Item 2. Management’s Discussion and Analysis
Item 2 . 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 unaudited financial statements and the notes accompanying our unaudited financial statements appearing elsewhere in this report, as well as our audited financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2023.
EXECUTIVE OVERVIEW
Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture, and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service, and distribution network. Although most of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories, and replacement parts for our products, as well as customer service, training, and applications support.
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.
The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During the nine months of fiscal 2024, approximately 52% 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 11% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures. We operate in a cyclical industry where sales and order trends often change periodically and can vary from region to region.
During a time of global uncertainty and lower sales volumes, we have turned our attention to adjusting overhead expenses and operating expenses to help minimize the impact of the lower volumes of sales on operating income. We implemented cost reductions in the third quarter of fiscal year 2024 and adjusted and managed inventories (excluding the impact of foreign currency). We used that cashflow to manage our capital allocation strategies to continue investing in new technologies, product development, and necessary capital expenditures to maximize cashflows without incurring any significant indebtedness as we continue to seek new acquisitions and other growth opportunities. The cyclicality of our business requires that we exercise discipline in managing through unexpected changes in the markets and industries in which we operate. We believe that our long history of profitability and the strength of our balance sheet can provide us with stability to manage through these business cycles and we rely on our past experience in making measured decisions for the long-term success of our business.
We have three brands of CNC machine tools in our product portfolio: Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and mold, aerospace, and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. These three brands of CNC machine tools are responsible for the vast majority of our revenue. However, we have added other non-Hurco branded products to our product portfolio that have contributed product diversity and market penetration opportunity. 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 is our wholly-owned subsidiary that provides automation solutions. 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.
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We principally sell our products through approximately 180 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, 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 and assembled to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM.
Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling, and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. dollars for reporting in our financial statements, are higher than would be the case when the U.S. dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. dollars at exchange rates prevailing during the period covered by those financial statements.
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.
RESULTS OF OPERATIONS
Three Months Ended July 31, 2024 Compared to Three Months Ended July 31, 2023
Sales and Service Fees. Sales and service fees for the third quarter of fiscal year 2024 were $42.7 million, a decrease of $10.6 million, or 20%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than $0.1 million, or less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.
Sales and Service Fees by Geographic Region
The following table sets forth sales and service fees by geographic region for the third fiscal quarter ended July 31, 2024 and 2023 (dollars in thousands):
Three Months Ended
July 31,
2024
2023
$ Change
% Change
Americas
$
15,389
36
%
$
18,272
34
%
$
(2,883)
(16)
%
Europe
24,068
56
%
31,162
59
%
(7,094)
(23)
%
Asia Pacific
3,194
8
%
3,767
7
%
(573)
(15)
%
Total
$
42,651
100
%
$
53,201
100
%
$
(10,550)
(20)
%
Sales in the Americas for the third quarter of fiscal year 2024 decreased by 16%, compared to the corresponding period in fiscal year 2023, primarily due to decreased shipments of Hurco and Takumi machines. The decrease in sales of these machines was primarily attributable to decreased shipments of Hurco and Takumi 3-axis vertical machines, partially offset by increased sales of higher-performing Hurco 5-axis machines and Milltronics 3-axis vertical machines.
European sales for the third quarter of fiscal year 2024 decreased by 23%, compared to the corresponding period in fiscal year 2023, and included a favorable currency impact of less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year decrease in European sales was primarily attributable to a decreased volume of shipments of Hurco and Takumi machines in Germany, Italy, and the United Kingdom, as well as decreased shipments of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary, LCM.
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Asian Pacific sales for the third quarter of fiscal year 2024 decreased by 15%, compared to the corresponding prior year period, and included an unfavorable currency impact of 2%, when translating foreign sales to U.S. dollars for financial reporting purposes. The third quarter of fiscal year 2024 decrease in Asian Pacific sales was mainly due to decreased shipments of Takumi machines in China and Hurco machines in Southeast Asia, partially offset by increased shipments of Hurco machines in India and one customer with multiple machine orders in China.
Sales and Service Fees by Product Category
The following table sets forth sales and service fees by product group and services for the third fiscal quarter ended July 31, 2024 and 2023 (dollars in thousands):
Three Months Ended
July 31,
2024
2023
$ Change
% Change
Computerized Machine Tools
$
33,191
78
%
$
43,189
81
%
$
(9,998)
(23)
%
Computer Control Systems and Software †
697
2
%
778
1
%
(81)
(10)
%
Service Parts
6,535
15
%
7,166
14
%
(631)
(9)
%
Service Fees
2,228
5
%
2,068
4
%
160
8
%
Total
$
42,651
100
%
$
53,201
100
%
$
(10,550)
(20)
%
† 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 third quarter of fiscal year 2024 decreased by 23%, compared to the corresponding prior year period, primarily due to a decreased volume of shipments of Hurco and Takumi machines in Germany, the Americas, Italy, and China, and included an unfavorable currency impact of less than 1% when translating foreign sales to U.S. dollars for financial reporting purposes. Sales of computer control systems and software for the third quarter of fiscal year 2024 decreased by 10%, compared to the corresponding prior year period, due mainly to decreased aftermarket sales of Hurco software upgrades in France and the Americas, partially offset by increased aftermarket sales of systems and software upgrades in the United Kingdom. Sales of service parts for the third quarter of fiscal year 2024 decreased by 9%, compared to the corresponding prior year period, primarily due to decreased aftermarket sales of Hurco service parts in Germany and the Americas. Service fees for the third quarter of fiscal year 2024 increased by 8%, compared to the corresponding prior year period, primarily due to increased aftermarket services performed in the United Kingdom and Germany.
Orders. Orders for the third quarter of fiscal year 2024 were $52.8 million, an increase of $10.7 million, or 26%, compared to the corresponding period in fiscal year 2023, and included an unfavorable currency impact of less than $0.1 million, or less than 1%, when translating foreign orders to U.S. dollars.
The following table sets forth new orders booked by geographic region for the third fiscal quarter ended July 31, 2024 and 2023 (dollars in thousands):
Three Months Ended
July 31,
2024
2023
$ Change
% Change
Americas
$
17,625
33
%
$
14,607
35
%
$
3,018
21
%
Europe
28,349
54
%
24,752
59
%
3,597
15
%
Asia Pacific
6,841
13
%
2,723
6
%
4,118
151
%
Total
$
52,815
100
%
$
42,082
100
%
$
10,733
26
%
Orders in the Americas for the third quarter of fiscal year 2024 increased by 21%, compared to the corresponding period in fiscal year 2023. The increase in orders was primarily due to increased customer demand for Hurco higher-performing 5-axis machines, Hurco and Milltronics lathes, and Milltronics 3-axis vertical machines.
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European orders for the third quarter of fiscal year 2024 increased by 15%, compared to the corresponding prior year period, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S. dollars. The increase in orders was driven primarily by increased customer demand for Hurco machines in the United Kingdom, France and Italy, particularly Hurco lathes and higher-performing 5-axis machines.
Asian Pacific orders for the third quarter of fiscal year 2024 increased by 151%, compared to the corresponding prior year period, and included an unfavorable currency impact of 5%, when translating foreign orders to U.S. dollars. The increase in Asian Pacific orders was driven primarily by increased customer demand for Hurco and Takumi machines in China, India, and Southeast Asia. The increased customer demand for Hurco machines in China and India related primarily to two customers with multiple machine orders.
Gross Profit . Gross profit for the third quarter of fiscal year 2024 was $7.8 million, or 18% of sales, compared to $13.4 million, or 25% of sales, for the corresponding prior year period. The year-over-year decrease in gross profit was primarily due to the lower volume of vertical milling machine sales in the Americas and Europe. Additionally, the third quarter of fiscal 2024 included decreases in average net selling prices for certain machines, designed to penetrate key markets and reduce inventories. The decreases in both sales volume and pricing unfavorably impacted gross profit in dollars and as a percentage of sales, reducing our leverage of fixed costs, in comparison to the corresponding prior year period. Further, certain cost reductions were implemented in the third quarter of fiscal 2024 in an effort to help offset the impact of lower sales volumes and pricing.
Operating Expenses . Selling, general, and administrative expenses for the third quarter of fiscal year 2024 were $10.4 million, or 24% of sales, compared to $12.4 million, or 23% of sales, in the corresponding fiscal year 2023 period, and included an unfavorable currency impact of less than $0.1 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses in absolute dollar terms was primarily due to cost reductions implemented in the third quarter of fiscal year 2024 in an effort to help offset the impact of lower sales volume. Despite the reduction in absolute dollar terms, selling, general, and administrative expenses as a percentage of sales increased in the third quarter of fiscal year 2024 compared to the corresponding prior year period due to the lower volume of sales year-over-year.
Operating Income/Loss . Operating loss for the third quarter of fiscal year 2024 was $2.5 million, compared to operating income of $1.0 million for the corresponding period in fiscal year 2023. The change was primarily due to a lower volume of sales of vertical milling machines and the negative impact of fixed costs on lower sales and production volumes.
Other (Expense) Income, Net . Other expense, net for the third quarter of fiscal year 2024 was $0.1 million compared to $0.4 million for the corresponding period in fiscal year 2023. The decrease in other expense was due mainly to a reduction in foreign currency exchange loss in the third quarter of fiscal year 2024 compared to the same period in fiscal year 2023.
Income Taxes . Income tax expense during the third quarter of fiscal 2024 was $7.0 million, compared to $0.4 million for the corresponding period in 2023. The year-over-year increase in income tax expense for the third quarter of fiscal 2024 was primarily due to an $8.2 million non-cash valuation allowance on U.S. deferred tax assets, changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, and discrete items related to unvested stock compensation. Because we have a valuation allowance recorded against our U.S. deferred tax assets, we did not record a tax benefit for our U.S. net losses for the three months ended July 31, 2024. The valuation allowance recorded during the third quarter of fiscal 2024 reflects a full valuation allowance of the U.S. deferred tax assets and was recorded based on our conclusion that the deferred tax assets were not more likely than not going to be realized.
Nine Months Ended July 31, 2024 Compared to Nine Months Ended July 31, 2023
Sales and Service Fees. Sales and service fees for the nine months of fiscal year 2024 were $132.9 million, a decrease of $28.8 million, or 18%, compared to the corresponding prior year period, and included a favorable currency impact of $0.8 million, or less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.
Sales and Service Fees by Geographic Region
The following table sets forth sales and service fees by geographic region for the nine months ended July 31, 2024 and 2023 (dollars in thousands):
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Nine Months Ended
July 31,
2024
2023
$ Change
% Change
Americas
$
48,986
37
%
$
58,609
36
%
$
(9,623)
(16)
%
Europe
69,538
52
%
89,745
56
%
(20,207)
(23)
%
Asia Pacific
14,358
11
%
13,348
8
%
1,010
8
%
Total
$
132,882
100
%
$
161,702
100
%
$
(28,820)
(18)
%
Sales in the Americas for the nine months of fiscal year 2024 decreased by 16%, compared to the corresponding period in fiscal year 2023, primarily due to decreased shipments of Hurco and Takumi machines. The decrease in sales of these machines was primarily attributable to decreased shipments of Hurco and Takumi 3-axis vertical machines, partially offset by increased sales of higher-performing Hurco 5-axis machines and Milltronics 3-axis vertical machines.
European sales for the nine months of fiscal year 2024 decreased by 23%, compared to the corresponding period in fiscal year 2023, 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 European sales was primarily attributable to a decreased volume of shipments of Hurco and Takumi machines in Germany, Italy, and the United Kingdom, as well as decreased shipments of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary, LCM.
Asian Pacific sales for the nine months of fiscal year 2024 increased by 8%, compared to the corresponding prior year period, and included an unfavorable currency impact of 2%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year increase in Asian Pacific sales in the nine-month period was primarily attributable to increased shipments of Hurco machines in India and one customer with multiple machine orders in China, partially offset by decreased shipments of Takumi machines in China and Hurco machines in Southeast Asia.
Sales and Service Fees by Product Category
The following table sets forth sales and service fees by product group and services for the nine months ended July 31, 2024 and 2023 (dollars in thousands):
Nine Months Ended
July 31,
2024
2023
$ Change
% Change
Computerized Machine Tools
$
104,176
79
%
$
132,535
82
%
$
(28,359)
(21)
%
Computer Control Systems and Software †
1,866
1
%
1,916
1
%
(50)
(3)
%
Service Parts
20,389
15
%
21,101
13
%
(712)
(3)
%
Service Fees
6,451
5
%
6,150
4
%
301
5
%
Total
$
132,882
100
%
$
161,702
100
%
$
(28,820)
(18)
%
† 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 nine months of fiscal year 2024 decreased by 21%, compared to the corresponding prior year period, primarily due to a decreased volume of shipments of Hurco and Takumi machines in Germany, the Americas, Italy, and the United Kingdom, and included a favorable currency impact of less than 1% when translating foreign sales to U.S. dollars for financial reporting purposes. Sales of computer control systems and software for the nine months of fiscal year 2024 decreased by 3%, compared to the corresponding prior year period, due mainly to decreased aftermarket sales of Hurco software upgrades in Germany, Italy and the Americas, partially offset by increased aftermarket sales of systems and software upgrades in the United Kingdom and Southeast Asia. Sales of service parts for the nine months of fiscal year 2024 decreased by 3%, compared to the corresponding prior year period, primarily due to decreased aftermarket sales of Hurco service parts in the Americas and the United Kingdom, partially offset by increased aftermarket sales of Hurco service parts in Germany and France. Service fees for the nine months of fiscal year 2024 increased by 5%, compared to the corresponding prior year period, primarily due to increased aftermarket services performed in the United Kingdom and France, partially offset by decreased aftermarket services performed in the Americas.
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Orders. Orders for the nine months of fiscal year 2024 were $147.2 million, a decrease of $8.3 million, or 5%, compared to the corresponding period in fiscal year 2023, and included a favorable currency impact of $0.8 million, or less than 1%, when translating foreign orders to U.S. dollars.
The following table sets forth new orders booked by geographic region for the nine months ended July 31, 2024 and 2023 (dollars in thousands):
Nine Months Ended
July 31,
2024
2023
$ Change
% Change
Americas
$
55,490
38
%
$
56,548
37
%
$
(1,058)
(2)
%
Europe
75,757
51
%
87,632
56
%
(11,875)
(14)
%
Asia Pacific
15,978
11
%
11,355
7
%
4,623
41
%
Total
$
147,225
100
%
$
155,535
100
%
$
(8,310)
(5)
%
Orders in the Americas for the nine months of fiscal year 2024 decreased by 2%, compared to the corresponding period in fiscal year 2023. The decrease in orders was primarily due to decreased customer demand for Hurco 3-axis vertical machines, partially offset by increased demand for Hurco higher-performing 5-axis machines and Milltronics 3-axis vertical machines. The decrease in orders was also impacted by a reduction in average net selling prices for certain machines, designed to penetrate key markets and reduce inventories.
European orders for the nine months of fiscal year 2024 decreased by 14%, compared to the corresponding prior year period, and included a favorable currency impact of 1%, when translating foreign orders to U.S. dollars. The year-over-year decrease was mainly due to decreased customer demand for Hurco machines across the European region where our customers are located and for electro-mechanical components and accessories manufactured by LCM.
Asian Pacific orders for the nine months of fiscal year 2024 increased by 41%, compared to the corresponding prior year period, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. dollars. The year-over-year increase in Asian Pacific orders was driven primarily by increased customer demand for Hurco machines in China and Hurco and Takumi machines in India, partially offset by decreased demand for Takumi machines in China. The increased customer demand for Hurco machines in China and India related primarily to two customers with multiple machine orders.
Gross Profit . Gross profit for the nine months of fiscal year 2024 was $25.6 million, or 19% of sales, compared to $38.7 million, or 24% of sales, for the corresponding prior year period. The year-over-year decrease was primarily due to the lower volume of vertical milling machine sales in the Americas and Europe. Additionally, the second and third quarters of fiscal 2024 included decreases in average net selling prices for certain machines, designed to penetrate key markets and reduce inventories. The decreases in both sales volume and pricing unfavorably impacted gross profit in dollars and as a percentage of sales, reducing our leverage of fixed costs, in comparison to the corresponding prior year period. Further, certain cost reductions were implemented in the third quarter of fiscal 2024 in an effort to help offset the impact of lower sales volumes and pricing.
Operating Expenses . Selling, general, and administrative expenses for the nine months of fiscal year 2024 were $33.4 million, or 25% of sales, compared to $35.5 million, or 22% of sales, in the corresponding fiscal year 2023 period, and included an unfavorable currency impact of $0.2 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses in absolute dollar terms was primarily due to cost reductions implemented in the third quarter of fiscal year 2024 in an effort to help offset the impact of lower sales volume. Despite the reduction in absolute dollar terms, selling, general, and administrative expenses as a percentage of sales increased in the nine months of fiscal year 2024 compared to the corresponding prior year period due to the lower volume of sales year-over-year.
Operating Income/Loss . Operating loss for the nine months of fiscal year 2024 was $7.8 million, compared to operating income of $3.2 million for the corresponding period in fiscal year 2023. The change was primarily due to a lower volume of sales of vertical milling machines and the negative impact of fixed costs on lower sales and production volumes.
Other (Expense) Income, Net . Other expense, net for the nine months of fiscal year 2024 was $1.1 million compared to $0.1 million for the corresponding period in fiscal year 2023, due mainly to an increase in foreign currency exchange loss in the nine months of fiscal year 2024 compared to the same period in fiscal year 2023.
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Income Taxes . Income tax expense during the nine months of fiscal 2024 was $6.4 million, compared to income tax expense of $1.3 million for the corresponding period in 2023. The year-over-year increase in income tax expense for the nine months of fiscal 2024 was primarily due to an $8.2 million non-cash valuation allowance on U.S. deferred tax assets, changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, and discrete items related to unvested stock compensation. Because we have a valuation allowance recorded against our U.S. deferred tax assets, we did not record a tax benefit for our U.S. net losses for the nine months ended July 31, 2024. The valuation allowance recorded during the third quarter of fiscal 2024 reflects a full valuation allowance of the U.S. deferred tax assets and was recorded based on our conclusion that the deferred tax assets were not more likely than not going to be realized.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2024, we had cash and cash equivalents of $36.1 million, compared to $41.8 million at October 31, 2023. Approximately 26% of the $36.1 million of cash and cash equivalents was denominated in U.S. dollars. The balance was attributable to our foreign operations and is held in the local currencies of our various foreign entities, subject to fluctuations in currency exchange rates. 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 $182.0 million at July 31, 2024, compared to $193.3 million at October 31, 2023. The decrease in working capital was primarily driven by decreases in accounts receivable, net and cash and cash equivalents, partially offset by increases in inventories, net and decreases in accounts payable and accrued payroll and employee benefits.
Capital expenditures of $2.1 million during the nine months of fiscal year 2024 were primarily for capital improvements in existing facilities and software development costs. We funded these expenditures with cash on hand.
On January 6, 2023, we announced a 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. During the three months and nine months ended July 31, 2024, we repurchased $0.5 million, or 29,413 shares, under that program, and $22.7 million remained available under the program as of that date. In August 2024, we repurchased an additional $0.8 million, or 44,352 shares, under that program, leaving $21.9 million repurchase authority remaining as of August 30, 2024.
During the nine months ended July 31, 2024, we paid cash dividends to our shareholders of $2.1 million. On June 14, 2024, we announced a temporary suspension of our regular quarterly cash dividend as we seek to enhance our financial flexibility and improve our ability to manage market volatility while focusing on strengthening our balance sheet, reinvesting in our core business and research and development related to emerging technologies, and returning value to shareholders via the appropriate channels in both the near and long-term. 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. Subsequent to the June 14, 2024, dividend suspension announcement, we repurchased a total of $1.3 million, or 73,765 shares, through August 30, 2024, in an effort to continue returning value to shareholders.
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, December 23, 2020, December 17, 2021, January 4, 2023 and December 19, 2023. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2025.
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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%.
The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $25.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.
In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. In February and December 2023, NHML and HML, respectively, renewed the above-referenced credit facilities on substantially similar terms and identical maximum aggregate limits.
As of July 31, 2024, our existing credit facilities consisted of a €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, 2024.
At July 31, 2024, we had an aggregate of approximately $50.7 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 beyond, and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, and a balanced capital allocation 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 ESTIMATES
Our MD&A 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 critical accounting estimates, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023, 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 nine months of fiscal year 2024, 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 fiscal year ended October 31, 2023.
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no material changes related to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023.
OFF BALANCE SHEET ARRANGEMENTS
From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of July 31, 2024, we had nine outstanding third party payment guarantees totaling approximately $0.9 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
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.
These risks, uncertainties and other factors include, but are not limited to:
•
The cyclical nature of the machine tool industry;
• Uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets;
• The risks of our international operations;
•
Governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to tax laws;
• The effects of changes in currency exchange rates;
• Competition with larger companies that have greater financial resources;
• Our dependence on new product development;
• The need and/or ability to protect our intellectual property assets;
• The limited number of our manufacturing and supply chain sources;
• Increases in the prices of raw materials, especially steel and iron products;
• The effect of the loss of members of senior management and key personnel;
• Our ability to integrate acquisitions;
• Acquisitions that could disrupt our operations and affect operating results;
• Failure to comply with data privacy and security regulations;
• Breaches of our network and system security measures;
• Possible obsolescence of our technology and the need to make technological advances;
• Impairment of our assets;
• Negative or unforeseen tax consequences;
• Uncertainty concerning our ability to use tax loss carryforwards;
• Changes in the SOFR rate; and
•
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.
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.
Readers are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement is applicable to all forward-looking statements contained in this report.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.