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HURCO COMPANIES INC - Quarter Report: 2012 January (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQuarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended January 31, 2012 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 x 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 March 1, 2012 was 6,441,351.

 

 
 

 

HURCO COMPANIES, INC.

January 2012 Form 10-Q Quarterly Report

 

Table of Contents

 

    Part I - Financial Information    
         
Item 1.   Financial Statements    
         
    Condensed Consolidated Statements of Income Three months ended January 31, 2012 and 2011   3
         
    Condensed Consolidated Balance Sheets As of January 31, 2012 and October 31, 2011   4
         
    Condensed Consolidated Statements of Cash Flows Three months ended January 31, 2012 and 2011   5
         
    Condensed Consolidated Statements of Changes in Shareholders' Equity   Three months ended January 31, 2012 and 2011   6
         
    Notes to Condensed Consolidated Financial Statements   7
         
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   17
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   23
         
Item 4.   Controls and Procedures   25
         
    Part II - Other Information    
         
Item 1.   Legal Proceedings   26
         
Item 1A.   Risk Factors   26
         
Item 5.   Other Information   26
         
Item 6.   Exhibits   27
         
Signatures       28

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1.      FINANCIAL STATEMENTS

 

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

   Three Months Ended 
   January 31 
   2012   2011 
   (Unaudited) 
         
Sales and service fees  $51,126   $39,680 
           
Cost of sales and service   34,642    27,989 
           
Gross profit   16,484    11,691 
           
Selling, general and administrative expenses   9,730    8,830 
           
Operating income   6,754    2,861 
           
Interest expense   24    5 
           
Interest income   22    40 
           
Investment income   6    5 
           
Other (income) expense, net   (138)   456 
           
Income before taxes   6,896    2,445 
           
Provision for income taxes   2,263    899 
           
Net income  $4,633   $1,546 
           
Income per common share          
           
Basic  $.71   $.24 
Diluted  $.71   $.24 
           
Weighted average common shares outstanding          
           
Basic   6,441    6,441 
Diluted   6,466    6,463 

 

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)

 

   January 31
2012
   October 31
2011
 
   (Unaudited)   (Audited) 
ASSETS          
           
Current assets:          
Cash and cash equivalents  $42,667   $44,961 
Accounts receivable, net   31,189    27,057 
Refundable taxes   1,442    1,442 
Inventories, net   80,470    81,127 
Deferred income taxes   1,296    2,692 
Derivative assets   3,160    1,197 
Other   7,097    5,598 
Total current assets   167,321    164,074 
           
Non-current assets:          
Property and equipment:          
Land   782    782 
Building   7,116    7,116 
Machinery and equipment   16,545    16,336 
Leasehold improvements   2,559    2,508 
    27,002    26,742 
Less accumulated depreciation and amortization   (15,648)   (15,198)
    11,354    11,544 
Software development costs, less accumulated amortization   4,560    4,928 
Investments and other assets, net   5,916    5,999 
   $189,151   $186,545 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $36,573   $39,046 
Accrued expenses and other   13,299    13,983 
Accrued warranty expenses   1,760    1,725 
Derivative liabilities   856    1,609 
Short-term debt   1,506    865 
Total current liabilities   53,994    57,228 
           
Non-current liabilities:          
Deferred income taxes   1,991    1,982 
Deferred credits and other   1,154    1,123 
Total liabilities   57,139    60,333 
           
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, 12,500,000 shares authorized, 6,496,453 and 6,471,710 shares issued; and 6,441,351 and 6,440,851 shares outstanding, as of January 31, 2012  and October 31, 2011, respectively   644    644 
Additional paid-in capital   52,812    52,614 
Retained earnings   79,581    74,948 
Accumulated other comprehensive loss   (1,025)   (1,994)
Total shareholders’ equity   132,012    126,212 
   $189,151   $186,545 

 

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 
   January 31 
   2012   2011 
   (Unaudited) 
Cash flows from operating activities:          
Net income  $4,633   $1,546 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:          
Provision for doubtful accounts   (6)   54 
Deferred income taxes   97    120 
Equity in (income) loss of affiliates   (90)   5 
Depreciation and amortization   1,087    1,067 
Foreign currency (gain) loss   2,763    (14)
Unrealized (gain) loss on derivatives   (586)   134 
Stock-based compensation   197    71 
Change in assets and liabilities:          
(Increase) decrease in accounts receivable and refundable taxes   (4,830)   2,280 
(Increase) decrease in inventories   (614)   (2,968)
Increase (decrease) in accounts payable   (2,468)   (1,754)
Increase (decrease) in accrued expenses   (317)   1,917 
Net change in derivative assets and liabilities   128    (457)
Other   (1,861)   356 
Net cash provided by (used for) operating activities   (1,867)   2,357 
           
Cash flows from investing activities:          
Purchase of property and equipment   (341)   (168)
Software development costs   (203)   (373)
Other investments   (32)   (12)
Net cash provided by (used for) investing activities   (576)   (553)
           
Cash flows from financing activities:          
Borrowings on short-term debt   631     
Proceeds from exercise of common stock options   1     
Net cash provided by (used for) financing activities   632     
           
Effect of exchange rate changes on cash   (483)   230 
           
Net increase (decrease) in cash and cash equivalents   (2,294)   2,034 
           
Cash and cash equivalents at beginning of period   44,961    48,255 
           
Cash and cash equivalents at end of period  $42,667   $50,289 

 

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 three months ended January 31, 2012 and 2011

(Unaudited)

 

(In thousands, except
shares outstanding)
  Common stock    Additional        Accumulated
other
comprehensive
     
   Shares
outstanding
   Amount   paid-in
capital
   Retained
earnings
   Income
(loss)
   Total 
                         
Balances, October 31, 2010   6,440,851   $644   $52,144   $63,824   $(1,872)  $114,740 
                               
Net income               1,546        1,546 
                               
Translation of foreign currency financial statements                   682    682 
                               
Realized gains on derivative instruments reclassified into operations, net of tax of $(129)                   (220)   (220)
                               
Unrealized gains on derivative instruments, net of tax of $582                   989    989 
                               
Comprehensive income                       2,997 
                               
Stock-based compensation expense           71            71 
                               
Balances, January 31, 2011 (Unaudited)   6,440,851   $644   $52,215   $65,370   $(421)  $117,808 
                               
                               
Balances, October 31, 2011   6,440,851   $644   $52,614   $74,948   $(1,994)  $126,212 
                               
Net income               4,633        4,633 
                               
Translation of foreign currency financial statements                   (1,176)   (1,176)
                               
Realized loss on derivative instruments reclassified into operations, net of tax of $247                   429    429 
                               
Unrealized gain on derivative instruments, net of tax of $987                   1,716    1,716 
                               
Comprehensive income                       5,602 
                               
Exercise of common stock options   500        1            1 
                               
Stock-based compensation expense           197            197 
                               
Balances, January 31, 2012 (Unaudited)   6,441,351   $644   $52,812   $79,581   $(1,025)  $132,012 

 

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 January 31, 2012 and for the three months ended January 31, 2012 and January 31, 2011 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, 2011.

 

2.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

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 subsidiary’s 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, South African Rand, Singapore Dollars, Indian Rupee, Chinese Yuan and New Taiwan Dollars.

 

We record all derivative instruments as assets or liabilities at fair value.

 

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 and service 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, net 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.

 

7
 

 

We had forward contracts outstanding as of January 31, 2012, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from February 2012 through January 2013. The contract amounts, expressed at forward rates in U.S. Dollars at January 31, 2012, were $36.4 million for Euros, $10.1 million for Pounds Sterling and $29.1 million for New Taiwanese Dollars. At January 31, 2012, we had approximately $1.2 million of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $1.2 million represents unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through January 2013, when 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 have maintained a forward contract 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 Financial Accounting Standards Board, or FASB, guidance related to the accounting for derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2012. At January 31, 2012, we had $227,000 of realized gains and $78,000 of unrealized gains, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract.

 

Derivatives Not Designated as Hedging Instruments

 

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. These derivative instruments are not designated as hedges under the FASB guidance and, as a result, changes in their fair value are reported currently as Other (income) expense, net, in the Condensed Consolidated Statements of Operations consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

 

We had forward contracts outstanding as of January 31, 2012, in Euros, Pounds Sterling, Canadian Dollars, South African Rand, and New Taiwan Dollars with set maturity dates ranging from February 2012 through April 2012. The aggregate amount of these contracts at forward rates in U.S. Dollars at January 31, 2012 for Euros, Pounds Sterling, Canadian Dollars, South African Rand and New Taiwan Dollars totaled $34.3 million.

 

8
 

 

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 Sheets. As of January 31, 2012 and October 31, 2011, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):

  

   January 31, 2012    October 31, 2011
   Balance sheet     Fair     Balance sheet    Fair 
Derivatives  location     value    location    value 
                    
Designated as hedging instruments:                   
Foreign exchange forward contracts   Derivative assets    $2,567    Derivative assets   $634  
Foreign exchange forward contracts   Derivative liabilities    $596    Derivative liabilities   $1,492  
                    
Not designated as hedging instruments:                   
Foreign exchange forward contracts   Derivative assets    $593    Derivative assets   $563  
Foreign exchange forward contracts   Derivative liabilities    $260    Derivative liabilities   $117  

  

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

 

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Shareholders’ Equity and Income during the three months ended January 31, 2012 and 2011 (in thousands):

 

Derivatives  Amount of gain (loss)
recognized in Other
comprehensive loss
Three months ended
January 31,
   Location of
gain (loss)
reclassified
from Other
comprehensive
loss
   Amount of gain (loss)
reclassified from Other
comprehensive loss
Three months ended
January 31,
 
   2012   2011      2012   2011 
Designated as hedging
instruments:
                         
(Effective portion)                         
Foreign exchange forward contracts                         
– Intercompany sales/purchases  $2,703   $1,571    Cost of sales and service   $(676)  $349 
                          
Foreign exchange forward contract                         
– Net investment  $249   $56                

  

We recognized a gain of $178,000 for the three months ended January 31, 2012, and a loss of $7,000 for the three months ended January 31, 2011 as a result of contracts closed early that were deemed ineffective for financial reporting purposes and did not qualify as cash flow hedges.

 

9
 

 

Derivatives   Location of gain (loss)
recognized in operations
  Amount of gain (loss)
recognized in operations
Three months ended January 31,
    2012   2011
Not designated as hedging instruments:            
             
Foreign exchange forward contracts   Other (income) expense, net  $(1,281)  $492  

 

 

3.EQUITY INCENTIVE PLAN

 

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 and restricted shares under the 2008 Plan. 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.

 

A summary of stock option activity for the three-month period ended January 31, 2012, is as follows:

 

   Stock
Options
   Weighted
Average
Exercise
Price
 
         
Outstanding at October 31, 2011   115,369   $20.66 
           
Options granted   45,236    21.45 
Options exercised   (500)   2.15 
Options cancelled        
           
Outstanding at January 31, 2012   160,105   $20.94 

 

10
 

 

Summarized information about outstanding stock options as of January 31, 2012, that have already vested and those that are expected to vest, as well as stock options that are currently exercisable, are as follows:

 

   Options already
vested and expected
to vest
   Options currently
exercisable
 
         
Number of outstanding options   160,105    77,356 
           
Weighted average remaining contractual life (years)   7.66    4.72 
Weighted average exercise price per share  $20.94   $23.00 
           
Intrinsic value of outstanding options  $650,000   $272,000 

 

The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of January 31, 2012 and the exercise price of the option.

 

On December 14, 2011, the Compensation Committee granted a total of 45,236 stock options under the 2008 Plan to our executive officers. 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 of 64%, expected term of the options of five years, dividend yield rate of 0% and a risk-free interest rate of .86% based upon the five-year U.S. Treasury yield as of the date of grant. The options vest over a three-year period beginning one year from the date of grant. Based upon the foregoing factors, the grant date fair value of the stock options was determined to be $11.50 per share.

 

On December 14, 2011, the Compensation Committee granted a total of 24,243 shares of restricted stock to our executive officers. The restricted stock vests in full three years from the date of grant provided the recipient remains employed by us through that date. The grant date fair value of the restricted stock is based on the closing sales price of our common stock on the grant date which was $21.45 per share.

 

A reconciliation of the Company’s restricted stock activity and related information is as follows:

 

   Number of
Shares
   Weighted Average
Grant  Date
Fair Value
 
Unvested at October 31, 2011   30,859   $24.38 
Shares granted   24,243    21.45 
Shares vested        
Shares cancelled        
           
Unvested at January 31, 2012   55,102   $23.09 

 

During the first three months of fiscal 2012 and 2011, we recorded $197,000 and $71,000, respectively, of stock-based compensation expense related to grants of stock options and shares of restricted stock. As of January 31, 2012, there was $1.6 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2015.

 

11
 

 

4.EARNINGS PER SHARE

 

Per share results have been computed based on the average number of common shares outstanding. The computation of basic and diluted net income per share is determined using net income applicable to common shareholders as the numerator and the number of shares included in the denominator as follows (in thousands, except per share amounts):

 

   Three months ended 
   January 31, 
   2012   2011 
(in thousands, except per share amount)  Basic   Diluted   Basic   Diluted 
                 
Net income  $4,633   $4,633   $1,546   $1,546 
Undistributed earnings                    
Allocated to participating shares   (39)   (39)   (6)   (6)
Net income  applicable to common shareholders  $4,594   $4,594   $1,540   $1,540 
Weighted average shares outstanding   6,441    6,441    6,441    6,441 
Stock options       25        22 
    6,441    6,466    6,441    6,463 
Income  per share  $0.71   $0.71   $.24   $.24 

 

5.ACCOUNTS RECEIVABLE

 

Accounts receivable are net of allowances for doubtful accounts of $602,000 as of January 31, 2012 and $608,000 as of October 31, 2011.

 

6.INVENTORIES

 

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

 

   January 31, 2012   October 31, 2011 
Purchased parts and sub-assemblies  $19,312   $20,925 
Work-in-process   15,697    15,440 
Finished goods   45,461    44,762 
   $80,470   $81,127 

 

7.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.

 

12
 

 

8.GUARANTEES AND WARRANTIES

 

We follow FASB guidance for accounting for contingencies relating to the guarantor’s accounting for, and disclosures of, the issuance of certain types of guarantees.

 

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. As of January 31, 2012, we had 23 outstanding third party payment guarantees totaling approximately $1.3 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue for potential liabilities under these guarantees when we believe a loss is probable and can be estimated.

 

We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve is as follows (in thousands):

 

   Three months ended 
   January 31, 2012   January 31, 2011 
Balance, beginning of period  $1,725   $1,591 
Provision for warranties during the period   900    535 
Charges to the reserve   (850)   (485)
Impact of foreign currency translation   (15)   28 
Balance, end of period  $1,760   $1,669 

 

The increased provision in the three months ended January 31, 2012 compared to the three months ended January 31, 2011 reflects the increased volume of sales and anticipated claims related to machines under warranty and the sale of a greater number of our higher performance machines which have a higher cost per claim.

 

9.COMPREHENSIVE INCOME

 

A reconciliation of our net income to comprehensive income is as follows (in thousands):

 

   Three months ended 
   January 31,  
2012
   January 31, 
 2011
 
Net income  $4,633   $1,546 
Translation of foreign currency financial statements   (1,176)   682 
Realized (gains) losses on derivative instruments reclassified into operations, net of tax   429    (220)
Unrealized gains (losses) on derivative instruments, net of tax   1,716    989 
Comprehensive income  $5,602   $2,997 

 

10.DEBT AGREEMENTS

 

We are party to a domestic credit agreement that provides us with a $15.0 million revolving credit facility and maximum outstanding letters of credit of $3.0 million. Borrowings under this agreement may be used for general corporate purposes and bear interest at a floating rate, based either on LIBOR or the prime rate, plus an applicable margin.  The agreement contains financial covenants, including restrictions on incurring additional debt, making acquisitions, or paying dividends if we report a cumulative net loss for four consecutive quarters. We also have an uncommitted credit facility in Taiwan in the amount of 100.0 million New Taiwan Dollars (approximately $3.4 million) in addition to a £1.0 million revolving credit facility in the United Kingdom and a €1.5 million revolving credit facility in Germany.  The domestic and United Kingdom facilities mature on December 7, 2012. The credit facility in Germany does not have an expiration date.

 

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On March 7, 2011 we entered into an uncommitted credit facility in China in the amount of 20.0 million Chinese Yuan (approximately $3.2 million) and amended our domestic credit agreement to accommodate the new facility. As of February 24, 2012 this facility was extended for another twelve months.

 

All of our credit facilities are unsecured.

 

At January 31, 2012, we had $1.5 million of borrowings outstanding under our credit facility in China and had no other borrowings under any of our other credit facilities. At January 31, 2012, we were in compliance with the covenants contained in all of our credit facilities and had an aggregate of $23.6 million available for borrowings under our credit facilities.

 

11.INCOME TAXES

 

Our effective tax rate for the first three months of fiscal 2012 was 33% in comparison to 37% for the same period in fiscal 2011. We recorded an income tax provision during the first three months of fiscal 2012 of approximately $2.3 million compared to $899,000 for the same period in fiscal 2011, as a result of the increase in pre-tax income period-over-period.

 

Our unrecognized tax benefits were $275,000 as of January 31, 2012 and October 31, 2011 and in each case included accrued interest.   

 

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision.  We believe our unrecognized tax positions meet the minimum statutory threshold to avoid payment of penalties and, therefore, no tax penalties have been estimated.  As of January 31, 2012, the gross amount of interest accrued, reported in Accrued expenses and other, was approximately $31,000, which did not include the federal tax benefit of interest deductions.

 

We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions.  The statutes of limitations with respect to unrecognized tax benefits will expire between July 2014 and July 2015.

 

The Internal Revenue Service (IRS) is currently examining our federal income tax returns for the years 2006-2010. At this time, we do not expect to have any significant examination adjustments that would result in a material change to our financial position or results of operations.

 

12.FINANCIAL INSTRUMENTS

 

The carrying amounts for our trade receivables and payables approximate their fair values. We also have financial instruments in the form of foreign currency forward exchange contracts as described in Note 2. The U.S. Dollar equivalent notional amounts of these contracts were $116.7 million and $126.4 million at January 31, 2012 and October 31, 2011, respectively. The fair value of Derivative assets recorded on our Condensed Consolidated Balance Sheets was $3.2 million at January 31, 2012 and $1.2 million at October 31, 2011. The fair value of Derivative liabilities recorded on our Condensed Consolidated Balance Sheets was $856,000 at January 31, 2012 and $1.6 million at October 31, 2011.

 

The future value of our foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility. The counterparties to these contracts are substantial and creditworthy financial institutions. We do not consider either the risk of counterparty non-performance or the economic consequences of counterparty non-performance as material risks.

 

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FASB fair value guidance establishes 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 this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of January 31, 2012 and October 2011 (in thousands):

 

   Assets   Liabilities 
   January 31, 
2012
   October 31,
 2011
   January 31, 
2012
   October 31, 
2011
 
                 
Level 1                    
Deferred Compensation  $794   $741   $-   $- 
                     
Level 2                    
Derivatives  $3,160   $1,197   $856   $1,609 

 

Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices which are readily available. Included as Level 2 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.

 

During the first three months of fiscal 2012, we did not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities.

 

13. EMPLOYEE BENEFITS

 

We have defined contribution plans that include a majority of our employees, under which our matching contributions are primarily 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 matching contributions to the plans are based on employee contributions or compensation. From April 1, 2009 to December 31, 2010, we suspended our discretionary contributions to the U.S. plan as a cost reduction measure; however, effective January 1, 2011 we reinstated our matching contributions to that plan in an amount equal to 25% of the first 6% of a participant’s annual earnings contributed, up to the maximum permitted by law. Effective January 1, 2012, we increased our matching contributions to 50% of the first 6% of a participant’s annual earnings contributed, up the maximum permitted by law. Our total contributions to all plans were approximately $89,000 and $46,000, for the three months ended January 31, 2012 and 2011, respectively.

 

14. NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2011, the FASB amended Accounting Standards Update (ASU) 2011-05, Comprehensive Income, Presentation of Comprehensive Income, which will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The guidance in ASU 2011-05 does not change the items which must be reported in other comprehensive income, how such items are measured, or when they must be reclassified to net income. The guidance in ASU 2011-05 is effective for fiscal years and interim periods within those years beginning after December 15, 2011, and should be applied retrospectively. Since the provisions of ASU 2011-05 are presentation related only, we do not expect the adoption of ASU 2011-05 to have a material effect on our consolidated financial statements.

 

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In December 2011, The FASB issued Accounting Standards Update 2011-12 (ASU 2011-12), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of AOCI in both net income and OCI on the face of the financial statements. The effective dates for ASU 2011-12 are consistent with the effective dates for ASU 2011-05 and, similar to our expectations for the adoption of ASU 2011-05, we do not expect that the adoption of this guidance will have a material effect on our consolidated financial statements.

 

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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 following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance. This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report.

 

From fiscal 2004 through fiscal 2008, we experienced a period of sustained growth due to the strong worldwide demand for machine tools, the expansion of our product line to include higher-performance machines, increased customer acceptance of our products, and the strength of our selling and manufacturing operations outside the United States. In fiscal 2009 we began experiencing the effects of the world-wide recession. In fiscal 2009 and 2010 we took steps to reduce production and operating costs. In fiscal 2011, worldwide demand for machine tools increased as global manufacturing rebounded from the recession and we were able to ramp up production and return to profitability. We continued to experience increased demand in the first quarter of fiscal 2012.

 

The market for machine tools is international in scope. We have both significant foreign sales and foreign manufacturing operations. During the past three fiscal years, approximately 63% of our revenues were attributable to customers located in Europe and 10% of our sales were attributable to customers located in Asia. During the first quarter of fiscal 2012, 58% of our sales were attributable to customers in Europe, 30% of our sales were attributable to customers in North America, and 12% of our sales were attributable to customers in Asia. The increase in North America reflects an improvement in industrial manufacturing. The increase in Asia reflects increased market penetration. 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, India, Italy, Poland, Singapore, South Africa, the United Kingdom and certain parts of the United States. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited (HML). Machine castings and components to support HML’s production are manufactured at our facility in Ningbo, China. We also manufacture certain machine tools for the Chinese market at the Ningbo plant.

 

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 weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results including the increases or decreases in those results as reported in our financial statements (which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements) and also the effect that changes in exchange rates had 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.

 

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As the global manufacturing industry began to rebound from the economic downturn, we increased production at our manufacturing facilities to meet growing demand.

 

In the first quarter of fiscal 2012, our business continued to benefit from increased global demand for machine tools. Sales for the first quarter of fiscal 2012 were 29% higher than in the corresponding quarter of fiscal 2011. Unit orders in the first quarter of fiscal 2012 were 20% and 22% higher than the third and fourth quarters of fiscal 2011, respectively. Our gross profit for the first quarter of fiscal 2012 was $16.5 million, or 32% of sales, compared to $11.7 million or 29% of sales, for the prior year period.

 

RESULTS OF OPERATIONS

 

Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011

 

Sales and Service Fees. Sales and service fees for the first quarter of fiscal 2012 were $51.1 million, an increase of $11.4 million, or 29%, from the first quarter of fiscal 2011, reflecting the continued improvement in demand we have experienced since the beginning of fiscal 2011. The effect of a stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes had an unfavorable impact of approximately 1%, or $385,000, on the period-to-period comparison.

 

The following tables set forth net sales (in thousands) by geographic region and product category for the first quarter of fiscal 2012 and 2011, respectively:

 

Sales and Service Fees by Geographic Region

   Three months ended January 31,   Change 
   2012   2011   Amount   % 
North America  $15,326    30%  $13,462    34%  $1,864    14%
Europe   29,919    58%   21,279    54%   8,640    41%
Asia Pacific   5,881    12%   4,939    12%   942    19%
Total  $51,126    100%  $39,680    100%  $11,446    29%

 

The increase in sales was driven by higher customer demand, particularly in Europe, as a result of the rebound in industrial manufacturing activity that began during the first quarter of fiscal 2011. Compared to the prior year period, unit shipments for the first quarter of fiscal 2012 increased in North America by 4%, in Europe by 25%, and in the Asia Pacific sales region by 26%.

 

Sales and Service Fees by Product Category

   Three months ended January 31,   Change 
   2012   2011   Amount   % 
Computerized Machine Tools  $45,308    89%  $33,994    86%  $11,314    33%
Service Fees, Parts and Other   5,818    11%   5,686    14%   132    2%
Total  $51,126    100%  $39,680    100%  $11,446    29%

 

Orders. Orders for the first quarter of fiscal 2012 were $48.9 million, an increase of $4.6 million, or 10%, from the corresponding period in fiscal 2011. The impact of currency translation on orders was consistent with the impact on sales. Unit orders for the first quarter of fiscal 2012 increased 3% in North America, but decreased 4% in Europe and 13% in the Asia Pacific region compared to the prior year period. During the first and second quarters of fiscal 2011, we experienced a significant upturn in our business, which was reflected in our unit orders for those quarters. While unit orders for the first quarter of fiscal 2012 did not outpace the rebound in orders we experienced during the first two quarters of fiscal 2011, the unit orders for the quarter did outpace the last two consecutive quarters by 20% and 22%, respectively, primarily due to increased demand in North America and Europe where industrial markets continue to experience recoveries.

 

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Gross Profit. Gross profit for the first quarter of fiscal 2012 was $16.5 million, or 32% of sales, compared to $11.7 million, or 29% of sales, for the same period in 2011. The increase in gross profit was primarily the result of increased sales in Europe and North America and the resulting leveraging of fixed costs across those sales.

 

Operating Expenses. Selling, general and administrative expenses were $9.7 million for the first quarter of fiscal 2012, an increase of $900,000, or 10%, over the first quarter of fiscal 2011. The increase was primarily related to higher sales commissions and sales and marketing expenses.  Despite the dollar increase, selling, general and administrative expenses were 19% of sales and service fees during the first quarter of fiscal 2012 compared to 22% for the first quarter of fiscal 2011 because of the resulting leveraging of operating costs across higher sales.

 

Operating Income . Operating income for the first quarter of fiscal 2012 was $6.8 million compared to $2.9 million for the prior year period. The substantial improvement in operating income period-over-period was primarily due to the significant increase in sales and the resulting leveraging of fixed costs across those sales.

 

Other (Income) Expense, Net. The increase in other income of $594,000 for the first quarter of fiscal 2012 compared to the same period in fiscal 2011 was primarily due to an increase in net realized and unrealized gains from foreign currency fluctuations on payables and receivables, net of foreign currency forward exchange contracts.

 

Income Taxes. Our effective tax rate for the first three months of fiscal 2012 was 33% in comparison to 37% for the same period in fiscal 2011. The decrease in the effective income tax rate is primarily driven from a shift in income from the U.S. to our foreign locations. We recorded an income tax provision during the first three months of fiscal 2012 of approximately $2.3 million compared to $899,000 for the same period in fiscal 2011, as a result of the increase in pre-tax income period-over-period.

 

Three Months Ended January 31, 2011 Compared to Three Months Ended January 31, 2010

 

Sales and Service Fees. Sales and service fees for the first quarter of fiscal 2011 were $39.7 million, an increase of $19.1 million, or 92%, from the first quarter of fiscal 2010. The increase in first quarter revenues reflected the substantial improvement in industrial manufacturing activity following significant declines in fiscal 2009 and 2010. The effect of a stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes had a negative impact of approximately 5%, or $1.1 million, on the period-to-period comparison.

 

The following tables set forth net sales (in thousands) by geographic region and product category for the first quarter of fiscal 2011 and 2010, respectively:

 

Net Sales and Service Fees by Geographic Region

   Three months ended January 31,   Change 
   2011   2010   Amount   % 
North America  $13,462    34%  $6,101    30%  $7,361    121%
Europe   21,279    54%   12,015    58%   9,264    77%
Asia Pacific   4,939    12%   2,500    12%   2,439    98%
Total  $39,680    100%  $20,616    100%  $19,064    92%

 

The increase in sales was primarily driven by higher customer demand in all sales regions. Unit shipments for the first quarter of fiscal 2011 increased in the North America by 139%, in Europe by 68%, and in the Asia Pacific region by 55% compared to the same period in fiscal 2010.

 

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Net Sales and Service Fees by Product Category

   Three months ended January 31,   Change 
   2011   2010   Amount   % 
Computerized Machine Tools  $33,994    86%  $16,890    82%  $17,104    101%
Service Fees, Parts and Other   5,686    14%   3,726    18%   1,960    53%
Total  $39,680    100%  $20,616    100%  $19,064    92%

 

Unit shipments of computerized machine tools during the first quarter of fiscal 2011 increased by 85% from the corresponding period in fiscal 2010.

 

Orders. New orders for the first quarter of fiscal 2011 totaled $44.3 million, an increase of $23.7 million, or 115%, from the corresponding period in fiscal 2010. New orders increased in North America by $7.8 million, or 134%, in Europe by $13.7 million, or 117%, and in the Asia Pacific region by $2.2 million, or 71%. The impact of currency translation on new orders was consistent with the impact on sales. New orders, measured in units, increased in North America by 166%, in Europe by 110%, and in the Asia Pacific sales region by 45%.

 

Gross Profit. Our gross profit for the first quarter of fiscal 2011 was 29%, compared to 19% for the same period in fiscal 2010. The increase in gross profit as a percentage of sales was due to the significant increase in production and sales volume and was partially offset by the negative impact of a strengthened Taiwanese Dollar in relation to the U.S. Dollar and an increase in the cost of raw materials, particularly metals.

 

Operating Expenses. Selling, general and administrative expenses were $8.8 million for the first quarter of fiscal 2011, an increase of $2.3 million, or 35%, from the first quarter of fiscal 2010. The increase included $594,000 of increased compensation paid to employees who took wage reductions during the economic downturn. The remainder of the increase primarily related to higher sales commissions and increased sales and marketing expenses. Despite the dollar increase, selling, general and administrative expenses were 22% of sales and service fees during the first quarter of fiscal 2011 compared to 32% for the first quarter of fiscal 2010.

 

Operating Income (Loss). Operating income for the first quarter of fiscal 2011 was $2.9 million compared to an operating loss of $2.6 million for the prior year period. The substantial improvement in operating income year-over-year was primarily due to the significant increase in sales and production volume.

 

Other (Income) Expense, Net. The increase in other expense of $179,000 was primarily due to net realized and unrealized losses from foreign currency fluctuations on payables and receivables, net of foreign currency forward exchange contracts.

 

Income Taxes. Our effective tax rate for the first quarter of fiscal 2011 was 37% in comparison to 35% for the same period in fiscal 2010. We recorded an income tax provision during the first quarter of fiscal 2011 of approximately $899,000 compared to an income tax benefit of $983,000 for the same period in fiscal 2010, as a result of the increase in operating income quarter over quarter.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At January 31, 2012, we had cash of $42.7 million, compared to $45.0 million at October 31, 2011. Approximately 62% of the $42.7 million of cash is denominated in U.S. Dollars. The balance is held outside the U.S. in the local currencies of our various foreign entities and is subject to fluctuations in currency exchange rates.

 

Working capital, excluding cash, was $70.7 million at January 31, 2012, compared to $61.9 million at October 31, 2011. The increase in working capital, excluding cash, was primarily due to an increase in accounts receivable and a decrease in accounts payable and accrued expenses during the first quarter of fiscal 2012. Accounts receivable have increased due to a higher volume of sales, while accounts payable and accrued expenses have decreased due to the timing of vendor payments and payments to employees for fiscal 2011 performance bonuses.

 

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Capital expenditures of $544,000 during the first three months of fiscal 2012 were primarily for implementation of operating systems, purchase of factory equipment for production facilities in Taiwan and software development costs. We funded these expenditures with cash on hand.

 

At January 31, 2012, we had $1.5 million of borrowings outstanding under our credit facility in China and had no other borrowings under any of our other credit facilities. The increase in the borrowings on the credit facility in China from October 31, 2011 to January 31, 2012 was to meet working capital needs as production levels are being increased to meet current demand. At January 31, 2012, we were in compliance with the covenants contained in all of our credit facilities and had an aggregate of $23.6 million available for borrowings under our credit facilities.

 

We believe our cash position and borrowing capacity under our credit facilities provide adequate liquidity to fund our operations and keep us committed to our strategic plan of product innovation and targeted penetration of developing markets.

 

Although we have not made any significant acquisitions in the recent past, we continue to receive and review information on businesses and assets, including intellectual property assets, which are available for purchase.

 

CRITICAL ACCOUNTING POLICIES

 

Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, 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 quarter of fiscal 2012.

 

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, 2011.

 

OFF BALANCE SHEET ARRANGEMENTS

 

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow Financial Accounting Standards Board, or FASB, guidance for accounting for contingencies with respect to these guarantees. As of January 31, 2012, we had 23 outstanding third party payment guarantees totaling approximately $1.3 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue for potential liabilities under these guarantees when we believe a loss is probable and can be estimated.

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 cyclical nature of the machine tool industry;
·Uncertain economic conditions may adversely affect overall demand, particularly in Europe
·The risks of our international operations;
·The limited number of our manufacturing sources;

 

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·The effects of changes in currency exchange rates;
·Our dependence on new product development;
·Possible obsolescence of our technology and the need to make technological advances;
·Competition with larger companies that have greater financial resources;
·Increases in the prices of raw materials, especially steel and iron products;
·Acquisitions that could disrupt our operations and affect operating results;
·Impairment of our assets;
·Negative or unforeseen tax consequences;
·The need to protect our intellectual property assets;
·The effect of the loss of members of senior management and key personnel; and
·Governmental actions and initiatives, including import and export restrictions and tariffs.

 

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 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Interest on borrowings on our credit agreements are tied to prevailing domestic and foreign interest rates. At January 31, 2011, we had $1.5 million of borrowings outstanding under our credit facility in China, but had no other debt or borrowings under any of our other credit agreements.

 

Foreign Currency Exchange Risk

 

In fiscal 2011, we derived more than 70% 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 subsidiaries in Taiwan and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar.

 

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 January 31, 2012, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities 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
   January 31,
2012
   Maturity Dates 
Sale Contracts:                         
Euro   27,825,000    1.3843    38,518,148    36,438,904    February 2012 – January 2013 
Pound Sterling   6,450,000    1.5892    10,250,467    10,146,390    February 2012 – January 2013 
Purchase Contracts:                         
New Taiwan Dollar   857,000,000    29.143*   29,406,565    29,071,988    February 2012 – January 2013 

 

*NT Dollars per U.S. Dollar

 

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Forward contracts for the sale or purchase of foreign currencies as of January 31, 2012, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables and are not designated as hedges under this guidance denominated in foreign currencies, were as follows:

 

           Contract Amount at
Forward Rates in
U.S. Dollars 
     
Forward Contracts  Notional
Amount in
Foreign
Currency
   Weighted
Avg.
Forward
Rate
   Contract
Date
   January 31,
2012
   Maturity Dates 
Sale Contracts:                         
Euro   15,611,946    1.3286    20,741,313    20,433,554    February 2012 – April 2012 
Pound Sterling   1,226,661    1.5474    1,898,110    1,931,881    February 2012 – March 2012 
Canadian Dollar   621,070    0.9972    619,303    618,332    April 2012 
South African Rand   4,662,812    0.1273    593,762    589,727    April 2012 
                          
Purchase Contracts:                         
New Taiwan Dollar   317,561,280    29.901*   10,620,588    10,716,504    February 2012 – March 2012 

 

* NT Dollars per U.S. Dollar

 

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we have maintained a forward contract 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 FASB, guidance related to the accounting for derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2012. At January 31, 2012, we had $227,000 of realized gains and $78,000 of unrealized gains, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract. Forward contracts for the sale or purchase of foreign currencies as of January 31, 2012, which are designated as net investment hedges under this guidance were as follows:

 

           Contract Amount at
Forward Rates in
U.S. Dollars
     
Forward Contracts  Notional
Amount
in Foreign
Currency
   Weighted
Avg.
Forward
Rate
   Contract
Date
   January 31,
2012
   Maturity Date 
Sale Contracts:                         
Euro   3,000,000    1.3520    4,056,000    3,932,940    November 2012 

 

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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 January 31, 2012, 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 January 31, 2012 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, 2011.

 

Item 5. OTHER INFORMATION

 

During the period covered by this report, the Audit Committee of our Board of Directors engaged our independent registered public accounting firm to perform non-audit, tax planning 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

 

  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.
     
  101.INS XBRL Instance Document*
     
  101.SCH XBRL Taxonomy Extension Schema Document*
     
  101.CAL XBRL Taxonomy Extension Calculation Linkbase
     
  101.LAB XBRL Taxonomy Extension Label Linkbase Document*
     
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
     
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document*

 

*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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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  

 

March 9, 2012

 

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