Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2023, we had no borrowings outstanding under any of our credit facilities.
Foreign Currency Exchange Risk
In fiscal year 2023, we derived approximately 61% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.
Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy, and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro.
We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables, payables, and loans denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes.
Forward contracts for the sale or purchase of foreign currencies as of October 31, 2023, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows (in thousands, except weighted average forward rates):
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Contract Amount at
Notional
Weighted
Forward Rates in
Amount
Avg.
U.S. Dollars
Forward
in Foreign
Forward
Contract
October 31,
Contracts
Currency
Rate
Date
2023
Maturity Dates
Sale Contracts:
Euro
12,400
1.0850
13,454
13,196
Nov 2023 - Oct 2024
Sterling
4,100
1.2349
5,063
4,981
Nov 2023 - Oct 2024
Purchase Contracts:
New Taiwan Dollar
660,000
30.3066
*
21,777
20,655
Nov 2023 - Oct 2024
* New Taiwan Dollars per U.S. dollar
Forward contracts for the sale or purchase of foreign currencies as of October 31, 2023, which were entered into to protect against the effects of foreign currency fluctuations on inter-company receivables, payables, and loans and are not designated as hedges under this guidance denominated in foreign currencies, were as follows (in thousands, except weighted average forward rates):
Contract Amount at
Notional
Weighted
Forward Rates in
Amount
Avg.
U.S. Dollars
Forward
in Foreign
Forward
Contract
October 31,
Contracts
Currency
Rate
Date
2023
Maturity Dates
Sale Contracts:
Euro
16,024
1.0783
17,278
16,975
Nov 2023 - Feb 2024
Sterling
738
1.2125
895
895
Nov 2023
Purchase Contracts:
New Taiwan Dollar
1,139,418
31.4244
*
36,259
35,685
Nov 2023 - Mar 2024
* New Taiwan Dollars per U.S. dollar
We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2022. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2023 and we entered into a new forward contract for the same notional amount that is set to mature in November 2024. As of October 31, 2023, we had $1.3 million of realized gain and $0.1 million of unrealized loss, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.
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Forward contracts designated as net investment hedges under this guidance as of October 31, 2023, were as follows (in thousands, except weighted average forward rates):
Contract Amount at
Notional
Weighted
Forward Rates in U.S. Dollars
Forward
Amount
Avg.
Contract
October 31,
Maturity
Contracts
in Foreign Currency
Forward Rate
Date
2023
Date
Sale Contracts:
Euro
3,000
1.0275
3,083
3,169
Nov 2023
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Management’s Annual Report on Internal Control over Financial Reporting
To the Shareholders and
Board of Directors
of Hurco Companies, Inc.
Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Management is responsible for the Company’s financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.
Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In management’s opinion, the Company’s internal control over financial reporting as of October 31, 2023, was effective based on the criteria specified above.
Our independent registered public accounting firm, RSM US LLP (“RSM”), which also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting as of October 31, 2023. RSM has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K.
/s/ Gregory S. Volovic
Gregory S. Volovic
President and Chief Executive Officer
/s/ Sonja K. McClelland
Sonja K. McClelland
Executive Vice President, Treasurer, and
Chief Financial Officer
Indianapolis, Indiana
January 5, 2024
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