What changed in this filing

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Item 1. Financial Statements

2020-06-08 compared with 2020-03-06 · 448 added, 297 removed, 475 unchanged (61% of the section changed)

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Three Months Ended

Six Months Ended

Sales and service fees

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Investment income

Other income, net

Other income (expense), net

Income (loss) before taxes

Provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

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Three Months Ended

Six Months Ended

Net income (loss)

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Gain / (loss) on derivative instruments, net of tax of $165, $84, $164 and $5, respectively

other comprehensive income (loss)

Comprehensive

income (loss)

Total other comprehensive income (loss)

Comprehensive income (loss)

The accompanying notes are an integral

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Common stock:

no par value, $.10 stated value per share, 12,500,000 shares authorized 6,868,950 and 6,824,451 shares issued;

and 6,803,163 and 6,767,237 shares outstanding, as of January 31, 2020 and October 31, 2019, respectively

no par value, $.10 stated value per share, 12,500,000 shares authorized 6,737,969 and 6,824,451 shares issued and 6,666,226 and 6,767,237 shares outstanding, as of April 30, 2020 and October 31, 2019, respectively

Additional paid-in capital

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Three Months Ended

Six Months Ended

Cash flows from operating activities:

income (loss)

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

Provision for doubtful accounts

Provision (benefit) for doubtful accounts

Deferred income taxes

Equity in income of affiliates

Equity in income (loss) of affiliates

Depreciation and amortization

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Increase (decrease) in accrued expenses

Net change in derivative assets and liabilities

Increase (decrease) in accrued income tax

Net change in operating lease assets and liabilities

Net change in derivative assets and liabilities

Net cash provided by (used for) operating activities

Cash flows from investing activities:

Purchase of property and equipment

Proceeds from sale of equipment

Purchase of property and equipment

Software development costs

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Taxes paid related to net settlement of restricted shares

Stock repurchases

Repayment of short-term debt

Net cash provided by (used for) financing activities

Effect of exchange rate changes

Effect of exchange rate changes on cash

Net increase (decrease) in cash and cash equivalents

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HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS

OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended

January 31, 2020 and 2019

(In thousands, except

shares outstanding)

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY

(In thousands, except shares outstanding)

Three Months Ended April 30, 2020 and 2019

Comprehensive

Income (Loss)

Balances, January 31, 2019

Other comprehensive income (loss)

Stock-based compensation expense, net of taxes withheld for vested restricted shares

Dividends paid

Balances, April 30, 2019

Balances, January 31, 2020

Other comprehensive income (loss)

Stock-based compensation expense, net of taxes withheld for vested restricted shares

Stock repurchases

Dividends paid

Balances, April 30, 2020

Six Months Ended April 30, 2020 and 2019

Retained Earnings

Comprehensive

Income (Loss)

Balances, October 31, 2018

Other comprehensive income

Other comprehensive income (loss)

Stock-based compensation expense, net of taxes withheld for vested restricted shares

Dividends paid

Balances, January 31, 2019 (Unaudited)

Balances, April 30, 2019

Balances, October 31, 2019

Other comprehensive income

Other comprehensive income (loss)

Stock-based compensation expense, net of taxes withheld for vested restricted shares

Stock repurchases

Dividends paid

Balances, January 31, 2020 (Unaudited)

Balances, April 30, 2020

The accompanying notes are an integral

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and its consolidated subsidiaries.

As used in this report, the words “we”,

“us”, “our”, “Hurco” and the “Company” refer to Hurco Companies, Inc.

and its consolidated

subsidiaries.

As used in this report, the words

“we”, “us”, “our”, “Hurco”

and the “Company”

refer to Hurco Companies, Inc.

and its consolidated subsidiaries.

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.

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service and training and applications support.

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 had a significant impact on our business and industry during fiscal 2020.

Over the past few months,

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 significant disruptions in their business operations and normal

purchasing cycles.

Because of this disruption in demand and the potential for extended vulnerability during the

remainder of this fiscal year, we have closely evaluated the estimates we have made in preparing the financial statements as

of April 30, 2020 with the understanding that these estimates could change in the near term.

We cannot predict the

duration or scope of the 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.

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.

The condensed financial information as

of January 31, 2020 and for the three months ended January 31, 2020 and January 31, 2019 is unaudited.

However, in our opinion,

the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated

financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of the interim

We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the financial statements

and the notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2019.

of April 30, 2020 and for the three and six months ended April 30, 2020 and April 30, 2019 is unaudited.

in our opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present

fairly our consolidated financial position, results of operations, changes in shareholders’

equity and cash flows for and

at the end of the interim periods.

We suggest that you read these Condensed Consolidated Financial Statements in conjunction with

the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended October 31,

REVENUE RECOGNITION

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We adopted Accounting Standards Codification

(“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) on November 1, 2018, the start

of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption.

Prior to the adoption of ASC

606, our revenues were already recognized in the same manner as that required by ASC 606.

Therefore, the adoption of ASC 606 did

not have an effect on our overall financial statements.

(“ASC”) 606 “Revenue from Contracts with Customers”

(“ASC 606”) on November 1, 2018, the

start of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption.

Prior to the adoption

of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606.

Therefore, the adoption of ASC

606 did not have an effect on our overall financial statements.

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.

record revenues based on a five-step model in accordance with Financial Accounting Standards Board (“FASB”) guidance

codified in ASC 606.

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allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when

(or as) each of the performance obligation to the customer is fulfilled.

(or as) each of the performance obligations to the customer is fulfilled.

A good or service is transferred when the customer

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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.

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systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment.

Depending upon geographic

location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor

or by one of our service technicians.

In most instances where a machine is sold through a distributor, we have no installation

If sales are direct or through sales agents, we will typically complete the machine installation, which consists of

the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing

within the standard specifications.

We consider the machine installation process for our three-axis machines to be inconsequential

and perfunctory.

For our five-axis machines that we install, we estimate the fair value of the installation performance obligation

and recognize that installation revenue on a prorata basis over the period of the installation process.

Depending upon geographic location, after

shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our

service technicians.

In most instances where a machine is sold through a distributor, we have no installation involvement.

are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain

parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications.

We consider the machine installation process for our three-axis machines to be inconsequential and perfunctory.

For our five-axis

machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation

revenue on a prorata basis over the period of the installation process.

From time to time, and depending upon geographic

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the impact on our net earnings of foreign currency fluctuations on receivables and payables denominated in foreign currencies that

are different than the subsidiaries’ functional currency.

are different than the subsidiaries’

functional currency.

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.

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 record all derivative instruments as assets or liabilities at fair value.

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developments regarding the risk of a counterparty default.

We had forward contracts outstanding

as of January 31, 2020, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from

February 2020 through January 2021.

We had forward contracts outstanding as

of April 30, 2020, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from May 2020

through April 2021.

The contract amounts, expressed at forward rates in U.S.

Dollars at January

31, 2020, were $12.3 million for Euros, $3.9 million for Pounds Sterling and $15.0 million for New Taiwan Dollars.

31, 2020, we had approximately $5,000 of loss, net of tax, related to cash flow hedges deferred in Accumulated other

comprehensive loss.

Included in this amount were $156,000 of unrealized gains, net of tax, related to cash flow hedge

instruments that remain subject to currency fluctuation risk.

The majority of these deferred gains will be recorded as an

adjustment to Cost of sales and service in periods through January 2021, when the corresponding inventory that is the subject

of the related hedge contracts is sold, as described above.

Dollars at April 30, 2020, were $8.5 million

for Euros, $3.2 million for Pounds Sterling and $14.5 million for New Taiwan Dollars.

At April 30, 2020, we had approximately

$547,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss.

Included in this amount

were $490,000 of unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation

The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through April 2021,

when the corresponding inventory that is the subject of the related hedge contracts is sold, as described above.

We are also exposed to foreign currency

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To manage this risk, we entered into a forward contract

with a notional amount of €3.0 million in November 2019.

We designated this forward contract as a hedge of our net investment

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This forward contract matures in November 2020.

As of January 31, 2020, we had a realized gain of $947,000 and an unrealized gain

of $10,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this

forward contract.

As of April 30, 2020, we had a realized gain of $947,000 and an unrealized

gain of $75,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to

this forward contract.

Derivatives Not Designated as Hedging

We also enter into foreign currency forward

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

These derivative instruments are not designated as hedges under the FASB guidance and, as a result, changes in their

fair value are reported currently as Other expense, net in the Condensed Consolidated Statements of Operations consistent with

the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

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

foreign currencies.

These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes in

their fair value are reported currently as Other income (expense), net in the Condensed Consolidated Statements of Operations

consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

We had forward contracts outstanding as

of January 31, 2020, denominated in Euros, Pounds Sterling, South African Rand, and New Taiwan Dollar with set maturity dates ranging

from February 2020 through January 2021.

of April 30, 2020, denominated in Euros, Pounds Sterling, South African Rand, and New Taiwan Dollar with set maturity dates

ranging from May 2020 through April 2021.

The contract amounts, expressed at forward rates in U.S.

Dollars at January 31, 2020,

Dollars at April 30,

2020, totaled $46.7 million.

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instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheets.

As of January 31, 2020 and

October 31, 2019, all derivative instruments were recorded at fair value on our Consolidated Balance Sheets as follows (in thousands):

January 31, 2020

As of April 30, 2020

and October 31, 2019, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets

as follows (in thousands):

April 30, 2020

October 31, 2019

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Derivative liabilities

Effect of Derivative Instruments on

the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed

Consolidated Statements of Operations

Effect of Derivative Instruments on the Condensed Consolidated

Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’

Equity and Condensed Consolidated Statements

of Operations

Derivative instruments had the following

effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity

and Condensed Consolidated Statements of Operations, net of tax, during the three months ended January 31, 2020 and 2019 (in thousands):

of Gain (Loss)

effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’

and Condensed Consolidated Statements of Operations, net of tax, during the three months ended April 30, 2020 and 2019 (in

Amount of Gain (Loss)

Recognized in Other

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Income (Loss)

Location of Gain

(Loss) Reclassified

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Income (Loss)

Amount of Gain

(Loss) Reclassified

Comprehensive

Income (Loss)

Three Months Ended

Designated as Hedging Instruments:

(Effective portion)

Foreign exchange forward contracts

Foreign exchange forward contracts –

Intercompany sales/purchases

Cost of sales and service

Foreign exchange forward contract

Foreign exchange forward contract –

Net investment

We did not recognize any gains or losses

as a result of hedges deemed ineffective for either of the three months ended January 31, 2020 or 2019.

as a result of hedges deemed ineffective for either of the three months ended April 30, 2020 or 2019.

We recognized the following

losses and gains in our Condensed Consolidated Statements of Operations during the three months ended January 31, 2020 and 2019

on derivative instruments not designated as hedging instruments (in thousands):

of Gain (Loss)

Recognized in Operations

gains in our Condensed Consolidated Statements of Operations during the three months ended April 30, 2020 and 2019 on derivative

instruments not designated as hedging instruments (in thousands):

Location of Gain

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in Operations

Amount of Gain (Loss)

Recognized in Operations

Three Months Ended

Not Designated as Hedging Instruments:

Foreign exchange forward contracts

Other income, net

Other income (expense), net

The following table presents the changes in the components of

Accumulated other comprehensive loss, net of tax, for the three months ended January 31, 2020 (in thousands):

Accumulated other comprehensive loss, net of tax, for the three months ended April 30, 2020 (in thousands):

Foreign Currency

Balance, January 31, 2020

Other comprehensive income (loss) before reclassifications

Reclassifications

Balance, April 30, 2020

Derivative instruments had the following

effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’

and Condensed Consolidated Statements of Operations, net of tax, during the six months ended April 30, 2020 and 2019 (in thousands):

Amount of Gain (Loss)

Recognized in Other

Comprehensive

Income (Loss)

Location of Gain

(Loss) Reclassified

Comprehensive

Income (Loss)

Amount of Gain

(Loss) Reclassified

Comprehensive

Income (Loss)

Six Months Ended

Designated as Hedging Instruments:

(Effective portion)

Foreign exchange forward contracts –

Intercompany sales/purchases

Cost of sales and service

Foreign exchange forward contract –

Net investment

We did not recognize any gains or losses

as a result of hedges deemed ineffective for either of the six months ended April 30, 2020 or 2019.

We recognized the following

gains in our Condensed Consolidated Statements of Operations during the six months ended April 30, 2020 and 2019 on derivative

instruments not designated as hedging instruments (in thousands):

Location of Gain

(Loss) Recognized

in Operations

Amount of Gain (Loss)

Recognized in Operations

Six Months Ended

Not Designated as Hedging Instruments:

Foreign exchange forward contracts

Other income (expense), net

The following table presents the changes

in the components of Accumulated other comprehensive loss, net of tax, for the six months ended April 30, 2020 (in thousands):

Foreign Currency

Balance, October 31, 2019

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Reclassifications

Balance, January 31, 2020

Balance, April 30, 2020

EQUITY INCENTIVE PLAN

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Companies, Inc.

2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock

options, stock appreciation rights, restricted stock, stock units and other stock-based awards.

The 2016 Equity Plan replaced

the Hurco Companies, Inc.

2008 Equity Incentive Plan (the “2008 Plan”) and is the only active plan under which

equity awards may be made by us to our employees and non-employee directors.

No further awards will be made under our 2008

The total number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is

856,048, which includes 386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the

date our shareholders approved the 2016 Equity Plan.

The 2016 Equity Plan replaced the

Hurco Companies, Inc.

2008 Equity Incentive Plan (the “2008 Plan”) and is the only active plan under which equity

awards may be made by us to our employees and non-employee directors.

No further awards will be made under our 2008 Plan.

number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048, which includes

386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date our shareholders approved

the 2016 Equity Plan.

The Compensation Committee of our Board

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A summary of stock option activity for

the three-month period ended January 31, 2020, is as follows:

the six-month period ended April 30, 2020, is as follows:

Stock Options

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Options cancelled

Outstanding at January 31, 2020

Outstanding at April 30, 2020

Summarized information about outstanding

stock options as of January 31, 2020, that have already vested and are currently exercisable, are as follows:

Already Vested and

stock options as of April 30, 2020, that have already vested and are currently exercisable, are as follows:

Options Already Vested and

Currently Exercisable

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The intrinsic value of an outstanding stock

option is calculated as the difference between the stock price as of January 31, 2020 and the exercise price of the option.

On November 13, 2019, the Compensation

Committee granted a total of 8,052 shares of time-based restricted stock to our non-executive employees.

option is calculated as the difference between the stock price as of April 30, 2020 and the exercise price of the option.

On March 12, 2020, the Compensation

Committee granted a total of 17,780 shares of time-based restricted stock to our non-employee directors.

The restricted shares

vest in 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

vest in full one year from the date of grant provided the recipient remains on the board of directors through that date.

date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was

$23.62 per share.

On January 2, 2020, the Compensation Committee

determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 performance period

was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the

Compensation Committee in 2017.

As a result, the Compensation Committee determined that a total of 28,979 PSUs were earned by our

executive officers, which performance share units (“PSUs”) vested on January 2, 2020.

The vesting date fair value of

the PSUs was based on the closing sales price of our common stock on the vesting date, which was $37.79 per share.

On January 2, 2020, the Compensation

Committee also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted

shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

awards were approximately 25% time-based vesting and approximately 75% performance-based vesting.

The three-year performance

period for the PSUs is fiscal 2020 through fiscal 2022.

Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 performance

period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established

by the Compensation Committee in 2017.

As a result, the Compensation Committee determined that a total of 28,979 performance share

units (“PSUs”) were earned by our executive officers, which PSUs vested on January 2, 2020.

The vesting date fair

value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $37.79 per share.

On January 2, 2020, the Compensation

Committee also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares

and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were

approximately 25% time-based vesting and approximately 75% performance-based vesting.

The three-year performance period for the

PSUs is fiscal 2020 through fiscal 2022.

On that date, the Compensation Committee

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the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $37.79 per share.

On January 2, 2020, the Compensation Committee

also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”.

PSUs were weighted as approximately 40% of the overall 2020 executive long-term incentive compensation arrangement and will vest

and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2020-2022, relative

On January 2, 2020, the Compensation

Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU –

These PSUs were weighted as approximately 40% of the overall 2020 executive long-term incentive compensation arrangement and will

vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2020-2022, relative

to the total shareholder return of the companies in a specified peer group over that period.

Participants will have the ability

to earn between 50% of the target number of the PSUs – TSR for achieving threshold performance and 200% of the target number

of the PSUs – TSR for achieving maximum performance.

The grant date fair value of the PSUs – TSR was $46.81 per PSU

to earn between 50% of the target number of the PSUs –

TSR for achieving threshold performance and 200% of the target number

of the PSUs –

TSR for achieving maximum performance.

The grant date fair value of the PSUs –

TSR was $46.81 per PSU

and was calculated using the Monte Carlo approach.

On January 2, 2020, the Compensation Committee

also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”.

PSUs were weighted as approximately 35% of the overall 2020 executive long-term incentive compensation arrangement and will vest

and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year

period of fiscal 2020-2022.

Participants will have the ability to earn between 50% of the target number of the PSUs - ROIC for

achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving maximum performance.

On January 2, 2020, the Compensation

Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU –

These PSUs were weighted as approximately 35% of the overall 2020 executive long-term incentive compensation arrangement and will

vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the

three-year period of fiscal 2020-2022.

Participants will have the ability to earn between 50% of the target number of the PSUs

- ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving maximum performance.

The grant date fair value of the PSUs –

ROIC was based on the closing sales price of our common stock on the grant date,

which was $37.79 per share.

On November 13, 2019, the Compensation

Committee granted a total of 8,052 shares of time-based restricted stock to our non-executive employees.

The restricted shares

vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date

fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $37.79

A reconciliation of our restricted stock and PSU activity

and related information for the three-month period ended January 31, 2020 is as follows:

fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was

$35.75 per share.

A reconciliation of our restricted stock and PSU activity and

related information for the six-month period ended April 30, 2020 is as follows:

Number of Shares

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Shares or units withheld

Unvested at January 31, 2020

During the first three months of fiscal

2020 and 2019, we recorded approximately $136,000 and $709,000, respectively, of stock-based compensation expense related to grants

Unvested at April 30, 2020

During the first six months of fiscal 2020

and 2019, we recorded approximately $779,000 and $1.4 million, respectively, of stock-based compensation expense related to grants

under the 2016 Equity Plan.

As of January 31, 2020, there was an estimated $4.3 million of total unrecognized stock-based compensation

As of April 30, 2020, there was an estimated $4.1 million of total unrecognized stock-based compensation

cost that we expect to recognize by the end of the first quarter of fiscal 2023.

ACQUISITION OF BUSINESS

On August 5, 2019,

we (through a newly-formed subsidiary, ProCobots, LLC (“ProCobots”)) acquired substantially all of the assets of a

U.S.-based automation integration company for approximately $4.4 million.

This acquired business provides automation solutions

that can be integrated with any machine tool.

The purchase price has been preliminarily

allocated to the assets acquired and the liabilities assumed based on their fair values, and approximated $4.4 million.

The allocation

of the opening balance sheet of ProCobots as of August 5, 2019 is as follows (in thousands):

2019, we (through a newly-formed subsidiary, ProCobots, LLC (“ProCobots”)) acquired substantially all of the assets

of a U.S.-based automation integration company for approximately $4.4 million.

This acquired business provides automation

solutions that can be integrated with any machine tool.

The purchase price has been

preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, and approximated $4.4 million.

The allocation of the opening balance sheet of ProCobots as of August 5, 2019 was as follows (in thousands):

Current assets

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outstanding as the denominator as follows (in thousands, except per share amounts):

Three Months Ended January 31,

Three Months Ended

Six Months Ended

Net income (loss)

Undistributed (earnings) loss

Undistributed earnings

allocated to participating shares

Net income (loss) applicable to common shareholders

Weighted average shares outstanding

Stock options and contingently issuable securities

Net income (loss) applicable to

common shareholders

Weighted average shares

Stock options and

contingently issuable securities

Income (loss) per share

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Accounts receivable are net of allowances

for doubtful accounts of $879,000 as of January 31, 2020 and $891,000 million as of October 31, 2019.

for doubtful accounts of $1.0 million as of April 30, 2020 and $891,000 as of October 31, 2019.

Inventories, priced at the lower of cost

(first-in, first-out method) or net realizable value, are summarized below (in thousands):

January 31, 2020

April 30, 2020

October 31, 2019

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We adopted Accounting Standards Update

2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal

year, and utilized the transition method allowed.

Accordingly, comparative period financial information was not adjusted for the

effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the

adoption date.

(“ASU”) No.

2016-02, “Leases”

(“ASC 842”) on November 1, 2019, the start of our 2020

fiscal year, and utilized the transition method allowed.

Accordingly, comparative period financial information was not adjusted

for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings

on the adoption date.

Upon adoption of ASC 842, we utilized the

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we intend to include leases of less than 12 months within the updated footnote disclosures, if material.

We have elected not to use the portfolio method if we enter into a large

number of leases in the same month with the same terms and conditions.

We have elected not to use the portfolio method if we enter into a large number of leases in the

same month with the same terms and conditions.

As we have applied the new transition method allowed per ASU 2018-11, we have elected not to reassess

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liability on our Condensed Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842.

have no lease agreements in place for which we are a lessor, and all our leases for which we are a lessee are classified as operating

leases under the guidance in Topic 840.

We recorded total operating lease

expense of $1.3 million and $1.2 million for the three months ended January 31, 2020 and 2019, respectively, which is

classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed

Consolidated Statements of Operations.

Operating lease expense includes short-term leases and variable lease payments which

are immaterial.

There have been no lease costs capitalized on the Condensed Consolidated Balance Sheets as of January 31,

are a lessor in a small number of lease agreements associated with our automation integration equipment for which the impact to

our consolidated financial statements is immaterial.

All our leases for which we are a lessee are classified as operating leases

under the guidance in Topic 840.

We recorded total operating lease expense

of $2.5 million and $2.4 million for the six months ended April 30, 2020 and 2019, respectively, which is classified within Cost

of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations.

Operating lease expense includes short-term leases and variable lease payments which are immaterial.

There have been no lease costs

capitalized on the Condensed Consolidated Balance Sheets as of April 30, 2020.

The following

table summarizes supplemental cash flow information and non-cash activity related to operating leases for the three months ended

January 31, 2020 (in thousands):

Three Months Ended

January 31, 2020

table summarizes supplemental cash flow information and non-cash activity related to operating leases for the six months ended

April 30, 2020 (in thousands):

Six Months Ended

April 30, 2020

Operating cash flow information:

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The following

table summarizes the maturities of lease commitments as of October 31, 2019, prior to the adoption of the new lease guidance, as

previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 (in thousands):

table summarizes the maturities of lease commitments as of October 31, 2019, prior to the adoption of the new lease guidance,

as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 (in thousands):

2024 and thereafter

The following

table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of January

table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of April 30,

2020 (in thousands):

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Present value of operating lease liabilities

As of January 31, 2020,

the weighted-average remaining term of our lease portfolio was approximately 4.0 years and the weighted-average discount rate was

approximately 1.5%

As of April 30, 2020,

the weighted-average remaining term of our lease portfolio was approximately 4.1 years and the weighted-average discount rate

was approximately 1.6%.

SEGMENT INFORMATION

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GUARANTEES AND PRODUCT WARRANTIES

time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that

use financing.

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 January

31, 2020, we had 23 outstanding third party payment guarantees totaling approximately $0.5 million.

The terms of these

guarantees are consistent with the underlying customer financing terms.

Upon shipment of a machine, the customer assumes the

risk of ownership.

The customer does not obtain title, however, until it has paid for the machine.

A retention of title

clause allows us to recover the machine if the customer defaults on the financing.

We accrue liabilities under these

guarantees at fair value, which amounts are insignificant.

As of April 30, 2020, we had 23 outstanding third

party payment guarantees totaling approximately $0.5 million.

The terms of these guarantees are consistent with the underlying

customer financing terms.

Upon shipment of a machine, the customer assumes the risk of ownership.

The customer does not obtain

title, however, until it has paid for the machine.

A retention of title clause allows us to recover the machine if the customer

defaults on the financing.

We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

We provide warranties on our products with

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changes in our warranty reserve is as follows (in thousands):

Three Months Ended

Six Months Ended

Balance, beginning of period

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On December 31, 2018, we and our subsidiary

entered into a new credit agreement (the “2018 Credit Agreement”) with Bank of America, N.A., as the lender.

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

of $40.0 million.

The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may

not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V.

at any one time may not exceed

$20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed

$20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V.

entered into a new credit agreement, which was amended by that certain First Amendment dated March 13, 2020 (as

amended, the “2018 Credit Agreement”), with Bank of America, N.A., as the lender.

The 2018 Credit Agreement provides

for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million.

The 2018 Credit

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

amount of outstanding loans made to our subsidiary Hurco B.V.

at any one time may not exceed $20.0 million, and the maximum amount

of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million.

Under the 2018 Credit

Agreement, we and Hurco B.V.

are borrowers, and certain of our other subsidiaries are guarantors.

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

The scheduled maturity date of

the 2018 Credit Agreement is December 31, 2020.

Borrowings under the 2018 Credit Agreement

bear interest at floating rates based on, at our option, either (i) a LIBOR-based rate, or other alternative currency-based rate

approved by the lender, plus 0.75% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%,

(b) the prime rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum.

Outstanding letters of credit will

carry an annual rate of 0.75%.

bear interest at floating rates based on, at our option, either (i) a LIBOR-based rate, or other alternative currency-based

rate approved by the lender, plus 0.75% per annum, or (ii) a base rate (which is the highest of (a) the federal funds

rate plus 0.50%, (b) the prime rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum.

letters of credit will carry an annual rate of 0.75%.

The 2018 Credit Agreement contains customary

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(2) restricting

us from making certain payments, including cash dividends, except that we may pay cash dividends as long as immediately before

and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our

cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend

(3) requiring that we maintain a minimum working capital of $125.0 million;

and (4) requiring that we maintain a minimum

tangible net worth of $170.0 million.

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

In March 2019, our wholly-owned

subsidiaries in Taiwan, Hurco Manufacturing Limited.

(“HML”), and China, Ningbo Hurco Machine Tool Co.

(“NHML”), closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New

Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit

facility”), respectively.

As uncommitted facilities, both the Taiwan and China credit facilities are subject to review

and termination by the respective underlying lending institutions from time to time.

As of January 31, 2020, our existing credit

facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit

facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit

There were no borrowings under any of our credit facilities and there was $51.3 million of available borrowing capacity

In December 2017, the Tax Cuts and Jobs

Act (the “Tax Reform Act”) was enacted.

The Tax Reform Act lowered the U.S.

corporate tax rate from 35% to 21%, implemented

a territorial tax system from a worldwide system, imposed a tax on deemed repatriation of earnings of foreign subsidiaries and

added provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign-Derived Intangible Income (“FDII”),

among other provisions.

The Tax Reform Act created a new requirement

that GILTI income earned by Controlled Foreign Corporations (“CFCs”) must be included in the gross income of the CFC’s

We have elected the period cost method to account for GILTI tax.

The Tax Reform Act also created the FDII for

companies that derive income from the export of tangible and intangible property and services.

We have included an estimate

for the GILTI and FDII in our annualized effective tax rate used to determine tax expense (benefit) for the three months ended

January 31, 2020.

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 $170.0 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, Hurco Manufacturing Limited.

(“HML”), and China, Ningbo Hurco Machine Tool Co.

(“NHML”),

closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the “Taiwan

credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”), respectively.

As uncommitted facilities,

both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institutions

from time to time.

As of April 30, 2020, our existing

credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan

credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the

2018 Credit Agreement.

There were no borrowings under any of our credit facilities and there was $51.3 million of available borrowing

capacity thereunder.

Our provision for income taxes and effective

tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates,

conditional reduced tax rates and other events that are not consistent from period to period, such as changes in income tax laws.

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.

Act includes several provisions that provide economic relief for individuals and businesses.

The CARES Act, among other things,

includes tax provisions relating to refundable payroll tax credits, the deferral of employer’s social security payments,

and modifications to net operating loss carryback provisions.

We are currently evaluating the impact of the CARES Act on our financial

position, results of operations and cash flows.

We recorded an income tax benefit during

the first three months of fiscal 2020 of $597,000 compared to income tax expense of $2.5 million for the same period in fiscal

Our effective tax rate for the first three months of fiscal 2020 was 40% in comparison to 27% for the same period in fiscal

The increase in effective tax rate was primarily due to a shift in geographic mix of income and loss among tax jurisdictions.

The shift in geographic mix of income and loss during the quarter created an unfavorable impact of certain U.S.

tax reform provisions

in the current fiscal year related to deductions for FDII and minimal tax provisions for GILTI.

Our unrecognized tax benefits were $228,000

as of January 31, 2020 and $225,000 as of October 31, 2019, and in each case included accrued interest.

the first six months of fiscal 2020 of $1.4 million compared to a tax expense of $4.9 million for the same period in fiscal 2019.

Our effective tax rate for the first six months of fiscal 2020 was 22%, compared to 29% for the same period in fiscal 2019.

Our unrecognized

tax benefits were $230,000 as of April 30, 2020 and $225,000 as of October 31, 2019, and in each case included accrued interest.

We recognize accrued interest and penalties

related to unrecognized tax benefits as components of income tax expense.

As of January 31, 2020, the gross amount of interest

accrued, reported in Accrued expenses, was approximately $35,000, which did not include the federal tax benefit of interest deductions.

As of April 30, 2020, the gross amount of

interest accrued, reported in Accrued expenses, was approximately $37,000, which did not include the federal tax benefit

of interest deductions.

federal and state income tax

returns, as well as tax returns in several foreign jurisdictions.

The statutes of limitations with respect to unrecognized tax

benefits will expire between July 2020 and August 2023.

The statutes of limitations with respect to unrecognized

tax benefits will expire between July 2020 and July 2024.

FINANCIAL INSTRUMENTS

FASB fair value guidance establishes

a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value.

FASB fair value guidance establishes a

three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value.

These tiers include:

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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 January 31, 2020

table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of April 30,

2020 and October 31, 2019 (in thousands):

April 30, 2020

October 31, 2019

April 30, 2020

Deferred Compensation

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Dollar equivalent notional amounts of these contracts was

$87.9 million and $108.6 million at January 31, 2020 and October 31, 2019, respectively.

$76.6 million and $108.6 million at April 30, 2020 and October 31, 2019, respectively.

The fair value of our foreign currency

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The counterparties to the forward exchange contracts are substantial and creditworthy financial institutions.

We do not consider either the risk of counterparties’ non-performance or the economic consequences of counterparties’

We do not consider either the risk of counterparties’

non-performance or the economic consequences of counterparties’

non-performance to be material risks.

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.

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.

NEW ACCOUNTING PRONOUNCEMENTS

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Between February 2016 and February 2019,

FASB issued ASU No.

2016-02, Leases (Topic 842) , and various related updates, which establish a comprehensive new lease

accounting model.

Topic 842 clarifies the definition of a lease, requires a dual approach to lease classification similar to current

lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding

right-of-use asset for leases with a lease-term of more than twelve months.

Under Topic 842, the income statement will reflect

lease expense for operating leases and amortization/interest expense for financing leases.

Topic 842 is effective for our fiscal year

FASB issued ASC 842, and various related updates, which establish a comprehensive new lease accounting model.

ASC 842 clarifies

the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and requires

lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a

lease-term of more than twelve months.

Under ASC 842, the income statement will reflect lease expense for operating leases and

amortization/interest expense for financing leases.

ASC 842 is effective for our fiscal year

2020, including interim periods within the fiscal year, and requires modified retrospective application.

We adopted Topic 842 on

We adopted ASC 842 on

November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information

was not adjusted for the effects of adopting Topic 842 and no cumulative-effect adjustment was required to the opening balance

of retained earnings on the adoption date.

was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of

retained earnings on the adoption date.

See Note 9 of Notes to the Condensed Consolidated Financial Statements for further information.

LONG-LIVED ASSETS AND GOODWILL

of Long-Lived Assets.

Annually, or more often when there are indicators of impairment, we evaluate the carrying value of long-lived

assets to be held and used.

The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired

when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the

carrying value of the asset (or group of assets).

The adverse change in the business climate resulting from the COVID-19

pandemic created triggering events during the second quarter of fiscal 2020, which warranted our review of these assets for potential

impairment as of April 30, 2020.

We determined that we have a single asset group due to the interdependent nature of our

We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash

flow was in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived

assets for the period ended April 30, 2020.

and Intangible Assets.

Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and

charged to expense over time.

Instead, goodwill and indefinite-lived intangibles must be reviewed annually for impairment, or

more frequently, if circumstances arise indicating potential impairment.

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.

assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review

for impairment if indicators of impairment are identified.

The adverse change in the business climate resulting from the

COVID-19 pandemic created triggering events during the second quarter of fiscal 2020, which warranted our review of these assets

for potential impairment as of April 30, 2020.

For the goodwill impairment test we developed a discounted cash flow model

for our single reporting unit.

The discounted cash flows were in excess of our book value of equity, and therefore we determined

that goodwill and indefinite lived assets were not impaired.

Should actual cash flows differ from the assumptions used in

the discounted cash flow estimates, it is reasonably possible that there could be impairment of these assets in the future .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements