HURCO COMPANIES INC 10-Q

Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At April 30, 2020, we had no borrowings outstanding under any of our credit facilities. Foreign Currency Exchange Risk In the first six months of fiscal 2020, we derived approximately 58% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies. Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro. We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). 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. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of April 30, 2020, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows (in thousands, except weighted average forward rates): Notional Amount Weighted Average Contract Amount at Forward Rates in U.S. Dollars Forward Contracts in Foreign Currency Forward Rate Contract Date April 30, 2020 Maturity Dates Sale Contracts: Euro 7,750 1.1277 8,740 8,501 May 2020 - Apr 2021 Pound Sterling 2,525 1.2865 3,248 3,178 May 2020 - Apr 2021 Purchase Contracts: New Taiwan Dollar* 420,000 29.627 * 14,176 14,505 May 2020 - Apr 2021 *New Taiwan Dollars per U.S. Dollar 32 Forward contracts for the sale or purchase of foreign currencies as of April 30, 2020, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies and are not designated as hedges under FASB guidance, were as follows (in thousands, except weighted average forward rates): Notional Amount Weighted Avg. Contract Amount at Forward Rates in U.S. Dollars Forward Contracts in Foreign Currency Forward Rate Contract Date April 30, 2020 Maturity Dates Sale Contracts: Euro 24,283 1.1215 27,233 26,670 May 2020 - Apr 2021 Pound Sterling 887 1.2420 1,102 1,116 May 2020 - Jun 2020 South African Rand 3,232 0.0543 175 174 Jun 2020 Purchase Contracts: New Taiwan Dollar 550,661 29.6169 * 18,593 18,734 May 2020 - Aug 2020 * New Taiwan Dollars per U.S. Dollar We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we have maintained a forward contract with a notional amount of €3.0 million. 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 the hedging of our net investment in Euro-denominated assets. Forward contracts for the sale or purchase of foreign currencies as of April 30, 2020, which are designated as net investment hedges under this guidance were as follows (in thousands, except weighted average forward rates): Notional Amount Weighted Avg. Contract Amount at Forward Rates in U.S. Dollars Forward Contract in Foreign Currency Forward Rate Contract Date April 30, 2020 Maturity Date Sale Contracts: Euro 3,000 1.1231 3,369 3,295 Nov 2020