Item 2. Management’s Discussion and Analysis
Item 2 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide an understanding of our financial condition and other related matters, including our liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the notes accompanying our unaudited financial statements appearing elsewhere in this report, as well as our audited financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2020.
EXECUTIVE OVERVIEW
Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support.
The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance. This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report.
The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During the nine months of fiscal 2021, approximately 49% 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 14% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.
We have three brands of CNC machine tools in our product portfolio: Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die 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. Many of 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. Additionally, ProCobots LLC (“ProCobots”) is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool. Finally, through our wholly-owned subsidiary in Italy, LCM, we produce high value machine tool components and accessories.
We principally sell our products through more than 200 independent agents and distributors throughout the Americas, Europe, and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM.
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Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling, and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements.
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 had a significant impact on our business and industry in fiscal 2020. We are currently participating in challenging global market conditions, with continued COVID-19 business restrictions, vendor delays, chronic logistics issues and inflationary increases in cost of materials. 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. However, we cannot predict the duration or scope of impact of the COVID-19 pandemic on a global basis and the impact that any new developments, including variants and surges, could have on our financial results. 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, 2021 Compared to Three Months Ended July 31, 2020
Sales and Service Fees. Sales and service fees for the third quarter of fiscal 2021 were $54.2 million, an increase of $8.8 million, or 19%, compared to the corresponding prior year period, and included a favorable currency impact of $2.3 million, or 5%, 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 third quarter ended July 31, 2021 and 2020 (dollars in thousands):
Three Months Ended
July 31,
2021
2020
$ Change
% Change
Americas
$
19,150
35
%
$
17,870
39
%
$
1,280
7
%
Europe
28,403
53
%
19,538
43
%
8,865
45
%
Asia Pacific
6,625
12
%
7,974
18
%
(1,349)
(17)
%
Total
$
54,178
100
%
$
45,382
100
%
$
8,796
19
%
Sales in the Americas for the third quarter of fiscal 2021 increased by 7%, compared to the corresponding period in fiscal 2020. The increase in sales in the Americas for the third quarter of fiscal 2021 was due to an increased volume of machine shipments, both Hurco and Milltronics, and an increase in sales of ProCobots automation solutions. The improved sales volume of machines primarily reflected increased shipments of Hurco VM and VMX machines as well as Milltronics toolroom machines.
European sales for the third quarter of fiscal 2021 increased by 45%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 10%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year increase in European sales was attributable to increased volume of shipments of Hurco and Takumi machines in Germany, the United Kingdom, and Italy, as well as increased shipments of machine tool components and accessories manufactured by LCM. The improved sales volume of machines was primarily attributable to increased shipments of Hurco Lathes, VM and VMX machines.
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Asian Pacific sales for the third quarter of fiscal 2021 decreased by 17%, 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 decrease in Asian Pacific sales for the third quarter of fiscal 2021 was primarily due to decreased sales of Hurco 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, 2021 and 2020 (dollars in thousands):
Three Months Ended
July 31,
2021
2020
$ Change
% Change
Computerized Machine Tools
$
45,326
84
%
$
37,752
83
%
$
7,574
20
%
Computer Control Systems and Software †
612
1
%
422
1
%
190
45
%
Service Parts
6,251
11
%
5,818
13
%
433
7
%
Service Fees
1,989
4
%
1,390
3
%
599
43
%
Total
$
54,178
100
%
$
45,382
100
%
$
8,796
19
%
† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems.
Sales of computerized machine tools for the third quarter of fiscal 2021 increased by 20%, compared to the corresponding prior year period, due mainly to increased volume of shipments of Hurco, Takumi and Milltronics products, particularly in the Americas and Europe. Sales of computer control systems and software and service fees for the third quarter of fiscal 2021 increased by 45% and 43%, respectively, compared to the corresponding prior year period, primarily due to increased software sales and services provided across all regions where our customers are located. Service parts for the third quarter of fiscal 2021 increased by 7%, compared to the corresponding prior year period, due mainly to increased aftermarket parts sales for Hurco products in Germany and France. The increases in each product category described above included a favorable currency impact of 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes.
Orders. Orders for the third quarter of fiscal 2021 were $66.7 million, an increase of $30.6 million, or 85%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of $2.9 million, or 8%, when translating foreign orders to U.S. Dollars.
The following table sets forth new orders booked by geographic region for the third quarter ended July 31, 2021 and 2020 (dollars in thousands):
Three Months Ended
July 31,
2021
2020
$ Change
% Change
Americas
$
23,837
36
%
$
16,315
45
%
$
7,522
46
%
Europe
33,998
51
%
14,155
39
%
19,843
140
%
Asia Pacific
8,882
13
%
5,621
16
%
3,261
58
%
Total
$
66,717
100
%
$
36,091
100
%
$
30,626
85
%
Orders in the Americas for the third quarter of fiscal 2021 increased by 46%, compared to the corresponding period in fiscal 2020. The increased order levels reflected higher demand for all categories of Hurco, Takumi, and Milltronics machines as well as increased demand for ProCobots automation solutions.
European orders for the third quarter of fiscal 2021 increased by 140%, compared to the corresponding prior year period, and included a favorable currency impact of 17%, when translating foreign orders to U.S. Dollars. The year-over-year increases in orders were driven primarily by increased customer demand for Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased demand for LCM machine tool components and accessories.
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Asian Pacific orders for the third quarter of fiscal 2021 increased by 58%, compared to the corresponding prior year period, primarily due to increased customer demand for Hurco vertical milling machines and Takumi machines in China and Southeast Asia. Asian Pacific orders for the third quarter of fiscal 2021 included a favorable currency impact of 9%, when translating foreign orders to U.S. dollars.
Gross Profit . Gross profit for the third quarter of fiscal 2021 was $13.0 million, or 24% of sales, compared to $11.1 million, or 24% of sales, for the corresponding prior year period. The year-over-year increase in gross profit reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and normalized inventory levels, and the favorable impact of foreign currency translation compared to the corresponding prior year periods. Approximately $0.4 million of the gross profit improvement for the third quarter of fiscal 2021 was a result of recording the employee retention credit extended to the Company under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021 (the “employee retention credit”). The improvement in gross profit as a percentage of sales is partially offset by recent inflationary increases in cost of materials and high costs associated with transporting finished goods on a global basis.
Operating Expenses . Selling, general, and administrative expenses for the third quarter of fiscal 2021 were $10.3 million, or 19% of sales, compared to $9.6 million, or 21% of sales, in the corresponding fiscal 2020 period, and included an unfavorable currency impact of $0.4 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. Selling, general and administrative expenses for the third quarter of fiscal 2021 continued to trend downward as a percentage of sales from fiscal 2020 as a result of the cost management plans implemented during fiscal 2020 and continued during fiscal 2021. Additionally, approximately $0.6 million of the selling, general, and administrative expense reduction for the third quarter of fiscal 2021 was a result of recording the employee retention credit.
Operating Income . Operating income for the third quarter of fiscal 2021 was $2.6 million, or 5% of sales, compared to $1.4 million, or 3% of sales, for the corresponding prior year period. The year-over-year increase in operating income for the third quarter was primarily due to increases in the sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories, and ProCobots automation solutions. As discussed above, operating income for the third quarter of fiscal 2021 included a benefit of $1.0 million, related to the employee retention credit recorded during the third quarter of fiscal 2021.
Other Income (Expense), Net . Other income, net in the third quarter of fiscal 2021 was less than $0.1 million, compared to other expense, net of $0.2 million in the corresponding period in fiscal 2020. The change from other expense, net to other income, net was due mainly to a reduction in foreign currency exchange losses in the third quarter of fiscal 2021, compared to the corresponding prior year period.
Income Taxes . The effective tax rate for the third quarter of fiscal 2021 was 41%, compared to (76)% 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.
Nine Months Ended July 31, 2021 Compared to Nine Months Ended July 31, 2020
Sales and Service Fees. Sales and service fees for the nine months of fiscal 2021 were $166.2 million, an increase of $40.0 million, or 32%, compared to the corresponding prior year period, and included a favorable currency impact of $6.7 million, or 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes.
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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, 2021 and 2020 (dollars in thousands):
Nine Months Ended
July 31,
2021
2020
$ Change
% Change
Americas
$
62,121
37
%
$
52,045
41
%
$
10,076
19
%
Europe
81,598
49
%
54,359
43
%
27,239
50
%
Asia Pacific
22,494
14
%
19,764
16
%
2,730
14
%
Total
$
166,213
100
%
$
126,168
100
%
$
40,045
32
%
Sales in the Americas for the nine months of fiscal 2021 increased by 19%, compared to the corresponding period in fiscal 2020. The increase in sales in the Americas for the nine months of fiscal 2021 was due to an increased volume of machine shipments, both Hurco and Milltronics, and an increase in sales of ProCobots automation solutions. The improved sales volume of machines primarily reflected increased shipments of Hurco VM and VMX machines as well as Milltronics toolroom machines.
European sales for the nine months of fiscal 2021 increased by 50%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 10%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year increase in European sales was attributable to increased volume of shipments of Hurco and Takumi machines in Germany, the United Kingdom, and Italy, as well as increased shipments of machine tool components and accessories manufactured by LCM. The improved sales volume of machines was primarily attributable to increased shipments of Hurco Lathes, VM and VMX machines.
Asian Pacific sales for the nine months of fiscal 2021 increased by 14%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 6%, when translating foreign sales to U.S. Dollars for financial reporting purposes. The year-over-year increase in sales for the nine months of fiscal 2021 was attributable to increased shipments of Hurco machines in India and Southeast Asia.
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, 2021 and 2020 (dollars in thousands):
Nine Months Ended
July 31,
2021
2020
$ Change
% Change
Computerized Machine Tools
$
139,211
84
%
$
102,955
82
%
$
36,256
35
%
Computer Control Systems and Software †
1,859
1
%
1,317
1
%
542
41
%
Service Parts
19,394
12
%
16,905
13
%
2,489
15
%
Service Fees
5,749
3
%
4,991
4
%
758
15
%
Total
$
166,213
100
%
$
126,168
100
%
$
40,045
32
%
† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems.
Sales of computerized machine tools for the nine months of fiscal 2021 increased by 35%, compared to the corresponding prior year period, due to an increased volume of shipments of Hurco, Takumi and Milltronics products across all regions where our customers are located. Sales of computer control systems and software and service parts for the nine months of fiscal 2021 increased by 41% and 15%, respectively, compared to the corresponding prior year period, due mainly to increased aftermarket sales for Hurco and Takumi products across all regions where our customers are located. Service fees for the nine months of fiscal 2021 increased by 15%, compared to the corresponding prior year period, mainly due to increased services provided to customers in Europe for Hurco, Takumi and LCM products. Increases in each of the product categories described above included a favorable currency impact of 5%, when translating foreign sales to U.S. Dollars for financial reporting purposes.
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Orders. Orders for the nine months of fiscal 2021 were $189.8 million, an increase of $71.5 million, or 61%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of $8.0 million, or 7%, when translating foreign orders to U.S. Dollars.
The following table sets forth new orders booked by geographic region for the nine months ended July 31, 2021 and 2020 (dollars in thousands):
Nine Months Ended
July 31,
2021
2020
$ Change
% Change
Americas
$
66,988
35
%
$
50,400
43
%
$
16,588
33
%
Europe
94,194
50
%
51,476
43
%
42,718
83
%
Asia Pacific
28,573
15
%
16,347
14
%
12,226
75
%
Total
$
189,755
100
%
$
118,223
100
%
$
71,532
61
%
Orders in the Americas for the nine months of fiscal 2021 increased by 33%, compared to the corresponding period in fiscal 2020. The increased order levels reflected higher demand for all categories of Hurco, Takumi, and Milltronics machines as well as increased demand for ProCobots automation solutions.
European orders for the nine months of fiscal 2021 increased by 83%, compared to the corresponding prior year period, and included a favorable currency impact of 13%, when translating foreign orders to U.S. Dollars. The year-over-year increase in orders was driven primarily by increased customer demand for Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased demand for LCM machine tool components and accessories.
Asian Pacific orders for the nine months of fiscal 2021 increased by 75%, compared to the corresponding prior year period, primarily due to increased customer demand for Hurco vertical milling machines and Takumi machines in China and Southeast Asia. Asian Pacific orders for the nine months of fiscal 2021 included a favorable currency impact of 10%, when translating foreign orders to U.S. Dollars.
Gross Profit . Gross profit for the nine months of fiscal 2021 was $39.3 million, or 24% of sales, compared to $26.9 million, or 21% of sales, for the corresponding prior year period. The year-over-year increase in gross profit as a percentage of sales reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and normalized inventory levels, and the favorable impact of foreign currency translation compared to the corresponding prior year periods. Additionally, approximately $1.2 million of the gross profit improvement for the nine months of fiscal 2021 was a result of recording the employee retention credit. The improvement in gross profit as a percentage of sales is partially offset by recent inflationary increases in cost of materials and high costs associated with transporting finished goods on a global basis.
Operating Expenses . Selling, general, and administrative expenses for the nine months of fiscal 2021 were $32.2 million, or 19% of sales, compared to $31.1 million, or 25% of sales, in the corresponding fiscal 2020 period, and included an unfavorable currency impact of $1.1 million, when translating foreign expenses to U.S. Dollars for financial reporting purposes. Selling, general and administrative expenses for the nine months of fiscal 2021 continued to trend downward as a percentage of sales from fiscal 2020 as a result of the cost management plans implemented during fiscal 2020 and continued during fiscal 2021. Additionally, approximately $1.7 million of the selling, general, and administrative expense reduction for the nine months of fiscal 2021 was a result of recording the employee retention credit.
Operating Income (Loss) . Operating income for the nine months of fiscal 2021 was $7.1 million, or 4% of sales, compared to operating loss of $4.1 million, or (3)% of sales, for the corresponding prior year period. The year-over-year increase from an operating loss to operating income for the nine month period was primarily due to increases in the of sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories, and ProCobots automation solutions. As discussed above, operating income for the nine months of fiscal 2021 included a benefit of $2.9 million related to the employee retention credit recorded during fiscal 2021.
Other Income (Expense), Net . Other expense, net in the nine months of fiscal 2021 was less than $0.1 million compared to $0.9 million for the corresponding period in fiscal 2020. The decrease in other expense, net was due mainly to a reduction in foreign currency exchange losses in the nine months of fiscal 2021, compared to the corresponding prior year period.
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Income Taxes . The 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.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2021, we had cash and cash equivalents of $80.5 million, compared to $57.9 million at October 31, 2020. Approximately 25% of the $80.5 million of cash and cash equivalents was denominated in U.S. Dollars. The balance was attributable to our foreign operations and is held in the local currencies of our various foreign entities, subject to fluctuations in currency exchange rates. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.
Working capital was $207.3 million at July 31, 2021 compared to $201.0 million at October 31, 2020. The increase in working capital was primarily driven by the increase in cash and cash equivalents and accounts receivable, which was partially offset by increases in accounts payable and customer deposits.
Capital expenditures of $1.8 million during the nine months of fiscal 2021 were primarily for capital improvements in existing facilities and software development costs. We funded these expenditures with cash on hand.
On March 12, 2021, we announced that our Board of Directors approved a share repurchase program in an aggregate amount of up to $7.0 million. Repurchases under the program may be made in the open market or through privately-negotiated transactions from time to time through March 10, 2023, subject to applicable laws, regulations and contractual provisions. The program may be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We did not repurchase any shares of our common stock under this program during the third quarter of fiscal 2021.
In addition, during the nine months ended July 31, 2021, we paid cash dividends to our shareholders of $2.7 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 each of March 13, 2020 and December 23, 2020. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 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%.
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 Specified Outstanding Amount exceeds $25.0 million, then the Company will not permit the amount
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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, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time.
As of 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. We had no debt or borrowings under any of our credit facilities at July 31, 2021.
At July 31, 2021, we had an aggregate of approximately $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. We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, payment of dividends and our stock repurchase program.
We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase.
CRITICAL ACCOUNTING POLICIES
Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, require management to make significant estimates and assumptions using information available at the time the estimates are made. These estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenues, and expenses. If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition would be affected. There were no material changes to our critical accounting policies during the nine months of fiscal 2021.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no material changes related to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
OFF BALANCE SHEET ARRANGEMENTS
From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of 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 the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements made in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may
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cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements. These risks, uncertainties and other factors include, but are not limited to:
● The 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;
● Uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets;
● The risks of our international operations;
● 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;
● 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;
● Uncertainty concerning our ability to use tax loss carryforwards; and
● 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. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement is applicable to all forward-looking statements contained in this report.
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