What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-03-04 compared with 2021-09-03 · 70 added, 133 removed, 122 unchanged (62% of the section changed)

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We have both significant foreign sales and significant foreign manufacturing operations.

During the nine months of fiscal 2021, approximately 49% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines.

During the first three months of fiscal 2022, approximately 51% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines.

Additionally, approximately 13% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.

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However, we have added other non-Hurco branded products to our product portfolio that have contributed product diversity and market penetration opportunity.

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

Additionally, ProCobots LLC (“ProCobots”) is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool.

Finally, through our wholly-owned subsidiary in Italy, LCM, we produce high value machine tool components and accessories.

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

ProCobots LLC (“ProCobots”) is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool.

In addition, through our wholly-owned subsidiary in Italy, LCM Precision Technology S.r.l.

(“LCM”), we produce high value machine tool components and accessories.

We principally sell our products through more than 180 independent agents and distributors throughout the Americas, Europe, and Asia.

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Dollars at exchange rates prevailing during the period covered by those financial statements.

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

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

We are currently participating in challenging global market conditions, with continued COVID-19 business restrictions, vendor delays, chronic logistics issues and inflationary increases in cost of materials.

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

However, we cannot predict the duration or scope of impact of the COVID-19 pandemic on a global basis and the impact that any new developments, including variants and surges, could have on our financial results.

We will continue to evaluate and disclose any trends and uncertainties that have had or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of each interim period.

Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating currency exchange rates.

We seek to mitigate those risks through the use of derivative instruments – principally foreign currency forward exchange contracts.

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

Our operations and 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.

We cannot predict the duration or scope of impact of the COVID-19 pandemic, as well as other aforementioned factors, and the potential impact to our operations and financial results cannot be reasonably estimated.

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

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

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

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

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

RESULTS OF OPERATIONS

Three Months Ended July 31, 2021 Compared to Three Months Ended July 31, 2020

Three Months Ended January 31, 2022 Compared to Three Months Ended January 31, 2021

Sales and Service Fees.

Sales and service fees for the third quarter of fiscal 2021 were $54.2 million, an increase of $8.8 million, or 19%, compared to the corresponding prior year period, and included a favorable currency impact of $2.3 million, or 5%, when translating foreign sales to U.S.

Sales and service fees for the first quarter of fiscal 2022 were $66.9 million, an increase of $12.8 million, or 24%, compared to the corresponding prior year period, and included an unfavorable currency impact of $1.2 million, or 2%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Sales and Service Fees by Geographic Region

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

The following table sets forth net sales and service fees by geographic region for the first quarter ended January 31, 2022 and 2021 (dollars in thousands):

Three Months Ended

Sales in the Americas for the third quarter of fiscal 2021 increased by 7%, compared to the corresponding period in fiscal 2020.

The increase in sales in the Americas for the third quarter of fiscal 2021 was due to an increased volume of machine shipments, both Hurco and Milltronics, and an increase in sales of ProCobots automation solutions.

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

European sales for the third quarter of fiscal 2021 increased by 45%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 10%, when translating foreign sales to U.S.

Sales in the Americas for the first quarter of fiscal 2022 increased by 3%, compared to the corresponding period in fiscal 2021, primarily due to an increased volume of shipments of higher-performance Hurco machines.

European sales for the first quarter of fiscal 2022 increased by 41%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of 5%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

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

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

Asian Pacific sales for the third quarter of fiscal 2021 decreased by 17%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 5%, when translating foreign sales to U.S.

The increase in European sales for the first quarter of fiscal 2022 was primarily attributable to an increased volume of shipments of Hurco, Takumi, and Milltronics machines across the European regions where our customers are located, as well as increased sales of electro-mechanical components and accessories manufactured by our wholly owned subsidiary, LCM.

Asian Pacific sales for the first quarter of fiscal 2022 increased by 32%, compared to the corresponding period in fiscal 2021, and included a favorable currency impact of 1%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The year-over-year decrease in Asian Pacific sales for the third quarter of fiscal 2021 was primarily due to decreased sales of Hurco and Takumi machines in China.

The increase in Asian Pacific sales primarily resulted from an increased volume of shipments of Hurco and Takumi machines in Southeast Asia and India, partially offset by a reduced volume of shipments of Hurco machines in China.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the third quarter ended July 31, 2021 and 2020 (dollars in thousands):

The following table sets forth net sales and service fees by product category for the first quarter ended January 31, 2022 and 2021 (dollars in thousands):

Three Months Ended

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Service Parts

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

Sales of computerized machine tools for the third quarter of fiscal 2021 increased by 20%, compared to the corresponding prior year period, due mainly to increased volume of shipments of Hurco, Takumi and Milltronics products, particularly in the Americas and Europe.

Sales of computer control systems and software and service fees for the third quarter of fiscal 2021 increased by 45% and 43%, respectively, compared to the corresponding prior year period, primarily due to increased software sales and services provided across all regions where our customers are located.

Service parts for the third quarter of fiscal 2021 increased by 7%, compared to the corresponding prior year period, due mainly to increased aftermarket parts sales for Hurco products in Germany and France.

The increases in each product category described above included a favorable currency impact of 5%, when translating foreign sales to U.S.

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

Sales of computerized machine tools for the first quarter of fiscal 2022 increased by 26%, compared to the corresponding prior year period, primarily due to increased shipments of Hurco and Takumi machines across most regions and countries where our customers are located, other than China.

Sales of computer control systems and software and service fees for the first quarter of fiscal 2022 increased by 42% and 5%, respectively, compared to the corresponding prior year period.

The increases in control systems and software and service fees primarily resulted from increased demand in aftermarket software and services of Hurco product in France, Germany and the United Kingdom.

Sales of service parts for the first quarter of fiscal 2022 increased by 11%, compared to the corresponding prior year period, due mainly to increased shipments of Hurco and Takumi products in North America, France, Germany and the United Kingdom.

All product categories included an unfavorable currency impact of 2%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Orders for the third quarter of fiscal 2021 were $66.7 million, an increase of $30.6 million, or 85%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of $2.9 million, or 8%, when translating foreign orders to U.S.

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

Orders for the first quarter of fiscal 2022 were $70.9 million, an increase of $13.5 million, or 24%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of $1.7 million, or 3%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the first quarter ended January 31, 2022 and 2021 (dollars in thousands):

Three Months Ended

Orders in the Americas for the third quarter of fiscal 2021 increased by 46%, compared to the corresponding period in fiscal 2020.

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

European orders for the third quarter of fiscal 2021 increased by 140%, compared to the corresponding prior year period, and included a favorable currency impact of 17%, when translating foreign orders to U.S.

The year-over-year increases in orders were driven primarily by increased customer demand for Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased demand for LCM machine tool components and accessories.

Asian Pacific orders for the third quarter of fiscal 2021 increased by 58%, compared to the corresponding prior year period, primarily due to increased customer demand for Hurco vertical milling machines and Takumi machines in China and Southeast Asia.

Asian Pacific orders for the third quarter of fiscal 2021 included a favorable currency impact of 9%, when translating foreign orders to U.S.

Orders in the Americas for the first quarter of fiscal 2022 decreased by 7%, compared to the corresponding period in fiscal 2021, primarily due to decreased customer demand for Milltronics and Hurco machines.

European orders for the first quarter of fiscal 2022 increased by 58%, compared to the corresponding prior year period, and included an unfavorable currency impact of 7%, when translating foreign orders to U.S.

The increase in orders was driven primarily by increased customer demand for Hurco, Takumi and Milltronics machines across the European region where our customers are located.

Asian Pacific orders for the first quarter of fiscal 2022 increased by 5%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S.

The increase in Asian Pacific orders was driven primarily by an increase in customer demand for Hurco vertical milling machines in Southeast Asia and India, partially offset by decreased demand for Hurco machines in China.

Gross Profit .

Gross profit for the third quarter of fiscal 2021 was $13.0 million, or 24% of sales, compared to $11.1 million, or 24% of sales, for the corresponding prior year period.

The year-over-year increase in gross profit reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and normalized inventory levels, and the favorable impact of foreign currency translation compared to the corresponding prior year periods.

Approximately $0.4 million of the gross profit improvement for the third quarter of fiscal 2021 was a result of recording the employee retention credit extended to the Company under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and the American Rescue Plan Act of 2021 (the “employee retention credit”).

The improvement in gross profit as a percentage of sales is partially offset by recent inflationary increases in cost of materials and high costs associated with transporting finished goods on a global basis.

Gross profit for the first quarter of fiscal 2022 was $16.9 million, or 25% of sales, compared to $11.5 million, or 21% of sales, for the corresponding prior year period.

The increase in gross profit as a percentage of sales reflected the increased volume of sales of Hurco and Takumi machines, particularly in Europe, the primary market for higher-performance machines, and the benefits of allocating fixed costs across higher production levels.

Operating Expenses .

Selling, general, and administrative expenses for the third quarter of fiscal 2021 were $10.3 million, or 19% of sales, compared to $9.6 million, or 21% of sales, in the corresponding fiscal 2020 period, and included an unfavorable currency impact of $0.4 million, when translating foreign expenses to U.S.

Selling, general, and administrative expenses for the first quarter of fiscal 2022 were $11.7 million, or 17% of sales, compared to $10.6 million, or 20% of sales, in the corresponding fiscal 2021 period, and included a favorable currency impact of $0.2 million, when translating foreign expenses to U.S.

Dollars for financial reporting purposes.

Selling, general and administrative expenses for the third quarter of fiscal 2021 continued to trend downward as a percentage of sales from fiscal 2020 as a result of the cost management plans implemented during fiscal 2020 and continued during fiscal 2021.

Additionally, approximately $0.6 million of the selling, general, and administrative expense reduction for the third quarter of fiscal 2021 was a result of recording the employee retention credit.

The increase in selling, general, and administrative expenses was driven primarily by increased agent commissions, marketing and tradeshow expenses, incentive compensation, and employee support costs for the global sales operations.

Operating Income .

Operating income for the third quarter of fiscal 2021 was $2.6 million, or 5% of sales, compared to $1.4 million, or 3% of sales, for the corresponding prior year period.

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

As discussed above, operating income for the third quarter of fiscal 2021 included a benefit of $1.0 million, related to the employee retention credit recorded during the third quarter of fiscal 2021.

Other Income (Expense), Net .

Other income, net in the third quarter of fiscal 2021 was less than $0.1 million, compared to other expense, net of $0.2 million in the corresponding period in fiscal 2020.

The change from other expense, net to other income, net was due mainly to a reduction in foreign currency exchange losses in the third quarter of fiscal 2021, compared to the corresponding prior year period.

Income Taxes .

The effective tax rate for the third quarter of fiscal 2021 was 41%, compared to (76)% in the corresponding prior year period.

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

Nine Months Ended July 31, 2021 Compared to Nine Months Ended July 31, 2020

Sales and Service Fees.

Sales and service fees for the nine months of fiscal 2021 were $166.2 million, an increase of $40.0 million, or 32%, compared to the corresponding prior year period, and included a favorable currency impact of $6.7 million, or 5%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Sales and Service Fees by Geographic Region

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

Nine Months Ended

Sales in the Americas for the nine months of fiscal 2021 increased by 19%, compared to the corresponding period in fiscal 2020.

The increase in sales in the Americas for the nine months of fiscal 2021 was due to an increased volume of machine shipments, both Hurco and Milltronics, and an increase in sales of ProCobots automation solutions.

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

European sales for the nine months of fiscal 2021 increased by 50%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 10%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

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

Asian Pacific sales for the nine months of fiscal 2021 increased by 14%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 6%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The year-over-year increase in sales for the nine months of fiscal 2021 was attributable to increased shipments of Hurco machines in India and Southeast Asia.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the nine months ended July 31, 2021 and 2020 (dollars in thousands):

Nine Months Ended

Computerized Machine Tools

Computer Control Systems and Software †

Service Parts

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

Sales of computerized machine tools for the nine months of fiscal 2021 increased by 35%, compared to the corresponding prior year period, due to an increased volume of shipments of Hurco, Takumi and Milltronics products across all regions where our customers are located.

Sales of computer control systems and software and service parts for the nine months of fiscal 2021 increased by 41% and 15%, respectively, compared to the corresponding prior year period, due mainly to increased aftermarket sales for Hurco and Takumi products across all regions where our customers are located.

Service fees for the nine months of fiscal 2021 increased by 15%, compared to the corresponding prior year period, mainly due to increased services provided to customers in Europe for Hurco, Takumi and LCM products.

Increases in each of the product categories described above included a favorable currency impact of 5%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Orders for the nine months of fiscal 2021 were $189.8 million, an increase of $71.5 million, or 61%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of $8.0 million, or 7%, when translating foreign orders to U.S.

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

Nine Months Ended

Orders in the Americas for the nine months of fiscal 2021 increased by 33%, compared to the corresponding period in fiscal 2020.

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

European orders for the nine months of fiscal 2021 increased by 83%, compared to the corresponding prior year period, and included a favorable currency impact of 13%, when translating foreign orders to U.S.

The year-over-year increase in orders was driven primarily by increased customer demand for Hurco and Takumi machines in Germany, the United Kingdom, France and Italy, as well as increased demand for LCM machine tool components and accessories.

Asian Pacific orders for the nine months of fiscal 2021 increased by 75%, compared to the corresponding prior year period, primarily due to increased customer demand for Hurco vertical milling machines and Takumi machines in China and Southeast Asia.

Asian Pacific orders for the nine months of fiscal 2021 included a favorable currency impact of 10%, when translating foreign orders to U.S.

Gross Profit .

Gross profit for the nine months of fiscal 2021 was $39.3 million, or 24% of sales, compared to $26.9 million, or 21% of sales, for the corresponding prior year period.

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

Additionally, approximately $1.2 million of the gross profit improvement for the nine months of fiscal 2021 was a result of recording the employee retention credit.

Operating Expenses .

Selling, general, and administrative expenses for the nine months of fiscal 2021 were $32.2 million, or 19% of sales, compared to $31.1 million, or 25% of sales, in the corresponding fiscal 2020 period, and included an unfavorable currency impact of $1.1 million, when translating foreign expenses to U.S.

Dollars for financial reporting purposes.

Selling, general and administrative expenses for the nine months of fiscal 2021 continued to trend downward as a percentage of sales from fiscal 2020 as a result of the cost management plans implemented during fiscal 2020 and continued during fiscal 2021.

Additionally, approximately $1.7 million of the selling, general, and administrative expense reduction for the nine months of fiscal 2021 was a result of recording the employee retention credit.

Operating Income (Loss) .

Operating income for the nine months of fiscal 2021 was $7.1 million, or 4% of sales, compared to operating loss of $4.1 million, or (3)% of sales, for the corresponding prior year period.

The year-over-year increase from an operating loss to operating income for the nine month period was primarily due to increases in the of sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories, and ProCobots automation solutions.

As discussed above, operating income for the nine months of fiscal 2021 included a benefit of $2.9 million related to the employee retention credit recorded during fiscal 2021.

Other Income (Expense), Net .

Other expense, net in the nine months of fiscal 2021 was less than $0.1 million compared to $0.9 million for the corresponding period in fiscal 2020.

The decrease in other expense, net was due mainly to a reduction in foreign currency exchange losses in the nine months of fiscal 2021, compared to the corresponding prior year period.

Operating income for the first quarter of fiscal 2022 was $5.2 million compared to $1.0 million for the corresponding period in fiscal 2021.

The increase in operating income was primarily driven by the increased sales volume.

Other Expense (Income), Net .

Other expense (income), net for the first quarter of fiscal 2022 increased by $0.4 million from the corresponding period in fiscal 2021, due mainly to an increase in foreign currency exchange losses in the first quarter of fiscal 2022 compared to the same period in fiscal 2021.

Income Taxes .

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

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

The year-over-year 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.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2021, we had cash and cash equivalents of $80.5 million, compared to $57.9 million at October 31, 2020.

At January 31, 2022, we had cash and cash equivalents of $90.0 million, compared to $84.1 million at October 31, 2021.

Approximately 41% of the $90.0 million of cash and cash equivalents was denominated in U.S.

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We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.

Working capital was $207.3 million at July 31, 2021 compared to $201.0 million at October 31, 2020.

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

Capital expenditures of $1.8 million during the nine months of fiscal 2021 were primarily for capital improvements in existing facilities and software development costs.

Working capital was $210.5 million at January 31, 2022 compared to $208.7 million at October 31, 2021.

The increase in working capital was primarily driven by an increase in cash and cash equivalents and inventories, partially offset by reductions in accounts receivable and prepaid assets and an increase in accounts payable, net of related parties.

Capital expenditures of $0.6 million during the first three months of fiscal 2022 were primarily for capital improvements in existing facilities and software development costs.

We funded these expenditures with cash on hand.

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The program may be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock.

We did not repurchase any shares of our common stock under this program during the third quarter of fiscal 2021.

In addition, during the nine months ended July 31, 2021, we paid cash dividends to our shareholders of $2.7 million.

During the first quarter of fiscal 2022, we repurchased $1.2 million in shares of our common stock, and $5.8 million remained available under the program as of January 31, 2022.

In addition, during the three months ended January 31, 2022, we paid cash dividends to our shareholders of $0.9 million.

Future dividends are subject to approval of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors deemed relevant by our Board of Directors from time to time.

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

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

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

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 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.

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

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

We had no debt or borrowings under any of our credit facilities at July 31, 2021.

At July 31, 2021, we had an aggregate of approximately $52.2 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

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.

We had no debt or borrowings under any of our credit facilities at January 31, 2022.

At January 31, 2022, we had an aggregate of approximately $52.2 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

We have an international cash pooling strategy that generally provides access to available cash deposits and credit facilities when needed in the U.S., Europe or Asia Pacific.

We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, payment of dividends and our stock repurchase program.

We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and beyond, and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, payment of dividends and our stock repurchase program.

We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase.

CRITICAL ACCOUNTING POLICIES

Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, require management to make significant estimates and assumptions using information available at the time the estimates are made.

These estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenues, and expenses.

If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition would be affected.

There were no material changes to our critical accounting policies during the nine months of fiscal 2021.

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S.

Generally Accepted Accounting Principles.

The preparation of financial statements in conformity with those accounting principles requires us to make judgments and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.

Those judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Actual results could differ from those estimates.

Our accounting policies, which are described in our Annual Report on Form 10 K for the fiscal year ended October 31, 2021, are frequently evaluated as our judgment and estimates are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

During the first three months of fiscal 2022, there were no material changes to our critical accounting estimates as described in the MD&A included in our Annual Report on Form 10 K for the year ended October 31, 2021.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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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.

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Certain statements made in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may

cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements.

These risks, uncertainties and other factors include, but are not limited to:

● The impact of the COVID-19 pandemic and other public health epidemics on the global economy, our business and operations, our employees and the business, operations and economies of our customers and suppliers;

The impact of the COVID 19 pandemic and other public health epidemics and pandemics on the global economy, our business and operations, our employees and the business, operations and economies of our customers and suppliers;

• The cyclical nature of the machine tool industry;

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• Uncertainty concerning our ability to use tax loss carryforwards.

● Changes in the LIBOR rate.

We discuss these and other important risks and uncertainties that may affect our future operations in Part I, Item 1A – Risk Factors in our most recent Annual Report on Form 10-K and may update that discussion in Part II, Item 1A – Risk Factors in this report or in a Quarterly Report on Form 10-Q we file hereafter.

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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-Q

Item 2. Management’s Discussion and Analysis