Hurco Companies, Inc.
Annual Report 2023

Plain-text annual report

2023 ANNUAL REPORT Precision United: Engineering Excellence Across Every Brand REPORT TO SHAREHOLDERS I am pleased to report on the accomplishments and performance of Hurco Companies, Inc. during the 2023 fiscal year. Building upon the successful strides made in 2022, where we experienced increased demand for automation and advanced manufacturing technologies, this past year has once again demonstrated our resilience and commitment to innovation that promotes significant product line growth to position us for future success. Despite the initial uncertainty in demand witnessed in the global machine tool market at the beginning of 2023, Hurco remained steadfast in its dedication to innovation and investment in new and advanced technologies. Throughout the year, we navigated challenging conditions in key machine tool markets such as the U.S., China, and Germany. Nevertheless, our divisions in smaller European markets, including Italy and the United Kingdom, experienced higher sales, driven by strong customer interest and demand for Hurco machines. As we concluded the fiscal year, our company achieved remarkable fourth-quarter sales, signaling a positive trajectory that hopefully foreshadows a more general and sustainable market recovery. This success is underpinned by our strong balance sheet and liquidity, positioning us to be both opportunistic and prepared to capitalize on the upside of the market cycle when it unfolds. Fiscal year 2023 serves as a testament to our unwavering dedication to innovation and continuous research and development. We are proud to highlight significant advancements in our industry-leading WinMax® control software for Hurco CNC machines. These updates not only simplify the user experience but also enhance operational efficiency. Furthermore, a substantial update to UltiMonitor, our Extended Shop Floor IoT platform, now incorporates productivity monitoring and Overall Equipment Effectiveness (OEE), providing our customers with advanced tools to drive immediate operational transparency, efficiency, and productivity. The Milltronics brand achieved a significant milestone with the introduction of the INSPIRE V11 control. Built on decades of innovation, this state-of-the-art technology enhances cutting performance, precision, and surface finish while providing a user-friendly interface. We successfully relocated Milltronics’ corporate headquarters to a new facility in Indianapolis, which will allow us to leverage resources and expertise to expedite product development and better support the Milltronics brand on a national and global scale moving forward. A pivotal element of our success in recent years lies in the expansion of our product portfolio across our three brands — Hurco, Takumi, and Milltronics. This expansion has resulted in increased machine capacity, capabilities, and throughput, featuring faster speeds, improved torque, and larger travels across all brands in numerous models. Our participation at the European Machine tool exhibition in Hannover, Germany, provided a platform to reconnect with customers and distributors from all over the world. It also allowed us to showcase the advancements of ProCobots, our automation technology subsidiary. The seamless integration of ProCobots automation with Hurco CNC machines and controls has positioned us uniquely to address the labor shortage constraining our customers’ growth potential. Notable sales growth for ProCobots automation solutions across our divisions in the U.K., U.S., France, and Germany underscores the success of these initiatives. Looking ahead, our commitment to technological leadership is evident in the groundwork laid by our engineers in 2023. Hurco is poised to lead the industry in commercializing emerging technologies, integrating automation, and leveraging artificial intelligence (AI) to transform manufacturing. Our goal is to provide our customers with sophisticated, accessible products that empower them to navigate both current and future challenges. The pillars of our success are anchored in software and product innovation, efficient machine tool design and manufacturing, targeted expansion of products and markets, and strategic acquisitions. The complete vertical integration of the CNC machine, control, software, and automation is what sets Hurco apart. This unique level of control over the complete software and hardware machining environment arms us with a distinctive opportunity to develop technology that truly simplifies complex processes — ultimately enhancing our customers’ efficiency and profitability. On behalf of everyone at Hurco, I extend heartfelt thanks to our shareholders for the trust you place in us as conscientious stewards of your investment. I express gratitude to our Board of Directors for their insight, guidance, and encouragement. Sincere appreciation goes to our customers for their loyalty and continued support, and a special thank you to our employees for their dedication, talent, and commitment. As a worldwide leader in our industry, we are committed to sustaining our strategic endeavors, driving innovation, simplifying complexity, and facilitating automation. Our mission is to be a global partner to those who contribute not only to solving the demands of today but also the needs of the future. Gregory S. Volovic President and Chief Executive Officer HURCO – MIND OVER METAL® Hurco CNC machines are powered by proprietary technology that increases customer productivity and profitability. We provide customers with reliable machine tools equipped with sophisticated technologies that simplify complex processes. The integrated Hurco control is the most versatile in the industry, supporting both industry standard programming and conversational programming. MILLTRONICS – Let’s Invent Milltronics CNC machines are equipped with an interactive computer control system that is compatible with G-codes and M-codes generated from CAD/CAM software and conversational visual-aid programming. The Milltronics brand includes seven product lines of general purpose CNC mills and lathes. The Milltronics line is designed for excellent value with more standard features for the price versus other market leaders. When precision matters. TAKUMI – WHEN PRECISION MATTERS™ Takumi CNC machines are designed and built for high efficiency milling and high level precision. Equipped with control systems such as Fanuc ®, Siemens ®, Mitsubishi ®, and Heidenhain ®. 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. With several patents pending, the automation software features developed this year provide our customers with complete integration between the Hurco control and the ProCobots automation system. 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 2023 2022 $ 227,807 $ 250,814 $ $ $ 6,616 4,389 0.66 $ $ $ 12,747 8,226 1.23 $ 209,676 $ 240,931 $ $ 193,257 — $ $ 194,733 — $ 222,231 $ 222,644 716 735 Closing stock price as of October 31 $ 20.00 $ 23.15 Stock price range for the Fiscal Year High Low $ $ 30.41 19.59 $ $ 35.15 21.75 $235.2 $250.8 $227.8 350 300 250 200 150 100 50 0 2021 2022 2023 Sales and Service Fees (Millions) 250 200 150 100 50 0 $238.4 $222.6 $222.2 2021 2022 2023 Shareholders’ Equity (Millions) 20 15 10 5 0 $8.2 $6.8 $4.4 2021 2022 Net Income (Loss) (Millions) 2023 ANNUAL REPORT 2023 2023 $227,807 171,639 49,552 — 6,616 138 6,754 2,365 $4,389 6,499 6,528 $0.67 $0.66 $2,577 $4,093 24.7% 2.9% $20.00 $30.41 $19.59 2023 $193,257 4.52 $290,589 $ — $222,231 0.0% $34.04 716 $0.63 2022 $250,814 186,336 51,731 — 12,747 (869) 11,878 3,652 $8,226 6,580 6,632 $1.24 $1.23 $2,193 $3,918 25.7% 5.1% $23.15 $35.15 $21.75 2022 $194,733 3.66 $306,237 $ — $222,644 0.0% $33.57 735 $0.59 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 23.9% 4.4% $32.45 $38.83 $28.27 2021 $208,700 3.57 $332,935 $ — $238,419 0.0% $36.08 706 $0.55 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 21.4% (5.8%) $29.84 $39.38 $20.39 2020 $200,974 4.98 $295,655 $ — $231,148 0.0% $34.65 710 $0.51 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 Gross profit margin % Operating income as % of sales Closing Stock Price as of October 31 Stock price range for the Fiscal Year High Low At Fiscal Year End (In thousands except per share data and number of employees) Working capital Current ratio Total assets Total debt Shareholders' equity Total debt to capitalization % Shareholder's equity per share (1) Number of employees Dividends paid per share (1) Based on shares outstanding at fiscal year end — diluted. ANNUAL REPORT 2023 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 29.3% 8.6% $34.79 $44.99 $31.07 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 30.5% 11.2% $40.74 $50.50 $38.08 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 29.0% 8.6% $44.75 $46.75 $24.80 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 31.0% 8.6% $26.20 $33.65 $23.25 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 31.5% 10.9% $26.87 $39.95 $24.93 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 30.9% 9.9% $38.53 $39.64 $23.63 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 28.6% 7.1% $24.49 $31.61 $21.22 2019 2018 2017 2016 2015 2014 2013 $207,229 4.79 $301,065 $ — $240,245 0.0% $35.25 785 $0.47 $194,632 3.24 $315,407 $1,434 $222,853 0.6% $32.91 800 $0.43 $175,526 3.48 $277,808 $1,507 $203,085 0.7% $30.40 749 $0.39 $160,413 3.77 $251,949 $1,476 $185,475 0.8% $27.92 758 $0.35 $151,026 3.32 $248,577 $1,583 $174,568 0.9% $26.44 769 $0.31 $141,888 3.12 $239,176 $3,272 $164,645 1.9% $25.18 617 $0.26 $127,235 3.28 $212,804 $3,665 $151,491 2.4% $23.32 625 $0.10 HURCO COMPANIES, INC., LEADERSHIP BOARD OF DIRECTORS CORPORATE OFFICERS AND DIVISION EXECUTIVES Thomas Aaro Marketing Consultant (2) Michael Doar Executive Chairman Hurco Companies, Inc. Cynthia Dubin Member, UK Competition and Markets Authority (CMA) (2) Timothy Gardner Former Executive, Illinois Tool Works (1, 3) Jay Longbottom Operating Partner, BERKS Group (1, 3) Richard Porter Private Equity Manager (1, 3, 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 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) Scott Camloh General Manager, Hurco North America 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) ANNUAL REPORT 2023 Paul Gray Operations Manager, ProCobots Vice President R&D and Product Development 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 Managing Director, Takumi (Taiwan) Cory Miller Vice President, Milltronics Paolo Raspanti Interim 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 Manager and Vice General Managers, Hurco Manufacturing Limited (Taiwan) and Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) ANNUAL MEETING All shareholders are invited to attend our annual meeting, which will be held on Thursday, March 14, 2024, at 10:00 a.m. Eastern Time at Hurco’s Corporate Offices, One Technology Way, Indianapolis, IN 46268 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 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 2023 2022 High Low High Low January 31 $23.03 $28.94 $35.00 $27.80 April 30 July 31 $21.50 $30.41 $35.15 $28.13 $20.56 $23.41 $29.09 $23.98 October 31 $19.59 $23.32 $26.00 $21.75 There were approximately 119 holders of record of Hurco Common Stock as of December 14, 2023. 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. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒(cid:3) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October ☐(cid:3) 31, 2023 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  Accelerated filer  Non–accelerated filer  Smaller reporting company ☐ Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  Indicate by check mark whether the registrant 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.  If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive- based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ 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 28, 2023 (the last business day of our most recently completed second quarter) was $144,946,000. The number of shares of the registrant’s common stock outstanding as of December 31, 2023 was 6,471,850. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2024 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 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; 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; changes in the SOFR rate; 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; 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 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 create a program quickly and easily to machine 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, the Czech Republic, 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 increase 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 significant 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 geographic 4 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 year 2023, our sales and service fees were $227.8 million, a decrease of $23.0 million, or 9%, compared to fiscal year 2022 and included an unfavorable currency impact of $2.4 million, or 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. Sales decreased year-over-year due primarily to a decreased volume of shipments of higher-performance Hurco, Takumi, and Milltronics machines across Europe, Asia Pacific, and the Americas. For fiscal year 2023, we reported net income of $4.4 million, or $0.66 per diluted share, compared to net income of $8.2 million, or $1.23 per diluted share, for fiscal year 2022. 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: • Global Machine Tool Outlook – generated by Oxford Economics; • 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 for Manufacturing Technology, 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 six 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 powered by our proprietary software, while the remaining machine tools are equipped with industry standard 5 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 2023 $ 188,335 Year Ended October 31, 2022 83 % $ 211,804 2021 85 % $ 198,602 Computerized Machine Tools Computer Control Systems and Software † 1 % 11 % Service Parts 3 % Service Fees Total 100 % † Amounts shown do not include computer control systems and software sold as an integrated component of computerized 2,634 28,219 8,157 100 % $ 250,814 2,528 26,425 7,640 100 % $ 235,195 2,805 28,439 8,228 $ 227,807 1 % 12 % 4 % 1 % 11 % 3 % 85 % 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, machine tending systems, 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 no machine tool programming experience can successfully create a program with minimal training and begin 6 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, part 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 six models in four sizes with X-axis (horizontal) travels of 26 (three models), 30, 40, and 50 inches. 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. HSi Product Line Due to the integral, motorized spindle with a maximum speed of 20,000 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 __________________ †† Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. 7 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 eight, ten, and 14-inch diameter rotary tables with either standard (belted) or direct drive (inline) spindles. High-speed spindles (20,000 rpm) are offered as an option. 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 machines are available with either a 20-inch or 23.6-inch pallet, moderately-priced models, or 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. The 53-inch and 63-inch models are available with #40 or #50 taper. 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. 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 two, three, and four-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 machine equipped with an articulating head. DCX machines are the largest models offered by Hurco that feature the powerful and flexible WinMax® control. 8 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: six, eight, ten, 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 eight or ten-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 fiscal year 2023 include new HSK spindles for our entry level high-speed VM10HSi 3-axis and VM10UHSi 5-axis machines. We also made background enhancements to our WinMax® software, focusing on bolstering reliability and optimizing resource management. These improvements are designed to ensure a smoother user experience without interrupting workflow. These efforts collectively enhance software performance and efficiency, providing a more dependable and responsive experience while using WinMax®. 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, research and development, 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. 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 worktable. Typical applications for these machines include general machining, job shops, prototype, or 9 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 have 40-taper spindles and are available in four different sizes. Customers can choose models with X-axis 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 in 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 six, eight, and ten inches and support an optional conversational high-efficiency cutting cycle on the control called Bi-Directional Turning, a cutting strategy typically available only with high- end CAD/CAM systems. Product Development In fiscal year 2023, Milltronics introduced the new Inspire CNC control, leveraging patented Hurco intellectual property to enhance cutting precision and surface finish on Milltronics machine tools. Features like rapid retract, leadscrew compensation, and squareness compensation enable customers to maximize their Milltronics machine tool's performance, while the Inspire control offers users a familiar user interface for seamless interaction with the machine. 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; 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: 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. 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 four sizes with X-axis travels of 34, 42, 50, and 60 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 offer trunnion table sizes of 10, 16, 24, and 31.5 inches. The UB version is equipped with a B/C swivel head ________________________ * 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. 11 and a 12,000 rpm built-in spindle. Its double-column design provides a spacious X-axis travel of 126 inches. 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. The HMX500 model is available in either #40 or #50 taper spindles. 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 four models: the SL200 and SL250, both available with ten-inch chucks; the SL300, which has a 12-inch chuck; and the SL450, which has an 18-inch chuck. Product Development In fiscal year 2023, Takumi introduced a #50 taper version of the HMX500 horizontal machining center, for applications that require heavy cutting and more power. Additionally, a new 60” X-travel VC1500 was introduced to the marketplace. Other Computer Control Systems and Software Products The following machine tool computer control systems and software products are sold directly to end-users and/or to other original equipment manufacturers (“OEMs”). 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. 12 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, Solid Model Import with 3D DXF Technology, Swept Surface, DXF Transfer, UltiMonitor, UltiPocket with Helical Ramp Entry and Insert Pockets, Conversational Part and Tool Probing, Tool and Material Library, NC/Conversational Merge, Job List, 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. 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. 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. Designed to take advantage of the Internet of Things, 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. 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. ________________________ * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. 13 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 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 high-mix, low- and medium-volume manufacturing environments. Products include portable models, such as the ProFeeder Flex and ProFeeder Table, as well as flexible cell solutions, including the ProFeeder and Easy Desk, and higher volume systems including the ProFeeder Compact, ProFeeder X, and ProFeeder XL models. ProCobots solutions are available for any Hurco, Milltronics, or Takumi machine. 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. 14 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). Non-Hurco Branded Products & Technologies While our three brands of CNC machine tools, related software products, Autobend®, ProCobots, and LCM are responsible for the vast majority of our revenue, we have added certain other non-Hurco OEM products to our portfolio that contribute to our top and bottom line, provide product diversity and market penetration opportunity, and reduce the impact of geographic cyclicality. We believe these non-Hurco branded products help us partially offset the cyclical nature of the machine tool market and potentially reduce the risks associated with expansion into new geographic markets 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. Parts and Service Our service organization provides installation, warranty, operator training, and customer support for our products on a worldwide basis. In the United States, our principal distributors generally have the primary responsibility for machine installation and warranty service and support for product sales. Our service organization also sells software options, computer control upgrades, accessories, and replacement parts for our products. We believe our after-sales parts and service business strengthens our customer relationships and provides continuous information concerning the evolving requirements of end-users. Manufacturing Our computerized metal cutting machine tools are manufactured and assembled to our specifications primarily by our wholly-owned subsidiary 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 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, Milltronics IL/XP models, 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. 15 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 approximately 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, the Czech Republic, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world’s principal machine tool consuming markets. 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 year 2023, approximately 61% 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 of large batches of a few types of parts instead of small batches of many different parts. Industries served include aerospace, defense, medical equipment, energy, automotive/transportation, electronics, and computer industries. We also sell our Autobend® computer control systems to OEMs of new metal fabrication machine tools that integrate them with their own products prior to the sale of those products to their own customers, to retrofitters of used metal fabrication machine tools that integrate them with those machines as part of the retrofitting operation, and to end-users that have an installed base of metal fabrication machine tools, either with or without related computer control systems. Demand We believe demand for our products is driven by advances in industrial technology and the related demand for automated process improvements. Other factors affecting demand include: • • • • the need to continuously improve productivity and shorten cycle time; an aging machine tool installed base that will require replacement with more advanced technology; the industrial development of emerging markets in Latin America, Asia, and Eastern Europe; and the declining supply of skilled machinists. Demand for our products is also highly dependent upon economic conditions and the general level of business confidence, as well as factors such as production capacity utilization and changes in governmental policies regarding tariffs, corporate taxation, fluctuations in foreign currencies, and other investment incentives. 16 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 us. Major worldwide competitors include DMG Mori Seiki Co., Ltd., Mazak Corporation, Haas Automation, Inc., DN Solutions (formerly Doosan Corporation), Okuma Machinery Works, Ltd., Fryer Machine Systems Inc., ProtoTRAK CNC Machines, Quick Jet Machine, Co., Ltd., Gentiger Machinery Industrial, Co., Ltd., and Yeong Chin Machinery Industries, Co., Ltd. Through our subsidiary LCM, we compete with manufacturers of machine tool components and accessories such as IBAG, Kessler, Peron Speed International, 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, 2023, Hurco had approximately 716 full-time employees, of which approximately 28% were in the Americas and 72% were 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. 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. 17 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 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. 18 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 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. Material adverse developments in global economic conditions, or the occurrence of certain other world events, could negatively affect demand for our products and harm our business. 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. Global economic uncertainty has produced, and continues to produce, substantial stress, volatility, illiquidity, and disruption of global credit and other financial markets. Various factors contribute to the uncertain economic environment, including geopolitical tensions, military conflicts, the level and volatility of interest rates, the level of inflation, the continuing effects of the COVID-19 pandemic, an actual recession or fears of a recession, trade policies and tariffs, and political and governmental instability. Economic uncertainty has and could continue to negatively affect the businesses and purchasing decisions of companies in the industries we serve. Such disruptions present considerable risks to our businesses and operations. As global economic conditions experience stress and negative volatility, or if there is an escalation in regional or global conflicts, or terrorism, we will likely experience reductions in the number of available customers and in capital expenditures by our remaining customers, longer sales cycles, deferral, or delay of purchase commitments for our products and increased price competition, any of which may adversely affect our business, results of operations and liquidity. Our international operations pose additional risks that may adversely impact sales and earnings. During fiscal year 2023, approximately 61% 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; 19 • • • • • • • 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 geopolitical environment, wars, conflicts, or trade barriers or blockades in the European Union and Asia, which 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 products, 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, procedures, and training designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies. 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. 20 Additionally, the geopolitical environment and ongoing sovereign relationship between China and Taiwan, including recent heightened tensions between them, could have a material impact on our business. Specifically, if a trade war, tariff, physical or economic 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 and medium 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 61% of our revenues in fiscal year 2023, 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, many 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 many of our competitors, making it challenging to remain competitive. 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 21 affected. Developments by others may render our products or technologies obsolete or noncompetitive. 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 to 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 a 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, military conflicts, 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. 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. In addition, we may not be able to establish additional or replacement suppliers for such components in a reasonable period of time, or on commercially reasonable terms, if at all, which could result in delays or interruptions in our operations, which would adversely affect our business, results of operations and financial condition. Fluctuations in the price of raw materials and other inputs, especially steel, iron, and energy, 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, as well as for other inputs such as energy, are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs, anticipated or perceived shortages, geopolitical relationships or conflicts, and tariffs or other trade restrictions. In some cases, those cost 22 increases can be passed on to customers in the form of price increases, in other cases, they cannot. If the prices of raw materials and other inputs increase and we are not able to charge our customers higher prices to compensate, our results of operations would be adversely affected. 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 actively 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; and the potential loss of key employees of the acquired companies. 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. Mergers and acquisitions are inherently risky. No assurance can be given that our acquisitions will be successful. Further, no assurance can be given that an acquisition will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate an acquisition could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance that enhancements to those products will be made in a timely manner or that pre-acquisition due diligence will identify all possible issues that might arise with respect to such products or the acquired business. 23 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”) revised and significantly expanded the scope of the CCPA. The CPRA also created 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 regulatory actions. 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, strict obligations and restrictions on the collection and use of U.K. and E.U. personal data, a requirement for prompt notice of data breaches in certain circumstances, a requirement for implementation of certain approved safeguards (such as the use of approved “standard contractual clauses” and the performance of appropriate data transfer impact assessments) for transfers of personal data to other countries that have not been determined by the E.U. or the U.K. to provide adequate data privacy protections, and possible substantial fines for any violations. Brazil, India, South Africa, Japan, China, Israel, Canada, and numerous other countries have introduced and, in some cases, enacted, similar data privacy and cyber 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 24 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 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. 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. 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 in the future have, a material adverse effect on our business, financial condition, and results of operations. The full extent to which a global health crisis, such as COVID- 19, will impact our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new medical and other information that may emerge as a result and the actions by governmental entities or others to contain it or treat its impact. The impacts of a potential resurgence of COVID-19 or other severe global health crisis could pose the risk that we or our employees, suppliers, customers and others may be restricted or prevented from conducting business activities for indefinite or intermittent periods of time, including as a result of employee health and safety concerns, shutdowns, shelter in place orders, travel restrictions and other actions and restrictions that may be prudent or required by governmental authorities. We, our suppliers, and our customers had modified our business practices for the continued health and safety of our employees during the outbreak of COVID-19. If a resurgence of COVID-19 or other severe global health crisis occurs, it could disrupt our ability to deliver and/or install machines, our procurement of supplies for our operations, and our customers’ purchasing behavior or decisions, including reduced demand for our products that 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 in the future 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. 25 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. 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. 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. 26 Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES The following table sets forth the principal use, location, and size of each of our facilities: Principal Uses 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 Sales, application engineering, customer service, and warehousing Locations Square Footage Indianapolis, Indiana, U.S. 184,200 Taichung, Taiwan Castell’Alfero, Italy Ningbo, China High Wycombe, England Paris, France Munich and Verl, Germany Milan, Italy Venlo, the Netherlands Toh Guan, Singapore Shanghai, Dongguan and Kunshan, China Chennai and Pune, India Liegnitz, Poland Grand Rapids, Michigan, U.S. Los Angeles, California, U.S. Stritez, the Czech Republic 485,100 32,300 31,000 26,300 12,800 20,900 12,900 9,700 5,600 9,700 16,700 1,000 3,700 11,400 5,500 We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2024 to July 2032. 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. 27 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, 2023, the name of each executive officer and his or her age, tenure as an officer, principal occupation, and business experience: Name Michael Doar Gregory S. Volovic Sonja K. McClelland HaiQuynh Jamison Jonathon D. Wright Age 68 59 52 45 41 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 March 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. 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 28 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 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. international public accounting firms, 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 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. Holders There were 119 holders of record of our common stock as of December 14, 2023. Dividend Policy We began declaring cash dividends on our common stock in the third quarter of fiscal year 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 4 of Notes to Consolidated Financial Statements. Other Information During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. 29 The disclosure under the caption “Equity Compensation Plan Information at 2023 Fiscal Year End” in our 2024 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. RESERVED Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide an understanding of our financial condition and other related matters, including our liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes thereto included elsewhere in this report. The following MD&A generally focuses on the operating results and year-over-year comparisons between fiscal years 2023 and 2022. Discussion of fiscal year 2021 results and year-over-year comparisons between fiscal years 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, filed with the SEC on January 6, 2023. 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, 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, and notes thereto, that appear elsewhere in this report. The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During fiscal year 2023, approximately 53% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance VMX series machines. Additionally, approximately 8% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures. 30 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 in Italy, LCM, we produce high value machine tool components and accessories. We principally sell our products through approximately 180 independent agents and distributors throughout the Americas, Europe, and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, the Czech Republic, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured and assembled to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct-drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM. Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling, and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. dollars for reporting in our financial statements, are higher than would be the case when the U.S. dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. dollars at exchange rates prevailing during the period covered by those financial statements. Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of derivative instruments – principally foreign currency forward exchange contracts. Results of Operations The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Operations expressed as a percentage of our worldwide sales and service fees and the year-to-year percentage changes in the dollar amounts of those items. 31  Percentage of Revenues Year-to-Year % Change 2023 2022 2021 Increase/Decrease ’23 vs. ’22 ’22 vs. ’21 Sales and service fees Gross profit Selling, general and administrative expenses Operating income Net income 100 % 25 % 22 % 3 % 2 % 100 % 100 % 24 % 20 % 4 % 3 % 26 % 21 % 5 % 3 % (9) % (13) % (4) % (48) % (47) % 7 % 15 % 12 % 24 % 22 % Fiscal Year 2023 Compared to Fiscal Year 2022 Sales and Service Fees. Sales and service fees for fiscal year 2023 were $227.8 million, a decrease of $23.0 million, or 9%, compared to fiscal year 2022, and included an unfavorable currency impact of $2.4 million, or 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. Net Sales and Service Fees by Geographic Region The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2023 and 2022 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, Increase/Decrease 2023 $ 88,329 120,525 18,953 $ 227,807 2022 39 % $ 95,964 53 % 126,050 28,800 100 % $ 250,814 8 % Amount % 38 % $ (7,635) (5,525) 50 % (9,847) 12 % 100 % $ (23,007) (8) % (4) % (34) % (9) % Sales in the Americas for fiscal year 2023 decreased by 8%, compared to fiscal 2022, primarily due to decreased shipments of Hurco and Milltronics machines, particularly the higher-performance VMX machines. European sales for fiscal year 2023 decreased by 4%, compared to fiscal year 2022, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year- over-year decrease in European sales was primarily attributable to a decreased volume of shipments of Hurco machines in Germany, France, and Italy, partially offset by increased sales of electro-mechanical components and accessories manufactured by LCM and increased shipments of Hurco machines in the United Kingdom and Milltronics machines throughout Europe where our customers are located. Asian Pacific sales for fiscal year 2023 decreased by 34%, compared to fiscal 2022, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year- over-year decrease in Asian Pacific sales for the fiscal year primarily resulted from a reduced volume of shipments of Takumi machines in China and Hurco machines in Southeast Asia, China, and India, partially offset by an increased volume of shipments of Takumi machines in India. Net Sales and Service Fees by Product Category The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2023 and 2022 (dollars in thousands): 32 Fiscal Year Ended October 31, Increase/Decrease 2023 $ 188,335 2022 83 % $ 211,804 Amount % 85 % $ (23,469) (11) % Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees 6 % 1 % 1 % (9) % † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. 2,634 28,219 8,157 100 % $ 250,814 171 220 71 100 % $ (23,007) 2,805 28,439 8,228 $ 227,807 1 % 12 % 4 % 1 % 11 % 3 % Total Sales of computerized machine tools for fiscal year 2023 decreased by 11%, compared to fiscal year 2022, primarily due to a decreased volume of shipments of Hurco machines in all regions where our customers are located, except the United Kingdom; Milltronics machines in North America; and Takumi machines in China. Sales of computer control systems and software for fiscal 2023 increased by 6%, compared to fiscal 2022, due to increased sales of software for Hurco machines in North America. Sales of service parts for fiscal year 2023 increased by 1%, compared to fiscal year 2022, due mainly to increased volume of sales of Hurco and ProCobots parts in Europe and North America, mostly offset by a reduction in volume of sales of parts in North America. Service fees increased by 1% for fiscal year 2023, compared to fiscal year 2022, primarily due to increased service of Hurco machines in the United Kingdom, France and Italy, mostly offset by a reduction in service of Hurco machines in North America and Germany. During fiscal year 2023, sales for all product categories included an unfavorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. Orders and Backlog. Orders for fiscal year 2023 were $209.7 million, a decrease of $31.3 million, or 13%, compared to fiscal 2022, and included an unfavorable currency impact of $2.0 million, or less than 1%, when translating foreign orders to U.S. dollars. The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2023 and 2022 (dollars in thousands): Americas Europe Asia Pacific Total Fiscal Year Ended October 31, Increase/Decrease 2023 $ 80,412 114,961 14,303 $ 209,676 2022 38 % $ 92,268 55 % 122,556 26,107 100 % $ 240,931 7 % Amount % 38 % $ (11,856) 51 % (7,595) 11 % (11,804) 100 % $ (31,255) (13) % (6) % (45) % (13) % Orders in the Americas for fiscal year 2023 decreased by 13%, compared to fiscal year 2022, mainly due to decreased customer orders for Hurco and Milltronics, particularly higher-performance VMX machines, partially offset by increased demand for Takumi machines. European orders for fiscal 2023 decreased by 6%, compared to fiscal 2022, and included an unfavorable currency impact of 1%, when translating foreign orders to U.S. dollars. The year-over-year decrease in European demand was primarily attributable to decreased demand for Hurco machines in Germany and France, partially offset by increased customer demand for Hurco machines in the United Kingdom and Italy, and electro-mechanical components and accessories manufactured by LCM. 33 Asian Pacific orders for fiscal year 2023 decreased by 45%, compared to fiscal 2022, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. dollars. The decrease in Asian Pacific orders year-over-year was driven primarily by decreased customer demand for Hurco and Takumi machines in China and Hurco machines in Southeast Asia and India, partially offset by increased demand for Takumi machines in India. Backlog at October 31, 2023 decreased to $28.3 million from $44.8 million at October 31, 2022, primarily due to decreased customer demand during fiscal year 2023 for Hurco, Milltronics, and Takumi machines in the U.S., Germany, France, China and Southeast Asia. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2023 are expected to be fulfilled in fiscal year 2024. Gross Profit. Gross profit for fiscal year 2023 was $56.2 million, or 25% of sales, compared to $64.5 million, or 26% of sales, for fiscal 2022. The year-over-year decreases in gross profit and gross profit as a percentage of sales were primarily due to the lower volume of sales of our higher-performance VMX machines and the negative impact of fixed costs on lower sales and production volumes. Operating Expenses. Selling, general, and administrative expenses for fiscal year 2023 were $49.6 million, or 22% of sales, compared to $51.7 million, or 21% of sales, in fiscal 2022, and included a favorable currency impact of $0.4 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year decrease in selling, general and administrative expenses in absolute dollar terms was primarily attributable to lower costs related to tradeshow expenses, sales commissions, and employee support costs for our global operations. Operating Income. Operating income for fiscal year 2023 was $6.6 million, or 3% of sales, compared to $12.7 million, or 5% of sales, for fiscal year 2022. The year-over-year decrease in operating income was primarily due to decreased volume of machine shipments. Other Expense, Net. Other expense, net for fiscal year 2023 decreased by $1.3 million from fiscal year 2022, due mainly to a decrease in foreign currency exchange losses and increased gains on sale of property and equipment. Provision for Income Taxes. We recorded income tax expense of $2.4 million for fiscal year 2023, compared to $3.7 million for fiscal year 2022. Our effective tax rate for fiscal year 2023 was 35%, compared to 31% for fiscal year 2022. The year-over-year increase in the effective tax rate in the full year was primarily due to changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, discrete items related to stock compensation and the impact of valuation allowances for our China operations combined with lower levels of consolidated income before taxes. Net Income. Net income for fiscal year 2023 was $4.4 million, or $0.66 per diluted share, compared to $8.2 million, or $1.23 per diluted share, for fiscal year 2022. The year-over-year decrease in net income was primarily due to decreased volume of machine shipments. Liquidity and Capital Resources At October 31, 2023, we had cash and cash equivalents of $41.8 million, compared to $63.9 million at October 31, 2022. The decrease in cash and cash equivalents was primarily a result of net cash used for payments of outstanding accounts payable, stock repurchases and dividend payments. Approximately 26% of our $41.8 34 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 at October 31, 2023 was $193.3 million, compared to $194.7 million at October 31, 2022. The decrease in working capital was primarily driven by a decrease in cash and cash equivalents, mostly offset by decreases in accounts payable and customer deposits and increases in inventory and accounts receivable. Inventories, net were $158.0 million at October 31, 2023, compared to $156.2 million at October 31, 2022, and included an unfavorable currency impact of $4.9 million, or 3%, when translating foreign inventories to U.S. dollars for financial reporting purposes. Inventory turns at October 31, 2023 were 1.1 compared to 1.2 at October 31, 2022. Capital expenditures were $2.6 million in fiscal year 2023, compared to $2.2 million in fiscal year 2022. Capital expenditures for fiscal year 2023 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions. We funded these expenditures with cash flows from operations. On January 6, 2023, we announced a share repurchase program in an aggregate amount of up to $25.0 million. Repurchases under the program may be made in the open market or through privately negotiated transactions from time to time through November 10, 2024, 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. During fiscal year 2023, approximately 67,513 shares were repurchased at an aggregate value of approximately $1.8 million under that program, resulting in $23.2 million remaining available under the program as of October 31, 2023. Our prior $7.0 million share repurchase program also remained in effect until its scheduled expiration on March 10, 2023. During fiscal year 2023, approximately 98,776 shares were repurchased at an aggregate value of approximately $2.8 million under that program. Aggregate repurchases under all programs during fiscal year 2023 were approximately $4.6 million. In addition, during fiscal year 2023, we paid cash dividends to our shareholders equal to $4.1 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, December 17, 2021, January 4, 2023, and December 19, 2023 (as amended, the “2018 Credit Agreement”). The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2025. 35 Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%. The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $25.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. In February and December 2023, NHML and HML, respectively, renewed the above-referenced credit facilities on substantially similar terms and identical maximum aggregate limits. As of October 31, 2023, our existing credit facilities consisted of a €1.5 million revolving credit facility in Germany, the 150 million New Taiwan dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. We had no debt or borrowings under any of our credit facilities at October 31, 2023. At October 31, 2023, we had an aggregate of approximately $50.6 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. We remain committed to a balanced capital allocation strategy that prioritizes a strong balance sheet and liquidity position while recognizing the importance of accretive growth and returning value to shareholders through dividends and stock repurchases, where 36 appropriate. As such, we continue to actively evaluate acquisition opportunities that support our long-term strategic plan. Contractual Obligations and Commitments The following is a table of contractual obligations and commitments as of October 31, 2023 (in thousands): Payments Due by Period Operating leases Accrued and deferred taxes and credits Total $ $ Less than 1 Year Total 12,220 $ 5,779 17,999 $ 1-3 Years 3-5 Years 2,807 $ — 2,807 $ 4,263 $ 1,027 5,290 $ 4,027 $ 349 4,376 $ More than 5 Years 1,123 4,403 5,526 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 $0.1 million, excluding any interest and penalties, have been excluded from the table above because we are unable to determine a reasonably reliable estimate of the timing of future payment. We expect capital spending in fiscal year 2024 to be approximately $3.8 million, which includes investments for software development, leasehold improvement, factory equipment, and production facilities, as well as general software and equipment for selling facilities. We expect to fund these commitments with cash on hand and cash generated from operations. Off Balance Sheet Arrangements From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460). As of October 31, 2023, we had nine outstanding third party payment guarantees totaling approximately $1.0 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. Critical Accounting Estimates Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. The preparation of financial statements in conformity with those accounting principles requires us to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Our accounting policies are frequently evaluated as our judgment and estimates are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. 37 Our judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates and such differences could be material to our financial condition and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results. Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. We have no goodwill as of October 31, 2023. Other indefinite-lived intangible assets primarily consist of trademarks and trade names and are not material to our consolidated financial statements. Finite-lived intangible assets are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. We are not aware of any events or changes in circumstances that indicate the carrying value of its finite-lived assets may not be recoverable. 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. We are not aware of any events or changes in circumstances that indicate the carrying value of our long-lived assets may not be recoverable. Inventories and Related Reserves – 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. We have not experienced substantive write-offs due to obsolescence. Income Taxes – We account for income taxes and the related accounts under the asset and liability method. Deferred tax assets and liabilities are measured using enacted income tax rates in each jurisdiction in effect for the year in which the temporary differences are expected to be recovered or settled. These deferred tax assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We operate in multiple jurisdictions through wholly- owned subsidiaries, and our global structure is complex. 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. Accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, 38 change in U.S. or foreign tax laws, and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income. 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, 2023, we had no borrowings outstanding under any of our credit facilities. Foreign Currency Exchange Risk In fiscal year 2023, we derived approximately 61% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies. Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy, and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency 39 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, 2023, 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 Weighted Avg. Forward Currency Rate Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2023 Maturity Dates 12,400 4,100 1.0850 1.2349 13,454 5,063 13,196 Nov 2023 - Oct 2024 4,981 Nov 2023 - Oct 2024 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar *New Taiwan Dollars per U.S. dollar 660,000 30.3066 * 21,777 20,655 Nov 2023 - Oct 2024 Forward contracts for the sale or purchase of foreign currencies as of October 31, 2023, 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 Amount Weighted Avg. Contract Amount at Forward Rates in U.S. Dollars in Foreign Forward Contract October 31, Currency Rate Date 2023 Maturity Dates 16,024 738 1.0783 1.2125 17,278 895 16,975 Nov 2023 - Feb 2024 895 Nov 2023 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar * New Taiwan Dollars per U.S. dollar 1,139,418 31.4244 * 36,259 35,685 Nov 2023 - Mar 2024 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 2022. We designated this forward contract as a hedge of our net investment in Euro denominated 40 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 2023 and we entered into a new forward contract for the same notional amount that is set to mature in November 2024. As of October 31, 2023, we had $1.3 million of realized gain and $0.1 million of unrealized loss, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. Forward contracts designated as net investment hedges under this guidance as of October 31, 2023, were as follows (in thousands, except weighted average forward rates): Forward Contracts Sale Contracts: Euro Notional Amount Weighted Avg. Contract Amount at Forward Rates in U.S. Dollars Contract October 31, in Foreign Currency Forward Rate Date 2023 Maturity Date 3,000 1.0275 3,083 3,169 Nov 2023 41 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, 2023, 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, 2023, 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, 2023. 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 5, 2024 42 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, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2023, 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, 2023, 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 43 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 6 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 $11.8 million as of October 31, 2023, with an offsetting valuation allowance of $1.8 million. The deferred tax assets are further reduced by $5.3 million deferred tax liabilities in tax jurisdictions to record net deferred tax assets of $4.7 million and net deferred tax liabilities of $83 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 44 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 5, 2024 45 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Sales and service fees $ 2023 Year Ended October 31, 2022 (In thousands, except per share amounts) 227,807 250,814 $ $ 2021 235,195 Cost of sales and service 171,639 186,336 178,946 Gross profit 56,168 64,478 Selling, general and administrative expenses 49,552 51,731 56,249 46,001 Operating income Interest expense Interest income Investment income Income from equity investments Other expense, net 6,616 12,747 10,248 282 369 61 494 504 27 79 174 733 1,828 24 34 173 203 513 10,121 3,357 Income before income taxes 6,754 11,878 Provision for income taxes 2,365 3,652 Net income Income per common share Basic Diluted $ $ $ Weighted average common shares outstanding 4,389 $ 8,226 $ 6,764 0.67 0.66 $ $ 1.24 1.23 $ $ 1.01 1.01 Basic Diluted 6,499 6,528 6,580 6,632 6,595 6,608 Dividends paid per share $ 0.63 $ 0.59 $ 0.55 The accompanying notes are an integral part of the consolidated financial statements. 46 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 2023 Year Ended October 31, 2022 (In thousands) 2021 Net income $ 4,389 $ 8,226 $ 6,764 Other comprehensive income (loss): Translation gain (loss) of foreign currency financial statements 3,274 (19,591) 2,405 (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(146), $59, and $(204), respectively (488) 191 (679) Loss on derivative instruments, net of tax of $(439), $(119), and $(143), respectively (1,465) (384) (477) Total other comprehensive income (loss) 1,321 (19,784) 1,249 Comprehensive income (loss) $ 5,710 $ (11,558) $ 8,013 The accompanying notes are an integral part of the consolidated financial statements. 47 HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories, net Derivative assets Prepaid and other assets 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 party 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: As of October 31, 2022 2023 (In thousands, except share and per share data) $ $ 41,784 39,965 157,952 740 7,789 248,230 1,046 7,387 26,779 4,473 39,685 (30,826) 8,859 7,030 994 10,971 4,749 9,756 33,500 $ 290,589 $ $ $ 28,544 1,117 2,827 1,821 3,712 9,853 1,713 4,092 1,294 54,973 83 1,293 7,606 4,403 13,385 63,922 38,444 156,207 2,515 6,981 268,069 868 7,352 26,532 4,351 39,103 (30,620) 8,483 7,302 1,246 8,460 3,442 9,235 29,685 306,237 38,783 1,924 4,839 3,632 3,973 10,751 2,611 5,397 1,426 73,336 67 1,281 4,814 4,095 10,257 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; 6,553,673 and 6,645,352 shares issued and 6,462,138 and 6,566,994 shares outstanding, as of October 31, 2023 and October 31, 2022, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity — — 646 61,665 180,124 (20,204) 222,231 290,589 $ 657 63,635 179,877 (21,525) 222,644 306,237 $ The accompanying notes are an integral part of the consolidated financial statements. 48 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS 2023 Year Ended October 31, 2022 (In thousands) 2021 $ 4,389 $ 8,226 $ 6,764 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used for) operating activities: Provision for doubtful accounts Deferred income taxes Equity in (income) loss of affiliates Foreign currency (gain) loss Unrealized (gain) loss on derivatives Depreciation and amortization Stock–based compensation Change in assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable (Increase) decrease in inventories (Increase) decrease in prepaid and other current assets 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 deferred tax assets and liabilities 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 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 Excise tax payable related to stock repurchases Net cash provided by (used for) financing activities Effect of exchange rate changes on cash and cash equivalents 32 21 (494) (2,551) (754) 4,093 2,699 (84) (648) (805) (11,767) (2,179) (1,978) (901) (985) (1,277) 885 (517) (12,821) 407 (1,286) (1,291) 273 (1,897) 270 (4,142) (313) (4,609) (28) (8,822) 1,402 (159) (631) (733) 1,393 727 3,918 2,686 280 (24,440) 7,022 (2,278) (3,056) 1,018 362 1,698 (25) 264 (238) (3,966) 101 (1,107) (1,086) — (2,092) 117 (3,923) (207) (2,890) — (6,903) (7,180) 244 (112) (203) 31 (316) 4,193 2,779 (15,188) 2,165 690 20,617 3,111 2,142 3,458 900 (325) (135) 1,360 32,175 3 (1,260) (1,109) (979) (3,345) 350 (3,674) (197) — — (3,521) 895 26,204 57,859 Net increase (decrease) in cash and cash equivalents (22,138) (20,141) Cash and cash equivalents at beginning of period 63,922 84,063 Cash and cash equivalents at end of period Supplemental disclosures: Cash paid for (provided by): Interest Income taxes, net $ $ $ 41,784 $ 63,922 $ 84,063 — 4,336 $ $ — (1,628) $ $ — 1,572 The accompanying notes are an integral part of the consolidated financial statements. 49 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands, except shares outstanding) Balances, October 31, 2020 Net income Other comprehensive income Exercise of common stock options Stock–based compensation expense, net of taxes withheld for vested restricted shares Dividends paid Balances, October 31, 2021 Net income Other comprehensive income (loss) Exercise of common stock options Stock–based compensation expense, net of taxes withheld for vested restricted shares Stock repurchases Dividends paid Balances, October 31, 2022 Net income Other comprehensive income Stock-based compensation expense, net of taxes withheld for vested restricted shares Exercise of common stock options Stock repurchases, net of excise tax payable Dividends paid Balances, October 31, 2023 Common Stock Shares Common Additional Paid–In Stock Outstanding Amount Capital Retained Earnings 6,565,163 $ 657 $ 60,997 $ 172,484 $ Accumulated Other Comprehensive Loss (2,990) $ 231,148 Total — — 16,311 36,243 — — — 2 3 — — — 348 6,764 — — — 1,249 — 6,764 1,249 350 6,617,717 $ 662 $ 63,924 $ 175,574 $ 2,579 — — (3,674) — — 2,582 (3,674) (1,741) $ 238,419 — — 5,437 — — 1 — — 116 8,226 — — — (19,784) — 8,226 (19,784) 117 33,761 (89,921) — 3 (9) — 2,476 (2,881) — (3,923) 6,566,994 $ 657 $ 63,635 $ 179,877 $ 2,479 (2,890) (3,923) (21,525) $ 222,644 — — — — — — — 4,389 — — 1,321 4,389 1,321 49,874 11,559 (166,289) — 5 1 (17) — 2,381 269 (4,620) — — (4,142) 6,462,138 $ 646 $ 61,665 $ 180,124 $ — 2,386 270 (4,637) (4,142) (20,204) $ 222,231 — The accompanying notes are an integral part of the consolidated financial statements. 50 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly–owned subsidiaries (“we”, “us”, “our”, “Hurco” or the “Company”). We have a 35% ownership interest in a Taiwan affiliate that is accounted for using the equity method. Our investment in that affiliate was approximately $5.1 million and $5.0 million as of October 31, 2023 and 2022, 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, 2023, were a net loss of $20.2 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net. Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in shareholders’ equity and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. 51 For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts. Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter– company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro, and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. dollar value of the inter–company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other expense, net. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. We had forward contracts outstanding as of October 31, 2023, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2023 through October 2024. The contract amount at forward rates in U.S. dollars at October 31, 2023 for Euros and Pounds Sterling was $13.2 million and $5.0 million, respectively. The contract amount at forward rates in U.S. dollars for New Taiwan Dollars was $20.1 million at October 31, 2023. At October 31, 2023, we had approximately $1.5 million of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $0.6 million represented unrealized loss, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred losses will be recorded as an adjustment to Cost of sales and service in periods through October 2024, 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 2022. 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 2023, and we entered into a new forward contract for the same notional amount that is set to mature in November 2024. As of October 31, 2023, we had a realized gain of $1.3 million and an unrealized loss of $0.1 million, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. 52 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, 2023, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2023 through March 2024. The contract amounts at forward rates in U.S. dollars at October 31, 2023 for Euros and Pounds Sterling totaled $17.9 million. The contract amount at forward rates in U.S. dollars for New Taiwan Dollars was $35.7 million at October 31, 2023. 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, 2023 and October 31, 2022, all derivative instruments were recorded at fair value on our Consolidated Balance Sheets as follows (in thousands): Derivatives Designated as Hedging Instruments: 2023 Balance Sheet Location Fair Value 2022 Balance Sheet Location Fair Value Foreign exchange forward contracts Derivative assets $ 2,273 Foreign exchange forward contracts Derivative liabilities $ 1,232 Derivative liabilities $ 2,891 $ 363 Derivative assets Not Designated as Hedging Instruments: $ 242 Foreign exchange forward contracts Derivative assets Foreign exchange forward contracts Derivative liabilities $ 589 Derivative liabilities $ 741 $ 377 Derivative assets Effect of Derivative Instruments on the Consolidated Balance Sheets, Consolidated Statements of Changes in Shareholders’ Equity, and Consolidated Statements of Operations Derivative instruments had the following effects on our Consolidated Balance Sheets, Consolidated Statements of Changes in Shareholders’ Equity, and Consolidated Statements of Operations, net of tax, during the fiscal years ended October 31, 2023, 2022, and 2021 (in thousands): 53 Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) Location of Gain (Loss) Reclassified From Other Other Comprehensive Amount of Gain (Loss) Reclassified from Comprehensive Income (Loss) Derivatives Designated as Hedging Instruments: (Effective Portion) Foreign exchange forward contracts – Intercompany sales/purchases Foreign exchange forward contract – Net investment 2023 2022 2021 Income (Loss) 2023 2022 2021 $ (1,465) $ (384) $ (477) Cost of sales and service $ 488 $ (191) $ 679 $ (99) $ 401 $ 43 We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2023, 2022, and 2021. We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2023, 2022, and 2021 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 2023 Amount of Gain (Loss) Recognized in Operations 2021 2022 Other expense, net $ (3,112) $ 2,374 $ (313) The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2023 and 2022 (in thousands): Foreign Currency Cash Flow Translation Hedges Total $ (1,668) $ (73) $ Balance, October 31, 2021 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2022 Other comprehensive income (loss) before reclassifications Reclassifications Balance, October 31, 2023 $ $ (19,591) — (21,259) $ 3,274 — (17,985) $ (1,741) (384) (19,975) 191 191 (266) $ (21,525) 1,809 (488) (2,219) $ (20,204) (1,465) (488) 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. 54 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 $2.3 million for fiscal year 2023, $2.3 million for fiscal year 2022, and $2.5 million for fiscal year 2021. Revenue Recognition. We design, manufacture, and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories, and replacement parts for our products, as well as customer service, training, and applications support. We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand–alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s facility by a distributor, independent contractor, or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract. For our five-axis machines and automation systems 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 55 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 11 of these Notes to Consolidated Financial Statements for further discussion of warranties. Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses. Research and development expenses totaled $4.2 million, $3.4 million, and $3.2 million, in fiscal years 2023, 2022, and 2021, 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 $1.3 million in fiscal year 2023, $1.1 million in fiscal year 2022, and $1.1 million in fiscal year 2021. Amortization expense for software development costs was $1.6 million, $1.3 million, and $1.4 million for the fiscal years ended October 31, 2023, 2022, and 2021, respectively. Accumulated amortization at October 31, 2023 and 2022 was $25.3 million and $23.7 million, respectively. Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands): Fiscal Year 2024 2025 2026 2027 2028 and thereafter $ Amortization Expense 1,738 1,456 1,186 1,022 1,628 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 56 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 no goodwill as of October 31, 2023. 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, 2023, 2022, or 2021. As of October 31, 2023, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Average Amortization Period indefinite Assets $ Gross Intangible Accumulated Amortization Net Intangible Assets 177 $ 742 369 647 580 2,973 392 5,880 $ — $ (324) (270) (514) (493) (2,909) (376) (4,886) $ 177 418 99 133 87 64 16 994 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Noncompete Patents Other Total 14 years 15 years 13 years 5 years 6 years 8 years $ As of October 31, 2022, 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 Accumulated Net Intangible Amortization Assets $ $ 177 $ 728 367 605 580 2,972 387 5,816 $ — (261) (243) (434) (377) (2,884) (371) (4,570) $ $ 177 467 124 171 203 88 16 1,246 Intangible asset amortization expense was $271,000, $272,000, and $273,000 for fiscal years 2023, 2022, and 2021, respectively. Annual intangible asset amortization expense for the next five years is estimated to be $235,000 for fiscal year 2024, $141,000 for fiscal year 2025, $109,000 for fiscal year 2026, $45,000 for fiscal year 2027, and $45,000 for fiscal year 2028. 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 57 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. Based on that review, there was no impairment indications for our long- lived assets for the period ended October 31, 2023. Therefore, there were no impairments recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2023, 2022, or 2021. 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.” The following table presents a reconciliation of our basic and diluted earnings per share computation: (in thousands, except per share amounts) Basic Net income Undistributed earnings allocated to participating shares Net income applicable to common shareholders $ $ (61) 4,328 $ 4,389 $ 2023 Diluted Basic 4,389 $ Fiscal Year Ended October 31, 2022 Diluted Basic 8,226 $ 8,226 $ 2021 Diluted 6,764 $ 6,764 (61) (97) (97) (76) (76) 4,328 $ 8,129 $ 8,129 $ 6,688 $ 6,688 Weighted average shares outstanding Stock options and contingently issuable securities Income per share $ 0.67 $ 0.66 $ 1.24 $ 1.23 $ 1.01 $ — 6,499 29 6,528 — 6,580 52 6,632 — 6,595 13 6,608 1.01 6,499 6,499 6,580 6,580 6,595 6,595 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 58 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, inventory reserves, product warranties, income taxes and deferred tax valuation allowances, capitalized software development costs, derivative instruments, stock compensation, 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. Industries 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 energy, aerospace, operations. automotive/transportation, electronics, and computer industries. Our products are sold principally through approximately 180 independent agents and distributors throughout the Americas, Europe and Asia. We also have our own direct sales and service organizations in China, the Czech Republic, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain areas of the United States. defense, medical equipment, include: served 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 years 2021 through 2023, our operating results were adversely affected by the international business disruptions due to the economic slowdown in Europe, political friction in the U.S. and many other regions of the world, geopolitical tensions, conflicts, wars in Europe and Asia, competitive labor markets, vendor delays, transportation issues, unusually high inflation, volatility of foreign currencies, and the COVID-19 pandemic. Because of the potential for extended 59 vulnerability due to these and other factors, we have closely evaluated the estimates we have made in preparing the financial statements as of October 31, 2023, 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. 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, such as conflicts or wars; trade wars, blockages, embargoes, or tariffs; or a natural disaster, such as 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, 2023 and 2022 are summarized below (in thousands): Purchased parts and sub–assemblies Work–in–process Finished goods October 31, 2023 October 31, 2022 $ $ 37,161 $ 16,217 104,574 157,952 $ 43,363 16,539 96,305 156,207 Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe, and Asia was $9.6 million and $10.9 million as of October 31, 2023 and 2022, respectively. 4. 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, December 17, 2021, January 4, 2023, and December 19, 2023 (as amended, the “2018 Credit Agreement”). The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at 60 any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2025. Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%. The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $25.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes. In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. In February and December 2023, NHML and HML, respectively, renewed the above- referenced credit facilities on substantially similar terms and identical maximum aggregate limits. As a result, as of October 31, 2023, our existing credit facilities consisted of a €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility, and the $40.0 million revolving credit facility under the 2018 Credit Agreement. As of October 31, 2023, there were no borrowings under any of our credit facilities and there was $50.6 million of available borrowing capacity thereunder. 5. 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. 61 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 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, 2023 and 2022 (in thousands): Level 1 Deferred compensation Level 2 Derivatives Recurring Fair Value Measurements Assets Liabilities October 31, October 31, October 31, October 31, 2023 2022 2023 2022 $ 2,217 $ 1,996 $ — $ — $ 740 $ 2,515 $ 1,821 $ 3,632 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 that 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. The U.S. dollar equivalent notional amount of these contracts was $97.8 million and $102.8 million at October 31, 2023 and 2022, 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 to be material risks. 6. 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. The Inflation Reduction Act of 2022 (the “Inflation Reduction Act” or “IRA”) was signed into law on August 16, 2022. The IRA provides investment in clean energy, promotes reductions in carbon emissions, and extends select Affordable Care Act premium reductions. The IRA is paid for through the implementation of a 15 percent corporate minimum tax on corporations with over $1 billion of financial statement income, budget increases for the Internal Revenue Service, an excise tax on stock repurchases, and changes to Medicare rules. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes. 62 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. We filed the net operating loss carryback claims during the fourth quarter of fiscal year 2021 and received $5.4 million in tax refunds during fiscal year 2022. 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 year 2021. We did not qualify for the employee retention credit in fiscal years 2022 or 2023. 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 2023 Year Ended October 31, 2022 2021 $ $ (431) 2,775 2,344 104 (83) 21 2,365 $ $ 1,092 3,191 4,283 (933) 302 (631) 3,652 $ $ 1,763 1,706 3,469 66 (178) (112) 3,357 The components of income (loss) before taxes are (in thousands): Income (loss) before income taxes: Domestic Foreign Year Ended October 31, 2022 2021 2023 $ $ (3,259) $ 10,013 6,754 $ (232) $ 12,110 11,878 $ 4,340 5,781 10,121 A comparison of income tax expense at the U.S. statutory rate to our effective tax rate is as follows: Year Ended October 31, 2022 2021 2023 U.S. statutory rate Effect of tax rate of international jurisdictions different than U.S. statutory rates Valuation allowance State taxes Tax credits U.S. benefit of foreign intangible income Impact of CARES act Stock-based compensation Other Effective tax rate 63 21 % 21 % 21 % 6 % 2 % (1) % — % — % — % 6 % 1 % 35 % 4 % 3 % 1 % 1 % (3) % — % 4 % — % 31 % 4 % — % 1 % — % (1) % 5 % 4 % (1) % 33 % 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, 2023, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations. Accordingly, we did not accrue 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, 2023, we had deferred tax assets established for accumulated net operating loss carryforwards of $2.2 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for tax credits of $0.7 million. We established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of each of October 31, 2023, and 2022, the balance of this valuation allowance was $1.8 million. Significant components of our deferred tax assets and liabilities at October 31, 2023 and 2022 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 October 31, 2023 2022 1,580 $ 241 2,222 683 — 344 2,249 712 2,818 798 131 11,778 (1,810) 9,968 1,329 270 2,495 98 117 318 1,449 703 2,023 831 171 9,804 (1,754) 8,050 Deferred Tax Liabilities: Unrealized exchange loss Property and equipment and capitalized software development costs Operating lease - right of use assets Other Net deferred tax assets (159) (1,915) (2,731) (497) 4,666 $ — (2,394) (1,960) (321) 3,375 $ As of October 31, 2023, we had net operating loss carryforwards for international and U.S. income tax purposes of $14.3 million, of which $4.4 million will expire within 5 years beginning in fiscal 2024 and $7.6 million are U.S. and state net operating losses which will expire between 5 and 20 years. The remaining 64 $2.3 million in net operating losses will be carried forward indefinitely based on current international tax laws. We also had tax credits of $0.7 million which will expire between years 2024 and 2033. 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 $ 138 $ Additions based on tax positions related to the current year Additions (reductions) related to prior year tax positions Reductions due to statute expiration — — — Balance, end of year $ 138 $ 167 $ 21 — (50) 138 $ 168 74 — (75) 167 2023 2022 2021 The entire balance of the unrecognized tax benefits and related interest on October 31, 2023, 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, 2023, the amount of interest accrued, reported in other liabilities, was approximately $44,000 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 2024 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 income tax audit for fiscal years 2021 through 2022. A summary of open tax years by major jurisdiction is presented below: United States federal United Kingdom Taiwan Germany¹ Fiscal 2014 through the current period Fiscal 2017 through the current period Fiscal 2018 through the current period Fiscal 2022 through the current period ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. 7. 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 $1.4 million, $1.3 million, and $1.2 million, for the fiscal years ended October 31, 2023, 2022, and 2021, respectively. 8. STOCK–BASED COMPENSATION In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (as amended, 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 initially was 856,048, which included 386,048 shares that remained available 65 for future grants under the 2008 Equity Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan. On March 10, 2022, our shareholders approved the Amended and Restated Hurco Companies, Inc. 2016 Equity Incentive Plan, which, among other items, increased the aggregate number of shares that may be issued under the 2016 Equity Plan by 850,000 shares. 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. We previously granted stock options under the 2008 Equity Plan; none of which remained outstanding as of October 31, 2023. 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 stock options as of October 31, 2023, 2022, and 2021, and the related activity for the year is as follows: Shares Under Option Weighted Average Grant Date Fair Value Balance October 31, 2020 Granted Cancelled Expired Exercised Balance October 31, 2021 Granted Cancelled Expired Exercised Balance October 31, 2022 Granted Cancelled Expired Exercised Balance October 31, 2023 33,307 $ — — — (16,311) $ 16,996 $ — — — (5,437) 11,559 $ — — — (11,559) — $ 22.09 — — — 21.45 22.71 — — — 21.45 23.30 — — — 23.30 — The total intrinsic value of stock options exercised during the twelve months ended October 31, 2023, 2022, and 2021, was approximately $0, $9,000, and $179,000, respectively. As of October 31, 2023, no stock options remained outstanding. On March 9, 2023, the Compensation Committee granted a total of 17,226 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 $27.86 per share. On January 3, 2023, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of time-based restricted shares and performance stock units (“PSUs”) under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested. The awards were approximately 25% time-based vesting and approximately 75% performance- 66 based vesting. The three-year performance period for the PSUs is fiscal year 2023 through fiscal year 2025. On that date, the Compensation Committee granted a total of 29,376 shares of time-based restricted stock to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $26.38 per share. On January 3, 2023, the Compensation Committee also granted a total target number of 47,003 PSUs to our executive officers designated as “PSU – NI”. These PSUs were weighted as approximately 40% of the overall 2023 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average net income over the three-year period of fiscal 2023-2025. Participants will have the ability to earn between 50% of the target number of the PSUs – NI for achieving threshold performance and 200% of the target number of the PSUs – NI for achieving maximum performance. The grant date fair value of the PSUs – NI was based on the closing sales price of our common stock on grant date, which was $26.38 per PSU. On January 3, 2023, the Compensation Committee also granted a total target number of 41,126 PSUs to our executive officers designated as “PSU –FCF”. These PSUs were weighted as approximately 35% of the overall 2023 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average free cash flow over the three-year period of fiscal 2023-2025. Participants will have the ability to earn between 50% of the target number of the PSUs – FCF for achieving threshold performance and 200% of the target number of the PSUs – FCF for achieving maximum performance. The grant date fair value of the PSUs – FCF was based on the closing sales price of our common stock on the grant date, which was $26.38 per PSU. On November 9, 2022, the Compensation Committee granted a total of 12,223 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 $24.53 per share. On March 10, 2022, the Compensation Committee granted a total of 13,914 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 $34.49 per share. On January 4, 2022, 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 year 2022 through fiscal year 2024. On that date, the Compensation Committee granted a total of 23,442 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 $30.39 per share. On January 4, 2022, the Compensation Committee also granted a total target number of 34,203 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2022 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 years 2022-2024, 67 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 $33.33 per PSU and was calculated using the Monte Carlo approach. On January 4, 2022, the Compensation Committee also granted a total target number of 32,821 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2022 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 years 2022-2024. Participants will have the ability to earn between 50% of the target number of the PSUs – ROIC for achieving threshold performance and 200% of the target number of the PSUs – ROIC for achieving maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $30.39 per share. On November 10, 2021, the Compensation Committee granted a total of 8,234 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 $33.99 per 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 vested 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 $37.06 per share. On January 5, 2021, the Compensation Committee determined that no PSUs were earned pursuant to the long-term incentive compensation arrangement for the fiscal years 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 year 2021 through fiscal year 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 years 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. 68 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 $33.33 per PSU and was calculated using the Monte Carlo approach. On January 4, 2022, the Compensation Committee also granted a total target number of 32,821 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2022 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 years 2022-2024. Participants will have the ability to earn between 50% of the target number of the PSUs – ROIC for achieving threshold performance and 200% of the target number of the PSUs – ROIC for achieving maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $30.39 per share. On November 10, 2021, the Compensation Committee granted a total of 8,234 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 $33.99 per 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 vested 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 $37.06 per share. On January 5, 2021, the Compensation Committee determined that no PSUs were earned pursuant to the long-term incentive compensation arrangement for the fiscal years 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 year 2021 through fiscal year 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 years 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 also 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 years 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 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. 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 vested in thirds over three years from the date of grant provided the recipient remained 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. A reconciliation of our restricted stock and PSU activity and related information is as follows: Unvested at October 31, 2022 Shares or units granted Shares or units vested Shares or units cancelled Shares withheld Unvested at October 31, 2023 Number of Shares Weighted Average Grant Date Fair Value 273,103 $ 146,954 (49,874) (39,916) (11,950) 318,317 $ 32.90 26.40 36.23 40.22 37.84 28.27 During fiscal years 2023, 2022, and 2021, we recorded approximately $2.7 million, $2.7 million, and $2.8 million, respectively, of stock–based compensation expense related to grants under the 2016 Equity Plan. As of October 31, 2023, there was an estimated $3.5 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal year 2026. 9. RELATED PARTY TRANSACTIONS As of October 31, 2023, 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 $5.1 million and $5.0 million at October 31, 2023 and 2022, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $10.2 million, $10.5 million, and $8.7 million in fiscal years 2023, 2022, and 2021, respectively. Sales of control component parts to HAL were $92,000, $321,000, and $262,000 for the fiscal years ended October 31, 2023, 2022, and 2021, respectively. Trade payables to HAL were $1.1 million and $1.9 million at October 31, 2023 and 2022, respectively. Trade receivables from HAL were $36,000 and $34,000 at October 31, 2023 and 2022, respectively. 68 69 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 Non-current Liabilities 2023 2022 2021 $ 13,025 $ 2,224 1,025 2,007 $ 13,669 $ 7,115 3,385 2,027 $ $ 14,171 2,397 1,053 2,528 15,018 6,430 4,998 1,619 12,361 2,011 216 802 14,695 6,850 5,339 1,850 10. 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. 11. GUARANTEES AND PRODUCT WARRANTIES From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of October 31, 2023, we had nine outstanding third party payment guarantees totaling approximately $1.0 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): 2023 2022 2021 Balance, beginning of period Provision for warranties during the period Charges to the reserve Impact of foreign currency translation Balance, end of period 70 $ 1,426 $ 1,516 $ 1,200 2,948 (2,643) 11 $ 1,294 $ 1,426 $ 1,516 2,915 (2,877) (128) 2,629 (2,792) 31 The decrease in our warranty reserve from October 31, 2022 to October 31, 2023 was primarily due to a decrease in the number of machines under warranty from decreased sales volume in fiscal year 2023. The decrease in our warranty reserve from October 31, 2021 to October 31, 2022 was primarily due to the impact of foreign currencies when translating foreign reserves to US. dollars for financial reporting purposes. 12. LEASES 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 that, at the commencement date, have a lease term of more than 12 months and are classified as operating leases. We recorded total operating lease expense for the fiscal years ended October 31, 2023, 2022, and 2021 of $5.2 million, $5.1 million, and $5.2 million, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Consolidated Statements of Operations. Operating 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, 2023. The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for fiscal years 2023 and 2022 (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 $ $ 2023 2022 4,770 $ 4,457 7,485 $ 3,577 71 The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of October 31, 2023 (in thousands): 2024 2025 2026 2027 2028 2029 and thereafter Total Less: Imputed interest Present value of operating lease liabilities 4,027 2,600 1,663 1,467 1,340 1,123 12,220 (902) 11,318 $ $ As of October 31, 2023, the weighted-average remaining term of our lease portfolio was approximately 4.4 years, and the weighted-average discount rate was approximately 3.2%. 13. QUARTERLY FINANCIAL INFORMATION (Unaudited) 2023 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Operating income Provision for income taxes Net income Income per common share – basic Income per common share – diluted 2022 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Operating income Provision for income taxes Net income Income per common share – basic Income per common share – diluted First Second Third Fourth Quarter Quarter Quarter Quarter $ 54,682 $ 12,718 53,819 $ 12,583 53,201 $ 13,448 23 % 23 % 25 % 66,105 17,419 26 % 11,484 1,234 610 1,330 0.20 $ 0.20 $ 11,592 991 291 377 0.06 $ 0.06 $ 12,436 1,012 385 260 0.04 $ 0.04 $ 14,040 3,379 1,079 2,422 0.37 0.36 $ $ First Second Third Fourth Quarter Quarter Quarter Quarter $ 66,887 $ 16,907 62,825 $ 15,602 57,640 $ 14,399 25 % 25 % 25 % 63,462 17,570 28 % 11,697 5,210 1,643 3,535 0.53 $ 0.53 $ 12,515 3,087 893 2,029 0.30 $ 0.30 $ 12,647 1,752 488 1,238 0.19 $ 0.18 $ 14,872 2,698 628 1,424 0.22 0.22 $ $ 72 14. SEGMENT INFORMATION We operate in a single segment: industrial automation equipment. We design, manufacture, and sell computerized (i.e., Computer Numeric Control) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service, and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, 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 approximately 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, the Czech Republic, 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 year 2023, no distributor accounted for more than 5% of our sales and service fees. In fiscal year 2023, approximately 61% 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. The following table sets forth the contribution of each of our product groups and services to our total sales and service fees during each of the past three fiscal years (in thousands): Net Sales and Service Fees by Product Category Computerized Machine Tools Computer Control Systems and Software † Service Parts Service Fees 2021 198,602 2,528 26,425 7,640 Total 235,195 † Amounts shown do not include computer control systems and software sold as an integrated component of 2023 188,335 $ 2,805 28,439 8,228 227,807 $ Year ended October 31, 2022 211,804 2,634 28,219 8,157 250,814 $ $ $ $ computerized machine systems. 73 The following table sets forth revenues by geographic area, based on customer location, for each of the past three fiscal years (in thousands): 2023 Year Ended October 31, 2022 2021 United States of America Canada Central & South Americas Total Americas Germany United Kingdom Italy France Other Europe Total Europe China India Other Asia Pacific Total Asia Pacific Other Foreign Grand Total $ 83,747 $ 3,827 1,839 89,413 30,468 29,704 15,554 11,851 28,204 115,781 7,529 6,016 7,858 21,403 1,210 $ 227,807 $ $ 92,050 3,996 1,279 97,325 42,026 26,629 16,499 14,291 24,437 123,882 10,293 6,578 11,975 28,846 83,218 2,636 989 86,843 37,584 30,314 12,718 14,252 21,467 116,335 14,284 3,654 12,393 30,331 761 250,814 $ 1,686 235,195 Long–lived tangible assets, net by geographic area, were (in thousands): United States of America Foreign countries Net assets by geographic area were (in thousands): 2023 As of October 31, 2022 $ $ 7,072 $ 4,034 11,106 $ 5,628 $ 4,941 10,569 $ 2021 6,104 6,640 12,744 Americas Europe Asia Pacific 2023 As of October 31, 2022 $ $ 70,649 $ 81,730 69,852 222,231 $ 87,476 67,797 67,371 222,644 $ $ 2021 84,385 80,769 73,265 238,419 15. NEW ACCOUNTING PRONOUNCEMENTS There have been no significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended October 31, 2023. 74 Item 9. ACCOUNTING AND FINANCIAL DISCLOSURE CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 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, 2023, 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, 2023, 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 Trading Arrangements During the three months ended October 31, 2023, none of our directors or officers (as defined in Rule 16a- 1(f) of the Exchange Act) adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement (as defined in the Securities and Exchange Commission’s rules). Stock Price Performance Graph The graph below matches the cumulative 5-year total return of holders of Hurco Companies, Inc.'s common stock with the cumulative total returns of the Russell 2000 index, the Nasdaq Global Select index and a customized peer group of eighteen companies that includes: Ampco-Pittsburgh Corporation, Broadwind, Inc., Douglas Dynamics, Inc., DMC Global Inc., The Eastern Company, Energy Recovery, Inc., FARO Technologies, Inc., Graham Corporation, Helios Technologies, Inc., Key Tronic Corporation, The L.S. Starrett Company, Omega Flex, Inc., Onto Innovation Inc., Proto Labs, Inc., Transcat, Inc., Twin Disc, Incorporated, UFP Technologies, Inc., and Vishay Precision Group, Inc. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on October 31, 2018 and tracks it through October 31, 2023. 75 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, the NASDAQ Global Select Index, and a Peer Group $250 $200 $150 $100 $50 $0 10/18 10/19 10/20 10/21 10/22 10/23 Hurco Companies, Inc. Russell 2000 NASDAQ Global Select Peer Group *$100 invested on 10/31/18 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Copyright© 2023 Russell Investment Group. All rights reserved. Hurco Companies, Inc. Russell 2000 Nasdaq Global Select Peer Group 10/31/18 10/31/19 10/31/20 10/31/21 10/31/22 10/31/23 100.00 100.00 100.00 100.00 86.52 104.90 116.33 98.02 75.56 104.76 153.60 104.86 83.58 157.98 213.01 142.55 60.95 128.69 147.66 110.36 54.08 117.67 178.95 118.05 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 76 Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2024 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 2024 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 2024 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 2024 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 2024 annual meeting of shareholders. 77 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: Page 43 Report of Independent Registered Public Accounting Firm - RSM US LLP, PCAOB Firm ID No. 00049 Consolidated Statements of Operations – years ended October 31, 2023, 2022 and 2021 46 Consolidated Statements of Comprehensive Income (Loss) – years ended October 31, 2023, 2022 and 2021 47 48 Consolidated Balance Sheets – as of October 31, 2023 and 2022 49 Consolidated Statements of Cash Flows – years ended October 31, 2023, 2022 and 2021 50 Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2023, 2022 and 2021 Notes to Consolidated Financial Statements 51 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, 2023, 2022 and 2021 (Dollars in thousands) Charged to/ (Recovered from) Balance at Beginning Costs and of Period Expenses Accounts Deductions of Period Charged to Other Balance at End $ $ $ 1,486 $ 1,645 $ 1,401 $ 79 $ (74) $ 268 $ — $ — $ — $ 47 (1) $ 1,518 85 (1) $ 1,486 24 (1) $ 1,645 $ $ $ 1,754 $ 1,871 $ 2,164 $ 249 $ 502 $ 49 $ — $ — $ — $ 193 $ 1,810 619 $ 1,754 342 $ 1,871 Description Allowance for doubtful accounts for the year ended: October 31, 2023 October 31, 2022 October 31, 2021 Income tax valuation allowance for the year ended: October 31, 2023 October 31, 2022 October 31, 2021 (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. 78  (b) Exhibits Exhibits Filed. The following exhibits are filed with this report: EXHIBITS INDEX 19.1 21.1 23.1 31.1 31.2 32.1 32.2 97.1 101 104 Hurco Companies, Inc. Insider Trading Policy 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. Hurco Companies, Inc. Compensation Recovery Policy The following information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2023, 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; (vi) Notes to Consolidated Financial Statements; and (vii) information set forth under “Trading Arrangements” in Part II, Item 9B. Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). 79 Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: 3.1 3.2 4.1 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. Amended and Restated By-Laws of the Registrant as amended through 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, as amended and restated as of March 10, 2022, incorporated herein by reference to Appendix A to the Company’s definitive proxy statement for its 2022 annual meeting of shareholders filed on January 24, 2022. 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 S. 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 10.13 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. 80 10.14 10.15 10.16 10.17 10.18 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, 2021. 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, 2021. 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 23, 2021. Fourth Amendment to Credit Agreement, dated as of January 4, 2023, 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 January 6, 2023. Fifth Amendment to Credit Agreement, dated as of December 19, 2023, 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 22, 2023. * 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 5th day of January, 2024. HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer and Chief Financial Officer 81 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature and Title(s) Date /s/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer, President and Director 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 /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 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 January 5, 2024 82 HURCO COMPANIES, INC. INSIDER TRADING POLICY Adopted: June 8, 2023 Exhibit 19.1 Federal and state securities laws prohibit individuals from trading in the securities of a company while they are aware of material information about that company that is not generally known or available to the public. Such trading is often referred to as “insider trading.” The purpose of this Insider Trading Policy (this “Policy”) is to prevent insider trading or allegations of insider trading, and to protect the reputation for integrity and ethical conduct of Hurco Companies, Inc. (the “Company”). Applicability of Policy Material Nonpublic Information means material information (described below) that has either not A. been disclosed to the public generally or has been disclosed so recently that sufficient time has not yet passed to allow the information to become widely available among investors and the financial community. Material Information means information about a company that would be expected to affect the B. investment or voting decision of a reasonable investor, or information that could reasonably be expected to have an effect on the price of that company’s securities. Examples of what might be considered material information are listed later in this Policy. C. Covered Individuals. This Policy applies to: 1. Company Personnel. All directors, officers and employees of the Company and any subsidiary (“Company Personnel”), as well as members of their immediate families and others living in the same household. For purposes of this Policy, the term “SEC Covered Persons” means officers, directors, and other Company Personnel who are subject to the provisions of Section 16 of the Securities and Exchange Act of 1934 (as amended, the “Exchange Act”). 2. Consultants and Advisors. All consultants and advisors to the Company and any subsidiaries whose work for the Company brings them into contact with material nonpublic information. 3. Related Parties. Any other person or entity, including a trust, corporation, partnership or other association, whose transactions in Company securities are directed by any person covered by paragraph C(1) or C(2) or are subject to that person’s influence or control. The individuals and entities described in paragraphs C(1), C(2) and C(3) are referred to as “Covered Persons.” D. Covered Companies. This Policy applies to trading in the securities of: ▪ the Company; and ▪ any other company with which the Company or any subsidiary is or may be doing business, such as customers, suppliers or companies with which a major transaction such as a merger, acquisition or divestiture may be or is being negotiated. 83 Covered Transactions. The securities trading that this Policy covers includes purchases and sales E. of common stock, options to acquire common stock and any other securities the Company may issue from time to time, such as preferred stock, warrants and convertible debentures, and purchases and sales of derivative securities relating to the Company’s stock, whether or not issued by the Company, such as exchange-traded options. Trading covered by this Policy may or may not include transactions under Company-sponsored plans as follows: 1. Stock Option Exercises. The Policy’s trading restrictions do not apply to the purchase of Company stock through the exercise of stock options granted by the Company. However, the trading restrictions do apply to any contemporaneous (such as a sale through a broker as part of a cashless exercise of the option) or subsequent sale of Company stock acquired through an option exercise. 2. Restricted Stock/Unit and Performance Stock/Unit Awards. The Policy’s trading restrictions do not apply to the vesting of restricted stock/units or performance stock/units, or to the exercise of a tax withholding right pursuant to which the person elects to have the Company withhold shares of stock to satisfy tax withholding requirements upon vesting. The trading restrictions do apply to any market sales of shares, such as a sale-to-cover. 3. Certain Gifts. The Policy’s trading restrictions do not apply to a bona fide gift of Company stock so long as either (i) the recipient of the gift is subject to the same trading restrictions under this Policy as are applicable to you, or (ii) you otherwise have no reason to believe that the recipient intends to sell the securities immediately or during a period when you would not be permitted to trade pursuant to the terms of this Policy. 4. Employee Stock Purchase Plan Purchases. The Policy’s trading restrictions do not apply to the purchase of Company stock through any Employee Stock Purchase Plan that the Company may maintain from time to time (but the Policy’s trading restrictions do apply to any election to participate in such plan, any election to change the level of participation in such plan or the sale of any shares acquired under such plan). Statement of Policy Insider trading involves trading at any time when the person making the purchase or sale is aware of material nonpublic information regarding the company whose securities are being traded. If you have a doubt or question about whether you are aware of or in possession of material nonpublic information concerning the Company or another company, you should contact the Company’s General Counsel. A. No Trading on Material Nonpublic Information 1. Company Securities. If you are a Covered Person, you must not purchase or sell any Company securities, or otherwise advise or assist any third party trading Company securities, while you are aware of material nonpublic information regarding the Company. 2. Other Companies’ Securities. If you are a Covered Person and you obtain material nonpublic information about any other publicly-held company as a result of your work on behalf of the Company or any subsidiaries, you must not trade in that company’s securities. No Disclosure to Others Who Might Trade. If you are a Covered Person, you must not B. communicate material nonpublic information to any person who does not need that information for a legitimate business purpose, or recommend to anyone the purchase or sale of securities when you are aware of material nonpublic information about the company involved. This practice, known as “tipping,” also violates the securities laws and can result in the same civil and criminal penalties that apply to insider trading, even though you did not actually trade and did not benefit from another’s trading. 84 Protect Material Nonpublic Information. In order to reduce the possibility that material nonpublic C. information will be inadvertently disclosed: You must treat material nonpublic information as strictly confidential, exercise the utmost caution in preserving the confidentiality of that information, and must not discuss it with any other person who does not need to know it for a legitimate business purpose. You should refrain from discussing material nonpublic information relating to the Company or any public company in public places where such discussions can be overheard. If you become aware of any leak of material nonpublic information, whether inadvertent or otherwise, you must report the leak immediately to the Company’s General Counsel. Specific Material Developments. From time to time, material developments known only to a D. limited number of Company personnel may occur to cause the Company to impose on an appropriate group of Company personnel additional restrictions on trading. You will be notified if you become part of such a group, and you must not disclose to others the fact that you have been so notified and that restrictions on trading have been imposed. Exceptions for Approved 10b5-1 Plans Transactions in Company securities that are executed pursuant to a 10b5-1 plan (or modifications thereto) approved in writing in advance by the General Counsel and that meet the other requirements set forth in this Policy are not subject to prohibition on trading on the basis of material nonpublic information or the restrictions in the attached Addendum B relating to the pre-clearance approval process or window periods. Rule 10b5-1 provides an affirmative defense from insider trading liability under the federal securities laws for trading plans that meet certain requirements. In general, a 10b5-1 plan must be entered into (or modified) in good faith, not as part of a plan or scheme to evade the prohibitions of the insider trading rules and during a time when you are not aware of material nonpublic information. The plan must also provide for a cooling- off period for at least the minimum period required under, and must comply with all other applicable provisions of, Rule 10b5-1(c) of the Exchange Act (as amended “Rule 10b5-1”). Once the plan is adopted, you must not exercise any influence over the securities subject to the plan, including the amount of securities to be traded, the price at which they are traded or the date of the trade. The plan must either specify (including by formula) the amount, pricing and timing of the transactions in advance or delegate discretion on those matters to an independent party. To comply with this Policy, a Rule 10b5-1 plan must not only be pre-approved in writing by the Company’s General Counsel as set forth above, but it must also comply with the requirements set forth in Addendum A attached hereto. Additional Restrictions on Corporate Insiders If you are an SEC Covered Person or any other person designated from time to time by the General Counsel as a Corporate Insider, you are also subject to additional restrictions on trading Company securities as set out in the attached Addendum B. The Company may also, from time to time, impose on all or an appropriate group of Covered Persons additional restrictions on trading Company securities when circumstances warrant. These additional restrictions will be communicated by the General Counsel. 85 Disciplinary Action and Potential Civil and Criminal Penalties Disciplinary Action. Company personnel who fail to comply with this Policy will be subject to A. appropriate disciplinary action, which may include ineligibility to participate in the Company’s equity incentive plans or termination of employment. Civil and Criminal Penalties. The penalties for violating insider trading laws are severe. If you B. trade on (or tip) material nonpublic information, you are subject to civil penalties of up to three times the profit gained or loss avoided, criminal fines of up to $5,000,000 and up to 20 years imprisonment. If the Company fails to take appropriate steps to prevent insider trading, the Company and its directors, officers and other supervisory personnel may be subject to “controlling person” liability and potential civil and criminal penalties. Material Information There are various categories of information that are particularly sensitive and, as a general rule, will presumptively be considered material. Examples of such information include: • Financial results or financial condition • Projections of future earnings or losses • Restatements of financial results or material impairments, write-offs or restructurings • Changes in auditors • Default under a significant financing arrangement, or financial liquidity problems • Business plans or budgets • Significant developments involving business relationships, including execution, modification or termination of significant agreements or orders with customers, suppliers, distributors, manufacturers or other business partners • Product introductions, modifications, defects or recalls, significant pricing changes, or other product announcements of a significant nature • Significant developments in research and development, clinical trials or relating to intellectual property • Public or private securities (equity or debt) offerings • Significant litigation exposure due to actual or threatened litigation • Significant regulatory exposure due to actual or threatened action by state or federal regulators • Significant corporate events, such as a pending or proposed merger, joint venture or tender offer, a significant investment, the acquisition or disposition of a significant business or asset, or a change in control of the company • Major personnel changes, such as changes in senior management or lay-offs • Major events regarding a company’s securities (such as defaults, redemptions, stock splits, repurchase plans, changes in dividends). Amendments; Application to Other Restrictions The Company reserves the right to amend, rescind, or terminate this Policy or any portion of it at any time and to adopt different policies and procedures at any time. Restrictions set forth in this Policy are in addition to any restrictions on trading in the Company’s securities under any other policy, employee hand book, or agreement to which a Covered Person may otherwise be subject. QUESTIONS Questions regarding any of the provisions or procedures of this Insider Trading Policy should be directed to the General Counsel. 86 ADDENDUM A REQUIREMENTS FOR RULE 10B5-1 PLANS This Addendum A is part of the Hurco Companies, Inc. Insider Trading Policy (the “Policy”). Capitalized terms used but not otherwise defined herein have their meanings set forth in the Policy. This Addendum A sets forth certain additional requirements for Rule 10b5-1 plans entered into by Covered Persons on or after the effective date of the Policy (the “Effective Date”) and related to the Company’s securities. To comply with the Policy, such Rule 10b5-1 plans must comply with the following: • The plan must be established through an investment broker approved by the Company’s General Counsel, and the Covered Person must agree to such investment broker’s form of Rule 10b5-1 plan; • A copy of the plan must be submitted to, and approved by, the General Counsel prior to establishing such plan with the Company’s approved investment broker; • The Covered Person must act in good faith with respect to the plan; • The plan may only be established during an open trading window, when the Covered Person is not in possession of any material nonpublic information; • For Covered Persons other than SEC Covered Persons, the time period between the establishment or modification of the plan and the date the initial trade is made following such establishment or modification is not less than 30 days; • For SEC Covered Persons, the time period between the establishment or modification of the plan and the date the initial trade is made following such establishment or modification is not less than the later of (i) 90 days after the adoption or modification of the plan or (ii) two business days following the filing of the Company’s Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted or modified, but in no event shall such period be required to exceed 120 days following adoption or modification of the plan; • For SEC Covered Persons, such person must include in the plan written representations certifying that such SEC Covered Person (i) is not aware of any material nonpublic information about the Company or the Company’s securities; and (ii) is adopting or modifying the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1; • The minimum term of the plan and maximum term of the plan may not be inconsistent with any requirements, restrictions, or limitations imposed by Rule 10b5-1; • The plan may not be modified, terminated, or suspended other than in good faith and during an open trading window and, in the event of any modification or suspension, no trades may be reinstated under the plan (i) for Covered Persons other than SEC Covered Persons, for a period of 3 months after such modification or suspension; and (ii) for SEC Covered Persons until the later of (a) 90 days after the adoption or modification of the plan or (b) two business days following the filing of the Company’s Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted or modified, but in no event shall such period be required to exceed 120 days following adoption or modification of the plan; • A Covered Person shall not enter into multiple overlapping plans; • A Covered Person shall not enter into more than one “single-trade plan” during any 12-month period, which is a plan designed to affect the open market purchase or sale of the total amount of Company securities subject to the plan in a single transaction; • The Company will be required to provide quarterly disclosure in its Forms 10-Q and Forms 10-K of (i) whether any SEC Covered Person has adopted, modified, or terminated a plan and (ii) a description of the material terms of each plan, including the name and title of the SEC Covered Person; the date the plan was adopted, modified or terminated; the plan’s duration; and the total number of Company securities to be purchased or sold hereunder. As a condition to approval by the General Counsel, such SEC Covered Person consents to the Company’s inclusion of such information in such forms; and • SEC Covered Persons who are reporting plan transactions on Forms 4 or 5 pursuant to Section 16 of the Exchange Act must indicate that the transactions were made in reliance on the affirmative defense against insider trading liability under Rule 10b5-1. Any modifications, terminations, or amendments to Rule 10b5-1 plans entered into by a Covered Person prior to the Effective Date and related to the Company’s securities shall require the prior written approval of the Company’s General Counsel. 87 ADDENDUM B ADDITIONAL REQUIREMENTS AND RESPONSIBILITIES FOR CORPORATE INSIDERS A. Purpose. This Addendum supplements the Hurco Companies, Inc. (the “Company”) Insider Trading Policy (the “Policy”). Any capitalized terms not otherwise defined herein have their meanings set forth in the Policy. This Addendum B applies to Company directors and officers as well as to key employees designated by the General Counsel. These individuals are subject to both the general requirements of the Insider Trading Policy as well as to additional procedures and requirements described below to help prevent inadvertent violations of federal securities laws, to avoid even the appearance of impermissible insider trading, and to facilitate their compliance with certain legal requirements not applicable to Company personnel generally. B. Persons Covered. 1. Directors and Section 16 Officers. All provisions of this Addendum apply to SEC Covered Persons. 2. Other Officers and Key Employees. Designated provisions of this Addendum apply to the other officers of the Company and to designated key employees. These other officers and key employees, whose duties may cause them to regularly have access to material nonpublic information about the Company, will be notified by the General Counsel that they are subject to this Addendum B. 3. Related Parties. If you are covered by paragraph B(1) or B(2), then this Addendum also applies to the same extent to your immediate family members and other individuals living in your household, and to any other person or entity, including a trust, corporation, partnership or other association, whose transactions in Company securities are directed by you or are subject to your influence or control (each a “Related Party”). The individuals and entities described in paragraphs B(1), B(2) and B(3) above are collectively referred to as “Corporate Insiders.” C. Blackout Periods for Corporate Insiders 1. Trading Not Permitted During Blackout Periods. If you are a Corporate Insider, you may not purchase, sell or otherwise trade Company securities during a blackout period. A quarterly blackout period is the period beginning at the end of the 15th day of the third month of each fiscal quarter of the Company and ending at the start of the third full trading day following the date of the Company’s public disclosure of the financial results for that fiscal quarter. The General Counsel may also impose special blackout periods from time to time and will notify the affected individuals of such special blackout period. 2. Trading Outside Blackout Periods. If a Corporate Insider wishes to trade outside of a blackout period, the person may do so only if he or she is not then aware of any material nonpublic information. In addition, before Corporate Insiders may trade outside of any blackout period, they must comply with the notification and pre-clearance procedures described below. 88 D. Required Preclearance of Trades 1. Notices of Intended Transaction and Requests for Approval. If you are a Corporate Insider, you may not engage in any transaction involving Company securities without first obtaining pre-clearance of that transaction from the Company’s General Counsel. Prior to initiating any transaction in Company securities, you must deliver to the General Counsel a written notice describing any intended transaction in Company securities by you during a permitted trading period (a form to request preclearance is attached as Exhibit A; the General Counsel may approve notifications to the preclearance form). Notices of intended transactions and requests for approval may be delivered by e-mail. 2. Clearance to Proceed with a Transaction. Prior to completing a transaction, a Corporate Insider must receive clearance from the General Counsel. Preclearance in response to a written request for approval will generally be valid for 48 hours, unless an earlier deadline is imposed by the General Counsel, but clearance may be revoked at any time immediately upon notice. E. Additional Restrictions on Trading by Directors and Section 16 Officers 1. Restricted Transactions. SEC Covered Persons, or their designees, are also prohibited from engaging in the following transactions with respect to Company securities: purchasing Company securities on margin, holding any Company securities in a margin account, or otherwise pledging Company securities; short sales of Company securities (selling securities not owned at the time of sale); buying or selling put or call options or other derivative securities based on Company securities; purchasing any financial instruments (including prepaid variable forward contracts, equity swaps, collars and exchange funds) or otherwise engaging in transactions that are designed to or have the effect of hedging or offsetting any decrease in the market value of equity securities (i) granted to the individual by the Company as part of the compensation of the individual or (ii) held, directly or indirectly, by the individual; and engaging in limit orders or other pre-arranged transactions that execute automatically, except for “same-day” limit orders and approved 10b5-1 plans. These restrictions apply to all Company securities owned directly or indirectly by SEC Covered Persons, including Company securities owned by family members where the SEC Covered Person is deemed to beneficially own such securities, and their respective designees. However, the restrictions do not prevent any individuals from engaging in general portfolio diversification or investing in broad-based index funds. 2. Short-Swing Trading Restrictions. SEC Covered Persons must also comply with the reporting obligations and limitations on short-swing trading transactions imposed by the Exchange Act. Among other things, Section 16 of the Exchange Act requires SEC Covered Persons to pay to the Company any profit realized from any purchase and sale (in either order) of Company securities that occur within six months of each other. Section 16 and its related rules are very complex. If you have any questions about short-swing trading restrictions, please contact the Company’s General Counsel. 3. Disclosure and Reporting Requirements. SEC Covered Persons must provide prompt written notice to the Company’s General Counsel of any Rule 10b5-1 entered into by such SEC Covered Person before the effective date of the Policy and related to the Company’s securities. Additionally, subject to any and all pre-clearance and pre-approval procedures and requirements set forth in the Policy and this Addendum, each SEC Covered Person must also provide written notice to the Company’s General Counsel summarizing any transactions in the Company’s securities by such SEC Covered Person or a Related Party of such SEC Covered Person by the end of the calendar day on which such trade or transaction occurred, including without limitation any sale, purchase, or gift thereof, and including without limitation any trades executed pursuant to a Rule 10b5-1 plan. 89 EXHIBIT A FORM OF CORPORATE INSIDER REQUEST FOR APPROVAL TO TRADE • • • • I certify I do not have any material, non-public information; In connection with my proposed trade, I certify that, in making this request, I am complying with the applicable provisions of the Hurco Companies, Inc. Insider Trading Policy; I understand that clearance for the transaction(s), if granted, will be valid only until the earlier of (i) the end of the 48 hours from when clearance is granted; (ii) the trading window closing; and (iii) notification that pre-clearance and/or approval has been withdrawn; and If I become aware of any material non-public information prior to the trade occurring, I will not execute the trade. If you are submitting a 10b-5 plan, you may omit the last two bullets above. Type of Transaction:  Purchase  Sale  Exercise of Option  Exercise of Option and Sale of Securities  Other (explain:) Securities to be Traded: Number of shares or principal amount: _________________________________________________ If You Are Buying or Selling Securities (check one):   Securities held/to be held directly by me Securities held/to be held by securities holder other than me: Print name of holder:_____________________________ Relationship of securities holder to me:_____________________________ I hereby represent that the transaction(s) referenced above will occur within the current permitted trading period of ____________________ to ____________________. 90 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. Milltronics Europe B.V. Ningbo Hurco Machine Tool Co., Ltd. Takumi Precision Co, Ltd. Jurisdiction of Incorporation The Netherlands United Kingdom Federal Republic of Germany India Taiwan R.O.C. France Italy Singapore Italy United States United States The Netherlands China Taiwan 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, 2023. 91 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, 333-210072, and 333-263461) on Form S-8 of Hurco Companies, Inc. of our report dated January 5, 2024, 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, 2023. Exhibit 23.1 8 /s/ RSM US LLP Indianapolis, Indiana January 5, 2024 92 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Gregory S. Volovic, certify that: Exhibit 31.1 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President January 5, 2024 93 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 (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 5, 2024 94 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, 2023, 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. 8 /s/ Gregory S. Volovic Gregory S. Volovic Chief Executive Officer and President January 5, 2024 95 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, 2023, 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 5, 2024 96 HURCO COMPANIES, INC. COMPENSATION RECOVERY POLICY Effective June 8, 2023 Exhibit 97.1 Policy Statement The Board of Directors (the “Board”) of Hurco Companies, Inc. (the “Company”) has adopted this Compensation Recovery Policy (this “Policy”) pursuant to Rule 10D-1 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), the Securities and Exchange Commission (“SEC”) regulations promulgated thereunder, and applicable Nasdaq Stock Market (“Nasdaq”) listing standards. Subject to and in accordance with the terms of this Policy, upon a Recoupment Event, each Covered Executive shall be obligated to return to the Company, reasonably promptly, the amount of Erroneously Awarded Compensation that was received by such Covered Executive during the Lookback Period. Administration This Policy will be administered by the Compensation Committee (the “Committee”) of the Board, and all determinations made by the Committee will be final and binding on all parties, including the Company, Covered Executives, and all other entities or individuals. Definitions “Accounting Restatement” means an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. “Covered Executive” means an individual who is a current or former officer of the Company as provided in Rule 16a-1(f) of the Exchange Act. At a minimum, executive officers identified pursuant to Item 401(b) of Regulation S-K shall constitute Covered Executives. “Erroneously Awarded Compensation” means, with respect to each Covered Executive in connection with an Accounting Restatement, the excess of the amount of Incentive-Based Compensation received by the Covered Executive during the Lookback Period over the amount of Incentive-Based Compensation that otherwise would have been received had it been determined based on the restated amounts, computed without regard to any taxes paid. For Incentive-Based Compensation based on stock price or total shareholder return, where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in an accounting restatement: (a) the amount must be based on a reasonable estimate of the effect of the accounting restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was received; and (b) the Company must maintain documentation of the determination of that reasonable estimate and provide such documentation to Nasdaq. “Financial Reporting Measures” are any measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures derived wholly or in part from such measures. Stock price and total shareholder return are also Financial Reporting Measures. A Financial Reporting Measure need not be presented within the financial statements or included in a filing with the SEC. 97 “Incentive-Based Compensation” is any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure. “Lookback Period” means the three completed fiscal years immediately preceding the Required Restatement Date and any transition period (that results from a change in the Company’s fiscal year) of less than nine months within or immediately following those three completed fiscal years. A “Recoupment Event” occurs when the Company is required to prepare an Accounting Restatement. “Required Restatement Date” means the earlier to occur of: (a) the date the Company’s Board, a committee of the Board, or the officer(s) of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement, or (b) the date a court, regulator, or other legally authorized body directs the Company to prepare an Accounting Restatement. “Section 409A” means Section 409A of the Internal Revenue Code and the regulations and guidance promulgated thereunder. Amount Subject to Recovery Incentive-Based Compensation received (i) on or after the original effective date of this Policy (even if such Incentive-Based Compensation was approved, awarded, or granted prior to the effective date); (ii) after an individual began serving as a Covered Executive; (iii) by an individual who served as a Covered Executive at any time during the performance period for such Incentive-Based Compensation; and (iv) while the Company has a class of securities listed on a national securities exchange or national securities association, shall be subject to potential recovery under this Policy. The amount of Incentive-Based Compensation subject to recovery from a Covered Executive upon a Recoupment Event is the Erroneously Awarded Compensation, which amount shall be determined by the Committee. For purposes of this Policy, Incentive-Based Compensation is deemed “received” in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive-Based Compensation award is attained, even if the payment or grant of the Incentive-Based Compensation occurs after the end of that period. Recovery of Erroneously Awarded Compensation Promptly following a Recoupment Event, the Committee will determine the amount of Erroneously Awarded Compensation for each Covered Executive, and the Company will provide each such Covered Executive with a written notice of such amount and a demand for repayment or return. Upon receipt of such notice, each affected Covered Executive shall promptly repay or return such Erroneously Awarded Compensation to the Company. If such repayment or return is not made within a reasonable time, the Company shall recover Erroneously Awarded Compensation in a reasonable and prompt manner using any lawful method, which may include, without limitation: • requiring reimbursement of cash previously paid, as well as any Erroneously Awarded 98 Compensation that is deferred and not yet payable, including any interest or earnings accrued; seeking recovery of any shares of Company stock that are Erroneously Awarded Compensation; seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; • • • offsetting such amount from any compensation the Company otherwise owes to the Covered Executive; • • • cancelling outstanding vested or unvested equity awards; causing the forfeiture of any unpaid, vested, or unvested, compensation; and taking any other remedial and recovery action permitted by law; provided that recovery of any Erroneously Awarded Compensation must be made in compliance with Section 409A. The applicable Covered Executive shall also be required to reimburse the Company for any and all expenses (including legal fees) reasonably incurred by the Company in recovering such Erroneously Awarded Compensation in accordance with the immediately preceding sentence. Limited Exceptions Erroneously Awarded Compensation will be recovered in accordance with this Policy unless the Committee determines that recovery would be impracticable and one of the following conditions is met: • • the direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered, provided the Company has first made a reasonable effort to recover the Erroneously Awarded Compensation; or the recovery would likely cause a U.S. tax-qualified retirement plan to fail to meet the requirements of Internal Revenue Code Sections 401(a)(13) and 411(a) and the regulations thereunder. Reliance on any of the above exemptions will further comply with applicable listing standards, including without limitation, documenting the reason for the impracticability and providing required documentation to Nasdaq. No Insurance or Indemnification The Company will not, and each Covered Executive shall be required to acknowledge that the Company will not, indemnify any Covered Executive against the loss of any Erroneously Awarded Compensation (or related expenses incurred by the Covered Executive) pursuant to a recovery of Erroneously Awarded Compensation under this Policy, nor will it pay or reimburse a Covered Executive for any insurance premiums on any insurance policy obtained by the Covered Executive to protect against the forfeiture or recovery of any compensation pursuant to this Policy. 99 Interpretation The Committee is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy. This Policy shall be applied and interpreted in a manner that is consistent with the requirements of Rule 10D-1 and any applicable regulations, rules or standards adopted by SEC, or the rules of any national securities exchange or national securities association on which the Company’s securities are listed. In the event that this Policy does not meet the requirements of Rule 10D-1, the SEC regulations promulgated thereunder, or the rules of any national securities exchange or national securities association on which the Company’s securities are listed, this Policy shall be deemed to be amended to meet such requirements. Reporting The Company will file all disclosures with respect to this Policy in accordance with the requirements of the federal securities laws, including the disclosure required by the applicable SEC rules and forms. Amendment; Termination The Board may amend this Policy in its discretion and shall amend this Policy as it deems necessary to comply with the regulations adopted by the SEC under Rule 10D-1 and the rules of any national securities exchange or national securities association on which the Company’s securities are listed. The Board may terminate this Policy at any time. Notwithstanding anything herein to the contrary, no amendment or termination of this Policy shall be effective if that amendment or termination would cause the Company to violate any federal securities laws, SEC rules, or the rules of any national securities exchange or national securities association on which the Company’s securities are listed. Other Recoupment Rights The Board intends that this Policy will be applied to the fullest extent of the law. Any Incentive-Based Compensation provided for in an employment agreement, incentive compensation plan, policy, program or agreement, equity award, or similar plan, program or agreement shall, as a condition to the grant of any benefit thereunder, be subject to the terms of this Policy. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, incentive compensation plan, policy, program or agreement, equity award, or similar plan, program or agreement and any other legal remedies available to the Company. This Policy is in addition to any other clawback or compensation recovery, recoupment or forfeiture policy that may be adopted by the Company from time to time or any laws, rules, or listing standards applicable to the Company, including without limitation, the Company’s right to recoup any bonus or other compensation subject to Section 304 of the Sarbanes-Oxley Act of 2022. Successors This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators, or other legal representatives. 100 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] Milltronics (Indianapolis, Indiana, USA) Hurco Companies, Inc. Hurco North America (Indianapolis, Indiana, USA) Serving the USA, Canada, Mexico, and South America Takumi USA (Indianapolis, Indiana, USA) Serving the USA ProCobots (Indianapolis, Indiana, USA) Hurco Europe Ltd. (United Kingdom) Serving the United Kingdom, Ireland, Africa, the Middle East, and Scandinavia Milltronics Europe B. V. (The Netherlands) Hurco Werkzeugmaschinen GmbH (Germany) Serving Germany, Austria, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Mazedonia, Montenegro, the Netherlands, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Switzerland, Turkey, and Ukraine Hurco 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 Precision Co., Ltd. (Taiwan) 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 PRINTED IN THE USA | 001CSN5297 | HPG 1.1M | C053 ANNUAL REPORT Precision United: Engineering Excellence Across Every Brand 

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