HURCO COMPANIES INC 10-Q

Item 1 . FINANCIAL STATEMENTS HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ July 31, ​ July 31, ​ ​ ​ 2021 2020 2021 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales and service fees ​ $ 54,178 ​ $ 45,382 ​ $ 166,213 ​ $ 126,168 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales and service ​ 41,204 ​ 34,313 ​ 126,898 ​ 99,231 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit ​ 12,974 ​ 11,069 ​ 39,315 ​ 26,937 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative expenses ​ 10,331 ​ 9,627 ​ 32,172 ​ 31,072 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating income (loss) ​ 2,643 ​ 1,442 ​ 7,143 ​ ( 4,135 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest expense ​ 2 ​ 19 ​ 23 ​ 69 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ 17 ​ 14 ​ 33 ​ 104 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investment income ​ 8 ​ 11 ​ 154 ​ 76 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense), net ​ 11 ​ ( 223 ) ​ ( 37 ) ​ ( 933 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before income taxes ​ 2,677 ​ ​ 1,225 ​ 7,270 ​ ​ ( 4,957 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision (benefit) for income taxes ​ 1,109 ​ ( 937 ) ​ 2,602 ​ ( 2,299 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 1,568 ​ $ 2,162 ​ $ 4,668 ​ $ ( 2,658 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.23 ​ $ 0.32 ​ $ 0.70 ​ $ ( 0.39 ) ​ Diluted ​ $ 0.23 ​ $ 0.32 ​ $ 0.70 ​ $ ( 0.39 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average common shares outstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 6,601 ​ ​ 6,595 ​ ​ 6,591 ​ ​ 6,705 ​ Diluted ​ ​ 6,618 ​ ​ 6,604 ​ ​ 6,605 ​ ​ 6,705 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dividends paid per share ​ $ 0.14 ​ $ 0.13 ​ $ 0.41 ​ $ 0.38 ​ ​ The accompanying notes are an integral part of the condensed consolidated financial statements. ​ 3 Table of Contents HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ July 31, ​ July 31, ​ ​ 2021 2020 2021 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 1,568 ​ $ 2,162 ​ $ 4,668 ​ $ ( 2,658 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income (loss): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Translation gain (loss) of foreign currency financial statements ​ ( 732 ) ​ 5,092 ​ 3,574 ​ 5,240 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Gain) / loss on derivative instruments reclassified into operations, net of tax of $ 6 , $( 47 ), $( 210 ) and $( 80 ), respectively ​ 20 ​ ( 158 ) ​ ( 699 ) ​ ( 268 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gain / (loss) on derivative instruments, net of tax of $( 83 ), $( 145 ), $( 272 ) and $ 19 , respectively ​ ( 277 ) ​ ( 480 ) ​ ( 906 ) ​ 67 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total other comprehensive income (loss) ​ ( 989 ) ​ 4,454 ​ 1,969 ​ 5,039 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Comprehensive income (loss) ​ $ 579 ​ $ 6,616 ​ $ 6,637 ​ $ 2,381 ​ ​ The accompanying notes are an integral part of the condensed consolidated financial statements. ​ 4 Table of Contents HURCO COMPANIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 31, ​ October 31, ​ ​ 2021 2020 ​ ​ (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ASSETS ​ ​ ​ ​ ​ Current assets: ​ ​ ​ Cash and cash equivalents ​ $ 80,471 ​ $ 57,859 ​ Accounts receivable, net ​ 31,798 ​ 27,686 ​ Inventories, net ​ 149,326 ​ 149,864 ​ Derivative assets ​ 444 ​ 968 ​ Prepaid assets ​ 14,088 ​ 13,803 ​ Other ​ 191 ​ 1,231 ​ Total current assets ​ 276,318 ​ 251,411 ​ Property and equipment: ​ ​ ​ ​ ​ Land ​ 868 ​ 868 ​ Building ​ 7,352 ​ 7,352 ​ Machinery and equipment ​ 29,663 ​ 29,195 ​ Leasehold improvements ​ 5,152 ​ 4,754 ​ ​ ​ 43,035 ​ 42,169 ​ Less accumulated depreciation and amortization ​ ( 32,047 ) ​ ( 30,248 ) ​ Total property and equipment, net ​ 10,988 ​ 11,921 ​ Non–current assets: ​ ​ ​ ​ ​ Software development costs, less accumulated amortization ​ 7,660 ​ 7,840 ​ Intangible assets, net ​ 1,645 ​ 1,846 ​ Operating lease - right of use assets, net ​ ​ 11,105 ​ ​ 11,748 ​ Deferred income taxes ​ 2,682 ​ 2,479 ​ Investments and other assets, net ​ 9,348 ​ 8,410 ​ Total non–current assets ​ 32,440 ​ 32,323 ​ Total assets ​ $ 319,746 ​ $ 295,655 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS’ EQUITY ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ Accounts payable ​ $ 41,857 ​ $ 27,643 ​ Customer deposits ​ ​ 8,194 ​ ​ 5,356 ​ Derivative liabilities ​ ​ 909 ​ ​ 872 ​ Operating lease liabilities ​ ​ 4,245 ​ ​ 4,132 ​ Accrued payroll and employee benefits ​ 7,218 ​ 6,931 ​ Accrued income taxes ​ 731 ​ 285 ​ Accrued expenses ​ 4,529 ​ 4,018 ​ Accrued warranty expenses ​ 1,332 ​ 1,200 ​ Total current liabilities ​ 69,015 ​ 50,437 ​ Non–current liabilities: ​ ​ ​ ​ ​ Deferred income taxes ​ 73 ​ 131 ​ Accrued tax liability ​ ​ 1,819 ​ ​ 1,918 ​ Operating lease liabilities ​ ​ 7,257 ​ ​ 7,989 ​ Deferred credits and other ​ 4,655 ​ 4,032 ​ Total non–current liabilities ​ 13,804 ​ 14,070 ​ Shareholders’ equity: ​ ​ ​ ​ ​ Preferred stock: no par value per share, 1,000,000 shares authorized; no shares issued ​ — ​ — ​ Common stock: no par value, $ .10 stated value per share, 12,500,000 shares authorized; 6,674,741 and 6,636,906 shares issued and 6,601,406 and 6,565,163 shares outstanding, as of July 31, 2021 and October 31, 2020, respectively ​ 660 ​ 657 ​ Additional paid-in capital ​ 62,876 ​ 60,997 ​ Retained earnings ​ 174,412 ​ 172,484 ​ Accumulated other comprehensive loss ​ ( 1,021 ) ​ ( 2,990 ) ​ Total shareholders’ equity ​ 236,927 ​ 231,148 ​ Total liabilities and shareholders’ equity ​ $ 319,746 ​ $ 295,655 ​ ​ The accompanying notes are an integral part of the condensed consolidated financial statements. ​ 5 Table of Contents HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ July 31, ​ July 31, ​ ​ 2021 2020 2021 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 1,568 ​ $ 2,162 ​ $ 4,668 ​ $ ( 2,658 ) ​ Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities, net of acquisitions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision for doubtful accounts ​ ( 1 ) ​ ​ 290 ​ 226 ​ ​ 417 ​ Deferred income taxes ​ 192 ​ ​ 142 ​ 703 ​ ​ 201 ​ Equity in loss (income) of affiliates ​ ( 33 ) ​ ​ ( 11 ) ​ ( 69 ) ​ ​ ( 77 ) ​ Foreign currency (gain) loss ​ ​ 229 ​ ​ ( 1,603 ) ​ ​ ( 431 ) ​ ​ ( 36 ) ​ Unrealized (gain) loss on derivatives ​ ( 163 ) ​ ​ 1,823 ​ ( 306 ) ​ ​ 1,842 ​ Depreciation and amortization ​ 1,034 ​ ​ 1,246 ​ 3,150 ​ ​ 3,418 ​ Stock–based compensation ​ 699 ​ ​ 640 ​ 2,079 ​ ​ 1,419 ​ Change in assets and liabilities, net of acquisitions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Increase) decrease in accounts receivable ​ 5,022 ​ ​ ( 3,409 ) ​ ( 3,851 ) ​ ​ 11,595 ​ (Increase) decrease in inventories ​ ( 4,871 ) ​ ​ 3,665 ​ 2,483 ​ ​ ( 1,093 ) ​ (Increase) decrease in prepaid expenses ​ 481 ​ ​ ( 487 ) ​ ( 680 ) ​ ​ ( 5,055 ) ​ Increase (decrease) in accounts payable ​ 4,200 ​ ​ 1,190 ​ 13,542 ​ ​ ( 3,127 ) ​ Increase (decrease) in customer deposits ​ ( 107 ) ​ ​ ( 200 ) ​ 2,690 ​ ​ ( 174 ) ​ Increase (decrease) in accrued expenses ​ ( 175 ) ​ ​ 631 ​ 694 ​ ​ ( 5,758 ) ​ Increase (decrease) in accrued income tax ​ ​ 216 ​ ​ ( 526 ) ​ ​ 432 ​ ​ ( 2,006 ) ​ Net change in derivative assets and liabilities ​ 7 ​ ​ 245 ​ 170 ​ ​ 40 ​ Other ​ 216 ​ ​ ( 778 ) ​ 948 ​ ​ 1,237 ​ Net cash provided by (used for) operating activities ​ 8,514 ​ ​ 5,020 ​ 26,448 ​ ​ 185 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proceeds from sale of property and equipment ​ — ​ ​ 1 ​ 3 ​ ​ 128 ​ Purchase of property and equipment ​ ( 325 ) ​ ​ ( 89 ) ​ ( 1,001 ) ​ ​ ( 478 ) ​ Software development costs ​ ( 227 ) ​ ​ ( 236 ) ​ ( 833 ) ​ ​ ( 692 ) ​ Other investments ​ ( 28 ) ​ ​ — ​ ( 210 ) ​ ​ — ​ Net cash provided by (used for) investing activities ​ ( 580 ) ​ ​ ( 324 ) ​ ( 2,041 ) ​ ​ ( 1,042 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Dividends paid ​ ( 951 ) ​ ​ ( 875 ) ​ ( 2,740 ) ​ ​ ( 2,568 ) ​ Taxes paid related to net settlement of restricted shares ​ — ​ ​ — ​ ( 197 ) ​ ​ ( 498 ) ​ Proceeds from exercise of common stock options ​ ​ — ​ ​ 67 ​ ​ — ​ ​ 67 ​ Stock repurchases ​ ​ — ​ ​ ( 3,088 ) ​ ​ — ​ ​ ( 7,000 ) ​ Net cash provided by (used for) financing activities ​ ( 951 ) ​ ​ ( 3,896 ) ​ ( 2,937 ) ​ ​ ( 9,999 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash and cash equivalents ​ ( 400 ) ​ ​ 1,022 ​ 1,142 ​ ​ 1,002 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net increase (decrease) in cash and cash equivalents ​ 6,583 ​ ​ 1,822 ​ 22,612 ​ ​ ( 9,854 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents at beginning of period ​ 73,888 ​ ​ 45,267 ​ 57,859 ​ ​ 56,943 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents at end of period ​ $ 80,471 ​ $ 47,089 ​ $ 80,471 ​ $ 47,089 ​ ​ The accompanying notes are an integral part of the condensed consolidated financial statements. ​ 6 Table of Contents HURCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands, except shares outstanding) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended July 31, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ Common Stock ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ Shares ​ ​ ​ ​ Paid–in ​ Retained ​ Comprehensive ​ ​ ​ ​ Outstanding Amount Capital Earnings Income (Loss) Total Balances, April 30, 2020 ​ 6,666,226 ​ $ 667 ​ $ 62,731 ​ $ 175,638 ​ $ ( 8,348 ) ​ $ 230,688 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ 2,162 ​ — ​ ​ 2,162 Other comprehensive income (loss) ​ — ​ ​ — ​ ​ — ​ ​ — ​ 4,454 ​ ​ 4,454 Stock–based compensation expense, net of taxes withheld for vested restricted shares ​ — ​ ​ — ​ ​ 638 ​ ​ — ​ — ​ ​ 638 Exercise of common stock options ​ 3,738 ​ ​ — ​ ​ 67 ​ ​ — ​ — ​ ​ 67 Stock repurchases ​ ( 104,801 ) ​ ​ ( 10 ) ​ ​ ( 3,078 ) ​ ​ — ​ ​ — ​ ​ ( 3,088 ) Dividends paid ​ — ​ ​ — ​ ​ — ​ ​ ( 875 ) ​ — ​ ​ ( 875 ) Balances, July 31, 2020 ​ 6,565,163 ​ $ 657 ​ $ 60,358 ​ $ 176,925 ​ $ ( 3,894 ) ​ $ 234,046 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, April 30, 2021 ​ 6,601,406 ​ $ 660 ​ $ 62,177 ​ $ 173,795 ​ $ ( 32 ) ​ $ 236,600 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ 1,568 ​ — ​ ​ 1,568 Other comprehensive income (loss) ​ — ​ ​ — ​ ​ — ​ ​ — ​ ( 989 ) ​ ​ ( 989 ) Stock–based compensation expense, net of taxes withheld for vested restricted shares ​ — ​ ​ — ​ ​ 699 ​ ​ — ​ — ​ ​ 699 Exercise of common stock options ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — Stock repurchases ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — Dividends paid ​ — ​ ​ — ​ ​ — ​ ​ ( 951 ) ​ — ​ ​ ( 951 ) Balances, July 31, 2021 ​ 6,601,406 ​ $ 660 ​ $ 62,876 ​ $ 174,412 ​ $ ( 1,021 ) ​ $ 236,927 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended July 31, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ Common Stock ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ Shares ​ ​ ​ ​ Paid–in ​ Retained ​ Comprehensive ​ ​ ​ ​ Outstanding Amount Capital Earnings Income (Loss) Total Balances, October 31, 2019 ​ 6,767,237 ​ $ 677 ​ $ 66,350 ​ $ 182,151 ​ $ ( 8,933 ) ​ $ 240,245 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ ( 2,658 ) ​ — ​ ​ ( 2,658 ) Other comprehensive income (loss) ​ — ​ ​ — ​ ​ — ​ ​ — ​ 5,039 ​ ​ 5,039 Stock–based compensation expense, net of taxes withheld for vested restricted shares ​ 47,750 ​ ​ 5 ​ ​ 916 ​ ​ — ​ — ​ ​ 921 Exercise of common stock options ​ 3,738 ​ ​ — ​ ​ 67 ​ ​ — ​ ​ — ​ ​ 67 Stock repurchases ​ ( 253,562 ) ​ ​ ( 25 ) ​ ​ ( 6,975 ) ​ ​ — ​ ​ — ​ ​ ( 7,000 ) Dividends paid ​ — ​ ​ — ​ ​ — ​ ​ ( 2,568 ) ​ — ​ ​ ( 2,568 ) Balances, July 31, 2020 ​ 6,565,163 ​ $ 657 ​ $ 60,358 ​ $ 176,925 ​ $ ( 3,894 ) ​ $ 234,046 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, October 31, 2020 ​ 6,565,163 ​ $ 657 ​ $ 60,997 ​ $ 172,484 ​ $ ( 2,990 ) ​ $ 231,148 Net income (loss) ​ — ​ ​ — ​ ​ — ​ ​ 4,668 ​ — ​ ​ 4,668 Other comprehensive income (loss) ​ — ​ ​ — ​ ​ — ​ ​ — ​ 1,969 ​ ​ 1,969 Stock–based compensation expense, net of taxes withheld for vested restricted shares ​ 36,243 ​ ​ 3 ​ ​ 1,879 ​ ​ — ​ — ​ ​ 1,882 Exercise of common stock options ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock repurchases ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends paid ​ — ​ ​ — ​ ​ — ​ ​ ( 2,740 ) ​ — ​ ​ ( 2,740 ) Balances, July 31, 2021 ​ 6,601,406 ​ $ 660 ​ $ 62,876 ​ $ 174,412 ​ $ ( 1,021 ) ​ $ 236,927 ​ ​ ​ ​ ​ The accompanying notes are an integral part of the condensed consolidated financial statements. ​ 7 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL The unaudited Condensed Consolidated Financial Statements include the accounts of Hurco Companies, Inc. and its consolidated subsidiaries. As used in this report, the words “we”, “us”, “our”, “Hurco”, and the “Company” refer to Hurco Companies, Inc. and its consolidated subsidiaries. We design, manufacture, and sell computerized (i.e., Computer Numeric Control (“CNC”)) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service, and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, 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. During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of COVID-19 and the 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 nine months of fiscal 2021, our sales increased year-over-year in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions. Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of July 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, 2021 and for the three and nine months ended July 31, 2021 and July 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. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2020. ​ 2. REVENUE RECOGNITION We design, manufacture, and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support. 8 Table of Contents 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 Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) each of the performance obligations to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we generally recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s facility by a distributor, independent contractor or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and perfunctory. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process. From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant. ​ 3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk, and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk, for which we enter into derivative instruments in the form of foreign currency forward exchange contracts with a major financial institution. We enter into these forward exchange contracts to reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, to reduce the impact on gross profit and net earnings from sales and purchases denominated in foreign currencies, and to reduce the impact on our net earnings of foreign currency fluctuations on receivables and payables denominated in foreign currencies that are different than the subsidiaries’ functional currency. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We record all derivative instruments as assets or liabilities at fair value. 9 Table of Contents Derivatives Designated as Hedging Instruments We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in the following foreign currencies: the Pound Sterling, Euro, and New Taiwan Dollar. The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other expense, 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, 2021, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from August 2021 through July 2022. The contract amounts, expressed at forward rates in U.S. Dollars at July 31, 2021, were $ 16.2 million for Euros, $ 9.5 million for Pounds Sterling and $ 26.0 million for New Taiwan Dollars. At July 31, 2021, we had approximately $ 906,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount was $ 402,000 of unrealized loss, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred losses will be recorded as an adjustment to Cost of sales and service in periods through July 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. To manage this risk, we entered into a forward contract with a notional amount of € 3.0 million in November 2020. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2021. As of July 31, 2021, we had a realized gain of $ 813,000 and a minimal amount of unrealized loss recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract. Derivatives Not Designated as Hedging Instruments We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on 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 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 not designated as hedges under FASB guidance as of July 31, 2021, denominated in Euros, Pounds Sterling, and New Taiwan Dollar with set maturity dates ranging from August 2021 through May 2022. The contract amounts, expressed at forward rates in U.S. Dollars at July 31, 2021, totaled $ 37.5 million. 10 Table of Contents 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, 2021 and October 31, 2020, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 31, 2021 ​ October 31, 2020 ​ ​ ​ Balance Sheet ​ Fair ​ Balance Sheet ​ Fair ​ Derivatives Location Value Location Value Designated as Hedging Instruments: ​ ​ ​ ​ ​ ​ ​ Foreign exchange forward contracts ​ Derivative assets ​ $ 177 ​ Derivative assets ​ $ 495 ​ Foreign exchange forward contracts ​ Derivative liabilities ​ $ 697 ​ Derivative liabilities ​ $ 279 ​ ​ ​ ​ ​ ​ ​ ​ ​ Not Designated as Hedging Instruments: ​ ​ ​ ​ ​ ​ ​ ​ Foreign exchange forward contracts ​ Derivative assets ​ $ 267 ​ Derivative assets ​ $ 473 ​ Foreign exchange forward contracts ​ Derivative liabilities ​ $ 212 ​ Derivative liabilities ​ $ 593 ​ ​ 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, 2021 and 2020 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Location of Gain ​ Amount of Gain ​ ​ Amount of Gain (Loss) ​ (Loss) Reclassified ​ (Loss) Reclassified ​ ​ Recognized in Other ​ from Other ​ from Other ​ ​ Comprehensive ​ Comprehensive ​ Comprehensive Derivatives ​ Income (Loss) ​ Income (Loss) ​ Income (Loss) ​ ​ Three Months Ended ​ ​ ​ Three Months Ended ​ ​ July 31, ​ ​ ​ July 31, ​ 2021 2020 ​ 2021 2020 Designated as Hedging Instruments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Effective portion) ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign exchange forward contracts – Intercompany sales/purchases ​ $ ( 277 ) ​ $ ( 480 ) ​ Cost of sales and service ​ $ ( 20 ) $ 158 Foreign exchange forward contract – Net investment ​ $ 44 ​ $ ( 193 ) ​ ​ ​ We did no t recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended July 31, 2021 or 2020. We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the three months ended July 31, 2021 and 2020 on derivative instruments not designated as hedging instruments (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Location of Gain ​ ​ ​ ​ ​ ​ ​ ​ (Loss) Recognized ​ Amount of Gain (Loss) Derivatives in Operations ​ Recognized in Operations ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ July 31, ​ ​ ​ 2021 2020 Not Designated as Hedging Instruments: ​ ​ ​ Foreign exchange forward contracts Other expense, net ​ $ 602 $ ( 1,784 ) ​ 11 Table of Contents The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended July 31, 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign Currency ​ Cash Flow ​ ​ ​ ​ Translation Hedges Total Balance, April 30, 2021 ​ $ 233 $ ( 265 ) ​ $ ( 32 ) Other comprehensive income (loss) before reclassifications ​ ( 732 ) ​ ( 277 ) ​ ( 1,009 ) Reclassifications ​ — ​ 20 ​ 20 Balance, July 31, 2021 ​ $ ( 499 ) $ ( 522 ) ​ $ ( 1,021 ) ​ ​ ​ ​ 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, 2021 and 2020 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Location of Gain ​ Amount of Gain ​ ​ ​ Amount of Gain (Loss) ​ (Loss) Reclassified ​ (Loss) Reclassified ​ ​ ​ Recognized in Other ​ from Other ​ from Other ​ ​ ​ Comprehensive ​ Comprehensive ​ Comprehensive ​ ​ ​ Income (Loss) ​ Income (Loss) ​ Income (Loss) ​ ​ ​ Nine Months Ended ​ ​ ​ Nine Months Ended ​ ​ ​ July 31, ​ ​ ​ July 31, ​ Derivatives 2021 2020 ​ 2021 2020 Designated as Hedging Instruments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Effective Portion) ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign exchange forward contracts – Intercompany sales/purchases ​ $ ( 906 ) ​ $ 67 ​ Cost of sales and service ​ $ 699 $ 268 ​ Foreign exchange forward contract – Net investment ​ $ ( 36 ) ​ $ ( 104 ) ​ ​ ​ ​ We did no t recognize any gains or losses as a result of hedges deemed ineffective for either of the nine months ended July 31, 2021 or 2020. We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the nine months ended July 31, 2021 and 2020 on derivative instruments not designated as hedging instruments (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Location of Gain ​ ​ ​ ​ ​ ​ ​ ​ ​ (Loss) Recognized ​ Amount of Gain (Loss) ​ Derivatives ​ in Operations ​ Recognized in Operations ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ July 31, ​ Derivatives ​ 2021 2020 Not Designated as Hedging Instruments: ​ ​ ​ Foreign exchange forward contracts Other expense, net ​ $ ( 801 ) $ ( 658 ) ​ The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the nine months ended July 31, 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign Currency ​ Cash Flow ​ ​ ​ ​ ​ Translation ​ Hedges ​ ​ ​ ​ ​ Foreign ​ Cash ​ ​ ​ ​ ​ Currency ​ Flow ​ ​ ​ ​ Translation Hedges Total Balance, October 31, 2020 ​ $ ( 4,073 ) $ 1,083 ​ $ ( 2,990 ) Other comprehensive income (loss) before reclassifications ​ 3,574 ​ ( 906 ) ​ 2,668 Reclassifications ​ — ​ ( 699 ) ​ ( 699 ) Balance, July 31, 2021 ​ $ ( 499 ) $ ( 522 ) ​ $ ( 1,021 ) ​ ​ 12 Table of Contents 4. EQUITY INCENTIVE PLAN In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards. The 2016 Equity Plan replaced the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008 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 the 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; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 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, 2021, is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average ​ Stock Options Exercise Price Outstanding at October 31, 2020 ​ 33,307 ​ $ 22.09 Options granted ​ — ​ ​ — Options exercised ​ — ​ ​ — Options cancelled ​ — ​ ​ — Outstanding at July 31, 2021 ​ 33,307 ​ $ 22.09 ​ Summarized information about outstanding stock options as of July 31, 2021, that have already vested and are currently exercisable, are as follows: ​ ​ ​ ​ ​ ​ ​ Options Already Vested and ​ Currently Exercisable Number of outstanding options ​ ​ 33,307 Weighted average remaining contractual life (years) ​ ​ 0.72 Weighted average exercise price per share ​ $ 22.09 Intrinsic value of outstanding options ​ $ 395,000 ​ The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of July 31, 2021 and the exercise price of the option. On March 11, 2021, the Compensation Committee granted a total of 9,708 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 $ 37.06 per share. 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. The three-year performance period for the PSUs is fiscal 2021 through fiscal 2023. 13 Table of Contents On that date, the Compensation Committee granted a total of 23,164 shares of time-based restricted stock to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 28.60 per share. 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. Participants will have the ability to earn between 50 % of the target number of the PSUs – TSR for achieving threshold performance and 200 % of the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs – TSR was $ 27.04 per PSU and was calculated using the Monte Carlo approach. 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. Participants will have the ability to earn between 50 % of the target number of the PSUs – ROIC for achieving threshold performance and 200 % of the target number of the PSUs – ROIC for achieving maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $ 28.60 per share. ​ On November 12, 2020, the Compensation Committee granted a total of 11,531 shares of time-based restricted stock to our non-executive employees. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 29.30 per share. ​ A reconciliation of our restricted stock and PSU activity and related information for the nine-month period ended July 31, 2021 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average Grant ​ Number of Shares Date Fair Value Unvested at October 31, 2020 231,960 ​ $ 39.03 Shares or units granted 116,032 ​ 28.85 Shares or units vested ( 36,243 ) ​ 31.12 Shares or units cancelled ( 42,625 ) ​ 43.99 Shares withheld ( 6,568 ) ​ 38.20 Unvested at July 31, 2021 262,556 ​ $ 34.84 ​ During the nine months of fiscal 2021 and 2020, we recorded approximately $ 2.1 million and $ 1.4 million, respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan. As of July 31, 2021, there was an estimated $ 3.7 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024. 14 Table of Contents 5. EARNINGS PER SHARE Per share results have been computed based on the average number of common shares outstanding over the period in question. The computation of basic and diluted net income (loss) per share is determined using net income (loss) applicable to common shareholders as the numerator and the number of shares outstanding as the denominator as follows (in thousands, except per share amounts): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ July 31, ​ July 31, ​ ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 ​ (in thousands, except per share amounts) Basic Diluted Basic Diluted Basic Diluted Basic Diluted Net income (loss) ​ $ 1,568 ​ $ 1,568 ​ $ 2,162 ​ $ 2,162 ​ $ 4,668 ​ $ 4,668 ​ $ ( 2,658 ) ​ $ ( 2,658 ) ​ Undistributed earnings (loss) allocated to participating shares ​ ( 17 ) ​ ( 17 ) ​ ( 23 ) ​ ( 23 ) ​ ( 51 ) ​ ( 51 ) ​ 28 ​ 28 ​ Net income (loss) applicable to common shareholders ​ $ 1,551 ​ $ 1,551 ​ $ 2,139 ​ $ 2,139 ​ $ 4,617 ​ $ 4,617 ​ $ ( 2,630 ) ​ $ ( 2,630 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average shares outstanding ​ 6,601 ​ 6,601 ​ 6,595 ​ 6,595 ​ 6,591 ​ 6,591 ​ 6,705 ​ 6,705 ​ Stock options and contingently issuable securities ​ — ​ 17 ​ — ​ 9 ​ — ​ 14 ​ — ​ — ​ ​ ​ 6,601 ​ 6,618 ​ 6,595 ​ 6,604 ​ 6,591 ​ 6,605 ​ 6,705 ​ 6,705 ​ Income (loss) per share ​ $ 0.23 ​ $ 0.23 ​ $ 0.32 ​ $ 0.32 ​ $ 0.70 ​ $ 0.70 ​ $ ( 0.39 ) ​ $ ( 0.39 ) ​ ​ ​ 6. ACCOUNTS RECEIVABLE Accounts receivable are net of allowances for doubtful accounts of $ 1.6 million as of July 31, 2021 and $ 1.4 million as of October 31, 2020. ​ 7. INVENTORIES Inventories, priced at the lower of cost (first-in, first-out method) or net realizable value, are summarized below (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ July 31, October 31, ​ ​ 2021 ​ 2020 ​ Purchased parts and sub–assemblies ​ $ 37,815 $ 30,390 ​ Work–in–process ​ 16,901 ​ 12,635 ​ Finished goods ​ 94,610 ​ 106,839 ​ ​ ​ $ 149,326 $ 149,864 ​ ​ ​ 8. LEASES We adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed. Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. Upon adoption of ASC 842, we utilized the following elections: ● We have elected to combine non-lease components with lease components. ● If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply ASC 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material. ● We have elected not to use the portfolio method if we enter into a large number of leases in the same month with the same terms and conditions. 15 Table of Contents Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment. Most of the leased production and assembly facilities have lease terms ranging from two to five years , although the terms and conditions of our leases can vary significantly from lease to lease. We have assessed the specific terms and conditions of each lease to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon lease commencement. In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain. There are no material residual value guarantees provided by us, nor any material restrictions or covenants imposed by the leases to which we are a party. In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value. We record a right-of-use asset and lease liability on our Condensed Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842. We are a lessor in a small number of lease agreements associated with our machine tools and/or automation integration equipment for which the impact to our consolidated financial statements is immaterial. All our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840. We recorded total operating lease expense of $ 3.9 million and $ 3.7 million for the nine months ended July 31, 2021 and 2020, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations. Operating lease expense includes short-term leases and variable lease payments which are immaterial. There were no lease costs capitalized on the Condensed Consolidated Balance Sheets as of July 31, 2021. The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the nine months ended July 31, 2021 (in thousands): ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ July 31, 2021 Operating cash flow information: ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities ​ $ 3,827 Non-cash information: ​ ​ ​ Right-of-use assets obtained in exchange for new operating lease liabilities ​ $ 3,003 ​ The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of July 31, 2021 (in thousands): ​ ​ ​ ​ ​ Remainder of 2021 ​ $ 1,208 2022 ​ ​ 4,116 2023 ​ ​ 2,775 2024 ​ ​ 1,210 2025 ​ ​ 821 2026 and thereafter ​ ​ 1,750 Total ​ ​ 11,880 Less: Imputed interest ​ ​ ( 378 ) Present value of operating lease liabilities ​ $ 11,502 ​ As of July 31, 2021, the weighted-average remaining term of our lease portfolio was approximately 4.0 years and the weighted-average discount rate was approximately 1.6 %. ​ 16 Table of Contents 9. SEGMENT INFORMATION We operate in a single segment : industrial automation equipment. We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support. ​ ​ 10. GUARANTEES AND PRODUCT WARRANTIES From time to time, we guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of July 31, 2021, we had 12 outstanding third party payment guarantees totaling approximately $ 1.0 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve is as follows (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ July 31, ​ ​ ​ 2021 ​ 2020 ​ Balance, beginning of period ​ $ 1,200 $ 1,760 ​ Provision for warranties during the period ​ 1,495 ​ 1,474 ​ Charges to the reserve ​ ( 1,384 ) ​ ( 1,988 ) ​ Impact of foreign currency translation ​ 21 ​ 25 ​ Balance, end of period ​ $ 1,332 $ 1,271 ​ ​ The year-over-year increase in our warranty reserve was primarily due to an increase in unit sales volume. ​ 11. 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 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. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $ 10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $ 20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $ 20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2021 . Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a LIBOR–based rate, or other alternative currency–based rate approved by the lender, plus 1.25 % per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50 %, (b) the prime rate or (c) the one month LIBOR–based rate plus 1.00 %), plus 0.00 % per annum. Outstanding letters of credit will carry an annual rate of 1.25 %. 17 Table of Contents The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $ 10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $ 10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $ 10.0 million; (3) requiring that we maintain a minimum working capital of $ 125.0 million; (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, 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 a result, as of July 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 July 31, 2021, there were no borrowings under any of our credit facilities and there was approximately $ 52.2 million of available borrowing capacity thereunder. ​ 12. INCOME TAXES Our provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates, and other events that are not consistent from period to period, such as changes in income tax laws. ​ In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The CARES Act included several provisions that provide economic relief for individuals and businesses. The CARES Act, among other things, included tax provisions relating to refundable payroll tax credits, the deferral of employer’s social security payments, and modifications to net operating loss carryback provisions. On December 27, 2020, the Consolidated Appropriations Act of 2021 (the “CAA”), which includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021, was signed into law and provided further COVID-19 economic relief with an expansion of the employee retention credit. As a result, we recorded a benefit of $ 2.9 million related to the employee retention credit during the nine months of fiscal 2021. ​ During the third 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. We recorded an income tax expense during the nine months of fiscal 2021 of $ 2.6 million compared to an income tax benefit of $ 2.3 million for the same period in 2020. Our effective tax rate for the nine months of fiscal 2021 was 36 %, compared to 46 % in the corresponding prior year period. The year-over-year change in the effective tax rate was primarily due to changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, various discrete income tax expense items, and more specifically related to the prior year period, and changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic. ​ Our unrecognized tax benefits were $ 268,000 as of July 31, 2021 and $ 204,000 as of October 31, 2020, and in each case included accrued interest. 18 Table of Contents We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. As of July 31, 2021, the gross amount of interest accrued, reported in Accrued expenses, was approximately $ 41,000 , which did not include the federal tax benefit of interest deductions. We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions. The statutes of limitations with respect to unrecognized tax benefits will expire between August 2021 and August 2024 . ​ Currently, our subsidiary in Taiwan is under tax audit for fiscal year 2018. ​ 13. FINANCIAL INSTRUMENTS FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions. 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, 2021 and October 31, 2020 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets ​ Liabilities ​ ​ July 31, 2021 October 31, 2020 July 31, 2021 October 31, 2020 Level 1 ​ ​ ​ ​ ​ ​ ​ Deferred compensation ​ $ 2,398 $ 1,868 $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 2 ​ ​ ​ ​ ​ ​ ​ Derivatives ​ $ 444 $ 968 $ 909 ​ $ 872 ​ ​ Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices that are readily available. Included in Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying Condensed Consolidated Financial Statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 3 of Notes to the Condensed Consolidated Financial Statements. The U.S. Dollar equivalent notional amounts of these contracts was $ 93.6 million and $ 70.8 million at July 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. The counterparties to the forward exchange contracts are substantial and creditworthy financial institutions. We do not consider either the risk of counterparties’ non-performance or the economic consequences of counterparties’ non-performance to be material risks. ​ 14. CONTINGENCIES AND LITIGATION From time to time, we are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. ​ 19 Table of Contents 15. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements: 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 U.S. Generally Accepted Accounting Principles 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 nine months ended July 31, 2021. ​ ​ ​ ​ 20 Table of Contents