HURCO COMPANIES INC 10-K

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2021, we had no borrowings outstanding under any of our credit facilities. Foreign Currency Exchange Risk In fiscal 2021, we derived approximately 63% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies. Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy, and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro. ​ We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables, payables, and loans denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. 50 ​ Forward contracts for the sale or purchase of foreign currencies as of October 31, 2021, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows (in thousands, except weighted average forward rates): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract Amount at ​ ​ ​ ​ Notional ​ Weighted ​ Forward Rates in ​ ​ ​ ​ Amount ​ Avg. ​ U.S. Dollars ​ ​ Forward in Foreign Forward Contract October 31, ​ ​ Contracts Currency Rate Date 2021 Maturity Dates Sale Contracts: ​ ​ Euro 14,850 ​ 1.1872 ​ 17,629 ​ 17,206 ​ Nov 2021 - Oct 2022 Sterling 6,250 ​ 1.3764 ​ 8,603 ​ 8,537 ​ Nov 2021 - Oct 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Purchase Contracts: ​ ​ ​ ​ ​ New Taiwan Dollar 720,000 ​ 27.1551 * 26,514 ​ 26,163 ​ Nov 2021 - Oct 2022 *New Taiwan Dollars per U.S. Dollar Forward contracts for the sale or purchase of foreign currencies as of October 31, 2021, which were entered into to protect against the effects of foreign currency fluctuations on inter-company receivables, payables and loans and are not designated as hedges under this guidance denominated in foreign currencies, were as follows (in thousands, except weighted average forward rates): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract Amount at ​ ​ ​ ​ Notional ​ Weighted ​ Forward Rates in ​ ​ ​ ​ Amount ​ Avg. ​ U.S. Dollars ​ ​ Forward in Foreign Forward Contract October 31, ​ ​ Contracts Currency Rate Date 2021 Maturity Dates Sale Contracts: Euro 10,533 ​ 1.1762 ​ 12,389 ​ 12,199 ​ Nov 2021 - Jul 2022 Sterling 1,724 ​ 1.3676 ​ 2,357 ​ 2,358 ​ Jan 2022 - Feb 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Purchase Contracts: ​ ​ ​ ​ ​ ​ ​ ​ ​ New Taiwan Dollar 654,332 ​ 27.8115 * 23,527 ​ 23,533 ​ Nov 2021 - Feb 2022 * New Taiwan Dollars per U.S. Dollar We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2020. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. 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, 2021, we had $813,000 of realized gain and $98,000 of unrealized gain, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. 51 ​ Forward contracts designated as net investment hedges under this guidance as of October 31, 2021 were as follows (in thousands, except weighted average forward rates): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Notional ​ Weighted Contract Amount at Forward Rates in ​ ​ ​ ​ ​ Amount ​ Avg. ​ U.S. Dollars ​ ​ ​ Forward ​ in Foreign ​ Forward ​ Contract ​ October 31, ​ Maturity ​ Contracts Currency Rate Date 2021 Date Sale Contracts: Euro 3,000 1.1892 3,568 3,463 Nov 2021 ​ ​ ​ ​ ​ 52 ​ Management’s Annual Report on Internal Control over Financial Reporting ​ To the Shareholders and Board of Directors of Hurco Companies, Inc. Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of 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 (2013 framework) (COSO). Management is responsible for the Company’s financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. 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. In management’s opinion, the Company’s internal control over financial reporting as of October 31, 2021, was effective based on the criteria specified above. Our independent registered public accounting firm, RSM US LLP (“RSM”), which also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting as of October 31, 2021. RSM has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K. ​ ​ ​ /s/ Gregory S. Volovic Gregory S. Volovic President and Chief Executive Officer /s/ Sonja K. McClelland Sonja K. McClelland Executive Vice President, Treasurer, and Chief Financial Officer ​ Indianapolis, Indiana January 7, 2022 ​ ​ ​ ​ ​ ​ 53 ​