What changed in this filing

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Item 1. Financial Statements

2021-03-05 compared with 2020-09-04 · 127 added, 216 removed, 379 unchanged (48% of the section changed)

4 unchanged sentences

Three Months Ended

Nine Months Ended

Sales and service fees

4 unchanged sentences

Interest income

Investment income (loss)

Other income (expense), net

Income (loss) before taxes

Investment income

Other income, net

Income (loss) before income taxes

Provision (benefit) for income taxes

8 unchanged sentences

Three Months Ended

Nine Months Ended

Net income (loss)

Other comprehensive income (loss):

Translation of foreign currency financial statements

Translation gain (loss) of foreign currency financial statements

(Gain) / loss on derivative instruments reclassified into operations, net of tax of $( 114 ) and $( 24 ), respectively

1 unchanged sentence

Total other comprehensive income (loss)

Comprehensive income

Comprehensive income (loss)

The accompanying notes are an integral part of the condensed consolidated financial statements.

13 unchanged sentences

Less accumulated depreciation and amortization

Total property and equipment

Total property and equipment, net

Non–current assets:

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Accrued expenses

Accrued warranty

Accrued warranty expenses

Total current liabilities

10 unchanged sentences

Common stock:

no par value, $.10 stated value per share, 12,500,000 shares authorized 6,636,906 and 6,824,451 shares issued and 6,565,163 and 6,767,237 shares outstanding, as of July 31, 2020 and October 31, 2019, respectively

no par value, $ .10 stated value per share, 12,500,000 shares authorized 6,665,033 and 6,636,906 shares issued;

and 6,583,626 and 6,565,163 shares outstanding, as of January 31, 2021 and October 31, 2020, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Total shareholders’ equity

5 unchanged sentences

Three Months Ended

Nine Months Ended

Cash flows from operating activities:

Net income (loss)

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

Provision (benefit) for doubtful accounts

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

Provision for doubtful accounts

Deferred income taxes

Equity in income (loss) of affiliates

Depreciation and amortization

Equity in loss (income) of affiliates

Foreign currency (gain) loss

Unrealized (gain) loss on derivatives

Depreciation and amortization

Stock–based compensation

Change in assets and liabilities:

Change in assets and liabilities, net of acquisitions:

(Increase) decrease in accounts receivable

3 unchanged sentences

Increase (decrease) in accrued expenses

Increase (decrease) in accrued income tax

Net change in operating lease assets and liabilities

Net change in derivative assets and liabilities

1 unchanged sentence

Cash flows from investing activities:

Proceeds from sale of equipment

Proceeds from sale of property and equipment

Purchase of property and equipment

5 unchanged sentences

Taxes paid related to net settlement of restricted shares

Proceeds from exercise of common stock options

Stock repurchases

Repayment of short-term debt

Net cash provided by (used for) financing activities

Effect of exchange rate changes on cash

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

The accompanying notes are an integral part of the condensed consolidated financial statements.

2 unchanged sentences

(In thousands, except shares outstanding)

Three Months Ended July 31, 2020 and 2019

Comprehensive

Income (Loss)

Balances, April 30, 2019

Other comprehensive income (loss)

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

Dividends paid

Balances, July 31, 2019

Balances, April 30, 2020

Other comprehensive income (loss)

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

Exercise of common stock options

Stock repurchases

Dividends paid

Balances, July 31, 2020

Nine Months Ended July 31, 2020 and 2019

Comprehensive

Income (Loss)

Balances, October 31, 2019

Net income (loss)

Other comprehensive income (loss)

1 unchanged sentence

Dividends paid

Balances, July 31, 2019

Balances, January 31, 2020

Balances, October 31, 2020

Net income (loss)

Other comprehensive income (loss)

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

Exercise of common stock options

Stock repurchases

Dividends paid

Balances, July 31, 2020

Balances, January 31, 2021

The accompanying notes are an integral part of the condensed consolidated financial statements.

7 unchanged sentences

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.

Beginning in early 2020, 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, and continue to experience, 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 July 31, 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.

During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of coronavirus and the ongoing economic slowdown in Europe, uncertainty surrounding the U.K.

Brexit activities, and political friction in the U.S.

Many of our customers deferred or eliminated investments in capital equipment last year, which we attributed largely to the uncertainty these events created.

During the first quarter of fiscal 2021, our sales increased year-over-year in all regions, particularly in the Americas and Europe, our primary markets for our higher-performance, higher-priced machines.

We also saw global machine tool manufacturers price their excess inventories aggressively to compete in the market recovery.

Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of January 31, 2021 with the understanding that these estimates could change in the near term.

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 July 31, 2020 and for the three and nine months ended July 31, 2020 and July 31, 2019 is unaudited.

The condensed financial information as of January 31, 2021 and for the three months ended January 31, 2021 and January 31, 2020 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.

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We adopted Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) on November 1, 2018, the start of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption.

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

Therefore, the adoption of ASC 606 did not have an effect on our overall financial statements.

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.

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

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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.

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 income (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 (expense), net.

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 July 31, 2020, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from August 2020 through July 2021.

We had forward contracts outstanding as of January 31, 2021, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from February 2021 through January 2022.

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

dollars at July 31, 2020, were $ 5.6 million for Euros, $ 2.5 million for Pounds Sterling and $ 11.8 million for New Taiwan Dollars.

At July 31, 2020, we had approximately $ 67,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss.

dollars at January 31, 2021, were $ 15.8 million for Euros, $ 4.9 million for Pounds Sterling and $ 18.4 million for New Taiwan Dollars.

At January 31, 2021, we had approximately $ 554,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive income (loss).

Included in this amount was $ 293,000 of unrealized loss, 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 July 2021, when the corresponding inventory that is the subject of the related hedge contracts is sold, as described above.

The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through January 2022, 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.

2 unchanged sentences

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.

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 income (loss), net of tax, in the same manner as the underlying hedged net assets.

This forward contract matures in November 2021.

As of July 31, 2020, we had a realized gain of $ 947,000 and an unrealized loss of $ 118,000 , net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract.

As of January 31, 2021, we had a realized gain of $ 813,000 and an unrealized loss of $ 72,000 , net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive income (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 July 31, 2020, denominated in Euros, Pounds Sterling, and New Taiwan Dollar with set maturity dates ranging from August 2020 through July 2021.

We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables, payables and loans 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, net in the Condensed Consolidated Statements of Operations consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

We had forward contracts outstanding as of January 31, 2021, denominated in Euros, Pounds Sterling, and New Taiwan Dollar with set maturity dates ranging from February 2021 through October 2021.

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

dollars at July 31, 2020, totaled $ 43.3 million.

dollars at January 31, 2021, totaled $ 43.4 million.

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 July 31, 2020 and October 31, 2019, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):

July 31, 2020

As of January 31, 2021 and October 31, 2020, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):

January 31, 2021

October 31, 2020

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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 July 31, 2020 and 2019 (in thousands):

Location of Gain

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– Net investment

We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended July 31, 2020 or 2019.

We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the three months ended July 31, 2020 and 2019 on derivative instruments not designated as hedging instruments (in thousands):

We did no t recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended January 31, 2021 or 2020.

We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the three months ended January 31, 2021 and 2020 on derivative instruments not designated as hedging instruments (in thousands):

Location of Gain

6 unchanged sentences

Foreign exchange forward contracts

Other income (expense), net

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended July 31, 2020 (in thousands):

Foreign Currency

Balance, April 30, 2020

Other comprehensive income (loss) before reclassifications

Reclassifications

Balance, July 31, 2020

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 nine months ended July 31, 2020 and 2019 (in thousands):

Location of Gain

Amount of Gain (Loss)

(Loss) Reclassified

Amount of Gain (Loss)

Recognized in Other

Reclassified from Other

Comprehensive

Income (Loss)

Nine Months Ended

Designated as Hedging Instruments:

(Effective portion)

Foreign exchange forward contracts

– Intercompany sales/purchases

Cost of sales and service

Foreign exchange forward contract

– Net investment

We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the nine months ended July 31, 2020 or 2019.

We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the nine months ended July 31, 2020 and 2019 on derivative instruments not designated as hedging instruments (in thousands):

Location of Gain

(Loss) Recognized

Amount of Gain (Loss)

in Operations

Recognized in Operations

Nine Months Ended

Not Designated as Hedging Instruments:

Foreign exchange forward contracts

Other income (expense), net

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the nine months ended July 31, 2020 (in thousands):

Other income, net

The following table presents the changes in the components of Accumulated other comprehensive income (loss), net of tax, for the three months ended January 31, 2021 (in thousands):

Foreign Currency

2 unchanged sentences

Reclassifications

Balance, July 31, 2020

Balance, January 31, 2021

EQUITY INCENTIVE PLAN

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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.

2008 Equity Incentive Plan (the “2008 Equity 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 Equity 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 Equity 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;

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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.

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 Equity 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 nine-month period ended July 31, 2020, is as follows:

A summary of stock option activity for the three-month period ended January 31, 2021, is as follows:

Weighted Average

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Options cancelled

Outstanding at July 31, 2020

Summarized information about outstanding stock options as of July 31, 2020, that have already vested and are currently exercisable, are as follows:

Outstanding at January 31, 2021

Summarized information about outstanding stock options as of January 31, 2021, that have already vested and are currently exercisable, are as follows:

Options Already Vested and

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Intrinsic value of outstanding options

The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of July 31, 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.

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 intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of January 31, 2021 and the exercise price of the option.

On January 5, 2021, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of time-based restricted shares and performance stock units (“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.

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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 $ 28.60 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”.

On January 5, 2021, the Compensation Committee granted a total target number of 39,199 PSUs to our executive officers designated as “PSU – TSR”.

These PSUs were weighted as approximately 40 % of the overall 2021 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 2021-2023, relative to the total shareholder return of the companies in a specified peer group over that period.

1 unchanged sentence

The grant date fair value of the PSUs – TSR was $ 27.04 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”.

On January 5, 2021, the Compensation Committee granted a total target number of 32,430 PSUs to our executive officers designated as “PSU – ROIC”.

These PSUs were weighted as approximately 35 % of the overall 2021 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 2021-2023.

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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 $ 29.30 per share.

A reconciliation of our restricted stock and PSU activity and related information for the nine-month period ended July 31, 2020 is as follows:

A reconciliation of our restricted stock and PSU activity and related information for the three-month period ended January 31, 2021 is as follows:

Weighted Average Grant

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Shares or units cancelled

Shares or units withheld

Unvested at July 31, 2020

During the nine months of fiscal 2020 and 2019, we recorded approximately $ 1.4 million and $ 2.1 million, respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan.

As of July 31, 2020, there was an estimated $ 3.4 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2023.

ACQUISITION OF BUSINESS

On August 5, 2019, we (through a newly-formed subsidiary, ProCobots, LLC (“ProCobots”)) acquired substantially all of the assets of a U.S.-based automation integration company for approximately $ 4.4 million.

This acquired business provides automation solutions that can be integrated with any machine tool.

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

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

Current assets

Property plant and equipment

Current liabilities

Total liabilities

Total purchase price and cash expended

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.

These allocations reflected various provisional estimates 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.

Shares withheld

Unvested at January 31, 2021

During the first three months of fiscal 2021 and 2020, we recorded approximately $ 659,000 and $ 136,000 , respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan.

As of January 31, 2021, there was an estimated $ 4.2 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024.

EARNINGS PER SHARE

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Three Months Ended

Nine Months Ended

Net income (loss)

Undistributed earnings allocated to participating shares

Undistributed earnings (loss) allocated to participating shares

Net income (loss) applicable to common shareholders

3 unchanged sentences

ACCOUNTS RECEIVABLE

Accounts receivable are net of allowances for doubtful accounts of $ 1.3 million as of July 31, 2020 and $ 891,000 as of October 31, 2019.

Accounts receivable are net of allowances for doubtful accounts of $ 1.5 million as of January 31, 2021 and $ 1.4 million as of October 31, 2020.

Inventories, priced at the lower of cost (first-in, first-out method) or net realizable value, are summarized below (in thousands):

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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:

Upon adoption of ASC 842, we utilized the following elections:

● We have elected to combine non-lease components with lease components.

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● 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.

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All our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840.

We recorded total operating lease expense of $ 3.7 million for each of the nine months ended July 31, 2020 and 2019, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations.

We recorded total operating lease expense of $ 1.3 million for each of the three months ended January 31, 2021 and 2020, 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 July 31, 2020.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the nine months ended July 31, 2020 (in thousands):

Nine Months Ended

July 31, 2020

There have been no lease costs capitalized on the Condensed Consolidated Balance Sheets as of January 31, 2021.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the three months ended January 31, 2021 (in thousands):

Three Months Ended

January 31, 2021

Operating cash flow information:

2 unchanged sentences

Right-of-use assets obtained in exchange for new operating lease liabilities

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):

2024 and thereafter

The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of July 31, 2020 (in thousands):

The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of January 31, 2021 (in thousands):

Remainder of 2021

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Present value of operating lease liabilities

As of July 31, 2020, the weighted-average remaining term of our lease portfolio was approximately 4.1 years and the weighted-average discount rate was approximately 1.5 %.

As of January 31, 2021, the weighted-average remaining term of our lease portfolio was approximately 4.2 years and the weighted-average discount rate was approximately 1.6 %.

SEGMENT INFORMATION

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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.

GUARANTEES AND PRODUCT WARRANTIES

1 unchanged sentence

We follow FASB guidance for accounting for guarantees (codified in ASC 460).

As of July 31, 2020, we had 17 outstanding third party payment guarantees totaling approximately $ 0.5 million.

As of January 31, 2021, we had 15 outstanding third party payment guarantees totaling approximately $ 0.8 million.

The terms of these guarantees are consistent with the underlying customer financing terms.

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A reconciliation of the changes in our warranty reserve is as follows (in thousands):

Nine Months Ended

Balance, beginning of period

Provision for warranties during the period

Three Months Ended

Balance, beginning of year

Provision for warranties during the year

Charges to the reserve

Impact of foreign currency translation

Balance, end of period

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.

Balance, end of year

The year-over-year decrease in our warranty reserve was primarily due to a decrease in the number of machines under warranty.

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.

entered into a new credit agreement, which was amended by that certain First Amendment dated March 13, 2020 and that certain Second Amendment dated December 23, 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.

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(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.

(4) requiring that we maintain a minimum tangible net worth of $ 170.0 million;

and (5) providing that if the total amount of indebtedness outstanding owed by the Company and its Taiwanese and Chinese subsidiaries to the lender or its affiliates (the “Specified Outstanding Amount”) exceeds $ 25.0 million, then the Company will not permit the amount of unrestricted cash-on-hand of the Company and its subsidiaries to be less than the Specified Outstanding Amount.

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

In March 2019, our wholly-owned subsidiaries in Taiwan, Hurco Manufacturing Limited.

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

("NHML"), closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the "Taiwan credit facility") and 32.5 million Chinese Yuan (the "China credit facility"), respectively.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand, we repaid in full the $ 1.4 million outstanding under, and terminated, our credit facility in China and (2) we terminated our United Kingdom credit facility.

In March 2019, our wholly-owned subsidiaries in Taiwan (Hurco Manufacturing Limited (“HML”)) and China (Ningbo Hurco Machine Tool, 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 July 31, 2020, our existing credit facilities consist of our € 1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $ 40.0 million revolving credit facility under the 2018 Credit Agreement.

There were no borrowings under any of our credit facilities and there was $ 51.5 million of available borrowing capacity thereunder.

As a result, as of January 31, 2021, our existing credit facilities consisted 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.

As of January 31, 2021, there were no borrowings under any of our credit facilities and there was $ 52.2 million of available borrowing capacity thereunder.

Our provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other events that are not consistent from period to period, such as changes in income tax laws.

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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.

During the third quarter of fiscal 2020, we assessed and recorded the estimated year to date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

The Consolidated Appropriations Act of 2021 (the “CAA”) was signed into law on December 27, 2020.

The CAA provides further COVID-19 economic relief by providing an expansion of the employee retention tax credit.

At this time, we are still evaluating the impact of the CAA on our results and will monitor any additional legislation related to COVID-19 and its impact on our results.

During the first quarter of fiscal 2021, we assessed and recorded the estimated year-to-date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

The CARES Act included economic relief and modifications, most notably the net operating loss carryback provisions for the U.S.

For the third quarter of fiscal 2020, we recorded an income tax benefit of $ 0.9 million compared to a tax expense of $ 1.2 million for the same period in fiscal 2019.

We recorded an income tax benefit during the nine months of fiscal 2020 of $ 2.3 million compared to a tax expense of $ 6.1 million for the same period in fiscal 2019.

Our unrecognized tax benefits were $ 194,000 as of July 31, 2020 and $ 225,000 as of October 31, 2019, and in each case included accrued interest.

For the first quarter of fiscal 2021, we recorded an income tax expense of $ 546,000 compared to income tax benefit of $ 597,000 for the same period in fiscal 2020.

Our effective tax rate for the first quarter of fiscal 2021 was 45 %, compared to 40 % in the corresponding prior year period.

The year-over-year increase in the effective tax rate was primarily due to changes in geographic mix of income and loss which includes jurisdictions with differing tax rates and other events that are not consistent from period to period, such as changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic and a discrete income tax expense related to unvested stock awards in the first three months of fiscal 2021.

Our unrecognized tax benefits were $ 221,000 as of January 31, 2021 and $ 204,000 as of October 31, 2020, 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 July 31, 2020, the gross amount of interest accrued, reported in Accrued expenses, was approximately $ 33,000 , which did not include the federal tax benefit of interest deductions.

As of January 31, 2021, the gross amount of interest accrued, reported in Accrued expenses, was approximately $ 38,000 , which did not include the federal tax benefit of interest deductions.

federal and state income tax returns, as well as tax returns in several foreign jurisdictions.

The statutes of limitations with respect to unrecognized tax benefits will expire between July 2021 and July 2024 .

The statutes of limitations with respect to unrecognized tax benefits will expire between August 2021 and August 2024 .

Currently, our subsidiary in France is under tax audit for the fiscal years 2018 and 2019.

FINANCIAL INSTRUMENTS

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and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions.

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 July 31, 2020 and October 31, 2019 (in thousands):

July 31, 2020

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of January 31, 2021 and October 31, 2020 (in thousands):

January 31, 2021

October 31, 2020

July 31, 2020

January 31, 2021

October 31, 2020

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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.

Dollar equivalent notional amounts of these contracts was $ 64.7 million and $ 108.6 million at July 31, 2020 and October 31, 2019, respectively.

Dollar equivalent notional amounts of these contracts was $ 84.5 million and $ 70.8 million at January 31, 2021 and October 31, 2020, 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.

9 unchanged sentences

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

ASC 842 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application.

We adopted 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.

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 were no impairment indications for our long-lived assets for the period ended April 30, 2020.

There were no triggering events during the third quarter of fiscal 2020 which warranted our review of these assets for potential impairment as of July 31,2020.

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.

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 as of April 30, 2020.

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.

There were no triggering events during the third quarter of fiscal 2020 which warranted our review of these assets for potential impairment as of July 31, 2020.

In June 2016, FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.

This may result in the earlier recognition of allowances for losses.

This standard is effective for our fiscal year 2021.

We adopted this standard on November 1, 2020.

This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures.

New Accounting Pronouncements:

In December 2019, FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which allows for companies to remove certain exceptions and clarifies certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations.

This standard is effective for our fiscal year 2022, with early adoption permitted.

We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.

In March 2020, FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This standard provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR.

This standard is effective for all entities beginning March 12, 2020 through December 31, 2022.

We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.

There have been no other significant changes in the Company’s critical accounting policies and estimates during the three months ended January 31, 2021.

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

What changed 10-Q

Item 1. Financial Statements