What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-01-07 compared with 2021-01-08 · 92 added, 87 removed, 238 unchanged (43% of the section changed)

21 unchanged sentences

These non-Hurco branded products are sold by our wholly-owned distributors and are comprised primarily of other general-purpose vertical milling centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machines, metal cutting saws and CNC swill lathes.

ProCobots is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool.

ProCobots is our wholly-owned subsidiary that provides automation solutions.

In addition, through our wholly-owned subsidiary LCM, we produce high value machine tool components and accessories.

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We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries.

The COVID-19 pandemic has had a significant impact on our business and industry during fiscal 2020.

The COVID-19 pandemic has not had as a significant impact on our business and industry during fiscal 2021 as it did in fiscal 2020.

Beginning in early 2020, governmental authorities in many of the major global machine tool markets implemented mandatory stay-at-home or shelter orders requiring most businesses to close or to significantly limit operations, resulting in a sudden decrease in demand for many goods and services.

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We cannot predict the duration or scope of impact of the COVID-19 pandemic and the negative financial impact to our results cannot be reasonably estimated, but we believe the impact has been material thus far with regard to revenues, income from operations, and cash flow from operations and could continue to be material in the near future.

To date, we have not experienced material disruptions in our supply chain and have not completely ceased operations at any of our global facilities, but have implemented remote working capabilities, as appropriate or otherwise required under local law.

We have also implemented reductions in headcount and discretionary spending, delayed capital expenditures, and pulled back production activities in an effort to weather the adverse business climate.

To date, we have experienced some delays in our supply chain and have not completely ceased operations at any of our global facilities, but have implemented remote working capabilities, as appropriate or otherwise required under local law.

We have also implemented adjustments in headcount and discretionary spending, delayed capital expenditures, and monitored production activities closely in an effort to weather the adverse business climate.

We have also received stimulus in various countries to support operations and implemented tax deferrals and provisions that were available to us.

More recently, we have begun to see inflationary pressures and input cost increases imposed in our supply chains on components for our products.

We have also seen capacity for transportation and freight services limited significantly by container or vessel availability and delays at departing and receiving ports, all of which have contributed to significantly increased costs and prices associated with the global shipment of our products.

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.

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Sales and Service Fees.

Sales and service fees for fiscal 2021 were $235.2 million, an increase of $64.6 million, or 38%, compared to fiscal 2020, and included a favorable currency impact of $7.7 million, or 5%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

During fiscal 2021, sales increased year-over-year for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020.

Net Sales and Service Fees by Geographic Region

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

Fiscal Year Ended October 31,

Increase/Decrease

Sales in the Americas for fiscal 2021 increased by 28%, compared to fiscal 2020.

The increase in sales in the Americas for fiscal 2021 was primarily due to an increased volume of shipments of Hurco, Takumi and Milltronics machines, and an increase in sales of ProCobots automation solutions.

The improved sales volume of machines primarily reflected increased shipments of Hurco lathes, VM and VMX machines, as well as Milltronics lathes and toolroom machines.

European sales for fiscal 2021 increased by 51%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The year-over-year increase in European sales was primarily attributable to an increased volume of shipments of Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased shipments of machine tool components and accessories manufactured by our wholly owned subsidiary, LCM.

The improved sales volume of machines was primarily attributable to increased shipments of Hurco Lathes, VM and VMX machines.

Asian Pacific sales for fiscal 2021 increased by 25%, compared to 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 Asian Pacific sales for fiscal 2021 was primarily due to increased volume of shipments of Hurco machines in Southeast Asia and China and Takumi machines in Taiwan.

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2021 and 2020 (dollars in thousands):

Fiscal Year Ended October 31,

Increase/Decrease

Computerized Machine Tools

Computer Control Systems and Software †

Service Parts

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

Sales of computerized machine tools and computer control systems and software for fiscal 2021 increased by 42% and 49%, respectively, compared to fiscal 2020, and each included a favorable currency impact of 5%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Sales of service parts and service fees increased by 18% and 11%, respectively, during fiscal 2021, compared to fiscal 2020, and each included a favorable currency impact of 5%.

During fiscal 2021, sales increased year-over-year for all product categories as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020.

Orders and Backlog .

Orders for fiscal 2021 were $265.4 million, an increase of $98.5 million, or 59%, compared to fiscal 2020, and included a favorable currency impact of $8.4 million, or 5%, when translating foreign orders to U.S.

Similar to sales, orders increased year-over-year for all product brands and in all regions.

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

Fiscal Year Ended October 31,

Increase/Decrease

Orders in the Americas for fiscal 2021 increased by 42%, compared to fiscal 2020.

The increased order level reflected a higher demand for all categories of Hurco, Takumi, and Milltronics machines as well as increased demand for ProCobots automation solutions.

European orders for fiscal 2021 increased by 74%, compared to fiscal 2020, and included a favorable currency impact of 9%, when translating foreign orders to U.S.

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 fiscal 2021 increased by 61%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign orders to U.S.

The year-over-year increase in Asian Pacific orders for fiscal 2021 was primarily due to increased customer demand for Hurco vertical milling machines in Southeast Asia, China and India, as well as increased customer demand for Takumi machines in Taiwan.

Backlog at October 31, 2021 increased to $60.0 million from $29.9 million at October 31, 2020, primarily due to increased customer demand during fiscal 2021 for all product brands and in all regions.

We do not believe backlog is a useful measure of past performance or indicative of future performance.

Backlog orders as of October 31, 2021 are expected to be fulfilled in fiscal 2022.

Gross Profit.

Gross profit for fiscal 2021 was $56.2 million, or 24% of sales, compared to $36.5 million, or 21% of sales, for fiscal 2020.

The year-over-year increase in gross profit as a percentage of sales for fiscal 2021 reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and more normalized inventory levels, and the favorable impact of foreign currency translation compared fiscal 2020.

Additionally, approximately $1.2 million of the gross profit improvement for fiscal 2021 was a result of recording the employee retention credit extended to Hurco 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 in fiscal 2021 was partially offset by inflationary increases in cost of materials and higher costs associated with transporting finished goods on a global basis.

Operating Expenses.

Selling, general, and administrative expenses for fiscal 2021 were $46.0 million, or 20% of sales, compared to $41.4 million, or 24% of sales, for fiscal 2020, and included an unfavorable currency impact of $1.2 million, when translating foreign expenses to U.S.

Dollars for financial reporting purposes.

Selling, general and administrative expenses for fiscal 2021 trended 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 fiscal 2021 was a result of recording the employee retention credit.

Operating Income (Loss).

Operating income for fiscal 2021 was $10.2 million, or 4% of sales, compared to an operating loss of $9.9 million, or (6%) of sales, for fiscal 2020.

The year-over-year increase in operating income for fiscal 2021 was primarily due to an increase in the sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories and ProCobots automation solutions.

Operating income for fiscal 2021 included a benefit of $2.9 million related to the employee retention credit recorded during fiscal 2021.

The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Other Expense, Net.

Other expense, net for fiscal 2021 decreased by $0.8 million from fiscal 2020, due mainly to a reduction in foreign currency exchange losses in fiscal 2021, compared to fiscal 2020.

Provision for Income Taxes .

We recorded an income tax expense of $3.4 million for fiscal 2021, compared to income tax benefit of $4.6 million for fiscal 2020.

Our effective tax rate for fiscal 2021 was 33%, compared to 42% for fiscal 2020.

The year-over-year change in the effective tax rate was primarily due to changes in geographic mix of income and loss that included jurisdictions with differing tax rates, various discrete income tax expense items, and more specifically related to fiscal 2020, changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

Net Income (Loss).

Net income for fiscal 2021 was $6.8 million, or $1.01 per diluted share, an increase of $13.0 million from the fiscal 2020 net loss of $6.2 million, or $(0.93) per diluted share.

The year-over-year increase from net loss to net income was primarily due to increased sales volume for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020.

The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Fiscal 2020 Compared to Fiscal 2019

Sales and Service Fees.

Sales and service fees for fiscal 2020 were $170.6 million, a decrease of $92.8 million, or 35%, compared to fiscal 2019, and included a favorable currency impact of $0.6 million, or less than 1%, when translating foreign sales to U.S.

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We do not believe backlog is a useful measure of past performance or indicative of future performance.

Backlog orders as of October 31, 2020 are expected to be fulfilled in fiscal 2021.

Gross Profit.

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The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Fiscal 2019 Compared to Fiscal 2018

Sales and Service Fees.

Sales and service fees for fiscal 2019 were $263.4 million, a decrease of $37.3 million, or 12%, compared to fiscal 2018, and included an unfavorable currency impact of $8.5 million, or 3%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2019 and 2018 (dollars in thousands):

Fiscal Year Ended October 31,

Increase/Decrease

Sales in the Americas for fiscal 2019 increased by 9%, compared to fiscal 2018, primarily attributable to sales of vertical milling machines from a U.S.

machine tool distributor in California acquired by Hurco in the fourth quarter of fiscal 2018.

European sales for fiscal 2019 decreased by 20%, compared to fiscal 2018, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The decrease in European sales for fiscal 2019 was primarily attributable to a reduced volume of shipments of Hurco machines in Germany and the United Kingdom, as well as a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary in Italy, LCM.

Asian Pacific sales for fiscal 2019 decreased by 30%, compared to fiscal 2018, and included an unfavorable currency impact of 2%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The decrease in Asian Pacific sales for fiscal 2019 was primarily attributable to decreased shipments of Hurco vertical milling machines and Takumi bridge mill machines in China, partially offset by increased shipments of Hurco vertical milling machines in India.

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2019 and 2018 (dollars in thousands):

Fiscal Year Ended October 31,

Increase/Decrease

Computerized Machine Tools

Computer Control Systems and Software †

Service Parts

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

Sales of computerized machine tools and computer control systems and software for fiscal 2019 decreased by 15% and 2%, respectively, and each included an unfavorable currency impact of 3%, compared to fiscal 2018.

The year-over-year decrease in sales of computerized machine tools and computer control systems and software were mainly due to decreased sales of Hurco and Takumi machines in Germany, the United Kingdom, and China, as well as a decrease in sales of electro-mechanical components and accessories manufactured by LCM, partially offset by an increase in sales of vertical milling machines from the U.S.

machine tool distributor in California acquired by Hurco in the fourth quarter of fiscal 2018.

Sales of service parts and service fees for fiscal 2019 increased by 1% and 4%, respectively, compared to fiscal 2018, due primarily to an increase in aftermarket sales and aftermarket service of Hurco products in North America.

Orders and Backlog .

Orders for fiscal 2019 were $241.1 million, a decrease of $64.7 million, or 21%, compared to fiscal 2018, and included an unfavorable currency impact of $8.5 million, or 3%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2019 and 2018 (dollars in thousands):

Fiscal Year Ended October 31,

Increase/Decrease

Orders in the Americas for fiscal 2019 decreased by 5%, compared to fiscal 2018, primarily due to the fact that fiscal 2018 reflected orders resulting from year-end promotional activities following the September 2018 International Manufacturing Technology Show (“IMTS”), which is held every two years.

The decrease in orders for fiscal 2019, compared to fiscal 2018, was partially offset by increased customer demand for vertical milling machines from the distributor in California acquired in the fourth quarter of fiscal 2018 and increased customer demand for automation and integration systems from ProCobots, a U.S.

-based automation integration company acquired by Hurco in the fourth quarter of fiscal 2019 .

European orders for fiscal 2019 decreased by 29%, compared to fiscal 2018, and included an unfavorable currency impact of 4%, when translating foreign orders to U.S.

The year-over-year decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany and Italy, as well as a decrease in customer demand for electro-mechanical components and accessories manufactured by LCM.

Asian Pacific orders for fiscal 2019 decreased by 23%, compared to fiscal 2018, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S.

Dollars, due mainly to decreased customer demand for Hurco and Takumi machines in China and India.

Backlog at October 31, 2019 decreased to $32.7 million from $55.0 million at October 31, 2018, primarily due to a reduction in customer demand during fiscal 2019.

We do not believe backlog is a useful measure of past performance or indicative of future performance.

Gross Profit.

Gross profit for fiscal 2019 was $77.2 million, or 29% of sales, compared to $91.8 million, or 31% of sales, for fiscal 2018.

The year-over-year decrease in gross profit as a percentage of sales was primarily due to lower sales of more complex, higher-performance machines in the European sales region, the impact of fixed costs on lower sales and production volume, and competitive pricing pressures on a global basis.

Operating Expenses.

Selling, general, and administrative expenses for fiscal 2019 were $54.7 million, or 21% of sales, compared to $58.0 million, or 19% of sales, in fiscal 2018, and included a favorable currency impact of $1.5 million, when translating foreign expenses to U.S.

Dollars for financial reporting purposes.

The year-over-year reduction in selling, general, and administrative expenses were primarily due to a decrease in tradeshow expenses associated with the September 2018 IMTS, decreased variable employee compensation, and other operating expense reductions implemented during fiscal 2019, partially offset by increased operating expenses associated with the U.S.

companies we acquired in the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2019.

Operating Income.

Operating income for fiscal 2019 was $22.5 million, or 9% of sales, compared to $33.8 million, or 11% of sales, in fiscal 2018.

The year-over-year decrease in operating income was due to an overall reduction in sales volume year-over-year, particularly in Europe where our more complex, higher performance machines are primarily sold, as well as increased operating expenses associated with the U.S.

companies we acquired in the fourth quarter of fiscal 2018 and the fourth quarter of fiscal 2019, partially offset by a reduction in other selling, general, and administrative expenses.

Other Income (Expense).

Other expense, net for fiscal 2019 decreased by $1.8 million from fiscal 2018, due mainly to a reduction in foreign currency exchange losses in fiscal 2019, compared to fiscal 2018.

Provision for Income Taxes .

Our effective tax rate for fiscal 2019 was 25%, compared to 34% in fiscal 2018.

The year-over-year decrease in the effective tax rate for fiscal 2019 principally resulted from the favorable impact of certain U.S.

tax reform provisions available in that fiscal year, including the full year impact of a lower U.S.

corporate tax rate from 35% to 21%, a new deduction attributable to Foreign-Derived Intangible Income (“FDII”), and the benefit of foreign tax credits included in these tax reform provisions.

In addition, the year-over year changes in the effective tax rates included a shift in geographic mix of income and loss among tax jurisdictions.

The effective tax rate for fiscal 2018 included one-time charges of $2.9 million related to the U.S.

Tax Cuts and Jobs Act that was enacted in December 2017.

Net income for fiscal 2019 was $17.5 million, or $2.55 per diluted share, a decrease of $4.0 million, or 19%, from fiscal 2018 net income of $21.5 million, or $3.15 per diluted share.

Liquidity and Capital Resources

At October 31, 2021, we had cash and cash equivalents of $84.1 million, compared to $57.9 million at October 31, 2020.

The increase in cash and cash equivalents was primarily a result of a decrease in accounts receivable, partially offset by the repurchase of common stock during the second and third quarters of fiscal 2020, as well as a decrease in accrued payroll and employee benefits.

The increase in cash and cash equivalents was primarily a result of increases in accounts payable, accrued payroll and employee benefits and customer deposits, partially offset by an increase in accounts receivable.

Approximately 34% of our $84.1 million of cash and cash equivalents is held in the U.S.

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Working capital (including cash and cash equivalents) was $208.7 million at October 31, 2021, compared to $201.0 million at October 31, 2020.

The decrease in working capital was mostly driven by a decrease in accounts receivable and an increase in operating lease liabilities, partially offset by an increase in prepaid expenses and a decrease in accrued payroll and employee benefits.

The increase in working capital was primarily driven by increases in cash and accounts receivable, partially offset by increases in accounts payable, accrued expenses and customer deposits.

Inventories, net were $148.2 million at October 31, 2021, compared to $149.9 million at October 31, 2020.

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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 could be made in the open market or through privately-negotiated transactions from time to time through March 11, 2022, subject to applicable laws, regulations, and contractual provisions.

The program could have been amended, suspended, or discontinued at any time and did not commit us to repurchase any shares of our common stock.

During fiscal 2020, we repurchased all $7.0 million in shares of our common stock.

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

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 fiscal 2021.

In addition, during fiscal 2021, we paid cash dividends to our shareholders of $3.7 million.

1 unchanged sentence

On December 31, 2018, we and our subsidiary Hurco B.V.

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

entered into a credit agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020 and December 17, 2021 (as amended, the “2018 Credit Agreement”).

The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million.

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The scheduled maturity date of the 2018 Credit Agreement is December 31, 2023.

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.

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% 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 SOFR-based rate plus 1.00%), plus 0.00% per annum.

Outstanding letters of credit will carry an annual rate of 1.00%.

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(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.

and (4) requiring that we maintain a minimum tangible net worth of $176.5 million.

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

1 unchanged sentence

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 October 31, 2020, our existing credit facilities consisted of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement.

As of October 31, 2021, our existing credit facilities consisted of the €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 October 31, 2021.

At October 31, 2020, we had an aggregate of $51.8 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

At October 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, and payment of dividends.

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 beyond 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.

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We follow Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460).

As of October 31, 2020, we had 14 outstanding third party payment guarantees totaling approximately $0.4 million.

As of October 31, 2021, we had eight outstanding third party payment guarantees totaling approximately $0.9 million.

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

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Therefore, we 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 facilities by a distributor, independent contractor, or by one of our service technicians.

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.

We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract.

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.

We consider these services to be immaterial 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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis