What changed in this filing

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Item 1. Financial Statements

2022-03-04 compared with 2021-09-03 · 103 added, 204 removed, 380 unchanged (45% of the section changed)

4 unchanged sentences

Three Months Ended

Nine Months Ended

Sales and service fees

1 unchanged sentence

Selling, general and administrative expenses

Operating income (loss)

Operating income

Interest expense

Interest income

Investment income

Other income (expense), net

Income (loss) before income taxes

Provision (benefit) for income taxes

Net income (loss)

Income (loss) per common share

Investment income, net

Other expense (income), net

Income before income taxes

Provision for income taxes

Income per common share

Weighted average common shares outstanding

5 unchanged sentences

Three Months Ended

Nine Months Ended

Net income (loss)

Other comprehensive income (loss):

3 unchanged sentences

Total other comprehensive income (loss)

Comprehensive income (loss)

Comprehensive income

The accompanying notes are an integral part of the condensed consolidated financial statements.

44 unchanged sentences

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

6,674,741 and 6,636,906 shares issued and 6,601,406 and 6,565,163 shares outstanding, as of July 31, 2021 and October 31, 2020, respectively

6,681,589 and 6,691,052 shares issued and 6,607,437 and 6,617,717 shares outstanding, as of January 31, 2022 and October 31, 2021, respectively

Additional paid-in capital

8 unchanged sentences

Three Months Ended

Nine Months Ended

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities, net of acquisitions:

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Provision for doubtful accounts

Deferred income taxes

Equity in loss (income) of affiliates

Equity in (income) loss of affiliates

Foreign currency (gain) loss

2 unchanged sentences

Stock–based compensation

Change in assets and liabilities, net of acquisitions:

Change in assets and liabilities:

(Increase) decrease in accounts receivable

1 unchanged sentence

(Increase) decrease in prepaid expenses

Increase (decrease) in accounts payable

Increase (decrease) in accounts payable, net of related parties

Increase (decrease) in customer deposits

Increase (decrease) in accrued expenses

Increase (decrease) in warranty expenses

Increase (decrease) in accrued payroll and employee benefits

Increase (decrease) in accrued income tax

8 unchanged sentences

Cash flows from financing activities:

Proceeds from exercise of common stock options

Dividends paid

Taxes paid related to net settlement of restricted shares

Proceeds from exercise of common stock options

Stock repurchases

8 unchanged sentences

(In thousands, except shares outstanding)

Three Months Ended July 31, 2021 and 2020

Comprehensive

Income (Loss)

Balances, April 30, 2020

Net income (loss)

Other comprehensive income (loss)

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

Exercise of common stock options

Stock repurchases

Dividends paid

Balances, July 31, 2020

Balances, April 30, 2021

Net income (loss)

Other comprehensive income (loss)

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

Exercise of common stock options

Stock repurchases

Dividends paid

Balances, July 31, 2021

Nine Months Ended July 31, 2021 and 2020

Comprehensive

Income (Loss)

Balances, October 31, 2020

Net income (loss)

Other comprehensive income (loss)

Other comprehensive income

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

Exercise of common stock options

Stock repurchases

Dividends paid

Balances, July 31, 2020

Balances, January 31, 2021

Balances, October 31, 2021

Net income (loss)

Other comprehensive income (loss)

3 unchanged sentences

Dividends paid

Balances, July 31, 2021

Balances, January 31, 2022

The accompanying notes are an integral part of the condensed consolidated financial statements.

9 unchanged sentences

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

During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of COVID-19 and the economic slowdown in Europe, uncertainty surrounding the U.K.

Brexit activities, and political friction in the U.S.

Many of our customers deferred or eliminated investments in capital equipment last year, which we attributed largely to the uncertainty these events created.

During the nine months of fiscal 2021, our sales increased year-over-year in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions.

Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of July 31, 2021, with the understanding that these estimates could change in the near term.

Our operating results during fiscal years 2020, 2021 and the first quarter of fiscal 2022 were affected by the international business disruption due to the outbreak of COVID-19, vendor delays, transportation issues, inflationary cost pressures, competitive labor markets, uncertainty surrounding the U.K.

Brexit activities, and political friction in the U.S and many regions of the world.

Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of January 31, 2022, with the understanding that these estimates could change in the near term.

We will continue to evaluate and disclose any uncertainty associated with key assumptions underlying fair value estimates, trends, and uncertainties that have had, or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders' equity, and cash flows for and at the end of each interim period.

The condensed financial information as of July 31, 2021 and for the three and nine months ended July 31, 2021 and July 31, 2020 is unaudited.

The condensed financial information as of January 31, 2022 and for the three months ended January 31, 2022 and January 31, 2021 is unaudited.

However, in our opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of the interim periods.

5 unchanged sentences

We recognize revenues from the sale of machine tools, components and accessories, and services and reflect the consideration to which we expect to be entitled.

We record revenues based on a five-step model in accordance with Financial Accounting Standards Board (“FASB”) guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”).

We record revenues based on a five-step model in accordance with Financial Accounting Standards Board (“FASB”) guidance codified in Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”).

In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories.

For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) each of the performance obligations to the customer is fulfilled.

For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled.

A good or service is transferred when the customer obtains control of that good or service.

2 unchanged sentences

We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance.

Therefore, we generally recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment.

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 facility by a distributor, independent contractor, or by one of our service technicians.

1 unchanged sentence

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.

4 unchanged sentences

We manage our exposure to these and other market risks through regular operating and financing activities.

Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk, for which we enter into derivative instruments in the form of foreign currency forward exchange contracts with a major financial institution.

We enter into these forward exchange contracts to reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, to reduce the impact on gross profit and net earnings from sales and purchases denominated in foreign currencies, and to reduce the impact on our net earnings of foreign currency fluctuations on receivables and payables denominated in foreign currencies that are different than the subsidiaries’ functional currency.

7 unchanged sentences

These forward contracts have been designated as cash flow hedge instruments and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities.

The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S.

The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive income (loss) and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S.

Dollar value of the inter-company sale or purchase being hedged.

The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other expense, net.

The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other expense (income), net.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly.

We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.

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

We had forward contracts outstanding as of January 31, 2022, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from February 2022 through January 2023.

The contract amounts, expressed at forward rates in U.S.

Dollars at July 31, 2021, were $ 16.2 million for Euros, $ 9.5 million for Pounds Sterling and $ 26.0 million for New Taiwan Dollars.

At July 31, 2021, we had approximately $ 906,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss.

Included in this amount was $ 402,000 of unrealized loss, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk.

The majority of these deferred losses will be recorded as an adjustment to Cost of sales and service in periods through July 2022, when the corresponding inventory that is the subject of the related hedge contracts is sold, as described above.

Dollars at January 31, 2022, were $ 23.6 million for Euros, $ 8.8 million for Pounds Sterling and $ 31.4 million for New Taiwan Dollars.

At January 31, 2022, we had approximately $ 335,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive income (loss).

Included in this amount was $ 313,000 of unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk.

The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through January 2023, when the corresponding inventory that is the subject of the related hedge contracts is sold, as described above.

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries.

2 unchanged sentences

We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities.

The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets.

The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive income (loss), net of tax, in the same manner as the underlying hedged net assets.

This forward contract matures in November 2022.

As of July 31, 2021, we had a realized gain of $ 813,000 and a minimal amount of unrealized loss recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract.

As of January 31, 2022, we had a realized gain of $ 0.9 million and an unrealized gain of $ 68,000 , net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive income (loss) related to this forward contract.

Derivatives Not Designated as Hedging Instruments

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

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

We had forward contracts outstanding not designated as hedges under FASB guidance as of July 31, 2021, denominated in Euros, Pounds Sterling, and New Taiwan Dollar with set maturity dates ranging from August 2021 through May 2022.

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

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

The contract amounts, expressed at forward rates in U.S.

Dollars at July 31, 2021, totaled $ 37.5 million.

Dollars at January 31, 2022, totaled $ 38.8 million.

Fair Value of Derivative Instruments

We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheets.

As of July 31, 2021 and October 31, 2020, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):

July 31, 2021

As of January 31, 2022 and October 31, 2021, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):

January 31, 2022

October 31, 2021

16 unchanged sentences

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed Consolidated Statements of Operations

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity, and Condensed Consolidated Statements of Operations, net of tax, during the three months ended July 31, 2021 and 2020 (in thousands):

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed Consolidated Statements of Operations, net of tax, during the three months ended January 31, 2022 and 2021 (in thousands):

Location of Gain

19 unchanged sentences

– Net investment

We did no t recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended July 31, 2021 or 2020.

We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the three months ended July 31, 2021 and 2020 on derivative instruments not designated as hedging instruments (in thousands):

We did no t recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended January 31, 2022 or 2021.

We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the three months ended January 31, 2022 and 2021 on derivative instruments not designated as hedging instruments (in thousands):

Location of Gain

6 unchanged sentences

Foreign exchange forward contracts

Other expense, net

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended July 31, 2021 (in thousands):

Foreign Currency

Balance, April 30, 2021

Other comprehensive income (loss) before reclassifications

Reclassifications

Balance, July 31, 2021

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity, and Condensed Consolidated Statements of Operations, net of tax, during the nine months ended July 31, 2021 and 2020 (in thousands):

Location of Gain

Amount of Gain

Amount of Gain (Loss)

(Loss) Reclassified

Recognized in Other

Comprehensive

Income (Loss)

Nine Months Ended

Designated as Hedging Instruments:

(Effective Portion)

Foreign exchange forward contracts

– Intercompany sales/purchases

Cost of sales and service

Foreign exchange forward contract

– Net investment

We did no t recognize any gains or losses as a result of hedges deemed ineffective for either of the nine months ended July 31, 2021 or 2020.

We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the nine months ended July 31, 2021 and 2020 on derivative instruments not designated as hedging instruments (in thousands):

Location of Gain

(Loss) Recognized

Amount of Gain (Loss)

in Operations

Recognized in Operations

Nine Months Ended

Not Designated as Hedging Instruments:

Foreign exchange forward contracts

Other expense, net

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the nine months ended July 31, 2021 (in thousands):

Other expense (income), net

The following table presents the changes in the components of Accumulated other comprehensive income (loss), net of tax, for the three months ended January 31, 2022 (in thousands):

Foreign Currency

2 unchanged sentences

Reclassifications

Balance, July 31, 2021

Balance, January 31, 2022

EQUITY INCENTIVE PLAN

3 unchanged sentences

2008 Equity Incentive Plan (the “2008 Equity Plan”) and is the only active plan under which equity awards may be made by us to our employees and non-employee directors.

No further awards will be made under the 2008 Equity Plan.

No further awards will be made under our 2008 Equity Plan.

The total number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048 , which includes 386,048 shares remaining available for future grants under the 2008 Equity Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan.

6 unchanged sentences

The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date.

A summary of stock option activity for the nine-month period ended July 31, 2021, is as follows:

A summary of stock option activity for the three-month period ended January 31, 2022, is as follows:

Weighted Average

5 unchanged sentences

Options cancelled

Outstanding at July 31, 2021

Summarized information about outstanding stock options as of July 31, 2021, that have already vested and are currently exercisable, are as follows:

Outstanding at January 31, 2022

Summarized information about outstanding stock options as of January 31, 2022, that have already vested and are currently exercisable, are as follows:

Options Already Vested and

4 unchanged sentences

Intrinsic value of outstanding options

The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of July 31, 2021 and the exercise price of the option.

On March 11, 2021, the Compensation Committee granted a total of 9,708 shares of time-based restricted stock to our non-employee directors.

The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date.

The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $ 37.06 per share.

The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of January 31, 2022 and the exercise price of the option.

On January 4, 2022, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of time-based restricted shares and performance stock units (“PSUs”) under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

4 unchanged sentences

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 $ 30.39 per share.

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

On January 4, 2022, the Compensation Committee also granted a total target number of 34,203 PSUs to our executive officers designated as “PSU – TSR”.

These PSUs were weighted as approximately 40 % of the overall 2022 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 2022-2024, relative to the total shareholder return of the companies in a specified peer group over that period.

1 unchanged sentence

The grant date fair value of the PSUs – TSR was $ 33.33 per PSU and was calculated using the Monte Carlo approach.

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

On January 4, 2022, the Compensation Committee also granted a total target number of 32,821 PSUs to our executive officers designated as “PSU – ROIC”.

These PSUs were weighted as approximately 35 % of the overall 2022 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 2022-2024.

4 unchanged sentences

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 $ 33.99 per share.

A reconciliation of our restricted stock and PSU activity and related information for the nine-month period ended July 31, 2021 is as follows:

A reconciliation of our restricted stock and PSU activity and related information for the three-month period ended January 31, 2022 is as follows:

Weighted Average Grant

6 unchanged sentences

Shares withheld

Unvested at July 31, 2021

During the nine months of fiscal 2021 and 2020, we recorded approximately $ 2.1 million and $ 1.4 million, respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan.

As of July 31, 2021, there was an estimated $ 3.7 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024.

Unvested at January 31, 2022

During the first three months of fiscal 2022 and 2021, we recorded approximately $ 0.8 million and $ 0.7 million, respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan.

As of January 31, 2022, there was an estimated $ 5.9 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2025.

EARNINGS PER SHARE

Per share results have been computed based on the average number of common shares outstanding over the period in question.

The computation of basic and diluted net income (loss) per share is determined using net income (loss) applicable to common shareholders as the numerator and the number of shares outstanding as the denominator as follows (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

The computation of basic and diluted net income per share is determined using net income applicable to common shareholders as the numerator and the number of shares outstanding as the denominator as follows (in thousands, except per share amounts):

(in thousands, except per share amounts)

Net income (loss)

Undistributed earnings (loss) allocated to participating shares

Net income (loss) applicable to common shareholders

Undistributed earnings allocated to participating shares

Net income applicable to common shareholders

Weighted average shares outstanding

Stock options and contingently issuable securities

Income (loss) per share

Income per share

ACCOUNTS RECEIVABLE

Accounts receivable are net of allowances for doubtful accounts of $ 1.6 million as of July 31, 2021 and $ 1.4 million as of October 31, 2020.

Accounts receivable are net of allowances for doubtful accounts of $ 1.6 million as of January 31, 2022 and $ 1.6 million as of October 31, 2021.

Inventories, priced at the lower of cost (first-in, first-out method) or net realizable value, are summarized below (in thousands):

3 unchanged sentences

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

2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed.

Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date.

Upon adoption of ASC 842, we utilized the following elections:

● We have elected to combine non-lease components with lease components.

● If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply ASC 842 recognition requirements.

Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material.

● We have elected not to use the portfolio method if we enter into a large number of leases in the same month with the same terms and conditions.

2016-02, “Leases” (“ASC 842”) on November 1, 2019.

Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment.

2 unchanged sentences

In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain.

There are no material residual value guarantees provided by us, nor any material restrictions or covenants imposed by the leases to which we are a party.

There are no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a party.

In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value.

We record a right-of-use asset and lease liability on our Condensed Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842.

We are a lessor in a small number of lease agreements associated with our machine tools and/or automation integration equipment for which the impact to our consolidated financial statements is immaterial.

All our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840.

We recorded total operating lease expense of $ 3.9 million and $ 3.7 million for the nine months ended July 31, 2021 and 2020, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations.

In accordance with ASC 842, we record a right-of-use asset and lease liability on our Condensed Consolidated Balance Sheets for all leases that, at the commencement date, have a lease term of more than 12 months and are classified as operating leases.

We recorded total operating lease expense of $ 1.3 million for each of the three months ended January 31, 2022 and 2021, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations.

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

There were no lease costs capitalized on the Condensed Consolidated Balance Sheets as of July 31, 2021.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the nine months ended July 31, 2021 (in thousands):

Nine Months Ended

July 31, 2021

There have been no lease costs capitalized on the Condensed Consolidated Balance Sheets as of January 31, 2022.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the three months ended January 31, 2022 (in thousands):

Three Months Ended

January 31, 2022

Operating cash flow information:

2 unchanged sentences

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

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

The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of January 31, 2022 (in thousands):

Remainder of 2022

2 unchanged sentences

Present value of operating lease liabilities

As of July 31, 2021, the weighted-average remaining term of our lease portfolio was approximately 4.0 years and the weighted-average discount rate was approximately 1.6 %.

As of January 31, 2022, the weighted-average remaining term of our lease portfolio was approximately 3.7 years and the weighted-average discount rate was approximately 1.7 %.

SEGMENT INFORMATION

6 unchanged sentences

GUARANTEES AND PRODUCT WARRANTIES

From time to time, we guarantee third party payment obligations in connection with the sale of machines to customers that use financing.

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing.

We follow FASB guidance for accounting for guarantees (codified in ASC 460).

As of July 31, 2021, we had 12 outstanding third party payment guarantees totaling approximately $ 1.0 million.

As of January 31, 2022, we had eight outstanding third party payment guarantees totaling approximately $ 0.8 million.

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

8 unchanged sentences

A reconciliation of the changes in our warranty reserve is as follows (in thousands):

Nine Months Ended

Three Months Ended

Balance, beginning of period

Provision for warranties during the period

Provision for warranties during the year

Charges to the reserve

1 unchanged sentence

Balance, end of period

The year-over-year increase in our warranty reserve was primarily due to an increase in unit sales volume.

The year-over-year increase in our warranty reserve was primarily due to an increase in the number of machines under warranty from increased sales volume.

DEBT AGREEMENTS

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

entered into a new credit agreement, which was amended by that certain First Amendment dated March 13, 2020 and that certain Second Amendment dated December 23, 2020 (as amended, the “2018 Credit Agreement”), with Bank of America, N.A., as the lender.

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.

In March 2019, our wholly-owned subsidiaries in Taiwan (Hurco Manufacturing Limited (“HML”)) and China (Ningbo Hurco Machine Tool, Ltd (“NHML”)) closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the "Taiwan credit facility") and 32.5 million Chinese Yuan (the "China credit facility"), respectively.

As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institutions from time to time.

As a result, as of July 31, 2021, our existing credit facilities consisted of our € 1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $ 40.0 million revolving credit facility under the 2018 Credit Agreement.

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

Our provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates, and other events that are not consistent from period to period, such as changes in income tax laws.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020.

The CARES Act included several provisions that provide economic relief for individuals and businesses.

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

On December 27, 2020, the Consolidated

Appropriations Act of 2021 (the “CAA”), which includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

and the American Rescue Plan Act of 2021, was signed into law and provided further COVID-19 economic relief with an expansion of

the employee retention credit.

As a result, we recorded a benefit of $ 2.9 million related to the employee retention credit during the

nine months of fiscal 2021.

During the third quarter of fiscal 2021, we assessed and recorded the estimated year to date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

The CARES Act included economic relief and modifications, most notably the net operating loss carryback provisions for the U.S.

We recorded an income tax expense during the nine months of fiscal 2021 of $ 2.6 million compared to an income tax benefit of $ 2.3 million for the same period in 2020.

Our effective tax rate for the nine months of fiscal 2021 was 36 %, compared to 46 % in the corresponding prior year period.

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

Our unrecognized tax benefits were $ 268,000 as of July 31, 2021 and $ 204,000 as of October 31, 2020, and in each case included accrued interest.

In March 2019, our wholly-owned subsidiaries in Taiwan (Hurco Manufacturing Limited (“HML”)), and China, (Ningbo Hurco Machine Tool, Ltd.

(“NHML”)), closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively.

As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time.

As a result, as of January 31, 2022, 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 January 31, 2022, there were no borrowings under any of our credit facilities and there was approximately $ 52.2 million of available borrowing capacity thereunder.

Our provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income that includes jurisdictions with differing tax rates, conditional reduced tax rates, and other events that are not consistent from period to period, such as changes in income tax laws.

We recorded an income tax expense for the first three months of fiscal 2022 of $ 1.6 million compared to $ 0.5 million for the same period in 2021.

Our effective tax rate for the first three months of fiscal 2022 was 32 %, compared to 45 % in the corresponding prior year period.

The decrease in the effective tax rate was primarily due to changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, various discrete tax items, and changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

Our unrecognized tax benefits were $ 202,000 as of January 31, 2022, and $ 198,000 as of October 31, 2021, and in each case included accrued interest.

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

As of July 31, 2021, the gross amount of interest accrued, reported in Accrued expenses, was approximately $ 41,000 , which did not include the federal tax benefit of interest deductions.

As of January 31, 2022, the gross amount of interest accrued, reported in Accrued expenses, was approximately $ 32,000 , which did not include the federal tax benefit of interest deductions.

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

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and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions.

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of July 31, 2021 and October 31, 2020 (in thousands):

July 31, 2021

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 January 31, 2022 and October 31, 2021 (in thousands):

January 31, 2022

October 31, 2021

July 31, 2021

January 31, 2022

October 31, 2021

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We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 3 of Notes to the Condensed Consolidated Financial Statements.

Dollar equivalent notional amounts of these contracts was $ 93.6 million and $ 70.8 million at July 31, 2021 and October 31, 2020, respectively.

Dollar equivalent notional amounts of these contracts was $ 107.5 million and $ 94.6 million at January 31, 2022 and October 31, 2021, respectively.

The fair value of our foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility.

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Recently Adopted Accounting Pronouncements:

In June 2016, FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.

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

This standard is effective for our fiscal year 2021.

We adopted this standard on November 1, 2020.

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

New Accounting Pronouncements:

In December 2019, FASB issued ASU No.

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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.

We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.

This standard is effective for our fiscal year 2022.

We adopted this standard on November 1, 2021.

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

In March 2020, FASB issued ASU No.

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This standard is effective for all entities beginning March 12, 2020 through December 31, 2022.

We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.

There have been no other significant changes in the Company’s critical accounting policies and estimates during the nine months ended July 31, 2021.

We adopted this standard on November 1, 2021.

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

There have been no other significant changes in the Company’s critical accounting policies and estimates during the three months ended January 31, 2022.

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-Q

Item 1. Financial Statements