HURCO COMPANIES INC 10-Q

Item 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide an understanding of our financial condition and other related matters, including our liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the notes accompanying our unaudited financial statements appearing elsewhere in this report, as well as our audited financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2019. EXECUTIVE OVERVIEW Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support. The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance. This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report. The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During 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 higher-performance, higher-priced VMX series machines. Additionally, approximately 15% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures. We have three brands of CNC machine tools in our product portfolio: Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die/mold, aerospace and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. These three brands of CNC machine tools are responsible for the vast majority of our revenue, however, we have added other non-Hurco branded products to our product portfolio that have contributed product diversity and market penetration opportunity. These non-Hurco branded products are sold by our wholly-owned distributors and are comprised primarily of other general-purpose vertical milling centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machines, metal cutting saws and CNC swill lathes. ProCobots is our wholly-owned subsidiary that provides automation solutions 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. We principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom and certain parts of the United States , which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM. 22 Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements. Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of derivative instruments – principally foreign currency forward exchange contracts. We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. The COVID-19 pandemic has 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. To 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 law. 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. We will continue to evaluate and disclose any trends and uncertainties that have had or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of each interim period. RESULTS OF OPERATIONS Three Months Ended April 30, 2020 Compared to Three Months Ended April 30, 2019 Sales and Service Fees. Sales and 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 to U.S. dollars for financial reporting purposes. 23 Sales and Service Fees by Geographic Region The following table sets forth net sales and service fees by geographic region for the second quarter ended April 30, 2020 and 2019 (dollars in thousands): Three Months Ended April 30, 2020 2019 $ Change % Change Americas $ 16,696 45 % $ 23,830 34 % $ (7,134 ) (30 )% Europe 14,736 40 % 38,103 54 % (23,367 ) (61 )% Asia Pacific 5,694 15 % 8,741 12 % (3,047 ) (35 )% Total $ 37,126 100 % $ 70,674 100 % $ (33,548 ) (47 )% 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. 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 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. 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 second quarter 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 second quarter ended April 30, 2020 and 2019 (dollars in thousands): Three Months Ended April 30, 2020 2019 $ Change % Change Computerized Machine Tools $ 29,990 81 % $ 60,567 86 % $ (30,577 ) (50 )% Computer Control Systems and Software † 338 1 % 692 1 % (354 ) (51 )% Service Parts 5,185 14 % 7,128 10 % (1,943 ) (27 )% Service Fees 1,613 4 % 2,287 3 % (674 ) (29 )% Total $ 37,126 100 % $ 70,674 100 % $ (33,548 ) (47 )% † 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 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. 24 Orders. 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 included an unfavorable currency impact of $0.4 million, or less than 1%, when translating foreign orders to U.S. dollars. The following table sets forth new orders booked by geographic region for the second quarter ended April 30, 2020 and 2019 (dollars in thousands): Three Months Ended April 30, 2020 2019 $ Change % Change Americas $ 15,924 43 % $ 20,268 30 % $ (4,344 ) (21 %) Europe 15,575 43 % 36,840 55 % (21,265 ) (58 %) Asia Pacific 5,054 14 % 10,099 15 % (5,045 ) (50 %) Total $ 36,553 100 % $ 67,207 100 % $ (30,654 ) (46 %) 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 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. dollars. The year-over-year decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines, and a decrease in sales of electro-mechanical components and accessories manufactured by LCM, during the COVID-19 pandemic. 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. dollars. 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 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 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 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 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. -based automation integration business acquired by Hurco in the fourth quarter of fiscal 2019 . Operating Income (Loss). Operating 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. 25 Other Income (Expense), Net . Other 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 2019. Income Taxes . The effective tax 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 . Sales and 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 Region 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): Six Months Ended April 30, 2020 2019 $ Change % Change Americas $ 34,175 42 % $ 52,986 37 % $ (18,811 ) (36 )% Europe 34,821 43 % 73,815 51 % (38,994 ) (53 )% Asia Pacific 11,790 15 % 18,086 12 % (6,296 ) (35 )% Total $ 80,786 100 % $ 144,887 100 % $ (64,101 ) (44 )% 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. 26 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 April 30, 2020 2019 $ Change % Change Computerized Machine Tools $ 65,203 81 % $ 124,799 86 % $ (59,596 ) (48 )% Computer Control Systems and Software † 896 1 % 1,425 1 % (529 ) (37 )% Service Parts 11,087 14 % 14,258 10 % (3,171 ) (22 )% Service Fees 3,600 4 % 4,405 3 % (805 ) (18 )% Total $ 80,786 100 % $ 144,887 100 % $ (64,101 ) (44 )% † 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. 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. dollars. 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 April 30, 2020 2019 $ Change % Change Americas $ 34,086 42 % $ 44,998 33 % $ (10,912 ) (24) % Europe 37,321 45 % 70,150 52 % (32,829 ) (47) % Asia Pacific 10,726 13 % 20,066 15 % (9,340 ) (47) % Total $ 82,133 100 % $ 135,214 100 % $ (53,081 ) (39) % 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. dollars. 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. dollars. 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. 27 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. -based automation integration business acquired by Hurco in the fourth quarter of fiscal 2019 . Operating Income (Loss). Operating 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 sales. Other Income (Expense), Net . Other 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 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 was denominated in U.S. Dollars. 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. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs. 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 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. The purchase price for the ProCobots acquisition has been preliminarily allocated 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. 28 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. Future dividends are subject to approval of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors deemed relevant by our Board of Directors from time to time. On December 31, 2018, we and our subsidiary Hurco B.V. entered into 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. 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%. 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, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. As of 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 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. 29 We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase. CRITICAL ACCOUNTING POLICIES 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. There were no material changes 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. OFF BALANCE SHEET ARRANGEMENTS From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow 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 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. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements. These risks, uncertainties 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; 30 · 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; · 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; and · Governmental 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 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 reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement is applicable to all forward-looking statements contained in this report. 31