What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-03-05 compared with 2020-09-04 · 76 added, 142 removed, 115 unchanged (65% of the section changed)

8 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.

The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance.

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

During the nine 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.

During the first three months of fiscal 2021, approximately 45% 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 12% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.

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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.

The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and 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 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.

ProCobots LLC (“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 in Italy, LCM Precision Technology S.r.l.

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

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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.

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.

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.

The COVID-19 pandemic has had a significant impact on our business and industry.

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 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.

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.

RESULTS OF OPERATIONS

Three Months Ended July 31, 2020 Compared to Three Months Ended July 31, 2019

Three Months Ended January 31, 2021 Compared to Three Months Ended January 31, 2020

Sales and Service Fees.

Sales and service fees for the third quarter of fiscal 2020 were $45.4 million, a decrease of $13.1 million, or 22%, compared to the corresponding prior year period, and included a favorable currency impact of $0.1 million, or less than 1%, when translating foreign sales to U.S.

Sales and service fees for the first quarter of fiscal 2021 were $54.1 million, an increase of $10.5 million, or 24%, compared to the corresponding prior year period, and included a favorable currency impact of $1.6 million, or 4%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

Sales and service fees for the third quarter of fiscal 2020 improved by $8.3 million, or 22%, from the second quarter of fiscal 2020 ($37.1 million) and by $1.7 million, or 4%, from the first quarter of fiscal 2020 ($43.7 million) as COVID-19 stay-at-home and shelter orders began to lift globally during the third quarter of fiscal 2020.

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.

Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the third quarter ended July 31, 2020 and 2019 (dollars in thousands):

The following table sets forth net sales and service fees by geographic region for the first quarter ended January 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

Sales in the Americas for the third quarter of fiscal 2020 decreased by 15%, 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 for portions of the third quarter of fiscal 2020.

European sales for the third quarter of fiscal 2020 decreased by 36%, compared to the corresponding period in fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S.

Sales in the Americas for the first quarter of fiscal 2021 increased by 33%, compared to the corresponding period in fiscal 2020, primarily due to an increased volume of shipments of Hurco machines.

The increased machine shipments reflected higher sales volumes of lathes and VM and VMX machines, particularly in the southeast and midwest regions of the U.S.

European sales for the first quarter of fiscal 2021 increased by 21%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 7%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The decrease in European sales for the third quarter of fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines and a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned Italian subsidiary LCM.

Similar to the Americas, the reduction in shipment volume was mainly driven by government-mandated COVID-19 stay-at-home or shelter orders or other similar operating restrictions imposed across the region during portions of the third quarter of fiscal 2020.

Asian Pacific sales for the third quarter of fiscal 2020 increased by 12%, 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.

The increase in European sales for the first quarter of fiscal 2021 was primarily attributable to an increased volume of shipments of Hurco machines in the United Kingdom and Germany, partially offset by reduced volumes in France and Italy.

Asian Pacific sales for the first quarter of fiscal 2021 increased by 9%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 5%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The year-over-year improvement in Asian Pacific sales for the third quarter resulted from increased sales in China and Southeast Asia for Hurco and Takumi machines, as many countries in the region eased government-mandated COVID-19 stay-at-home or shelter orders.

The year-over-year increase in Asian Pacific sales primarily resulted from an increased volume of shipments of Hurco vertical milling machines in China and Southeast Asia, partially offset by reduced volume of shipments of Hurco machines in India and Takumi machines in China.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the third quarter ended July 31, 2020 and 2019 (dollars in thousands):

The following table sets forth net sales and service fees by product category for the first quarter ended January 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

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† 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 third quarter of fiscal 2020 decreased by 23% and 29%, 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 11% and 37%, respectively, during the third 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 a reduced volume of shipments of Hurco, Milltronics and Takumi machines, parts, and services provided as a result of the impact of government-mandated COVID-19 restrictions across all regions.

Orders for the third quarter of fiscal 2020 were $36.1 million, a decrease of $16.9 million, or 32%, compared to the corresponding period in fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the third quarter ended July 31, 2020 and 2019 (dollars in thousands):

Three Months Ended

Orders in the Americas for the third quarter of fiscal 2020 decreased by 17%, 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.

Orders in the Americas of $16.3 million for the third quarter of fiscal 2020 reflected a slight improvement over second quarter orders of $15.9 million, but were still lower than the pre-pandemic first quarter orders of $18.2 million.

European orders for the third quarter of fiscal 2020 decreased by 48%, compared to the corresponding prior year period, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S.

The 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.

Although European orders of $14.2 million for the third quarter of fiscal 2020 were lower than the $15.6 million of orders in the second quarter of fiscal 2020 and the $21.7 million of orders in the first quarter of fiscal 2020, machine unit orders for the third quarter improved from the second quarter (particularly in the U.K.), but had not returned to first quarter unit order levels and reflected a higher mix of our entry level VM series machines.

Asian Pacific orders for the third quarter of fiscal 2020 decreased by 9%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S.

The decrease in Asian Pacific orders was driven primarily by a reduction in customer demand for Hurco machines during the COVID-19 pandemic in China, India and Southeast Asia, and for Takumi vertical and bridge mill machines in China.

Gross Profit .

Gross profit for the third quarter of fiscal 2020 was $11.1 million, or 24% of sales, compared to $17.2 million, or 29% 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.

Gross profit for the third quarter of fiscal 2020 of $11.1 million, or 24% of sales, improved from second quarter of fiscal 2020 gross profit of $6.7 million, or 18% of sales, and first quarter of fiscal 2020 gross profit of $9.2 million, or 21% of sales, reflecting the impact of increased sales volume, particularly in Europe where we sell more higher-performance machines, and cost reductions implemented in the first six months of the fiscal year to improve the leverage of fixed costs.

Operating Expenses .

Selling, general and administrative expenses for the third quarter of fiscal 2020 were $9.6 million, or 21% of sales, compared to $12.6 million, or 22% of sales, for the corresponding period in fiscal 2019, and included an unfavorable currency impact of less than 1%, when translating foreign expenses to U.S.

dollars for financial reporting purposes.

Selling, general and administrative expenses as a percent of sales trended downward to 21% in the third quarter of fiscal 2020 from 29% in the second quarter of fiscal 2020, and 25% in the first quarter of 2020, reflecting the implementation of cost reduction plans including changes in employee headcount, decreases in incentive and performance compensation, and reductions in other discretionary spending, 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 income for the third quarter of fiscal 2020 was $1.4 million compared to operating income of $4.6 million for the corresponding period in fiscal 2019.

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

Other Income (Expense), Net .

Other expense, net in the third quarter of fiscal 2020 was $0.2 million compared to $0.1 million for the corresponding period in fiscal 2019.

This increase was primarily due to an increase in foreign currency exchange loss in fiscal 2020, compared to the corresponding period in fiscal 2019.

Income Taxes .

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

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.

In response to the COVID-19 pandemic, the Coronavirus Aid Relief, and Economic Security Act (the “CARES Act”) was signed into law in the U.S.

on March 27, 2020.

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

In addition, the year-over-year changes in income tax benefits and expenses reflect the shift in geographic mix of income and loss among international tax jurisdictions which result in changes in foreign tax credits, deductions for foreign derived intangible income;

and provision for global intangible low taxed income.

Nine Months Ended July 31, 2020 Compared to Nine Months Ended July 31, 2019

Sales and Service Fees .

Sales and service fees for the nine months of fiscal 2020 were $126.2 million, a decrease of $77.2 million, or 38%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact of $0.6 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 nine months ended July 31, 2020 and 2019 (dollars in thousands):

Nine Months Ended

Sales in the Americas for the nine months 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 reduction in shipment volume was mainly attributable to government-mandated stay-at-home or shelter orders imposed across the region for portions of the second and third quarters of fiscal 2020.

Additionally, sales in the Americas in the first half of fiscal 2019 benefitted from strong demand and backlog coming off fiscal 2018, a record sales year for Hurco.

European sales for the nine months of fiscal 2020 decreased by 48%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact of less than 1%, when translating foreign sales to U.S.

Sales of computerized machine tools and service parts for the first quarter of fiscal 2021 increased by 29% and 6%, respectively, compared to the corresponding prior year period, and each included a favorable currency impact of 4%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The decrease in European sales for the nine months of fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines and a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned Italian subsidiary LCM.

Similar to the Americas, the reductions in shipment volume were mainly driven by government-mandated COVID-19 stay-at-home or shelter orders or other similar operating restrictions imposed across the region during portions of the second and third quarters of fiscal 2020.

Additionally, sales in Europe during the first half of fiscal 2019 benefitted from higher demand and backlog coming off fiscal 2018, the recent peak of the European market, particularly for Germany.

Asian Pacific sales for the nine months of fiscal 2020 decreased by 22%, 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.

The increases in machine tools and service parts were primarily due to increased shipments of Hurco-branded products across all regions where our customers are located.

Sales of computer control systems and software and service fees decreased by 6% each, compared to the corresponding prior year period, and each included a favorable currency impact of 4%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

The year-over-year decrease in Asian Pacific sales primarily resulted from a reduction in the volume of shipments of Hurco vertical milling machines in all Asian Pacific regions, as many customers were negatively impacted by government-mandated COVID-19 stay-at-home orders or similar operating restrictions for the first six months of fiscal 2020.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the nine months ended July 31, 2020 and 2019 (dollars in thousands):

Nine Months Ended

Computerized Machine Tools

Computer Control Systems and Software †

Service Parts

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

Sales of computerized machine tools and computer control systems and software for the nine months of fiscal 2020 decreased by 41% and 35%, 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 19% and 24%, respectively, during the nine 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 a reduced volume of shipments of Hurco, Milltronics and Takumi machines, parts, and services provided, as well as the impact of government- mandated COVID-19 restrictions across all regions.

Orders for the nine months of fiscal 2020 were $118.2 million, a decrease of $70.0 million, or 37%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the nine months of fiscal 2020 and 2019 (dollars in thousands):

Nine Months Ended

Orders in the Americas for the nine months of fiscal 2020 decreased by 22%, 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 nine 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.

Asian Pacific orders for the nine months of fiscal 2020 decreased by 38%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S.

The decreases in control systems and software and service fees primarily resulted from decreased demand in aftermarket software and services in North America.

Orders for the first quarter of fiscal 2021 were $57.3 million, an increase of $11.7 million, or 26%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of $2.1 million, or 5%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the first quarter ended January 31, 2021 and 2020 (dollars in thousands):

Three Months Ended

Orders in the Americas for the first quarter of fiscal 2021 increased by 31%, compared to the corresponding period in fiscal 2020, primarily due to increased customer demand for Hurco machines.

The increased order levels, similar to the increased sales levels, reflected a higher demand for lathes and VM and VMX machines.

European orders for the first quarter of fiscal 2021 increased by 19%, compared to the corresponding prior year period, and included a favorable currency impact of 8%, when translating foreign orders to U.S.

The year-over-year increase in orders was driven primarily by increased customer demand for Hurco machines in Germany, France and the United Kingdom.

Asian Pacific orders for the first quarter of fiscal 2021 increased by 35%, compared to the corresponding prior year period, and included a favorable currency impact of 7%, when translating foreign orders to U.S.

The year-over-year increase in Asian Pacific orders was driven primarily by an increase in customer demand for Hurco vertical milling machines in China and Southeast Asia, partially offset by decreased demand for Takumi machines in China.

Gross Profit .

Gross profit for the nine months of fiscal 2020 was $26.9 million, or 21% of sales, compared to $61.0 million, or 30% of sales, for the corresponding prior year period.

Gross profit for the first quarter of fiscal 2021 was $11.5 million, or 21% of sales, compared to $9.2 million, or 21% of sales, for the corresponding prior year period.

Gross profit as a percentage of sales remained relatively unchanged year-over-year on a higher level of sales, as global excess inventory levels continue to apply competitive pricing pressure on the machine tool industry.

Additionally, similar to fiscal 2020, the first quarter of fiscal 2021 gross profit continued to be impacted by the allocation of fixed costs on lower production volumes year-to-date.

Operating Expenses .

Selling, general and administrative expenses for the nine months of fiscal 2020 were $31.1 million, or 25% of sales, compared to $40.6 million, or 20% 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.

Selling, general, and administrative expenses for the first quarter of fiscal 2021 were $10.6 million, or 20% of sales, compared to $10.8 million, or 25% of sales, in the corresponding fiscal 2020 period, and included an unfavorable currency impact of $0.3 million, when translating foreign expenses to U.S.

dollars for financial reporting purposes.

The year-over-year reduction in selling, general and administrative expenses reflects the implementation of cost reduction plans including changes in employee headcount, decreases in incentive and performance compensation, and reductions in other discretionary spending, 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.

The year-over-year reduction in selling, general, and administrative expenses was primarily due to operating cost reduction measures implemented in the first two quarters of fiscal 2020, partially offset by increases in incentive compensation.

Operating Income (Loss) .

Operating loss for the nine months of fiscal 2020 was $4.1 million compared to operating income of $20.4 million for the corresponding period in fiscal 2019.

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

Other Income (Expense), Net .

Other expense, net in the nine months of fiscal 2020 was $0.9 million compared to other income, net of $0.5 million in the corresponding period in fiscal 2019.

This change was 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.

Operating income for the first quarter of fiscal 2021 was $1.0 million compared to an operating loss of $1.7 million for the corresponding period in fiscal 2020.

The increase in operating income was primarily driven by the increased volume of sales.

Other Income, Net .

Other income, net in the first quarter of fiscal 2021 was $0.1 million compared to $0.1 million for the corresponding period in fiscal 2020.

Income Taxes .

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

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.

In response to the COVID-19 pandemic, the Coronavirus Aid Relief, and Economic Security Act (the “CARES Act”) was signed into law in the U.S.

on March 27, 2020.

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

and provision for global intangible low taxed income.

The 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 quarter of fiscal 2021.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2020, we had cash and cash equivalents of $47.1 million, compared to $56.9 million at October 31, 2019.

At January 31, 2021, we had cash and cash equivalents of $66.6 million, compared to $57.9 million at October 31, 2020.

Approximately 15% of the $66.6 million of cash and cash equivalents was denominated in U.S.

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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 $198.7 million at July 31, 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.

Pursuant to the adoption of Accounting Standards Update No.

2016-02, “Leases” (Topic 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 $4.2 million for the nine months ended July 31, 2020.

Capital expenditures of $1.2 million during the nine months of fiscal 2020 were primarily for capital improvements in existing facilities and software development costs.

Working capital was $204.0 million at January 31, 2021 compared to $201.0 million at October 31, 2020.

The increase in working capital was primarily driven by an increase in prepaid expenses, offset by a reduction in inventory and an increase in accounts payable.

Capital expenditures of $0.6 million during the first three months of fiscal 2021 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 could 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 could have been amended, suspended or discontinued at any time and did not commit us to repurchase any shares of our common stock.

During the three and nine months ended July 31, 2020, we repurchased $3.1 million and $7.0 million, respectively, in shares of our common stock.

As a result of our repurchase of the maximum aggregate amount under the program, this share repurchase program has concluded.

In addition, during the three and nine months ended July 31, 2020, we paid cash dividends to our shareholders of $875,000 and $2.6 million, respectively.

In addition, during the three months ended January 31, 2021, we paid cash dividends to our shareholders of $0.9 million.

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.

entered into a Credit Agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020 and December 23, 2020 (as amended, the “2018 Credit Agreement”).

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.

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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 July 31, 2020, 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.

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

At July 31, 2020, we had an aggregate of $51.5 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

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.

We had no debt or borrowings under any of our credit facilities at January 31, 2021.

At January 31, 2021, we had an aggregate of $52.2 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.

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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 nine months of fiscal 2020.

There were no material changes to our critical accounting policies during the first three months of fiscal 2021.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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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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These risks, uncertainties and other factors include, but are not limited to:

● The impact of the 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;

● The cyclical nature of the machine tool industry;

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● The risks of our international operations;

● The limited number of our manufacturing and supply chain sources;

● Governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to tax laws;

● 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;

● The United Kingdom’s withdrawal from the European Union (Brexit);

● Our dependence on new product development;

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

● The limited number of our manufacturing and supply chain sources;

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

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

● Our ability to integrate acquisitions;

● Acquisitions that could disrupt our operations and affect operating results;

● Failure to comply with data privacy and security regulations;

● Breaches of our network and system security measures;

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

● Impairment of our assets;

● Negative or unforeseen tax consequences;

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

● Our ability to integrate acquisitions;

● Uncertainty concerning our ability to use tax loss carryforwards;

● Breaches of our network and system security measures;

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

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

● Changes in the LIBOR rate.

We discuss these and other important risks and uncertainties that may affect our future operations in Part I, Item 1A – Risk Factors in our most recent Annual Report on Form 10-K and may update that discussion in Part II, Item 1A – Risk Factors in this report or in a Quarterly Report on Form 10-Q we file hereafter.

Readers are cautioned not to place undue reliance on these forward-looking statements.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis