HURCO COMPANIES INC 10-Q

Item 1 . FINANCIAL STATEMENTS HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended Six Months Ended April 30, April 30, 2020 2019 2020 2019 Sales and service fees $ 37,126 $ 70,674 $ 80,786 $ 144,887 Cost of sales and service 30,417 49,037 64,918 101,108 Gross profit 6,709 21,637 15,868 43,779 Selling, general and administrative expenses 10,599 14,111 21,445 28,025 Operating income (loss) (3,890 ) 7,526 (5,577 ) 15,754 Interest expense 32 14 50 26 Interest income 20 99 90 181 Investment income 3 129 65 371 Other income (expense), net (793 ) (7 ) (710 ) 560 Income (loss) before taxes (4,692 ) 7,733 (6,182 ) 16,840 Provision (benefit) for income taxes (765 ) 2,481 (1,362 ) 4,934 Net income (loss) $ (3,927 ) $ 5,252 $ (4,820 ) $ 11,906 Income (loss) per common share Basic $ (0.58 ) $ 0.77 $ (0.71 ) $ 1.75 Diluted $ (0.58 ) $ 0.76 $ (0.71 ) $ 1.73 Weighted average common shares outstanding Basic 6,739 6,764 6,760 6,750 Diluted 6,739 6,824 6,760 6,816 Dividends paid per share $ 0.13 $ 0.12 $ 0.25 $ 0.23 The accompanying notes are an integral part of the condensed consolidated financial statements. 3 HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Three Months Ended Six Months Ended April 30, April 30, 2020 2019 2020 2019 Net income (loss) $ (3,927 ) $ 5,252 $ (4,820 ) $ 11,906 Other comprehensive income (loss): Translation of foreign currency financial statements (135 ) (1,386 ) 148 (77 ) (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(9), $(14), $(33) and $(11), respectively (30 ) (48 ) (110 ) (36 ) Gain / (loss) on derivative instruments, net of tax of $165, $84, $164 and $5, respectively 551 289 547 19 Total other comprehensive income (loss) 386 (1,145 ) 585 (94 ) Comprehensive income (loss) $ (3,541 ) $ 4,107 $ (4,235 ) $ 11,812 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 HURCO COMPANIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) April 30, October 31, 2020 2019 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 45,267 $ 56,943 Accounts receivable, net 27,798 43,279 Inventories, net 152,864 148,851 Derivative assets 1,449 1,391 Prepaid assets 14,093 9,414 Other 427 1,983 Total current assets 241,898 261,861 Property and equipment: Land 868 868 Building 7,352 7,352 Machinery and equipment 28,746 28,846 Leasehold improvements 4,730 4,902 41,696 41,968 Less accumulated depreciation and amortization (28,909 ) (28,055 ) Total property and equipment 12,787 13,913 Non-current assets: Software development costs, less accumulated amortization 8,044 8,318 Goodwill 5,809 5,847 Intangible assets, net 746 1,096 Operating lease – right-of-use assets, net 12,300 -- Deferred income taxes 1,686 1,846 Investments and other assets, net 8,105 8,184 Total non-current assets 36,690 25,291 Total assets $ 291,375 $ 301,065 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 29,977 $ 33,969 Derivative liabilities 60 388 Operating lease liabilities 3,905 -- Accrued payroll and employee benefits 6,384 11,564 Accrued income taxes 473 1,936 Accrued expenses 4,211 5,015 Accrued warranty 1,244 1,760 Total current liabilities 46,254 54,632 Non-current liabilities: Deferred income taxes 182 160 Accrued tax liability 1,944 2,036 Operating lease liabilities 8,738 -- Deferred credits and other 3,569 3,992 Total non-current liabilities 14,433 6,188 Shareholders’ equity: Preferred stock: no par value per share, 1,000,000 shares authorized; no shares issued -- -- Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized 6,737,969 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 667 677 Additional paid-in capital 62,731 66,350 Retained earnings 175,638 182,151 Accumulated other comprehensive loss (8,348 ) (8,933 ) Total shareholders’ equity 230,688 240,245 Total liabilities and shareholders’ equity $ 291,375 $ 301,065 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended Six Months Ended April 30, April 30, 2020 2019 2020 2019 Cash flows from operating activities: Net income (loss) $ (3,927 ) $ 5,252 $ (4,820 ) $ 11,906 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Provision (benefit) for doubtful accounts 139 (92 ) 127 (139 ) Deferred income taxes (49 ) 12 59 (26 ) Equity in income (loss) of affiliates (23 ) (123 ) (66 ) (408 ) Depreciation and amortization 1,067 906 2,172 1,845 Foreign currency (gain) loss 1,460 436 1,567 (356 ) Unrealized (gain) loss on derivatives (647 ) (425 ) 19 (221 ) Stock-based compensation 643 724 779 1,433 Change in assets and liabilities: (Increase) decrease in accounts receivable 3,852 8,340 15,004 10,400 (Increase) decrease in inventories (3,462 ) (3,473 ) (4,758 ) (10,570 ) (Increase) decrease in prepaid expenses (2,443 ) (386 ) (4,568 ) (1,362 ) Increase (decrease) in accounts payable 249 (4,724 ) (4,291 ) (7,616 ) Increase (decrease) in accrued expenses 89 1,116 (6,389 ) (3,641 ) Increase (decrease) in accrued income tax (853 ) (5,123 ) (1,480 ) (2,745 ) Net change in operating lease assets and liabilities (4 ) -- 351 -- Net change in derivative assets and liabilities (103 ) (75 ) (205 ) 376 Other 1,923 12 1,663 (469 ) Net cash provided by (used for) operating activities (2,089 ) 2,377 (4,836 ) (1,593 ) Cash flows from investing activities: Proceeds from sale of equipment 54 9 127 31 Purchase of property and equipment (203 ) (499 ) (389 ) (1,281 ) Software development costs (193 ) (508 ) (456 ) (969 ) Net cash provided by (used for) investing activities (342 ) (998 ) (718 ) (2,219 ) Cash flows from financing activities: Dividends paid (879 ) (818 ) (1,693 ) (1,565 ) Taxes paid related to net settlement of restricted shares -- -- (498 ) (499 ) Stock repurchases (3,911 ) -- (3,911 ) -- Repayment of short-term debt -- -- -- (1,454 ) Net cash provided by (used for) financing activities (4,790 ) (818 ) (6,102 ) (3,518 ) Effect of exchange rate changes on cash (99 ) (139 ) (20 ) 340 Net increase (decrease) in cash and cash equivalents (7,320 ) 422 (11,676 ) (6,990 ) Cash and cash equivalents at beginning of period 52,587 69,758 56,943 77,170 Cash and cash equivalents at end of period $ 45,267 $ 70,180 $ 45,267 $ 70,180 The accompanying notes are an integral part of the condensed consolidated financial statements. 6 HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except shares outstanding) Three Months Ended April 30, 2020 and 2019 Common Stock Additional Accumulated Other Shares Outstanding Amount Paid-in Capital Retained Earnings Comprehensive Income (Loss) Total Balances, January 31, 2019 6,758,123 $ 676 $ 64,391 $ 173,766 $ (8,812 ) $ 230,021 Net income -- -- -- 5,252 -- 5,252 Other comprehensive income (loss) -- -- -- -- (1,145 ) (1,145 ) Stock-based compensation expense, net of taxes withheld for vested restricted shares 9,114 1 723 -- -- 724 Dividends paid -- -- -- (818 ) -- (818 ) Balances, April 30, 2019 6,767,237 $ 677 $ 65,114 $ 178,200 $ (9,957 ) $ 234,034 Balances, January 31, 2020 6,803,163 $ 680 $ 65,985 $ 180,444 $ (8,734 ) $ 238,375 Net loss -- -- -- (3,927 ) -- (3,927 ) Other comprehensive income (loss) -- -- -- -- 386 386 Stock-based compensation expense, net of taxes withheld for vested restricted shares 11,824 2 642 -- -- 644 Stock repurchases (148,761 ) (15 ) (3,896 ) -- -- (3,911 ) Dividends paid -- -- -- (879 ) -- (879 ) Balances, April 30, 2020 6,666,226 $ 667 $ 62,731 $ 175,638 $ (8,348 ) $ 230,688 Six Months Ended April 30, 2020 and 2019 Common Stock Additional Accumulated Other Shares Outstanding Amount Paid-in Capital Retained Earnings Comprehensive Income (Loss) Total Balances, October 31, 2018 6,723,160 $ 672 $ 64,185 $ 167,859 $ (9,863 ) $ 222,853 Net income -- -- -- 11,906 -- 11,906 Other comprehensive income (loss) -- -- -- -- (94 ) (94 ) Stock-based compensation expense, net of taxes withheld for vested restricted shares 44,077 5 929 -- -- 934 Dividends paid -- -- -- (1,565 ) -- (1,565 ) Balances, April 30, 2019 6,767,237 $ 677 $ 65,114 $ 178,200 $ (9,957 ) $ 234,034 Balances, October 31, 2019 6,767,237 $ 677 $ 66,350 $ 182,151 $ (8,933 ) $ 240,245 Net loss -- -- -- (4,820 ) -- (4,820 ) Other comprehensive income (loss) -- -- -- -- 585 585 Stock-based compensation expense, net of taxes withheld for vested restricted shares 47,750 5 277 -- -- 282 Stock repurchases (148,761 ) (15 ) (3,896 ) -- -- (3,911 ) Dividends paid -- -- -- (1,693 ) -- (1,693 ) Balances, April 30, 2020 6,666,226 $ 667 $ 62,731 $ 175,638 $ (8,348 ) $ 230,688 The accompanying notes are an integral part of the condensed consolidated financial statements. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL The unaudited Condensed Consolidated Financial Statements include the accounts of 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. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service 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 April 30, 2020 and for the three and six months ended April 30, 2020 and April 30, 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 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, 2019. 2. REVENUE RECOGNITION We design, manufacture and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support. We 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. 8 We recognize revenues from the sale of machine tools, components and accessories and services and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with Financial Accounting Standards Board (“FASB”) guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) each of the performance obligations to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s 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. 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. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. 3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk, for which we enter into derivative instruments in the form of foreign currency forward exchange contracts with a few major financial institutions. We enter into these forward exchange contracts to reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, to reduce the impact on gross profit and net earnings from sales and purchases denominated in foreign currencies, and to reduce 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. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We record all derivative instruments as assets or liabilities at fair value. 9 Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in the following foreign currencies: the Pound Sterling, Euro and New Taiwan Dollar. The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other income, net. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. We had forward contracts outstanding as of 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 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 risk. 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 exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2019. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2020. 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 Instruments 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 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 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 April 30, 2020, totaled $46.7 million. 10 Fair Value of Derivative Instruments We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheets. 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 Balance Sheet Fair Balance Sheet Fair Derivatives Location Value Location Value Designated as Hedging Instruments: Foreign exchange forward contracts Derivative assets $ 721 Derivative assets $ 751 Foreign exchange forward contracts Derivative liabilities $ 10 Derivative liabilities $ 99 Not Designated as Hedging Instruments: Foreign exchange forward contracts Derivative assets $ 728 Derivative assets $ 640 Foreign exchange forward contracts Derivative liabilities $ 50 Derivative liabilities $ 289 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 April 30, 2020 and 2019 (in thousands): Derivatives Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) Location of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) Three Months Ended April 30, Three Months Ended April 30, 2020 2019 2020 2019 Designated as Hedging Instruments: (Effective portion) Foreign exchange forward contracts – Intercompany sales/purchases $ 551 $ 289 Cost of sales and service $ 30 $ 48 Foreign exchange forward contract – Net investment $ 64 $ 74 We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended April 30, 2020 or 2019. We recognized the following 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): Derivatives Location of Gain (Loss) Recognized in Operations Amount of Gain (Loss) Recognized in Operations Three Months Ended April 30, 2020 2019 Not Designated as Hedging Instruments: Foreign exchange forward contracts Other income (expense), net $ 970 $ 345 11 The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended April 30, 2020 (in thousands): Foreign Currency Translation Cash Flow Hedges Total Balance, January 31, 2020 $ (9,759 ) $ 1,025 $ (8,734 ) Other comprehensive income (loss) before reclassifications (135 ) 551 416 Reclassifications -- (30 ) (30 ) Balance, April 30, 2020 $ (9,894 ) $ 1,546 $ (8,348 ) 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 six months ended April 30, 2020 and 2019 (in thousands): Derivatives Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) Location of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) Six Months Ended April 30, Six Months Ended April 30, 2020 2019 2020 2019 Designated as Hedging Instruments: (Effective portion) Foreign exchange forward contracts – Intercompany sales/purchases $ 547 $ 19 Cost of sales and service $ 110 $ 36 Foreign exchange forward contract – Net investment $ 89 $ 72 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): Derivatives Location of Gain (Loss) Recognized in Operations Amount of Gain (Loss) Recognized in Operations Six Months Ended April 30, 2020 2019 Not Designated as Hedging Instruments: Foreign exchange forward contracts Other income (expense), net $ 1,126 $ 111 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 Translation Cash Flow Hedges Total Balance, October 31, 2019 $ (10,042 ) $ 1,109 $ (8,933 ) Other comprehensive income (loss) before reclassifications 148 547 695 Reclassifications -- (110 ) (110 ) Balance, April 30, 2020 $ (9,894 ) $ 1,546 $ (8,348 ) 12 4. EQUITY INCENTIVE PLAN In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards. The 2016 Equity Plan replaced the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008 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. 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 Compensation Committee of our Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 Plan that are currently outstanding. No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee may determine at the date of grant. The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date. A summary of stock option activity for the six-month period ended April 30, 2020, is as follows: Stock Options Weighted Average Exercise Price Outstanding at October 31, 2019 37,045 $ 21.69 Options granted -- -- Options exercised -- -- Options cancelled -- -- Outstanding at April 30, 2020 37,045 $ 21.69 Summarized information about outstanding stock options as of April 30, 2020, that have already vested and are currently exercisable, are as follows: Options Already Vested and Currently Exercisable Number of outstanding options 37,045 Weighted average remaining contractual life (years) 1.77 Weighted average exercise price per share $ 21.69 Intrinsic value of outstanding options $ 407,000 The intrinsic value of an outstanding stock 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 full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $23.62 per share. On January 2, 2020, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 performance period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the Compensation Committee in 2017. As a result, the Compensation Committee determined that a total of 28,979 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. 13 On January 2, 2020, the Compensation Committee also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested. The awards were approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2020 through fiscal 2022. On that date, the Compensation Committee granted a total of 20,837 shares of time-based restricted stock to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $37.79 per share. On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2020 executive long-term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2020-2022, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of the PSUs – TSR for achieving threshold performance and 200% of the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs – TSR was $46.81 per PSU and was calculated using the Monte Carlo approach. On January 2, 2020, the Compensation Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2020 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period of fiscal 2020-2022. Participants will have the ability to earn between 50% of the target number of the PSUs - ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for 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 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 Weighted Average Grant Date Fair Value Unvested at October 31, 2019 200,482 $ 39.62 Shares or units granted 102,761 37.54 Shares or units vested (47,750 ) 38.35 Shares or units cancelled (10,164 ) 40.88 Shares or units withheld (13,369 ) 37.38 Unvested at April 30, 2020 231,960 $ 39.03 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 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. 14 5. 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 was as follows (in thousands): Current assets $ 349 Property plant and equipment 452 Intangibles 148 Goodwill 3,500 Total assets 4,449 Current liabilities 96 Total liabilities 96 Total purchase price and cash expended $ 4,353 The acquisition was accounted for in accordance with ASC Topic 805, Business Combinations. Accordingly, the total purchase price was allocated to tangible assets and liabilities based on their fair value and the intangibles and goodwill were allocated on a provisional basis at the date of acquisition. These allocations reflected various provisional estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are in the process of being finalized. The results of operations of ProCobots have been included in the consolidated financial statements from the date of acquisition. 6. EARNINGS PER SHARE Per share results have been computed based on the average number of common shares outstanding over the period in question. The computation of basic and diluted net income (loss) per share is determined using net income (loss) applicable to common shareholders as the numerator and the number of shares outstanding as the denominator as follows (in thousands, except per share amounts): Three Months Ended Six Months Ended April 30, April 30, 2020 2019 2020 2019 Basic Diluted Basic Diluted Basic Diluted Basic Diluted Net income (loss) $ (3,927 ) $ (3,927 ) $ 5,252 $ 5,252 $ (4,820 ) $ (4,820 ) $ 11,906 $ 11,906 Undistributed earnings allocated to participating shares 41 41 (44 ) (44 ) 51 51 (100 ) (100 ) Net income (loss) applicable to common shareholders $ (3,886 ) $ (3,886 ) $ 5,208 $ 5,208 $ (4,769 ) $ (4,769 ) $ 11,806 $ 11,806 Weighted average shares outstanding 6,739 6,739 6,764 6,764 6,760 6,760 6,750 6,750 Stock options and contingently issuable securities -- -- -- 60 -- -- -- 66 6,739 6,739 6,764 6,824 6,760 6,760 6,750 6,816 Income (loss) per share $ (0.58 ) $ (0.58 ) $ 0.77 $ 0.76 $ (0.71 ) $ (0.71 ) $ 1.75 $ 1.73 15 7. ACCOUNTS RECEIVABLE Accounts receivable are net of allowances for doubtful accounts of $1.0 million as of April 30, 2020 and $891,000 as of October 31, 2019. 8. INVENTORIES Inventories, priced at the lower of cost (first-in, first-out method) or net realizable value, are summarized below (in thousands): April 30, 2020 October 31, 2019 Purchased parts and sub-assemblies $ 31,192 $ 32,074 Work-in-process 15,644 20,901 Finished goods 106,028 95,876 $ 152,864 $ 148,851 9. LEASES We adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed. Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. Upon adoption of ASC 842, we utilized the following elections and practical expedients: · We have elected to combine non-lease components with lease components. · If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply ASC 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material. · We 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 arrangements entered into prior to November 1, 2019 for whether an arrangement is or contains a lease, the lease classification applied or to separate initial direct costs. · We have elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended. Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment. Most of the leased production and assembly facilities have lease terms ranging from two to five years, although the terms and conditions of our leases can vary significantly from lease to lease. We have assessed the specific terms and conditions of each lease to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon lease commencement. In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain. There are no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a party. In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value. We record a right-of-use asset and lease liability on our Condensed Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842. We 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. 16 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 six months ended April 30, 2020 (in thousands): Six Months Ended April 30, 2020 Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities $ 2,336 Noncash information: Right-of-use assets obtained in exchange for new operating lease liabilities $ 1,007 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): 2020 $ 4,015 2021 3,149 2022 2,224 2023 1,482 2024 and thereafter 2,531 Total $ 13,401 The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of April 30, 2020 (in thousands): Remainder of 2020 $ 2,233 2021 3,767 2022 2,689 2023 1,729 2024 and thereafter 2,778 Total 13,196 Less: Imputed interest (553 ) Present value of operating lease liabilities $ 12,643 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%. 10. SEGMENT INFORMATION We operate in a single segment: industrial automation equipment. We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support. 17 11. GUARANTEES AND PRODUCT WARRANTIES From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of 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 respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve is as follows (in thousands): Six Months Ended April 30, 2020 2019 Balance, beginning of period $ 1,760 $ 2,497 Provision for warranties during the period 899 1,630 Charges to the reserve (1,407 ) (1,793 ) Impact of foreign currency translation (8 ) 11 Balance, end of period $ 1,244 $ 2,345 The year-over-year decrease in our warranty reserve was primarily due to a decrease in the number of machines under warranty resulting from decreased sales volume. 12. DEBT AGREEMENTS On December 31, 2018, we and our subsidiary 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. 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%. 18 The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $10.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $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. Ltd. (“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. 13. INCOME TAXES 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. The CARES 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 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 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. We file U.S. 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 July 2024. 14. FINANCIAL INSTRUMENTS FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions. 19 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 April 30, 2020 and October 31, 2019 (in thousands): Assets Liabilities April 30, 2020 October 31, 2019 April 30, 2020 October 31, 2019 Level 1 Deferred Compensation $ 1,580 $ 1,991 $ -- $ -- Level 2 Derivatives $ 1,449 $ 1,391 $ 60 $ 388 Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices that are readily available. Included in Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying Condensed Consolidated Financial Statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 3 of Notes to the Condensed Consolidated Financial Statements. The U.S. Dollar equivalent notional amounts of these contracts was $76.6 million and $108.6 million at April 30, 2020 and October 31, 2019, respectively. The fair value of our foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility. 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’ non-performance to be material risks. 15. 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. 16. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements: Between February 2016 and February 2019, 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. 20 ASC 842 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application. 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 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. 17. LONG-LIVED ASSETS AND GOODWILL Impairment 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 operations. We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended April 30, 2020. Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed 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. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment if indicators of impairment are identified. 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 . 21