What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-06-08 compared with 2020-03-06 · 354 added, 194 removed, 141 unchanged (80% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion

and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide

The following Management’s Discussion

and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide

an understanding of our financial condition and other related matters, including our liquidity, capital resources and results of

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We have both significant foreign sales and significant foreign manufacturing operations.

During the first three months

During the first six months

of fiscal 2020, approximately 43% of our revenues were attributable to customers in Europe, where we typically sell more of our

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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 the lineup that have contributed product diversity and market penetration opportunity.

These non-Hurco branded

products 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 that can be integrated with any machine tool.

In addition, through our wholly-owned

subsidiary LCM Precision Technology S.r.l.

(“LCM”), we produce high value machine tool components and accessories.

principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and

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.

vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan,

Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China,

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.

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 that can be integrated with

any machine tool.

In addition, through our wholly-owned subsidiary LCM Precision Technology S.r.l.

(“LCM”), we produce

high value machine tool components and accessories.

principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and Asia.

some distributors carry competitive products, we are the primary line for the majority of our distributors globally.

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,

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We seek to mitigate those risks through

the use of derivative instruments – principally foreign currency forward exchange contracts.

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 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.

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.

date, we have not experienced material disruptions 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

We have also implemented reductions in headcount and discretionary spending, delayed capital expenditures, and

pulled back production activities 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.

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

Three Months Ended January 31, 2020

Compared to Three Months Ended January 31, 2019

and Service Fees.

Sales and service fees for the first quarter of fiscal 2020 were $43.7

million, a decrease of $30.6 million, or 41%, compared to the corresponding prior year period and included an unfavorable currency

impact of $0.3 million, or less than 1%, when translating foreign sales to U.S.

Three Months Ended April 30, 2020 Compared to Three

Months Ended April 30, 2019

Sales and Service Fees.

service fees for the second quarter of fiscal 2020 were $37.1 million, a decrease of $33.5 million, or 47%, compared to the corresponding

prior year period and included an unfavorable currency impact of $0.4 million, or less than 1%, when translating foreign sales

dollars for financial reporting purposes.

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The following table sets forth net sales

and service fees by geographic region for the first quarter ended January 31, 2020 and 2019 (dollars in thousands):

and service fees by geographic region for the second quarter ended April 30, 2020 and 2019 (dollars in thousands):

Three Months Ended

Since the beginning of fiscal 2020, our

operating results have been adversely affected by the ongoing economic slowdown in Germany, trade tensions between U.S.

political friction in the U.S., the U.K.

Brexit activities and more recently the international business disruption due to the outbreak

of coronavirus.

Many of our customers deferred or eliminated investments in capital equipment, which we attribute largely to the

uncertainty these events created.

During the first quarter of fiscal 2020, sales declined in all regions, particularly in

Europe and the Americas, our primary markets for our higher-performance, higher-priced machines.

Additionally, global machine tool

manufacturers have priced their excess inventories more competitively in order to realign inventory levels with current demand.

Sales in the Americas for the first quarter

Sales in the Americas for the second quarter

of fiscal 2020 decreased by 30%, compared to the corresponding period in fiscal 2019, primarily due to a reduced volume of shipments

of Hurco, Milltronics and Takumi machines.

Sales in the Americas in the first quarter of fiscal 2019 also benefitted from strong

demand and backlog coming off fiscal 2018, a record sales year for Hurco.

European sales for the first quarter of

The reductions in shipment volume were mainly attributable to government-mandated stay-at-home

or shelter orders imposed across the region.

Additionally, sales in the Americas in the second quarter of fiscal 2019 benefitted

from strong demand and backlog coming off fiscal 2018, a record sales year for Hurco.

European sales for the second quarter of

fiscal 2020 decreased by 61%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact

of less than 1%, when translating foreign sales to U.S.

of 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The decrease in European sales

for the first quarter of fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines in

Germany and the United Kingdom, as well as a decrease in sales of electro-mechanical components and accessories manufactured by

our wholly-owned subsidiary in Italy, LCM.

Sales in Europe in the first quarter of fiscal 2019 also benefitted from higher demand

The decrease in European sales for the

second quarter of fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines as well

as a decrease in sales of electro-mechanical components and accessories manufactured by LCM.

Similar to the Americas, the reduction

in shipment volume was mainly driven by government-mandated COVID-19 stay-at-home orders or other similar operating restrictions

imposed across the region.

Additionally, sales in Europe during the second quarter of fiscal 2019 benefitted from higher demand

and backlog from the fourth quarter of fiscal 2018.

Asian Pacific sales for the first quarter

Asian Pacific sales for the second quarter

of fiscal 2020 decreased by 35%, compared to the corresponding period in fiscal 2019, and included a negative currency impact of

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dollars for financial reporting purposes.

The year-over-year reduction in

Asian Pacific sales primarily resulted from a reduced volume of shipments of Hurco vertical milling and lathe machines in China,

India and Southeast Asia, as well as lower sales of Takumi vertical milling machines in China.

The reduction in Asian Pacific sales

primarily resulted from a reduced volume of shipments of Hurco vertical milling machines in all Asian regions where our customers

are located, as many of them were impacted by government-mandated COVID-19 stay-at-home orders or similar operating restrictions.

Sales and Service Fees by Product Category

The following table sets forth net sales

and service fees by product category for the quarter ended January 31, 2020 and 2019 (dollars in thousands):

and service fees by product category for the second quarter ended April 30, 2020 and 2019 (dollars in thousands):

Three Months Ended

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Service Parts

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

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 the first quarter of fiscal 2020 decreased by 45% and 24%, respectively, compared to

the corresponding prior year period, and included an unfavorable currency impact of less than 1%.

The year-over-year decreases

were a result of decreased shipments of Hurco and Milltronics machines across all regions.

Sales of service parts decreased by

17% during the first quarter of 2020, compared to the corresponding prior year period, reflecting decreased aftermarket sales of

service parts in North America, Germany, France and the United Kingdom.

Service fees for the first quarter of fiscal 2020 decreased

by 6%, compared to the corresponding prior year period, due primarily to a decrease in aftermarket service of Hurco products in

Orders for the first quarter

computer control systems and software for the second quarter of fiscal 2020 decreased by 50% and 51%, respectively, compared to

the corresponding prior year period, and each included an unfavorable currency impact of less than 1%.

Sales of service parts and

service fees decreased by 27% and 29%, respectively, during the second quarter of fiscal 2020, compared to the corresponding prior

year period, and each included an unfavorable currency impact of less than 1%.

The decreases in all product categories were primarily

due to reduced volume of shipments of Hurco, Milltronics and Takumi machines and parts and reduced volume of services provided

as a result of the impact of government-mandated COVID-19 restrictions across all regions.

Orders for the second quarter

of fiscal 2020 were $36.6 million, a decrease of $30.7 million, or 46%, compared to the corresponding period in fiscal 2019, and

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The following table sets forth new orders

booked by geographic region for the first quarter ended January 31, 2020 and 2019 (dollars in thousands):

booked by geographic region for the second quarter ended April 30, 2020 and 2019 (dollars in thousands):

Three Months Ended

Orders in the Americas for the first quarter

Orders in the Americas for the second quarter

of fiscal 2020 decreased by 21%, compared to the corresponding period in fiscal 2019, primarily due to decreased customer demand

for Hurco, Milltronics and Takumi machines.

European orders for the first quarter of

fiscal 2020 decreased by 35%, compared to the corresponding prior year period, and included an unfavorable currency impact of less

than 1%, when translating foreign orders to U.S.

The year-over-year decrease in orders was driven primarily by decreased

customer demand for Hurco and Takumi machines in Germany and the United Kingdom.

Asian Pacific orders for the first quarter

of fiscal 2020 decreased by 43%, compared to the corresponding prior year period, and included a favorable currency impact of less

than 1%, when translating foreign orders to U.S.

The year-over-year decrease in Asian Pacific orders was driven primarily

by a reduction in customer demand for Hurco machines in China and Southeast Asia.

for Hurco, Milltronics and Takumi machines during the COVID-19 pandemic.

European orders for the second quarter

of fiscal 2020 decreased by 58%, compared to the corresponding prior year period, and included an unfavorable currency impact of

1%, when translating foreign orders to U.S.

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.

Asian Pacific orders for the second quarter

of fiscal 2020 decreased by 50%, compared to the corresponding prior year period, and included an unfavorable currency impact of

1%, when translating foreign orders to U.S.

The year-over-year decrease in Asian Pacific orders was driven primarily by

a reduction in customer demand for Hurco machines in China, India and Southeast Asia, and Takumi vertical and bridge mill machines

in China, during the COVID-19 pandemic.

Gross Profit .

Gross profit for the

first quarter of fiscal 2020 was $9.2 million, or 21% of sales, compared to $22.1 million, or 30% of sales, for the corresponding

second quarter of fiscal 2020 was $6.7 million, or 18% of sales, compared to $21.6 million, or 31% of sales, for the corresponding

prior year period.

The year-over-year decrease in gross profit as a percentage of sales were primarily due to lower sales of more

higher-priced, higher-performance machines across all sales regions, particularly the European sales region, and competitive pricing

pressures on a global basis due to excess inventory levels.

Additionally, gross profit was negatively impacted by the allocation

of fixed costs on lower sales and production volumes.

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 due to excess inventory levels and the negative impact of fixed costs leveraged against lower sales

and production volumes.

Operating Expenses .

Selling, general

and administrative expenses for the first quarter of fiscal 2020 were $10.8 million, or 25% of sales, compared to $13.9 million,

or 19% of sales, in the corresponding period in fiscal 2019, and included a favorable currency impact of $0.1 million, when translating

and administrative expenses for the second quarter of fiscal 2020 were $10.6 million, or 29% of sales, compared to $14.1 million,

or 20% of sales, for the corresponding period in fiscal 2019, and included a favorable currency impact of $0.1 million, when translating

foreign expenses to U.S.

dollars for financial reporting purposes.

The year-over-year reduction in selling, general and administrative

expenses was primarily due to a decrease in incentive and variable employee compensation, employee benefits and other operating

expense reductions implemented during the first quarter of fiscal 2020, 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 .

The reduction in selling, general and administrative expenses

was primarily 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 implemented during the second quarter of fiscal 2020,

partially offset by increased operating expenses associated with ProCobots LLC, the U.S.

automation integration business acquired by Hurco in the fourth quarter of fiscal 2019 .

Operating Income (Loss).

loss for the first quarter of fiscal 2020 was $1.7 million compared to operating income of $8.2 million for the corresponding period

in fiscal 2019.

The decrease in operating income (loss) year-over-year was primarily driven by the decreased volume of sales.

Other Income, Net .

Other income,

net in the first quarter of fiscal 2020 decreased by $0.5 million from the corresponding period in fiscal 2019 primarily due to

a reduction in foreign currency exchange gains in fiscal 2020, compared to the corresponding period in fiscal 2019.

loss for the second quarter of fiscal 2020 was $3.9 million compared to operating income of $7.5 million for the corresponding

period in fiscal 2019.

The decrease in operating income (loss) was primarily driven by the decreased volume of sales.

Other Income (Expense), Net .

income (expense), net in the second quarter of fiscal 2020 decreased by $0.8 million from the corresponding period in fiscal 2019

primarily due to an increase in foreign currency exchange loss in fiscal 2020, compared to the corresponding period in fiscal

Income Taxes .

The effective tax

rates for the first quarter of fiscal 2020 was 40%, compared to 27% in the corresponding prior year period.

The year-over-year

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

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.

rate for the second quarter of fiscal 2020 was 16%, compared to 32% for the corresponding prior year period.

The decrease in the

effective tax rate was primarily due to changes in 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

recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

In response to the COVID-19 pandemic,

the CARES Act was signed into law in the U.S.

on March 27, 2020.

The CARES Act includes several provisions that provide economic

relief, deferral for payroll taxes and modifications to net operating loss carryback provisions that we are currently evaluating.

The potential impact of these tax law changes is reflected in the effective tax rate for the current fiscal year period.

Six Months Ended April 30, 2020 Compared to Six

Months Ended April 30, 2019

Sales and Service Fees .

service fees for the first six months of fiscal 2020 were $80.8 million, a decrease of $64.1 million, or 44%, compared to the

corresponding period in fiscal 2019, and included an unfavorable currency impact of $0.8 million, or less than 1%, when translating

foreign sales to U.S.

dollars for financial reporting purposes.

Sales and Service Fees by Geographic

The following table sets forth net sales

and service fees by geographic region for the six months ended April 30, 2020 and 2019 (dollars in thousands):

Sales in the Americas for the first six

months of fiscal 2020 decreased by 36%, compared to the corresponding period in 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

stay-at-home or shelter orders imposed across the region.

Additionally, sales in the Americas in the first six months of fiscal

2019 benefitted from strong demand and backlog coming off fiscal 2018, a record sales year for Hurco.

European sales for the first six months

of fiscal 2020 decreased by 53%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact

of 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The decrease in European sales for the

first six months of fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines as well

as a decrease in sales of electro-mechanical components and accessories manufactured by LCM.

Similar to the Americas, the reduction

in shipment volume was mainly driven by government-mandated COVID-19 stay-at-home orders or other similar operating restrictions

imposed across the region.

Additionally, sales in Europe during the first six months of fiscal 2019 benefitted from higher demand

and backlog from the fourth quarter of fiscal 2018.

Asian Pacific sales for the first six

months of fiscal 2020 decreased by 35%, compared to the corresponding period in fiscal 2019, and included a negative currency

impact of less than 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The reduction in Asian

Pacific sales primarily resulted from a reduced volume of shipments of Hurco vertical milling machines in all Asian regions where

our customers are located, as many of them were impacted by government-mandated COVID-19 stay-at-home orders or similar operating

restrictions.

Sales and Service Fees by Product Category

The following table sets forth net sales

and service fees by product category for the six months ended April 30, 2020 and 2019 (dollars in thousands):

Six Months Ended

Computerized Machine Tools

Computer Control Systems and Software &dagger;

Service Parts

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 the first six months of fiscal 2020 decreased by 48% and 37%, respectively, compared

to the corresponding prior year period, and each included an unfavorable currency impact of less than 1%.

Sales of service parts

and service fees decreased by 22% and 18%, respectively, during the first six months of fiscal 2020, compared to the corresponding

prior year period, and each included an unfavorable currency impact of less than 1%.

The decreases in all product categories are

primarily due to reduced volume of shipments of Hurco, Milltronics and Takumi machines and parts and reduced volume of services

provided, as well as the impact of government- mandated COVID-19 restrictions across all regions.

Orders for the first six

months of fiscal 2020 were $82.1 million, a decrease of $53.1 million, or 39%, compared to the corresponding period in fiscal 2019,

and included an unfavorable currency impact of $0.7 million, or less than 1%, when translating foreign orders to U.S.

The following table sets forth new orders

booked by geographic region for the first six months of fiscal 2020 and 2019 (dollars in thousands):

Six Months Ended

Orders in the Americas for the first six

months of fiscal 2020 decreased by 24%, compared to the corresponding period in fiscal 2019, primarily due to decreased customer

demand for Hurco, Milltronics and Takumi machines during the COVID-19 pandemic.

European orders for the first six months

of fiscal 2020 decreased by 47%, compared to the corresponding prior year period, and included an unfavorable currency impact

of 1%, when translating foreign orders to U.S.

The 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.

Asian Pacific orders for the first six

months of fiscal 2020 decreased by 47%, compared to the corresponding prior year period, and included an unfavorable currency impact

of less than 1%, when translating foreign orders to U.S.

The decrease in Asian Pacific orders was driven primarily by

a reduction in customer demand for Hurco machines in China, India and Southeast Asia and Takumi vertical and bridge mill machines

in China during the COVID-19 pandemic.

Gross Profit .

Gross profit for

the first six months of fiscal 2020 was $15.9 million, or 20% of sales, compared to $43.8 million, or 30% of sales, for the corresponding

prior year period.

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 due to excess inventory levels and the negative impact of fixed costs leveraged against lower sales

and production volumes.

Operating Expenses .

Selling, general

and administrative expenses for the first six months of fiscal 2020 were $21.4 million, or 27% of sales, compared to $28.0 million,

or 19% of sales, for the corresponding period in fiscal 2019, and included a favorable currency impact of $0.2 million, when translating

foreign expenses to U.S.

dollars for financial reporting purposes.

The reduction in selling, general and administrative expenses

was primarily 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 implemented during the first six months of fiscal

2020, partially offset by increased operating expenses associated with ProCobots LLC, the U.S.

automation integration business acquired by Hurco in the fourth quarter of fiscal 2019 .

Operating Income (Loss).

loss for the first six months of fiscal 2020 was $5.6 million compared to operating income of $15.8 million for the corresponding

period in fiscal 2019.

The decrease in operating income (loss) year-over-year was primarily driven by the decreased volume of

Other Income (Expense), Net .

income (expense), net in the first six months of fiscal 2020 decreased by $1.3 million from the corresponding period in fiscal

2019 primarily due to foreign currency exchange losses incurred in fiscal 2020, compared to foreign currency exchange gains incurred

in the corresponding period in fiscal 2019, as well as a reduction in income related to our equity investment in Hurco Automation, Ltd.

Income Taxes .

The effective tax

rate for the first six months of fiscal 2020 was 22%, compared to 29% for the corresponding prior year period.

The decrease in

the effective tax rate was primarily due to changes in 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

recent changes in income tax laws under the CARES Act.

The potential impact of these tax law changes is reflected in the effective

tax rate for the current fiscal year period.

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 2020, we had cash and cash

At April 30, 2020, we had cash and cash

equivalents of $45.3 million, compared to $56.9 million at October 31, 2019.

Approximately 20% of the $45.3 million of cash and

cash equivalents is denominated in U.S.

The balance is attributable to our foreign operations and is held in the local

cash equivalents was denominated in U.S.

The balance was attributable to our foreign operations and is held in the local

currencies of our various foreign entities, subject to fluctuations in currency exchange rates.

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reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.

Working capital was $202.3 million at

January 31, 2020 compared to $207.2 million at October 31, 2019.

The decrease in working capital was primarily driven by decreases

in accounts receivable and increases in operating lease liabilities, partially offset by decreases in accrued payroll, employee

benefits and accounts payables.

Pursuant to the adoption of Accounting Standards Update No.

2016-02, “Leases”

(Topic 842) right of use assets were all recorded as noncurrent, but the lease liabilities were allocated between current and

This created a current liability for operating leases, which resulted in a reduction to our working capital

of $4.2 million for the three months ended January 31, 2020.

Working capital was $195.6 million at April

30, 2020 compared to $207.2 million at October 31, 2019.

The decrease in working capital was primarily driven by decreases in cash

and accounts receivable and increases in operating lease liabilities, partially offset by increases in inventories and prepaid

expenses and decreases in accrued payroll and employee benefits, and trade accounts payable.

Pursuant to our adoption of

ASC 842, on November 1, 2019, right-of-use assets were all recorded as noncurrent, but the lease liabilities were allocated between

current and noncurrent.

This created a current liability for operating leases, which resulted in a reduction to our working

capital of $3.9 million for the six months ended April 30, 2020.

Capital expenditures of $0.8 million during

the first three months of fiscal 2020 were primarily for capital improvements in existing facilities and software development costs.

the first six months of fiscal 2020 were primarily for capital improvements in existing facilities and software development costs.

We funded these expenditures with cash on hand.

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

On March 13, 2020, 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 11, 2022,

subject to applicable laws, regulations and contractual provisions.

The program may be amended, suspended or discontinued at any

time and does not commit us to repurchase any shares of our common stock.

During the three and six months ended April 30,

2020, we repurchased $3.9 million in shares of our common stock.

In addition, during the three and six

months ended April 30, 2020, we paid cash dividends to our shareholders of $879,000 and $1.7 million, respectively.

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

entered into 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.

entered into the 2018 Credit Agreement with Bank of America, N.A., as the lender, which was subsequently amended on

March 13, 2020.

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.

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

any one time may not exceed $20.0 million.

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

are borrowers, and certain of our

other subsidiaries are guarantors.

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

Borrowings under the 2018 Credit Agreement

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

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

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

Outstanding letters of credit will

carry an annual rate of 0.75%.

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

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

(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

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

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are subject to review and termination by the respective underlying lending institution 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

We had no debt or borrowings under any of our credit facilities at January 31, 2020.

At January 31, 2020, we had an aggregate

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.

We had no debt or borrowings under any of our credit facilities at April 30, 2020.

At April 30, 2020, we had an aggregate

of $51.3 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

We believe our cash position and borrowing

capacity under our credit facilities provide adequate liquidity to fund our operations over the next twelve months and allow us

to remain committed to our strategic plan of product innovation, strategic acquisitions and targeted penetration of developing

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 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

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Our accounting policies, which are described

in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, require management to make significant estimates

and assumptions using information available at the time the estimates are made.

These estimates and assumptions significantly affect

various reported amounts of assets, liabilities, revenues, and expenses.

If our future experience differs materially from these

estimates and assumptions, our results of operations and financial condition would be affected.

in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, require management to make significant

estimates and assumptions using information available at the time the estimates are made.

These estimates and assumptions significantly

affect various reported amounts of assets, liabilities, revenues, and expenses.

If our future experience differs materially from

these estimates and assumptions, our results of operations and financial condition would be affected.

There were no material changes

to our critical accounting policies during the first three months of fiscal 2020.

to our critical accounting policies during the first six months of fiscal 2020.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes related

to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year

ended October 31, 2019.

to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal

year ended October 31, 2019.

OFF BALANCE SHEET ARRANGEMENTS

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

use financing.

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

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.

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.

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.

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.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements made in this report

constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

constitute “forward-looking statements”

within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results,

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and other factors include, but are not limited to:

The cyclical nature of the machine tool industry;

Uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets;

The risks of our international operations;

The limited number of our manufacturing and supply chain sources;

The effects of changes in currency exchange rates;

Our dependence on new product development;

Possible obsolescence of our technology and the need to make technological advances;

Competition with larger companies that have greater financial resources;

Increases in the prices of raw materials, especially steel and iron products;

Acquisitions that could disrupt our operations and affect operating results;

Impairment of our assets;

Negative or unforeseen tax consequences;

The need and/or ability to protect our intellectual property assets;

Our ability to integrate acquisitions;

Uncertainty concerning our ability to use tax loss carryforwards;

Breaches of our network and system security measures;

The effect of the loss of members of senior management and key personnel;

Governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to

cyclical nature of the machine tool industry;

economic conditions, which may adversely affect overall demand, in the Americas, Europe

and Asia Pacific markets;

risks of our international operations;

limited number of our manufacturing and supply chain sources;

effects of changes in currency exchange rates;

dependence on new product development;

obsolescence of our technology and the need to make technological advances;

with larger companies that have greater financial resources;

in the prices of raw materials, especially steel and iron products;

that could disrupt our operations and affect operating results;

of our assets;

or unforeseen tax consequences;

need and/or ability to protect our intellectual property assets;

ability to integrate acquisitions;

concerning our ability to use tax loss carryforwards;

of our network and system security measures;

effect of the loss of members of senior management and key personnel;

The impact of COVID-19 pandemic and other public health epidemics on the global economy, our business

and operations, our employees and the business, operations and economies of our customers and suppliers;

actions, initiatives and regulations, including import and export restrictions, duties

and tariffs and changes to tax laws.

We discuss these and other important risks

and uncertainties that may affect our future operations in Part I, Item 1A – Risk Factors in our most recent Annual Report

on Form 10-K and may update that discussion in Part II, Item 1A – Risk Factors in this report or a Quarterly Report on Form

10-Q we file hereafter.

and uncertainties that may affect our future operations in Part I, Item 1A –

Risk Factors in our most recent Annual

Report on Form 10-K and in Part II, Item 1A –

Risk Factors in this report, and we may update that discussion

in a Quarterly Report on Form 10-Q we file hereafter.

Readers are cautioned not to place undue

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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 2. Management’s Discussion and Analysis