What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-01-06 compared with 2022-01-07 · 85 added, 172 removed, 158 unchanged (62% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide an understanding of our financial condition and other related matters, including our liquidity, capital resources and results of operations.

The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes thereto included elsewhere in this report.

The following MD&A generally focuses on the operating results and year-over-year comparisons between fiscal years 2022 and 2021.

Discussion of fiscal year 2020 results and year-over-year comparisons between fiscal years 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, filed with the SEC on January 7, 2022.

EXECUTIVE OVERVIEW

6 unchanged sentences

The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance.

This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report.

This overview is intended to be read in conjunction with the more detailed information included in our financial statements, and notes thereto, that appear elsewhere in this report.

The market for machine tools is international in scope.

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

During fiscal 2021, 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.

During fiscal year 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 12% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.

9 unchanged sentences

In addition, through our wholly-owned subsidiary 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.

We principally sell our products through approximately 200 independent agents and distributors throughout the Americas, Europe, and Asia.

Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally.

We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States , which are among the world's principal machine tool consuming markets.

We also have our own direct sales and service organizations in China, the Czech Republic, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States , which are among the world's principal machine tool consuming markets.

The vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML.

14 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.

The COVID-19 pandemic has not had as a significant impact on our business and industry during fiscal 2021 as it did in fiscal 2020.

Beginning in early 2020, governmental authorities in many of the major global machine tool markets implemented mandatory stay-at-home or shelter orders requiring most businesses to close or to significantly limit operations, resulting in a sudden decrease in demand for many goods and services.

As a result of the global COVID-19 pandemic, beginning in early 2020, governmental authorities in many of the major global machine tool markets implemented mandatory stay-at-home or shelter orders requiring most businesses to close or to significantly limit operations, resulting in a sudden decrease in demand for many goods and services.

Although the mandatory stay-at-home or shelter orders in many jurisdictions permitted our local operations to continue as an essential business or a supplier to critical infrastructure industries or otherwise with remote work capabilities, many of our customers experienced, and continue to experience, significant disruptions in their business operations and normal purchasing cycles.

2 unchanged sentences

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

We also experienced inflationary pressures and input cost increases 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.

The COVID-19 pandemic did not have as significant an impact on our business and industry during fiscal year 2022 as it did in fiscal years 2020 and 2021.

However, intermittent lockdowns and similar restrictions in certain markets from time to time continue to impact our business, including those in China pursuant to its zero- tolerance COVID policy.

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.

9 unchanged sentences

Net income (loss)

Fiscal 2021 Compared to Fiscal 2020

Fiscal Year 2022 Compared to Fiscal Year 2021

Sales and Service Fees.

Sales and service fees for fiscal 2021 were $235.2 million, an increase of $64.6 million, or 38%, compared to fiscal 2020, and included a favorable currency impact of $7.7 million, or 5%, when translating foreign sales to U.S.

Sales and service fees for fiscal year 2022 were $250.8 million, an increase of $15.6 million, or 7%, compared to fiscal year 2021, and included an unfavorable currency impact of $13.9 million, or 6%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

During fiscal 2021, sales increased year-over-year for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020.

Net Sales and Service Fees by Geographic Region

2 unchanged sentences

Increase/Decrease

Sales in the Americas for fiscal 2021 increased by 28%, compared to fiscal 2020.

The increase in sales in the Americas for fiscal 2021 was primarily due to an increased volume of shipments of Hurco, Takumi and Milltronics machines, and an increase in sales of ProCobots automation solutions.

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

European sales for fiscal 2021 increased by 51%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign sales to U.S.

Sales in the Americas for fiscal year 2022 increased by 11%, compared to fiscal year 2021, primarily due to inflationary price increases and an increased volume of shipments of VM and higher-performance five-axis Hurco machines.

European sales for fiscal year 2022 increased by 7%, compared to fiscal year 2021, and included an unfavorable currency impact of 11%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

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

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

Asian Pacific sales for fiscal 2021 increased by 25%, compared to fiscal 2020, and included a favorable currency impact of 6%, when translating foreign sales to U.S.

This increase was primarily driven by inflationary price increases, an increased volume of shipments of higher-performance 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 fiscal year 2022 decreased by 8%, compared to fiscal year 2021, and included an unfavorable currency impact of 3%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The year-over-year increase in Asian Pacific sales for fiscal 2021 was primarily due to increased volume of shipments of Hurco machines in Southeast Asia and China and Takumi machines in Taiwan.

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

The reduced volume of shipments of Hurco and Takumi machines in China was primarily due to recent COVID-19 lockdowns and similar restrictions in major Chinese markets pursuant to China’s zero-tolerance COVID-19 policy.

Net Sales and Service Fees by Product Category

6 unchanged sentences

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

Sales of computerized machine tools and computer control systems and software for fiscal 2021 increased by 42% and 49%, respectively, compared to fiscal 2020, and each included a favorable currency impact of 5%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Sales of service parts and service fees increased by 18% and 11%, respectively, during fiscal 2021, compared to fiscal 2020, and each included a favorable currency impact of 5%.

During fiscal 2021, sales increased year-over-year for all product categories as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020.

Orders and Backlog .

Orders for fiscal 2021 were $265.4 million, an increase of $98.5 million, or 59%, compared to fiscal 2020, and included a favorable currency impact of $8.4 million, or 5%, when translating foreign orders to U.S.

Similar to sales, orders increased year-over-year for all product brands and in all regions.

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

Fiscal Year Ended October 31,

Increase/Decrease

Orders in the Americas for fiscal 2021 increased by 42%, compared to fiscal 2020.

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

European orders for fiscal 2021 increased by 74%, compared to fiscal 2020, and included a favorable currency impact of 9%, 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 fiscal 2021 increased by 61%, compared to fiscal 2020, and included a favorable currency impact of 8%, when translating foreign orders to U.S.

The year-over-year increase in Asian Pacific orders for fiscal 2021 was primarily due to increased customer demand for Hurco vertical milling machines in Southeast Asia, China and India, as well as increased customer demand for Takumi machines in Taiwan.

Backlog at October 31, 2021 increased to $60.0 million from $29.9 million at October 31, 2020, primarily due to increased customer demand during fiscal 2021 for all product brands and in all regions.

We do not believe backlog is a useful measure of past performance or indicative of future performance.

Backlog orders as of October 31, 2021 are expected to be fulfilled in fiscal 2022.

Gross Profit.

Gross profit for fiscal 2021 was $56.2 million, or 24% of sales, compared to $36.5 million, or 21% of sales, for fiscal 2020.

The year-over-year increase in gross profit as a percentage of sales for fiscal 2021 reflected improved leverage of fixed overhead costs through higher levels of machine sales, improved pricing due to changes in demand and more normalized inventory levels, and the favorable impact of foreign currency translation compared fiscal 2020.

Additionally, approximately $1.2 million of the gross profit improvement for fiscal 2021 was a result of recording the employee retention credit extended to Hurco 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 in fiscal 2021 was partially offset by inflationary increases in cost of materials and higher costs associated with transporting finished goods on a global basis.

Operating Expenses.

Selling, general, and administrative expenses for fiscal 2021 were $46.0 million, or 20% of sales, compared to $41.4 million, or 24% of sales, for fiscal 2020, and included an unfavorable currency impact of $1.2 million, when translating foreign expenses to U.S.

Dollars for financial reporting purposes.

Selling, general and administrative expenses for fiscal 2021 trended 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 fiscal 2021 was a result of recording the employee retention credit.

Operating Income (Loss).

Operating income for fiscal 2021 was $10.2 million, or 4% of sales, compared to an operating loss of $9.9 million, or (6%) of sales, for fiscal 2020.

The year-over-year increase in operating income for fiscal 2021 was primarily due to an increase in the sales volume of Hurco, Takumi and Milltronics machines, LCM components and accessories and ProCobots automation solutions.

Operating income for fiscal 2021 included a benefit of $2.9 million related to the employee retention credit recorded during fiscal 2021.

The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Other Expense, Net.

Other expense, net for fiscal 2021 decreased by $0.8 million from fiscal 2020, due mainly to a reduction in foreign currency exchange losses in fiscal 2021, compared to fiscal 2020.

Provision for Income Taxes .

We recorded an income tax expense of $3.4 million for fiscal 2021, compared to income tax benefit of $4.6 million for fiscal 2020.

Our effective tax rate for fiscal 2021 was 33%, compared to 42% for fiscal 2020.

The year-over-year change in the effective tax rate was primarily due to changes in geographic mix of income and loss that included jurisdictions with differing tax rates, various discrete income tax expense items, and more specifically related to fiscal 2020, changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

Net Income (Loss).

Net income for fiscal 2021 was $6.8 million, or $1.01 per diluted share, an increase of $13.0 million from the fiscal 2020 net loss of $6.2 million, or $(0.93) per diluted share.

The year-over-year increase from net loss to net income was primarily due to increased sales volume for all product brands and in all regions as countries began to lift the government-mandated COVID-19 stay-at-home orders or other similar operating restrictions put in place in fiscal 2020.

The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the then prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Fiscal 2020 Compared to Fiscal 2019

Sales and Service Fees.

Sales and service fees for fiscal 2020 were $170.6 million, a decrease of $92.8 million, or 35%, compared to fiscal 2019, and included a favorable currency impact of $0.6 million, or less than 1%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands):

Fiscal Year Ended October 31,

Increase/Decrease

Sales in the Americas for fiscal 2020 decreased by 32%, compared to fiscal 2019, primarily due to a reduced volume of shipments of Hurco, Milltronics, and Takumi machines.

The reduction in shipment volume was mainly attributable to government-mandated COVID-19 stay-at-home or shelter orders imposed across the region during portions of fiscal 2020.

Additionally, sales in the Americas in the first half of fiscal 2019 benefitted from strong demand and backlog generated in the fourth quarter of fiscal 2018.

European sales for fiscal 2020 decreased by 42%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The decrease in European sales for fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines and a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned Italian subsidiary, LCM.

Like the Americas, the reduction in shipment volume was mainly driven by government-mandated COVID-19 stay-at-home or shelter orders or other similar operating restrictions imposed across the region during portions of fiscal 2020.

Additionally, sales in Europe during the first half of fiscal 2019 benefitted from higher demand and backlog coming off fiscal 2018, the recent peak of the European market, particularly for Germany.

Asian Pacific sales for fiscal 2020 decreased by 18%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S.

Sales of computerized machine tools and computer control systems and software for fiscal year 2022 increased by 7% and 4%, respectively, compared to fiscal year 2021, primarily due to inflationary price increases and an increased volume of shipments of VM and higher-performance five-axis Hurco machines in North America and Europe.

Sales of service parts for fiscal year 2022 increased by 7%, compared to fiscal year 2021, due mainly to inflationary price increases and an increased volume of aftermarket sales in North America and the United Kingdom.

Service fees increased by 7% during fiscal year 2022, compared to fiscal year 2021, primarily due to increased aftermarket service for Hurco and Takumi machines throughout Europe.

During fiscal year 2022, sales for all product categories included an unfavorable currency impact of 6%, when translating foreign sales to U.S.

Dollars for financial reporting purposes.

The year-over-year decrease in Asian Pacific sales resulted primarily from a reduction in the volume of shipments of Hurco and Takumi machines in all Asian Pacific regions, where our customers are located, as many customers were negatively impacted by government-mandated COVID-19 stay-at-home orders or similar operating restrictions during the first six months of fiscal 2020.

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2020 and 2019 (dollars in thousands):

Fiscal Year Ended October 31,

Increase/Decrease

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 and computer control systems and software for fiscal 2020 decreased by 38% and 40%, respectively, compared to fiscal 2019, and each included a favorable currency impact of less than 1%.

Sales of service parts and service fees decreased by 19% and 23%, respectively, during fiscal 2020, compared to fiscal 2019, and each included a favorable currency impact of less than 1%.

The decreases in all product categories were primarily due to a reduced volume of shipments of Hurco, Milltronics and Takumi machines, parts, and services provided, as well as the impact of government- mandated COVID-19 restrictions across all regions.

Orders and Backlog .

Orders for fiscal 2020 were $166.9 million, a decrease of $74.2 million, or 31%, compared to fiscal 2019, and included a favorable currency impact of $1.2 million, or less than 1%, when translating foreign orders to U.S.

Orders for fiscal year 2022 were $240.9 million, a decrease of $24.5 million, or 9%, compared to fiscal year 2021, and included an unfavorable currency impact of $14.3 million, or 5%, when translating foreign orders to U.S.

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

1 unchanged sentence

Increase/Decrease

Orders in the Americas for fiscal 2020 decreased by 24%, compared to fiscal 2019, primarily due to decreased customer demand for Hurco, Milltronics and Takumi machines during the COVID-19 pandemic.

Orders in the Americas of $17.2 million for the fourth quarter of fiscal 2020 reflected a slight improvement over orders in the second and third quarters of fiscal 2020 of $15.9 million and $16.3 million, respectively, but fell short of pre-pandemic order levels in the first quarter of $18.2 million.

European orders for fiscal 2020 decreased by 36%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S.

The year-over-year decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines, and a decrease in sales of electro-mechanical components and accessories manufactured by LCM, during the COVID-19 pandemic.

European orders for the fourth quarter of fiscal 2020 were the highest quarter of the fiscal year at $25.6 million, rebounding from the fiscal year low third quarter orders of $14.2 million, second quarter orders of $15.6 million, and first quarter pre-pandemic orders of $21.7 million.

Asian Pacific orders for fiscal 2020 decreased by 30%, compared to fiscal 2019, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S.

The year-over-year decrease in Asian Pacific orders was driven primarily by a reduction in customer demand for Hurco and Takumi machines during the COVID-19 pandemic throughout the Asian Pacific region where our customers are located.

Asian Pacific orders for the fourth quarter of fiscal 2020 reflected the same trend as the European orders, marking the highest quarter of orders of fiscal 2020 at $5.9 million, outpacing the third quarter orders of $5.6 million, second quarter orders of $5.1 million, and first quarter orders of $5.7 million.

Backlog at October 31, 2020 decreased to $29.9 million from $32.7 million at October 31, 2019, primarily due to a reduction in customer demand during fiscal 2020.

Orders in the Americas for fiscal year 2022 decreased by 4%, compared to fiscal year 2021, primarily due to decreased customer demand for Hurco and Milltronics machines, partially offset by inflationary price increases implemented during fiscal year 2022.

Despite the year-over-year decrease in total machine order volume, machine orders for Hurco lathes and higher-performance five-axis machines increased during the fiscal year.

European orders for fiscal year 2022 decreased by 8%, compared to fiscal year 2021, and included an unfavorable currency impact of 10%, when translating foreign orders to U.S.

This decrease was primarily attributable to the negative impact of currency and decreased customer demand for electro-mechanical components manufactured by LCM and for Hurco machines in the United Kingdom, France, and Italy, partially offset by inflationary price increases implemented during fiscal year 2022 and increased demand for Hurco and Takumi machines in Germany and for Milltronics machines across the region.

Asian Pacific orders for fiscal year 2022 decreased by 27%, compared to fiscal year 2021, and included an unfavorable currency impact of 4%, 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 and similar restrictions, partially offset by increased demand for Hurco machines in India.

Backlog at October 31, 2022 decreased to $44.8 million from $60.0 million at October 31, 2021, primarily due to decreased customer demand during fiscal year 2022 for all product brands and in all regions where our customers are located.

We do not believe backlog is a useful measure of past performance or indicative of future performance.

Backlog orders as of October 31, 2022 are expected to be fulfilled in fiscal year 2023.

Gross Profit.

Gross profit for fiscal 2020 was $36.5 million, or 21% of sales, compared to $77.2 million, or 29% of sales, for fiscal 2019.

The decrease in gross profit as a percentage of sales was primarily due to lower sales across all sales regions, particularly the European sales region where we typically sell higher-priced, higher-performance machines, competitive pricing pressures on a global basis, and the negative impact of fixed costs leveraged against lower sales and production volumes.

Gross profit for fiscal year 2022 was $64.5 million, or 26% of sales, compared to $56.2 million, or 24% of sales, for fiscal year 2021.

During fiscal year 2021, we recorded approximately $1.2 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 fiscal year 2022, gross profit as a percentage of sales benefited from increased sales of higher-performance machines, improved leverage of fixed overhead costs and inflationary price increases implemented during fiscal year 2022.

Operating Expenses.

Selling, general, and administrative expenses for fiscal 2020 were $41.4 million, or 24% of sales, compared to $54.7 million, or 21% of sales, for fiscal 2019, and included an unfavorable currency impact of $0.3 million, when translating foreign expenses to U.S.

Selling, general, and administrative expenses for fiscal year 2022 were $51.7 million, or 21% of sales, compared to $46.0 million, or 20% of sales, for fiscal year 2021, and included a favorable currency impact of $2.2 million, when translating foreign expenses to U.S.

Dollars for financial reporting purposes.

Selling, general, and administrative expenses for fiscal 2020 trended downward as a percentage of sales from the first half of fiscal 2020 to the second half of fiscal 2020 by approximately 5% due to the implementation of cost reduction plans, including changes in employee headcount, decreases in incentive and performance compensation, and reductions in other discretionary spending, partially offset by increased operating expenses associated with ProCobots, the U.S.-based automation integration business acquired by Hurco in the fourth quarter of fiscal 2019, and the unfavorable currency impact when translating foreign expenses to U.S Dollars for financial reporting purposes.

The year-over-year increase in selling, general, and administrative expenses was driven primarily by increases in marketing and tradeshow expenses (particularly related to the International Manufacturing Technology Show in September 2022), sales commissions, and employee benefit and compensation costs, as well as increased one-time costs for administrative services.

The increase in selling, general, and administrative expenses year-over-year also reflected the employee retention credit recorded in those expenses in fiscal year 2021 of $1.7 million, or 1% of sales.

Operating Income (Loss).

The operating loss for fiscal 2020 was $9.9 million, or (6%) of sales, compared to operating income of $22.5 million, or 9% of sales, for fiscal 2019.

The year-over-year decrease from operating income to operating loss was primarily due to reduced sales volume that resulted from government-mandated stay-at-home or shelter orders imposed across the globe during 2020.

The operating loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Operating income for fiscal year 2022 was $12.7 million, or 5% of sales, compared to an operating income of $10.2 million, or 4% of sales, for fiscal year 2021.

The year-over-year increase in operating income for fiscal year 2022 was primarily due to increased sales of higher-performance machines and inflationary price increases implemented during fiscal year 2022.

Operating income for fiscal year 2021 included a benefit of $2.9 million related to the employee retention credit.

Other Expense, Net.

Other expense, net for fiscal 2020 increased by $0.6 million from fiscal 2019, due mainly to a reduction in foreign currency exchange losses in fiscal 2020, compared to fiscal 2019.

Other expense, net for fiscal year 2022 increased by $1.3 million from fiscal year 2021, due mainly to an increase in foreign currency exchange losses.

Provision for Income Taxes .

We recorded an income tax benefit of $4.6 million for fiscal 2020, compared to income tax expense of $5.8 million for fiscal 2019.

During the third and fourth quarters of fiscal 2020, we assessed and recorded the year-to-date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the U.S.

on March 27, 2020.

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

In addition, the year-over-year changes in our income tax benefits and expenses reflected the shift in the geographic mix of income and loss among international tax jurisdictions, which resulted in changes in foreign tax credits, deductions for foreign derived intangible income, and recording of a provision for global intangible low taxed income.

We recorded an income tax expense of $3.7 million for fiscal year 2022, compared to income tax expense of $3.4 million for fiscal year 2021.

Our effective tax rate for fiscal year 2022 was 31%, compared to 33% for fiscal year 2021.

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 tax items, and changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.

Net Income (Loss).

Net loss for fiscal 2020 was $6.2 million, or $(0.93) per diluted share, a decrease of $23.7 million, or 136%, from fiscal 2019 net income of $17.5 million, or $2.55 per diluted share.

The year-over-year decrease from net income to net loss was primarily due to reduced sales volume that resulted from government-mandated stay-at-home or shelter orders imposed across the globe during 2020.

The net loss for fiscal 2020 included a one-time $4.9 million non-cash goodwill impairment charge attributable primarily to the prolonged ongoing uncertainty in the global markets due to the COVID-19 pandemic.

Net income for fiscal year 2022 was $8.2 million, or $1.23 per diluted share, compared to $6.8 million, or $1.01 per diluted share, for fiscal year 2021.

The year-over-year increase in net income was primarily due to increased sales of higher-performance machines and inflationary price increases implemented during fiscal year 2022.

Liquidity and Capital Resources

At October 31, 2022, we had cash and cash equivalents of $63.9 million, compared to $84.1 million at October 31, 2021.

The increase in cash and cash equivalents was primarily a result of increases in accounts payable, accrued payroll and employee benefits and customer deposits, partially offset by an increase in accounts receivable.

The decrease in cash and cash equivalents was primarily a result of increases in inventories .

Approximately 31% of our $63.9 million of cash and cash equivalents is held in the U.S.

2 unchanged sentences

Working capital (including cash and cash equivalents) was $194.7 million at October 31, 2022, compared to $208.7 million at October 31, 2021.

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

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

Inventories, net were $156.2 million at October 31, 2022, compared to $148.2 million at October 31, 2021.

Inventory turns at October 31, 2021 were 1.2, compared to 0.9 turns at October 31, 2020.

Capital expenditures were $2.4 million in fiscal 2021, compared to $1.7 million in fiscal 2020.

Capital expenditures for fiscal 2021 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions.

Inventory turns at October 31, 2022 of 1.2 remained the same as that at October 31, 2021.

Capital expenditures were $2.2 million in fiscal year 2022, compared to $2.4 million in fiscal year 2021.

Capital expenditures for fiscal year 2022 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions.

We funded these expenditures with cash flows from operations.

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.

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

In addition, during fiscal 2021, we paid cash dividends to our shareholders of $3.7 million.

During fiscal year 2022, we repurchased $2.9 million in shares of our common stock, and $4.1 million remained available under the program as of January 6, 2023.

On January 6, 2023, we announced that our Board of Directors approved an additional share repurchase program in an aggregate amount of up to $25.0 million.

Repurchases under the program may be made in the open market or through privately negotiated transactions from time to time through November 10, 2024, subject to applicable laws, regulations and contractual provisions.

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

In addition, during fiscal year 2022, we paid cash dividends to our shareholders equal to $3.9 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 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”).

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, December 17, 2021, and January 4, 2023 (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.

18 unchanged sentences

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.

We remain committed to a balanced capital allocation strategy that prioritizes a strong balance sheet and liquidity position while recognizing the importance of accretive growth and returning value to shareholders through dividends and stock repurchases, where appropriate.

As such, we continue to actively evaluate acquisition opportunities that support our long-term strategic plan.

Contractual Obligations and Commitments

7 unchanged sentences

Unrecognized tax benefits in the amount of approximately $0.1 million, excluding any interest and penalties, have been excluded from the table above because we are unable to determine a reasonably reliable estimate of the timing of future payment.

We expect capital spending in fiscal 2022 to be approximately $5.8 million, which includes investments for real estate development, software development, factory equipment and production facilities, as well as general software and equipment for selling facilities.

We expect capital spending in fiscal year 2023 to be approximately $3.7 million, which includes investments for software development, leasehold improvement, factory equipment, and production facilities, as well as general software and equipment for selling facilities.

We expect to fund these commitments with cash on hand and cash generated from operations.

2 unchanged sentences

We follow Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460).

As of October 31, 2021, we had eight outstanding third party payment guarantees totaling approximately $0.9 million.

As of October 31, 2022, we had nine outstanding third party payment guarantees totaling approximately $0.7 million.

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

3 unchanged sentences

We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

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

1 unchanged sentence

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 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, including those described below, 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.

Revenue Recognition – 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 FASB guidance codified in 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 is 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.

Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations.

Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications.

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 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.

In most instances, where a machine is sold through a distributor, we have no installation involvement.

If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications.

We consider the machine installation process for our three-axis machines to be inconsequential and 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 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.

Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded.

We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant.

Inventories – We determine at each balance sheet date how much, if any, of our inventory may ultimately prove to be either unsalable or unsalable at its carrying cost.

Our accounting policies 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.

Our 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 and such differences could be material to our financial condition and results of operations.

Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results.

Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.

Goodwill and Intangible Assets.

Goodwill and indefinite-lived intangibles arising from a business combination are reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment.

We have no goodwill as of October 31, 2022.

Other indefinite-lived intangible assets primarily consist of trademarks and trade names and are not material to our consolidated financial statement.

Finite-lived intangible assets are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets.

We are not aware of any events or changes in circumstances that indicate the carrying value of its finite-lived assets may not be recoverable.

Impairment of Long-Lived Assets – We are required periodically to review the recoverability of certain assets, including property, plant, and equipment, intangible assets, and goodwill, based on projections of anticipated future cash flows, including future profitability assessments of various product lines.

We estimate cash flows using internal budgets based on recent sales data.

We are not aware of any events or changes in circumstances that indicate the carrying value of our long-lived assets may not be recoverable.

Inventories and Related Reserves – We determine at each balance sheet date how much, if any, of our inventory may ultimately prove to be either unsalable or unsalable at its carrying cost.

Reserves are established to effectively adjust the carrying value of such inventory to lower of cost (first-in, first-out method) or net realizable value.

1 unchanged sentence

We evaluate the need for changes to valuation reserves based on market conditions, competitive offerings, and other factors on a regular basis.

We have not experienced substantive write-offs due to obsolescence.

Income Taxes – We account for income taxes and the related accounts under the asset and liability method.

1 unchanged sentence

These deferred tax assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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

Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S.

or foreign tax laws, and other factors.

These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.

The determination of our provision for income taxes requires judgment, the use of estimates, and the interpretation and application of complex federal, state and foreign tax laws.

Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions.

In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward-looking statements is based on currently effective tax laws.

Significant changes in those laws could materially affect these estimates.

We operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex.

2 unchanged sentences

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions, and the resolution of such audits may span multiple years.

Tax law is complex and often subject to varied interpretations.

Accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized.

Impairment of Goodwill and Intangible Assets.

Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time.

Instead, goodwill and indefinite-lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment.

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

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

Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified.

We estimate cash flows using internal budgets based on recent sales data.

Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, change in U.S.

or foreign tax laws, and other factors.

These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in

Capitalized Software Development Costs – Costs incurred to develop computer software products and significant enhancements to software features of existing products are capitalized as required by FASB guidance relating to accounting for the costs of computer software to be sold, leased, or otherwise marketed, and such capitalized costs are amortized over the estimated product life of the related software.

8 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-K

Item 7. Management’s Discussion and Analysis