What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-01-10 compared with 2024-01-05 · 80 added, 78 removed, 151 unchanged (51% of the section changed)

8 unchanged sentences

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 the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components.

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.

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

During fiscal year 2023, approximately 53% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance VMX series machines.

During fiscal year 2024, approximately 51% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines.

Additionally, approximately 10% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.

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, adjusted and managed inventories (excluding the impact of foreign currency) and temporary suspended our regular quarterly cash dividend .

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.

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

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 is our wholly-owned subsidiary that provides automation solutions.

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Selling, general and administrative expenses

Operating income

Operating (loss) income

Net (loss) income

Fiscal Year 2024 Compared to Fiscal Year 2023

Sales and Service Fees.

Sales and service fees for fiscal year 2023 were $227.8 million, a decrease of $23.0 million, or 9%, compared to fiscal year 2022, and included an unfavorable currency impact of $2.4 million, or 1%, when translating foreign sales to U.S.

Sales and service fees for fiscal year 2024 were $186.6 million, a decrease of $41.2 million, or 18%, compared to fiscal year 2023, and included a favorable currency impact of $1.8 million, or less than 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

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Increase/Decrease

Sales in the Americas for fiscal year 2023 decreased by 8%, compared to fiscal 2022, primarily due to decreased shipments of Hurco and Milltronics machines, particularly the higher-performance VMX machines.

European sales for fiscal year 2023 decreased by 4%, compared to fiscal year 2022, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S.

Sales in the Americas for fiscal year 2024 decreased by 18%, compared to fiscal year 2023, primarily due to decreased shipments of Hurco and Takumi machines.

The decrease in sales of these machines was mainly attributable to decreased shipments of Hurco and Takumi 3-axis vertical machines, partially offset by increased sales of higher-performance Hurco 5-axis machines and Milltronics 3-axis vertical machines.

European sales for fiscal year 2024 decreased by 21%, compared to fiscal year 2023, and included a favorable currency impact of 2%, 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 machines in Germany, France, and Italy, partially offset by increased sales of electro-mechanical components and accessories manufactured by LCM and increased shipments of Hurco machines in the United Kingdom and Milltronics machines throughout Europe where our customers are located.

Asian Pacific sales for fiscal year 2023 decreased by 34%, compared to fiscal 2022, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S.

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, and of electro-mechanical components and accessories manufactured by LCM, partially offset by an increased volume of shipments of Hurco and Takumi machines in France and increased sales of ProCobots automation solutions.

Asian Pacific sales for fiscal year 2024 increased by 2%, compared to fiscal year 2023, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

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

The year-over-year increase in Asian Pacific sales for the fiscal year was primarily attributable to increased shipments of Hurco and Takumi machines in India and to one customer with multiple machine orders in China, partially offset by decreased shipments of Hurco and Takumi machines in China and Southeast Asia.

Net Sales and Service Fees by Product Category

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Service Parts

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

Sales of computerized machine tools for fiscal year 2023 decreased by 11%, compared to fiscal year 2022, primarily due to a decreased volume of shipments of Hurco machines in all regions where our customers are located, except the United Kingdom;

Milltronics machines in North America;

and Takumi machines in China.

Sales of computer control systems and software for fiscal 2023 increased by 6%, compared to fiscal 2022, due to increased sales of software for Hurco machines in North America.

Sales of service parts for fiscal year 2023 increased by 1%, compared to fiscal year 2022, due mainly to increased volume of sales of Hurco and ProCobots parts in Europe and North America, mostly offset by a reduction in volume of sales of parts in North America.

Service fees increased by 1% for fiscal year 2023, compared to fiscal year 2022, primarily due to increased service of Hurco machines in the United Kingdom, France and Italy, mostly offset by a reduction in service of Hurco machines in North America and Germany.

During fiscal year 2023, sales for all product categories included an unfavorable currency impact of 1%, when translating foreign sales to U.S.

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

Sales of computerized machine tools for fiscal year 2024 decreased by 22%, compared to fiscal year 2023, primarily due to a decreased volume of shipments of Hurco and Takumi machines in all regions where our customers are located, except India and France, partially offset by increased sales of Milltronics vertical machines in North America.

Sales of computer control systems and software for fiscal year 2024 decreased by 13%, compared to fiscal year 2023, due to decreased sales of software for Hurco machines in North America and Germany.

Sales of service parts for fiscal year 2024 decreased by 3%, compared to fiscal year 2023, due mainly to a decreased volume of aftermarket sales of Hurco and LCM parts in Europe and North America.

Service fees increased by 9% for fiscal year 2024, compared to fiscal year 2023, primarily due to increased service of Hurco machines in the United Kingdom, France and North America.

During fiscal year 2024, sales for all product categories included a favorable currency impact of less than 1%, when translating foreign sales to U.S.

dollars for financial reporting purposes.

Orders and Backlog .

Orders for fiscal year 2023 were $209.7 million, a decrease of $31.3 million, or 13%, compared to fiscal 2022, and included an unfavorable currency impact of $2.0 million, or less than 1%, when translating foreign orders to U.S.

Orders for fiscal year 2024 were $198.3 million, a decrease of $11.4 million, or 5%, compared to fiscal year 2023, and included a favorable currency impact of $1.9 million, or less than 1%, 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, 2024 and 2023 (dollars in thousands):

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Increase/Decrease

Orders in the Americas for fiscal year 2023 decreased by 13%, compared to fiscal year 2022, mainly due to decreased customer orders for Hurco and Milltronics, particularly higher-performance VMX machines, partially offset by increased demand for Takumi machines.

European orders for fiscal 2023 decreased by 6%, compared to fiscal 2022, and included an unfavorable currency impact of 1%, when translating foreign orders to U.S.

The year-over-year decrease in European demand was primarily attributable to decreased demand for Hurco machines in Germany and France, partially offset by increased customer demand for Hurco machines in the United Kingdom and Italy, and electro-mechanical components and accessories manufactured by LCM.

Asian Pacific orders for fiscal year 2023 decreased by 45%, compared to fiscal 2022, and included an unfavorable currency impact of 3%, 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 Hurco machines in Southeast Asia and India, partially offset by increased demand for Takumi machines in India.

Backlog at October 31, 2023 decreased to $28.3 million from $44.8 million at October 31, 2022, primarily due to decreased customer demand during fiscal year 2023 for Hurco, Milltronics, and Takumi machines in the U.S., Germany, France, China and Southeast Asia.

Orders in the Americas for fiscal year 2024 decreased by 5%, compared to 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.

European orders for fiscal year 2024 decreased by 13%, compared to fiscal year 2023, and included a favorable currency impact of 2%, when translating foreign orders to U.S.

The decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany, France, and Italy, as well as decreased demand for electro-mechanical components and accessories manufactured by LCM, partially offset by increased demand for Hurco higher-performance VMX machines in the United Kingdom and for ProCobots automation solutions sold across the European region.

Asian Pacific orders for fiscal year 2024 increased by 54%, compared to fiscal year 2023, and included an unfavorable currency impact of 2%, when translating foreign orders to U.S.

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 for the fiscal year included two customers with multiple machine orders.

Backlog as of October 31, 2024 increased to $40.8 million from $28.3 million as of October 31, 2023, primarily due to increased customer demand during the last six months of fiscal year 2024, compared to the same period in prior year.

The increase in backlog was driven primarily by increased demand for higher-performance VMX and 5-axis Hurco machines in the U.S.

and Europe, Milltronics toolroom and 3-axis vertical machines in the U.S., and Hurco 3-axis vertical machines and Takumi bridge mills in Asia Pacific.

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

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Gross Profit.

Gross profit for fiscal year 2023 was $56.2 million, or 25% of sales, compared to $64.5 million, or 26% of sales, for fiscal 2022.

The year-over-year decreases in gross profit and gross profit as a percentage of sales were primarily due to the lower volume of sales of our higher-performance VMX machines and the negative impact of fixed costs on lower sales and production volumes.

Gross profit for fiscal year 2024 was $37.7 million, or 20% of sales, compared to $56.2 million, or 25% of sales, for fiscal year 2023.

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, there were decreases in average net selling prices for certain machines during fiscal year 2024 that were designed to penetrate key markets and reduce inventories.

The decreases in both sales volume and pricing negatively impacted gross profit in dollars and as a percentage of sales, reducing our leverage of fixed costs, in comparison to fiscal year 2023.

Further, certain cost reductions were implemented in the third quarter of fiscal year 2024 to help offset the impact of lower sales volumes and pricing.

Operating Expenses.

Selling, general, and administrative expenses for fiscal year 2023 were $49.6 million, or 22% of sales, compared to $51.7 million, or 21% of sales, in fiscal 2022, and included a favorable currency impact of $0.4 million, when translating foreign expenses to U.S.

Selling, general, and administrative expenses for fiscal year 2024 were $46.0 million, or 25% of sales, compared to $49.6 million, or 22% of sales, in fiscal year 2023, and included an unfavorable currency impact of $0.4 million, when translating foreign expenses to U.S.

dollars for financial reporting purposes.

The year-over-year decrease in selling, general and administrative expenses in absolute dollar terms was primarily attributable to lower costs related to tradeshow expenses, sales commissions, and employee support costs for our global operations.

Operating Income.

Operating income for fiscal year 2023 was $6.6 million, or 3% of sales, compared to $12.7 million, or 5% of sales, for fiscal year 2022.

The year-over-year decrease in operating income was primarily due to decreased volume of machine shipments.

The year-over-year reduction in selling, general, and administrative expenses was primarily due to cost reductions implemented in the third quarter of fiscal year 2024 to help offset the impact of lower sales volume, partially offset by increased tradeshow costs (for IMTS) in the fourth quarter of fiscal year 2024.

Despite the reduction from an absolute dollar perspective, selling, general, and administrative expenses increased as a percentage of sales in fiscal year 2024, compared to fiscal year 2023, due to the lower volume of sales year-over-year.

Operating (Loss) Income.

Operating loss for fiscal year 2024 was $8.3 million, or 4% of sales, compared to operating income of $6.6 million, or 3% of sales, for fiscal year 2023.

The year-over-year decrease in operating income was primarily due to lower volume of vertical milling machine sales in the Americas and Europe.

Other Expense, Net.

Other expense, net for fiscal year 2023 decreased by $1.3 million from fiscal year 2022, due mainly to a decrease in foreign currency exchange losses and increased gains on sale of property and equipment.

Other expense, net for fiscal year 2024 increased by $1.5 million from fiscal year 2023, due mainly to an increase in foreign currency exchange losses.

Provision for Income Taxes .

We recorded income tax expense of $2.4 million for fiscal year 2023, compared to $3.7 million for fiscal year 2022.

Our effective tax rate for fiscal year 2023 was 35%, compared to 31% for fiscal year 2022.

The year-over-year increase in the effective tax rate in the full year was primarily due to changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, discrete items related to stock compensation and the impact of valuation allowances for our China operations combined with lower levels of consolidated income before taxes.

Net income for fiscal year 2023 was $4.4 million, or $0.66 per diluted share, compared to $8.2 million, or $1.23 per diluted share, for fiscal year 2022.

The year-over-year decrease in net income was primarily due to decreased volume of machine shipments.

Income tax expense for fiscal year 2024 was $6.8 million, compared to $2.4 million for fiscal year 2023.

The year-over-year increase in income tax expense was primarily due to an $8.4 million non-cash valuation allowance recorded on U.S.

and China deferred tax assets, as well as 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 an $8.3 million valuation allowance recorded against our U.S.

deferred tax assets, we did not record a tax benefit for our U.S.

net losses for fiscal year 2024.

The valuation allowance recorded during fiscal year 2024 reflected a full valuation allowance of the U.S.

deferred tax assets and was recorded after evaluating changes to tax laws, statutory tax rates, and our cumulative three-year income (loss) levels for the U.S.

for fiscal year 2024.

Net (Loss) Income.

Net loss for fiscal year 2024 was $16.6 million, or $(2.56) per diluted share, compared to net income of $4.4 million, or $0.66 per diluted share, for fiscal year 2023.

The year-over-year decrease in net income was primarily due to decreased volume of machine shipments, as well as the valuation allowance recorded against our U.S.

and China deferred tax assets.

Liquidity and Capital Resources

At October 31, 2023, we had cash and cash equivalents of $41.8 million, compared to $63.9 million at October 31, 2022.

As of October 31, 2024, we had cash and cash equivalents of $33.3 million, compared to $41.8 million as of October 31, 2023.

The decrease in cash and cash equivalents was primarily a result of net cash used for payments of outstanding accounts payable, stock repurchases and dividend payments .

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

Working capital at October 31, 2023 was $193.3 million, compared to $194.7 million at October 31, 2022.

The decrease in working capital was primarily driven by a decrease in cash and cash equivalents, mostly offset by decreases in accounts payable and customer deposits and increases in inventory and accounts receivable.

Inventories, net were $158.0 million at October 31, 2023, compared to $156.2 million at October 31, 2022, and included an unfavorable currency impact of $4.9 million, or 3%, when translating foreign inventories to U.S.

Working capital as of October 31, 2024 was $180.8 million, compared to $193.3 million as of October 31, 2023.

The decrease in working capital was primarily driven by decreases in cash and cash equivalents, inventories, accounts receivable, net, and prepaid and other assets, as well as increases in customer deposits, partially offset by decreases in accounts payable and accrued payroll and employee benefits.

Inventories were $153.0 million as of October 31, 2024, compared to $158.0 million as of October 31, 2023, and included a favorable currency impact of $3.2 million, or 2%, when translating foreign inventories to U.S.

dollars for financial reporting purposes.

Inventory turns at October 31, 2023 were 1.1 compared to 1.2 at October 31, 2022.

Inventory turns as of October 31, 2024 were 1.0 compared to 1.1 as of October 31, 2023.

Capital expenditures were $2.9 million in fiscal year 2024, compared to $2.6 million in fiscal year 2023.

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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.

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

On September 25, 2024, we announced an extension of the term of this $25.0 million repurchase program from November 10, 2024 to November 10, 2026.

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 fiscal year 2023, approximately 67,513 shares were repurchased at an aggregate value of approximately $1.8 million under that program, resulting in $23.2 million remaining available under the program as of October 31, 2023.

Our prior $7.0 million share repurchase program also remained in effect until its scheduled expiration on March 10, 2023.

During fiscal year 2023, approximately 98,776 shares were repurchased at an aggregate value of approximately $2.8 million under that program.

Aggregate repurchases under all programs during fiscal year 2023 were approximately $4.6 million.

In addition, during fiscal year 2023, we paid cash dividends to our shareholders equal to $4.1 million.

During fiscal year 2024, we repurchased $1.5 million, or 87,635 shares, under the program, and $21.7 million remained available under the program as of October 31, 2024.

During fiscal year 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.

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As of October 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 October 31, 2023.

At October 31, 2023, we had an aggregate of approximately $50.6 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

We had no debt or borrowings under any of our credit facilities as of October 31, 2024.

As of October 31, 2024, we had an aggregate of approximately $50.9 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, 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

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We have no material minimum purchase commitments or “take-or-pay” type agreements or arrangements.

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.

Unrecognized tax benefits, excluding any interest and penalties, were immaterial for fiscal year 2024 and 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 year 2025 to be approximately $4.1 million, which includes investments for software development, leasehold improvement, factory equipment, and production facilities, as well as general software and equipment for selling facilities.

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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, 2023.

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

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.

To determine the appropriate level of valuation reserves, we evaluate current stock levels in relation to historical and expected patterns of demand for all of our products.

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.

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

The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications.

We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position.

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

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

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

During fiscal year 2024, we recorded an $8.6 million non-cash valuation allowance on U.S.

and China deferred tax assets, of which $8.3 million reflected a full valuation allowance of the U.S.

deferred tax assets, and was recorded after evaluating changes to tax laws, statutory tax rates, and our cumulative three-year income (loss) levels for the U.S.

for fiscal year 2024.

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 fiscal year 2024.

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.

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We periodically review the carrying values of these assets and make judgments as to ultimate realization considering the above-mentioned risk factors.

Derivative Financial Instruments – Critical aspects of our accounting policy for derivative financial instruments that we designate as hedging instruments include conditions that require that critical terms of a hedging instrument are essentially the same as a hedged forecasted transaction.

Another important element of our policy demands that formal documentation be maintained as required by FASB guidance relating to accounting for derivative instruments and hedging activities.

Failure to comply with these conditions would result in a requirement to recognize changes in market value of hedge instruments in earnings.

We routinely monitor significant estimates, assumptions, and judgments associated with derivative instruments and compliance with formal documentation requirements.

Stock Compensation – We account for share-based compensation according to FASB guidance relating to share-based payments, which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date.

This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period.

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