What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-03 compared with 2022-03-04 · 92 added, 43 removed, 149 unchanged (48% of the section changed)

13 unchanged sentences

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

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.

During the first six months of fiscal 2022, approximately 50% 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 14% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.

29 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.

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.

Our operating results during fiscal years 2020, 2021 and the first six months of fiscal 2022 were affected by the international business disruption due to the outbreak of COVID-19 and continued lockdowns in certain markets, vendor delays, transportation issues, unusually high inflation, volatility of foreign currencies, competitive labor markets, uncertainty surrounding the U.K.

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

6 unchanged sentences

RESULTS OF OPERATIONS

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

Three Months Ended April 30, 2022 Compared to Three Months Ended April 30, 2021

Sales and Service Fees.

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.

Sales and service fees for the second quarter of fiscal 2022 were $62.8 million, an increase of $4.9 million, or 8%, compared to the corresponding prior year period, and included an unfavorable currency impact of $2.5 million, or 4%, 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 first quarter ended January 31, 2022 and 2021 (dollars in thousands):

The following table sets forth net sales and service fees by geographic region for the second quarter ended April 30, 2022 and 2021 (dollars in thousands):

Three Months Ended

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.

Sales in the Americas for the second quarter of fiscal 2022 increased by 14%, compared to the corresponding period in fiscal 2021, primarily due to inflationary price increases, increased volume of shipments of higher-performance Hurco machines and increased sales of ProCobots automation solutions.

European sales for the second quarter of fiscal 2022 increased by 7%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of 8%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

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.

This increase was primarily attributable to inflationary price increases, an increased volume of shipments of Hurco machines in Germany, Italy, and the United Kingdom, as well as increased sales of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary, LCM.

Asian Pacific sales for the second quarter of fiscal 2022 increased by 3%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

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.

The increase in Asian Pacific sales primarily resulted from inflationary price increases and 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 due to recent COVID-19 lockdowns.

Sales and Service Fees by Product Category

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):

The following table sets forth net sales and service fees by product category for the second quarter ended April 30, 2022 and 2021 (dollars in thousands):

Three Months Ended

3 unchanged sentences

† 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.

Sales of computerized machine tools for the second quarter of fiscal 2022 increased by 10%, compared to the corresponding prior year period, primarily due to inflationary price increases and increased shipments of higher-performance Hurco machines in Italy, Germany, Southeast Asia and North America.

Sales of computer control systems and software for the second quarter of fiscal 2022 decreased by 14%, compared to the corresponding prior year period, primarily due to a decrease in sales of Hurco software in France.

Sales of service parts and service fees for the second quarter of fiscal 2022 increased by 1% and 12%, respectively, compared to the corresponding prior year period, due mainly to increased aftermarket sales and service of Hurco and Milltronics products in North America and Germany.

All product categories included an unfavorable currency impact of 4%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

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):

Orders for the second quarter of fiscal 2022 were $58.9 million, a decrease of $6.9 million, or 10%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of $1.4 million, or 2%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the second quarter ended April 30, 2022 and 2021 (dollars in thousands):

Three Months Ended

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.

Orders in the Americas for the second quarter of fiscal 2022 increased by 26%, compared to the corresponding period in fiscal 2021, primarily due to inflationary price increases, increased customer demand for higher-performance Hurco and Milltronics machines, and increased demand for ProCobots automation solutions.

European orders for the second quarter of fiscal 2022 decreased by 19%, compared to the corresponding prior year period, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S.

This decrease was driven primarily by decreased customer demand for Hurco machines in the United Kingdom, Italy and France, as well as decreased customer demand for electro-mechanical components and accessories manufactured by LCM, partially offset by an increase in customer demand for Hurco machines in Germany and Milltronics machines in Italy.

Asian Pacific orders for the second quarter of fiscal 2022 decreased by 45%, compared to the corresponding prior year period, and included an unfavorable currency impact of 2%, when translating foreign orders to U.S.

The decrease in Asian Pacific orders was driven primarily by decreased customer demand for Hurco and Takumi machines in China and Southeast Asia due to recent COVID-19 lockdowns, partially offset by increased demand for Hurco machines in India.

Gross Profit .

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.

Gross profit for the second quarter of fiscal 2022 was $15.6 million, or 25% of sales, compared to $14.8 million, or 26% of sales, for the corresponding prior year period.

During the second quarter of fiscal 2021, we recorded approximately $0.8 million, or 1% of sales, for the employee retention credit extended to companies 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”).

While the employee retention credit did not recur in the second quarter of fiscal 2022, gross profit as a percentage of sales for the second quarter of fiscal 2022 benefitted from increased higher-performance machine sales, improved leverage of fixed overhead costs across higher production levels, and improved pricing due to changes in demand and normalized inventory levels.

Operating Expenses .

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.

Selling, general, and administrative expenses for the second quarter of fiscal 2022 were $12.5 million, or 20% of sales, compared to $11.3 million, or 19% of sales, in the corresponding fiscal 2021 period, and included a favorable currency impact of $0.4 million, when translating foreign expenses to U.S.

dollars for financial reporting purposes.

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.

We also recorded approximately $1.1 million, or 2% of sales, for the employee retention credit in selling, general and administrative expenses during the second quarter of fiscal 2021.

The year-over-year increase in selling, general, and administrative expenses was driven primarily by increased agent commissions, marketing and tradeshow expenses, and employee support costs for the global sales operations, partially offset by not recording the employee retention credit in selling, general and administrative expenses in the second quarter of 2022.

Operating Income .

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.

Operating income for the second quarter of fiscal 2022 was $3.1 million compared to $3.5 million for the corresponding period in fiscal 2021.

The decrease in operating income was primarily due to the $1.9 million, or 3% of sales, of employee retention credit recorded during the second quarter of fiscal 2021.

Other Income (Expense), Net .

Other income (expense), net for the second quarter of fiscal 2022 of $0.2 million was consistent with the corresponding prior year period.

Income Taxes .

The effective tax rate for the second quarter of fiscal 2022 was 31%, compared to 28%, for the corresponding prior year period.

The year-over-year increase 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.

Six Months Ended April 30, 2022 Compared to Six Months Ended April 30, 2021

Sales and Service Fees.

Sales and service fees for the first six months of fiscal 2022 were $129.7 million, an increase of $17.7 million, or 16%, compared to the corresponding prior year period, and included an unfavorable currency impact of $3.7 million, or 3%, 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 six months ended April 30, 2022 and 2021 (dollars in thousands):

Six Months Ended

Sales in the Americas for the first six months of fiscal 2022 increased by 8%, compared to the corresponding period in fiscal 2021, primarily due to inflationary price increases, increased volume of shipments of higher-performance Hurco machines and increased sales of ProCobots automation solutions.

European sales for the first six months of fiscal 2022 increased by 22%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of 7%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

This increase was primarily attributable to inflationary price increases, an increased volume of shipments of Hurco, Takumi, and Milltronics machines across the European region, as well as increased sales of electro-mechanical components and accessories manufactured by LCM.

Asian Pacific sales for the first six months of fiscal 2022 increased by 15%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the first six months ended April 30, 2022 and 2021 (dollars in thousands):

Six 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 tools.

Sales of computerized machine tools and computer control systems and software for the first six months of fiscal 2022 increased by 18% and 9%, respectively, compared to the corresponding prior year period, primarily due to inflationary price increases and increased shipments of Hurco and Takumi machines across most regions and countries where our customers are located, other than China.

Sales of service parts for the first six months of fiscal 2022 increased by 6%, compared to the corresponding prior year period, due mainly to aftermarket sales of Hurco products in North America and the United Kingdom.

Service fees for the first six months of fiscal 2022 increased by 8%, compared to the corresponding prior year period, due mainly to aftermarket service of Hurco and Takumi products in Germany, the United Kingdom and France.

All product categories included an unfavorable currency impact of 3%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Orders for the first six months of fiscal 2022 were $129.7 million, an increase of $6.7 million, or 5%, compared to the corresponding period in fiscal 2021, and included an unfavorable currency impact of $3.1 million, or 3%, when translating foreign orders to U.S.

The following table sets forth new orders booked by geographic region for the six months ended April 30, 2022 and 2021 (dollars in thousands):

Six Months Ended

Orders in the Americas for the first six months of fiscal 2022 increased by 8%, compared to the corresponding period in fiscal 2021, primarily due to inflationary price increases and increased customer demand for higher-performance Hurco machines and ProCobots automation solutions.

European orders for the first six months of fiscal 2022 increased by 14%, compared to the corresponding prior year period, and included an unfavorable currency impact of 5%, when translating foreign orders to U.S.

The increase in orders was driven primarily by inflationary price increases and increased customer demand for Hurco and Takumi machines in Germany, France, and Italy, partially offset by decreased customer demand for Hurco machines in the United Kingdom and electro-mechanical components and accessories manufactured by LCM.

Asian Pacific orders for the first six months of fiscal 2022 decreased by 26%, compared to the corresponding prior year period, and included an unfavorable currency impact of 1%, when translating foreign orders to U.S.

The decrease in Asian Pacific orders year-over-year was driven primarily by decreased customer demand for Hurco and Takumi machines in China and Southeast Asia due to recent COVID-19 lockdowns, partially offset by increased demand for Hurco machines in India.

Gross Profit .

Gross profit for the first six months of fiscal 2022 was $32.5 million, or 25% of sales, compared to $26.3 million, or 24% of sales, for the corresponding prior year period.

While the $0.8 million recorded in the prior year period for the employee retention credit did not recur in the current year period, gross profit as a percentage of sales for the first six months of fiscal 2022 benefitted from increased higher-performance machine sales, improved leverage of fixed overhead costs across higher production levels, and improved pricing due to changes in demand and normalized inventory levels.

Operating Expenses .

Selling, general, and administrative expenses for the first six months of fiscal 2022 were $24.2 million, or 19% of sales, compared to $21.8 million, or 19% of sales, in the corresponding fiscal 2021 period, and included a favorable currency impact of $0.6 million, when translating foreign expenses to U.S.

dollars for financial reporting purposes.

The increase in selling, general, and administrative expenses was driven primarily by increases in agent commissions, marketing and tradeshow expenses, and employee support costs for the global sales operations, partially offset by not recording any amounts in the fiscal 2022 period related to the employee retention credit, for which $1.1 million was recorded in selling, general and administrative expenses in the fiscal 2021 period.

Operating Income .

Operating income for the first six months of fiscal 2022 was $8.3 million compared to $4.5 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.

Other Income (Expense), Net .

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

Income Taxes .

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

The effective tax rate for the first six months of fiscal 2022 was 31%, compared to 33% for 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 January 31, 2022, we had cash and cash equivalents of $90.0 million, compared to $84.1 million at October 31, 2021.

At April 30, 2022, we had cash and cash equivalents of $82.0 million, compared to $84.1 million at October 31, 2021.

Approximately 15% of the $82.0 million of cash and cash equivalents was denominated in U.S.

1 unchanged sentence

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 $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.

Working capital was $203.4 million at April 30, 2022, compared to $208.7 million at October 31, 2021.

The decrease in working capital was primarily driven by decreases in accounts receivable, prepaid assets, partially offset by an increase in inventories and a decrease in customer deposits.

Capital expenditures of $1.1 million during the first six months of fiscal 2022 were primarily for capital improvements in existing facilities and software development costs.

We funded these expenditures with cash on hand.

2 unchanged sentences

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

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.

During the first six months of fiscal 2022, we repurchased $2.9 million in shares of our common stock, and $4.1 million remained available under the program as of April 30, 2022.

In addition, during the six months ended April 30, 2022, we paid cash dividends to our shareholders of $1.9 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.

7 unchanged sentences

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 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.

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the 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%.

6 unchanged sentences

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 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.

As of April 30, 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 April 30, 2022.

At April 30, 2022, we had an aggregate of approximately $51.6 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.

8 unchanged sentences

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.

During the first six 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

3 unchanged sentences

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

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

As of April 30, 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.

14 unchanged sentences

• Competition with larger companies that have greater financial resources;

• The United Kingdom’s withdrawal from the European Union (Brexit);

• Our dependence on new product development;

17 unchanged sentences

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