline spindles, these 40-taper machines are available in four sizes. Models include X-axis travels PV Series The PV Series are entry-level vertical machining centers, yet feature high-performance direct drive spindles and robust roller way technology. PV machines are available in two sizes with X-axis travels of either 26 or 41 inches. They are designed for general purpose and job shop applications. 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. Customers can choose from three different models with X- of 30, 42, 50, or 60 inches. VM Extra Power (XP) Product Line 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 with up to 200 inches in X-axis travel by 80 inches in Y-axis travel. ML Product Line SL Product Line New Products 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. 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. These compact machines are available with chuck sizes of 6, 8, and 10 inches. In fiscal 2021, Milltronics launched a new high torque version of its 60 inch TRM model called the TRM30HT. Hardware upgrades included a new semi-enclosure option for the BR Series and expanded capacity automatic tool changers (24 ATC) for the GP Series. 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 job shops. The VC machines are available in three 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. 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 spindles, or built-in HSK spindles, with up to 20,000 rpm, in addition to spindle speed options of 24,000 rpm and 36,000 rpm. The H Series product line consists of 11 models with X-axis travels of 24, 40, 49, 63, 86, 126, 157, and 197 inches, with select models available with extended Y-axis travel and/or high-speed spindles. These machines are specifically targeted for die and mold and aerospace customers. U Series Designed with trunnion tables or swivel heads, these five-axis simultaneous machining centers provide versatility, as well as reduce setup time and process time. Most models are offered with a double-column structure for superior stability and performance. The U Series product line consists of six models, four of which ________________________ *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. 10 11 11 offer trunnion table sizes of 10, 16, 24, and 31.5 inches. The UB version is equipped with a B/C swivel head and a 12,000 rpm built-in spindle. Its double-column design provides a spacious X-axis travel of 126 inches. An additional 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 with high-speed, direct-drive spindles, or built-in HSK spindles, that have up to 20,000 rpm, but are also equipped with a graphite dust extraction system. The G Series product line consists of three models with X- axis travels of 22, 30, and 40 inches. BC Series BC Series machines are double column, three-axis machining centers designed for heavy cutting and applications that require high power and torque, such as die and mold. These models include a heavy cutting, 6,000 rpm geared-head spindle for maximum cutting power. The BC Series models are available in eight sizes, including X-axis travels of 83, 122, 126, 157 and 197 inches, with several models featuring different choices of Y-axis travel. HMX Series The HMX Series are high-speed horizontal machining centers that are capable of up to 1G acceleration. These models include twin pallets to maximize cutting time along with very fast pallet exchange times and rapid traverse rates. Available in 400, 500, and 630 mm pallet sizes, they can also be fitted with expandable automatic tool changers that hold up to 220 tools. 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, both available with 10 inch chucks; and the SL300, which has a 12 inch chuck. New Products In 2021, Takumi redesigned its popular H12 double column machining center. Now called the H12E, improvements include faster rapid traverses and trimmed dimensions to reduce shipping cost, as the redesigned model can now fit inside a standard high cube shipping container. The new H12E is also available with an optional 15,000 rpm high-speed spindle. Another new model is the H27S, a 106 inch X-axis travel, high-speed, bridge type machining center. Hardware upgrades include expanded automatic tool changer (32 ATC) for #50 taper models and new high-torque #50 taper options for V-Series box way machines. Takumi also developed software to become the first CNC machine with a FANUC control that provides a seamless interface with the Renishaw Set & Inspect program to facilitate on-machine inspection probing that doesn’t require macro- programming. 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”). 12 12 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, Automation Job Manager, Stream Load, Active 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 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. 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. Designed to take advantage of the 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 designs, receive event notifications via email for 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. ___________________ countries. * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other 13 offer trunnion table sizes of 10, 16, 24, and 31.5 inches. The UB version is equipped with a B/C swivel head and a 12,000 rpm built-in spindle. Its double-column design provides a spacious X-axis travel of 126 inches. An additional 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, 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 with high-speed, direct-drive spindles, or built-in HSK spindles, that have up to 20,000 rpm, but are also equipped with a graphite dust extraction system. The G Series product line consists of three models with X- and energy applications. G Series axis travels of 22, 30, and 40 inches. BC Series BC Series machines are double column, three-axis machining centers designed for heavy cutting and applications that require high power and torque, such as die and mold. These models include a heavy cutting, 6,000 rpm geared-head spindle for maximum cutting power. The BC Series models are available in eight sizes, including X-axis travels of 83, 122, 126, 157 and 197 inches, with several models featuring different choices of Y-axis travel. HMX Series SL Lathes New Products The HMX Series are high-speed horizontal machining centers that are capable of up to 1G acceleration. These models include twin pallets to maximize cutting time along with very fast pallet exchange times and rapid traverse rates. Available in 400, 500, and 630 mm pallet sizes, they can also be fitted with expandable automatic tool changers that hold up to 220 tools. 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, both available with 10 inch chucks; and the SL300, which has a 12 inch chuck. In 2021, Takumi redesigned its popular H12 double column machining center. Now called the H12E, improvements include faster rapid traverses and trimmed dimensions to reduce shipping cost, as the redesigned model can now fit inside a standard high cube shipping container. The new H12E is also available with an optional 15,000 rpm high-speed spindle. Another new model is the H27S, a 106 inch X-axis travel, high-speed, bridge type machining center. Hardware upgrades include expanded automatic tool changer (32 ATC) for #50 taper models and new high-torque #50 taper options for V-Series box way machines. Takumi also developed software to become the first CNC machine with a FANUC control that provides a seamless interface with the Renishaw Set & Inspect program to facilitate on-machine inspection probing that doesn’t require macro- programming. 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, Automation Job Manager, Stream Load, Active 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 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. 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. Designed to take advantage of the 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 designs, receive event notifications via email for 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. ___________________ * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. 12 13 13 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. 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 sold by our wholly-owned distributors and 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 the Hurco SRT line of five-axis machining centers to achieve simultaneous five-axis machining. CNC Rotary Tables Automation Job Manager is a software feature designed specifically for seamless integration of the Hurco control to our automation package called Job Shop Automation, which promotes intuitive programming of collaborative robots for machine tending applications. LCM has several 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. 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. CNC Tilt Tables Active Thermal Compensation is a feature that uses sensors to measure head casting temperature growth and software that automatically compensates for that growth, improving part accuracy. 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 ProCobots provides automation solutions including collaborative robots (cobots), 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 customers who are in the high-mix, low-volume manufacturing environment. Products include portable models, such as the ER Work and ProFeeder Table, as well as flexible cell solutions, including the ProFeeder, ProFeeder Flex, ProFeeder Compact, and ProFeeder X. ProCobots solutions are available for any Hurco, Milltronics or Takumi machine. 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. Non-Hurco Branded Products & Technologies Manufacturing While our three brands of CNC machine tools are responsible for the vast majority of our revenue, we have added other products to our portfolio that have contributed to our top and bottom line growth and 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 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”)). HML conducts final assembly operations and is 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 14 14 15 LCM has several lines of CNC tilting rotary tables, intended specifically for five-axis machining centers. Each of the 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 several electro-spindle (built-in motors for swivel heads) options. The two lines of swivel heads are differentiated by the type of transmission (either mechanical transmission or torque motor). In 2021, LCM developed a new high performance tilting rotary table called BRATT400, with the tilting axis positioned at 45 degrees. It is powered by new LCM torque motors and designed for specific applications on Product Development highly dynamic five-axis machines. Parts and Service 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. Automation Job Manager is a software feature designed specifically for seamless integration of the Hurco control to our automation package called Job Shop Automation, which promotes intuitive programming of collaborative robots for machine tending applications. 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. Active Thermal Compensation is a feature that uses sensors to measure head casting temperature growth and software that automatically compensates for that growth, improving part accuracy. 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 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 sold by our wholly-owned distributors and 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 the Hurco SRT line of five-axis machining centers to achieve simultaneous five-axis machining. CNC Rotary Tables LCM has several 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 several lines of CNC tilting rotary tables, intended specifically for five-axis machining centers. Each of the 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 several electro-spindle (built-in motors for swivel heads) options. The two lines of swivel heads are differentiated by the type of transmission (either mechanical transmission or torque motor). Product Development In 2021, LCM developed a new high performance tilting rotary table called BRATT400, with the tilting axis positioned at 45 degrees. It is powered by new LCM torque motors and designed for specific applications on highly dynamic five-axis machines. Parts and Service ProCobots provides automation solutions including collaborative robots (cobots), 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 customers who are in the high-mix, low-volume manufacturing environment. Products include portable models, such as the ER Work and ProFeeder Table, as well as flexible cell solutions, including the ProFeeder, ProFeeder Flex, ProFeeder Compact, and ProFeeder X. ProCobots solutions are available for any Hurco, Milltronics or Takumi machine. 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. Non-Hurco Branded Products & Technologies Manufacturing While our three brands of CNC machine tools are responsible for the vast majority of our revenue, we have added other products to our portfolio that have contributed to our top and bottom line growth and 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 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”)). HML conducts final assembly operations and is 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 14 15 15 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 and Milltronics bridge mills for the American market and manufactures certain electro-spindle components for LCM. We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd. (“HAL”), a Taiwanese company in which we have a 35% ownership interest. This company produces all of our computer control systems to our specifications, sources industry standard computer components and our proprietary parts, performs final assembly, and conducts test operations. We work closely with our subsidiaries, key component suppliers, and HAL to ensure that their production capacity will be sufficient to meet the projected demand for our machine tool products. Many of the key components used in our machines can be sourced from multiple suppliers. However, any prolonged interruption of operations or significant reduction in the capacity or performance capability at any of our manufacturing facilities, or at any of our key component suppliers, could have a material adverse effect on our operations. Marketing and Distribution We principally sell our products through more than 180 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, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world’s principal machine tool consuming markets. Our selling divisions in the United States have responsibility for the Americas, which includes Canada, Mexico, Central America, South America, and the U.S. Approximately 87% of the worldwide demand for computerized machine tools and computer control systems is outside of the U.S. In fiscal 2021, approximately 63% of our revenues were derived from customers outside of the Americas. 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; 16 16 • • • 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 Corporation, Haas Automation, Inc., Doosan Corporation, Okuma Machinery Works, Ltd., Fryer Machine Systems, ProtoTRAK CNC Machines, Quick Jet Machine, Co., Ltd., Gentiger Machinery Industrial, Co., Ltd., and Yeong Chin Machinery Industries, Co., Ltd. (YCM). 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. Human Capital Resources Hurco is committed to attracting and retaining the brightest and best talent. Therefore, investing, developing, and maintaining human capital is critical to our success. As of October 31, 2021, Hurco had approximately 706 full-time employees, of which approximately 28% were in the Americas, and 72% in other global regions. As a global industrial technology company, a large number of our employees are engineers or trained trade or technical workers focusing on advanced manufacturing, and many of them hold masters’, doctorate, or equivalent advanced degrees. Hurco emphasizes a number of measures and objectives in managing its human capital assets, including, among others, employee safety and wellness, talent acquisition and retention, employee engagement, development, and training, diversity and inclusion, and compensation and pay equity. None of our employees are covered by a collective-bargaining agreement. We have not experienced any employee-generated work stoppages or disruptions, and we consider our employee relations to be satisfactory. COVID-19 and Employee Safety and Wellness During the COVID-19 pandemic, the safety and well-being of our employees and their families has been a top priority as we continue to serve our customers – many of which are involved in the installation, production, 17 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 and Milltronics bridge mills for the American market and manufactures certain electro-spindle components for LCM. We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd. (“HAL”), a Taiwanese company in which we have a 35% ownership interest. This company produces all of our computer control systems to our specifications, sources industry standard computer components and our proprietary parts, performs final assembly, and conducts test operations. We work closely with our subsidiaries, key component suppliers, and HAL to ensure that their production capacity will be sufficient to meet the projected demand for our machine tool products. Many of the key components used in our machines can be sourced from multiple suppliers. However, any prolonged interruption of operations or significant reduction in the capacity or performance capability at any of our manufacturing facilities, or at any of our key component suppliers, could have a material adverse effect on our operations. Marketing and Distribution We principally sell our products through more than 180 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, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world’s principal machine tool consuming markets. Our selling divisions in the United States have responsibility for the Americas, which includes Canada, Mexico, Central America, South America, and the U.S. Approximately 87% of the worldwide demand for computerized machine tools and computer control systems is outside of the U.S. In fiscal 2021, approximately 63% of our revenues were derived from customers outside of the Americas. 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; 16 • • • 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 Corporation, Haas Automation, Inc., Doosan Corporation, Okuma Machinery Works, Ltd., Fryer Machine Systems, ProtoTRAK CNC Machines, Quick Jet Machine, Co., Ltd., Gentiger Machinery Industrial, Co., Ltd., and Yeong Chin Machinery Industries, Co., Ltd. (YCM). 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. Human Capital Resources Hurco is committed to attracting and retaining the brightest and best talent. Therefore, investing, developing, and maintaining human capital is critical to our success. As of October 31, 2021, Hurco had approximately 706 full-time employees, of which approximately 28% were in the Americas, and 72% in other global regions. As a global industrial technology company, a large number of our employees are engineers or trained trade or technical workers focusing on advanced manufacturing, and many of them hold masters’, doctorate, or equivalent advanced degrees. Hurco emphasizes a number of measures and objectives in managing its human capital assets, including, among others, employee safety and wellness, talent acquisition and retention, employee engagement, development, and training, diversity and inclusion, and compensation and pay equity. None of our employees are covered by a collective-bargaining agreement. We have not experienced any employee-generated work stoppages or disruptions, and we consider our employee relations to be satisfactory. COVID-19 and Employee Safety and Wellness During the COVID-19 pandemic, the safety and well-being of our employees and their families has been a top priority as we continue to serve our customers – many of which are involved in the installation, production, 17 17 and/or maintenance of critical infrastructure. Our global pandemic efforts include leveraging the advice and recommendations of infectious disease experts and organizations to establish appropriate safety standards and secure appropriate levels of personal protective equipment for our workforce. Based upon this advice and recommendations, we have adopted and implemented the Hurco COVID-19 Exposure Prevention, Preparedness, and Response Plan (the “Hurco COVID Response Plan”) to outline our policies and procedures designed to mitigate the potential for transmission of COVID-19 and prevent exposure to illness from certain other infectious diseases. Among other things, the Hurco COVID Response Plan memorializes employee, manager, and company responsibilities related to house-keeping and sanitization, hygiene and respiratory etiquette, use of personal protective equipment, employee and visitor screening procedures, leave policies and accommodations, remote working opportunities and infrastructure, and protocols for not reporting to work and/or when to return to work upon potential and/or confirmed COVID-19 exposure or infection. In addition to procuring personal protective equipment, automatic screening stations, and other preventative resources, we also leveraged Hurco technology and human capital to directly produce personal protective equipment on Hurco products during fiscal 2020 and distributed the same to our personnel and customers around the world. We have also implemented a wellness program aimed at engaging employees with healthcare providers to promote the proactive evaluation, tracking, and management of major health and wellness indicators, such as blood pressure, weight, and routine blood laboratory analysis. Employee Engagement, Development, and Training We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. We advance continual learning and career development through ongoing performance and development conversations or evaluations with employees, internally and externally developed training programs, and educational reimbursement programs. In connection with the latter, reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relative to our business or otherwise to the development of the employee’s skill set or knowledge base. In addition, we routinely invest in seminar, conference, and other training or continuing education events for our employees. Diversity and Inclusion We are committed to fostering work environments that value and promote diversity and inclusion. This commitment includes a policy to provide equal access to, and participation in, equal employment opportunities, programs, and services without regard to race, religion, color, national origin, disability, sex, sexual orientation, gender identity, stereotypes or assumptions based thereon. We pride ourselves on policies and programs designed for the development and fair treatment of our global workforce, including generous healthcare and benefit programs for our employees, equal employment hiring practices and policies, anti-harassment, workforce safety, and anti-retaliation policies, and implementation of affirmative action programs. We welcome and celebrate our teams’ differences, experiences, and beliefs, and we are investing in a more engaged, diverse, and inclusive workforce. Ethical Business Practices We also foster a strong corporate culture that promotes high standards of ethics and compliance for our businesses, including policies that set forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We also maintain a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical business conduct on the part of our businesses, employees, officers, directors, or vendors and provide training and education to our global workforce with respect to our Code of Business Conduct and Ethics and anti-corruption and anti-bribery policies. We intend to disclose any amendment to, or a waiver from, a provision of our Code of Business 18 18 Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on our website at www.hurco.com. Backlog Condition and Results of Operations in this report. Availability of Reports and Other Information For information on orders and backlog, see Item 7. Management’s Discussion and Analysis of Financial 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 • Press releases on quarterly earnings, product announcements, legal developments and other material file that material with or furnish it to the SEC; news that we may post from time to time; • Corporate governance information including our Corporate Governance Principles, Code of Business Conduct and Ethics, information concerning our Board of Directors and its committees, including the charters of the Audit Committee, Compensation Committee, Nominating and Governance Committee and other governance-related policies; and • Opportunities to sign up for email alerts and RSS feeds to have information provided in real time. The information available on our website is not incorporated by reference in, or a part of, this or any other report we file with, or furnish to, the SEC. Item 1A. RISK FACTORS In this section, we describe what we believe to be the material risks related to our business. The risks and uncertainties described below or elsewhere in this report are not the only ones to which we are exposed. Additional risks and uncertainties not presently known and/or risks we currently deem immaterial may also adversely affect our business and operations. If any of the developments included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. Risks Related to the COVID-19 Pandemic Public health emergencies or outbreaks of epidemics, pandemics, or contagious diseases have disrupted, and could continue to disrupt, our operations and materially and adversely affect our business, financial condition, and results of operations. Widespread public health emergencies or outbreaks of epidemics, pandemics, or contagious diseases, such as the COVID-19 pandemic, have had, and could continue to have, a material adverse effect on our business, financial condition, and results of operations. As a result of the COVID-19 pandemic, governmental authorities in jurisdictions where our facilities, customers, and suppliers are located have imposed mandatory closures, 19 and/or maintenance of critical infrastructure. Our global pandemic efforts include leveraging the advice and recommendations of infectious disease experts and organizations to establish appropriate safety standards and secure appropriate levels of personal protective equipment for our workforce. Based upon this advice and recommendations, we have adopted and implemented the Hurco COVID-19 Exposure Prevention, Preparedness, and Response Plan (the “Hurco COVID Response Plan”) to outline our policies and procedures designed to mitigate the potential for transmission of COVID-19 and prevent exposure to illness from certain other infectious diseases. Among other things, the Hurco COVID Response Plan memorializes employee, manager, and company responsibilities related to house-keeping and sanitization, hygiene and respiratory etiquette, use of personal protective equipment, employee and visitor screening procedures, leave policies and accommodations, remote working opportunities and infrastructure, and protocols for not reporting to work and/or when to return to work upon potential and/or confirmed COVID-19 exposure or infection. In addition to procuring personal protective equipment, automatic screening stations, and other preventative resources, we also leveraged Hurco technology and human capital to directly produce personal protective equipment on Hurco products during fiscal 2020 and distributed the same to our personnel and customers around the world. We have also implemented a wellness program aimed at engaging employees with healthcare providers to promote the proactive evaluation, tracking, and management of major health and wellness indicators, such as blood pressure, weight, and routine blood laboratory analysis. Employee Engagement, Development, and Training We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. We advance continual learning and career development through ongoing performance and development conversations or evaluations with employees, internally and externally developed training programs, and educational reimbursement programs. In connection with the latter, reimbursement is available to employees enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relative to our business or otherwise to the development of the employee’s skill set or knowledge base. In addition, we routinely invest in seminar, conference, and other training or continuing education events for our employees. Diversity and Inclusion We are committed to fostering work environments that value and promote diversity and inclusion. This commitment includes a policy to provide equal access to, and participation in, equal employment opportunities, programs, and services without regard to race, religion, color, national origin, disability, sex, sexual orientation, gender identity, stereotypes or assumptions based thereon. We pride ourselves on policies and programs designed for the development and fair treatment of our global workforce, including generous healthcare and benefit programs for our employees, equal employment hiring practices and policies, anti-harassment, workforce safety, and anti-retaliation policies, and implementation of affirmative action programs. We welcome and celebrate our teams’ differences, experiences, and beliefs, and we are investing in a more engaged, diverse, and inclusive workforce. Ethical Business Practices We also foster a strong corporate culture that promotes high standards of ethics and compliance for our businesses, including policies that set forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We also maintain a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical business conduct on the part of our businesses, employees, officers, directors, or vendors and provide training and education to our global workforce with respect to our Code of Business Conduct and Ethics and anti-corruption and anti-bribery policies. We intend to disclose any amendment to, or a waiver from, a provision of our Code of Business 18 Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on our website at www.hurco.com. Backlog For information on orders and backlog, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report. 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. 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. Risks Related to the COVID-19 Pandemic Public health emergencies or outbreaks of epidemics, pandemics, or contagious diseases have disrupted, and could continue to disrupt, our operations and materially and adversely affect our business, financial condition, and results of operations. Widespread public health emergencies or outbreaks of epidemics, pandemics, or contagious diseases, such as the COVID-19 pandemic, have had, and could continue to have, a material adverse effect on our business, financial condition, and results of operations. As a result of the COVID-19 pandemic, governmental authorities in jurisdictions where our facilities, customers, and suppliers are located have imposed mandatory closures, 19 19 stay-at-home orders, and social distancing protocols that significantly limit the movement of people, goods, and services or otherwise restrict normal business operations or consumption patterns. The COVID-19 pandemic has disrupted our operations and will likely continue to affect our business. Specifically, many of our sales and service organizations throughout the Americas, Europe, and Asia Pacific have, at one time or another, been subject to temporary closures or otherwise been required to adopt remote work strategies. We may continue to experience additional temporary facility closures in response to government mandates and/or the incidence of additional spread. Additionally, the COVID-19 outbreak has disrupted and could in the future disrupt our ability to deliver and/or install machines, our procurement of supplies for our operations, and our customers’ purchasing behavior or decisions. The COVID-19 pandemic has resulted in significantly reduced demand for our products, which could continue for an extended period of time. Any or all of the foregoing in jurisdictions where we or our customers, suppliers, or business partners are located have had and could continue to have a material adverse effect on our business, results of operations, cash flows, and financial condition. In addition, fluctuations in demand and other implications associated with the COVID-19 pandemic have resulted in, and could continue resulting in, certain supply chain constraints and challenges. Specifically, we have begun to experience vendor delays, bottlenecks and significant cost increases in transportation and freight services, and inflationary and similar cost increases for the cost of our materials and components. These issues could impact our ability to timely ship products to meet customer demand and/or impose pricing pressures on our product margin. Should these pressures continue for a significant period of time, and if we are unable to pass on cost or inflationary input increases to customers, our future operations, operating results, and cash flows could be materially adversely impacted. Significant increases in economic and demand uncertainty have led to disruption and volatility in the global credit and financial markets, which increases the cost of capital and adversely impacts access to capital for both our company and our customers and suppliers. In addition, resulting changes in our access to or cost of capital, expected cash flows, or other factors could cause our intangible assets to be impaired, resulting in a non-cash charge against results of operations to write down the intangible assets for the amount of the impairment. The duration and scope of the COVID-19 pandemic remains uncertain and, therefore, we cannot reasonably estimate its potential impact on our business, financial condition, or results of operations, but such impact has been, and could continue to be, material. Risks Related to Our Industry and International Operations 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 have adversely affected, and may in the future adversely affect, our results of operations and financial condition. 20 20 Our international operations pose additional risks that may adversely impact sales and earnings. During fiscal 2021, approximately 63% of our revenues were derived from sales to customers located outside of the Americas. 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 and nationalistic trade strategies; differing labor regulation; governmental expropriation; domestic and foreign customs and tariffs; 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 products 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 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. Similarly, significant delays at one or more of the ports where our products are shipped or received has impacted, and could continue to impact, the amount of time required to ship our products to customers, which could materially adversely impact our business, demand for our product, our ability to meet quoted delivery dates, our results of operations, future operations, and/or financial condition. 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 21 stay-at-home orders, and social distancing protocols that significantly limit the movement of people, goods, and services or otherwise restrict normal business operations or consumption patterns. The COVID-19 pandemic has disrupted our operations and will likely continue to affect our business. Specifically, many of our sales and service organizations throughout the Americas, Europe, and Asia Pacific have, at one time or another, been subject to temporary closures or otherwise been required to adopt remote work strategies. We may continue to experience additional temporary facility closures in response to government mandates and/or the incidence of additional spread. Additionally, the COVID-19 outbreak has disrupted and could in the future disrupt our ability to deliver and/or install machines, our procurement of supplies for our operations, and our customers’ purchasing behavior or decisions. The COVID-19 pandemic has resulted in significantly reduced demand for our products, which could continue for an extended period of time. Any or all of the foregoing in jurisdictions where we or our customers, suppliers, or business partners are located have had and could continue to have a material adverse effect on our business, results of operations, cash flows, and financial condition. In addition, fluctuations in demand and other implications associated with the COVID-19 pandemic have resulted in, and could continue resulting in, certain supply chain constraints and challenges. Specifically, we have begun to experience vendor delays, bottlenecks and significant cost increases in transportation and freight services, and inflationary and similar cost increases for the cost of our materials and components. These issues could impact our ability to timely ship products to meet customer demand and/or impose pricing pressures on our product margin. Should these pressures continue for a significant period of time, and if we are unable to pass on cost or inflationary input increases to customers, our future operations, operating results, and cash flows could be materially adversely impacted. Significant increases in economic and demand uncertainty have led to disruption and volatility in the global credit and financial markets, which increases the cost of capital and adversely impacts access to capital for both our company and our customers and suppliers. In addition, resulting changes in our access to or cost of capital, expected cash flows, or other factors could cause our intangible assets to be impaired, resulting in a non-cash charge against results of operations to write down the intangible assets for the amount of the impairment. The duration and scope of the COVID-19 pandemic remains uncertain and, therefore, we cannot reasonably estimate its potential impact on our business, financial condition, or results of operations, but such impact has been, and could continue to be, material. Risks Related to Our Industry and International Operations 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 have adversely affected, and may in the future adversely affect, our results of operations and financial condition. Our international operations pose additional risks that may adversely impact sales and earnings. During fiscal 2021, approximately 63% of our revenues were derived from sales to customers located outside of the Americas. 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 and nationalistic trade strategies; 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 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. Similarly, significant delays at one or more of the ports where our products are shipped or received has impacted, and could continue to impact, the amount of time required to ship our products to customers, which could materially adversely impact our business, demand for our product, our ability to meet quoted delivery dates, our results of operations, future operations, and/or financial condition. 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 20 21 21 compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies. Finally, a significant portion of our manufacturing, production, and assembly operations are located in certain limited geographic territories, including the People’s Republic of China (“China”) and the Republic of China (“Taiwan”). An unplanned interruption in manufacturing or supply, or significant increase in price from third party suppliers, could 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. Additionally, the geopolitical environment and ongoing sovereign relationship between China and Taiwan could have a material impact on our business. Specifically, if a trade war, tariff, physical or economical blockade, or war ensued and impacted access to or from the Taiwan or Chinese markets or workforce, we could have challenges maintaining production plans or output, accessing the skilled labor necessary to produce our products without interruption, accessing and/or shipping our finished goods, work in progress, or other inventories located in either of those territories, accessing or maintaining our supply base that is located in those territories or elsewhere, and/or otherwise experience significant disruptions in our business. Such disruptions, if prolonged, could have a material adverse effect on our business, results of operations, and financial condition. In such a case, we may be forced to relocate and/or shift production facilities to other geographic territories to mitigate the risks associated with consolidating our manufacturing operations in such territories, which would likely result in disruptions to our production plans and/or our ability to meet forecasted customer demand in the near term, all of which could have a material adverse effect on our business, financial results, future operations, and/or financial position. 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 2021, 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. 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. 22 22 The United Kingdom's withdrawal from the European Union could have an adverse impact on our business, financial condition, operating results, and cash flows. On January 31, 2020, the United Kingdom (“U.K.”) withdrew from the European Union (“E.U.”), commonly referred to as “Brexit.” On or around that time, the U.K. and E.U. agreed to participate in a transition period (the “Transition Period”), which expired on December 31, 2020, to negotiate a trade agreement and other aspects of their relationship after the Transition Period. During the Transition Period, free trade continued between the U.K. and E.U. without checks or extra charges. Following the Transition Period, the U.K. is no longer a part of the single market and customs union of the E.U. However, immediately prior to expiration of the Transition Period, the U.K. and E.U. announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political issues (the “December 2020 Brexit Deal”) – avoiding some of the anticipated disruption of a no-deal, “hard” Brexit. We have operations in the U.K. related to Hurco Europe Ltd. (“HEL”), our sales and service business unit located there. Changes resulting from Brexit, the December 2020 Brexit Deal, and/or subsequent transition agreements or arrangements could subject us or our subsidiaries, including HEL, to increased risk, including, among others, changes in regulatory oversight, disruptions to supply, increases in prices, fees, taxes or tariffs on goods that are sold between the E.U. and the U.K., inspections or barriers on goods sold between the U.K. and the E.U., extra charges, and/or difficulty staffing. We have evaluated the impact of Brexit on us, our subsidiaries, including HEL, our business, and our future operations, operating results, and cash flows and it has not materially change our business to date. In addition, we do not know if the U.K. and E.U. will succeed in negotiating all material terms not otherwise addressed or covered by the December 2020 Brexit Deal or subsequent transition agreements or arrangements and/or if previously agreed upon items will be renegotiated in the future. Changes in these or other terms resulting from Brexit could, similarly, subject us or our subsidiaries, including HEL, to increased risk, including, among others, changes in regulatory oversight, disruptions to supply, increases in prices, fees, taxes or tariffs on goods that are sold between the E.U. and the U.K., inspections or barriers on goods sold between the U.K. and the E.U., extra charges, and/or difficulty staffing. Brexit may also cause fluctuations in the value of the Pound Sterling and the Euro. Fluctuations in exchange rates between the U.S. Dollar and foreign currencies may adversely affect our expenses, earnings, cash flows, results of operations, and revenues. Although we attempt to mitigate our exposure to some of our foreign currency exchange risks through hedging arrangements, our hedging arrangements may not target the potential impacts associated with fluctuations in currency resulting from Brexit or otherwise effectively offset the adverse financial impacts. Operational and Strategic Risks 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 be materially adversely affected. Developments by others may render our products or technologies obsolete or noncompetitive. 23 compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies. Finally, a significant portion of our manufacturing, production, and assembly operations are located in certain limited geographic territories, including the People’s Republic of China (“China”) and the Republic of China (“Taiwan”). An unplanned interruption in manufacturing or supply, or significant increase in price from third party suppliers, could 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. Additionally, the geopolitical environment and ongoing sovereign relationship between China and Taiwan could have a material impact on our business. Specifically, if a trade war, tariff, physical or economical blockade, or war ensued and impacted access to or from the Taiwan or Chinese markets or workforce, we could have challenges maintaining production plans or output, accessing the skilled labor necessary to produce our products without interruption, accessing and/or shipping our finished goods, work in progress, or other inventories located in either of those territories, accessing or maintaining our supply base that is located in those territories or elsewhere, and/or otherwise experience significant disruptions in our business. Such disruptions, if prolonged, could have a material adverse effect on our business, results of operations, and financial condition. In such a case, we may be forced to relocate and/or shift production facilities to other geographic territories to mitigate the risks associated with consolidating our manufacturing operations in such territories, which would likely result in disruptions to our production plans and/or our ability to meet forecasted customer demand in the near term, all of which could have a material adverse effect on our business, financial results, future operations, and/or financial position. 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 2021, 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. 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. 22 The United Kingdom's withdrawal from the European Union could have an adverse impact on our business, financial condition, operating results, and cash flows. On January 31, 2020, the United Kingdom (“U.K.”) withdrew from the European Union (“E.U.”), commonly referred to as “Brexit.” On or around that time, the U.K. and E.U. agreed to participate in a transition period (the “Transition Period”), which expired on December 31, 2020, to negotiate a trade agreement and other aspects of their relationship after the Transition Period. During the Transition Period, free trade continued between the U.K. and E.U. without checks or extra charges. Following the Transition Period, the U.K. is no longer a part of the single market and customs union of the E.U. However, immediately prior to expiration of the Transition Period, the U.K. and E.U. announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political issues (the “December 2020 Brexit Deal”) – avoiding some of the anticipated disruption of a no-deal, “hard” Brexit. We have operations in the U.K. related to Hurco Europe Ltd. (“HEL”), our sales and service business unit located there. Changes resulting from Brexit, the December 2020 Brexit Deal, and/or subsequent transition agreements or arrangements could subject us or our subsidiaries, including HEL, to increased risk, including, among others, changes in regulatory oversight, disruptions to supply, increases in prices, fees, taxes or tariffs on goods that are sold between the E.U. and the U.K., inspections or barriers on goods sold between the U.K. and the E.U., extra charges, and/or difficulty staffing. We have evaluated the impact of Brexit on us, our subsidiaries, including HEL, our business, and our future operations, operating results, and cash flows and it has not materially change our business to date. In addition, we do not know if the U.K. and E.U. will succeed in negotiating all material terms not otherwise addressed or covered by the December 2020 Brexit Deal or subsequent transition agreements or arrangements and/or if previously agreed upon items will be renegotiated in the future. Changes in these or other terms resulting from Brexit could, similarly, subject us or our subsidiaries, including HEL, to increased risk, including, among others, changes in regulatory oversight, disruptions to supply, increases in prices, fees, taxes or tariffs on goods that are sold between the E.U. and the U.K., inspections or barriers on goods sold between the U.K. and the E.U., extra charges, and/or difficulty staffing. Brexit may also cause fluctuations in the value of the Pound Sterling and the Euro. Fluctuations in exchange rates between the U.S. Dollar and foreign currencies may adversely affect our expenses, earnings, cash flows, results of operations, and revenues. Although we attempt to mitigate our exposure to some of our foreign currency exchange risks through hedging arrangements, our hedging arrangements may not target the potential impacts associated with fluctuations in currency resulting from Brexit or otherwise effectively offset the adverse financial impacts. Operational and Strategic Risks 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 be materially adversely affected. Developments by others may render our products or technologies obsolete or noncompetitive. 23 23 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. Finally, certain subcontractors, vendors, and third parties provide inputs, components, code, and/or similar items that are complimentary and compatible with our products, software, and controls. If we are unable to secure access and/or rights to any such inputs, components, code, or similar items, our ability to continue to produce our products without interruption could be challenged, which could materially and adversely impact our business, financial condition, results of operation, and demand for our products. 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 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. Recent inflationary pressures and other factors have resulted in increases to the cost of the inputs or materials for our products. Similarly, recently, costs associated with transportation and freight services have increased significantly due limited capacity and/or availability of containers, shipping vessels, and/or receiving port services. If prolonged, 24 24 and if they cannot be passed on to customers in the form of price increases, these fluctuations in the price of raw materials, product components, and/or transportation services could adversely affect our sales, costs, margin, and profitability. 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. 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: interest; • • • • • • • • • • • • • • • 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 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; borrow and subject us to increasing interest rates; 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. For example, in the fourth quarter of fiscal 2020, we recorded a one-time $4.9 million non-cash impairment charge on goodwill arising from prior acquisitions. The goodwill impairment charge was attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. 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, 25 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. 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 Finally, certain subcontractors, vendors, and third parties provide inputs, components, code, and/or similar items that are complimentary and compatible with our products, software, and controls. If we are unable to secure access and/or rights to any such inputs, components, code, or similar items, our ability to continue to produce our products without interruption could be challenged, which could materially and adversely impact our business, financial condition, results of operation, and demand for our products. 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 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. Recent inflationary pressures and other factors have resulted in increases to the cost of the inputs or materials for our products. Similarly, recently, costs associated with transportation and freight services have increased significantly due limited capacity and/or availability of containers, shipping vessels, and/or receiving port services. If prolonged, 24 and if they cannot be passed on to customers in the form of price increases, these fluctuations in the price of raw materials, product components, and/or transportation services could adversely affect our sales, costs, margin, and profitability. 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. 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; borrow and subject us to increasing interest rates; 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. For example, in the fourth quarter of fiscal 2020, we recorded a one-time $4.9 million non-cash impairment charge on goodwill arising from prior acquisitions. The goodwill impairment charge was attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. 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, 25 25 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 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.” 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 gives California residents certain privacy rights in the collection and disclosure of their personal information and requires businesses to make certain disclosures and take certain other acts in furtherance of those rights. Additionally, effective starting January 1, 2023, the California Privacy Rights Act (the “CPRA”) will revise and significantly expand the scope of the CCPA. The CPRA also creates a new California data protection agency authorized to implement and enforce the CCPA and the CPRA, which could result in increased privacy and information security enforcement. Other states have considered and/or enacted similar privacy laws. 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 U.K. and E.U. 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 worldwide annual revenue under the E.U. GDPR and up to the greater of 17.5 million Pounds or 4% of annual global turnover under the U.K. GDPR). Other governmental authorities around the world are considering and, in some cases, have enacted, similar privacy and data security laws. 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. 26 26 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 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. Financial, Credit, and Liquidity Risks 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. Assets have become, and may become further, impaired, requiring us to record a significant charge to earnings. We review our assets, including intangible assets, 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. In the fourth quarter 27 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 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.” 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 gives California residents certain privacy rights in the collection and disclosure of their personal information and requires businesses to make certain disclosures and take certain other acts in furtherance of those rights. Additionally, effective starting January 1, 2023, the California Privacy Rights Act (the “CPRA”) will revise and significantly expand the scope of the CCPA. The CPRA also creates a new California data protection agency authorized to implement and enforce the CCPA and the CPRA, which could result in increased privacy and information security enforcement. Other states have considered and/or enacted similar privacy laws. 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 U.K. and E.U. 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 worldwide annual revenue under the E.U. GDPR and up to the greater of 17.5 million Pounds or 4% of annual global turnover under the U.K. GDPR). Other governmental authorities around the world are considering and, in some cases, have enacted, similar privacy and data security laws. 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 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, threats, computer denial-of-service attacks, computer viruses, ransomware and other malware, wire fraud or other cyber incidents. insider 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. Financial, Credit, and Liquidity Risks 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. Assets have become, and may become further, impaired, requiring us to record a significant charge to earnings. We review our assets, including intangible assets, 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. In the fourth quarter 26 27 27 of fiscal 2020, we recorded a one-time $4.9 million non-cash goodwill impairment charge arising from prior acquisitions, and we may be required to record impairment charges on other assets in the future. Item 2. PROPERTIES We may experience negative or unforeseen tax consequences. We may experience negative or unforeseen tax consequences, which could materially adversely affect our results of operations. We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax-planning opportunities and other relevant considerations. Adverse changes in our profitability and financial outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition. We also earn a significant amount of our operating income from outside the U.S., and any repatriation of funds representing earnings of foreign subsidiaries may significantly impact our effective tax rates. We are subject to taxes in the U.S. and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions, including the U.S., may be subject to significant change. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including tax laws in the U.S. Similarly, changes in tax laws or regulations, including those in the U.S., could negatively impact our effective tax rate and results of operations. A change in a statutory tax rate may result in the revaluation of our deferred tax assets and liabilities related to the relevant jurisdiction in which the new tax law is enacted, potentially resulting in a material expense or benefit recorded in our Consolidated Statements of Income for that period. In December 2017, 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. Item 1B. UNRESOLVED STAFF COMMENTS None. The following table sets forth the principal use, location, and size of each of our facilities: Locations Square Footage Principal Uses 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 Manufacturing Ningbo, China Sales, application engineering, customer service, and warehousing Indianapolis, Indiana, U.S. 165,000 Taichung, Taiwan Waconia, Minnesota, U.S. Castell’Alfero, Italy High Wycombe, England Paris, France Munich and Verl, Germany Milan, Italy Venlo, the Netherlands Toh Guan, Singapore Chennai and Pune, India Liegnitz, Poland Grand Rapids, Michigan, U.S. Los Angeles, California, U.S. Shanghai, Dongguan, Qingdao and Kunshan, China 408,900 61,000 32,300 31,000 26,300 12,800 22,400 12,900 9,700 3,900 24,200 15,000 1,000 3,700 11,400 We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2022 to November 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 currently leased facilities if any of our leases were not renewed at expiration. 28 28 29 of fiscal 2020, we recorded a one-time $4.9 million non-cash goodwill impairment charge arising from prior acquisitions, and we may be required to record impairment charges on other assets in the future. Item 2. PROPERTIES The following table sets forth the principal use, location, and size of each of our facilities: We may experience negative or unforeseen tax consequences. We may experience negative or unforeseen tax consequences, which could materially adversely affect our results of operations. We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax-planning opportunities and other relevant considerations. Adverse changes in our profitability and financial outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition. We also earn a significant amount of our operating income from outside the U.S., and any repatriation of funds representing earnings of foreign subsidiaries may significantly impact our effective tax rates. We are subject to taxes in the U.S. and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions, including the U.S., may be subject to significant change. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including tax laws in the U.S. Similarly, changes in tax laws or regulations, including those in the U.S., could negatively impact our effective tax rate and results of operations. A change in a statutory tax rate may result in the revaluation of our deferred tax assets and liabilities related to the relevant jurisdiction in which the new tax law is enacted, potentially resulting in a material expense or benefit recorded in our Consolidated Statements of Income for that period. In December 2017, 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. Item 1B. UNRESOLVED STAFF COMMENTS None. 28 Principal Uses 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 Locations Square Footage Indianapolis, Indiana, U.S. 165,000 Taichung, Taiwan Waconia, Minnesota, U.S. Castell’Alfero, Italy Manufacturing Ningbo, China Sales, application engineering, customer service, and warehousing High Wycombe, England Paris, France Munich and Verl, Germany Milan, Italy Venlo, the Netherlands Toh Guan, Singapore Shanghai, Dongguan, Qingdao and Kunshan, China Chennai and Pune, India Liegnitz, Poland Grand Rapids, Michigan, U.S. Los Angeles, California, U.S. 408,900 61,000 32,300 31,000 26,300 12,800 22,400 12,900 9,700 3,900 24,200 15,000 1,000 3,700 11,400 We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2022 to November 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 currently leased facilities if any of our leases were not renewed at expiration. 29 29 Item 3. LEGAL PROCEEDINGS 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, 2021, the name of each executive officer and his or her age, tenure as an officer, principal occupation and business experience: Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Name Michael Doar Gregory S. Volovic Sonja K. McClelland HaiQuynh Jamison Jonathon D. Wright Age 66 57 50 43 39 Position(s) with the Company Executive Chairman of the Board Director, President and Chief Executive Officer Executive Vice President, Treasurer and Chief Financial Officer Corporate Controller and Principal Accounting Officer General Counsel and Corporate Secretary Michael Doar has been employed by us since November 2001 and has been a member of our Board of Directors since 2000. Mr. Doar was appointed as Executive Chairman of the Board in March 2021 and previously served as our Chairman of the Board and Chief Executive Officer from November 2001 to March 2021. Mr. Doar held various management positions with Ingersoll Milling Machine Company from 1989 until 2001. Gregory S. Volovic has been employed by us since March 2005 and has been a member of our Board of Directors since 2019. Mr. Volovic was appointed as our President in March 2013, and he served as our Chief Operating Officer from March 2019 until he was appointed as our Chief Executive Officer in March 2021. Prior to becoming President in 2013, Mr. Volovic held various positions within our company including Vice President Software & Controls, Executive Vice President Engineering & Technology, and Executive Vice President Engineering & Manufacturing Operations. Prior to joining us, Mr. Volovic held various positions with Thomson, Inc. including Director of E-Business, Engineering and Information Technology. Prior to Thomson, Mr. Volovic was employed by Unisys Corporation. 30 30 31 Sonja K. McClelland has been employed by us since September 1996 and was appointed as Vice President, Treasurer and Chief Financial Officer in 2014, then as Executive Vice President in March 2017. She also served as our Corporate Secretary from 2014 until March 2021. Ms. McClelland has been an executive officer of our company since 2004 when she was appointed as Principal Accounting Officer, Corporate Controller and Assistant Secretary. Ms. McClelland has held various finance and accounting roles with us between 1996 and 2004. Prior to joining us, Ms. McClelland was employed by Arthur Andersen LLP. HaiQuynh Jamison has been employed by us since March 2006 and was appointed as Corporate Controller and Principal Accounting Officer in March 2021. Prior to her appointment as Corporate Controller, Ms. Jamison served as the Director of Financial Reporting and Policy from 2014 to 2021 and as Corporate Accounting Manager then Division Controller from 2006 to 2014. Prior to joining us, Ms. Jamison was employed by various international public accounting firms, including Ernst & Young Global Limited and PricewaterhouseCoopers International Limited. Jonathon D. Wright has been employed by us since September 2016, was appointed as Corporate Secretary in March 2021, and has served as our General Counsel since 2016. Prior to joining us, Mr. Wright served as an attorney for Dentons Bingham Greenebaum LLP, specializing in corporate law, mergers and acquisitions, capital formation, and complex commercial transactions. PART II Market Information Holders Dividend Policy Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. There were 104 holders of record of our common stock as of December 31, 2021. 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. firms, international public accounting Sonja K. McClelland has been employed by us since September 1996 and was appointed as Vice President, Treasurer and Chief Financial Officer in 2014, then as Executive Vice President in March 2017. She also served as our Corporate Secretary from 2014 until March 2021. Ms. McClelland has been an executive officer of our company since 2004 when she was appointed as Principal Accounting Officer, Corporate Controller and Assistant Secretary. Ms. McClelland has held various finance and accounting roles with us between 1996 and 2004. Prior to joining us, Ms. McClelland was employed by Arthur Andersen LLP. HaiQuynh Jamison has been employed by us since March 2006 and was appointed as Corporate Controller and Principal Accounting Officer in March 2021. Prior to her appointment as Corporate Controller, Ms. Jamison served as the Director of Financial Reporting and Policy from 2014 to 2021 and as Corporate Accounting Manager then Division Controller from 2006 to 2014. Prior to joining us, Ms. Jamison was employed by various including Ernst & Young Global Limited and PricewaterhouseCoopers International Limited. Item 3. LEGAL PROCEEDINGS 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. Name Michael Doar Gregory S. Volovic Sonja K. McClelland HaiQuynh Jamison Jonathon D. Wright Age Position(s) with the Company 66 57 50 43 39 Executive Chairman of the Board Director, President and Chief Executive Officer Executive Vice President, Treasurer and Chief Financial Officer Corporate Controller and Principal Accounting Officer General Counsel and Corporate Secretary Michael Doar has been employed by us since November 2001 and has been a member of our Board of Directors since 2000. Mr. Doar was appointed as Executive Chairman of the Board in March 2021 and previously served as our Chairman of the Board and Chief Executive Officer from November 2001 to March 2021. Mr. Doar held various management positions with Ingersoll Milling Machine Company from 1989 until 2001. Gregory S. Volovic has been employed by us since March 2005 and has been a member of our Board of Directors since 2019. Mr. Volovic was appointed as our President in March 2013, and he served as our Chief Operating Officer from March 2019 until he was appointed as our Chief Executive Officer in March 2021. Prior to becoming President in 2013, Mr. Volovic held various positions within our company including Vice President Software & Controls, Executive Vice President Engineering & Technology, and Executive Vice President Engineering & Manufacturing Operations. Prior to joining us, Mr. Volovic held various positions with Thomson, Inc. including Director of E-Business, Engineering and Information Technology. Prior to Thomson, Mr. Volovic was employed by Unisys Corporation. The following information sets forth as of October 31, 2021, the name of each executive officer and his or her age, tenure as an officer, principal occupation and business experience: Item 5. STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED Jonathon D. Wright has been employed by us since September 2016, was appointed as Corporate Secretary in March 2021, and has served as our General Counsel since 2016. Prior to joining us, Mr. Wright served as an attorney for Dentons Bingham Greenebaum LLP, specializing in corporate law, mergers and acquisitions, capital formation, and complex commercial transactions. PART II Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. Holders There were 104 holders of record of our common stock as of December 31, 2021. 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. 30 31 31 Other Information Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 2021 Fiscal Year End” in our 2022 proxy statement is incorporated by reference in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The performance graph information is included in Item 9B. Other Information. Item 6. SELECTED FINANCIAL DATA The Selected Financial Data presented below has been derived from our consolidated financial statements for the fiscal 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. 2021 Year Ended October 31, 2019 (In thousands, except per share amounts) 2018 2020 2017 Statement of Operations Data: Sales and service fees Gross profit Selling, general and administrative expenses Goodwill impairment Operating income (loss) Other income (expense) Net income (loss) Earnings (loss) per common share - diluted Weighted average common shares outstanding-diluted Dividends declared per common share $ 235,195 56,249 46,001 — 10,248 (127) 6,764 1.01 $ $ 170,627 36,457 41,416 4,903 (9,862) 941 (6,247) (0.93) $ $ 263,377 77,208 54,668 — 22,540 784 17,495 2.55 $ $ 300,671 91,806 58,010 — 33,796 (1,300) 21,490 3.15 $ $ 243,667 70,564 49,661 — 20,903 (187) 15,115 2.25 $ 6,608 0.55 6,670 0.51 $ $ 6,815 0.47 6,771 0.43 6,680 0.39 $ $ $ 2021 2020 As of October 31, 2019 (Dollars in thousands) 2018 2017 Balance Sheet Data: Current assets Current liabilities Working capital Current ratio Total assets Non-current liabilities Total debt Shareholders’ equity $ 289,870 81,170 $ 208,700 3.6 $ 332,935 13,346 — 238,419 $ 251,411 50,437 $ 200,974 5.0 $ 295,655 14,070 — 231,148 $ 261,861 54,632 $ 207,229 4.8 $ 301,065 6,188 — 240,245 32 32 3.2 86,803 $ 281,435 $ 246,415 70,889 $ 194,632 $ 175,526 3.5 $ 315,407 $ 277,808 3,834 1,507 203,085 5,751 1,434 222,853 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, 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 2021, approximately 50% 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 13% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures. We have three brands of CNC machine tools in our product portfolio. Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and mold, aerospace, and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. These three brands of CNC machine tools are responsible for the vast majority of our revenue. However, we have added other non-Hurco branded products to our product portfolio that have contributed product diversity and market penetration opportunity. These non-Hurco branded products are sold by our wholly-owned distributors and are comprised primarily of other general-purpose vertical milling centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machines, metal cutting saws and CNC swill lathes. ProCobots is our wholly-owned subsidiary that provides automation solutions. In addition, through our wholly-owned subsidiary LCM, we produce high value machine tool components and accessories. We principally sell our products through more than 180 independent agents and distributors throughout the Americas, Europe, and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured 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 33 Other Information Item 7. RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. EXECUTIVE OVERVIEW The disclosure under the caption “Equity Compensation Plan Information at 2021 Fiscal Year End” in our 2022 proxy statement is incorporated by reference in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The performance graph information is included in Item 9B. Other Information. Item 6. SELECTED FINANCIAL DATA The Selected Financial Data presented below has been derived from our consolidated financial statements for the fiscal 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. Year Ended October 31, 2021 2020 2019 2018 2017 (In thousands, except per share amounts) Statement of Operations Data: Sales and service fees Gross profit Selling, general and administrative expenses Goodwill impairment Operating income (loss) Other income (expense) Net income (loss) Earnings (loss) per common share - diluted Weighted average common shares outstanding-diluted Dividends declared per common share $ $ $ 235,195 $ 170,627 $ 263,377 $ 300,671 $ 243,667 56,249 46,001 — 10,248 (127) 6,764 1.01 6,608 0.55 36,457 41,416 4,903 (9,862) 941 (6,247) (0.93) 6,670 0.51 $ $ 77,208 54,668 — 22,540 784 17,495 2.55 6,815 0.47 $ $ 91,806 58,010 — 33,796 (1,300) 21,490 3.15 6,771 0.43 70,564 49,661 — 20,903 (187) 15,115 2.25 6,680 0.39 $ $ $ $ Balance Sheet Data: Current assets Current liabilities Working capital Current ratio Total assets Non-current liabilities Total debt Shareholders’ equity 2021 2020 2019 2018 2017 As of October 31, (Dollars in thousands) $ 289,870 $ 251,411 $ 261,861 $ 281,435 $ 246,415 81,170 50,437 54,632 86,803 70,889 $ 208,700 $ 200,974 $ 207,229 $ 194,632 $ 175,526 3.6 5.0 3.2 3.5 $ 332,935 $ 295,655 $ 301,065 $ 315,407 $ 277,808 13,346 — 14,070 — 5,751 1,434 3,834 1,507 238,419 231,148 240,245 222,853 203,085 4.8 6,188 — 32 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, industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support. they predominantly use 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 2021, approximately 50% 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 13% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures. We have three brands of CNC machine tools in our product portfolio. Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and mold, aerospace, and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. These three brands of CNC machine tools are responsible for the vast majority of our revenue. However, we have added other non-Hurco branded products to our product portfolio that have contributed product diversity and market penetration opportunity. These non-Hurco branded products are sold by our wholly-owned distributors and are comprised primarily of other general-purpose vertical milling centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machines, metal cutting saws and CNC swill lathes. ProCobots is our wholly-owned subsidiary that provides automation solutions. In addition, through our wholly-owned subsidiary LCM, we produce high value machine tool components and accessories. We principally sell our products through more than 180 independent agents and distributors throughout the Americas, Europe, and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured 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 33 33 centers, such as the direct drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM. Results of Operations Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling, and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements. Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of derivative instruments – principally foreign currency forward exchange contracts. We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. The COVID-19 pandemic has not had as a significant impact on our business and industry during fiscal 2021 as it did in fiscal 2020. Beginning in early 2020, governmental authorities in many of the major global machine tool markets implemented mandatory stay-at-home or shelter orders requiring most businesses to close or to significantly limit operations, resulting in a sudden decrease in demand for many goods and services. Although the mandatory stay-at-home or shelter orders in many jurisdictions permitted our local operations to continue as an essential business or a supplier to critical infrastructure industries or otherwise with remote work capabilities, many of our customers experienced, and continue to experience, significant disruptions in their business operations and normal purchasing cycles. We cannot predict the duration or scope of impact of the COVID-19 pandemic and the negative financial impact to our results cannot be reasonably estimated, but we believe the impact has been material thus far with regard to revenues, income from operations, and cash flow from operations and could continue to be material in the near future. To date, we have experienced some delays in our supply chain and have not completely ceased operations at any of our global facilities, but have implemented remote working capabilities, as appropriate or otherwise required under local law. We have also implemented adjustments in headcount and discretionary spending, delayed capital expenditures, and monitored production activities closely in an effort to weather the adverse business climate. We have also received stimulus in various countries to support operations and implemented tax deferrals and provisions that were available to us. More recently, we have begun to see inflationary pressures and input cost increases imposed in our supply chains on components for our products. We have also seen capacity for transportation and freight services limited significantly by container or vessel availability and delays at departing and receiving ports, all of which have contributed to significantly increased costs and prices associated with the global shipment of our products. We will continue to evaluate and disclose any trends and uncertainties that have had or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of each interim period. 34 34 The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Operations expressed as a percentage of our worldwide sales and service fees and the year-to-year percentage changes in the dollar amounts of those items. Selling, general and administrative expenses Sales and service fees Gross profit Goodwill impairment Operating income (loss) Net income (loss) Fiscal 2021 Compared to Fiscal 2020 Percentage of Revenues Year-to-Year % Change 2021 2020 2019 Increase/Decrease ’21 vs. ’20 ’20 vs. ’19 100 % 100 % 100 % 24 % 20 % — 4 % 3 % 21 % 24 % (6)% (4)% 29 % 21 % 9 % 7 % 3 % — 38 % 54 % 11 % (100)% 204 % 208 % (35)% (53)% (24)% 100 % (144)% (136)% Sales and Service Fees. Sales and service fees for fiscal 2021 were $235.2 million, an increase of $64.6 million, or 38%, compared to fiscal 2020, and included a favorable currency impact of $7.7 million, or 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes. During fiscal 2021, sales increased year-over-year for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. 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, 2021 and 2020 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2021 2020 Increase/Decrease Amount % $ 86,301 117,522 31,372 $ 235,195 37 % $ 67,498 39 % $ 18,803 50 % 13 % 77,936 25,193 46 % 15 % 39,586 6,179 100 % $ 170,627 100 % $ 64,568 28 % 51 % 25 % 38 % Sales in the Americas for fiscal 2021 increased by 28%, compared to fiscal 2020. The increase in sales in the Americas for fiscal 2021 was primarily due to an increased volume of shipments of Hurco, Takumi and Milltronics machines, and an increase in sales of ProCobots automation solutions. The improved sales volume of machines primarily reflected increased shipments of Hurco lathes, VM and VMX machines, as well as Milltronics lathes and toolroom machines. European sales for fiscal 2021 increased by 51%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over- year increase in European sales was primarily attributable to an increased volume of shipments of Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased shipments of machine tool components and accessories manufactured by our wholly owned subsidiary, LCM. The improved 35 centers, such as the direct drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned Results of Operations subsidiary in Italy, LCM. The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Operations expressed as a percentage of our worldwide sales and service fees and the year-to-year percentage changes in the dollar amounts of those items. Sales and service fees Gross profit Selling, general and administrative expenses Goodwill impairment Operating income (loss) Net income (loss) Fiscal 2021 Compared to Fiscal 2020 Percentage of Revenues 2019 2020 2021 Year-to-Year % Change Increase/Decrease ’21 vs. ’20 ’20 vs. ’19 100 % 100 % 100 % 29 % 21 % 24 % 24 % 20 % 21 % 3 % — — (6)% 4 % (4)% 3 % 9 % 7 % 38 % 54 % 11 % (100)% 204 % 208 % (35)% (53)% (24)% 100 % (144)% (136)% Sales and Service Fees. Sales and service fees for fiscal 2021 were $235.2 million, an increase of $64.6 million, or 38%, compared to fiscal 2020, and included a favorable currency impact of $7.7 million, or 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes. During fiscal 2021, sales increased year-over-year for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. 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, 2021 and 2020 (dollars in thousands): Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling, and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements. Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of derivative instruments – principally foreign currency forward exchange contracts. We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. The COVID-19 pandemic has not had as a significant impact on our business and industry during fiscal 2021 as it did in fiscal 2020. Beginning in early 2020, governmental authorities in many of the major global machine tool markets implemented mandatory stay-at-home or shelter orders requiring most businesses to close or to significantly limit operations, resulting in a sudden decrease in demand for many goods and services. Although the mandatory stay-at-home or shelter orders in many jurisdictions permitted our local operations to continue as an essential business or a supplier to critical infrastructure industries or otherwise with remote work capabilities, many of our customers experienced, and continue to experience, significant disruptions in their business operations and normal purchasing cycles. We cannot predict the duration or scope of impact of the COVID-19 pandemic and the negative financial impact to our results cannot be reasonably estimated, but we believe the impact has been material thus far with regard to revenues, income from operations, and cash flow from operations and could continue to be material in the near future. To date, we have experienced some delays in our supply chain and have not completely ceased operations at any of our global facilities, but have implemented remote working capabilities, as appropriate or otherwise required under local law. We have also implemented adjustments in headcount and discretionary spending, delayed capital expenditures, and monitored production activities closely in an effort to weather the adverse business climate. We have also received stimulus in various countries to support operations and implemented tax deferrals and provisions that were available to us. More recently, we have begun to see inflationary pressures and input cost increases imposed in our supply chains on components for our products. We have also seen capacity for transportation and freight services limited significantly by container or vessel availability and delays at departing and receiving ports, all of which have contributed to significantly increased costs and prices associated with the global shipment of our products. We will continue to evaluate and disclose any trends and uncertainties that have had or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of each interim period. Sales in the Americas for fiscal 2021 increased by 28%, compared to fiscal 2020. The increase in sales in the Americas for fiscal 2021 was primarily due to an increased volume of shipments of Hurco, Takumi and Milltronics machines, and an increase in sales of ProCobots automation solutions. The improved sales volume of machines primarily reflected increased shipments of Hurco lathes, VM and VMX machines, as well as Milltronics lathes and toolroom machines. European sales for fiscal 2021 increased by 51%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over- year increase in European sales was primarily attributable to an increased volume of shipments of Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased shipments of machine tool components and accessories manufactured by our wholly owned subsidiary, LCM. The improved 34 35 35 Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2020 2021 $ 86,301 117,522 31,372 $ 235,195 37 % $ 67,498 77,936 50 % 13 % 25,193 100 % $ 170,627 Increase/Decrease Amount 39 % $ 18,803 39,586 46 % 15 % 6,179 100 % $ 64,568 28 % 51 % 25 % 38 % % sales volume of machines was primarily attributable to increased shipments of Hurco Lathes, VM and VMX machines. Orders in the Americas for fiscal 2021 increased by 42%, compared to fiscal 2020. The increased order level reflected a higher demand for all categories of Hurco, Takumi, and Milltronics machines as well as increased Asian Pacific sales for fiscal 2021 increased by 25%, compared to fiscal 2020, and included a favorable currency impact of 6%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year increase in Asian Pacific sales for fiscal 2021 was primarily due to increased volume of shipments of Hurco machines in Southeast Asia and China and Takumi machines in Taiwan. 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, 2021 and 2020 (dollars in thousands): Fiscal Year Ended October 31, 2020 2021 $ 198,602 85 % $ 139,577 Increase/Decrease Amount 82 % $ 59,025 % 42 % Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees 49 % 18 % 11 % 38 % † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. 1,699 22,484 6,867 100 % $ 170,627 829 3,941 773 100 % $ 64,568 2,528 26,425 7,640 $ 235,195 1 % 11 % 3 % 1 % 13 % 4 % Total Sales of computerized machine tools and computer control systems and software for fiscal 2021 increased by 42% and 49%, respectively, compared to fiscal 2020, and each included a favorable currency impact of 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes. Sales of service parts and service fees increased by 18% and 11%, respectively, during fiscal 2021, compared to fiscal 2020, and each included a favorable currency impact of 5%. During fiscal 2021, sales increased year-over-year for all product categories as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. Orders and Backlog. Orders for fiscal 2021 were $265.4 million, an increase of $98.5 million, or 59%, compared to fiscal 2020, and included a favorable currency impact of $8.4 million, or 5%, when translating foreign orders to U.S. Dollars. Similar to sales, orders increased year-over-year for all product brands and in all regions. The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2021 and 2020 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2020 2021 $ 95,767 133,802 35,852 $ 265,421 36 % $ 67,577 77,079 50 % 14 % 22,282 100 % $ 166,938 % Increase/Decrease Amount 41 % $ 28,190 46 % 56,723 13 % 13,570 100 % $ 98,483 42 % 74 % 61 % 59 % 36 36 37 demand for ProCobots automation solutions. European orders for fiscal 2021 increased by 74%, compared to fiscal 2020, and included a favorable currency impact of 9%, when translating foreign orders to U.S. Dollars. The year-over-year increase in orders was driven primarily by increased customer demand for Hurco and Takumi machines in Germany, the United Kingdom, France, and Italy, as well as increased demand for LCM machine tool components and accessories. Asian Pacific orders for fiscal 2021 increased by 61%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign orders to U.S. Dollars. The year-over-year increase in Asian Pacific orders for fiscal 2021 was primarily due to increased customer demand for Hurco vertical milling machines in Southeast Asia, China and India, as well as increased customer demand for Takumi machines in Taiwan. Backlog at October 31, 2021 increased to $60.0 million from $29.9 million at October 31, 2020, primarily due to increased customer demand during fiscal 2021 for all product brands and in all regions. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2021 are expected to be fulfilled in fiscal 2022. Gross Profit. Gross profit for fiscal 2021 was $56.2 million, or 24% of sales, compared to $36.5 million, or 21% of sales, for fiscal 2020. The year-over-year increase in gross profit as a percentage of sales for fiscal 2021 reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and more normalized inventory levels, and the favorable impact of foreign currency translation compared fiscal 2020. Additionally, approximately $1.2 million of the gross profit improvement for fiscal 2021 was a result of recording the employee retention credit extended to Hurco under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021 (the “employee retention credit”). The improvement in gross profit as a percentage of sales in fiscal 2021 was partially offset by inflationary increases in cost of materials and higher costs associated with transporting finished goods on a global basis. Operating Expenses. Selling, general, and administrative expenses for fiscal 2021 were $46.0 million, or 20% of sales, compared to $41.4 million, or 24% of sales, for fiscal 2020, and included an unfavorable currency impact of $1.2 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. Selling, general and administrative expenses for fiscal 2021 trended downward as a percentage of sales from fiscal 2020 as a result of the cost management plans implemented during fiscal 2020 and continued during fiscal 2021. Additionally, approximately $1.7 million of the selling, general, and administrative expense reduction for fiscal 2021 was a result of recording the employee retention credit. Operating Income (Loss). Operating income for fiscal 2021 was $10.2 million, or 4% of sales, compared to an operating loss of $9.9 million, or (6%) of sales, for fiscal 2020. The year-over-year increase in operating income for fiscal 2021 was primarily due to an increase in the sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories and ProCobots automation solutions. Operating income for fiscal 2021 included a benefit of $2.9 million related to the employee retention credit recorded during fiscal 2021. The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. sales volume of machines was primarily attributable to increased shipments of Hurco Lathes, VM and VMX machines. Asian Pacific sales for fiscal 2021 increased by 25%, compared to fiscal 2020, and included a favorable currency impact of 6%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year increase in Asian Pacific sales for fiscal 2021 was primarily due to increased volume of shipments of Hurco machines in Southeast Asia and China and Takumi machines in Taiwan. 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, 2021 and 2020 (dollars in thousands): Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees Total machine systems. Fiscal Year Ended October 31, 2021 2020 Increase/Decrease Amount % $ 198,602 85 % $ 139,577 82 % $ 59,025 2,528 26,425 7,640 1 % 11 % 3 % 1,699 22,484 6,867 1 % 13 % 4 % 829 3,941 773 $ 235,195 100 % $ 170,627 100 % $ 64,568 42 % 49 % 18 % 11 % 38 % † Amounts shown do not include computer control systems and software sold as an integrated component of computerized Sales of computerized machine tools and computer control systems and software for fiscal 2021 increased by 42% and 49%, respectively, compared to fiscal 2020, and each included a favorable currency impact of 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes. Sales of service parts and service fees increased by 18% and 11%, respectively, during fiscal 2021, compared to fiscal 2020, and each included a favorable currency impact of 5%. During fiscal 2021, sales increased year-over-year for all product categories as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. Orders and Backlog. Orders for fiscal 2021 were $265.4 million, an increase of $98.5 million, or 59%, compared to fiscal 2020, and included a favorable currency impact of $8.4 million, or 5%, when translating foreign orders to U.S. Dollars. Similar to sales, orders increased year-over-year for all product brands and in The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2021 and 2020 (dollars in thousands): Fiscal Year Ended October 31, 2021 2020 Increase/Decrease Amount % $ 95,767 133,802 35,852 $ 265,421 36 % $ 67,577 50 % 14 % 77,079 22,282 100 % $ 166,938 41 % $ 28,190 46 % 56,723 13 % 13,570 100 % $ 98,483 42 % 74 % 61 % 59 % all regions. Americas Europe Asia Pacific Total Orders in the Americas for fiscal 2021 increased by 42%, compared to fiscal 2020. The increased order level reflected a higher demand for all categories of Hurco, Takumi, and Milltronics machines as well as increased demand for ProCobots automation solutions. European orders for fiscal 2021 increased by 74%, compared to fiscal 2020, and included a favorable currency impact of 9%, when translating foreign orders to U.S. Dollars. The year-over-year increase in orders was driven primarily by increased customer demand for Hurco and Takumi machines in Germany, the United Kingdom, France, and Italy, as well as increased demand for LCM machine tool components and accessories. Asian Pacific orders for fiscal 2021 increased by 61%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign orders to U.S. Dollars. The year-over-year increase in Asian Pacific orders for fiscal 2021 was primarily due to increased customer demand for Hurco vertical milling machines in Southeast Asia, China and India, as well as increased customer demand for Takumi machines in Taiwan. Backlog at October 31, 2021 increased to $60.0 million from $29.9 million at October 31, 2020, primarily due to increased customer demand during fiscal 2021 for all product brands and in all regions. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2021 are expected to be fulfilled in fiscal 2022. Gross Profit. Gross profit for fiscal 2021 was $56.2 million, or 24% of sales, compared to $36.5 million, or 21% of sales, for fiscal 2020. The year-over-year increase in gross profit as a percentage of sales for fiscal 2021 reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and more normalized inventory levels, and the favorable impact of foreign currency translation compared fiscal 2020. Additionally, approximately $1.2 million of the gross profit improvement for fiscal 2021 was a result of recording the employee retention credit extended to Hurco under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021 (the “employee retention credit”). The improvement in gross profit as a percentage of sales in fiscal 2021 was partially offset by inflationary increases in cost of materials and higher costs associated with transporting finished goods on a global basis. Operating Expenses. Selling, general, and administrative expenses for fiscal 2021 were $46.0 million, or 20% of sales, compared to $41.4 million, or 24% of sales, for fiscal 2020, and included an unfavorable currency impact of $1.2 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. Selling, general and administrative expenses for fiscal 2021 trended downward as a percentage of sales from fiscal 2020 as a result of the cost management plans implemented during fiscal 2020 and continued during fiscal 2021. Additionally, approximately $1.7 million of the selling, general, and administrative expense reduction for fiscal 2021 was a result of recording the employee retention credit. Operating Income (Loss). Operating income for fiscal 2021 was $10.2 million, or 4% of sales, compared to an operating loss of $9.9 million, or (6%) of sales, for fiscal 2020. The year-over-year increase in operating income for fiscal 2021 was primarily due to an increase in the sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories and ProCobots automation solutions. Operating income for fiscal 2021 included a benefit of $2.9 million related to the employee retention credit recorded during fiscal 2021. The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. 36 37 37 Other Expense, Net. Other expense, net for fiscal 2021 decreased by $0.8 million from fiscal 2020, due mainly to a reduction in foreign currency exchange losses in fiscal 2021, compared to fiscal 2020. Provision for Income Taxes. We recorded an income tax expense of $3.4 million for fiscal 2021, compared to income tax benefit of $4.6 million for fiscal 2020. Our effective tax rate for fiscal 2021 was 33%, compared to 42% for fiscal 2020. The year-over-year change in the effective tax rate was primarily due to changes in geographic mix of income and loss that included jurisdictions with differing tax rates, various discrete income tax expense items, and more specifically related to fiscal 2020, changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic. Net Income (Loss). Net income for fiscal 2021 was $6.8 million, or $1.01 per diluted share, an increase of $13.0 million from the fiscal 2020 net loss of $6.2 million, or $(0.93) per diluted share. The year-over-year increase from net loss to net income was primarily due to increased sales volume for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Fiscal 2020 Compared to Fiscal 2019 Sales and Service Fees. Sales and service fees for fiscal 2020 were $170.6 million, a decrease of $92.8 million, or 35%, compared to fiscal 2019, and included a favorable currency impact of $0.6 million, or less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes. Net Sales and Service Fees by Geographic Region The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2019 2020 Increase/Decrease Amount % $ 67,498 77,936 25,193 $ 170,627 39 % $ 99,064 46 % 133,675 15 % 30,638 100 % $ 263,377 37 % $ (31,566) 51 % (55,739) 12 % (5,445) 100 % $ (92,750) (32)% (42)% (18)% (35)% Sales in the Americas for fiscal 2020 decreased by 32%, compared to fiscal 2019, primarily due to a reduced volume of shipments of Hurco, Milltronics, and Takumi machines. The reduction in shipment volume was mainly attributable to government-mandated COVID-19 stay-at-home or shelter orders imposed across the region during portions of fiscal 2020. Additionally, sales in the Americas in the first half of fiscal 2019 benefitted from strong demand and backlog generated in the fourth quarter of fiscal 2018. European sales for fiscal 2020 decreased by 42%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The decrease in European sales for fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines and a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned Italian subsidiary, LCM. Like the Americas, the reduction in shipment volume was mainly driven by government-mandated COVID-19 stay-at-home or shelter orders or other similar operating restrictions imposed across the region during portions of fiscal 2020. Additionally, sales in Europe during the first half of fiscal 2019 benefitted from higher demand and backlog coming off fiscal 2018, the recent peak of the European market, particularly for Germany. Asian Pacific sales for fiscal 2020 decreased by 18%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year decrease in Asian Pacific sales resulted primarily from a reduction in the volume of shipments of Hurco and Takumi machines in all Asian Pacific regions, where our customers are located, as many customers were negatively impacted by government-mandated COVID-19 stay-at-home orders or similar operating restrictions during the first six months of fiscal 2020. 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, 2020 and 2019 (dollars in thousands): Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees Total machine systems. Fiscal Year Ended October 31, 2020 2019 Increase/Decrease Amount % $ 139,577 82 % $ 223,735 85 % $ (84,158) (38)% 1,699 22,484 6,867 1 % 13 % 4 % 2,818 27,854 8,970 1 % 11 % 3 % (1,119) (5,370) (2,103) $ 170,627 100 % $ 263,377 100 % $ (92,750) (40)% (19)% (23)% (35)% † Amounts shown do not include computer control systems and software sold as an integrated component of computerized Sales of computerized machine tools and computer control systems and software for fiscal 2020 decreased by 38% and 40%, respectively, compared to fiscal 2019, and each included a favorable currency impact of less than 1%. Sales of service parts and service fees decreased by 19% and 23%, respectively, during fiscal 2020, compared to fiscal 2019, and each included a favorable currency impact of less than 1%. The decreases in all product categories were primarily due to a reduced volume of shipments of Hurco, Milltronics and Takumi machines, parts, and services provided, as well as the impact of government- mandated COVID-19 restrictions across all regions. Orders and Backlog. Orders for fiscal 2020 were $166.9 million, a decrease of $74.2 million, or 31%, compared to fiscal 2019, and included a favorable currency impact of $1.2 million, or less than 1%, when translating foreign orders to U.S. Dollars. 38 38 39 Other Expense, Net. Other expense, net for fiscal 2021 decreased by $0.8 million from fiscal 2020, due mainly to a reduction in foreign currency exchange losses in fiscal 2021, compared to fiscal 2020. Provision for Income Taxes. We recorded an income tax expense of $3.4 million for fiscal 2021, compared to income tax benefit of $4.6 million for fiscal 2020. Our effective tax rate for fiscal 2021 was 33%, compared to 42% for fiscal 2020. The year-over-year change in the effective tax rate was primarily due to changes in geographic mix of income and loss that included jurisdictions with differing tax rates, various discrete income tax expense items, and more specifically related to fiscal 2020, changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic. Net Income (Loss). Net income for fiscal 2021 was $6.8 million, or $1.01 per diluted share, an increase of $13.0 million from the fiscal 2020 net loss of $6.2 million, or $(0.93) per diluted share. The year-over-year increase from net loss to net income was primarily due to increased sales volume for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020. The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Fiscal 2020 Compared to Fiscal 2019 Sales and Service Fees. Sales and service fees for fiscal 2020 were $170.6 million, a decrease of $92.8 million, or 35%, compared to fiscal 2019, and included a favorable currency impact of $0.6 million, or less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes. Net Sales and Service Fees by Geographic Region The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2020 2019 Increase/Decrease Amount % $ 67,498 77,936 25,193 $ 170,627 39 % $ 99,064 46 % 133,675 15 % 30,638 100 % $ 263,377 37 % $ (31,566) 51 % (55,739) 12 % (5,445) 100 % $ (92,750) (32)% (42)% (18)% (35)% Sales in the Americas for fiscal 2020 decreased by 32%, compared to fiscal 2019, primarily due to a reduced volume of shipments of Hurco, Milltronics, and Takumi machines. The reduction in shipment volume was mainly attributable to government-mandated COVID-19 stay-at-home or shelter orders imposed across the region during portions of fiscal 2020. Additionally, sales in the Americas in the first half of fiscal 2019 benefitted from strong demand and backlog generated in the fourth quarter of fiscal 2018. European sales for fiscal 2020 decreased by 42%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The decrease in European sales for fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines and a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned Italian subsidiary, LCM. Like the Americas, the reduction in shipment volume was mainly driven by government-mandated COVID-19 stay-at-home or shelter orders or other similar operating restrictions imposed across the region during portions of fiscal 2020. Additionally, sales in Europe during the first half of fiscal 2019 benefitted from higher demand and backlog coming off fiscal 2018, the recent peak of the European market, particularly for Germany. Asian Pacific sales for fiscal 2020 decreased by 18%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year decrease in Asian Pacific sales resulted primarily from a reduction in the volume of shipments of Hurco and Takumi machines in all Asian Pacific regions, where our customers are located, as many customers were negatively impacted by government-mandated COVID-19 stay-at-home orders or similar operating restrictions during the first six months of fiscal 2020. 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, 2020 and 2019 (dollars in thousands): Fiscal Year Ended October 31, 2020 2019 $ 139,577 82 % $ 223,735 Increase/Decrease Amount 85 % $ (84,158) % (38)% Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees (40)% (19)% (23)% (35)% † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. (1,119) (5,370) (2,103) 100 % $ (92,750) 2,818 27,854 8,970 100 % $ 263,377 1,699 22,484 6,867 $ 170,627 1 % 13 % 4 % 1 % 11 % 3 % Total Sales of computerized machine tools and computer control systems and software for fiscal 2020 decreased by 38% and 40%, respectively, compared to fiscal 2019, and each included a favorable currency impact of less than 1%. Sales of service parts and service fees decreased by 19% and 23%, respectively, during fiscal 2020, compared to fiscal 2019, and each included a favorable currency impact of less than 1%. The decreases in all product categories were primarily due to a reduced volume of shipments of Hurco, Milltronics and Takumi machines, parts, and services provided, as well as the impact of government- mandated COVID-19 restrictions across all regions. Orders and Backlog. Orders for fiscal 2020 were $166.9 million, a decrease of $74.2 million, or 31%, compared to fiscal 2019, and included a favorable currency impact of $1.2 million, or less than 1%, when translating foreign orders to U.S. Dollars. 38 39 39 The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2019 2020 $ 67,577 77,079 22,282 $ 166,938 41 % $ 89,136 46 % 120,191 13 % 31,779 100 % $ 241,106 % Increase/Decrease Amount 37 % $ (21,559) 50 % (43,112) 13 % (9,497) 100 % $ (74,168) (24)% (36)% (30)% (31)% Orders in the Americas for fiscal 2020 decreased by 24%, compared to fiscal 2019, primarily due to decreased customer demand for Hurco, Milltronics and Takumi machines during the COVID-19 pandemic. Orders in the Americas of $17.2 million for the fourth quarter of fiscal 2020 reflected a slight improvement over orders in the second and third quarters of fiscal 2020 of $15.9 million and $16.3 million, respectively, but fell short of pre-pandemic order levels in the first quarter of $18.2 million. European orders for fiscal 2020 decreased by 36%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, 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, and a decrease in sales of electro-mechanical components and accessories manufactured by LCM, during the COVID-19 pandemic. European orders for the fourth quarter of fiscal 2020 were the highest quarter of the fiscal year at $25.6 million, rebounding from the fiscal year low third quarter orders of $14.2 million, second quarter orders of $15.6 million, and first quarter pre-pandemic orders of $21.7 million. Asian Pacific orders for fiscal 2020 decreased by 30%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S. Dollars. The year-over-year decrease in Asian Pacific orders was driven primarily by a reduction in customer demand for Hurco and Takumi machines during the COVID-19 pandemic throughout the Asian Pacific region where our customers are located. Asian Pacific orders for the fourth quarter of fiscal 2020 reflected the same trend as the European orders, marking the highest quarter of orders of fiscal 2020 at $5.9 million, outpacing the third quarter orders of $5.6 million, second quarter orders of $5.1 million, and first quarter orders of $5.7 million. Backlog at October 31, 2020 decreased to $29.9 million from $32.7 million at October 31, 2019, primarily due to a reduction in customer demand during fiscal 2020. We do not believe backlog is a useful measure of past performance or indicative of future performance. Gross Profit. Gross profit for fiscal 2020 was $36.5 million, or 21% of sales, compared to $77.2 million, or 29% of sales, for fiscal 2019. The decrease in gross profit as a percentage of sales was primarily due to lower sales across all sales regions, particularly the European sales region where we typically sell higher-priced, higher-performance machines, competitive pricing pressures on a global basis, and the negative impact of fixed costs leveraged against lower sales and production volumes. Operating Expenses. Selling, general, and administrative expenses for fiscal 2020 were $41.4 million, or 24% of sales, compared to $54.7 million, or 21% of sales, for fiscal 2019, and included an unfavorable currency impact of $0.3 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. Selling, general, and administrative expenses for fiscal 2020 trended downward as a percentage of sales from the first half of fiscal 2020 to the second half of fiscal 2020 by approximately 5% due to the implementation of cost reduction plans, including changes in employee headcount, decreases in incentive and performance 40 40 compensation, and reductions in other discretionary spending, partially offset by increased operating expenses associated with ProCobots, the U.S.-based automation integration business acquired by Hurco in the fourth quarter of fiscal 2019, and the unfavorable currency impact when translating foreign expenses to U.S Dollars for financial reporting purposes. Operating Income (Loss). The operating loss for fiscal 2020 was $9.9 million, or (6%) of sales, compared to operating income of $22.5 million, or 9% of sales, for fiscal 2019. The year-over-year decrease from operating income to operating loss was primarily due to reduced sales volume that resulted from government-mandated stay-at-home or shelter orders imposed across the globe during 2020. The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Other Expense, Net. Other expense, net for fiscal 2020 increased by $0.6 million from fiscal 2019, due mainly to a reduction in foreign currency exchange losses in fiscal 2020, compared to fiscal 2019. Provision for Income Taxes. We recorded an income tax benefit of $4.6 million for fiscal 2020, compared to income tax expense of $5.8 million for fiscal 2019. During the third and fourth quarters of fiscal 2020, we assessed and recorded the year-to-date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the U.S. on March 27, 2020. The CARES Act included economic relief and modifications, most notably the net operating loss carryback provisions. In addition, the year-over-year changes in our income tax benefits and expenses reflected the shift in the geographic mix of income and loss among international tax jurisdictions, which resulted in changes in foreign tax credits, deductions for foreign derived intangible income, and recording of a provision for global intangible low taxed income. Net Income (Loss). Net loss for fiscal 2020 was $6.2 million, or $(0.93) per diluted share, a decrease of $23.7 million, or 136%, from fiscal 2019 net income of $17.5 million, or $2.55 per diluted share. The year-over-year decrease from net income to net loss was primarily due to reduced sales volume that resulted from government- mandated stay-at-home or shelter orders imposed across the globe during 2020. The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Liquidity and Capital Resources At October 31, 2021, we had cash and cash equivalents of $84.1 million, compared to $57.9 million at October 31, 2020. The increase in cash and cash equivalents was primarily a result of increases in accounts payable, accrued payroll and employee benefits and customer deposits, partially offset by an increase in accounts receivable. Approximately 34% of our $84.1 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 $208.7 million at October 31, 2021, compared to $201.0 million at October 31, 2020. The increase in working capital was primarily driven by increases in cash and accounts receivable, partially offset by increases in accounts payable, accrued expenses and customer deposits. Inventories, net were $148.2 million at October 31, 2021, compared to $149.9 million at October 31, 2020. Inventory turns at October 31, 2021 were 1.2, compared to 0.9 turns at October 31, 2020. 41 The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, 2020 2019 Increase/Decrease Amount % $ 67,577 77,079 22,282 41 % $ 89,136 46 % 120,191 13 % 31,779 37 % $ (21,559) 50 % (43,112) 13 % (9,497) $ 166,938 100 % $ 241,106 100 % $ (74,168) (24)% (36)% (30)% (31)% Orders in the Americas for fiscal 2020 decreased by 24%, compared to fiscal 2019, primarily due to decreased customer demand for Hurco, Milltronics and Takumi machines during the COVID-19 pandemic. Orders in the Americas of $17.2 million for the fourth quarter of fiscal 2020 reflected a slight improvement over orders in the second and third quarters of fiscal 2020 of $15.9 million and $16.3 million, respectively, but fell short of pre-pandemic order levels in the first quarter of $18.2 million. European orders for fiscal 2020 decreased by 36%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, 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, and a decrease in sales of electro-mechanical components and accessories manufactured by LCM, during the COVID-19 pandemic. European orders for the fourth quarter of fiscal 2020 were the highest quarter of the fiscal year at $25.6 million, rebounding from the fiscal year low third quarter orders of $14.2 million, second quarter orders of $15.6 million, and first quarter pre-pandemic orders of $21.7 million. Asian Pacific orders for fiscal 2020 decreased by 30%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S. Dollars. The year-over-year decrease in Asian Pacific orders was driven primarily by a reduction in customer demand for Hurco and Takumi machines during the COVID-19 pandemic throughout the Asian Pacific region where our customers are located. Asian Pacific orders for the fourth quarter of fiscal 2020 reflected the same trend as the European orders, marking the highest quarter of orders of fiscal 2020 at $5.9 million, outpacing the third quarter orders of $5.6 million, second quarter orders of $5.1 million, and first quarter orders of $5.7 million. Backlog at October 31, 2020 decreased to $29.9 million from $32.7 million at October 31, 2019, primarily due to a reduction in customer demand during fiscal 2020. We do not believe backlog is a useful measure of past performance or indicative of future performance. Gross Profit. Gross profit for fiscal 2020 was $36.5 million, or 21% of sales, compared to $77.2 million, or 29% of sales, for fiscal 2019. The decrease in gross profit as a percentage of sales was primarily due to lower sales across all sales regions, particularly the European sales region where we typically sell higher-priced, higher-performance machines, competitive pricing pressures on a global basis, and the negative impact of fixed costs leveraged against lower sales and production volumes. Operating Expenses. Selling, general, and administrative expenses for fiscal 2020 were $41.4 million, or 24% of sales, compared to $54.7 million, or 21% of sales, for fiscal 2019, and included an unfavorable currency impact of $0.3 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. Selling, general, and administrative expenses for fiscal 2020 trended downward as a percentage of sales from the first half of fiscal 2020 to the second half of fiscal 2020 by approximately 5% due to the implementation of cost reduction plans, including changes in employee headcount, decreases in incentive and performance 40 compensation, and reductions in other discretionary spending, partially offset by increased operating expenses associated with ProCobots, the U.S.-based automation integration business acquired by Hurco in the fourth quarter of fiscal 2019, and the unfavorable currency impact when translating foreign expenses to U.S Dollars for financial reporting purposes. Operating Income (Loss). The operating loss for fiscal 2020 was $9.9 million, or (6%) of sales, compared to operating income of $22.5 million, or 9% of sales, for fiscal 2019. The year-over-year decrease from operating income to operating loss was primarily due to reduced sales volume that resulted from government-mandated stay-at-home or shelter orders imposed across the globe during 2020. The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Other Expense, Net. Other expense, net for fiscal 2020 increased by $0.6 million from fiscal 2019, due mainly to a reduction in foreign currency exchange losses in fiscal 2020, compared to fiscal 2019. Provision for Income Taxes. We recorded an income tax benefit of $4.6 million for fiscal 2020, compared to income tax expense of $5.8 million for fiscal 2019. During the third and fourth quarters of fiscal 2020, we assessed and recorded the year-to-date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the U.S. on March 27, 2020. The CARES Act included economic relief and modifications, most notably the net operating loss carryback provisions. In addition, the year-over-year changes in our income tax benefits and expenses reflected the shift in the geographic mix of income and loss among international tax jurisdictions, which resulted in changes in foreign tax credits, deductions for foreign derived intangible income, and recording of a provision for global intangible low taxed income. Net Income (Loss). Net loss for fiscal 2020 was $6.2 million, or $(0.93) per diluted share, a decrease of $23.7 million, or 136%, from fiscal 2019 net income of $17.5 million, or $2.55 per diluted share. The year-over-year decrease from net income to net loss was primarily due to reduced sales volume that resulted from government- mandated stay-at-home or shelter orders imposed across the globe during 2020. The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic. Liquidity and Capital Resources At October 31, 2021, we had cash and cash equivalents of $84.1 million, compared to $57.9 million at October 31, 2020. The increase in cash and cash equivalents was primarily a result of increases in accounts payable, accrued payroll and employee benefits and customer deposits, partially offset by an increase in accounts receivable. Approximately 34% of our $84.1 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 $208.7 million at October 31, 2021, compared to $201.0 million at October 31, 2020. The increase in working capital was primarily driven by increases in cash and accounts receivable, partially offset by increases in accounts payable, accrued expenses and customer deposits. Inventories, net were $148.2 million at October 31, 2021, compared to $149.9 million at October 31, 2020. Inventory turns at October 31, 2021 were 1.2, compared to 0.9 turns at October 31, 2020. 41 41 Capital expenditures were $2.4 million in fiscal 2021, compared to $1.7 million in fiscal 2020. Capital expenditures for fiscal 2021 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions. We funded these expenditures with cash flows from operations. On March 12, 2021, we announced that our Board of Directors approved a share repurchase program in an aggregate amount of up to $7.0 million. Repurchases under the program may be made in the open market or through privately-negotiated transactions from time to time through March 10, 2023, subject to applicable laws, regulations and contractual provisions. The program may be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We did not repurchase any shares of our common stock under this program during fiscal 2021. In addition, during fiscal 2021, we paid cash dividends to our shareholders of $3.7 million. Future dividends are subject to approval of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors deemed relevant by our Board of Directors from time to time. On December 31, 2018, we and our subsidiary Hurco B.V. entered into a credit agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020 and December 17, 2021 (as amended, the “2018 Credit Agreement”). The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2023. Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%. The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $10.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. As of October 31, 2021, our existing credit facilities consisted of the €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. We had no debt or borrowings under any of our credit facilities at October 31, 2021. At October 31, 2021, we had an aggregate of approximately $52.2 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto. We have an international cash pooling strategy that generally provides access to available cash deposits and credit facilities when needed in the U.S., Europe or Asia Pacific. We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and beyond, and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, payment of dividends and our stock repurchase program. We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase. Contractual Obligations and Commitments The following is a table of contractual obligations and commitments as of October 31, 2021 (in thousands): Operating leases Accrued and deferred taxes and credits Total Payments Due by Period Less than More than Total $ 11,351 6,562 $ 17,913 1 Year 1-3 Years 3-5 Years 5 Years $ $ 4,375 222 4,597 $ $ 4,424 677 5,101 $ $ 1,495 917 2,412 $ $ 1,057 4,746 5,803 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. 42 42 43 Capital expenditures were $2.4 million in fiscal 2021, compared to $1.7 million in fiscal 2020. Capital expenditures for fiscal 2021 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions. We funded these expenditures with cash flows from operations. On March 12, 2021, we announced that our Board of Directors approved a share repurchase program in an aggregate amount of up to $7.0 million. Repurchases under the program may be made in the open market or through privately-negotiated transactions from time to time through March 10, 2023, subject to applicable laws, regulations and contractual provisions. The program may be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We did not repurchase any shares of our common stock under this program during fiscal 2021. In addition, during fiscal 2021, we paid cash dividends to our shareholders of $3.7 million. Future dividends are subject to approval of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors deemed relevant by our Board of Directors from time to time. On December 31, 2018, we and our subsidiary Hurco B.V. entered into a credit agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020 and December 17, 2021 (as amended, the “2018 Credit Agreement”). The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2023. Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%. The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $10.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. As of October 31, 2021, our existing credit facilities consisted of the €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. We had no debt or borrowings under any of our credit facilities at October 31, 2021. At October 31, 2021, we had an aggregate of approximately $52.2 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto. We have an international cash pooling strategy that generally provides access to available cash deposits and credit facilities when needed in the U.S., Europe or Asia Pacific. We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and beyond, and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, payment of dividends and our stock repurchase program. We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase. Contractual Obligations and Commitments The following is a table of contractual obligations and commitments as of October 31, 2021 (in thousands): Operating leases Accrued and deferred taxes and credits Total Payments Due by Period Total $ 11,351 6,562 $ 17,913 Less than 1 Year 4,375 222 4,597 $ $ 1-3 Years 4,424 $ 677 5,101 $ 3-5 Years 1,495 $ 917 2,412 $ More than 5 Years 1,057 4,746 5,803 $ $ 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. 42 43 43 We expect capital spending in fiscal 2022 to be approximately $5.8 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, 2021, we had eight outstanding third party payment guarantees totaling approximately $0.9 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. Critical Accounting 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 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 facility by a distributor, independent contractor, or by one of our service technicians. In most instances, where a machine 44 44 is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be immaterial within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. 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. 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 45 We expect capital spending in fiscal 2022 to be approximately $5.8 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, 2021, we had eight outstanding third party payment guarantees totaling approximately $0.9 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. Critical Accounting 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 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 facility by a distributor, independent contractor, or by one of our service technicians. In most instances, where a machine 44 is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be immaterial within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. 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 45 45 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 Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite- lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. 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. Impairment of Long-Lived Assets – We are required periodically to review the recoverability of certain assets, including property, plant, and equipment, intangible assets, and goodwill, based on projections of anticipated future cash flows, including future profitability assessments of various product lines. We estimate cash flows using internal budgets based on recent sales data. Capitalized Software Development Costs – Costs incurred to develop computer software products and significant enhancements to software features of existing products are capitalized as required by FASB guidance relating to accounting for the costs of computer software to be sold, leased, or otherwise marketed, and such capitalized costs are amortized over the estimated product life of the related software. The determination as to when in the product development cycle technological feasibility has been established, and the expected product life, require judgments and estimates by management and can be affected by technological developments, innovations by competitors, and changes in market conditions affecting demand. We periodically review the carrying values of these assets and make judgments as to ultimate realization considering the above-mentioned risk factors. Derivative Financial Instruments – Critical aspects of our accounting policy for derivative financial instruments that we designate as hedging instruments include conditions that require that critical terms of a hedging instrument are essentially the same as a hedged forecasted transaction. Another important element of our policy demands that formal documentation be maintained as required by FASB guidance relating to accounting for derivative instruments and hedging activities. Failure to comply with these conditions would result in a requirement to recognize changes in market value of hedge instruments in earnings. We routinely monitor significant estimates, assumptions, and judgments associated with derivative instruments, and compliance with formal documentation requirements. Stock Compensation – We account for share-based compensation according to FASB guidance relating to share- based payments, which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date. This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2021, we had no borrowings outstanding under any of our credit facilities. Interest Rate Risk Foreign Currency Exchange Risk In fiscal 2021, 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 inter-company receivables, payables, and loans denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2021, 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 October 31, Date 2021 Maturity Dates 14,850 6,250 1.1872 1.3764 17,629 8,603 17,206 Nov 2021 - Oct 2022 8,537 Nov 2021 - Oct 2022 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar *New Taiwan Dollars per U.S. Dollar 720,000 27.1551 * 26,514 26,163 Nov 2021 - Oct 2022 46 46 47 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 Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite- lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. 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. Impairment of Long-Lived Assets – We are required periodically to review the recoverability of certain assets, including property, plant, and equipment, intangible assets, and goodwill, based on projections of anticipated future cash flows, including future profitability assessments of various product lines. We estimate cash flows using internal budgets based on recent sales data. Capitalized Software Development Costs – Costs incurred to develop computer software products and significant enhancements to software features of existing products are capitalized as required by FASB guidance relating to accounting for the costs of computer software to be sold, leased, or otherwise marketed, and such capitalized costs are amortized over the estimated product life of the related software. The determination as to when in the product development cycle technological feasibility has been established, and the expected product life, require judgments and estimates by management and can be affected by technological developments, innovations by competitors, and changes in market conditions affecting demand. We periodically review the carrying values of these assets and make judgments as to ultimate realization considering the above-mentioned risk factors. Derivative Financial Instruments – Critical aspects of our accounting policy for derivative financial instruments that we designate as hedging instruments include conditions that require that critical terms of a hedging instrument are essentially the same as a hedged forecasted transaction. Another important element of our policy demands that formal documentation be maintained as required by FASB guidance relating to accounting for derivative instruments and hedging activities. Failure to comply with these conditions would result in a requirement to recognize changes in market value of hedge instruments in earnings. We routinely monitor significant estimates, assumptions, and judgments associated with derivative instruments, and compliance with formal documentation requirements. Stock Compensation – We account for share-based compensation according to FASB guidance relating to share- based payments, which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date. This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2021, we had no borrowings outstanding under any of our credit facilities. Foreign Currency Exchange Risk In fiscal 2021, 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 inter-company receivables, payables, and loans denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2021, 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, 2021 Maturity Dates 14,850 6,250 1.1872 1.3764 17,629 8,603 17,206 Nov 2021 - Oct 2022 8,537 Nov 2021 - Oct 2022 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar *New Taiwan Dollars per U.S. Dollar 720,000 27.1551 * 26,514 26,163 Nov 2021 - Oct 2022 46 47 47 Forward contracts for the sale or purchase of foreign currencies as of October 31, 2021, which were entered into to protect against the effects of foreign currency fluctuations on inter-company receivables, payables and loans and are not designated as hedges under this guidance denominated in foreign currencies, were as follows (in thousands, except weighted average forward rates): Notional Weighted Amount in Foreign Currency Avg. Forward Rate Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2021 Maturity Dates 10,533 1,724 1.1762 1.3676 12,389 2,357 12,199 2,358 Nov 2021 - Jul 2022 Jan 2022 - Feb 2022 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar * New Taiwan Dollars per U.S. Dollar 654,332 27.8115 * 23,527 23,533 Nov 2021 - Feb 2022 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 2020. 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 2021 and we entered into a new forward contract for the same notional amount that is set to mature in November 2022. As of October 31, 2021, we had $813,000 of realized gain and $98,000 of unrealized gain, 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, 2021 were as follows (in thousands, except weighted average forward rates): Forward Contracts Sale Contracts: Euro Notional Amount in Foreign Currency Weighted Avg. Forward Rate Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2021 Maturity Date 3,000 1.1892 3,568 3,463 Nov 2021 Management’s Annual Report on Internal Control over Financial Reporting To the Shareholders and Board of Directors of Hurco Companies, Inc. Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2021, 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, 2021, 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, 2021. RSM has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K. /s/ Gregory S. Volovic Gregory S. Volovic President and Chief Executive Officer /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer, and Chief Financial Officer Indianapolis, Indiana January 7, 2022 48 48 49 Forward contracts for the sale or purchase of foreign currencies as of October 31, 2021, which were entered into to protect against the effects of foreign currency fluctuations on inter-company receivables, payables and loans and are not designated as hedges under this guidance denominated in foreign currencies, were as follows (in thousands, except weighted average forward rates): Notional Weighted Amount in Foreign Currency Avg. Forward Rate Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2021 Maturity Dates 10,533 1,724 1.1762 1.3676 12,389 2,357 12,199 2,358 Nov 2021 - Jul 2022 Jan 2022 - Feb 2022 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar * New Taiwan Dollars per U.S. Dollar 654,332 27.8115 * 23,527 23,533 Nov 2021 - Feb 2022 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 2020. 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 2021 and we entered into a new forward contract for the same notional amount that is set to mature in November 2022. As of October 31, 2021, we had $813,000 of realized gain and $98,000 of unrealized gain, 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, 2021 were as follows (in thousands, except weighted average forward rates): Forward Contracts Sale Contracts: Euro Notional Amount in Foreign Currency Avg. Forward Rate Weighted Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2021 Maturity Date 3,000 1.1892 3,568 3,463 Nov 2021 Management’s Annual Report on Internal Control over Financial Reporting To the Shareholders and Board of Directors of Hurco Companies, Inc. Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2021, 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, 2021, 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, 2021. RSM has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K. /s/ Gregory S. Volovic Gregory S. Volovic President and Chief Executive Officer /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer, and Chief Financial Officer Indianapolis, Indiana January 7, 2022 48 49 49 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Hurco Companies, Inc. Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. and its subsidiaries (the Company) as of October 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2021, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Basis for Opinions The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal 50 50 control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Accounting for Income Taxes – Deferred Tax Assets and Liabilities As described in Notes 1 and 7 to the consolidated financial statements, the Company accounts for income taxes under the asset and liability method. The Company operates in both the U.S. and international tax jurisdictions and has recorded deferred tax assets relating to deductible temporary differences, net operating losses and credit carryforwards of $10.4 million as of October 31, 2021, with an offsetting valuation allowance of $1.9 million. The deferred tax assets are further reduced by $5.4 million deferred tax liabilities in tax jurisdictions to record net deferred tax assets of $3.2 million and net deferred tax liabilities of $68 thousand. The Company reduces its deferred tax assets by a valuation allowance, if based upon all the available evidence, it is more likely than not that some portion, or all of the deferred tax asset will not be realized. Management evaluated the ability to realize the carrying value of deferred tax assets and liabilities, which involved applying complex tax regulations in federal, state, local and international tax jurisdictions. Management applied significant judgement in assessing the value of and realizability of its deferred tax assets and liabilities. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considers by jurisdiction all 51 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Hurco Companies, Inc. Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. and its subsidiaries (the Company) as of October 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2021, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Basis for Opinions The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal 50 control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Accounting for Income Taxes – Deferred Tax Assets and Liabilities As described in Notes 1 and 7 to the consolidated financial statements, the Company accounts for income taxes under the asset and liability method. The Company operates in both the U.S. and international tax jurisdictions and has recorded deferred tax assets relating to deductible temporary differences, net operating losses and credit carryforwards of $10.4 million as of October 31, 2021, with an offsetting valuation allowance of $1.9 million. The deferred tax assets are further reduced by $5.4 million deferred tax liabilities in tax jurisdictions to record net deferred tax assets of $3.2 million and net deferred tax liabilities of $68 thousand. The Company reduces its deferred tax assets by a valuation allowance, if based upon all the available evidence, it is more likely than not that some portion, or all of the deferred tax asset will not be realized. Management evaluated the ability to realize the carrying value of deferred tax assets and liabilities, which involved applying complex tax regulations in federal, state, local and international tax jurisdictions. Management applied significant judgement in assessing the value of and realizability of its deferred tax assets and liabilities. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considers by jurisdiction all 51 51 available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, ability to utilize future carrybacks, tax planning strategies and recent financial operations. We identified management’s evaluation of deferred tax assets and liabilities as well as the evaluation of the realizability of deferred tax assets, as a critical audit matter. The evaluation of gross deferred tax assets and liabilities involves complex tax regulations involving multiple tax jurisdictions. Assessing the realizability of deferred tax assets involves complexities of identifying and adhering to tax regulations in multiple jurisdictions, as well as the subjectivity of evaluating the realizability of the deferred tax assets. Auditing these elements required a high degree of auditor judgment and an increased extent of effort, including the need to involve our tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the valuation allowance. Our audit procedures related to the Company’s deferred tax assets and liabilities included the following, among others: • We obtained an understanding of the relevant controls related to the Company’s computation and evaluation of the gross deferred tax assets and liabilities as well as valuation allowance and tested such controls for design and operating effectiveness. • We utilized tax specialists in both domestic and international tax to assist in: o Evaluating the appropriateness and accuracy of the deferred tax assets and liabilities by considering applicable tax law and underlying financial records; o Testing the projected future reversal of temporary differences by jurisdiction, including the underlying management assumptions; o Analyzing management’s application of domestic and foreign tax laws to the Company’s tax provisions; and evaluating i.) the viability of contemplated tax planning strategies, and ii) the Company’s assessment of its ability to carryback net operating losses and/or credits. • We tested the completeness and accuracy of the data and inputs used to calculate the effective tax rate, current tax provision and deferred tax assets and liabilities. /s/ RSM US LLP We have served as the Company's auditor since 2017. Indianapolis, Indiana January 7, 2022 52 52 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended October 31, 2021 2020 2019 (In thousands, except per share amounts) $ 235,195 $ 170,627 $ 263,377 178,946 134,170 186,169 Operating income (loss) 10,248 (9,862) 22,540 Sales and service fees Cost of sales and service Gross profit Selling, general and administrative expenses Goodwill impairment Interest expense Interest income Investment income Income from equity investments Other expense, net Income (loss) before income taxes Provision (benefit) for income taxes Income (loss) per common share Basic Diluted Basic Diluted Weighted average common shares outstanding 56,249 46,001 — 24 34 173 203 513 10,121 3,357 $ 1.01 $ 1.01 6,595 6,608 36,457 41,416 4,903 94 130 133 69 1,179 (10,803) (4,556) ($ 0.93) ($ 0.93) 6,670 6,670 77,208 54,668 — 62 462 356 583 555 23,324 5,829 $ 2.57 $ 2.55 6,759 6,815 0.47 Net income (loss) $ 6,764 $ (6,247) $ 17,495 Dividends paid per share $ 0.55 $ 0.51 $ The accompanying notes are an integral part of the consolidated financial statements. 53 available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, ability to utilize future carrybacks, tax planning strategies and recent financial HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS operations. We identified management’s evaluation of deferred tax assets and liabilities as well as the evaluation of the realizability of deferred tax assets, as a critical audit matter. The evaluation of gross deferred tax assets and liabilities involves complex tax regulations involving multiple tax jurisdictions. Assessing the realizability of deferred tax assets involves complexities of identifying and adhering to tax regulations in multiple jurisdictions, as well as the subjectivity of evaluating the realizability of the deferred tax assets. Auditing these elements required a high degree of auditor judgment and an increased extent of effort, including the need to involve our tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the valuation allowance. Our audit procedures related to the Company’s deferred tax assets and liabilities included the following, among others: • We obtained an understanding of the relevant controls related to the Company’s computation and evaluation of the gross deferred tax assets and liabilities as well as valuation allowance and tested such controls for design and operating effectiveness. • We utilized tax specialists in both domestic and international tax to assist in: o Evaluating the appropriateness and accuracy of the deferred tax assets and liabilities by considering applicable tax law and underlying financial records; o Testing the projected future reversal of temporary differences by jurisdiction, including the underlying management assumptions; o Analyzing management’s application of domestic and foreign tax laws to the Company’s tax provisions; and evaluating i.) the viability of contemplated tax planning strategies, and ii) the Company’s assessment of its ability to carryback net operating losses and/or credits. • We tested the completeness and accuracy of the data and inputs used to calculate the effective tax rate, current tax provision and deferred tax assets and liabilities. We have served as the Company's auditor since 2017. /s/ RSM US LLP Indianapolis, Indiana January 7, 2022 $ Sales and service fees Cost of sales and service Gross profit Selling, general and administrative expenses Goodwill impairment Year Ended October 31, 2019 2020 2021 (In thousands, except per share amounts) 235,195 170,627 $ $ 263,377 178,946 134,170 186,169 56,249 46,001 — 36,457 41,416 4,903 77,208 54,668 — Operating income (loss) 10,248 (9,862) 22,540 Interest expense Interest income Investment income Income from equity investments Other expense, net Income (loss) before income taxes Provision (benefit) for income taxes 24 34 173 203 513 10,121 3,357 94 130 133 69 1,179 (10,803) (4,556) 62 462 356 583 555 23,324 5,829 Net income (loss) $ 6,764 $ (6,247) $ 17,495 Income (loss) per common share Basic Diluted Weighted average common shares outstanding Basic Diluted $ 1.01 $ 1.01 6,595 6,608 ($ 0.93) ($ 0.93) 6,670 6,670 Dividends paid per share $ 0.55 $ 0.51 $ The accompanying notes are an integral part of the consolidated financial statements. $ 2.57 $ 2.55 6,759 6,815 0.47 52 53 53 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS 2019 2021 Year Ended October 31, 2020 (In thousands) Net income (loss) $ 6,764 $ (6,247) $ 17,495 Other comprehensive income (loss): Translation gain (loss) of foreign currency financial statements 2,405 5,969 550 (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(204), $(126) and $(70), respectively (679) (421) (235) Gain / (loss) on derivative instruments, net of tax of $(143), $118 and $183, respectively Total other comprehensive income (loss) (477) 395 1,249 5,943 615 930 Comprehensive income (loss) $ 8,013 $ (304) $ 18,425 The accompanying notes are an integral part of the consolidated financial statements. LIABILITIES AND SHAREHOLDERS’ EQUITY 54 54 ASSETS Accounts receivable, less allowance for doubtful accounts of $1,645 in 2021 and $1,401 in 2020 Less accumulated depreciation and amortization Total property and equipment, net Non–current assets: Software development costs, less accumulated amortization 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 Intangible assets, net Operating lease - right of use assets, net Deferred income taxes Investments and other assets, net Total non–current assets Total assets Current liabilities: Accounts payable Accounts payable-related parties Customer deposits Derivative liabilities Operating lease liabilities Accrued payroll and employee benefits Accrued income taxes Accrued expenses Accrued warranty expenses Total current liabilities Non–current liabilities: Deferred income taxes Accrued tax liability Operating lease liabilities Deferred credits and other Total non–current liabilities Shareholders’ equity: respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity As of October 31, 2021 2020 (In thousands, except share and per share data) $ $ 84,063 42,620 148,216 905 13,091 975 289,870 868 7,352 29,533 5,172 42,925 (32,318) 10,607 7,553 1,565 10,624 3,154 9,562 32,458 332,935 6,165 8,593 467 4,221 10,389 1,192 5,911 1,516 81,170 68 1,749 6,794 4,735 13,346 57,859 27,686 149,864 968 13,803 1,231 251,411 868 7,352 29,195 4,754 42,169 (30,248) 11,921 7,840 1,846 11,748 2,479 8,410 32,323 1,289 5,356 872 4,132 6,931 285 4,018 1,200 50,437 131 1,918 7,989 4,032 14,070 $ $ $ 295,655 42,716 $ 26,354 662 63,924 175,574 (1,741) 238,419 332,935 657 60,997 172,484 (2,990) 231,148 295,655 $ $ 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; 6,691,052 and 6,636,906 shares issued and 6,617,717 and 6,565,163 shares outstanding, as of October 31, 2021 and October 31, 2020, The accompanying notes are an integral part of the consolidated financial statements. 55 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) HURCO COMPANIES, INC. HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS Year Ended October 31, 2021 2020 2019 (In thousands) $ 6,764 $ (6,247) $ 17,495 Net income (loss) Other comprehensive income (loss): Translation gain (loss) of foreign currency financial statements 2,405 5,969 550 (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(204), $(126) and $(70), respectively (679) (421) (235) Gain / (loss) on derivative instruments, net of tax of $(143), $118 and $183, respectively Total other comprehensive income (loss) (477) 395 1,249 5,943 615 930 Comprehensive income (loss) $ 8,013 $ (304) $ 18,425 The accompanying notes are an integral part of the consolidated financial statements. Current assets: ASSETS Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $1,645 in 2021 and $1,401 in 2020 Inventories, net Derivative assets Prepaid assets Other Total current assets Property and equipment: Land Building Machinery and equipment Leasehold improvements Less accumulated depreciation and amortization Total property and equipment, net Non–current assets: Software development costs, less accumulated amortization Intangible assets, net Operating lease - right of use 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 Customer deposits Derivative liabilities Operating lease liabilities Accrued payroll and employee benefits Accrued income taxes Accrued expenses Accrued warranty expenses Total current liabilities Non–current liabilities: Deferred income taxes Accrued tax liability Operating lease liabilities Deferred credits and other Total non–current liabilities Shareholders’ equity: Preferred stock: no par value per share, 1,000,000 shares authorized; no shares issued Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized; 6,691,052 and 6,636,906 shares issued and 6,617,717 and 6,565,163 shares outstanding, as of October 31, 2021 and October 31, 2020, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity As of October 31, 2021 2020 (In thousands, except share and per share data) $ $ $ $ 84,063 42,620 148,216 905 13,091 975 289,870 868 7,352 29,533 5,172 42,925 (32,318) 10,607 7,553 1,565 10,624 3,154 9,562 32,458 332,935 42,716 6,165 8,593 467 4,221 10,389 1,192 5,911 1,516 81,170 68 1,749 6,794 4,735 13,346 $ $ $ 57,859 27,686 149,864 968 13,803 1,231 251,411 868 7,352 29,195 4,754 42,169 (30,248) 11,921 7,840 1,846 11,748 2,479 8,410 32,323 295,655 26,354 1,289 5,356 872 4,132 6,931 285 4,018 1,200 50,437 131 1,918 7,989 4,032 14,070 — — 662 63,924 175,574 (1,741) 238,419 332,935 657 60,997 172,484 (2,990) 231,148 295,655 $ The accompanying notes are an integral part of the consolidated financial statements. 54 55 55 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY HURCO COMPANIES, INC. $ Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) 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 Goodwill impairment charge 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 customer deposits Increase (decrease) in accrued expenses Increase (decrease) in accrued payroll and employee benefits Increase (decrease) in accrued income tax 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 Stock repurchases Repayment of short-term debt Net cash provided by (used for) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period 2021 Year Ended October 31, 2020 (In thousands) (6,247) $ $ 6,764 244 (112) (203) 31 (316) 4,193 2,779 — (15,188) 2,165 437 20,617 3,111 2,142 3,458 900 (135) 1,288 32,175 3 (1,260) (1,109) (979) — (3,345) 350 (3,674) (197) — — (3,521) 895 26,204 57,859 510 (547) (69) 257 622 4,547 2,058 4,903 15,909 3,461 (4,364) (2,367) (189) (1,603) (4,941) (1,695) 115 572 10,932 106 (683) (973) 371 — (1,179) 67 (3,420) (498) (7,000) — (10,851) 2,014 916 56,943 2019 17,495 (136) 260 (583) 730 (388) 3,745 2,670 — 11,239 (10,499) (1,474) (23,281) (499) 114 (2,468) (3,259) 330 (409) (6,413) 83 (3,169) (1,701) 243 (4,353) (8,897) — (3,203) (499) — (1,450) (5,152) 235 (20,227) 77,170 (In thousands, except shares outstanding) Balances, October 31, 2018 Net income (loss) Other comprehensive income (loss) Stock–based compensation expense, net of taxes withheld for vested restricted shares Dividends paid Net income (loss) Other comprehensive income (loss) Stock–based compensation expense, net of taxes withheld for vested restricted shares Exercise of common stock options Stock repurchases Dividends paid Net income (loss) Other comprehensive income (loss) Stock-based compensation expense, net of taxes withheld for vested restricted shares Exercise of common stock options Dividends paid Common Stock Shares Common Additional Paid–In Capital Stock Retained Comprehensive Outstanding Amount 6,723,160 $ 672 $ 64,185 Earnings $ 167,859 $ Loss Total (9,863) $ 222,853 Accumulated Other 17,495 — — 930 17,495 930 Balances, October 31, 2019 6,767,237 $ 677 $ 66,350 $ 182,151 $ (8,933) $ 240,245 44,077 — 2,165 — — (3,203) — — — — 67 — — — (6,247) (3,420) 6,764 — — — — — — — 5,943 5,943 — — — — — — — — — — — 1,249 2,170 (3,203) (6,247) 1,560 67 (7,000) (3,420) 6,764 1,249 2,582 350 (3,674) 47,750 3,738 (253,562) 1,555 (6,975) Balances, October 31, 2020 6,565,163 $ $ 60,997 $ 172,484 $ (2,990) $ 231,148 36,243 16,311 — 2,579 348 — (3,674) Balances, October 31, 2021 6,617,717 $ $ 63,924 $ 175,574 $ (1,741) $ 238,419 The accompanying notes are an integral part of the consolidated financial statements. — — — — — — — — — 5 — — — 5 — (25) — 657 — — 3 2 — 662 57 — $ $ 487 The accompanying notes are an integral part of the consolidated financial statements. — $ $ 1,572 $ $ Cash and cash equivalents at end of period Supplemental disclosures: Cash paid for: Interest Income taxes, net $ 84,063 $ 57,859 $ 56,943 11 11,025 56 56 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Year Ended October 31, 2021 2020 (In thousands) 2019 $ 6,764 $ (6,247) $ 17,495 244 (112) (203) 31 (316) 4,193 2,779 — (15,188) 2,165 437 20,617 3,111 2,142 3,458 900 (135) 1,288 32,175 3 (1,260) (1,109) (979) — (3,345) 350 (3,674) (197) — — (3,521) 895 26,204 57,859 84,063 510 (547) (69) 257 622 4,547 2,058 4,903 15,909 3,461 (4,364) (2,367) (189) (1,603) (4,941) (1,695) 115 572 10,932 106 (683) (973) 371 — (1,179) 67 (3,420) (498) (7,000) — (10,851) 2,014 916 56,943 57,859 (136) 260 (583) 730 (388) 3,745 2,670 — 11,239 (10,499) (1,474) (23,281) (499) 114 (2,468) (3,259) 330 (409) (6,413) 83 (3,169) (1,701) 243 (4,353) (8,897) — (3,203) (499) — (1,450) (5,152) 235 (20,227) 77,170 56,943 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) 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 Goodwill impairment charge 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 customer deposits Increase (decrease) in accrued expenses Increase (decrease) in accrued payroll and employee benefits Increase (decrease) in accrued income tax 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 Stock repurchases Repayment of short-term debt Net cash provided by (used for) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosures: Cash paid for: Interest Income taxes, net 56 The accompanying notes are an integral part of the consolidated financial statements. $ $ $ $ $ — $ 1,572 — $ 487 11 11,025 $ $ (In thousands, except shares outstanding) Balances, October 31, 2018 Net income (loss) Other comprehensive income (loss) Stock–based compensation expense, net of taxes withheld for vested restricted shares Dividends paid Balances, October 31, 2019 Net income (loss) Other comprehensive income (loss) Stock–based compensation expense, net of taxes withheld for vested restricted shares Exercise of common stock options Stock repurchases Dividends paid Balances, October 31, 2020 Net income (loss) Other comprehensive income (loss) Stock-based compensation expense, net of taxes withheld for vested restricted shares Exercise of common stock options Dividends paid Balances, October 31, 2021 Common Stock Shares Common Additional Accumulated Other Stock Outstanding Amount 672 6,723,160 $ Paid–In Capital 64,185 $ Retained Comprehensive Earnings $ 167,859 Loss $ Total (9,863) $ 222,853 — — — — — — 17,495 — — 930 17,495 930 44,077 — 6,767,237 $ 5 — 677 2,165 — 66,350 — (3,203) $ 182,151 $ $ — — 2,170 (3,203) (8,933) $ 240,245 (6,247) — (6,247) — — 47,750 3,738 (253,562) — 6,565,163 $ — — 36,243 16,311 — 6,617,717 $ — — 5 — (25) — 657 — — 3 2 — 662 $ $ — — 1,555 — — 2,579 348 — 63,924 67 (6,975) — 60,997 — — (3,420) $ 172,484 $ — — 6,764 — — 5,943 5,943 — 1,560 — — — 67 (7,000) (3,420) (2,990) $ 231,148 — 1,249 6,764 1,249 — 2,582 — (3,674) $ 175,574 $ — — 350 (3,674) (1,741) $ 238,419 The accompanying notes are an integral part of the consolidated financial statements. 57 57 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly–owned subsidiaries (“we”, “us”, “our”, “Hurco” or the “Company”). We have a 35% ownership interest in a Taiwan affiliate that is accounted for using the equity method. Our investment in that affiliate was approximately $4.8 million and $4.4 million as of October 31, 2021 and 2020, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Inter-company accounts and transactions have been eliminated. Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation. This reclassification has no impact on previously reported net income or shareholders’ equity. Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items being hedged. Translation of Foreign Currencies. All balance sheet accounts of non–U.S. subsidiaries are translated at the exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss in shareholders’ equity. Income and expenses are translated at the average exchange rates during the year. Cumulative foreign currency translation adjustments, net of gains related to our net investment hedges, as of October 31, 2021, were a net loss of $1.7 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net. Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in 58 58 For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts. Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter– company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro, and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts 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, 2021, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2021 through October 2022. The contract amount at forward rates in U.S. Dollars at October 31, 2021 for Euros and Pounds Sterling was $17.2 million and $8.5 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $26.2 million at October 31, 2021. At October 31, 2021, we had approximately $478,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $106,000 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 2022, 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 2020. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2021, and we entered into a new forward contract for the same notional amount that is set to mature in November 2022. As 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HURCO COMPANIES, INC. 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. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly–owned subsidiaries (“we”, “us”, “our”, “Hurco” or the “Company”). We have a 35% ownership interest in a Taiwan affiliate that is accounted for using the equity method. Our investment in that affiliate was approximately $4.8 million and $4.4 million as of October 31, 2021 and 2020, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Inter-company accounts and transactions have been eliminated. Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation. This reclassification has no impact on previously reported net income or shareholders’ equity. Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items being hedged. Translation of Foreign Currencies. All balance sheet accounts of non–U.S. subsidiaries are translated at the exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss in shareholders’ equity. Income and expenses are translated at the average exchange rates during the year. Cumulative foreign currency translation adjustments, net of gains related to our net investment hedges, as of October 31, 2021, were a net loss of $1.7 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net. Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts. Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter– company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro, and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts 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, 2021, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2021 through October 2022. The contract amount at forward rates in U.S. Dollars at October 31, 2021 for Euros and Pounds Sterling was $17.2 million and $8.5 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $26.2 million at October 31, 2021. At October 31, 2021, we had approximately $478,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $106,000 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 2022, 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 2020. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2021, and we entered into a new forward contract for the same notional amount that is set to mature in November 2022. As 58 59 59 of October 31, 2021, we had a realized gain of $813,000 and an unrealized gain of $98,000, 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 inter-company receivables and payables denominated in foreign currencies. These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Consolidated Statements of Operations consistent with the transaction gain or loss on the related inter-company receivables, payables and loans denominated in foreign currencies. We had forward contracts outstanding as of October 31, 2021, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2021 through July 2022. The contract amounts at forward rates in U.S. Dollars at October 31, 2021 for Euros and Pounds Sterling totaled $14.6 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $23.5 million at October 31, 2021. 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, 2021 and October 31, 2020, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands): Derivatives Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Not Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts 2021 Balance Sheet Location Fair Value 2020 Balance Sheet Location Fair Value Derivative assets $ Derivative liabilities $ 646 Derivative assets $ 495 403 Derivative liabilities $ 279 Derivative assets $ Derivative liabilities $ 259 Derivative assets $ 473 64 Derivative liabilities $ 593 Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations, net of tax, during the fiscal years ended October 31, 2021, 2020, and 2019 (in thousands): 60 60 Amount of Gain (Loss) Recognized in Other Comprehensive Location of Gain (Loss) Reclassified From Other Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) Comprehensive Income (Loss) 2021 2020 2019 Income (Loss) 2021 2020 2019 Derivatives Designated as Hedging Instruments: (Effective Portion) Foreign exchange forward contracts Foreign exchange forward contract – Net investment – Intercompany sales/purchases (477) 395 615 679 421 235 Cost of sales and service 43 (64) 128 We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2021, 2020, and 2019 We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2021, 2020, and 2019 on derivative instruments not designated as hedging instruments (in thousands): Derivatives Recognized in Operations 2021 2020 2019 Location of Gain (Loss) Amount of Gain (Loss) Recognized in Operations Not Designated as Hedging Instruments: Foreign exchange forward contracts Other expense, net $ (313) $ (171) $ 514 The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2021 and 2020 (in thousands): Balance, October 31, 2019 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2020 reclassifications Reclassifications Balance, October 31, 2021 Other comprehensive income (loss) before Foreign Currency Translation Cash Flow Hedges (10,042) $ 1,109 $ (8,933) Total 5,969 — 395 (421) (4,073) $ 1,083 $ 2,405 — (1,668) $ (477) (679) (73) $ 6,364 (421) (2,990) 1,928 (679) (1,741) $ $ $ 61 of October 31, 2021, we had a realized gain of $813,000 and an unrealized gain of $98,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. currencies. 2021. Derivatives Not Designated as Hedging Instruments We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables and payables denominated in foreign currencies. These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Consolidated Statements of Operations consistent with the transaction gain or loss on the related inter-company receivables, payables and loans denominated in foreign We had forward contracts outstanding as of October 31, 2021, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2021 through July 2022. The contract amounts at forward rates in U.S. Dollars at October 31, 2021 for Euros and Pounds Sterling totaled $14.6 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $23.5 million at October 31, 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, 2021 and October 31, 2020, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands): Derivatives Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Not Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts 2021 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivative assets $ 646 Derivative assets $ 495 Derivative liabilities $ 403 Derivative liabilities $ 279 Derivative assets $ 259 Derivative assets $ 473 Derivative liabilities $ 64 Derivative liabilities $ 593 Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations, net of tax, during the fiscal years ended October 31, 2021, 2020, and 2019 (in thousands): 60 Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) 2020 2021 2019 Location of Gain (Loss) Reclassified From Other Comprehensive Income (Loss) Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) 2020 2021 2019 (477) 395 615 Cost of sales and service 679 421 235 43 (64) 128 Derivatives Designated as Hedging Instruments: (Effective Portion) Foreign exchange forward contracts – Intercompany sales/purchases Foreign exchange forward contract – Net investment We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2021, 2020, and 2019 We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2021, 2020, and 2019 on derivative instruments not designated as hedging instruments (in thousands): Derivatives Not Designated as Hedging Instruments: Foreign exchange forward contracts Location of Gain (Loss) Recognized in Operations Amount of Gain (Loss) Recognized in Operations 2020 2019 2021 Other expense, net $ (313) $ (171) $ 514 The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2021 and 2020 (in thousands): Balance, October 31, 2019 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2020 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2021 Foreign Currency Translation Cash Flow Hedges Total (10,042) $ 1,109 $ (8,933) 5,969 — (4,073) 2,405 — (1,668) $ $ 395 (421) 1,083 (477) (679) (73) $ $ 6,364 (421) (2,990) 1,928 (679) (1,741) $ $ $ 61 61 Inventories. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first–in, first–out method. Provisions are made to reduce excess or obsolete inventories to their estimated realizable value. Property and Equipment. Property and equipment are carried at cost. Depreciation and amortization of assets are provided primarily under the straight–line method over the shorter of the estimated useful lives or the lease terms as follows: Land Building Machines Shop and office equipment Building & leasehold improvements Number of Years Indefinite 40 7 – 10 3 – 7 3 – 40 Total depreciation and amortization expense recognized for property and equipment was $2.5 million for fiscal 2021, $2.7 million for fiscal 2020, and $2.6 million for fiscal 2019. Revenue Recognition. We design, manufacture, and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support. We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which 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 facility by a distributor, independent contractor, or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be immaterial within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted. 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 these Notes to Consolidated Financial Statements for further discussion of warranties. Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses. Research and development expenses totaled $3.2 million, $3.5 million, and $4.4 million, in fiscal 2021, 2020, and 2019, respectively. Software Development Costs. We sell software products that are essential to our machine tools. Costs incurred to develop computer software products and significant enhancements to software features of existing products to be sold or otherwise marketed are capitalized, after technological feasibility is established. Software development costs are amortized on a straight–line basis over the estimated product life of the related software, which ranges from three to five years. We capitalized costs related to software development projects of $1.1 million in fiscal 2021, $1.0 million in fiscal 2020, and $1.8 million in fiscal 2019. Amortization expense for software development costs was $1.4 million, $1.5 million, and $1.0 million, for the fiscal years ended October 31, 2021, 2020, and 2019, respectively. Accumulated amortization at October 31, 2021 and 2020 was $22.0 million and $21.0 million, respectively. 62 62 63 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 fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. realizable value. terms as follows: 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 Land Building Machines Shop and office equipment Building & leasehold improvements Number of Years Indefinite 40 7 – 10 3 – 7 3 – 40 Total depreciation and amortization expense recognized for property and equipment was $2.5 million for fiscal 2021, $2.7 million for fiscal 2020, and $2.6 million for fiscal 2019. Revenue Recognition. We design, manufacture, and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support. We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which 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 facility by a distributor, independent contractor, or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract. For our five-axis machines that we install, we estimate the From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be immaterial within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted. 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 these Notes to Consolidated Financial Statements for further discussion of warranties. Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses. Research and development expenses totaled $3.2 million, $3.5 million, and $4.4 million, in fiscal 2021, 2020, and 2019, respectively. Software Development Costs. We sell software products that are essential to our machine tools. Costs incurred to develop computer software products and significant enhancements to software features of existing products to be sold or otherwise marketed are capitalized, after technological feasibility is established. Software development costs are amortized on a straight–line basis over the estimated product life of the related software, which ranges from three to five years. We capitalized costs related to software development projects of $1.1 million in fiscal 2021, $1.0 million in fiscal 2020, and $1.8 million in fiscal 2019. Amortization expense for software development costs was $1.4 million, $1.5 million, and $1.0 million, for the fiscal years ended October 31, 2021, 2020, and 2019, respectively. Accumulated amortization at October 31, 2021 and 2020 was $22.0 million and $21.0 million, respectively. 62 63 63 Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands): As of October 31, 2020, the balances of intangible assets, other than goodwill, were as follows (in thousands): Fiscal Year 2022 2023 2024 2025 2026 and thereafter $ Amortization Expense 1,575 1,856 1,685 1,089 1,348 Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. We had goodwill for our single reporting unit, arising from the acquisitions of ProCobots, LLC (“ProCobots”) ($2.5 million) in 2019, LCM Precision Technology S.r.l. (“LCM”) ($2.2 million) in 2013, and our wholly- owned distributor located in Michigan ($0.2 million) in 2008. The adverse change in the business climate resulting from the COVID-19 pandemic and the net loss for fiscal 2020 caused the fair value of the reporting unit to fall below our book value of equity as of October 31, 2020, resulting in a full impairment loss of $4.9 million. As such, we have no goodwill as of October 31, 2021. For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified. There were no impairments recognized with respect to the carrying value of intangible assets for the years ended October 31, 2021, 2020, or 2019. As of October 31, 2021, the balances of intangible assets, other than goodwill, were as follows (in thousands): for the years ended October 31, 2021, 2020, or 2019. Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Noncompete Patents Other Total Weighted Average Period indefinite 14 years 15 years 13 years 5 years 6 years 8 years Gross Amortization Intangible Accumulated Net Intangible Assets Amortization Assets $ $ 177 765 374 713 580 2,972 397 5,978 $ $ — $ (181) (199) (402) (145) (2,837) (368) (4,132) 177 584 175 311 435 135 29 $ 1,846 Intangible asset amortization expense was $273,000, $358,000, and $117,000 for fiscal 2021, 2020, and 2019, respectively. Annual intangible asset amortization expense for the next five years is estimated to be $278,000 per year for fiscal years 2022 through 2023, $242,000 for fiscal year 2024, $148,000 for fiscal year 2025 and 114,000 for fiscal year 2026. Impairment of Long–Lived Assets. Annually, or when there are indicators of impairment, we evaluate the carrying value of long–lived assets to be held and used, including property and equipment, software development costs, and intangible assets, including goodwill, when events or circumstances warrant such a review. The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets). We determined that we have a single asset group due to the interdependent nature of our operations. We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended October 31, 2021. Thus, there was no impairment recognized with respect to the carrying values of long-lived assets Earnings Per Share. Basic earnings per share is calculated by dividing net income (loss) 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.” Accumulated Amortization $ Net Intangible Assets — $ Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Noncompete Patents Other Total Weighted Average Amortization Period indefinite 14 years 15 years 13 years 5 years 6 years 8 years Gross Intangible Assets $ $ 177 763 373 708 580 2,972 397 5,970 (234) (223) (454) (261) (2,860) (373) (4,405) $ $ 177 529 150 254 319 112 24 1,565 64 64 65 Estimated amortization expense for the remaining unamortized software development costs for the fiscal years As of October 31, 2020, the balances of intangible assets, other than goodwill, were as follows (in thousands): ending October 31, is as follows (in thousands): Fiscal Year Amortization Expense $ 2022 2023 2024 2025 2026 and thereafter 1,575 1,856 1,685 1,089 1,348 Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. We had goodwill for our single reporting unit, arising from the acquisitions of ProCobots, LLC (“ProCobots”) ($2.5 million) in 2019, LCM Precision Technology S.r.l. (“LCM”) ($2.2 million) in 2013, and our wholly- owned distributor located in Michigan ($0.2 million) in 2008. The adverse change in the business climate resulting from the COVID-19 pandemic and the net loss for fiscal 2020 caused the fair value of the reporting unit to fall below our book value of equity as of October 31, 2020, resulting in a full impairment loss of $4.9 million. As such, we have no goodwill as of October 31, 2021. For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified. There were no impairments recognized with respect to the carrying value of intangible assets for the years ended October 31, 2021, 2020, or 2019. As of October 31, 2021, the balances of intangible assets, other than goodwill, were as follows (in thousands): Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Noncompete Patents Other Total Weighted Average Amortization Period indefinite 14 years 15 years 13 years 5 years 6 years 8 years Gross Intangible Assets $ $ 177 763 373 708 580 2,972 397 5,970 $ $ Accumulated Amortization Net Intangible Assets — $ (234) (223) (454) (261) (2,860) (373) (4,405) 177 529 150 254 319 112 24 $ 1,565 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Noncompete Patents Other Total Weighted Average Amortization Period indefinite 14 years 15 years 13 years 5 years 6 years 8 years Gross Intangible Assets $ $ 177 765 374 713 580 2,972 397 5,978 Accumulated Net Intangible Amortization $ — $ Assets (181) (199) (402) (145) (2,837) (368) (4,132) $ $ 177 584 175 311 435 135 29 1,846 Intangible asset amortization expense was $273,000, $358,000, and $117,000 for fiscal 2021, 2020, and 2019, respectively. Annual intangible asset amortization expense for the next five years is estimated to be $278,000 per year for fiscal years 2022 through 2023, $242,000 for fiscal year 2024, $148,000 for fiscal year 2025 and 114,000 for fiscal year 2026. Impairment of Long–Lived Assets. Annually, or when there are indicators of impairment, we evaluate the carrying value of long–lived assets to be held and used, including property and equipment, software development costs, and intangible assets, including goodwill, when events or circumstances warrant such a review. The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets). We determined that we have a single asset group due to the interdependent nature of our operations. We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended October 31, 2021. Thus, there was no impairment recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2021, 2020, or 2019. Earnings Per Share. Basic earnings per share is calculated by dividing net income (loss) 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.” 64 65 65 The following table presents a reconciliation of our basic and diluted earnings per share computation: (in thousands, except per share amounts) Net income (loss) Undistributed earnings (loss) allocated to participating shares Net income (loss) applicable to common shareholders Weighted average shares outstanding Stock options and contingently issuable securities Income (loss) per share 2021 Fiscal Year Ended October 31, 2020 2019 Basic $ 6,764 Diluted $ 6,764 Basic Basic Diluted $ (6,247) $ (6,247) $ 17,495 Diluted $ 17,495 (76) (76) 66 66 (147) (147) $ 6,688 $ 6,688 $ (6,181) $ (6,181) $ 17,348 $ 17,348 6,595 6,595 6,670 6,670 6,759 6,759 — 6,595 $ 1.01 13 6,608 $ 1.01 — 6,670 — 6,670 $ (0.93) $ (0.93) $ — 6,759 2.57 56 6,815 2.55 $ 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. 66 66 Stock Compensation. We account for share–based compensation according to FASB guidance relating to share– based payments, which requires the measurement and recognition of compensation expense for all share–based awards made to employees and directors based on estimated fair values on the grant date. This guidance requires that we estimate the fair value of share–based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements. Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long– lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. 2. BUSINESS OPERATIONS Nature of Business. We design, manufacture, and sell computerized CNC machine tools, computer control systems and software products, machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support, 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 180 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, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain areas of the United States. We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of COVID-19 and the economic slowdown in Europe, uncertainty surrounding the U.K. Brexit activities, and political friction in the U.S. Many of our customers deferred or eliminated investments in capital equipment last year, which we attributed largely to the uncertainty these events created. During fiscal 2021, our sales increased year-over-year in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions. Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of October 31, 2021, with the understanding that these estimates could change in the near term. We will continue to evaluate and disclose any uncertainty associated with key assumptions underlying fair value estimates, trends, and uncertainties that have had, or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders' equity, and cash flows for and at the end of each interim period. 67 The following table presents a reconciliation of our basic and diluted earnings per share computation: (in thousands, except per share amounts) Net income (loss) Undistributed earnings (loss) allocated to participating shares Net income (loss) applicable to common shareholders Fiscal Year Ended October 31, 2021 2020 2019 Basic $ 6,764 Diluted $ 6,764 Basic Diluted Basic $ (6,247) $ (6,247) $ 17,495 Diluted $ 17,495 (76) (76) 66 66 (147) (147) $ 6,688 $ 6,688 $ (6,181) $ (6,181) $ 17,348 $ 17,348 Weighted average shares outstanding 6,595 6,595 6,670 6,670 6,759 6,759 Stock options and contingently issuable securities Income (loss) per share $ 1.01 $ 1.01 $ (0.93) $ (0.93) $ — 6,595 13 6,608 — 6,670 — 6,670 — 6,759 2.57 56 6,815 2.55 $ 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. Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements. Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long– lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. 2. BUSINESS OPERATIONS Nature of Business. We design, manufacture, and sell computerized CNC machine tools, computer control systems and software products, machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support, 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 180 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, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain areas of the United States. We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of COVID-19 and the economic slowdown in Europe, uncertainty surrounding the U.K. Brexit activities, and political friction in the U.S. Many of our customers deferred or eliminated investments in capital equipment last year, which we attributed largely to the uncertainty these events created. During fiscal 2021, our sales increased year-over-year in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions. Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of October 31, 2021, with the understanding that these estimates could change in the near term. We will continue to evaluate and disclose any uncertainty associated with key assumptions underlying fair value estimates, trends, and uncertainties that have had, or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders' equity, and cash flows for and at the end of each interim period. 66 67 67 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. 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 other third-party key suppliers may also have an adverse effect on our operating results and our financial condition. 3. INVENTORIES Inventories as of October 31, 2021 and 2020 are summarized below (in thousands): Purchased parts and sub–assemblies Work–in–process Finished goods 2021 37,527 17,559 93,130 148,216 $ $ 2020 30,390 12,635 106,839 149,864 $ $ Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe, and Asia was $11.8 million and $17.2 million as of October 31, 2021 and 2020, respectively. 4. ACQUISITION OF BUSINESS On August 5, 2019, we (through a newly-formed subsidiary, ProCobots) 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 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 were subject to change during the purchase price allocation period as valuations were finalized. All valuations are now final. 68 68 The following table summarizes the allocation of the opening balance sheet of ProCobots as of August 5, 2019 (in thousands): Current assets Property plant and equipment Intangibles Goodwill Total assets Current liabilities Total liabilities Initial Allocation Adjustments $ $ $ 349 452 148 3,500 4,449 96 96 Final Allocation 349 452 1,120 2,528 4,449 96 96 972 (972) — — — — — — Total purchase price and cash expended $ 4,353 $ $ 4,353 Intangible assets of $1.1 million were recorded as a result of the purchase. The fair value of the intangible assets was based upon a discounted cash flow method that involves inputs that are not observable in the market (Level 3). Intangible assets are amortized primarily using a straight-line methodology. The intangible assets consisted of the following (in thousands): Trademark/name Noncompete Other Remaining Economic Useful Life 15 5 1 $ 520 580 20 1,120 The excess purchase price over the fair value of the assets acquired and the liabilities assumed was recorded as goodwill in the amount of $2.5 million. Goodwill recognized in the acquisition relates primarily to expanding our current product offering. The amount recorded as goodwill will be fully deductible for tax purposes. As of October 31, 2020, we recognized an impairment loss for the full $2.5 million of goodwill relating to ProCobots. See Note 1 of these Notes to Consolidated Financial Statements for further information. 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 31, 2018, we and our subsidiary Hurco B.V. entered into a credit agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020 and December 17, 2021 (as amended, the “2018 Credit Agreement”). The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2023. 69 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. 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 other third-party key suppliers may also have an adverse effect on our operating results and our financial condition. 3. INVENTORIES Inventories as of October 31, 2021 and 2020 are summarized below (in thousands): Purchased parts and sub–assemblies Work–in–process Finished goods $ 2021 37,527 17,559 93,130 $ 148,216 2020 30,390 12,635 106,839 149,864 $ $ Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe, and Asia was $11.8 million and $17.2 million as of October 31, 2021 and 2020, respectively. 4. ACQUISITION OF BUSINESS On August 5, 2019, we (through a newly-formed subsidiary, ProCobots) 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 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 were subject to change during the purchase price allocation period as valuations were finalized. All valuations are now final. The following table summarizes the allocation of the opening balance sheet of ProCobots as of August 5, 2019 (in thousands): Current assets Property plant and equipment Intangibles Goodwill Total assets Current liabilities Total liabilities $ Initial Allocation 349 452 148 3,500 4,449 $ Adjustments — — 972 (972) — 96 96 — — — $ Final Allocation 349 452 1,120 2,528 4,449 96 96 $ 4,353 Total purchase price and cash expended $ 4,353 $ Intangible assets of $1.1 million were recorded as a result of the purchase. The fair value of the intangible assets was based upon a discounted cash flow method that involves inputs that are not observable in the market (Level 3). Intangible assets are amortized primarily using a straight-line methodology. The intangible assets consisted of the following (in thousands): Trademark/name Noncompete Other Remaining Economic Useful Life 15 5 1 $ 520 580 20 1,120 The excess purchase price over the fair value of the assets acquired and the liabilities assumed was recorded as goodwill in the amount of $2.5 million. Goodwill recognized in the acquisition relates primarily to expanding our current product offering. The amount recorded as goodwill will be fully deductible for tax purposes. As of October 31, 2020, we recognized an impairment loss for the full $2.5 million of goodwill relating to ProCobots. See Note 1 of these Notes to Consolidated Financial Statements for further information. 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 31, 2018, we and our subsidiary Hurco B.V. entered into a credit agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020 and December 17, 2021 (as amended, the “2018 Credit Agreement”). The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2023. 68 69 69 Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%. The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $10.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. As a result, as of October 31, 2021, our existing credit facilities consisted of the €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, 2021, there were no borrowings under any of our credit facilities and there was $52.2 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 above. The carrying amount of short–term debt approximates fair value due to the variable rate of the interest and the short term nature of the instrument. In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of October 31, 2021 and 2020 (in thousands): Level 1 Deferred compensation Level 2 Derivatives Recurring Fair Value Measurements Assets Liabilities October 31, October 31, October 31, October 31, 2021 2020 2021 2020 2,481 1,868 — $ — $ $ $ $ $ $ 905 968 467 $ 872 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 $94.6 million and $70.8 million at October 31, 2021 and 2020, 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 We utilize the asset and liability method of accounting for income taxes. Under this method, the provision (benefit) for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, included tax provisions that we applied relating to refundable payroll tax credits, the deferral of employer’s social security payments, and modifications to net operating loss carryback provisions. After we filed the net operating loss carryback claims during the fourth quarter of fiscal 2021, we included the $5.4 million of tax refunds in current assets. On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”), which includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021, was signed into law and provided further COVID-19 economic relief with an expansion of the employee retention credit. As a result, we recorded operating income of $2.9 million related to the employee retention credit during fiscal 2021. 70 70 71 Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%. The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $10.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. As a result, as of October 31, 2021, our existing credit facilities consisted of the €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, 2021, there were no borrowings under any of our credit facilities and there was $52.2 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 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. 70 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, 2021 and 2020 (in thousands): Level 1 Deferred compensation Level 2 Derivatives Recurring Fair Value Measurements Assets Liabilities October 31, October 31, October 31, October 31, 2021 2020 2021 2020 $ $ 2,481 905 $ $ 1,868 968 $ $ — $ — 467 $ 872 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 $94.6 million and $70.8 million at October 31, 2021 and 2020, 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 We utilize the asset and liability method of accounting for income taxes. Under this method, the provision (benefit) for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, included tax provisions that we applied relating to refundable payroll tax credits, the deferral of employer’s social security payments, and modifications to net operating loss carryback provisions. After we filed the net operating loss carryback claims during the fourth quarter of fiscal 2021, we included the $5.4 million of tax refunds in current assets. On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”), which includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021, was signed into law and provided further COVID-19 economic relief with an expansion of the employee retention credit. As a result, we recorded operating income of $2.9 million related to the employee retention credit during fiscal 2021. 71 71 In the fiscal years set forth below, the provision (benefit) 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, 2020 2021 2019 $ $ 1,763 1,706 3,469 66 (178) (112) 3,357 $ $ (4,932) 923 (4,009) (256) (291) (547) (4,556) $ $ 1,854 3,715 5,569 (31) 291 260 5,829 The components of income (loss) before taxes are (in thousands): Income (loss) before income taxes: Domestic Foreign Year Ended October 31, 2020 2021 2019 $ $ 4,340 5,781 10,121 $ $ (11,681) 878 (10,803) $ $ 9,793 13,531 23,324 A comparison of income tax expense at the U.S. statutory rate to our effective tax rate is as follows: U.S. statutory rate Effect of tax rate of international jurisdictions different than U.S. statutory rates Valuation allowance State taxes Tax credits Transition tax US tax on distributed and undistributed earnings US benefit of foreign intangible income Impact of CARES act Other Effective tax rate 1 Primarily due to discrete items for unearned stock awards Year Ended October 31, 2021 2020 2019 21 % 4 % — % 1 % — % — % — % (1)% 5 % 3 % 1 33 % 21 % (2)% — % 2 % 1 % — % — % — % 22 % (2)% 42 % 21 % 3 % 1 % 1 % (2)% (1)% 3 % (3)% — % 2 % 25 % 72 72 The Tax Reform Act enacted on December 22, 2017, 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. As of October 31, 2021, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations. Accordingly, we did not accrue for any withholding taxes on the undistributed earnings of our foreign subsidiaries, consistent with the position adopted on 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, 2021, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.7 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for tax credits of $0.8 million. We established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2021, and 2020, the balance of this valuation allowance was $1.9 million and $2.2 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2021 and 2020 are as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves Accrued warranty expenses Compensation related expenses Net derivative gain Unrealized exchange gain Other accrued expenses Net operating loss carryforwards Other credit carryforwards Operating lease liabilities Goodwill and intangibles Other Deferred tax assets Deferred Tax Liabilities: Net derivative loss Unrealized exchange loss Other Net deferred tax assets Less: Valuation allowance – net operating loss and other credit carryforwards Property and equipment and capitalized software development costs Operating lease - right of use assets $ $ 73 October 31, 2021 2020 $ $ 973 308 2,444 49 — 282 1,705 839 2,570 967 215 10,352 (1,871) 8,481 — (15) (2,533) (2,495) (352) 3,086 1,241 248 1,849 — 14 226 1,957 887 2,736 1,019 183 10,360 (2,164) 8,196 (305) — (2,563) (2,666) (314) 2,348 In the fiscal years set forth below, the provision (benefit) 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, 2021 2020 2019 $ $ (4,932) $ 1,763 1,706 3,469 66 (178) (112) 923 (4,009) (256) (291) (547) 1,854 3,715 5,569 (31) 291 260 $ 3,357 $ (4,556) $ 5,829 The components of income (loss) before taxes are (in thousands): Income (loss) before income taxes: Domestic Foreign Year Ended October 31, 2021 2020 2019 $ $ 4,340 5,781 10,121 $ $ (11,681) 878 (10,803) $ $ 9,793 13,531 23,324 A comparison of income tax expense at the U.S. statutory rate to our effective tax rate is as follows: Effect of tax rate of international jurisdictions different than U.S. statutory rate U.S. statutory rates Valuation allowance State taxes Tax credits Transition tax Impact of CARES act Other Effective tax rate US tax on distributed and undistributed earnings US benefit of foreign intangible income 1 Primarily due to discrete items for unearned stock awards Year Ended October 31, 2021 2020 2019 21 % 4 % — % 1 % — % — % — % (1)% 5 % 3 % 1 33 % 21 % (2)% — % 2 % 1 % — % — % — % 22 % (2)% 42 % 21 % 3 % 1 % 1 % (2)% (1)% 3 % (3)% — % 2 % 25 % 72 The Tax Reform Act enacted on December 22, 2017, 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. As of October 31, 2021, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations. Accordingly, we did not accrue for any withholding taxes on the undistributed earnings of our foreign subsidiaries, consistent with the position adopted on 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, 2021, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.7 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for tax credits of $0.8 million. We established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2021, and 2020, the balance of this valuation allowance was $1.9 million and $2.2 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2021 and 2020 are as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves Accrued warranty expenses Compensation related expenses Net derivative gain Unrealized exchange gain Other accrued expenses Net operating loss carryforwards Other credit carryforwards Operating lease liabilities Goodwill and intangibles Other Less: Valuation allowance – net operating loss and other credit carryforwards Deferred tax assets Deferred Tax Liabilities: Net derivative loss Unrealized exchange loss Property and equipment and capitalized software development costs Operating lease - right of use assets Other Net deferred tax assets 73 73 October 31, 2021 2020 $ $ 973 308 2,444 49 — 282 1,705 839 2,570 967 215 10,352 (1,871) 8,481 — (15) (2,533) (2,495) (352) 3,086 $ $ 1,241 248 1,849 — 14 226 1,957 887 2,736 1,019 183 10,360 (2,164) 8,196 (305) — (2,563) (2,666) (314) 2,348 As of October 31, 2021, we had net operating loss carryforwards for international and U.S. income tax purposes of $6.3 million, of which $3.9 million will expire within 5 years beginning in fiscal 2022 and $0.4 million are state net operating losses which will expire between 5 and 20 years. The remaining $2.0 million in net operating losses will be carried forward indefinitely based on current international tax laws. We also had tax credits of $0.8 million which will expire between years 2022 and 2031. 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 2021 2020 2019 $ $ 168 74 — (75) — 167 $ $ 193 9 (2) (32) — 168 $ $ 180 36 — (23) — 193 The entire balance of the unrecognized tax benefits and related interest on October 31, 2021, 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, 2021, the amount of interest accrued, reported in other liabilities, was approximately $31,000 which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between August 2022 and August 2025. We file U.S. federal and state income tax returns, as well as tax returns in applicable foreign jurisdictions. Currently, our subsidiary in Taiwan is under tax audit for fiscal year 2018. A summary of open tax years by major jurisdiction is presented below: United States federal Germany¹ Taiwan United Kingdom Fiscal 2014 through the current period Fiscal 2017 through the current period Fiscal 2016 through the current period Fiscal 2015 through the current period ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. Balance October 31, 2020 8. EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our U.S. employees, under which our matching contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment. Our contributions and related expense totaled $1.2 million, $1.3 million, $1.4 million, for the fiscal years ended October 31, 2021, 2020, and 2019, respectively. 74 74 75 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 Equity 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 Equity 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 Equity Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan. The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 Equity 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, 2021, 2020 and 2019 and the related activity for the year is as follows: Shares Under Weighted Average Grant Option Date Fair Value 37,045 $ 21.69 Balance October 31, 2018 Balance October 31, 2019 Granted Cancelled Expired Exercised Granted Cancelled Expired Exercised Granted Cancelled Expired Exercised Balance October 31, 2021 — $ 37,045 $ (3,738) 33,307 $ — — — — — — — — — (16,311) 16,996 $ — — — — — — — — — — 21.69 18.13 22.09 21.45 22.71 The total intrinsic value of stock options exercised during the twelve months ended October 31, 2021, 2020 and 2019 was approximately $179,000, $44,000, and $0, 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 Equity 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 Equity 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 Equity Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan. The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 Equity 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, 2021, 2020 and 2019 and the related activity for the year is as follows: Shares Under Weighted Average Grant Option Date Fair Value As of October 31, 2021, we had net operating loss carryforwards for international and U.S. income tax purposes of $6.3 million, of which $3.9 million will expire within 5 years beginning in fiscal 2022 and $0.4 million are state net operating losses which will expire between 5 and 20 years. The remaining $2.0 million in net operating losses will be carried forward indefinitely based on current international tax laws. We also had tax credits of $0.8 million which will expire between years 2022 and 2031. 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 2021 2020 2019 $ 168 $ 74 — (75) — 167 $ $ 193 9 (2) (32) — 168 $ $ 180 36 — (23) — 193 The entire balance of the unrecognized tax benefits and related interest on October 31, 2021, 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, 2021, the amount of interest accrued, reported in other liabilities, was approximately $31,000 which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between August 2022 and August 2025. We file U.S. federal and state income tax returns, as well as tax returns in applicable foreign jurisdictions. Currently, our subsidiary in Taiwan is under tax audit for fiscal year 2018. A summary of open tax years by major jurisdiction is presented below: United States federal Germany¹ Taiwan United Kingdom Fiscal 2014 through the current period Fiscal 2017 through the current period Fiscal 2016 through the current period Fiscal 2015 through the current period 8. EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our U.S. employees, under which our matching contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment. Our contributions and related expense totaled $1.2 million, $1.3 million, $1.4 million, for the fiscal years ended October 31, 2021, 2020, and 2019, respectively. ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. Balance October 31, 2020 Granted Cancelled Expired Exercised Balance October 31, 2021 Balance October 31, 2018 Granted Cancelled Expired Exercised Balance October 31, 2019 Granted Cancelled Expired Exercised $ 37,045 — — — — $ $ 37,045 — — — (3,738) 33,307 — — — (16,311) 16,996 $ $ 21.69 — — — — 21.69 — — — 18.13 22.09 — — — 21.45 22.71 The total intrinsic value of stock options exercised during the twelve months ended October 31, 2021, 2020 and 2019 was approximately $179,000, $44,000, and $0, respectively. 74 75 75 As of October 31, 2021, the total intrinsic value of stock options that were outstanding and exercisable was $166,000. Stock options outstanding and exercisable on October 31, 2021, were as follows: 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 $28.60 per share. Range of Exercise Prices Per Share Outstanding and Exercisable 21.45 23.30 21.45 - 23.30 $ $ Shares Under Option Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life in Years On November 12, 2020, the Compensation Committee granted a total of 11,531 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 $29.30 per 5,437 11,559 16,996 $ $ 21.45 23.30 22.71 0.04 0.76 0.80 share. On March 11, 2021, the Compensation Committee granted a total of 9,708 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 $37.06 per share. On January 5, 2021, the Compensation Committee determined that no performance stock units (“PSUs”) were earned pursuant to the long-term incentive compensation arrangement for the fiscal 2018-2020 performance period based on the results of the performance metrics that were established by the Compensation Committee in 2018. On January 5, 2021, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of time-based 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 approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2021 through fiscal 2023. On that date, the Compensation Committee granted a total of 23,164 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 $28.60 per share. On January 5, 2021, the Compensation Committee granted a total target number of 39,199 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2021 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 2021-2023, 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 $27.04 per PSU and was calculated using the Monte Carlo approach. On January 5, 2021, the Compensation Committee granted a total target number of 32,430 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2021 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 2021-2023. 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 76 76 On March 12, 2020, the Compensation Committee granted a total of 17,780 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 $23.62 per share. On January 2, 2020, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 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 2017. As a result, the Compensation Committee determined that a total of 28,979 PSUs were earned by our executive officers, which PSUs vested on January 2, 2020. The vesting date fair value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $37.79 per share. On January 2, 2020, 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 approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2020 through fiscal 2022. On that date, the Compensation Committee granted a total of 20,837 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 $37.79 per share. On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2020 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 2020-2022, 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 $46.81 per PSU and was calculated using the Monte Carlo approach. On January 2, 2020, the Compensation Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2020 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 2020-2022. 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 77 As of October 31, 2021, the total intrinsic value of stock options that were outstanding and exercisable was $166,000. Stock options outstanding and exercisable on October 31, 2021, were as follows: 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 $28.60 per share. Range of Exercise Prices Per Share Outstanding and Exercisable Shares Under Option Weighted Average Exercise Price Per Weighted Average Remaining Contractual Share Life in Years $ $ 21.45 23.30 21.45 - 23.30 5,437 11,559 16,996 $ $ 21.45 23.30 22.71 0.04 0.76 0.80 On March 11, 2021, the Compensation Committee granted a total of 9,708 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 $37.06 per share. On January 5, 2021, the Compensation Committee determined that no performance stock units (“PSUs”) were earned pursuant to the long-term incentive compensation arrangement for the fiscal 2018-2020 performance period based on the results of the performance metrics that were established by the Compensation Committee in 2018. On January 5, 2021, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of time-based 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 approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2021 through fiscal 2023. On that date, the Compensation Committee granted a total of 23,164 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 $28.60 per share. On January 5, 2021, the Compensation Committee granted a total target number of 39,199 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2021 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 2021-2023, 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 $27.04 per PSU and was calculated using the Monte Carlo approach. On January 5, 2021, the Compensation Committee granted a total target number of 32,430 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2021 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 2021-2023. 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 On November 12, 2020, the Compensation Committee granted a total of 11,531 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 $29.30 per share. On March 12, 2020, the Compensation Committee granted a total of 17,780 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 $23.62 per share. On January 2, 2020, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 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 2017. As a result, the Compensation Committee determined that a total of 28,979 PSUs were earned by our executive officers, which PSUs vested on January 2, 2020. The vesting date fair value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $37.79 per share. On January 2, 2020, 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 approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2020 through fiscal 2022. On that date, the Compensation Committee granted a total of 20,837 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 $37.79 per share. On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2020 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 2020-2022, 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 $46.81 per PSU and was calculated using the Monte Carlo approach. On January 2, 2020, the Compensation Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2020 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 2020-2022. 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 76 77 77 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 $37.79 per share. 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 13, 2019, the Compensation Committee granted a total of 8,052 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 $35.75 per share. 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 remained 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 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 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 A reconciliation of our restricted stock, performance share and PSU activity and related information is as share. follows: Unvested at October 31, 2020 Shares or units granted Shares or units vested Shares or units cancelled Shares withheld Unvested at October 31, 2021 Number of Shares Date Fair Value Weighted Average Grant $ 231,960 116,032 (36,243) (42,625) (6,568) 262,556 $ 39.03 28.85 31.12 43.99 38.20 34.84 During fiscal 2021, 2020, and 2019, we recorded approximately $2.8 million, $2.1 million, and $2.7 million, respectively, of stock–based compensation expense related to grants under the 2016 Equity Plan. As of October 31, 2021, there was an estimated $3.1 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024. 10. RELATED PARTY TRANSACTIONS As of October 31, 2021, 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 $4.8 million and $4.4 million at October 31, 2021 and 2020, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $4.8 million, $6.2 million, and $8.5 million in fiscal 2021, 2020 and 2019, respectively. Sales of control component parts to HAL were $262,000, $265,000 and $198,000 for the fiscal years ended October 31, 2021, 2020, and 2019, respectively. Trade payables to HAL were $6.2 million and $1.3 million at October 31, 2021 and 2020, respectively. Trade receivables from HAL were $74,000 and $25,000 at October 31, 2021 and 2020, respectively. 78 78 79 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 $37.79 per share. 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 13, 2019, the Compensation Committee granted a total of 8,052 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 $35.75 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 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 remained 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 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 78 A reconciliation of our restricted stock, performance share and PSU activity and related information is as follows: Unvested at October 31, 2020 Shares or units granted Shares or units vested Shares or units cancelled Shares withheld Unvested at October 31, 2021 Number of Shares 231,960 116,032 (36,243) (42,625) (6,568) 262,556 Weighted Average Grant Date Fair Value $ $ 39.03 28.85 31.12 43.99 38.20 34.84 During fiscal 2021, 2020, and 2019, we recorded approximately $2.8 million, $2.1 million, and $2.7 million, respectively, of stock–based compensation expense related to grants under the 2016 Equity Plan. As of October 31, 2021, there was an estimated $3.1 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024. 10. RELATED PARTY TRANSACTIONS As of October 31, 2021, 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 $4.8 million and $4.4 million at October 31, 2021 and 2020, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $4.8 million, $6.2 million, and $8.5 million in fiscal 2021, 2020 and 2019, respectively. Sales of control component parts to HAL were $262,000, $265,000 and $198,000 for the fiscal years ended October 31, 2021, 2020, and 2019, respectively. Trade payables to HAL were $6.2 million and $1.3 million at October 31, 2021 and 2020, respectively. Trade receivables from HAL were $74,000 and $25,000 at October 31, 2021 and 2020, respectively. 79 79 Summary unaudited financial information for HAL’s operations and financial condition is as follows (in thousands): The increase in our warranty reserve from fiscal 2020 to fiscal 2021 was primarily due to an increase in the number of machines under warranty from increased sales volume in fiscal 2021. The decrease in our warranty reserve from fiscal 2019 to fiscal 2020 was primarily due to a decrease in the number of machines under Net Sales Gross Profit Operating Income Net Income Current Assets Non–current Assets Current Liabilities 2021 $ 12,361 2,011 216 802 2020 $ 10,096 1,418 160 265 2019 $ 15,957 2,322 992 1,490 $ 14,695 6,850 5,339 $ 12,436 6,152 3,708 $ 12,019 5,560 3,674 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, 2021, we had eight outstanding third party payment guarantees totaling approximately $0.9 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve for each of the last three fiscal years 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 2021 1,200 2,948 (2,643) 11 1,516 $ $ 2020 1,760 2,075 (2,669) 34 1,200 $ $ 2019 2,497 2,246 (2,991) 8 1,760 $ $ 80 80 warranty from decreased sales volume. 13. LEASES We adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed. Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. Upon adoption of ASC 842, we utilized the following elections and practical expedients: • We 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 ASC 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the • We elected not to use the portfolio method if we enter into a large number of leases in the same month updated footnote disclosures, if material. with the same terms and conditions. • As we have applied the new transition method allowed per ASU 2018-11, we have elected not to 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 elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended. 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. We record a right-of-use asset and lease liability on our Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842. All our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840. We recorded total operating lease expense for the fiscal years ended October 31, 2021, 2020, and 2019 of $5.2 million, $5.0 million, and $5.1 million, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Consolidated Statements of Operations. Operating 81 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 2021 2020 2019 $ 12,361 $ 10,096 $ 15,957 2,011 216 802 6,850 5,339 1,418 160 265 6,152 3,708 2,322 992 1,490 5,560 3,674 $ 14,695 $ 12,436 $ 12,019 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, 2021, we had eight outstanding third party payment guarantees totaling approximately $0.9 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve for each of the last three fiscal years 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 $ $ $ 2021 1,200 2,948 (2,643) 11 2020 1,760 2,075 (2,669) 34 2019 2,497 2,246 (2,991) 8 $ 1,516 $ 1,200 $ 1,760 80 The increase in our warranty reserve from fiscal 2020 to fiscal 2021 was primarily due to an increase in the number of machines under warranty from increased sales volume in fiscal 2021. The decrease in our warranty reserve from fiscal 2019 to fiscal 2020 was primarily due to a decrease in the number of machines under warranty from decreased sales volume. 13. LEASES We adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed. Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. Upon adoption of ASC 842, we utilized the following elections and practical expedients: • We 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 ASC 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material. • We 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 not to 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 elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended. 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. We record a right-of-use asset and lease liability on our Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842. All our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840. We recorded total operating lease expense for the fiscal years ended October 31, 2021, 2020, and 2019 of $5.2 million, $5.0 million, and $5.1 million, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Consolidated Statements of Operations. Operating 81 81 lease expense includes short-term leases and variable lease payments which are immaterial. There has been no cost to obtain leases capitalized on the Consolidated Balance Sheets as of October 31, 2021. The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for fiscal 2021 (in thousands): Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities Noncash information: Right-of-use assets obtained in exchange for new operating lease liabilities $ $ 5,025 3,698 The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of October 31, 2021 (in thousands): Remainder of 2022 2023 2024 2025 2026 2027 and thereafter Total Less: Imputed interest Present value of operating lease liabilities $ $ 4,375 3,026 1,398 829 615 1,108 11,351 (336) 11,015 As of October 31, 2021, the weighted-average remaining term of our lease portfolio was approximately 3.9 years and the weighted-average discount rate was approximately 1.6%. 14. QUARTERLY FINANCIAL INFORMATION (Unaudited) 2021 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Operating income (loss) Provision (benefit) for income taxes Net income (loss) Income (loss) per common share – basic Income (loss) per common share – diluted First Quarter Second Quarter Third Quarter Fourth Quarter $ 54,115 11,547 $ 57,920 14,794 $ 54,178 12,974 $ 68,982 16,934 21 % 26 % 24 % 25 % 10,568 979 546 663 0.10 0.10 11,273 3,521 947 2,437 0.37 0.37 $ $ $ $ 10,331 2,643 1,109 1,568 0.23 0.23 13,829 3,105 755 2,096 0.31 0.31 $ $ $ $ 2020 (In thousands, except per share data) Selling, general and administrative Sales and service fees Gross profit Gross profit margin expenses Goodwill impairment Operating income (loss) Provision (benefit) for income taxes Net income (loss) 15. SEGMENT INFORMATION First Quarter Second Quarter Third Quarter Fourth Quarter $ 43,660 9,159 $ 37,126 6,709 $ 45,382 11,069 $ 44,459 9,520 21 % 18 % 24 % 21 % 10,846 — (1,687) (597) (893) (0.13) (0.13) 10,599 — (3,890) (765) (3,927) (0.58) (0.58) 9,627 — 1,442 (937) 2,162 0.32 0.32 10,344 4,903 (5,727) (2,257) (3,589) (0.54) (0.54) Income (loss) per common share – basic Income (loss) per common share – diluted $ $ $ $ $ $ $ $ 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 integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support. We principally sell our products through more than 180 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, the Netherlands, 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 2021, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2021, approximately 63% of our revenues were from customers located outside of the Americas, and no single end- user of our products accounted for more than 5% of our total sales and service fees. 82 82 83 $ $ 5,025 3,698 $ $ 4,375 3,026 1,398 829 615 1,108 11,351 (336) 11,015 lease expense includes short-term leases and variable lease payments which are immaterial. There has been no cost to obtain leases capitalized on the Consolidated Balance Sheets as of October 31, 2021. The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for fiscal 2021 (in thousands): Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities Noncash information: Right-of-use assets obtained in exchange for new operating lease liabilities The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of October 31, 2021 (in thousands): Remainder of 2022 2023 2024 2025 2026 Total 2027 and thereafter Less: Imputed interest Present value of operating lease liabilities As of October 31, 2021, the weighted-average remaining term of our lease portfolio was approximately 3.9 years and the weighted-average discount rate was approximately 1.6%. 14. QUARTERLY FINANCIAL INFORMATION (Unaudited) 2021 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Operating income (loss) Provision (benefit) for income taxes Net income (loss) First Quarter Second Quarter Third Quarter Fourth Quarter $ 54,115 11,547 $ 57,920 14,794 $ 54,178 12,974 $ 68,982 16,934 21 % 26 % 24 % 25 % 10,568 979 546 663 0.10 0.10 11,273 3,521 947 2,437 0.37 0.37 10,331 2,643 1,109 1,568 0.23 0.23 13,829 3,105 755 2,096 0.31 0.31 Income (loss) per common share – basic Income (loss) per common share – diluted $ $ $ $ $ $ $ $ 2020 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Goodwill impairment Operating income (loss) Provision (benefit) for income taxes Net income (loss) Income (loss) per common share – basic Income (loss) per common share – diluted 15. SEGMENT INFORMATION First Quarter Second Quarter Third Quarter Fourth Quarter $ 43,660 9,159 $ 37,126 6,709 $ 45,382 11,069 $ 44,459 9,520 21 % 18 % 24 % 21 % 10,846 — (1,687) (597) (893) (0.13) (0.13) $ $ 10,599 — (3,890) (765) (3,927) (0.58) (0.58) $ $ $ $ 9,627 — 1,442 (937) 2,162 0.32 0.32 $ $ 10,344 4,903 (5,727) (2,257) (3,589) (0.54) (0.54) 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 integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support. We principally sell our products through more than 180 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, the Netherlands, 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 2021, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2021, approximately 63% of our revenues were from customers located outside of the Americas, and no single end- user of our products accounted for more than 5% of our total sales and service fees. 82 83 83 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 assets by geographic area were (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, 2020 $ 139,577 1,699 22,484 6,867 $ 170,627 2019 $ 223,735 2,818 27,854 8,970 $ 263,377 2021 $ 198,602 2,528 26,425 7,640 $ 235,195 † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. The following table sets forth revenues by geographic area, based on customer location, for each of the past three fiscal years (in thousands): 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, 2020 $ 64,500 1,621 1,543 67,664 2019 $ 95,196 2,580 1,409 99,185 2021 $ 83,218 2,636 989 86,843 37,584 30,314 12,718 14,252 21,467 116,335 14,284 16,047 30,331 24,993 19,679 8,599 10,797 14,034 78,102 14,225 10,048 24,273 52,002 29,349 14,772 14,346 20,028 130,497 15,706 16,858 32,564 1,686 $ 235,195 588 $ 170,627 1,131 $ 263,377 As of October 31, 2021 2020 2019 $ $ 84,385 80,769 73,265 238,419 $ $ 83,214 77,840 70,094 231,148 $ $ 103,863 71,411 64,971 240,245 Americas Europe Asia Pacific 16. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements: In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. This standard is effective for our fiscal 2021 and we adopted this standard on November 1, 2020. This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures. New Accounting Pronouncements: In December 2019, FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which allows for companies to remove certain exceptions and clarifies certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations. This standard is effective for our fiscal year 2022, with early adoption permitted. We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures. In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides temporary optional expedients and exceptions to the U.S. Generally Accepted Accounting Principles guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures. There have been no other significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended October 31, 2021. Long–lived tangible assets, net by geographic area, were (in thousands): United States of America Foreign countries 2021 As of October 31, 2020 6,104 6,640 12,744 $ $ 6,826 7,059 13,885 $ $ 2019 7,967 8,006 15,973 $ $ 84 84 85 The following table sets forth the contribution of each of our product groups and services to our total sales and Net assets by geographic area were (in thousands): 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, 2021 2020 2019 $ 198,602 $ 139,577 $ 223,735 2,528 26,425 7,640 1,699 22,484 6,867 2,818 27,854 8,970 $ 235,195 $ 170,627 $ 263,377 † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. three fiscal years (in thousands): The following table sets forth revenues by geographic area, based on customer location, for each of the past United States of America Canada Central & South Americas Total Americas Germany United Kingdom Italy France Other Europe Total Europe China Other Asia Pacific Total Asia Pacific Other Foreign Grand Total United States of America Foreign countries Long–lived tangible assets, net by geographic area, were (in thousands): Year Ended October 31, 2021 2020 2019 $ 83,218 $ 64,500 $ 95,196 2,636 989 86,843 37,584 30,314 12,718 14,252 21,467 116,335 14,284 16,047 30,331 1,621 1,543 67,664 24,993 19,679 8,599 10,797 14,034 78,102 14,225 10,048 24,273 2,580 1,409 99,185 52,002 29,349 14,772 14,346 20,028 130,497 15,706 16,858 32,564 1,686 588 1,131 $ 235,195 $ 170,627 $ 263,377 As of October 31, 2021 2020 2019 6,104 6,640 12,744 $ $ 6,826 7,059 13,885 $ $ 7,967 8,006 15,973 $ $ 84 Americas Europe Asia Pacific 2021 84,385 80,769 73,265 238,419 $ $ As of October 31, 2020 $ $ 83,214 77,840 70,094 231,148 $ $ 2019 103,863 71,411 64,971 240,245 16. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements: In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. This standard is effective for our fiscal 2021 and we adopted this standard on November 1, 2020. This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures. New Accounting Pronouncements: In December 2019, FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which allows for companies to remove certain exceptions and clarifies certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations. This standard is effective for our fiscal year 2022, with early adoption permitted. We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures. In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides temporary optional expedients and exceptions to the U.S. Generally Accepted Accounting Principles guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures. There have been no other significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended October 31, 2021. 85 85 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, 2020 Peer Group and 2021 Peer Group Item 9. AND FINANCIAL DISCLOSURE CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 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, 2021, 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, 2021 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 2021, 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 following graph compares the cumulative 5-Year total return to shareholders of 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 for the 2020 peer group and the 2021 peer group, respectively, whose individual companies are listed below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on October 31, 2016 and its relative performance is tracked through October 31, 2021. • • The sixteen companies included in the Company's first customized peer group are: Ampco-Pittsburgh Corp, DMC Global Inc., Douglas Dynamics Inc., Eastern Co, Faro Technologies Inc., Graham Corp, Helios Technologies Inc., Kadant Inc., Key Tronic Corp, L S Starrett Co, Novanta Inc., Onto Innovation Inc., Proto Labs Inc., Transcat Inc., Twin Disc Inc. and Vishay Precision Group Inc. The eighteen companies included in the Company's second customized peer group are: Ampco-Pittsburgh Corp, Broadwind Inc., DMC Global Inc., Douglas Dynamics Inc., Eastern Co, Energy Recovery Inc., Faro Technologies Inc., Graham Corp, Helios Technologies Inc., Key Tronic Corp, L S Starrett Co, Omega Flex Inc., Onto Innovation Inc., Proto Labs Inc., Transcat Inc., Twin Disc Inc., UFP Technologies Inc. and Vishay Precision Group Inc. $350 $300 $250 $200 $150 $100 $50 86 86 87 $0 10/16 10/17 10/18 10/19 10/20 10/21 Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2020 Peer Group 2021 Peer Group *$100 invested on 10/31/16 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2021 Russell Investment Group. All rights reserved. Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2020 Peer Group 2021 Peer Group 10/31/16 10/31/17 10/31/18 10/31/19 10/31/20 10/31/21 100.00 100.00 100.00 100.00 100.00 172.80 127.85 129.42 181.00 152.45 158.84 130.22 142.78 200.35 167.33 137.43 136.60 162.48 205.09 163.99 120.02 136.42 209.73 221.96 175.64 132.76 205.72 293.16 328.58 238.70 The stock price performance included in this graph is not necessarily indicative of future stock price performance. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 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, 2021, 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, 2021 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 2021, 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 following graph compares the cumulative 5-Year total return to shareholders of 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 for the 2020 peer group and the 2021 peer group, respectively, whose individual companies are listed below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on October 31, 2016 and its relative performance is tracked through October 31, 2021. • • The sixteen companies included in the Company's first customized peer group are: Ampco-Pittsburgh Corp, DMC Global Inc., Douglas Dynamics Inc., Eastern Co, Faro Technologies Inc., Graham Corp, Helios Technologies Inc., Kadant Inc., Key Tronic Corp, L S Starrett Co, Novanta Inc., Onto Innovation Inc., Proto Labs Inc., Transcat Inc., Twin Disc Inc. and Vishay Precision Group Inc. The eighteen companies included in the Company's second customized peer group are: Ampco-Pittsburgh Corp, Broadwind Inc., DMC Global Inc., Douglas Dynamics Inc., Eastern Co, Energy Recovery Inc., Faro Technologies Inc., Graham Corp, Helios Technologies Inc., Key Tronic Corp, L S Starrett Co, Omega Flex Inc., Onto Innovation Inc., Proto Labs Inc., Transcat Inc., Twin Disc Inc., UFP Technologies Inc. and Vishay Precision Group Inc. 86 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, 2020 Peer Group and 2021 Peer Group 2020 Peer Group and 2021 Peer Group $350 $350 $300 $300 $250 $250 $200 $200 $150 $150 $100 $100 $50 $50 $0 10/16 $0 10/16 10/17 10/18 Hurco Companies, Inc. 10/17 Russell 2000 10/18 2020 Peer Group Hurco Companies, Inc. 2021 Peer Group Russell 2000 10/19 10/19 10/20 10/21 NASDAQ Global Select 10/20 10/21 NASDAQ Global Select 2020 Peer Group *$100 invested on 10/31/16 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2021 Russell Investment Group. All rights reserved. 2021 Peer Group *$100 invested on 10/31/16 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2021 Russell Investment Group. All rights reserved. Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2020 Peer Group 2021 Peer Group Hurco Companies, Inc. Russell 2000 NASDAQ Global Select 2020 Peer Group 2021 Peer Group 10/31/20 120.02 136.42 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 209.73 221.96 175.64 10/31/17 172.80 127.85 10/31/17 129.42 172.80 181.00 152.45 127.85 129.42 181.00 152.45 10/31/18 158.84 130.22 10/31/18 142.78 158.84 200.35 167.33 130.22 142.78 200.35 167.33 10/31/19 137.43 136.60 10/31/19 162.48 137.43 205.09 163.99 136.60 162.48 205.09 163.99 10/31/16 100.00 100.00 10/31/16 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 10/31/20 120.02 136.42 209.73 221.96 175.64 10/31/21 132.76 205.72 293.16 328.58 238.70 10/31/21 132.76 205.72 293.16 328.58 238.70 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 87 87 87 PART III PART IV Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2022 annual meeting of shareholders except that the information required by Item 10 regarding our executive officers is included herein under the caption “Information about our Executive Officers” 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 2022 annual meeting of shareholders. Item 12. MANAGEMENT AND RELATED STOCKHOLDER MATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2022 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 2022 annual meeting of shareholders. PRINCIPAL ACCOUNTANT FEES AND SERVICES Item 14. The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2022 annual meeting of shareholders. (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: Reports of Independent Registered Public Accounting Firm Consolidated Statements of Operations – years ended October 31, 2021, 2020 and 2019 Consolidated Statements of Comprehensive Income (Loss) – years ended October 31, 2021, 2020 and 2019 Consolidated Balance Sheets – as of October 31, 2021 and 2020 Consolidated Statements of Cash Flows – years ended October 31, 2021, 2020 and 2019 Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2021, 2020 and 2019 57 Notes to Consolidated Financial Statements Page 50 53 54 55 56 58 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, 2021, 2020 and 2019 (Dollars in thousands) Charged to/ (Recovered from) Costs and Expenses Balance at Beginning of Period $ $ $ $ $ $ 1,401 891 1,027 2,164 2,227 2,106 $ $ $ $ $ $ $ $ $ $ $ Charged to Other Balance at End Accounts Deductions of Period 268 575 (136) $ — $ — $ — $ 24 (1) $ 65 (1) $ — (1) $ 1,645 1,401 891 49 50 458 — $ — $ — $ 342 113 337 $ $ $ 1,871 2,164 2,227 Description Allowance for doubtful accounts for Income tax valuation allowance for the year ended: October 31, 2021 October 31, 2020 October 31, 2019 the year ended: October 31, 2021 October 31, 2020 October 31, 2019 (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. 88 88 89 PART III of Part I. The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2022 annual meeting of shareholders except that the information required by Item 10 regarding our executive officers is included herein under the caption “Information about our Executive Officers” at the end Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2022 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 2022 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 2022 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 2022 annual meeting of shareholders. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: Page Reports of Independent Registered Public Accounting Firm 50 Consolidated Statements of Operations – years ended October 31, 2021, 2020 and 2019 53 Consolidated Statements of Comprehensive Income (Loss) – years ended October 31, 2021, 2020 and 2019 54 Consolidated Balance Sheets – as of October 31, 2021 and 2020 55 56 Consolidated Statements of Cash Flows – years ended October 31, 2021, 2020 and 2019 Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2021, 2020 and 2019 57 58 Notes to Consolidated Financial Statements 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, 2021, 2020 and 2019 (Dollars in thousands) Charged to/ (Recovered from) Costs and Expenses Balance at Beginning of Period Charged to Other Accounts Deductions Balance at End of Period $ $ $ $ $ $ 1,401 891 1,027 2,164 2,227 2,106 $ $ $ $ $ $ $ 268 575 $ (136) $ — $ — $ — $ 24 (1) $ 65 (1) $ — (1) $ 1,645 1,401 891 49 50 458 $ $ $ — $ — $ — $ 342 113 337 $ $ $ 1,871 2,164 2,227 Description Allowance for doubtful accounts for the year ended: October 31, 2021 October 31, 2020 October 31, 2019 Income tax valuation allowance for the year ended: October 31, 2021 October 31, 2020 October 31, 2019 (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. 88 89 89 (b) Exhibits Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: Exhibits Filed. The following exhibits are filed with this report: EXHIBITS INDEX 21.1 23.1 31.1 31.2 32.1 32.2 101 104 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 Exchange Act of 1934, as amended. Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities 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. The following financial information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021, formatted in Inline XBRL: (i) Consolidated Statements of Operations; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Cash Flows; (v) Consolidated Statements of Changes in Shareholders’ Equity; and (vi) Notes to Consolidated Financial Statements Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 3.1 3.2 4.1 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 March 12, 2021, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 12, 2021. Description of the Company’s Common Stock, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-K filed on January 8, 2021. 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, 2016. 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 quarter ended January 31, 2017. 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 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. 10.7* First Amendment to Employment Agreement, dated as of November 11, 2021, by and 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 on November 17, 2021. 10.8* 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. 10.9* First Amendment to Employment Agreement, dated as of November 11, 2021, by and between Hurco Companies, Inc. and Gregory Volovic, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 17, 2021. 10.10* 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. 10.11* 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. 10.12* 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. 10.13 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. 90 90 91 (b) Exhibits Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: Exhibits Filed. The following exhibits are filed with this report: EXHIBITS INDEX 21.1 23.1 31.1 31.2 32.1 32.2 101 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 Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities 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. The following financial information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021, formatted in Inline XBRL: (i) Consolidated Statements of Operations; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Cash Flows; (v) Consolidated Statements of Changes in Shareholders’ Equity; and (vi) Notes to Consolidated Financial Statements 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 3.1 3.2 4.1 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13 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 March 12, 2021, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 12, 2021. Description of the Company’s Common Stock, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-K filed on January 8, 2021. 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. First Amendment to Employment Agreement, dated as of November 11, 2021, by and 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 on November 17, 2021. 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. First Amendment to Employment Agreement, dated as of November 11, 2021, by and between Hurco Companies, Inc. and Gregory Volovic, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 17, 2021. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Sonja K. McClelland, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8- K filed March 16, 2012. Hurco Companies, Inc. 2008 Equity Incentive Plan, incorporated by reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed January 28, 2008. Form of restated split-dollar insurance agreement, incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2008. 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. 90 91 91 10.14 10.15 10.16 First Amendment to Credit Agreement, dated as of March 13, 2020, to the 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 Current Report on Form 8-K filed March 13, 2020. Second Amendment to Credit Agreement, dated as of December 23, 2020, to the 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 Current Report on Form 8-K filed December 29, 2020. Third Amendment to Credit Agreement, dated as of December 17, 2021, to the 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 Current Report on Form 8-K filed December 21, 2021. * 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. SIGNATURES 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 7th day of January, 2022. HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer and Chief Financial Officer 92 92 93 10.14 First Amendment to Credit Agreement, dated as of March 13, 2020, to the 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 Current Report on Form 8-K filed 10.15 Second Amendment to Credit Agreement, dated as of December 23, 2020, to the 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 Current Report on Form 8-K filed March 13, 2020. December 29, 2020. 10.16 Third Amendment to Credit Agreement, dated as of December 17, 2021, to the 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 Current Report on Form 8-K filed * The indicated exhibit is a management contract, compensatory plan, or arrangement required to be listed December 21, 2021. by Item 601 of Regulation S-K. Item 16. FORM 10-K SUMMARY None. SIGNATURES 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 7th day of January, 2022. HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer and Chief Financial Officer 92 93 93 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: Exhibit 21.1 Signature and Title(s) Date /s/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President of Hurco Companies, Inc. (Principal Executive Officer) /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer and Chief Financial Officer of Hurco Companies, Inc. (Principal Financial Officer) /s/ HaiQuynh Jamison HaiQuynh Jamison Corporate Controller of Hurco Companies, Inc. (Principal Accounting Officer) January 7, 2022 January 7, 2022 January 7, 2022 /s/ Michael Doar Michael Doar, Executive Chairman of the Board January 7, 2022 /s/ Thomas A. Aaro Thomas A. Aaro, Director /s/ Cynthia Dubin Cynthia Dubin, Director /s/ Timothy J. Gardner Timothy J. Gardner, Director /s/ Jay C. Longbottom Jay C. Longbottom, Director /s/ Richard Porter Richard Porter, Director /s/ Janaki Sivanesan Janaki Sivanesan, Director January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 94 94 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF HURCO COMPANIES, INC. Jurisdiction of Incorporation The Netherlands United Kingdom Federal Republic of Germany 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. 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, 2021. 96 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: 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. Machinery Sales Co. Milltronics USA, Inc. Ningbo Hurco Machine Tool Co., Jurisdiction of Incorporation The Netherlands United Kingdom Federal Republic of Germany India Taiwan R.O.C. France Italy Singapore Italy United States United States Ltd. 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, 2021. 96 95 Signature and Title(s) Date /s/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President of Hurco Companies, Inc. (Principal Executive Officer) /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer and Chief Financial Officer of Hurco Companies, Inc. (Principal Financial Officer) /s/ HaiQuynh Jamison HaiQuynh Jamison Corporate Controller of Hurco Companies, Inc. (Principal Accounting Officer) /s/ Michael Doar Michael Doar, Executive Chairman of the Board January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 January 7, 2022 94 /s/ Thomas A. Aaro Thomas A. Aaro, Director /s/ Cynthia Dubin Cynthia Dubin, Director /s/ Timothy J. Gardner Timothy J. Gardner, Director /s/ Jay C. Longbottom Jay C. Longbottom, Director /s/ Richard Porter Richard Porter, Director /s/ Janaki Sivanesan Janaki Sivanesan, Director CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT Exhibit 23.1 Exhibit 31.1 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 report dated January 7, 2022, 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, 2021. /s/ RSM US LLP Indianapolis, Indiana January 7, 2022 97 96 I, Gregory S. Volovic, certify that: OF 1934, AS AMENDED 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 98 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 report dated January 7, 2022, 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, 2021. /s/ RSM US LLP Indianapolis, Indiana January 7, 2022 Exhibit 23.1 Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Gregory S. Volovic, 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 97 98 97 (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. CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT Exhibit 31.2 /s/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President January 7, 2022 99 98 I, Sonja K McClelland, certify that: OF 1934, AS AMENDED 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 100 (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/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President January 7, 2022 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Sonja K McClelland, certify that: Exhibit 31.2 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 99 100 99 (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, Treasurer and Chief Financial Officer January 7, 2022 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2021, 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/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President January 7, 2022 101 100 102 (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 Chief Financial Officer January 7, 2022 Executive Vice President, Treasurer and CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2021, 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/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President January 7, 2022 101 102 101 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2021, 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, Treasurer and Chief Financial Officer January 7, 2022 103 102 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the year ended October 31, 2021, 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 Chief Financial Officer January 7, 2022 Executive Vice President, Treasurer and [THIS PAGE INTENTIONALLY LEFT BLANK] 103 [THIS PAGE INTENTIONALLY LEFT BLANK] Hurco Europe Ltd. (United Kingdom) Serving the United Kingdom, Ireland, Africa, the Middle East, and Scandinavia Milltronics Europe (The Netherlands) 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 Milltronics (Waconia, Minnesota, USA) Hurco S.a.r.l. (France) Serving France and Belgium (Wallonia) Hurco Sp. z o.o. (Poland) Ningbo Hurco Trading Co., Ltd. (Shanghai, China) Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) Takumi (Taiwan) Hurco Companies, Inc. Hurco North America (Indianapolis, Indiana, USA) Serving the USA, Canada, Mexico, and South America Takumi USA (Indianapolis, Indiana, USA) Serving the USA ProCobots (Indianapolis, IN, USA) Hurco India Private Ltd. Serving India, Pakistan, Bangladesh, and Sri Lanka Hurco S.r.l. (Italy) LCM Precision Technology S.r.l. (Italy) Hurco S.E. Asia Pte. Ltd. (Singapore) Serving Australia, Indonesia, Malaysia, Myanmar, Philippines, Singapore, South Korea, Thailand, and Vietnam Hurco Manufacturing Ltd. (Taiwan) Hurco Automation Ltd. (Taiwan) Hurco Manufacturing Limited is responsible for the manufacturing and assembly of Hurco, Milltronics, and Takumi machine tools. Hurco Automation Limited is responsible for the manufacturing and assembly of Hurco and Milltronics controls. One Technology Way | PO Box 68180 | Indianapolis, IN 46268 800.634.2416 | Hurco.com/Investors

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