Hurco(HURC) - 2022 Q4 - Annual Report

FORM 10-K General Information This section provides key filing details for HURCO COMPANIES, INC.'s Annual Report on Form 10-K for the fiscal year ended October 31, 2022 - HURCO COMPANIES, INC. filed an Annual Report on Form 10-K for the fiscal year ended October 31, 2022[2] General Filing Information | Indicator | Value | | :--- | :--- | | Commission File No. | 0-9143 | | State of Incorporation | Indiana | | Registrant's Telephone Number | (317) 293–5309 | | Trading Symbol | HURC | | Exchange Registered | The Nasdaq Stock Market LLC | | Well-known Seasoned Issuer | No | | Required to File Reports | Yes | | Filed All Reports in Preceding 12 Months | Yes | | Submitted Interactive Data File | Yes | | Filer Status | Accelerated filer | | Market Value of Voting Stock (Non-affiliates, April 30, 2022) | $186,306,000 | | Common Stock Outstanding (December 31, 2022) | 6,586,962 shares | Forward-Looking Statements This section outlines forward-looking statements, their inherent risks, and the company's disclaimer regarding future updates - This report contains forward-looking statements, identifiable by words such as 'may', 'will', 'should', 'anticipate', 'expect', 'plan', 'believe', 'estimate', 'project', 'intend', and similar expressions[6] - These statements are based on current expectations and assumptions, subject to risks and uncertainties that could cause actual results to differ materially. Readers are cautioned not to place undue reliance on them, and the company disclaims any obligation to update or revise them[6] - Key risks include the cyclical nature of the machine tool industry, uncertain economic conditions, international operations risks, governmental actions, currency exchange rate effects, the impact of the COVID-19 pandemic, competition, dependence on new product development, intellectual property protection, supply chain limitations, raw material price increases, loss of key personnel, acquisition integration, data privacy and security, technology obsolescence, asset impairment, and tax consequences[6] PART I Item 1. BUSINESS Hurco Companies, Inc. is an international industrial technology company specializing in the design, manufacture, and sale of computerized (CNC) machine tools, control systems, and related solutions for the metal cutting industry. The company's strategy focuses on global market expansion and product diversity, achieved through both organic growth and strategic acquisitions. The machine tool industry is highly cyclical, with demand influenced by economic conditions and technological advancements. Hurco offers a comprehensive product portfolio under its Hurco, Milltronics, and Takumi brands, complemented by automation solutions (ProCobots) and machine tool components (LCM). The company's global manufacturing and distribution network supports its worldwide customer base. Human capital management, including employee safety, development, and diversity, along with ethical business practices, are central to its operations General Business Overview Hurco Companies, Inc. is an international industrial technology company specializing in computerized machine tools, pursuing global expansion and product diversification - Hurco Companies, Inc. is an international industrial technology company that designs, manufactures, and sells computerized (CNC) machine tools, primarily vertical machining centers (mills) and turning centers (lathes), to the metal cutting industry[8] - The company's strategy is to design, manufacture, and sell a comprehensive line of computerized machine tools to help customers increase productivity and profitability, expanding product offerings and entering new geographic markets[11][13] - Since 2013, Hurco has made five acquisitions to diversify its product portfolio, offering machines from entry-level to high-performance, and providing automation solutions[13] Financial Performance Summary | Metric | Fiscal Year 2022 | Fiscal Year 2021 | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales and Service Fees | $250.8 million | $235.2 million | +$15.6 million | +7% | | Unfavorable Currency Impact on Sales | $13.9 million | N/A | N/A | -6% | | Net Income | $8.2 million | $6.8 million | +$1.4 million | +20.6% | | Diluted EPS | $1.23 | $1.01 | +$0.22 | +21.8% | Industry Overview The machine tool industry is highly cyclical, with demand sensitive to economic conditions and short order backlogs - The machine tool industry is highly cyclical, as its products are considered capital goods, and demand can fluctuate significantly with changing economic conditions[15][16] - The U.S. machine tool market accounts for approximately 15% of worldwide consumption, with limited and often lagging data available for foreign markets[15] - Demand for capital equipment is difficult to estimate with certainty due to short order backlogs (approx. 45 days) and the absence of common leading indicators used in other industries[16] Products and Services Hurco offers a comprehensive portfolio of CNC machine tools under Hurco, Milltronics, and Takumi brands, alongside automation solutions and components - Hurco's core products include general-purpose computerized machine tools (vertical/horizontal machining centers, turning centers, toolroom machines), most equipped with proprietary control systems and software[17] Contribution to Total Revenues by Product Group and Services (in thousands) | Product Group/Service | 2022 Revenue | 2022 % of Total | 2021 Revenue | 2021 % of Total | 2020 Revenue | 2020 % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Computerized Machine Tools | $211,804 | 85% | $198,602 | 85% | $139,577 | 82% | | Computer Control Systems & Software | $2,634 | 1% | $2,528 | 1% | $1,699 | 1% | | Service Parts | $28,219 | 11% | $26,425 | 11% | $22,484 | 13% | | Service Fees | $8,157 | 3% | $7,640 | 3% | $6,867 | 4% | | Total | $250,814 | 100% | $235,195 | 100% | $170,627 | 100% | - The company's product portfolio includes three CNC machine tool brands: Hurco (technology/innovation with proprietary WinMax® software), Milltronics (value-based with easy-to-use machines), and Takumi (precision, high-speed performance with industry-standard controls)[21][23][41][53] - Additional offerings include ProCobots (automation solutions like collaborative robots) and LCM Precision Technology (high-value machine tool components and accessories)[21][80][81] - Other computer control systems and software products, such as Autobend® for press brake machines and various WinMax® software options (e.g., Advanced Verification Graphics, Solid Model Import, UltiMonitor, Simultaneous Five-Axis Contouring), are sold directly to end-users or OEMs[67][68][69][70][71][72][73][74][75][76][77][78][79] Operations and Market Dynamics Hurco's global manufacturing and distribution network supports its worldwide customer base, competing through proprietary technology and customer service - Manufacturing and assembly operations are primarily conducted by wholly-owned subsidiaries in Taiwan (HML), China (NHML), the U.S. (Indianapolis facility), and Italy (LCM), with computer control systems produced by an affiliated contract manufacturer in Taiwan (HAL)[89][90] - Products are sold through approximately 200 independent agents and distributors globally, supplemented by direct sales and service organizations in key markets across the Americas, Europe, and Asia[92] - Approximately 85% of worldwide demand for computerized machine tools is outside the U.S., with 62% of Hurco's FY2022 revenues derived from non-Americas customers[93] - Demand drivers include the need for productivity improvements, replacement of aging machine tools, industrial development in emerging markets, and the declining supply of skilled machinists, but demand is highly sensitive to economic conditions and governmental policies[96][101] - Hurco competes with numerous machine tool producers globally, many of which are larger and have greater financial resources, differentiating itself through proprietary software, technological capabilities, ease of use, reliability, quality, and extensive customer service[97][99] - The company protects its proprietary Hurco and Milltronics control systems and machine tools through patents, trademarks, nondisclosure agreements, and trade secret law[100] Human Capital and Governance Hurco manages human capital through safety, development, diversity, and ethical practices, with approximately 735 global employees - As of October 31, 2022, Hurco had approximately 735 full-time employees, with 27% in the Americas and 73% in other global regions, many being engineers or trained technical workers[102] - Human capital management focuses on employee safety and wellness (including a COVID-19 response plan and wellness program), talent acquisition and retention, development and training, diversity and inclusion, and compensation and pay equity[102][103][104][105][107] - The company fosters a strong corporate culture with high standards of ethics and compliance, guided by a Code of Business Conduct and Ethics, and maintains a whistleblower policy[108] Availability of Reports and Other Information Hurco provides public access to its financial reports and corporate governance information on its website - Hurco makes its Annual Reports (10-K), Quarterly Reports (10-Q), proxy materials, Current Reports (8-K), press releases, and corporate governance information available free of charge on its website, www.hurco.com[110](index=110&type=chunk)[112] Item 1A. RISK FACTORS Hurco faces a range of material risks across its operations. Industry and international risks include the cyclical nature of the machine tool market, uncertain global economic conditions (exacerbated by geopolitical conflicts), and challenges inherent in international operations such as trade barriers, currency fluctuations, and political instability, particularly concerning manufacturing in China and Taiwan. The COVID-19 pandemic continues to pose risks to operations, supply chains, and demand. Operational and strategic risks involve the need for continuous new product development, intellectual property protection, potential disruptions in manufacturing and supply chains, volatility in raw material prices, loss of key personnel, and the inherent complexities and potential disruptions from acquisitions. Financial, credit, and liquidity risks encompass inventory obsolescence, asset impairment, and negative tax consequences Risks Related to Our Industry and International Operations Hurco faces risks from the cyclical machine tool industry, uncertain global economic conditions, and complexities of international operations - The machine tool industry's cyclical nature causes significant fluctuations in sales and operating results, which can adversely affect financial performance[114] - Uncertain global economic conditions, particularly in Europe (where 50% of revenues are generated), the U.S., and Asia Pacific, adversely affect overall demand, with geopolitical conflicts (e.g., war in Ukraine) exacerbating these uncertainties[115][182] - International operations (62% of FY2022 revenues from outside Americas) expose Hurco to risks such as trade barriers, differing labor regulations, governmental expropriation, customs and tariffs, currency exchange rate fluctuations, political instability, and compliance with complex foreign and U.S. laws (e.g., FCPA, UK Bribery Act)[116][117][118][120][122] - Concentration of manufacturing in China and Taiwan creates vulnerability to political environment changes (trade wars, blockades), natural disasters, and cyber-attacks, which could disrupt production and supply chains[119][121] - Fluctuations in exchange rates between the U.S. Dollar and foreign currencies (Euro, Pound Sterling, Chinese Yuan, New Taiwan Dollar) can increase costs and decrease revenues, despite hedging efforts[122] - Hurco competes with larger companies possessing greater financial resources, making it challenging to maintain competitiveness[123] - Brexit could lead to increased risks for U.K. operations (Hurco Europe Ltd.), including changes in regulatory oversight, supply disruptions, increased prices/fees/tariffs, and currency fluctuations (Pound Sterling, Euro)[124][125][126][127] Risks Related to the COVID-19 Pandemic The COVID-19 pandemic continues to pose risks to Hurco's operations, supply chains, and market demand, particularly in regions with intermittent lockdowns - Public health emergencies like COVID-19 have disrupted and could continue to disrupt operations, including temporary closures, remote work, and impacts on delivery, installation, and procurement[128][129][131] - The pandemic has led to reduced demand in certain markets, supply chain constraints, increased costs for transportation and freight, and volatility in global credit markets, potentially causing asset impairment[131][132] - While the impact was less significant in FY2022 than in prior years, intermittent lockdowns, particularly in China due to its zero-tolerance policy, continue to affect the business[189] Operational and Strategic Risks Operational risks include new product development, intellectual property protection, supply chain disruptions, raw material price volatility, and acquisition integration challenges - Failure to timely develop and introduce new, enhanced products that are market-accepted could diminish Hurco's competitive position and growth prospects, especially given rapid technological change and evolving industry standards[133] - The company's continued success depends on its ability to protect intellectual property (patents, trademarks, trade secrets) from infringement, particularly in foreign countries with weaker protections, and to avoid infringing on third-party rights[134][135] - Disruptions in manufacturing operations (Taiwan, China, U.S., Italy) or the supply of key materials and components (e.g., from HAL) due to political changes, natural disasters, or cyber-attacks could materially adversely affect the business[138] - Fluctuations in raw material prices (steel, iron) and other inputs (energy, transportation) can adversely affect sales, costs, and profitability if price increases cannot be passed on to customers[139] - The unanticipated loss of senior management or other key personnel could impair the company's ability to execute its business plan and adversely affect operating results[140] - Acquisitions, while strategic, involve numerous risks including integration difficulties, diversion of management attention, challenges in new markets, supply chain dependencies, insufficient revenues, loss of key employees, and potential goodwill impairment charges (e.g., $4.9 million in FY2020)[141][142][143][145] Financial, Credit, and Liquidity Risks Financial risks encompass data privacy compliance, cyber-attacks, inventory obsolescence, asset impairment, and unforeseen tax consequences - Failure to comply with evolving data privacy and security laws and regulations (e.g., CCPA, CPRA, GDPR) could result in substantial penalties, litigation, adverse publicity, and negatively affect operating results[146][147][148] - Breaches of network and system security measures, including cyber-attacks, could lead to loss of business, litigation, financial liabilities, damage to reputation, and disruption of operations[150][151][152] - Technological changes, shifts in market demand, or competitive pressures could render portions of inventory obsolete or excessive, requiring write-offs that adversely affect results of operations[153] - Assets, including intangible assets, may become impaired, requiring significant non-cash charges to earnings, as seen with a $4.9 million goodwill impairment in FY2020[155] - Negative or unforeseen tax consequences, including changes in tax laws (e.g., Tax Cuts and Jobs Act, OECD's base erosion and profit shifting project), changes in profitability, or valuation allowances on deferred tax assets, could materially affect results of operations and financial condition[156][157][158][159] Item 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments from the SEC regarding the company's filings - The company has no unresolved staff comments[160] Item 2. PROPERTIES Hurco owns its corporate headquarters, design, and engineering facility in Indianapolis, Indiana, and leases all other facilities globally. These leased properties serve various functions including manufacturing, assembly, sales, application engineering, customer service, and warehousing across multiple countries. The company believes its facilities are well-maintained and adequate for current and foreseeable needs, with no significant difficulty anticipated in replacing leased facilities if necessary Principal Facilities and Square Footage | Principal Uses | Locations | Square Footage | | :--- | :--- | :--- | | Corporate headquarters, design and engineering, product testing, sales and marketing, application engineering, customer service, manufacturing and assembly | Indianapolis, Indiana, U.S. | 165,000 | | Manufacturing, assembly, sales, application engineering and customer service | Taichung, Taiwan | 427,500 | | Manufacturing, assembly, sales, application engineering and customer service | Waconia, Minnesota, U.S. | 61,000 | | Manufacturing, assembly, sales, application engineering and customer service | Castell'Alfero, Italy | 32,300 | | Manufacturing | Ningbo, China | 31,000 | | Sales, application engineering, customer service, and warehousing | High Wycombe, England | 26,300 | | Sales, application engineering, customer service, and warehousing | Paris, France | 12,800 | | Sales, application engineering, customer service, and warehousing | Munich and Verl, Germany | 22,400 | | Sales, application engineering, customer service, and warehousing | Milan, Italy | 12,900 | | Sales, application engineering, customer service, and warehousing | Venlo, the Netherlands | 9,700 | | Sales, application engineering, customer service, and warehousing | Toh Guan, Singapore | 5,600 | | Sales, application engineering, customer service, and warehousing | Shanghai, Qingdao and Kunshan, China | 23,700 | | Sales, application engineering, customer service, and warehousing | Chennai and Pune, India | 16,700 | | Sales, application engineering, customer service, and warehousing | Liegnitz, Poland | 1,000 | | Sales, application engineering, customer service, and warehousing | Grand Rapids, Michigan, U.S. | 3,700 | | Sales, application engineering, customer service, and warehousing | Los Angeles, California, U.S. | 11,400 | | Sales, application engineering, customer service, and warehousing | Stritez, the Czech Republic | 5,500 | - The Indianapolis facility is owned, while all other facilities are leased with terms expiring between April 2023 and January 2029[161] Item 3. LEGAL PROCEEDINGS Hurco is periodically involved in various claims and lawsuits arising in the normal course of business. The company accrues minimum liabilities for known claims and maintains insurance policies, expecting that these matters, individually or in aggregate, will not have a material adverse effect on its financial position or results of operations - The company is involved in routine claims and lawsuits, accruing minimum liabilities for known claims[163] - Hurco maintains insurance policies and expects that these claims will not have a material adverse effect on its consolidated financial position or results of operations, believing ultimate resolution will not exceed insurance coverage[163] Item 4. MINE SAFETY DISCLOSURES This item is not applicable to Hurco Companies, Inc - There are no mine safety disclosures applicable to the company[164] Information about our Executive Officers This section provides a summary of Hurco's executive officers as of October 31, 2022, detailing their age, current positions, and tenure with the company. Executive officers are appointed annually by the Board of Directors, and there are no family relationships among them or with Board members - Executive officers are appointed annually by the Board of Directors, with no family relationships among them or with Board members[165] Executive Officers as of October 31, 2022 | Name | Age | Position(s) with the Company | | :--- | :--- | :--- | | Michael Doar | 67 | Executive Chairman of the Board | | Gregory S. Volovic | 58 | Director, President, and Chief Executive Officer | | Sonja K. McClelland | 51 | Executive Vice President, Treasurer and Chief Financial Officer | | HaiQuynh Jamison | 44 | Corporate Controller and Principal Accounting Officer | | Jonathon D. Wright | 40 | General Counsel and Corporate Secretary | - Michael Doar has been with Hurco since November 2001, serving as Executive Chairman since March 2021. Gregory S. Volovic joined in March 2005, becoming President in March 2013 and CEO in March 2021. Sonja K. McClelland has been with the company since September 1996, appointed Executive Vice President, Treasurer, and CFO in 2017. HaiQuynh Jamison joined in March 2006, becoming Corporate Controller and Principal Accounting Officer in March 2021. Jonathon D. Wright has served as General Counsel since 2016 and Corporate Secretary since March 2021[166][167][169][170][171] PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Hurco's common stock is traded on the Nasdaq Global Select Market under the symbol "HURC". As of December 31, 2022, there were 110 holders of record. The company initiated cash dividends in Q3 fiscal year 2013 and expects to continue quarterly dividends, subject to Board discretion and limitations imposed by its U.S. credit agreement - Hurco's common stock is traded on the Nasdaq Global Select Market under the symbol "HURC"[172] - As of December 31, 2022, there were 110 holders of record of the company's common stock[173] - The company began declaring cash dividends in the third quarter of fiscal year 2013 and expects to continue quarterly dividends, subject to Board discretion and factors such as results of operations, financial condition, capital requirements, and regulatory/contractual restrictions[174] - Dividend payments are limited by the company's U.S. credit agreement[175] Item 6. RESERVED This item is reserved and contains no information Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides an in-depth analysis of Hurco's financial condition, liquidity, capital resources, and results of operations, focusing on fiscal year 2022 compared to 2021. The company, a global industrial technology firm, saw increased sales and net income in FY2022, driven by inflationary price increases and higher-performance machine shipments, despite unfavorable currency impacts and COVID-19 related disruptions in some regions. Orders and backlog decreased year-over-year. Liquidity decreased due to inventory increases, but the company maintains adequate borrowing capacity and a balanced capital allocation strategy, including share repurchases and dividends. Critical accounting estimates, such as goodwill impairment, inventory reserves, and income taxes, involve significant judgment Executive Overview This overview details Hurco's business model, geographic revenue distribution, product portfolio, and exposure to currency fluctuations and COVID-19 impacts - Hurco is an international industrial technology company that designs, manufactures, and sells computerized (CNC) machine tools, primarily vertical machining centers and turning centers, to the metal cutting industry[179] - Approximately 50% of FY2022 revenues were from Europe, where higher-performance VMX series machines are typically sold, and 12% from Asia Pacific, a region with greater pricing pressures[182] - The company's three main brands (Hurco, Milltronics, Takumi) and other non-Hurco branded products, automation solutions (ProCobots), and machine tool components (LCM) are responsible for the vast majority of revenue[183] - Sales to foreign customers are denominated in local currencies (Euro, Pound Sterling, Chinese Yuan), and product costs are primarily in New Taiwan Dollar and U.S. Dollar, exposing the company to currency exchange rate fluctuations, which are mitigated by derivative instruments[185][186] - The COVID-19 pandemic caused significant disruptions in FY2020 and FY2021, and while less impactful in FY2022, intermittent lockdowns (e.g., in China) continue to affect business, leading to supply chain delays, increased costs, and inflationary pressures[188][189] Results of Operations This section analyzes Hurco's sales, gross profit, operating income, and net income performance for fiscal year 2022, highlighting key drivers and regional variations Selected Consolidated Statements of Operations Data (as % of Revenues and Year-to-Year % Change) | Metric | 2022 (% of Rev) | 2021 (% of Rev) | 2020 (% of Rev) | '22 vs. '21 % Change | '21 vs. '20 % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and service fees | 100% | 100% | 100% | 7% | 38% | | Gross profit | 26% | 24% | 21% | 15% | 54% | | Selling, general and administrative expenses | 21% | 20% | 24% | 12% | 11% | | Goodwill impairment | — | — | 3% | — | (100)% | | Operating income (loss) | 5% | 4% | (6)% | 24% | 204% | | Net income (loss) | 3% | 3% | (4)% | 22% | 208% | - Sales and service fees for fiscal year 2022 increased by $15.6 million (7%) to $250.8 million, despite an unfavorable currency impact of $13.9 million (6%)[194] Net Sales and Service Fees by Geographic Region (in thousands) | Region | 2022 Sales | 2022 % of Total | 2021 Sales | 2021 % of Total | Increase/Decrease (Amount) | Increase/Decrease (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Americas | $95,964 | 38% | $86,301 | 37% | $9,663 | 11% | | Europe | $126,050 | 50% | $117,522 | 50% | $8,528 | 7% | | Asia Pacific | $28,800 | 12% | $31,372 | 13% | $(2,572) | (8)% | | Total | $250,814 | 100% | $235,195 | 100% | $15,619 | 7% | - Americas sales increased 11% due to inflationary price increases and higher shipments of VM and five-axis Hurco machines. European sales increased 7% (despite an 11% unfavorable currency impact) from price increases and higher shipments of Hurco, Takumi, and Milltronics machines, plus LCM components. Asia Pacific sales decreased 8% (including a 3% unfavorable currency impact) due to reduced shipments in China and Southeast Asia from COVID-19 lockdowns, partially offset by India[195][196][197] Net Sales and Service Fees by Product Category (in thousands) | Product Category | 2022 Sales | 2022 % of Total | 2021 Sales | 2021 % of Total | Increase/Decrease (Amount) | Increase/Decrease (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Computerized Machine Tools | $211,804 | 85% | $198,602 | 85% | $13,202 | 7% | | Computer Control Systems and Software | $2,634 | 1% | $2,528 | 1% | $106 | 4% | | Service Parts | $28,219 | 11% | $26,425 | 11% | $1,794 | 7% | | Service Fees | $8,157 | 3% | $7,640 | 3% | $517 | 7% | | Total | $250,814 | 100% | $235,195 | 100% | $15,619 | 7% | - Sales of computerized machine tools and computer control systems/software increased by 7% and 4% respectively, driven by inflationary price increases and higher shipments of VM and five-axis Hurco machines in North America and Europe. Service parts and fees also increased by 7% each[200] - Orders for fiscal year 2022 decreased by $24.5 million (9%) to $240.9 million, including an unfavorable currency impact of $14.3 million (5%). Backlog at October 31, 2022, decreased to $44.8 million from $60.0 million in 2021[201][205] - Gross profit increased to $64.5 million (26% of sales) in FY2022 from $56.2 million (24% of sales) in FY2021, benefiting from increased sales of higher-performance machines, improved leverage of fixed overhead, and inflationary price increases[206] - Selling, general, and administrative expenses increased to $51.7 million (21% of sales) in FY2022 from $46.0 million (20% of sales) in FY2021, primarily due to higher marketing, tradeshow, sales commission, and employee benefit costs, partially offset by a favorable currency impact[207] - Operating income increased to $12.7 million (5% of sales) in FY2022 from $10.2 million (4% of sales) in FY2021, driven by increased sales of higher-performance machines and inflationary price increases[208] - Net income for fiscal year 2022 was $8.2 million ($1.23 per diluted share), up from $6.8 million ($1.01 per diluted share) in FY2021, primarily due to increased sales of higher-performance machines and inflationary price increases[212] Liquidity and Capital Resources This section examines Hurco's cash position, working capital, capital expenditures, share repurchase programs, dividends, and credit facilities, affirming adequate liquidity Cash and Working Capital (in thousands) | Metric | October 31, 2022 | October 31, 2021 | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $63,922 | $84,063 | $(20,141) | -23.96% | | Working Capital | $194,700 | $208,700 | $(14,000) | -6.71% | | Inventories, net | $156,200 | $148,200 | +$8,000 | +5.40% | - The decrease in cash and cash equivalents was primarily a result of increases in inventories. Approximately 31% of cash and cash equivalents are held in the U.S., with the balance in foreign operations[213] - Capital expenditures were $2.2 million in FY2022, primarily for software development, factory equipment, and general software/equipment, funded by cash flows from operations[216] - The Board approved a $7.0 million share repurchase program in March 2021, under which $2.9 million in shares were repurchased in FY2022. An additional $25.0 million share repurchase program was approved in January 2023[217][218] - Cash dividends of $3.9 million were paid to shareholders in FY2022[219] - Hurco maintains a $40.0 million unsecured revolving credit and letter of credit facility (2018 Credit Agreement) with Bank of America, N.A., maturing December 31, 2023, and other uncommitted revolving credit facilities in Taiwan, China, and Germany[220][223][224] - As of October 31, 2022, there were no borrowings under any credit facilities, and $50.6 million was available for borrowing. The company was in compliance with all covenants, including maintaining minimum working capital of $125.0 million and tangible net worth of $176.5 million[222][225] - The company's international cash pooling strategy and borrowing capacity provide adequate liquidity to fund global operations and strategic plans, including product innovation, acquisitions, market penetration, dividends, and stock repurchases[226][227] Contractual Obligations and Commitments This section details Hurco's contractual obligations, including operating leases and tax liabilities, and outlines estimated capital spending for the upcoming fiscal year Contractual Obligations and Commitments as of October 31, 2022 (in thousands) | Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $9,092 | $4,132 | $3,477 | $986 | $497 | | Accrued and deferred taxes and credits | $5,444 | $38 | $802 | $509 | $4,095 | | Total | $14,536 | $4,170 | $4,279 | $1,495 | $4,592 | - The company has no material non-cancelable commitments for procurement of materials and services, nor any minimum purchase or "take-or-pay" agreements[228] - Capital spending for fiscal year 2023 is estimated at $3.7 million, to be funded by cash on hand and cash generated from operations[229] Off Balance Sheet Arrangements Hurco's off-balance sheet arrangements primarily consist of third-party payment guarantees for customer financing, not expected to materially impact financial results - As of October 31, 2022, Hurco had nine outstanding third-party payment guarantees totaling approximately $0.7 million, related to customer financing for machine sales[231] - These guarantees are not expected to have a material adverse effect, as the company retains title to machines until payment is complete, allowing for recovery in case of customer default[231] Critical Accounting Estimates This section outlines Hurco's critical accounting estimates, which involve significant judgment and can materially affect financial reporting - Critical accounting estimates involve significant subjectivity and judgment, and changes could materially impact financial condition or operating results[233][234] - Key estimates include goodwill and intangible assets impairment (no goodwill as of Oct 31, 2022), impairment of long-lived assets, inventories and related reserves, income taxes (deferred tax assets/liabilities, valuation allowances), capitalized software development costs, derivative financial instruments, and stock compensation[235][236][237][238][239][240] Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Hurco is exposed to market risks, primarily foreign currency exchange risk, due to its extensive international operations. While interest on credit agreements is tied to floating rates, there were no outstanding borrowings at fiscal year-end 2022. The company actively manages foreign currency risk through forward exchange contracts to hedge cash flow risks from inter-company sales/purchases and net investments in foreign assets, primarily involving the Euro, Pound Sterling, and New Taiwan Dollar - Interest on borrowings under bank credit agreements is tied to prevailing domestic and foreign interest rates; however, no borrowings were outstanding at October 31, 2022[242] - Hurco is exposed to significant foreign currency exchange risk, as 62% of FY2022 revenues were from customers outside the Americas, with sales invoiced in foreign currencies (Euro, Pound Sterling, Chinese Yuan) and purchases made in New Taiwan Dollar and Euro[243][244] - The company uses foreign currency forward exchange contracts to hedge cash flow risk related to forecasted inter-company sales and purchases (Euro, Pound Sterling, New Taiwan Dollar) and to protect against fluctuations on inter-company receivables, payables, and loans[245] Forward Contracts Designated as Cash Flow Hedges (as of October 31, 2022, in thousands) | Currency | Notional Amount (Foreign Currency) | Weighted Avg. Forward Rate | Contract Amount at Forward Rates (U.S. Dollars) | Maturity Dates | | :--- | :--- | :--- | :--- | :--- | | Euro (Sale) | 18,750 | 1.0689 | $20,041 | Nov 2022 - Oct 2023 | | Sterling (Sale) | 5,250 | 1.2342 | $6,479 | Nov 2022 - Oct 2023 | | New Taiwan Dollar (Purchase) | 830,000 | 28.7542* | $28,865 | Nov 2022 - Oct 2023 | New Taiwan Dollars per U.S. Dollar Forward Contracts Not Designated as Hedges (as of October 31, 2022, in thousands) | Currency | Notional Amount (Foreign Currency) | Weighted Avg. Forward Rate | Contract Amount at Forward Rates (U.S. Dollars) | Maturity Dates | | :--- | :--- | :--- | :--- | :--- | | Euro (Sale) | 20,056 | 0.9981 | $20,018 | Nov 2022 - Dec 2022 | | Sterling (Sale) | 999 | 1.1452 | $1,145 | Nov 2022 | | New Taiwan Dollar (Purchase) | 708,811 | 31.1668 | $22,743 | Nov 2022 - Feb 2023 | *New Taiwan Dollars per U.S. Dollar - A forward contract with a notional amount of €3.0 million was designated as a hedge of net investment in Euro-denominated assets, with a realized gain of $0.9 million and an unrealized gain of $0.4 million (net of tax) recorded as cumulative translation adjustments as of October 31, 2022[247] Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section includes management's report on internal control over financial reporting, the independent auditor's report, the consolidated financial statements, and detailed notes to these statements. Management affirmed the effectiveness of internal controls as of October 31, 2022. RSM US LLP provided an unqualified opinion on both the financial statements and internal controls, highlighting accounting for income taxes (deferred tax assets and liabilities) as a critical audit matter. The consolidated financial statements provide a comprehensive view of the company's financial performance and position, with the notes offering extensive disclosures on accounting policies, business operations, inventories, credit facilities, financial instruments, income taxes, employee benefits, stock-based compensation, related party transactions, contingencies, warranties, leases, and segment information Management's Annual Report on Internal Control over Financial Reporting Management affirmed the effectiveness of Hurco's internal control over financial reporting as of October 31, 2022, with independent auditor attestation - Management assessed the effectiveness of the company's internal control over financial reporting as of October 31, 2022, based on the COSO (2013 framework) criteria[251] - Management concluded that the company's internal control over financial reporting was effective as of October 31, 2022[253] - RSM US LLP, the independent registered public accounting firm, also audited and issued an attestation report on the effectiveness of internal control over financial reporting[253] Report of Independent Registered Public Accounting Firm RSM US LLP issued an unqualified opinion on Hurco's financial statements and internal controls, identifying income tax accounting as a critical audit matter - RSM US LLP issued an unqualified opinion on Hurco's consolidated financial statements for the three years ended October 31, 2022, and on the effectiveness of its internal control over financial reporting as of October 31, 2022[257] - The audit was conducted in accordance with PCAOB standards, assessing risks of material misstatement and evaluating accounting principles and estimates[259][261] - A critical audit matter identified was 'Accounting for Income Taxes – Deferred Tax Assets and Liabilities', due to the complexity of tax regulations across multiple jurisdictions and the subjectivity in evaluating the realizability of deferred tax assets[266][267] Consolidated Financial Statements This section presents Hurco's consolidated statements of operations, balance sheets, and cash flows for the reported fiscal years Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Sales and service fees | $250,814 | $235,195 | $170,627 | | Gross profit | $64,478 | $56,249 | $36,457 | | Operating income (loss) | $12,747 | $10,248 | $(9,862) | | Net income (loss) | $8,226 | $6,764 | $(6,247) | | Diluted EPS | $1.23 | $1.01 | $(0.93) | | Dividends paid per share | $0.59 | $0.55 | $0.51 | Consolidated Balance Sheets (as of October 31, in thousands) | Asset/Liability/Equity | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $63,922 | $84,063 | | Total current assets | $268,069 | $289,870 | | Total assets | $306,237 | $332,935 | | Total current liabilities | $73,336 | $81,170 | | Total liabilities | $83,593 | $94,516 | | Total shareholders' equity | $222,644 | $238,419 | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | $(3,966) | $32,175 | $10,932 | | Net cash provided by (used for) investing activities | $(2,092) | $(3,345) | $(1,179) | | Net cash provided by (used for) financing activities | $(6,903) | $(3,521) | $(10,851) | | Net increase (decrease) in cash and cash equivalents | $(20,141) | $26,204 | $916 | | Cash and cash equivalents at end of period | $63,922 | $84,063 | $57,859 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on Hurco's accounting policies, financial instruments, income taxes, and segment information, offering comprehensive financial context - The notes detail significant accounting policies including consolidation, cash flows, foreign currency translation, hedging (cash flow and net investment hedges), revenue recognition, product warranty, research and development costs, software development costs, goodwill and intangible assets, impairment of long-lived assets, earnings per share, income taxes, and stock compensation[282][283][284][285][286][287][288][289][290][291][292][293][294][295][297][298][299][300][301][303][304][305][306][308][309][310][311][312][313][314][316][317][318][319][320][321][322][323] - Inventories, net were $156.2 million at October 31, 2022, up from $148.2 million in 2021, with finished goods consigned to distributors at $10.9 million[331] - The company had no borrowings under its credit facilities as of October 31, 2022, with $50.6 million available borrowing capacity[336] - Deferred tax assets were $9.8 million (offset by a $1.8 million valuation allowance) and deferred tax liabilities were $4.7 million as of October 31, 2022. Net operating loss carryforwards totaled $5.8 million[266][351][353] - Stock-based compensation expense was $2.7 million in FY2022, with $3.2 million of unrecognized cost expected to be recognized by Q1 FY2025[386] - Related party transactions include purchases of controls from Hurco Automation, Ltd. (35% owned affiliate) totaling $10.5 million in FY2022[387] - Product warranty reserve was $1.4 million at October 31, 2022, decreasing from $1.5 million in 2021 primarily due to foreign currency translation impact[392][393] - Operating lease expense was $5.1 million in FY2022, with a weighted-average remaining lease term of 3.1 years and a weighted-average discount rate of 2.1%[398][399] Quarterly Financial Information (Unaudited, in thousands, except per share data) | Metric | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | | :--- | :--- | :--- | :--- | :--- | | Sales and service fees | $66,887 | $62,825 | $57,640 | $63,462 | | Gross profit | $16,907 | $15,602 | $14,399 | $17,570 | | Gross profit margin | 25% | 25% | 25% | 28% | | Operating income (loss) | $5,210 | $3,087 | $1,752 | $2,698 | | Net income (loss) | $3,535 | $2,029 | $1,238 | $1,424 | | Diluted EPS | $0.53 | $0.30 | $0.18 | $0.22 | - Hurco operates in a single segment: industrial automation equipment. In FY2022, 62% of revenues were from customers outside the Americas[402][403] Net Sales and Service Fees by Geographic Area (in thousands) | Geographic Area | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | United States of America | $92,050 | $83,218 | $64,500 | | Canada | $3,996 | $2,636 | $1,621 | | Central & South Americas | $1,279 | $989 | $1,543 | | Total Americas | $97,325 | $86,843 | $67,664 | | Germany | $42,026 | $37,584 | $24,993 | | United Kingdom | $26,629 | $30,314 | $19,679 | | Italy | $16,499 | $12,718 | $8,599 | | France | $14,291 | $14,252 | $10,797 | | Other Europe | $24,437 | $21,467 | $14,034 | | Total Europe | $123,882 | $116,335 | $78,102 | | China | $10,293 | $14,284 | $14,225 | | Other Asia Pacific | $18,553 | $16,047 | $10,048 | | Total Asia Pacific | $28,846 | $30,331 | $24,273 | | Other Foreign | $761 | $1,686 | $588 | | Grand Total | $250,814 | $235,195 | $170,627 | - Recently adopted accounting pronouncements include ASU No. 2019-12 (Income Taxes) and ASU No. 2020-04 (Reference Rate Reform), neither of which had a significant effect on accounting policies or financial statements[408][409][410] Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with the company's independent accountants on accounting and financial disclosure matters - There are no changes in or disagreements with accountants on accounting and financial disclosure[411] Item 9A. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the effectiveness of Hurco's disclosure controls and procedures as of October 31, 2022, concluding they were effective. No material changes in internal control over financial reporting occurred during the fourth quarter of fiscal year 2022 - Management concluded that disclosure controls and procedures were effective as of October 31, 2022[412] - No changes in internal control over financial reporting occurred during the fourth quarter of fiscal year 2022 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[413] Item 9B. OTHER INFORMATION During the fourth quarter of fiscal year 2022, the Audit Committee did not engage the independent registered public accounting firm for any new non-audit services. The section also includes a performance graph comparing Hurco's cumulative five-year total return against the Russell 2000 index, the Nasdaq Global Select index, and a customized peer group - The Audit Committee did not engage the independent registered public accounting firm for any new non-audit services during the fourth quarter of fiscal year 2022[415] Cumulative Five-Year Total Return (October 31, 2017 - October 31, 2022) | Index/Company | 10/31/17 | 10/31/18 | 10/31/19 | 10/31/20 | 10/31/21 | 10/31/22 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Hurco Companies, Inc. | 100.00 | 91.92 | 79.53 | 69.46 | 76.83 | 56.03 | | Russell 2000 | 100.00 | 101.85 | 106.85 | 106.70 | 160.91 | 131.07 | | Nasdaq Global Select | 100.00 | 105.90 | 124.90 | 169.56 | 237.87 | 165.32 | | Peer Group | 100.00 | 109.79 | 107.62 | 115.12 | 156.51 | 121.16 | Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to Hurco Companies, Inc - This item is not applicable[419] PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders, with the exception of executive officer information already provided in Part I of this report - Information is incorporated by reference from the 2023 proxy statement, except for executive officer information included in Part I[420] Item 11. EXECUTIVE COMPENSATION The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - Information is incorporated by reference from the 2023 proxy statement[421] Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - Information is incorporated by reference from the 2023 proxy statement[422] Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - Information is incorporated by reference from the 2023 proxy statement[423] Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of shareholders - Information is incorporated by reference from the 2023 proxy statement[424] PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists the financial statements included in Item 8, provides Schedule II – Valuation and Qualifying Accounts and Reserves, and details the exhibits filed with or incorporated by reference into the report. Schedule II presents the changes in allowance for doubtful accounts and income tax valuation allowance for the past three fiscal years - The section includes a list of consolidated financial statements found in Item 8[426] Schedule II – Valuation and Qualifying Accounts and Reserves (in thousands) | Description | Balance at Beginning of Period | Charged to/ (Recovered from) Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | | :--- | :--- | :--- | :--- | :--- | :--- | | Allowance for doubtful accounts: | | | | | | | October 31, 2022 | $1,645 | $(74) | $— | $85 (1) | $1,486 | | October 31, 2021 | $1,401 | $268 | $— | $24 (1) | $1,645 | | October 31, 2020 | $891 | $575 | $— | $65 (1) | $1,401 | | Income tax valuation allowance: | | | | | | | October 31, 2022 | $1,871 | $502 | $— | $619 | $1,754 | | October 31, 2021 | $2,164 | $49 | $— | $342 | $1,871 | | October 31, 2020 | $2,227 | $50 | $— | $113 | $2,164 | (1) Receivable write–offs. - An index of exhibits filed with the report (e.g., Subsidiaries, Consents, Certifications, XBRL data) and exhibits incorporated by reference (e.g., Articles of Incorporation, By-Laws, Equity Incentive Plans, Employment Agreements, Credit Agreements) is provided[431][432][435] Item 16. FORM 10-K SUMMARY This item is not applicable and contains no information - This item is not applicable[433] SIGNATURES This section contains the official signatures of Hurco Companies, Inc.'s authorized officers and directors, affirming the report's submission - The report is duly signed on behalf of Hurco Companies, Inc. by its authorized officers and directors, including the Chief Executive Officer, Chief Financial Officer, Corporate Controller, Executive Chairman of the Board, and other Directors, as of January 6, 2023[437][439][440]