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HURCO COMPANIES INC - Quarter Report: 2009 July (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)
 
x
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 31, 2009 or
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________.

Commission File No. 0-9143

HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)

Indiana
 
35-1150732
(State or other jurisdiction of
 
(I.R.S. Employer Identification Number)
incorporation or organization)
   
     
One Technology Way
   
Indianapolis, Indiana
 
46268
(Address of principal executive offices)
 
(Zip code)

Registrant’s telephone number, including area code      (317) 293-5309

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for the past 90 days:
Yes x  No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes ¨  No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨  No x

The number of shares of the Registrant's common stock outstanding as of September 1, 2009 was 6,440,851.

 
 

 

HURCO COMPANIES, INC.
July 2009 Form 10-Q Quarterly Report

Table of Contents

Part I - Financial Information

Item 1.
Financial Statements
 
     
 
Condensed Consolidated Statements of Operations
Three and nine months ended July 31, 2009 and 2008
3
     
 
Condensed Consolidated Balance Sheets
As of July 31, 2009 and October 31, 2008
4
     
 
Condensed Consolidated Statements of Cash Flows
Three and nine months ended July 31, 2009 and 2008
5
     
 
Condensed Consolidated Statements of Changes in Shareholders' Equity
Nine months ended July 31, 2009 and 2008
6
     
 
Notes to Condensed Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
15
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
     
Item 4.
Controls and Procedures
23
     
Part II - Other Information
     
Item 1.
Legal Proceedings
24
     
Item 1A.
Risk Factors
24
     
Item 5.
Other Information
24
     
Item 6.
Exhibits
25
     
Signatures
26

 
2

 

PART I - FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

   
Three Months Ended
   
Nine Months Ended
 
   
July 31
   
July 31
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
                         
Sales and service fees
  $ 19,039     $ 57,318     $ 67,835     $ 176,526  
                                 
Cost of sales and service
    13,788       36,439       48,822       110,459  
                                 
Gross profit
    5,251       20,879       19,013       66,067  
                                 
Selling, general and administrative expenses
    7,200       11,829       22,747       35,881  
                                 
Operating income (loss)
    (1,949 )     9,050       (3,734 )     30,186  
                                 
Interest expense
    6       25       33       46  
                                 
Interest income
    36       154       185       436  
                                 
Investment income
    3       72       32       363  
                                 
Other expense (income), net
    (133 )     471       (1,828 )     1,311  
                                 
Income (loss) before taxes
    (1,783 )     8,780       (1,722 )     29,628  
                                 
Provision (benefit) for income taxes
    (552 )     2,954       (564 )     10,530  
                                 
Net income (loss)
  $ (1,231 )   $ 5,826     $ (1,158 )   $ 19,098  
                                 
Earnings (loss) per common share
                               
                                 
Basic
  $ (0.19 )   $ 0.91     $ (0.18 )   $ 2.98  
Diluted
  $ (0.19 )   $ 0.90     $ (0.18 )   $ 2.96  
                                 
Weighted average common shares outstanding
                               
                                 
Basic
    6,434       6,414       6,425       6,414  
Diluted
    6,434       6,439       6,425       6,445  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
3

 

HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)

   
July 31
   
October 31
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 26,696     $ 26,394  
Short-term investments
          6,674  
Accounts receivable, net
    13,078       31,952  
Inventories
    65,284       66,368  
Deferred income taxes
    8,947       5,444  
Derivative assets
    161       12,463  
Other
    3,606       2,017  
      117,772       151,312  
                 
Property and equipment:
               
Land
    782       782  
Building
    7,127       7,127  
Machinery and equipment
    15,845       14,885  
Leasehold improvements
    1,754       1,765  
      25,508       24,559  
Less accumulated depreciation and amortization
    (12,043 )     (10,961 )
      13,465       13,598  
Non-current assets:
               
Software development costs, less accumulated amortization
    6,265       5,711  
Other assets
    7,365       6,823  
    $ 144,867     $ 177,444  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 7,340     $ 28,303  
Derivative liabilities
    3,522       2,692  
Accrued expenses
    9,727       20,134  
      20,589       51,129  
                 
Non-current liabilities:
               
Deferred income taxes
    2,071       2,056  
Deferred credits and other obligations
    916       782  
Total liabilities
    23,576       53,967  
                 
Shareholders’ equity:
               
Preferred stock: no par value per share; 1,000,000 shares authorized; no shares issued
           
Common stock:  no par value; $.10 stated value per share; 13,250,000 shares authorized, and 6,440,851 and 6,420,851 shares issued and outstanding, respectively
    644       642  
Additional paid-in capital
    51,917       51,690  
Retained earnings
    70,731       71,889  
Accumulated other comprehensive loss
    (2,001 )     (744 )
Total shareholders’ equity
    121,291       123,477  
    $ 144,867     $ 177,444  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
4

 

HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

   
Three Months Ended
   
Nine Months Ended
 
   
July 31
   
July 31
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:
                       
Net income (loss)
  $ (1,231 )   $ 5,826     $ (1,158 )   $ 19,098  
Adjustments to reconcile net income (loss) to Net cash provided by (used for) operating activities:
                               
Provision for doubtful accounts
    329       (22 )     845       (163 )
Deferred income tax provision
    217       (310 )     (1,029 )     (956 )
Equity in (income) loss of affiliates
    125       (40 )     213       (11 )
Foreign currency gain (loss)
    (4,366 )     104       (5,227 )     (3,896 )
Unrealized gain (loss) on derivatives
    1,232       (800 )     5,248       (675 )
Depreciation and amortization
    846       777       2,451       2,190  
Stock-based compensation
    72       364       186       478  
Change in assets and liabilities:
                               
(Increase) decrease in accounts receivable
    3,442       3,742       19,337       (2,541 )
(Increase) decrease in inventories
    2,905       (6,143 )     6,405       (10,290 )
Decrease in accounts payable
    (3,672 )     (826 )     (21,185 )     (1,559 )
Increase (decrease) in accrued expenses
    (1,925 )     2,144       (11,231 )     (1,826 )
Net change in derivative assets and liabilities
    (153 )     1,051       3,502       999  
Other
    874       (311 )     (2,065 )     (275 )
Net cash provided by (used for) operating activities
    (1,305 )     5,556       (3,708 )     573  
                                 
Cash flows from investing activities:
                               
Proceeds from sale of property and equipment
    24             245       12  
Purchase of property and equipment
    (169 )     (1,306 )     (1,497 )     (3,061 )
Purchase of investments
                      (9,100 )
Sale of investments
          1,725       6,674       12,075  
Software development costs
    (472 )     (236 )     (1,463 )     (395 )
Other investments
    (7 )     (334 )     (901 )     (73 )
Net cash provided by (used for) investing activities
    (624 )     (151 )     3,058       (542 )
                                 
Cash flows from financing activities:
                               
Tax benefit from exercise of stock options
                      36  
Proceeds from exercise of common stock options
    43             43       151  
Net cash provided by financing activities
    43             43       187  
                                 
Effect of exchange rate changes on cash
    732       34       909       1,070  
                                 
Net increase (decrease) in cash and cash equivalents
    (1,154 )     5,439       302       1,288  
                                 
Cash and cash equivalents at beginning of period
    27,850       25,609       26,394       29,760  
                                 
Cash and cash equivalents at end of period
  $ 26,696     $ 31,048     $ 26,696     $ 31,048  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
5

 

HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended July 31, 2009 and 2008

(In thousands, except
Shares Issued and Outstanding)
 
Common Stock
   
Additional
         
Accumulated
Other
Comprehensive
       
   
Shares Issued
& Outstanding
   
Amount
   
Paid-In
Capital
   
Retained
Earnings
   
Income
(Loss)
   
Total
 
                                     
Balances, October 31, 2007
   
6,392,220
   
$
639
   
$
50,971
   
$
49,369
   
$
(3,376
)
 
$
97,603
 
                                                 
Net income
   
     
     
     
19,098
     
     
19,098
 
                                                 
Translation of foreign currency financial statements
   
     
 —
     
     
     
 2,261
     
 2,261
 
                                                 
Unrealized loss on derivative instruments, net of tax
   
     
 —
     
     
     
(483
)
   
(483
)
                                                 
Unrealized loss on investments, net of tax
   
     
     
     
     
(202
)
   
(202
)
                                                 
Comprehensive income
                                           
20,674
 
                                                 
Exercise of common stock options
   
28,631
     
3
     
148
     
     
     
151
 
                                                 
Tax benefit from exercise of stock options
   
     
     
36
     
     
     
36
 
                                                 
Stock-based compensation
   
     
     
478
     
     
     
478
 
                                                 
Balances, July 31, 2008 (Unaudited)
   
6,420,851
   
$
642
   
$
51,633
   
$
68,467
   
$
(1,800
)
 
$
118,942
 
                                                 
Balances, October 31, 2008
   
6,420,851
   
$
642
   
$
51,690
   
$
71,889
   
$
(744
)
 
$
123,477
 
                                                 
Net loss
   
     
     
     
(1,158
)
   
     
(1,158
)
                                                 
Translation of foreign currency financial statements
   
     
 —
     
     
     
 2,346
     
 2,346
 
                                                 
Unrealized loss on derivative instruments, net of tax
   
     
 —
     
     
     
(3,805
)
   
(3,805
)
                                                 
Reversal of unrealized loss on investments, net of tax
   
     
  —
     
     
     
   202
     
   202
 
                                                 
Comprehensive loss
                                           
(2,415
)
                                                 
Exercise of common stock options
   
20,000
     
2
     
41
     
     
     
43
 
                                                 
Stock-based compensation
   
     
     
186
     
     
     
186
 
                                                 
Balances, July 31, 2009 (Unaudited)
   
6,440,851
   
$
644
   
$
51,917
   
$
70,731
   
$
(2,001
)
 
$
121,291
 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 
6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
GENERAL

The unaudited Condensed Consolidated Financial Statements include the accounts of Hurco Companies, Inc. and its consolidated subsidiaries.  As used in this report, and unless the context indicates otherwise, the terms “we”, “us”, “our” and similar language refer to Hurco Companies, Inc. and its consolidated subsidiaries. We design and produce computerized machine tools, interactive computer control systems and software for sale through our distribution network to the worldwide metal cutting market. We also provide software options, computer control upgrades, accessories and replacement parts for our products, as well as customer service and training support.

The condensed financial information as of July 31, 2009 and for the three and nine months ended July 31, 2009 and July 31, 2008 is unaudited; however, in our opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows at the end of the interim periods.  We suggest that you read these condensed consolidated financial statements in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2008.

In May 2009, we adopted FASB Statement No. 165, “Subsequent Events” (“SFAS 165”), which is effective for interim and annual periods ending after June 15, 2009.  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The statement introduces new terminology but is based on the same principles that previously existed in the auditing standards.  SFAS 165 requires disclosure of the date through which we have evaluated subsequent events and whether that date represents the date the financial statements were issued or the date the financial statements were available to be issued.  We issued our financial statements by filing with the Securities Exchange Commission on September 4, 2009, for the third quarter ended July 31, 2009 and we have evaluated subsequent events through the time of the filing.

2.
SHORT-TERM INVESTMENTS

As of October 31, 2008 we held $6.7 million face amount of auction rate securities, which represented indirect interest in student loan obligations and municipal bonds.  These securities were intended to provide liquidity via an auction process that would reset the applicable interest rate at predetermined intervals, allowing a holder to either roll over the investment or to sell the securities at par value.  We classified our auction rate securities as “available for sale” in accordance with the provisions of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

During the second quarter of fiscal 2008, we recorded an unrealized loss of $202,000 on our investment in these securities, net of tax, in Accumulated Other Comprehensive Loss, as we had concluded there was a temporary decline in the estimated fair value of the securities.  In the first quarter of fiscal 2009, we sold all of our holdings of auction rate securities at par value and, accordingly, we reversed our previously–recorded unrealized loss on the securities.  As a result, no gain or loss was recognized in our statement of operations for the nine months ended July 31, 2009, on the sale of the securities.

3.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

On February 1, 2009, we adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).  The adoption of SFAS 161 did not have a material impact on our consolidated financial position or results of operations, but does require increased disclosure of our derivative and hedging activities, including how derivative and hedging activities affect our consolidated financial statements.  These disclosures are provided below.

 
7

 

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk.  We manage our exposure to these and other market risks through regular operating and financing activities.  Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk.

We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates.  To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, gross profit and net earnings, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution.  We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Canadian Dollars, Singapore Dollars and New Taiwan Dollars.

We account for derivative instruments designated as hedging instruments in accordance with SFAS 133, and report all derivative instruments as assets or liabilities at fair value on our consolidated balance sheet.

Derivatives Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar).  The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates.  These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative Assets and Derivative Liabilities.  The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in Accumulated Other Comprehensive Loss and recognized as an adjustment to Cost of Sales in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-company sale or purchase being hedged.  The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is reported in Other Income (Expense) immediately.  We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly.   We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.

For forward contracts outstanding as of July 31, 2009, we have obligations to purchase Euros and Pounds Sterling and sell New Taiwan Dollars at set maturity dates ranging from August 2009 through July 2010.  The contract amount at forward rates in U.S. Dollars at July 31, 2009 to purchase Euros and Pounds Sterling was $16.3 million and $1.7 million, respectively.  The contract amount at forward rates in U.S. Dollars to sell New Taiwan Dollars was $11.9 million at July 31, 2009.  At July 31, 2009, we had approximately $25,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated Other Comprehensive Loss.  Of this amount, $552,000 represents unrealized losses, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk.  These deferred losses will be recorded as an adjustment to Cost of Sales in periods through July 2010, in which the corresponding inventory that is the subject of the related hedge contract is sold, as described above.

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries.   To manage this risk, we entered into a forward contract on November 26, 2007 with a notional amount of €3.0 million.  We designated this forward contract as a hedge of our net investment in Euro denominated assets.  We selected the forward method under the guidance of the Derivatives Implementation Group Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of Ineffectiveness in a Net Investment Hedge”. The forward method requires all changes in the fair value of the forward to be reported as a cumulative translation adjustment in Accumulated Other Comprehensive Loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matured on November 25, 2008 and we entered into a new forward contract for the same notional amount that is set to mature in November 2009.  At July 31, 2009, we had $355,000 of realized gains and $245,000 of unrealized losses, net of tax, recorded as cumulative translation adjustments in Accumulated Other Comprehensive Loss related to these forward contracts.

 
8

 

Derivatives Not Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. These derivative instruments are not designated as hedges under SFAS 133 and, as a result, changes in their fair value are reported currently as Other Expense (Income), Net in the Condensed Consolidated Statement of Operations consistent with the transaction gain or loss on the related non-hedged gains and losses.

For forward contracts outstanding as of July 31, 2009, we have obligations to purchase Euros, Pounds Sterling, Canadian Dollars and Singapore Dollars and sell New Taiwan Dollars at set maturity dates ranging from August 2009 through March 2010.  The contract amounts at forward rates in U.S. Dollars at July 31, 2009 to purchase Euros, Pounds Sterling, Canadian Dollars and Singapore Dollars totaled $33.1 million.  The contract amount at forward rates in U.S. Dollars to sell New Taiwan Dollars was $905,000 at July 31, 2009.

Fair Value of Derivative Instruments

We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheet.  As of July 31, 2009 and October 31, 2008, all derivative instruments were recorded at fair value on the balance sheet as follows (in thousands):

   
2009
 
2008
 
   
Balance Sheet
 
Fair
 
Balance Sheet
 
Fair
 
Derivatives
 
Location
 
Value
 
Location
 
Value
 
                   
Designated as Hedging Instruments:
                 
Foreign exchange forward contracts 
 
Derivative assets 
  $
161
 
Derivative assets
 
9,733
 
Foreign exchange forward contracts
 
Derivative liabilities
  $ 1,448  
Derivative liabilities
  $ 2,568  
                       
Not Designated as Hedging Instruments:
                     
Foreign exchange forward contracts
 
Derivative assets
  $  
Derivative assets
  $ 2,730  
Foreign exchange forward contracts
 
Derivative liabilities
  $ 2,074  
Derivative liabilities
  $ 124  

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity and Statements of Operations

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity and Statements of Operations, net of tax during the quarter ended July 31, 2009 and 2008 (in thousands):

Derivatives
 
Amount of Gain
Recognized in Other
Comprehensive Income
 
Location of Gain (Loss)
Reclassified from Other
Comprehensive Income
 
Amount of Gain (Loss)
Reclassified from Other
Comprehensive Income
 
   
7/31/09
   
7/31/08
     
7/31/09
   
7/31/08
 
Designated as Hedging Instruments:
                         
(Effective Portion)
                         
                           
Foreign exchange forward contracts
  $ 134     $ 3,126  
Cost of sales and service
  $ 687     $ (978 )
                                   
(Ineffective Portion)
                                 
Foreign exchange forward contracts
    N/A       N/A  
Other income (expense)
  $ 225     $  

 
9

 

   
Location of Loss
 
Amount of Loss
 
Derivatives
 
Recognized in Operations
 
Recognized in Operations
 
       
7/31/09
   
7/31/08
 
Not Designated as Hedging Instruments:
               
                     
Foreign exchange forward contracts
 
Other income (expense)
  $ (2,485 )   $ (170 )

4.
STOCK OPTIONS

In March 2008, we adopted the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008 Plan”), which allows us to grant awards of stock options, Stock Appreciation Rights settled in stock (SARs), restricted shares, performance shares and performance units.  The 2008 Plan replaced the 1997 Stock Option and Incentive Plan (the “1997 Plan”) which expired in March 2007.  The Compensation Committee of the Board of Directors has authority to determine the officers, directors and key employees who will be granted awards; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements.  We have granted stock options under both plans which are currently outstanding.  No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee may determine at the date of grant.  The total number of shares of our common stock that may be issued as awards under the 2008 Plan is 750,000.  The market value of a share of our common stock, for purposes of the 2008 Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date.

During the first nine months of fiscal 2009 and 2008, we recorded approximately $186,000 and $478,000, respectively, of stock-based compensation expense related to grants under the plans.  As of July 31, 2009, there was approximately $223,000 of total unrecognized stock-based compensation cost that we expect to recognize by the end of fiscal 2014.

During the first nine months of fiscal 2009, options to purchase 20,000 shares were exercised, resulting in cash proceeds of approximately $43,000 and no additional tax benefit, compared to 28,631 shares exercised in the first nine months of the prior year period resulting in cash proceeds of approximately $151,000 and an additional tax benefit of approximately $36,000.

On April 16, 2009, the Compensation Committee granted a total of 21,000 options under the 2008 Plan to three new employees.  The fair value of the options was estimated on the date of grant using a Black-Scholes valuation model with assumptions for expected volatility based on the historical volatility of our common stock, the contractual term of the options and a risk-free interest rate based upon the five-year U.S. Treasury yield as of the date of grant.  The options granted to the employees vest over a five-year period beginning one year from the date of grant.  Based upon the foregoing factors, the grant date fair value of the options was determined to be $8.62 per share.

 
10

 

A summary of stock option activity for the nine-month period ended July 31, 2009, is as follows:

   
Stock
Options
   
Weighted
Average
Exercise
Price
 
             
Outstanding at October 31, 2008
    64,369     $ 20.29  
                 
Options granted
    21,000       14.88  
Options exercised
    20,000       2.15  
Options cancelled
           
                 
Outstanding at July 31, 2009
    65,369     $ 24.11  

The aggregate intrinsic value of exercised stock options was $347,000 for the nine-month period ended July 31, 2009, and $685,000 for the nine-month period ended July 31, 2008. The intrinsic value of a stock option is calculated as the difference between the stock price as of July 31 and the exercise price of the option.

Summarized information about outstanding stock options as of July 31, 2009, that are already vested and those that are expected to vest, as well as stock options that are currently exercisable, is as follows:

   
Options Already
Vested and
Expected to Vest
   
Options Currently
Exercisable
 
             
Number of outstanding options
    65,369       34,369  
                 
Weighted average remaining contractual life (years)
    7.66       6.46  
Weighted average exercise price per share
  $ 24.11     $ 28.99  
                 
Intrinsic value
  $ 106,000     $ 9,000  

5.
EARNINGS PER SHARE

Basic and diluted earnings per common share are based on the weighted average number of shares of our common stock outstanding.  Diluted earnings per common share give effect to shares underlying outstanding stock options using the treasury method.  The dilutive number of shares for the nine months ended July 31, 2009 and 2008 was 0 and 31,000, respectively.

6.
ACCOUNTS RECEIVABLE

Accounts receivable are net of allowances for doubtful accounts of $625,000 as of July 31, 2009 and $678,000 as of October 31, 2008.

7.
INVENTORIES

Inventories, priced at the lower of cost (first-in, first-out method) or market, are summarized below (in thousands):

   
July 31, 2009
   
October 31, 2008
 
Purchased parts and sub-assemblies
  $ 14,171     $ 13,098  
Work-in-process
    3,914       11,243  
Finished goods
    47,199       42,027  
    $ 65,284     $ 66,368  

 
11

 

8.
SEGMENT INFORMATION
 
We operate in a single segment: industrial automation systems. We design and produce interactive computer control systems and software and computerized machine tools for sale through our own distribution network to the worldwide metal-working market. We also provide software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support.

9.
GUARANTEES AND WARRANTIES
 
From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of certain machines to customers that use lease financing.  As of July 31, 2009, we had 56 outstanding third party guarantees totaling approximately $2.5 million. The terms of our subsidiaries’ guarantees are consistent with the underlying customer financing terms. Upon shipment, the customer has the risk of ownership, but does not obtain title until the machine lease is paid in full.  A retention of title clause allows us to recover the machine if the customer defaults on the lease. We accrue for potential liabilities under these guarantees when we believe a loss is probable and can be estimated.  The accrual recorded at July 31, 2009 and October 31, 2008 was not material.
 
We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machine labor and service parts.  We recognize a liability with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the liability. The amount of the warranty liability is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience.  The warranty liability may vary due to changes in sales volume, product mix and sales by region.  A reconciliation of the changes in our warranty liability is as follows (in thousands):

   
Nine months ended
 
   
July 31, 2009
   
July 31, 2008
 
Balance, beginning of period
  $ 2,536     $ 2,449  
Provision for warranties during the period
    611       2,447  
Charges to the reserve
    (1,534 )     (2,020 )
Impact of foreign currency translation
    22       135  
Balance, end of period
  $ 1,635     $ 3,011  

10.
COMPREHENSIVE INCOME

A reconciliation of our net income to comprehensive income was as follows (in thousands):
   
Three months ended
 
   
July 31, 2009
   
July 31, 2008
 
Net income (loss)
  $ (1,231 )   $ 5,826  
Translation of foreign currency financial statements
    2,190       (23 )
Unrealized gain (loss) on derivative instruments, net of tax
    (1,700 )     212  
Comprehensive income (loss)
  $ (741 )   $ 6,015  

11.
DEBT AGREEMENTS

We are party to an unsecured domestic credit agreement that provides us with a $30.0 million unsecured revolving credit facility and a separate letter of credit facility in the amount of 100.0 million New Taiwan Dollars.  We are also party to a Taiwan revolving credit agreement of 100.0 million New Taiwan Dollars, which is an uncommitted demand credit facility. In the event the Taiwan facility is not available, the Taiwan letter of credit facility from the domestic agreement would enable us to provide credit enhancement to a replacement lender in Taiwan. We also have a £1.0 million revolving credit facility in the United Kingdom.
 
The domestic and U.K. facilities mature on December 7, 2012.

 
12

 
 
Borrowings under the domestic facility may be used for general corporate purposes and will bear interest at a LIBOR-based rate or an alternate base rate, in each case, plus an applicable margin determined by reference to the ratio of the interest-bearing debt and obligations and the undrawn face amount of all letters of credit outstanding, on a consolidated basis, to consolidated EBITDA.  The domestic facility contains customary affirmative and negative covenants and events of default for an unsecured commercial bank credit facility, including, among other things, limitations on consolidations, mergers and sales of assets. The financial covenants are a minimum rolling four quarter consolidated net income covenant and a covenant establishing a maximum ratio of consolidated total indebtedness to total indebtedness and net worth.
 
As of July 31, 2009 and October 31, 2008, we had no debt or borrowings outstanding under our domestic or European credit facilities and no outstanding letters of credit issued to non-U.S. suppliers for inventory purchase commitments.  As of July 31, 2009, we had unutilized credit facilities of $36.9 million available for either direct borrowings or commercial letters of credit.
 
12.
INCOME TAXES
 
On November 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109," ("FIN 48").  Our balance of unrecognized tax benefits as of July 31, 2009 and October 31, 2008 was approximately $629,000 and $613,000, respectively, which included accrued interest.
 
We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision.  As of July 31, 2009, the gross amount of accumulated interest accrued and reported in other liabilities was approximately $88,000.
 
We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions.  The statute of limitations will expire between March 2010 and July 2010 with respect to unrecognized tax benefits related to FIN 48.
 
13.
FAIR VALUE

On November 1, 2008, we adopted the provisions of FASB Statement No. 157 “Fair Value Measurements” (“SFAS 157”) as it relates to financial assets and liabilities recorded at fair value on a recurring basis.  Financial Accounting Standards Board Staff Position (FSP) No. 157-2 has delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on  a recurring basis.  We do not expect that the full adoption of SFAS 157 will have a material impact on our consolidated financial statements.

SFAS 157 established a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions.

In accordance with SFAS 157, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of July 31, 2009 (in thousands):
 
   
Level I
   
Level II
   
Level III
   
Total
 
Assets:
                       
Derivative Assets
  $     $ 161     $  —     $ 161  

 
13

 


   
Level I
   
Level II
   
Level III
   
Total
 
Liabilities:
                       
Derivative Liabilities
  $     $ 3,522     $     $ 3,522  

Included as Level II fair value measurements are derivative assets and liabilities related to hedged and unhedged gains and losses on foreign currency forward exchange contracts entered into with a third party.  We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets.

14.
EMPLOYEE BENEFITS

We maintain defined contribution plans in which a majority of our employees participate.  Our contributions to these plans are discretionary.  The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment.  Our contributions to the plans are based upon employee contributions or compensation.  As of April 1, 2009, we suspended our discretionary contributions to the plans for an indefinite period.

 
14

 

Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Hurco Companies, Inc. is an industrial technology company operating in a single segment.  We design and produce computerized machine tools, featuring our proprietary computer control systems and software, for sale through our own distribution network to the worldwide metal cutting market.  We also provide software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support.

The market for machine tools is international in scope.  We have both significant foreign sales and foreign manufacturing operations.  During fiscal 2008, more than 75% of our revenues were attributable to customers located abroad.  That percentage has since decreased to approximately 68%, due primarily to deterioration of the European and Asian markets for machine tool products as a result of the global recession.  We sell our products through more than 100 independent agents and distributors in countries throughout North America, Europe and Asia.  We also have our own direct sales and service organizations in Canada, China, France, Germany, Italy, Poland, Spain, Singapore, South Africa, and the United Kingdom.  Our machine tools are manufactured in Taiwan to our specifications by our wholly owned subsidiary, Hurco Manufacturing Limited (HML).

Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies—primarily the Euro and Pound Sterling—in the countries in which those customers are located. 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 balance sheets as reported under U.S. Generally Accepted Accounting Principles.  For example, when the U.S. Dollar strengthens in value relative to a foreign currency, as has been the case since the beginning of fiscal 2009, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are lower than would be the case when the U.S. Dollar is weaker.  In our comparison of period-to-period results, we discuss the effect of currency translation on those results.

Our high levels of foreign manufacturing and sales also subject us to cash flow risks due to fluctuating currency exchange rates.  We seek to mitigate those risks through the use of various derivative instruments – principally foreign currency forward exchange contracts.

We experienced significant growth in our sales and earnings between the beginning of fiscal 2003 and the end of fiscal 2008.  The primary drivers of this growth were the strong worldwide demand for machine tools during that period, the expansion of our product line to include higher-price and higher-margin products, increased customer acceptance of our products and the strength of our selling and manufacturing operations outside the United States.

Since the beginning of fiscal 2009, our operating results have been adversely affected by the ongoing global recession.  During periods of adverse economic conditions, manufacturers and suppliers of capital goods, such as our company, are often the first to experience reductions in demand, as their customers defer or eliminate investments in capital equipment.  Additionally, during the current recession, customers who might otherwise want to purchase capital goods have found it difficult to obtain financing due to disruptions in the credit markets.  During fiscal 2009, these conditions have had the greatest impact on our European sales region, the primary market for our more expensive, higher-margin machines.  As a result, we experienced overall declines of 62% in sales and 65% in orders during the first three quarters of fiscal 2009 in comparison to the same period of fiscal 2008, and our European sales region experienced declines of 67% in sales and 70% in orders.

In response to these adverse market conditions, we have implemented various initiatives to reduce expenses, including management and employee pay reductions, workforce reductions, the suspension of corporate 401K matching contributions and restrictions on travel expenditures, while staying committed to our strategic plan of product innovation and penetration of developing markets.   Monthly unit production levels for the third and fourth quarters of fiscal 2009 have been reduced by more than 80% from fiscal 2008 levels in an effort to decrease inventories.

 
15

 

We believe that our cash position and lack of outstanding debt provide us with the capability to weather the current global economic recession.

RESULTS OF OPERATIONS

Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008

Sales and Service Fees.  Sales and service fees for the third quarter of fiscal 2009 were $19.0 million, a decrease of $38.3 million, or 67%, from the third quarter of fiscal 2008.  The drop of third quarter revenues was primarily the result of the adverse impact of the global economic recession on demand for machine tools.  A stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes during the 2009 period accounted for approximately $1.7 million of the decrease.

The following tables set forth net sales (in thousands) by geographic region and product category for the third quarter of 2009 and 2008, respectively:

Net Sales and Service Fees by Geographic Region
 
   
Three months ended July 31,
   
Change
 
   
2009
   
2008
   
Amount
   
%
 
North America
  $ 5,809       30.5 %   $ 10,643       18.6 %   $ (4,834 )     (45.4 )%
Europe
    11,777       61.9 %     43,071       75.1 %     (31,294 )     (72.7 )%
Asia Pacific
    1,453       7.6 %     3,604       6.3 %     (2,151 )     (59.7 )%
Total
  $ 19,039       100.0 %   $ 57,318       100.0 %   $ (38,279 )     (66.8 )%

The decrease in sales was primarily driven by lower volume, particularly for higher priced VMX machines (which are principally marketed in the European sales region), and continued pricing pressures globally.  Unit shipments decreased in the North America, Europe and Asia Pacific sales regions by 51%, 68% and 57%, respectively.

Net Sales and Service Fees by Product Category
 
   
Three months ended July 31,
   
Change
 
   
2009
   
2008
   
Amount
   
%
 
Computerized Machine Tools
  $ 15,552       81.7 %   $ 50,991       89.0 %   $ (35,439 )     (69.5 )%
Service Fees, Parts and Other
    3,487       18.3 %     6,327       11.0 %     (2,840 )     (44.9 )%
Total
  $ 19,039       100.0 %   $ 57,318       100.0 %   $ (38,279 )     (66.8 )%

Unit sales of computerized machine tools during the third quarter of fiscal 2009 decreased by 62% from the corresponding period in fiscal 2008.

Orders. New order bookings in the third quarter of fiscal 2009, were $17.9 million, a decrease of $34.5 million, or 66%, compared to the prior year period, while unit orders declined by 63%.  Orders in the North America, Europe and Asia Pacific regions decreased $5.4 million, or 50%, $27.3 million, or 71%, and $1.8 million, or 61%, respectively.  The impact of currency translation on new orders booked in the third quarter was consistent with the impact on sales.

Gross Profit.  Gross margin for the third quarter of fiscal 2009 was 28%, compared to 36% for the 2008 period.  The decrease in margin as a percentage of sales was primarily due to lower sales of higher-margin VMX machines in the European sales region, the impact of fixed costs on lower sales volume, and competitive pricing pressures on a global basis.

 
16

 

Operating Expenses.  Selling, general and administrative expenses were $7.2 million, a decrease of $4.6 million, or 39%, from the corresponding period in 2008, reflecting lower sales commissions, the benefit of cost reduction initiatives, and the favorable effect of a stronger U.S. Dollar in 2009 when translating foreign operating expenses to U.S. Dollars for financial reporting purposes.

Operating Income (Loss).  The operating loss for the third quarter of fiscal 2009 was $1.9 million compared to operating income of $9.1 million for the prior year period.  The reduction in operating income year-over-year was primarily due to the reduction in sales, primarily those for the higher-margin VMX machines in the European sales region, and global competitive pricing pressures.

Other (Income) Expense, net.  The increase in other income of $0.6 million was primarily due to net realized gains on hedge contracts closed before maturity due to forecasted reductions in production and sales, and unrealized gains from foreign currency fluctuations on payables and receivables, net of foreign currency forward exchange contracts.   These net gains were partially offset by a loss in our equity investment of an affiliated Taiwan contract manufacturer.

Income Taxes.  Our effective tax rate for the third quarter of fiscal 2009 was 31% in comparison to 34% for the same period in fiscal 2008.  Our provision for income taxes during the third quarter of fiscal 2009 was approximately $3.5 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income before income taxes.

Nine months Ended July 31, 2009 Compared to Nine months Ended July 31, 2008

Sales and Service Fees.  Sales and service fees for the first nine months of fiscal 2009 were $67.8 million, a decrease of $108.7 million, or 62%, over the first nine months of fiscal 2008.  The decrease in sales and service fees was primarily the result of the adverse impact of the current global recession on demand for machine tools.  A stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes during the 2009 period accounted for approximately $7.9 million of the decrease.

The following tables set forth net sales (in thousands) by geographic region and product category for the first nine months of 2009 and 2008, respectively:

Net Sales and Service Fees by Geographic Region
 
   
Nine months ended July 31,
   
Change
 
   
2009
   
2008
   
Amount
   
%
 
North America
  $ 21,618       31.9 %   $ 35,427       20.1 %   $ (13,809 )     (39.0 )%
Europe
    42,879       63.2 %     130,776       74.1 %     (87,897 )     (67.2 )%
Asia Pacific
    3,338       4.9 %     10,323       5.8 %     (6,985 )     (67.7 )%
Total
  $ 67,835       100.0 %   $ 176,526       100.0 %   $ (108,691 )     (61.6 )%

The decrease in sales was primarily driven by lower volume, particularly for higher priced VMX machines (which are principally marketed in the European sales region), and continued pricing pressures globally.

Net Sales and Service Fees by Product Category
   
Nine months ended July 31,
   
Change
 
   
2009
   
2008
   
Amount
   
%
 
                                     
Computerized Machine Tools
  $ 56,019       82.6 %   $ 157,977       89.5 %   $ (101,958 )     (64.5 )%
Service Fees, Parts and Other
    11,816       17.4 %     18,549       10.5 %     (6,733 )     (36.3 )%
Total
  $ 67,835       100.0 %   $ 176,526       100.0 %   $ (108,691 )     (61.6 )%

Unit sales of computerized machine tools during the first nine months of fiscal 2009 decreased by 58% from the corresponding period in fiscal 2008.

 
17

 
 
Orders. New order bookings in the first nine months of fiscal 2009, were $60.6 million, a decrease of $111.9 million, or 65%, over the prior year period.  Of that decrease, North America, Europe, and Asia Pacific orders decreased $15.3 million, or 45%, $89.6 million, or 70%, and $7.1 million, or 72%, respectively.

Gross Profit.  Gross margin for the first nine months of fiscal 2009 was 28%, compared to 37% for the 2008 period.  The decrease in margin as a percentage of sales was primarily due to a lower sales of higher-margin VMX machines in the European sales region, the impact of fixed costs on lower sales volume, and global competitive pricing pressures.

Operating Expenses.  Selling, general and administrative expenses were $22.7 million for the first nine months of fiscal 2009, a reduction of $13.1 million, or 37%, from the 2008 period, reflecting various initiatives to reduce expenses that have included management and employee pay reductions, workforce reductions, the suspension of corporate 401K matching contributions, and restriction of travel and other expenditures. The reduction in expenses also included the favorable effect of a stronger U.S. Dollar in 2009 when translating foreign operating expenses to U.S. Dollars for financial reporting purposes.

Operating Income (Loss).  The operating loss for the first nine months of fiscal 2009 was $3.7 million compared to operating income of $30.2 million, for the prior year period.  The reduction in operating income (loss) year-over-year was primarily due the reduction in sales, primarily those for higher-margin VMX machines in the European sales region, and global competitive pricing pressures.

Other (Income) Expense, net.  The increase in other income of $3.1 million was primarily due to net realized gains on hedge contracts closed before maturity due to forecasted reductions in production and sales, and unrealized gains from foreign currency fluctuations on payables and receivables, net of foreign currency forward exchange contracts.   These net gains were partially offset by a loss in our equity investment of an affiliated Taiwan contract manufacturer.

Income Taxes.  Our provision for income taxes during the first nine months of fiscal 2009 was $11.1 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income before income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2009, we had cash of $26.7 million, compared to cash and short term investments of $33.1 million at October 31, 2008.  Approximately 66% of the $26.7 million of cash and cash equivalents is denominated in U.S. Dollars.  The remaining balances are held outside the U.S. in the local currencies of our various foreign entities and are subject to fluctuations in currency exchange rates.

Working capital, excluding cash and cash equivalents and short-term investments, was $70.5 million at July 31, 2009, compared to $67.1 million at October 31, 2008.  The $3.4 million increase in working capital was primarily driven by reduced accounts payable as a result of lower production levels and a reduction in accrued expenses.

We have a number of domestic and international credit facilities, including a $30.0 million unsecured revolving line of credit.  As of July 31, 2009, we had no borrowings outstanding under any of these facilities and were in compliance with all terms and conditions, including financial covenants.  One of the financial covenants applicable to the $30.0 million credit facility requires us to report consolidated net income of not less than $0 for four consecutive quarters on a rolling basis.  If we continue to report losses for the fourth quarter of the current fiscal year, we would not be permitted to borrow under our loan agreement.

We believe our cash resources will permit us to stay committed to our strategic plan of product innovation and targeted penetration of developing markets.  In order to minimize losses and sustain cash flow during these current economic conditions we have significantly reduced our production levels, eliminated overtime, reduced our work force, eliminated hiring and salary increases and reduced pay for salaried employees by 5-10%.

Capital expenditures were primarily for purchases of equipment for our manufacturing facilities and software development costs.  We funded these expenditures with cash flow from operations.

 
18

 

We have an effective “shelf” registration statement on file with the SEC that allows us to offer and sell a variety of securities, including common stock, preferred stock, warrants, depositary shares and debt securities, up to an aggregate amount of $200.0 million, if and when authorized by the Board of Directors.  At present, we have no plans to offer or sell securities.

Although we have not made any significant acquisitions in the recent past and we have no present plans for acquisitions, we continue to receive and review information on businesses and assets, including intellectual property assets, which are available for purchase.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”), which is a revision of SFAS No. 141 “Business Combinations.”  SFAS 141R changes the way in which we will account for business combinations as it introduces new purchase accounting concepts, expands the use of fair value accounting related to business combinations and changes the subsequent period accounting for certain acquired assets and liabilities, and among other things, includes a substantial number of new disclosure requirements. SFAS 141R will be applied prospectively on business combinations with acquisition dates in fiscal years beginning on or after December 15, 2008.  SFAS 141R may have a material impact on future acquisitions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity.  SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements or results of operations.

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” and Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting”. The FSP requires the SFAS No. 107 disclosures about the fair value of financial instruments to be presented in interim financial statements in addition to annual financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the FSP does not impact on our consolidated financial statements or results of operations.

CRITICAL ACCOUNTING POLICIES

Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, require management to make significant estimates and assumptions using information available at the time the estimates are made. These estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenues, and expenses.  If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition would be affected. There were no material changes to our critical accounting policies during the first nine months of fiscal 2009.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008.  As of July 31, 2009, our FIN 48 liabilities were $629,000. The periods in which the FIN 48 liabilities will be paid cannot be reliably estimated and are, therefore, excluded from our contractual obligations.  For additional information regarding FIN 48, see Note 12 of Notes to Condensed Consolidated Financial Statements.

 
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OFF BALANCE SHEET ARRANGEMENTS

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of certain machines to customers that use financing.  As of July 31, 2009, we had 56 outstanding third party guarantees totaling approximately $2.5 million.  The terms of our subsidiaries’ guarantees are consistent with the underlying customer financing terms.  Upon shipment, the customer has the risk of ownership, but does not obtain title until the machine is paid in full.  A retention of title clause allows us to recover the machine if the customer defaults on the lease.  We accrue for potential liabilities under these guarantees when we believe a loss is probable and can be estimated.  The accrual recorded at July 31, 2009 and October 31, 2008 was not material.
 
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:

 
·
The impact of the current global economic recession on demand for our products and our customers’ access to credit and ability to pay us for the products they purchase;
 
·
The cyclical nature of the machine tool industry;
 
·
The risks of our international operations;
 
·
The limited number of our manufacturing sources;
 
·
The effects of changes in currency exchange rates;
 
·
Our dependence on new product development;
 
·
The need to make technological advances;
 
·
Competition with larger companies that have greater financial resources;
 
·
Changes in the prices of raw materials, especially steel and iron products;
 
·
Possible obsolescence of our technology;
 
·
Acquisitions that could disrupt our operations and affect operating results;
 
·
Impairment of our goodwill or other assets;
 
·
The need to protect our intellectual property assets;
 
·
The impact of the continuing downturn in the U.S. economy;
 
·
The impact of ongoing disruptions in the credit markets on our investment securities; and
 
·
The effect of the loss of key personnel.

We discuss these and other important risks and uncertainties that may affect our future operation 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 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. This cautionary statement is applicable to all forward-looking statements contained in this report.

 
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Item 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on borrowings on our bank credit agreements are tied to prevailing U.S. and European interest rates.  At July 31, 2009, there were no outstanding borrowings under our bank credit agreements.

Foreign Currency Exchange Risk

In fiscal 2008, we derived more than 75% of our revenues from foreign markets.  All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.

Our products are sourced from foreign suppliers or built to our specifications by either our wholly owned subsidiary in Taiwan or an affiliated contract manufacturer. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar.

We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes.

Forward contracts for the sale or purchase of foreign currencies as of July 31, 2009, which are designated as cash flow hedges under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) were as follows:

   
Notional
Amount
   
Weighted
Avg.
   
Contract Amount at
Forward Rates in 
U.S. Dollars
   
Forward Contracts
 
in Foreign
Currency
   
Forward
Rate
   
Contract
Date
   
July 31,
2009
 
Maturity Dates
Sale Contracts:
                         
Euro
    11,460,000       1.3616       15,604,300       16,338,052  
August 2009 – July 2010
Pound Sterling
    1,010,000       1.5451       1,560,527       1,685,358  
August 2009 – July 2010
Purchase Contracts:
                                 
New Taiwan Dollar
    385,000,000       32.17 *     11,966,203       11,932,606  
August 2009 – July 2010

*NT Dollars per U.S. Dollar

 
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Forward contracts for the sale or purchase of foreign currencies as of July 31, 2009, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables and are not designated as hedges under SFAS 133 denominated in foreign currencies, were as follows:

     
Notional
Amount in
     
Weighted
Avg.
   
Contract Amount at
Forward Rates in 
U.S. Dollars
   
Forward Contracts
 
Foreign
Currency
   
Forward
Rate
   
Contract
Date
   
July 31,
2009
 
Maturity Dates
Sale Contracts:
                         
Euro
    18,814,156       1.3366       25,147,001       26,816,607  
August 2009 – February 2010
Pound Sterling
    396,826       1.6454       652,937       662,274  
August 2009 – September 2009
Canadian Dollar
    137,623       .9243       127,205       127,555  
            August 2009
Singapore Dollar
    7,916,763       1.5501       5,107,259       5,500,555  
             March 2010
                                   
Purchase Contracts:                                   
New Taiwan Dollar
    29,590,669       32.68 *     905,428       904,534  
             August 2009

* NT Dollars per U.S. Dollar

We are exposed to foreign currency exchange risk related to our investment in net assets in foreign countries.   To manage this risk, we entered into a forward contract on November 26, 2007 with a notional amount of €3.0 million.  We designated this forward contract as a hedge of our net investment in Euro denominated assets.  We selected the forward method under the guidance of the Derivatives Implementation Group Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of Ineffectiveness in a Net Investment Hedge”. The forward method requires all changes in the fair value of the forward to be reported as a cumulative translation adjustment in Accumulated Other Comprehensive Loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matured on November 25, 2008 and we entered into a new forward contract for the same notional amount.  As of July 31, 2009, we had a realized gain of $355,000 and an unrealized loss of $245,000, net of tax, recorded as cumulative translation adjustments in Accumulated Other Comprehensive Loss, related to these forward contracts.

Forward contracts for the sale or purchase of foreign currencies as of July 31, 2009, which are designated as net investment hedges under SFAS 133 were as follows:

   
Notional
Amount
   
Weighted
Avg.
   
Contract Amount at
Forward Rates in 
U.S. Dollars
   
Forward Contracts
 
in Foreign
Currency
   
Forward
Rate
   
Contract
Date
   
July 31,
2009
 
Maturity Date
Sale Contracts:
                         
Euro
    3,000,000       1.2936       3,880,800       4,275,990  
November 2009

 
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Item 4. CONTROLS AND PROCEDURES

We carried out an evaluation under the supervision and with participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2009, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the evaluation date.

There were no changes in our internal controls over financial reporting during the quarter ended July 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are involved in various claims and lawsuits arising in the normal course of our business.  We believe it is remote that any of these claims will have a material adverse effect on our consolidated financial position or results of operations.

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended October 31, 2008.

Item 5.  OTHER INFORMATION

During the period covered by this report, the Audit Committee of our Board of Directors did not engage our independent registered public accounting firm to perform any non-audit services.  This disclosure is made pursuant to Section 10A9(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

 
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Item 6.
EXHIBITS

3.1
Amended and Restated Bylaws of Hurco Companies, Inc. (as amended through July 8, 2009)

11
Computation of per share earnings.
 
31.1
Certification by the Chief Executive Officer, pursuant to Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended.
 
31.2
Certification by the Chief Financial Officer, pursuant to Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended.
 
32.1
Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HURCO COMPANIES, INC.
 
By:
/s/ John G. Oblazney
 
John G. Oblazney
 
Vice President and
 
Chief Financial Officer
   
By:
/s/ Sonja K. McClelland
 
Sonja K. McClelland
 
Corporate Controller and
 
Principal Accounting Officer

September 4, 2009

 
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