What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-01-07 compared with 2021-01-08 · 149 added, 180 removed, 779 unchanged (30% of the section changed)

4 unchanged sentences

of Hurco Companies, Inc.

Opinion on the Financial Statements

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc.

and its subsidiaries (the Company) as of October 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the three years in the period ended October 31, 2020, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated January 8, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

and its subsidiaries (the Company) as of October 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2021, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements).

We also have audited the Company’s internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Basis for Opinions

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's auditor since 2017.

Indianapolis, Indiana

January 8, 2021

Report of Independent Registered Public Accounting Firm

To the Shareholders

and the Board of Directors

of Hurco Companies, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited Hurco Companies, Inc.'s (the Company) internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows, for each of the three years in the period ended October 31, 2020, and the related notes and schedule listed in Item 15(a) of the Company, and our report dated January 8, 2021 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounting for Income Taxes – Deferred Tax Assets and Liabilities

As described in Notes 1 and 7 to the consolidated financial statements, the Company accounts for income taxes under the asset and liability method.

The Company operates in both the U.S.

and international tax jurisdictions and has recorded deferred tax assets relating to deductible temporary differences, net operating losses and credit carryforwards of $10.4 million as of October 31, 2021, with an offsetting valuation allowance of $1.9 million.

The deferred tax assets are further reduced by $5.4 million deferred tax liabilities in tax jurisdictions to record net deferred tax assets of $3.2 million and net deferred tax liabilities of $68 thousand.

The Company reduces its deferred tax assets by a valuation allowance, if based upon all the available evidence, it is more likely than not that some portion, or all of the deferred tax asset will not be realized.

Management evaluated the ability to realize the carrying value of deferred tax assets and liabilities, which involved applying complex tax regulations in federal, state, local and international tax jurisdictions.

Management applied significant judgement in assessing the value of and realizability of its deferred tax assets and liabilities.

In determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considers by jurisdiction all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, ability to utilize future carrybacks, tax planning strategies and recent financial operations.

We identified management’s evaluation of deferred tax assets and liabilities as well as the evaluation of the realizability of deferred tax assets, as a critical audit matter.

The evaluation of gross deferred tax assets and liabilities involves complex tax regulations involving multiple tax jurisdictions.

Assessing the realizability of deferred tax assets involves complexities of identifying and adhering to tax regulations in multiple jurisdictions, as well as the subjectivity of evaluating the realizability of the deferred tax assets.

Auditing these elements required a high degree of auditor judgment and an increased extent of effort, including the need to involve our tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the valuation allowance.

Our audit procedures related to the Company’s deferred tax assets and liabilities included the following, among others:

● We obtained an understanding of the relevant controls related to the Company’s computation and evaluation of the gross deferred tax assets and liabilities as well as valuation allowance and tested such controls for design and operating effectiveness.

● We utilized tax specialists in both domestic and international tax to assist in:

o Evaluating the appropriateness and accuracy of the deferred tax assets and liabilities by considering applicable tax law and underlying financial records;

o Testing the projected future reversal of temporary differences by jurisdiction, including the underlying management assumptions;

o Analyzing management’s application of domestic and foreign tax laws to the Company’s tax provisions;

and evaluating i.) the viability of contemplated tax planning strategies, and ii) the Company’s assessment of its ability to carryback net operating losses and/or credits.

● We tested the completeness and accuracy of the data and inputs used to calculate the effective tax rate, current tax provision and deferred tax assets and liabilities.

/s/ RSM US LLP

We have served as the Company's auditor since 2017.

Indianapolis, Indiana

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Net income (loss)

Income (loss) per common share – basic

Weighted average common shares outstanding – basic

Income (loss) per common share – diluted

Weighted average common shares outstanding – diluted

Income (loss) per common share

Weighted average common shares outstanding

Dividends paid per share

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As of October 31,

(In thousands, except share

and per share data)

(In thousands, except share and per share data)

Current assets:

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Accounts payable-related parties

Customer deposits

Derivative liabilities

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Common stock:

no par value, $ .10 stated value per share, 12,500,000 shares authorized 6,636,906 and 6,967,719 shares issued;

and 6,565,163 and 6,767,237 shares outstanding, as of October 31, 2020 and October 31, 2019, respectively

no par value, $ .10 stated value per share, 12,500,000 shares authorized;

6,691,052 and 6,636,906 shares issued and 6,617,717 and 6,565,163 shares outstanding, as of October 31, 2021 and October 31, 2020, respectively

Additional paid-in capital

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Increase (decrease) in accounts payable

Increase (decrease) in customer deposits

Increase (decrease) in accrued expenses

Increase (decrease) in accrued payroll and employee benefits

Increase (decrease) in accrued income tax

Increase (decrease) in accrued tax liability

Net change in operating lease assets and liabilities

Net change in derivative assets and liabilities

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Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures:

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands,

Comprehensive

(In thousands, except shares outstanding)

except shares outstanding)

Balances, October 31, 2018

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Other comprehensive income (loss)

Exercise of common stock options

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

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

Exercise of common stock options

Stock repurchases

Dividends paid

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Exercise of common stock options

Stock repurchases

Dividends paid

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Dollars for New Taiwan Dollars was $ 26.2 million at October 31, 2021.

At October 31, 2020, we had approximately $ 395,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss.

At October 31, 2021, we had approximately $ 478,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss.

Of this amount, $ 106,000 represented unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk.

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This forward contract matured in November 2021 , and we entered into a new forward contract for the same notional amount that is set to mature in November 2022 .

As of October 31, 2020, we had a realized gain of $ 947,000 and an unrealized loss of $ 78,000 , net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.

As of October 31, 2021, we had a realized gain of $ 813,000 and an unrealized gain of $ 98,000 , net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.

Derivatives Not Designated as Hedging Instruments

We 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.

We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables and payables denominated in foreign currencies.

These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Consolidated Statements of Operations consistent with the transaction gain or loss on the related inter-company receivables, payables and loans denominated in foreign currencies.

We had forward contracts outstanding as of October 31, 2020, in Euros, Pound Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2020 through October 2021 .

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

The contract amounts at forward rates in U.S.

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Foreign exchange forward contracts

Cost of sales

– Intercompany sales/purchases

Cost of sales and service

Foreign exchange forward contract

– Net investment

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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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For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit.

We have a total of $ 4.9 million of goodwill for our single reporting unit, arising from the acquisitions of ProCobots, LLC (“ProCobots”) ($ 2.5 million) in 2019, LCM Precision Technology S.r.l.

We had goodwill for our single reporting unit, arising from the acquisitions of ProCobots, LLC (“ProCobots”) ( $ 2.5 million) in 2019, LCM Precision Technology S.r.l.

(“LCM”) ( $ 2.2 million) in 2013, and our wholly-owned distributor located in Michigan ( $ 0.2 million) in 2008.

The adverse change in the business climate resulting from the COVID-19 pandemic created triggering events during the second quarter of fiscal 2020, which warranted our review of these assets for potential impairment.

With the assistance of a third-party expert, we developed a discounted cash flow model, which included projected growth rates and an appropriate market-participant discount rate, to compute the fair value of the reporting unit as of April 30, 2020.

In addition, the fair value determined was also compared to the value obtained using a market approach from guideline public company multiples.

The computed fair value of the reporting unit was in excess of our book value of equity as of April 30, 2020, and, therefore, we determined that goodwill and indefinite lived assets were not impaired at that time.

Due to the prolonged ongoing uncertainty in the global markets as a result of the COVID-19 pandemic and the net loss for fiscal 2020, we believed there was a risk that the total cash flow projections of this reporting unit could fall short of its previous projections, As such, we reperformed the goodwill impairment test as of October 31, 2020 using a similar discounted cash flow model.

As a result of the net loss for fiscal 2020 and the delayed timing of the recovery period, the total cash flow projected at October 31, 2020 fell short of those projected at April 30, 2020, causing the fair value of the reporting unit to fall below our book value of equity as of October 31, 2020, thus, resulting in a full impairment loss of $ 4.9 million.

The changes in the carrying amounts of goodwill for the fiscal year ended October 31, 2020 were as follows (in thousands):

Balance as of October 31, 2019

Changes in goodwill acquired

Goodwill impairment

Impact of foreign currency translation

Balance as of October 31, 2020

The adverse change in the business climate resulting from the COVID-19 pandemic and the net loss for fiscal 2020 caused the fair value of the reporting unit to fall below our book value of equity as of October 31, 2020, resulting in a full impairment loss of $ 4.9 million.

As such, we have no goodwill as of October 31, 2021.

For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess.

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Intangible asset amortization expense was $ 273,000 , $ 358,000 , and $ 117,000 for fiscal 2021, 2020, and 2019, respectively.

Annual intangible asset amortization expense is estimated to be $ 280,000 per year for fiscal years 2021 through 2025 .

Annual intangible asset amortization expense for the next five years is estimated to be $ 278,000 per year for fiscal years 2022 through 2023 , $ 242,000 for fiscal year 2024, $ 148,000 for fiscal year 2025 and 114,000 for fiscal year 2026.

Impairment of Long–Lived Assets.

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The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets).

We determined that we have a single asset group due to the interdependent nature of our operations.

We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended April 30, 2020.

Due to the prolonged ongoing uncertainty in the global markets as a result of the COVID-19 pandemic and the net loss for fiscal 2020, we believed there was a risk that the total cash flow projections could fall short of its previous projections, As such, we reevaluated the cash flows during the remaining useful life of the primary asset as of October 31, 2020.

The result indicated that our undiscounted cash flow continued to be in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended October 31, 2020.

Thus, there was no impairment recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2021, 2020, or 2019.

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Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements.

assumptions associated with goodwill, intangible and long–lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies.

Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long–lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies.

Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

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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 areas of the United States.

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 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 October 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.

Credit Risk .

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The amount recorded as goodwill will be fully deductible for tax purposes.

As of October 31, 2020, we have recognized an impairment loss for the full $ 2.5 million of goodwill relating to ProCobots.

As of October 31, 2020, we recognized an impairment loss for the full $ 2.5 million of goodwill relating to ProCobots.

See Note 1 of these Notes to Consolidated Financial Statements for further information.

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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.

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.

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.

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.

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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 % .

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;

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.

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.

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

In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, 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 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 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 a result, 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.

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

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The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of these instruments, and such instruments meet the Level 1 criteria of the three–tier fair value hierarchy discussed above.

carrying amount of short–term debt approximates fair value due to the variable rate of the interest and the short term nature of the instrument.

The carrying amount of short–term debt approximates fair value due to the variable rate of the interest and the short term nature of the instrument.

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 October 31, 2021 and 2020 (in thousands):

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We do not consider either the risk of counterparty non–performance or the economic consequences of counterparty non–performance as material risks.

We account for income taxes using the asset and liability method.

Under this method, the (benefit) provision for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year.

On March 27, 2020, the U.S.

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to COVID-19 pandemic.

The CARES Act, among other things, allows net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes, permits net operating loss carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before January 1, 2021.

Any net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, are created in years that have a 21.0 % federal income tax rate.

If these net operating losses are carried back to years prior to December 31, 2017, the resulting refund would be in years with a 34.0 % federal income tax rate.

We are planning to carry back our taxable loss in the U.S.

for fiscal 2020 under the provisions of the CARES Act and has recorded a tax benefit in the current year at 34 %.

The 2019 rate and 2018 rate reflect several effects associated with the U.S.

Tax Cuts and Jobs Act (the “Tax Reform Act”), which was enacted in December 2017.

The Tax Reform Act significantly revised the U.S.

corporate income tax regime by, among other things, lowering the U.S.

corporate tax rate from 35 % to 21 % effective January 1, 2018, implemented a modified territorial tax system from a global system by adding provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign-derived Intangible Income (”FDII”) among other provisions.

These provisions under the Tax Reform Act became effective for our fiscal 2019.

The Tax Reform Act also imposed a one-time transition tax which was

recorded in the fiscal 2018, on deemed repatriation of historical earnings of foreign subsidiaries.

The components of income (loss) before taxes are (in thousands):

Year Ended October 31,

Income (loss) before income taxes:

The components of income tax provision (benefit) are (in thousands):

We utilize the asset and liability method of accounting for income taxes.

Under this method, the provision (benefit) for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year.

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, among other things, included tax provisions that we applied relating to refundable payroll tax credits, the deferral of employer’s social security payments, and modifications to net operating loss carryback provisions.

After we filed the net operating loss carryback claims during the fourth quarter of fiscal 2021, we included the $ 5.4 million of tax refunds in current assets.

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 operating income of $ 2.9 million related to the employee retention credit during fiscal 2021.

In the fiscal years set forth below, the provision (benefit) for income taxes consisted of the following (in thousands):

Year Ended October 31,

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Foreign taxes

The components of income (loss) before taxes are (in thousands):

Year Ended October 31,

Income (loss) before income taxes:

A comparison of income tax expense at the U.S.

statutory rate to the Company’s effective tax rate is as follows:

statutory rate to our effective tax rate is as follows:

Year Ended October 31,

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Valuation allowance

Effect of tax rate changes

Transition tax

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Effective tax rate

The Tax Reform Act also made comprehensive changes to U.S.

1 Primarily due to discrete items for unearned stock awards

The Tax Reform Act enacted on December 22, 2017, made comprehensive changes to U.S.

federal income tax laws by moving from a global to a modified territorial tax regime.

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is generally no longer subject to U.S federal income tax.

On October 31, 2020, undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested or otherwise retained for continuing operations.

Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries beginning January 1, 2018.

As of October 31, 2021, the undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested and retained for continuing operations.

Accordingly, we did not accrue for any withholding taxes on the undistributed earnings of our foreign subsidiaries, consistent with the position adopted on January 1, 2018.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted.

Valuation allowances

are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements.

As of October 31, 2020, we had deferred tax assets established for accumulated net operating loss carryforwards of $ 2.0 million, primarily related to certain states in the U.S.

and foreign jurisdictions.

We also had deferred tax assets for tax credits of $ 0.9 million.

We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization.

As of October 31, 2020 and 2019, the balance of this valuation allowance was $ 2.2 million for each fiscal year.

Significant components of our deferred tax assets and liabilities at October 31, 2020 and 2019 were as follows (in thousands):

As of October 31, 2021, we had deferred tax assets established for accumulated net operating loss carryforwards of $ 1.7 million, primarily related to state and foreign jurisdictions.

We also have deferred tax assets for tax credits of $ 0.8 million.

We established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization.

As of October 31, 2021, and 2020, the balance of this valuation allowance was $ 1.9 million and $ 2.2 million, respectively.

Significant components of our deferred tax assets and liabilities at October 31, 2021 and 2020 are as follows (in thousands):

Deferred Tax Assets:

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Compensation related expenses

Unrealized exchange gain/loss

Net derivative gain

Unrealized exchange gain

Other accrued expenses

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Deferred Tax Liabilities:

Net derivative instruments

Net derivative loss

Unrealized exchange loss

Property and equipment and capitalized software development costs

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As of October 31, 2021, we had net operating loss carryforwards for international and U.S.

income tax purposes of $ 6.8 million, of which $ 5.1 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2021 and $ 1.7 million will expire between 5 and 20 years .

We also had tax credits of $ 0.9 million that will expire between years 2021 and 2030 .

income tax purposes of $ 6.3 million, of which $ 3.9 million will expire within 5 years beginning in fiscal 2022 and $ 0.4 million are state net operating losses which will expire between 5 and 20 years .

The remaining $ 2.0 million in net operating losses will be carried forward indefinitely based on current international tax laws.

We also had tax credits of $ 0.8 million which will expire between years 2022 and 2031 .

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):

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Balance, end of year

The entire balance of the unrecognized tax benefits and related interest at October 31, 2020, if recognized, could affect the effective tax rate in future periods.

The entire balance of the unrecognized tax benefits and related interest on October 31, 2021, if recognized, could affect the effective tax rate in future periods.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision.

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The statute of limitations with respect to unrecognized tax benefits will expire between August 2022 and August 2025 .

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

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

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

Currently, our subsidiary in Taiwan is under tax audit for fiscal year 2018.

A summary of open tax years by major jurisdiction is presented below:

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Fiscal 2016 through the current period

United Kingdom

Fiscal 2015 through the current period

Includes federal as well as state, provincial or similar local jurisdictions, as applicable.

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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 2, 2020, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 performance period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the Compensation Committee in 2017.

As a result, the Compensation Committee determined that a total of 28,979 performance stock units (“PSUs”) were earned by our executive officers, which PSUs vested on January 2, 2020.

The vesting date fair value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $ 37.79 per share.

On January 2, 2020, the Compensation Committee also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

On January 5, 2021, the Compensation Committee determined that no performance stock units (“PSUs”) were earned pursuant to the long-term incentive compensation arrangement for the fiscal 2018-2020 performance period based on the results of the performance metrics that were established by the Compensation Committee in 2018.

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 PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were approximately 25 % time-based vesting and approximately 75 % performance-based vesting.

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The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 28.60 per share.

On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”.

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

These PSUs were weighted as approximately 40 % of the overall 2021 executive long-term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2021-2023, relative to the total shareholder return of the companies in a specified peer group over that period.

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The grant date fair value of the PSUs – TSR was $ 27.04 per PSU and was calculated using the Monte Carlo approach.

On January 2, 2020, the Compensation Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”.

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

These PSUs were weighted as approximately 35 % of the overall 2021 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period of fiscal 2021-2023.

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As a result, the Compensation Committee determined that a total of 32,559 performance shares were earned by our executive officers, which performance shares vested on January 2, 2019.

The vesting date fair value of the performance shares was based on the closing sales price of our common stock on the vesting date, which was $ 36.08 per share.

As a result, the Compensation Committee determined that a total of 28,979 PSUs were earned by our executive officers, which PSUs vested on January 2, 2020.

The vesting date fair value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $ 37.79 per share.

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On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”.

These PSUs were weighted as approximately 40 % of the overall 2019 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 2019–2021, relative to the total shareholder return of the companies in

a specified peer group over that period.

These PSUs were weighted as approximately 40 % of the overall 2020 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 2020-2022, 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.

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On March 14, 2019, the Compensation Committee granted a total of 11,824 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 restricted shares vest in full one year from the date of grant provided the recipient remained 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 $ 40.58 per share.

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The vesting date fair value of the performance shares was based on the closing sales price of our common stock on the vesting date, which was $ 36.08 per share.

All related stock–based compensation cost for these vested performance shares was expensed accordingly during the three-year performance period ended October 31, 2017.

On January 2, 2019, the Compensation Committee also approved a long–term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were 25 % time–based vesting and 75 % performance–based vesting.

The awards were approximately 25 % time–based vesting and approximately 75 % performance–based vesting.

The three-year performance period for the PSUs is fiscal 2019 through fiscal 2021.

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On January 2, 2019, the Compensation Committee also granted a total target number of 30,557 PSUs to our executive officers designated as “PSU – ROIC”.

These PSUs were weighted as approximately 35 % of the overall 2018 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 2018–2020.

These PSUs were weighted as approximately 35 % of the overall 2019 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 2019–2021.

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.

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Unvested at October 31, 2021

During fiscal 2020, 2019, and 2018, we recorded approximately $ 2.1 million, $ 2.7 million, and $ 2.5 million, respectively, of stock–based compensation expense related to grants under the 2008 Equity Plan and the 2016 Equity Plan.

During fiscal 2021, 2020, and 2019, we recorded approximately $ 2.8 million, $ 2.1 million, and $ 2.7 million, respectively, of stock–based compensation expense related to grants under the 2016 Equity Plan.

As of October 31, 2021, there was an estimated $ 3.1 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024.

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Sales of control component parts to HAL were $ 262,000 , $ 265,000 and $ 198,000 for the fiscal years ended October 31, 2021, 2020, and 2019, respectively.

Trade payables to HAL were $ 1.3 million and $ 938,000 at October 31, 2020 and 2019, respectively.

Trade payables to HAL were $ 6.2 million and $ 1.3 million at October 31, 2021 and 2020, respectively.

Trade receivables from HAL were $ 74,000 and $ 25,000 at October 31, 2021 and 2020, respectively.

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We follow FASB guidance for accounting for guarantees (codified in 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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Balance, end of year

The decreases in our warranty reserve from fiscal 2019 to fiscal 2020 and from fiscal 2018 to fiscal 2019 were primarily due to a decrease in the number of machines under warranty resulting from decreased sales volume.

The increase in our warranty reserve from fiscal 2020 to fiscal 2021 was primarily due to an increase in the number of machines under warranty from increased sales volume in fiscal 2021.

The decrease in our warranty reserve from fiscal 2019 to fiscal 2020 was primarily due to a decrease in the number of machines under warranty from decreased sales volume.

We adopted Accounting Standards Update (“ASU”) No.

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We record a right-of-use asset and lease liability on our 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 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.

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Operating lease expense includes short-term leases and variable lease payments which are immaterial.

There have been no cost to obtain leases capitalized on the Consolidated Balance Sheets as of October 31, 2020.

There has been no cost to obtain leases capitalized on the Consolidated Balance Sheets as of October 31, 2021.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for fiscal 2021 (in thousands):

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

The following table summarizes the maturities of lease commitments as of October 31, 2019, prior to the adoption of the new lease guidance, as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 (in thousands):

2024 and thereafter

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

Remainder of 2022

2027 and thereafter

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Selling, general and administrative expenses

Goodwill impairment

Operating income (loss)

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Selling, general and administrative expenses

Operating income

Goodwill impairment

Operating income (loss)

Provision (benefit) for income taxes

Income per common share – basic

Income per common share – diluted

Net income (loss)

Income (loss) per common share – basic

Income (loss) per common share – diluted

SEGMENT INFORMATION

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Recently Adopted Accounting Pronouncements:

Between February 2016 and February 2019, FASB issued ASC 842, and various related updates, which establish a comprehensive new lease accounting model.

ASC 842 clarifies the definition of a lease, requires a dual approach to lease classification similar to previous lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months.

Under ASC 842, the income statement reflects lease expense for operating leases and amortization/interest expense for financing leases.

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

We adopted ASC 842 on November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date.

See Note 13 of these Notes to the Consolidated Financial Statements for further information.

In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities , which simplifies the application of hedge accounting and enables companies to better portray the economics of their risk management activities in their financial statements .

ASU 2017-12 was effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application.

We adopted this standard on November 1, 2019.

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

In February 2018, FASB issued ASU No.

2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from the Tax Reform Act that are stranded in accumulated other comprehensive income.

This standard also requires certain disclosures about stranded tax effects.

This ASU, however, does not change the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations.

ASU 2018-02 became effective for our fiscal year 2020 and we adopted this standard on November 1, 2019.

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 June 2016, FASB issued ASU No.

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

This standard is effective for our fiscal year 2021.

We do not anticipate that the adoption of this ASU will have a material impact on our consolidated financial statements and related disclosures.

This standard is effective for our fiscal 2021 and 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.

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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.

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.

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

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

This standard 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 as of March 12, 2020 through December 31, 2022.

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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 8. Financial Statements and Supplementary Data