HURCO COMPANIES, INC.

(HURC)
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HURCO COMPANIES INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

01/07/2022 | 05:24pm EDT

EXECUTIVE OVERVIEW


Hurco Companies, Inc. is an international, industrial technology company
operating in a single segment.  We design, manufacture and sell computerized
(i.e., CNC) machine tools, consisting primarily of vertical machining centers
(mills) and turning centers (lathes), to companies in the metal cutting industry
through a worldwide sales, service and distribution network. Although the
majority of our computer control systems and software products are proprietary,
they predominantly use industry standard personal computer components. Our
computer control systems and software products are primarily sold as integral
components of our computerized machine tool products. We also provide machine
tool components, automation integration equipment and solutions for job shops,
software options, control upgrades, accessories and replacement parts for our
products, as well as customer service, training and applications support.



The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance.

This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report.




The market for machine tools is international in scope. We have both significant
foreign sales and significant foreign manufacturing operations.  During fiscal
2021, approximately 50% of our revenues were attributable to customers in
Europe, where we typically sell more of our higher-performance, higher-priced
VMX series machines.  Additionally, approximately 13% of our revenues were
attributable to customers in the Asia Pacific region, where we encounter greater
pricing pressures.


We have three brands of CNC machine tools in our product portfolio.  Hurco is
the technology innovation brand for customers who want to increase productivity
and profitability by selecting a brand with the latest software and motion
technology.  Milltronics is the value-based brand for shops that want
easy-to-use machines at competitive prices.  The Takumi brand is for customers
that need very high speed, high efficiency performance, such as that required in
the production, die and mold, aerospace, and medical industries.  Takumi
machines are equipped with industry standard controls instead of the proprietary
controls found on Hurco and Milltronics machines.  These three brands of CNC
machine tools are responsible for the vast majority of our revenue.  However, we
have added other non-Hurco branded products to our product portfolio that have
contributed product diversity and market penetration opportunity.  These
non-Hurco branded products are sold by our wholly-owned distributors and are
comprised primarily of other general-purpose vertical milling centers and
lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact
horizontal machines, metal cutting saws and CNC swill lathes. ProCobots is our
wholly-owned subsidiary that provides automation solutions. In addition, through
our wholly-owned subsidiary LCM, we produce high value machine tool components
and accessories.



                                       35



We principally sell our products through more than 180 independent agents and
distributors throughout the Americas, Europe, and Asia. Although some
distributors carry competitive products, we are the primary line for the
majority of our distributors globally. We also have our own direct sales and
service organizations in China, France, Germany, India, Italy, the Netherlands,
Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United
States, which are among the world's principal machine tool consuming markets.
The vast majority of our machine tools are manufactured to our specifications
primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to
support HML's production are manufactured at our wholly-owned subsidiary in
Ningbo, China, NHML. Components to support our SRT line of five-axis machining
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.


We operate in the industrial equipment industry and have a global footprint that
subjects us to various business risks in many different countries. The COVID-19
pandemic has not had as a significant impact on our business and industry during
fiscal 2021 as it did in fiscal 2020. Beginning in early 2020, governmental
authorities in many of the major global machine tool markets implemented
mandatory stay-at-home or shelter orders requiring most businesses to close or
to significantly limit operations, resulting in a sudden decrease in demand for
many goods and services. Although the mandatory stay-at-home or shelter orders
in many jurisdictions permitted our local operations to continue as an essential
business or a supplier to critical infrastructure industries or otherwise with
remote work capabilities, many of our customers experienced, and continue to
experience, significant disruptions in their business operations and normal
purchasing cycles. We cannot predict the duration or scope of impact of the
COVID-19 pandemic and the negative financial impact to our results cannot be
reasonably estimated, but we believe the impact has been material thus far with
regard to revenues, income from operations, and cash flow from operations and
could continue to be material in the near future. To date, we have experienced
some delays in our supply chain and have not completely ceased operations at any
of our global facilities, but have implemented remote working capabilities, as
appropriate or otherwise required under local law. We have also implemented
adjustments in headcount and discretionary spending, delayed capital
expenditures, and monitored production activities closely in an effort to
weather the adverse business climate. We have also received stimulus in various
countries to support operations and implemented tax deferrals and provisions
that were available to us. More recently, we have begun to see inflationary
pressures and input cost increases imposed in our supply chains on components
for our products. We have also seen capacity for transportation and freight
services limited significantly by container or vessel availability and delays at
departing and receiving ports, all of which have contributed to significantly
increased costs and prices associated with the global shipment of our products.

                                       36


We will continue to evaluate and disclose any trends and uncertainties that have
had or are reasonably expected to have, a material effect on our consolidated
financial position, results of operations, changes in shareholders' equity and
cash flows for and at the end of each interim period.



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.




                                        Percentage of Revenues         Year-to-Year % Change
                                       2021       2020      2019         Increase/Decrease
                                                                     '21 vs. '20    '20 vs. '19
Sales and service fees                   100 %      100 %     100 %           38 %         (35) %
Gross profit                              24 %       21 %      29 %           54 %         (53) %
Selling, general and
administrative expenses                   20 %       24 %      21 %           11 %         (24) %
Goodwill impairment                        -          3 %       -          (100) %          100 %
Operating income (loss)                    4 %      (6) %       9 %          204 %        (144) %
Net income (loss)                          3 %      (4) %       7 %          208 %        (136) %



Fiscal 2021 Compared to Fiscal 2020

Sales and Service Fees. Sales and service fees for fiscal 2021 were $235.2
million, an increase of $64.6 million, or 38%, compared to fiscal 2020, and
included a favorable currency impact of $7.7 million, or 5%, when translating
foreign sales to U.S. Dollars for financial reporting purposes. During fiscal
2021, sales increased year-over-year for all product brands and in all regions
as countries began to lift the government-mandated COVID-19 stay-at-home orders
or other similar operating restrictions put in place in fiscal 2020.



Net Sales and Service Fees by Geographic Region




The following table sets forth net sales and service fees by geographic region
for the fiscal years ended October 31, 2021 and 2020 (dollars in thousands):



                   Fiscal Year Ended October 31,           Increase/Decrease
                      2021                 2020             Amount          %
Americas       $    86,301     37 %  $  67,498     39 %  $      18,803      28 %
Europe             117,522     50 %     77,936     46 %         39,586      51 %
Asia Pacific        31,372     13 %     25,193     15 %          6,179      25 %
Total          $   235,195    100 %  $ 170,627    100 %  $      64,568      38 %



Sales in the Americas for fiscal 2021 increased by 28%, compared to fiscal 2020.
The increase in sales in the Americas for fiscal 2021 was primarily due to an
increased volume of shipments of Hurco, Takumi and Milltronics machines, and an
increase in sales of ProCobots automation solutions. The improved sales volume
of machines primarily reflected increased shipments of Hurco lathes, VM and VMX
machines, as well as Milltronics lathes and toolroom machines.



                                       37



European sales for fiscal 2021 increased by 51%, compared to fiscal 2020, and
included a favorable currency impact of 8%, when translating foreign sales to
U.S. Dollars for financial reporting purposes. The year-over-year increase in
European sales was primarily attributable to an increased volume of shipments of
Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as
well as increased shipments of machine tool components and accessories
manufactured by our wholly owned subsidiary, LCM. The improved sales volume of
machines was primarily attributable to increased shipments of Hurco Lathes,
VM
and VMX machines.



Asian Pacific sales for fiscal 2021 increased by 25%, compared to fiscal 2020,
and included a favorable currency impact of 6%, when translating foreign sales
to U.S. Dollars for financial reporting purposes. The year-over-year increase in
Asian Pacific sales for fiscal 2021 was primarily due to increased volume of
shipments of Hurco machines in Southeast Asia and China and Takumi machines
in
Taiwan.


Net Sales and Service Fees by Product Category




The following table sets forth net sales and service fees by product group and
services for the fiscal years ended October 31, 2021 and 2020 (dollars in
thousands):



                                   Fiscal Year Ended October 31,              Increase/Decrease
                                     2021                   2020              Amount            %
Computerized Machine
Tools                        $   198,602       85 %  $ 139,577       82 %  $      59,025         42 %
Computer Control
Systems and Software †             2,528        1 %      1,699        1 %            829         49 %
Service Parts                     26,425       11 %     22,484       13 %          3,941         18 %
Service Fees                       7,640        3 %      6,867        4 %            773         11 %
Total                        $   235,195      100 %  $ 170,627      100 %  $      64,568         38 %

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


Sales of computerized machine tools and computer control systems and software
for fiscal 2021 increased by 42% and 49%, respectively, compared to fiscal 2020,
and each included a favorable currency impact of 5%, when translating foreign
sales to U.S. Dollars for financial reporting purposes.  Sales of service parts
and service fees increased by 18% and 11%, respectively, during fiscal 2021,
compared to fiscal 2020, and each included a favorable currency impact of 5%.
During fiscal 2021, sales increased year-over-year for all product categories as
countries began to lift the government-mandated COVID-19 stay-at-home orders or
other similar operating restrictions put in place in fiscal 2020.



Orders and Backlog. Orders for fiscal 2021 were $265.4 million, an increase of
$98.5 million, or 59%, compared to fiscal 2020, and included a favorable
currency impact of $8.4 million, or 5%, when translating foreign orders to U.S.
Dollars. Similar to sales, orders increased year-over-year for all product
brands and in all regions.



                                       38


The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2021 and 2020 (dollars in thousands):




                   Fiscal Year Ended October 31,           Increase/Decrease
                      2021                 2020             Amount          %
Americas       $    95,767     36 %  $  67,577     41 %  $      28,190      42 %
Europe             133,802     50 %     77,079     46 %         56,723      74 %
Asia Pacific        35,852     14 %     22,282     13 %         13,570      61 %
Total          $   265,421    100 %  $ 166,938    100 %  $      98,483      59 %



Orders in the Americas for fiscal 2021 increased by 42%, compared to fiscal 2020. The increased order level reflected a higher demand for all categories of Hurco, Takumi, and Milltronics machines as well as increased demand for ProCobots automation solutions.

European orders for fiscal 2021 increased by 74%, compared to fiscal 2020, and
included a favorable currency impact of 9%, when translating foreign orders to
U.S. Dollars. The year-over-year increase in orders was driven primarily by
increased customer demand for Hurco and Takumi machines in Germany, the United
Kingdom, France, and Italy, as well as increased demand for LCM machine tool
components and accessories.



Asian Pacific orders for fiscal 2021 increased by 61%, compared to fiscal 2020,
and included a favorable currency impact of 8%, when translating foreign orders
to U.S. Dollars. The year-over-year increase in Asian Pacific orders for fiscal
2021 was primarily due to increased customer demand for Hurco vertical milling
machines in Southeast Asia, China and India, as well as increased customer
demand for Takumi machines in Taiwan.



Backlog at October 31, 2021 increased to $60.0 million from $29.9 million at
October 31, 2020, primarily due to increased customer demand during fiscal 2021
for all product brands and in all regions. We do not believe backlog is a useful
measure of past performance or indicative of future performance. Backlog orders
as of October 31, 2021 are expected to be fulfilled in fiscal 2022.



Gross Profit. Gross profit for fiscal 2021 was $56.2 million, or 24% of sales,
compared to $36.5 million, or 21% of sales, for fiscal 2020. The year-over-year
increase in gross profit as a percentage of sales for fiscal 2021 reflected
improved leverage of fixed overhead costs through higher levels of machine
sales, improved pricing due to changes in demand and more normalized inventory
levels, and the favorable impact of foreign currency translation compared fiscal
2020. Additionally, approximately $1.2 million of the gross profit improvement
for fiscal 2021 was a result of recording the employee retention credit extended
to Hurco under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and
Venues Act and the American Rescue Plan Act of 2021 (the "employee retention
credit"). The improvement in gross profit as a percentage of sales in fiscal
2021 was partially offset by inflationary increases in cost of materials and
higher costs associated with transporting finished goods on a global basis.


                                       39



Operating Expenses. Selling, general, and administrative expenses for fiscal
2021 were $46.0 million, or 20% of sales, compared to $41.4 million, or 24% of
sales, for fiscal 2020, and included an unfavorable currency impact of $1.2
million, when translating foreign expenses to U.S. Dollars for financial
reporting purposes. Selling, general and administrative expenses for fiscal 2021
trended downward as a percentage of sales from fiscal 2020 as a result of the
cost management plans implemented during fiscal 2020 and continued during fiscal
2021. Additionally, approximately $1.7 million of the selling, general, and
administrative expense reduction for fiscal 2021 was a result of recording
the
employee retention credit.



Operating Income (Loss). Operating income for fiscal 2021 was $10.2 million, or
4% of sales, compared to an operating loss of $9.9 million, or (6%) of sales,
for fiscal 2020. The year-over-year increase in operating income for fiscal 2021
was primarily due to an increase in the sales volume of Hurco, Takumi and
Milltronics machines, LCM components and accessories and ProCobots automation
solutions. Operating income for fiscal 2021 included a benefit of $2.9 million
related to the employee retention credit recorded during fiscal 2021. The
operating loss for fiscal 2020 included a one-time $4.9 million non-cash
goodwill impairment charge attributable primarily to the then prolonged ongoing
uncertainty in the global markets due to the COVID-19 pandemic.



Other Expense, Net. Other expense, net for fiscal 2021 decreased by $0.8 million
from fiscal 2020, due mainly to a reduction in foreign currency exchange losses
in fiscal 2021, compared to fiscal 2020.

Provision for Income Taxes. We recorded an income tax expense of $3.4 million
for fiscal 2021, compared to income tax benefit of $4.6 million for fiscal
2020.  Our effective tax rate for fiscal 2021 was 33%, compared to 42% for
fiscal 2020. The year-over-year change in the effective tax rate was primarily
due to changes in geographic mix of income and loss that included jurisdictions
with differing tax rates, various discrete income tax expense items, and more
specifically related to fiscal 2020, changes in income tax laws to address the
unfavorable impact of the COVID-19 pandemic.



Net Income (Loss). Net income for fiscal 2021 was $6.8 million, or $1.01 per
diluted share, an increase of $13.0 million from the fiscal 2020 net loss of
$6.2 million, or $(0.93)  per diluted share. The year-over-year increase from
net loss to net income was primarily due to increased sales volume for all
product brands and in all regions as countries began to lift the
government-mandated COVID-19 stay-at-home orders or other similar operating
restrictions put in place in fiscal 2020.  The net loss for fiscal 2020 included
a one-time $4.9 million non-cash goodwill impairment charge attributable
primarily to the then prolonged ongoing uncertainty in the global markets due to
the COVID-19 pandemic.


Fiscal 2020 Compared to Fiscal 2019

Sales and Service Fees. Sales and service fees for fiscal 2020 were $170.6 million, a decrease of $92.8 million, or 35%, compared to fiscal 2019, and included a favorable currency impact of $0.6 million, or less than 1%, when translating foreign sales to U.S. Dollars for financial reporting purposes.





                                       40


Net Sales and Service Fees by Geographic Region




The following table sets forth net sales and service fees by geographic region
for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands):



                    Fiscal Year Ended October 31,           Increase/Decrease
                       2020                 2019             Amount         %
Americas        $    67,498     39 %  $  99,064     37 %  $    (31,566)    (32) %
Europe               77,936     46 %    133,675     51 %       (55,739)    (42) %
Asia Pacific         25,193     15 %     30,638     12 %        (5,445)    (18) %
Total           $   170,627    100 %  $ 263,377    100 %  $    (92,750)    (35) %



Sales in the Americas for fiscal 2020 decreased by 32%, compared to fiscal 2019,
primarily due to a reduced volume of shipments of Hurco, Milltronics, and Takumi
machines.  The reduction in shipment volume was mainly attributable to
government-mandated COVID-19 stay-at-home or shelter orders imposed across the
region during portions of fiscal 2020.  Additionally, sales in the Americas in
the first half of fiscal 2019 benefitted from strong demand and backlog
generated in the fourth quarter of fiscal 2018.



European sales for fiscal 2020 decreased by 42%, compared to fiscal 2019, and
included a favorable currency impact of less than 1%, when translating foreign
sales to U.S. Dollars for financial reporting purposes.  The decrease in
European sales for fiscal 2020 was primarily attributable to a reduced volume of
shipments of Hurco and Takumi machines and a decrease in sales of
electro-mechanical components and accessories manufactured by our wholly-owned
Italian subsidiary, LCM.  Like the Americas, the reduction in shipment volume
was mainly driven by government-mandated COVID-19 stay-at-home or shelter orders
or other similar operating restrictions imposed across the region during
portions of fiscal 2020.  Additionally, sales in Europe during the first half of
fiscal 2019 benefitted from higher demand and backlog coming off fiscal 2018,
the recent peak of the European market, particularly for Germany.



Asian Pacific sales for fiscal 2020 decreased by 18%, compared to fiscal 2019,
and included a favorable currency impact of less than 1%, when translating
foreign sales to U.S. Dollars for financial reporting purposes. The
year-over-year decrease in Asian Pacific sales resulted primarily from a
reduction in the volume of shipments of Hurco and Takumi machines in all Asian
Pacific regions, where our customers are located, as many customers were
negatively impacted by government-mandated COVID-19 stay-at-home orders or
similar operating restrictions during the first six months of fiscal 2020.




                                       41


Net Sales and Service Fees by Product Category




The following table sets forth net sales and service fees by product group and
services for the fiscal years ended October 31, 2020 and 2019 (dollars in
thousands):



                                   Fiscal Year Ended October 31,             Increase/Decrease
                                     2020                   2019              Amount         %
Computerized Machine
Tools                        $   139,577       82 %  $ 223,735       85 %  $    (84,158)     (38) %
Computer Control
Systems and Software †             1,699        1 %      2,818        1 %        (1,119)     (40) %
Service Parts                     22,484       13 %     27,854       11 %        (5,370)     (19) %
Service Fees                       6,867        4 %      8,970        3 %        (2,103)     (23) %
Total                        $   170,627      100 %  $ 263,377      100 %  $    (92,750)     (35) %

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


Sales of computerized machine tools and computer control systems and software
for fiscal 2020 decreased by 38% and 40%, respectively, compared to fiscal 2019,
and each included a favorable currency impact of less than 1%.  Sales of service
parts and service fees decreased by 19% and 23%, respectively, during fiscal
2020, compared to fiscal 2019, and each included a favorable currency impact of
less than 1%.   The decreases in all product categories were primarily due to a
reduced volume of shipments of Hurco, Milltronics and Takumi machines, parts,
and services provided, as well as the impact of government- mandated COVID-19
restrictions across all regions.



Orders and Backlog. Orders for fiscal 2020 were $166.9 million, a decrease of $74.2 million, or 31%, compared to fiscal 2019, and included a favorable currency impact of $1.2 million, or less than 1%, when translating foreign orders to U.S. Dollars.

The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands):




                   Fiscal Year Ended October 31,           Increase/Decrease
                      2020                 2019             Amount         %
Americas       $    67,577     41 %  $  89,136     37 %  $    (21,559)    (24) %
Europe              77,079     46 %    120,191     50 %       (43,112)    (36) %
Asia Pacific        22,282     13 %     31,779     13 %        (9,497)    (30) %
Total          $   166,938    100 %  $ 241,106    100 %  $    (74,168)    (31) %



Orders in the Americas for fiscal 2020 decreased by 24%, compared to fiscal
2019, primarily due to decreased customer demand for Hurco, Milltronics and
Takumi machines during the COVID-19 pandemic.  Orders in the Americas of $17.2
million for the fourth quarter of fiscal 2020 reflected a slight improvement
over orders in the second and third quarters of fiscal 2020 of $15.9 million and
$16.3 million, respectively, but fell short of pre-pandemic order levels in the
first quarter of $18.2 million.



                                       42


European orders for fiscal 2020 decreased by 36%, compared to fiscal 2019, and
included a favorable currency impact of less than 1%, when translating foreign
orders to U.S. Dollars.  The year-over-year decrease in orders was driven
primarily by decreased customer demand for Hurco and Takumi machines, and a
decrease in sales of electro-mechanical components and accessories manufactured
by LCM, during the COVID-19 pandemic.  European orders for the fourth quarter of
fiscal 2020 were the highest quarter of the fiscal year at $25.6 million,
rebounding from the fiscal year low third quarter orders of $14.2 million,
second quarter orders of $15.6 million, and first quarter pre-pandemic orders of
$21.7 million.



Asian Pacific orders for fiscal 2020 decreased by 30%, compared to fiscal 2019,
and included a favorable currency impact of less than 1%, when translating
foreign orders to U.S. Dollars.  The year-over-year decrease in Asian Pacific
orders was driven primarily by a reduction in customer demand for Hurco and
Takumi machines during the COVID-19 pandemic throughout the Asian Pacific region
where our customers are located. Asian Pacific orders for the fourth quarter of
fiscal 2020 reflected the same trend as the European orders, marking the highest
quarter of orders of fiscal 2020 at $5.9 million, outpacing the third quarter
orders of $5.6 million, second quarter orders of $5.1 million, and first quarter
orders of $5.7 million.



Backlog at October 31, 2020 decreased to $29.9 million from $32.7 million at
October 31, 2019, primarily due to a reduction in customer demand during fiscal
2020. We do not believe backlog is a useful measure of past performance or
indicative of future performance.

Gross Profit. Gross profit for fiscal 2020 was $36.5 million, or 21% of sales,
compared to $77.2 million, or 29% of sales, for fiscal 2019.  The decrease in
gross profit as a percentage of sales was primarily due to lower sales across
all sales regions, particularly the European sales region where we typically
sell higher-priced, higher-performance machines, competitive pricing pressures
on a global basis, and the negative impact of fixed costs leveraged against
lower sales and production volumes.



Operating Expenses. Selling, general, and administrative expenses for fiscal
2020 were $41.4 million, or 24% of sales, compared to $54.7 million, or 21% of
sales, for fiscal 2019, and included an unfavorable currency impact of $0.3
million, when translating foreign expenses to U.S. Dollars for financial
reporting purposes.  Selling, general, and administrative expenses for fiscal
2020 trended downward as a percentage of sales from the first half of fiscal
2020 to the second half of fiscal 2020 by approximately 5% due to the
implementation of cost reduction plans, including changes in employee headcount,
decreases in incentive and performance compensation, and reductions in other
discretionary spending, partially offset by increased operating expenses
associated with ProCobots, the U.S.-based automation integration business
acquired by Hurco in the fourth quarter of fiscal 2019, and the unfavorable
currency impact when translating foreign expenses to U.S Dollars for financial
reporting purposes.



Operating Income (Loss). The operating loss for fiscal 2020 was $9.9 million, or
(6%) of sales, compared to operating income of $22.5 million, or 9% of sales,
for fiscal 2019. The year-over-year decrease from operating income to operating
loss was primarily due to reduced sales volume that resulted from
government-mandated stay-at-home or shelter orders imposed across the globe
during 2020.  The operating loss for fiscal 2020 included a one-time $4.9
million non-cash goodwill impairment charge attributable primarily to the
prolonged ongoing uncertainty in the global markets due to the COVID-19
pandemic.



Other Expense, Net. Other expense, net for fiscal 2020 increased by $0.6 million
from fiscal 2019, due mainly to a reduction in foreign currency exchange losses
in fiscal 2020, compared to fiscal 2019.

                                       43



Provision for Income Taxes. We recorded an income tax benefit of $4.6 million
for fiscal 2020, compared to income tax expense of $5.8 million for fiscal
2019.  During the third and fourth quarters of fiscal 2020, we assessed and
recorded the year-to-date impact of recent changes in income tax laws to address
the unfavorable impact of the COVID-19 pandemic. In response to the COVID-19
pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES
Act") was signed into law in the U.S. on March 27, 2020.  The CARES Act included
economic relief and modifications, most notably the net operating loss carryback
provisions. In addition, the year-over-year changes in our income tax benefits
and expenses reflected the shift in the geographic mix of income and loss among
international tax jurisdictions, which resulted in changes in foreign tax
credits, deductions for foreign derived intangible income, and recording of a
provision for global intangible low taxed income.



Net Income (Loss). Net loss for fiscal 2020 was $6.2 million, or $(0.93) per
diluted share, a decrease of $23.7 million, or 136%, from fiscal 2019 net income
of $17.5 million, or $2.55 per diluted share. The year-over-year decrease from
net income to net loss was primarily due to reduced sales volume that resulted
from government-mandated stay-at-home or shelter orders imposed across the globe
during 2020.  The net loss for fiscal 2020 included a one-time $4.9 million
non-cash goodwill impairment charge attributable primarily to the prolonged
ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Liquidity and Capital Resources


At October 31, 2021, we had cash and cash equivalents of $84.1 million, compared
to $57.9 million at October 31, 2020. The increase in cash and cash equivalents
was primarily a result of increases in accounts payable, accrued payroll and
employee benefits and customer deposits, partially offset by an increase in
accounts receivable. Approximately 34% of our $84.1 million of cash and cash
equivalents is held in the U.S. The balance is attributable to our foreign
operations and is held in the local currencies of our various foreign entities,
subject to fluctuations in currency exchange rates. We do not believe that the
indefinite reinvestment of these funds offshore impairs our ability to meet our
domestic working capital needs.

Working capital (including cash and cash equivalents) was $208.7 million at
October 31, 2021, compared to $201.0  million at October 31, 2020. The increase
in working capital was primarily driven by increases in cash and accounts
receivable, partially offset by increases in accounts payable, accrued expenses
and customer deposits. Inventories, net were $148.2 million at October 31, 2021,
compared to $149.9 million at October 31, 2020. Inventory turns at October 31,
2021 were 1.2, compared to 0.9 turns at October 31, 2020.

Capital expenditures were $2.4 million in fiscal 2021, compared to $1.7 million
in fiscal 2020. Capital expenditures for fiscal 2021 were primarily for software
development costs, purchases of factory equipment for production facilities, and
purchases of general software and equipment for sales and service divisions. We
funded these expenditures with cash flows from operations.

On March 12, 2021, we announced that our Board of Directors approved a share
repurchase program in an aggregate amount of up to $7.0 million. Repurchases
under the program may be made in the open market or through privately-negotiated
transactions from time to time through March 10, 2023, subject to applicable
laws, regulations and contractual provisions. The program may be amended,
suspended or discontinued at any time and does not commit us to repurchase any
shares of our common stock. We did not repurchase any shares of our common stock
under this program during fiscal 2021.



                                       44


In addition, during fiscal 2021, we paid cash dividends to our shareholders of
$3.7 million. Future dividends are subject to approval of our Board of Directors
and will depend upon many factors, including our results of operations,
financial condition, capital requirements, regulatory and contractual
restrictions, our business strategy and other factors deemed relevant by our
Board of Directors from time to time.



On December 31, 2018, we and our subsidiary Hurco B.V. entered into a credit
agreement with Bank of America, N.A., as the lender, which was subsequently
amended on each of March 13, 2020, December 23, 2020 and December 17, 2021 (as
amended, the "2018 Credit Agreement"). The 2018 Credit Agreement provides for an
unsecured revolving credit and letter of credit facility in a maximum aggregate
amount of $40.0 million. The 2018 Credit Agreement provides that the maximum
amount of outstanding letters of credit at any one time may not exceed $10.0
million, the maximum amount of outstanding loans made to our subsidiary Hurco
B.V. at any one time may not exceed $20.0 million, and the maximum amount of all
outstanding loans denominated in alternative currencies at any one time may not
exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are
borrowers, and certain of our other subsidiaries are guarantors. The scheduled
maturity date of the 2018 Credit Agreement is December 31, 2023.



Borrowings under the 2018 Credit Agreement bear interest at floating rates based
on, at our option, either (i) a rate based upon the secured overnight financing
rate ("SOFR"), the Sterling Overnight Index Average Reference Rate, the Euro
Interbank Offering Rate, or another alternative currency-based rate approved by
the lender, depending on the term of the loan and the currency in which such
loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the
highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the
one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters
of credit will carry an annual rate of 1.00%.



The 2018 Credit Agreement contains customary affirmative and negative covenants
and events of default, including covenants (1) restricting us from making
certain investments, loans, advances and acquisitions (but permitting us to make
investments in subsidiaries of up to $10.0 million); (2) restricting us from
making certain payments, including (a) cash dividends, except that we may pay
cash dividends as long as immediately before and after giving effect to such
payment, the sum of the unused amount of the commitments under the 2018 Credit
Agreement plus our cash on hand is not less than $10.0 million, and as long as
we are not in default before and after giving effect to such dividend payments
and (b) payments made to repurchase shares of our common stock, except that we
may repurchase shares of our common stock as long as we are not in default
before and after giving effect to such repurchases and the aggregate amount of
payments made by us for all such repurchases during any fiscal year does not
exceed $10.0 million; (3) requiring that we maintain a minimum working capital
of $125.0 million; and (4) requiring that we maintain a minimum tangible net
worth of $176.5 million.  We may use the proceeds from advances under the 2018
Credit Agreement for general corporate purposes.



In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML,
closed on uncommitted revolving credit facilities with maximum aggregate amounts
of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively.

As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time.




As of October 31, 2021, our existing credit facilities consisted of the €1.5
million revolving credit facility in Germany, the 150 million New Taiwan Dollars
Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and
the $40.0 million revolving credit facility under the 2018 Credit Agreement.  We
had no debt or borrowings under any of our credit facilities at October 31,
2021.



                                       45


At October 31, 2021, we had an aggregate of approximately $52.2 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.




We have an international cash pooling strategy that generally provides access to
available cash deposits and credit facilities when needed in the U.S., Europe or
Asia Pacific. We believe our access to cash pooling and our borrowing capacity
under our credit facilities provide adequate liquidity to fund our global
operations over the next twelve months and beyond and allow us to remain
committed to our strategic plan of product innovation, acquisitions, targeted
penetration of developing markets, payment of dividends and our stock repurchase
program.


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

Contractual Obligations and Commitments

The following is a table of contractual obligations and commitments as of October 31, 2021 (in thousands):




                                                        Payments Due by Period
                                                Less than                                    More than
                                   Total        1 Year        1-3 Years      3-5 Years       5 Years
Operating leases                 $  11,351    $     4,375    $     4,424    $     1,495    $     1,057
Accrued and deferred taxes
and credits                          6,562            222            677            917          4,746
Total                            $  17,913    $     4,597    $     5,101    $     2,412    $     5,803



In addition to the contractual obligations and commitments disclosed above, we
also have a variety of other obligations for the procurement of materials and
services, none of which subject us to any material non-cancelable commitments.
While some of these obligations arise under long-term supply agreements, we are
not committed under these agreements to accept or pay for requirements that are
not needed to meet our production needs. We have no material minimum purchase
commitments or "take-or-pay" type agreements or arrangements. Unrecognized tax
benefits in the amount of approximately $0.2 million, excluding any interest and
penalties, have been excluded from the table above because we are unable to
determine a reasonably reliable estimate of the timing of future payment.



We expect capital spending in fiscal 2022 to be approximately $5.8 million,
which includes investments for real estate development, software development,
factory equipment and production facilities, as well as general software and
equipment for selling facilities. We expect to fund these commitments with cash
on hand and cash generated from operations.

                                       46



Off Balance Sheet Arrangements


From time to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of machines to customers that use financing. We follow
Financial Accounting Standards Board ("FASB") guidance for accounting for
guarantees (codified in Accounting Standards Codification ("ASC") 460). As of
October 31, 2021, we had eight outstanding third party payment guarantees
totaling approximately $0.9 million. The terms of these guarantees are
consistent with the underlying customer financing terms. Upon shipment of a
machine, the customer assumes the risk of ownership. The customer does not
obtain title, however, until the customer has paid for the machine. A retention
of title clause allows us to recover the machine if the customer defaults on the
financing. We accrue liabilities under these guarantees at fair value, which
amounts are insignificant.

Critical Accounting Policies and Estimates


Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles. The preparation
of financial statements in conformity with those accounting principles requires
us to make judgments and estimates that affect the amounts reported in the
consolidated financial statements and accompanying notes. Those judgments and
estimates have a significant effect on the financial statements because they
result primarily from the need to make estimates about the effects of matters
that are inherently uncertain. Actual results could differ from those estimates.
Our accounting policies, including those described below, are frequently
evaluated as our judgment and estimates are based upon historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances.

Revenue Recognition - We recognize revenues from the sale of machine tools,
components and accessories, and services and reflect the consideration to which
we expect to be entitled. We record revenues based on a five-step model in
accordance with FASB guidance codified in ASC 606. In accordance with ASC 606,
we have defined contracts as agreements with our customers and distributors in
the form of purchase orders, packing or shipping documents, invoices, and,
periodically, verbal requests for components and accessories. For each contract,
we identify our performance obligations, which is delivering goods or services,
determine the transaction price, allocate the contract transaction price to each
of the performance obligations (when applicable), and recognize the revenue when
(or as) the performance obligation to the customer is fulfilled.

A good or service is transferred when the customer obtains control of that good
or service. Our computerized machine tools are general purpose
computer-controlled machine tools that are typically used in stand-alone
operations. Prior to shipment, we test each machine to ensure the machine's
compliance with standard operating specifications. We deem that the customer
obtains control upon delivery of the product and that obtaining control is not
contingent upon contractual customer acceptance. Therefore, we recognize revenue
from sales of our machine tool systems upon delivery of the product to the
customer or distributor, which is normally at the time of shipment.

                                       47



Depending upon geographic location, after shipment, a machine may be installed
at the customer's facility by a distributor, independent contractor, or by one
of our service technicians. In most instances, where a machine is sold through a
distributor, we have no installation involvement. If sales are direct or through
sales agents, we will typically complete the machine installation, which
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing within the
standard specifications. We consider the machine installation process for our
three-axis machines to be inconsequential and immaterial within the context of
the contract. For our five-axis machines that we install, we estimate the fair
value of the installation performance obligation and recognize that installation
revenue on a prorata basis over the period of the installation process.

From time to time, and depending upon geographic location, we may provide
training or freight services. We consider these services to be immaterial within
the context of the contract, as the value of these services typically does not
rise to a material level as a component of the total contract value. Service
fees from maintenance contracts are deferred and recognized in earnings on a
prorata basis over the term of the contract and are generally sold on a
stand-alone basis. Customer discounts and estimated product returns are
considered variable consideration and are recorded as a reduction of revenue in
the same period that the related sales are recorded. We have reviewed the
overall sales transactions for variable consideration and have determined that
these amounts are not significant.

Inventories - We determine at each balance sheet date how much, if any, of our
inventory may ultimately prove to be either unsalable or unsalable at its
carrying cost. Reserves are established to effectively adjust the carrying value
of such inventory to lower of cost (first-in, first-out method) or net
realizable value. To determine the appropriate level of valuation reserves, we
evaluate current stock levels in relation to historical and expected patterns of
demand for all of our products. We evaluate the need for changes to valuation
reserves based on market conditions, competitive offerings, and other factors on
a regular basis.

Income Taxes - We account for income taxes and the related accounts under the
asset and liability method.  Deferred tax assets and liabilities are measured
using enacted income tax rates in each jurisdiction in effect for the year in
which the temporary differences are expected to be recovered or settled.  These
deferred tax assets are reduced by a valuation allowance, which is established
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized.  Net deferred tax assets and liabilities are
classified as non-current in the consolidated financial statements. Our judgment
regarding the realization of deferred tax assets may change due to future
profitability and market conditions, changes in U.S. or foreign tax laws, and
other factors.  These changes, if any, may require material adjustments to these
deferred tax assets and an accompanying reduction or increase in net income in
the period when such determinations are made.

The determination of our provision for income taxes requires judgment, the use
of estimates, and the interpretation and application of complex federal, state
and foreign tax laws.  Our provision for income taxes reflects a combination of
income earned and taxed at the federal and state level in the U.S., as well as
in various foreign jurisdictions.

In addition to the risks to the effective tax rate described above, the future
effective tax rate reflected in forward-looking statements is based on currently
effective tax laws.  Significant changes in those laws could materially affect
these estimates.

                                       48


We operate in multiple jurisdictions through wholly-owned subsidiaries, and our
global structure is complex. The estimates of our uncertain tax positions
involve judgments and assessment of the potential tax implications. We recognize
uncertain tax positions when it is more likely than not that the tax position
will be sustained upon examination by relevant taxing authorities, based on the
technical merits of the position. The amount recognized is measured as the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Our tax positions are subject to audit by
taxing authorities across multiple global jurisdictions, and the resolution of
such audits may span multiple years. Tax law is complex and often subject to
varied interpretations.  Accordingly, the ultimate outcome with respect to taxes
we may owe may differ from the amounts recognized.

Impairment of Goodwill and Intangible Assets. Goodwill and indefinite-lived
intangibles arising from a business combination are not amortized and charged to
expense over time. Instead, goodwill and indefinite-lived intangibles must be
reviewed for impairment annually as of the last day of our third fiscal quarter,
or more frequently, if circumstances arise indicating potential impairment. For
goodwill, if the carrying amount of the reporting unit containing the goodwill
exceeds the fair value of that reporting unit, an impairment loss is recognized
for that excess, but only to the extent of the goodwill amount allocated to that
reporting unit.  For indefinite-lived intangible assets, if the carrying amount
exceeds the fair value, an impairment loss is recognized in an amount equal to
that excess. Intangible assets that are determined to have a finite life are
amortized over their estimated useful lives and are also subject to review for
impairment, if indicators of impairment are identified.

Impairment of Long-Lived Assets - We are required periodically to review the
recoverability of certain assets, including property, plant, and equipment,
intangible assets, and goodwill, based on projections of anticipated future cash
flows, including future profitability assessments of various product lines. We
estimate cash flows using internal budgets based on recent sales data.



Capitalized Software Development Costs - Costs incurred to develop computer
software products and significant enhancements to software features of existing
products are capitalized as required by FASB guidance relating to accounting for
the costs of computer software to be sold, leased, or otherwise marketed, and
such capitalized costs are amortized over the estimated product life of the
related software. The determination as to when in the product development cycle
technological feasibility has been established, and the expected product life,
require judgments and estimates by management and can be affected by
technological developments, innovations by competitors, and changes in market
conditions affecting demand. We periodically review the carrying values of these
assets and make judgments as to ultimate realization considering the
above-mentioned risk factors.

Derivative Financial Instruments - Critical aspects of our accounting policy for
derivative financial instruments that we designate as hedging instruments
include conditions that require that critical terms of a hedging instrument are
essentially the same as a hedged forecasted transaction. Another important
element of our policy demands that formal documentation be maintained as
required by FASB guidance relating to accounting for derivative instruments and
hedging activities. Failure to comply with these conditions would result in a
requirement to recognize changes in market value of hedge instruments in
earnings. We routinely monitor significant estimates, assumptions, and judgments
associated with derivative instruments, and compliance with formal documentation
requirements.

                                       49



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.

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Financials ()
Sales 2021 235 M - -
Net income 2021 6,76 M - -
Net cash 2021 73,0 M - -
P/E ratio 2021 32,1x
Yield 2021 1,69%
Capitalization 169 M 169 M -
EV / Sales 2020 0,88x
EV / Sales 2021 0,60x
Nbr of Employees 706
Free-Float 93,5%
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Gregory S. Volovic President, Chief Executive Officer & Director
Sonja K. McClelland Chief Financial Officer, Treasurer & Executive VP
Michael Doar Executive Chairman
Janaki Sivanesan Independent Director
Richard Porter Independent Director
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