Hurco Companies Inc: Form 10-Q for the period ended Apr 30, 2025

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide an understanding of our financial condition and other related matters, including our liquidity, capital resources, and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the notes accompanying our unaudited financial statements appearing elsewhere in this report, as well as our audited financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2024.

EXECUTIVE OVERVIEW

Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture, and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service, and distribution network. Although most of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories, and replacement parts for our products, as well as customer service and training and applications support.

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

The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During the first six months of fiscal 2025, approximately 50% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines. Additionally, approximately 12% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures. We operate in a cyclical industry where sales and order trends often change periodically and can vary from region to region. Changes in trade policies, tariffs, and other import/export regulations of the U.S. and other nations did not have a material impact on our financial results for the three and six months ended April 30, 2025. However, we do have sales in, and purchases from, foreign countries that could be negatively impacted by recent or future tariff actions.

Sales and service fees in the first six months of fiscal 2025 decreased by 3%, compared to the same period in fiscal 2024. The decrease in sales occurred primarily in the European region. Orders in the first six months of fiscal 2025 decreased by 11% from the same period in fiscal 2024, reflecting a decrease in orders in the Americas and European regions, partially offset by an increase in orders in Asia Pacific region.

We have three brands of CNC machine tools in our product portfolio: Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die and mold, aerospace, and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. These three brands of CNC machine tools are responsible for the vast majority of our revenue. However, we have added other non-Hurco branded products to our product portfolio that have contributed product diversity and market penetration opportunity. These non-Hurco branded products are sold by our wholly-owned distributors and are comprised primarily of other general-purpose vertical milling centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machines, metal cutting saws and CNC swill lathes. ProCobots LLC is our wholly-owned subsidiary that provides automation solutions. In addition, through our wholly-owned subsidiary in Italy, LCM Precision Technology S.r.l. (“LCM”), we produce high value machine tool components and accessories.

We principally sell our products through approximately 180 independent agents and distributors throughout the Americas, Europe, and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, the Czech Republic, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain parts of the United States, which are among the world’s principal machine tool consuming markets. The vast majority of our machine tools are manufactured and assembled to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM.

Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling, and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. dollars for reporting in our financial statements, are higher than would be the case when the U.S. dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. dollars at exchange rates prevailing during the period covered by those financial statements.

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

RESULTS OF OPERATIONS

Three Months Ended April 30, 2025 Compared to Three Months Ended April 30, 2024

Sales and Service Fees. Sales and service fees for the second quarter of fiscal year 2025 were $40.9 million, a decrease of $4.3 million, or 10%, compared to the corresponding prior year period, and included a favorable currency impact of $0.2 million, or less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.

Sales and Service Fees by Geographic Region

The following table sets forth sales and service fees by geographic region for the second fiscal quarter ended April 30, 2025 and 2024 (dollars in thousands):

Sales in the Americas for the second quarter of fiscal year 2025 decreased by 9%, compared to the corresponding period in fiscal year 2024, primarily due to decreased shipments of Hurco and Takumi machines and reduced sales of other original equipment manufacturer (“OEM”) machines by our wholly-owned domestic distributors. The decrease in machine sales was mostly attributable to decreased shipments of Hurco VMX and Takumi bridge mill and horizontal machines.

European sales for the second quarter of fiscal year 2025 decreased by 5%, compared to the corresponding period in fiscal year 2024, and included a favorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in European sales for the second quarter of fiscal year 2025 was primarily attributable to a decreased volume of shipments of higher performance Hurco and Takumi machines in Germany, France, and Italy, as well as decreased volume of shipments of LCM electro-mechanical components and accessories, partially offset by increased shipment of higher performance Hurco machines in the United Kingdom.

Asian Pacific sales for the second quarter of fiscal year 2025 decreased by 29%, compared to the corresponding period in fiscal year 2024, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in Asian Pacific sales primarily resulted from decreased sales of higher-performance and 5-axis Hurco and Takumi machines in India, partially offset by increased shipment volume of Hurco VM and Takumi bridge mill and horizontal machines in China and Southeast Asia.

Sales and Service Fees by Product Category

The following table sets forth sales and service fees by product group and services for the second quarter ended April 30, 2025 and 2024 (dollars in thousands):

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

Sales of computerized machine tools for the second quarter of fiscal year 2025 decreased by 10%, compared to the corresponding prior year period, primarily due to a decreased volume of shipments of Hurco and Takumi machines in all geographic regions. Sales of computer control systems and software for the second quarter of fiscal year 2025 increased by 12%, compared to the corresponding prior year period, due mainly to increased software sales in the United Kingdom. Sales of service parts for the second quarter of fiscal year 2025 decreased by 14%, compared to the corresponding prior year period, primarily due to decreases in aftermarket service parts sales in Europe. Services fees for the second quarter of fiscal year 2025 increased by 7%, compared to the corresponding prior year period, primarily due to increased aftermarket service fees in Germany and Italy. Sales for all product lines included a favorable currency impact of less than 1% when translating foreign sales to U.S. dollars for financial reporting purposes.

Orders. Orders for the second quarter of fiscal year 2025 were $43.7 million, a decrease of $0.5 million, or 1%, compared to the corresponding period in fiscal year 2024, and included an immaterial favorable currency impact of $0.1 million, or less than 1%, when translating foreign orders to U.S. dollars.

The following table sets forth new orders booked by geographic region for the fiscal quarter ended April 30, 2025 and 2024 (dollars in thousands):

Orders in the Americas for the second quarter of fiscal year 2025 decreased by 1%, compared to the corresponding period in fiscal year 2024, primarily due to reduced demand for OEM machines sold by our wholly-owned domestic distributors, partially offset by increased customer demand for Milltronics machines.

European orders for the second quarter of fiscal year 2025 decreased by 12%, compared to the corresponding prior year period, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S. dollars. The decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany and the United Kingdom, partially offset by increased customer demand for Hurco machines in Italy and electro-mechanical components and accessories manufactured by LCM.

Asian Pacific orders for the second quarter of fiscal year 2025 increased by 74%, compared to the corresponding prior year period, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. dollars. The increase in Asian Pacific orders was driven primarily by an increase in customer demand for Hurco and Takumi machines across the Asian Pacific region where our customers are located.

Gross Profit. Gross profit for the second quarter of fiscal year 2025 was $7.8 million, or 19% of sales, compared to $8.0 million, or 18% of sales, for the corresponding prior year period. The year-over-year increase in gross profit as a percentage of sales was primarily due to an increase of European sales contributions to total sales of 3% and lower fixed costs allocated to overhead related to cost savings implemented in the second half of fiscal 2024.

Operating Expenses. Selling, general, and administrative expenses for the second quarter of fiscal year 2025 were $10.9 million, or 27% of sales, compared to $11.5 million, or 25% of sales, in the corresponding fiscal year 2024 period, and included an immaterial unfavorable currency impact of less than $0.1 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses for the quarter reflected lower levels of discretionary spending, reduced sales commissions, and reduced employee health insurance costs.

Operating Income/Loss. Operating loss for the second quarter of fiscal year 2025 was $3.1 million, compared to $3.4 million for the corresponding period in fiscal year 2024. The change was primarily due to a higher concentration of machines sales in Europe and lower fixed costs allocated to overhead and operating expenses related to cost savings implemented in the second half of 2024, partially offset by the lower volume of sales of vertical milling machines.

Other (Expense) Income, Net. Other expense, net for the second quarter of fiscal year 2025 was $0.6 million compared to $0.5 million for the corresponding period in fiscal year 2024, due mainly to a decrease in income from our equity investment.

Income Taxes. Income tax expense for the second quarter of fiscal year 2025 was $0.5 million, compared to an income tax expense of less than $0.1 million, for the corresponding prior year period. The year-over-year change was primarily due to a $1.3 million non-cash valuation allowance recorded on our Italian, U.S. and Chinese deferred tax assets, as well as changes in geographic mix of income and loss that include jurisdictions with differing tax rates, and discrete items related to unvested stock compensation. Because we have a valuation allowance recorded against our Italian, U.S. and Chinese deferred tax assets, we did not record a tax benefit of $1.3 million for our U.S., Italian and Chinese pre-tax losses for the three months ended April 30, 2025. The valuation allowance recorded during the second quarter of fiscal 2025 reflected a full valuation allowance of the U.S. and Italian deferred tax assets and was recorded after evaluating changes to tax laws, statutory tax rates, and our cumulative three-year income (loss) levels for the U.S. and Italy for the first six months of fiscal year 2025.

Six Months Ended April 30, 2025, Compared to Six Months Ended April 30, 2024

Sales and Service Fees. Sales and service fees for the first six months of fiscal year 2025 were $87.3 million, a decrease of $3.0 million, or 3%, compared to the corresponding prior year period, and included an unfavorable currency impact of $0.2 million, or less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.

Sales and Service Fees by Geographic Region

The following table sets forth sales and service fees by geographic region for the six months ended April 30, 2025 and 2024 (dollars in thousands):

Sales in the Americas for the first six months of fiscal year 2025 decreased by less than 1%, compared to the corresponding period in fiscal year 2024, primarily due to decreased shipments of Hurco and Takumi machines and reduced sales of OEM machines by our wholly-owned domestic distributors. The decrease in machine sales was mostly attributable to decreased shipments of Hurco VMX and Takumi bridge mill and horizontal machines.

European sales for the first six months of fiscal year 2025 decreased by 5%, compared to the corresponding period in fiscal year 2024, and included an unfavorable currency impact of less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in European sales for the first six months of fiscal year 2025 was primarily attributable to a decreased volume of shipments of Hurco and Takumi machines in Germany, France, and Italy, as well as a decreased volume of shipments of LCM electro-mechanical components and accessories, partially offset by increased shipments of higher performance Hurco machines in the United Kingdom.

Asian Pacific sales for the first six months of fiscal year 2025 decreased by 5%, compared to the corresponding period in fiscal year 2024, and included an unfavorable currency impact of 2%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in Asian Pacific sales primarily resulted from decreased sales of higher-performance and 5-axis Hurco and Takumi machines in India, partially offset by increased shipment volume of Hurco VM and Takumi bridge mill and horizontal machines in China and Southeast Asia.

Sales and Service Fees by Product Category

The following table sets forth sales and service fees by product group and services for the six months ended April 30, 2025 and 2024 (dollars in thousands):

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

Sales of computerized machine tools for the first six months of fiscal year 2025 decreased by 2%, compared to the corresponding prior year period, primarily due to a decreased volume of shipments of Hurco and Takumi machines in all geographic regions. Sales of computer control systems and software for the first six months of fiscal year 2025 increased by 12%, compared to the corresponding prior year period, due mainly to increased software sales in the United Kingdom. Sales of service parts for the first six months of fiscal year 2025 decreased by 13%, compared to the corresponding prior year period, primarily due to decreases in aftermarket service parts sales in the Americas and Europe. Services fees for the first six months of fiscal year 2025 increased by 5%, compared to the corresponding prior year period, primarily due to increased aftermarket service fees in the Americas, Germany, and France. Sales for all product lines included an unfavorable currency impact of less than 1% when translating foreign sales to U.S. dollars for financial reporting purposes.

Orders. Orders for the first six months of fiscal year 2025 were $83.8 million, a decrease of $10.6 million, or 11%, compared to the corresponding period in fiscal year 2024, and included an unfavorable currency impact of $0.3 million, or less than 1%, when translating foreign orders to U.S. dollars.

The following table sets forth new orders booked by geographic region for the six months ended April 30, 2025, and 2024 (dollars in thousands):

Orders in the Americas for the first six months of fiscal year 2025 decreased by 17%, compared to the corresponding period in fiscal year 2024, primarily due to decreased customer demand for Hurco and Takumi machines and reduced demand for OEM machines sold by our wholly-owned domestic distributors, partially offset by increased customer demand for Milltronics machines.

European orders for the first six months of fiscal year 2025 decreased by 15%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S. dollars. The year-over-year decrease was primarily due to decreased customer demand for Hurco machines in Germany, the United Kingdom, and France, and decreased customer demand for electro-mechanical components and accessories manufactured by LCM, partially offset by increased customer demand for Hurco machines in Italy.

Asian Pacific orders for the first six months of fiscal year 2025 increased by 28%, compared to the corresponding prior year period, and included an unfavorable currency impact of 2%, when translating foreign orders to U.S. dollars. The increase in Asian Pacific orders was driven primarily by increased customer demand for Hurco and Takumi machines across the Asian Pacific region where our customers are located.

Gross Profit. Gross profit for the first six months of fiscal year 2025 was $16.1 million, or 18% of sales, compared to $17.7 million, or 20% of sales, for the corresponding prior year period. The year-over-year decrease in gross profit as a percentage of sales was primarily due to the lower volume of sales of vertical milling machines in the Americas and Europe where we typically sell more of our higher-performance VMX series machines and lathes.

Operating Expenses. Selling, general, and administrative expenses for the first six months of fiscal year 2025 were $21.3 million, or 24% of sales, compared to $23.0 million, or 25% of sales, in the corresponding fiscal year 2024 period, and included an immaterial favorable currency impact of less than $0.1 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses for the first six months of fiscal year 2025 reflected lower levels of discretionary spending, reduced sales commissions, and reduced employee health insurance costs.

Operating Income/Loss. Operating loss for the first six months of fiscal year 2025 was $5.2 million, compared to $5.3 million for the corresponding period in fiscal year 2024. The change was primarily due to lower fixed costs allocated to overhead and operating expenses related to cost savings implemented in the second half of fiscal 2024, partially offset by the lower volume of sales of vertical milling machines.

Other (Expense) Income, Net. Other expense, net for the first six months of fiscal year 2025 was $1.0 million compared to $1.0 million for the corresponding period in fiscal year 2024.

Income Taxes. Income tax expense for the first six months of fiscal year 2025 was $2.6 million, compared to an income tax benefit of $0.6 million, for the corresponding prior year period. The year-over-year change was primarily due to a $3.7 million non-cash valuation allowance recorded on our Italian, U.S. and Chinese deferred tax assets, as well as changes in geographic mix of income and loss that includes jurisdictions with differing tax rates and discrete items related to unvested stock compensation. Because we have a valuation allowance recorded against our Italian, U.S. and Chinese deferred tax assets, we did not record a tax benefit of $2.4 million for our U.S., Italian and Chinese pre-tax losses for the six months ended April 30, 2025. The valuation allowance recorded during the first six months of fiscal 2025 reflected a full valuation allowance of the U.S. and Italian deferred tax assets and was recorded after evaluating changes to tax laws, statutory tax rates, and our cumulative three-year income (loss) levels for the U.S. and Italy for the first six months of fiscal year 2025.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2025, we had cash and cash equivalents of $43.8 million, compared to $33.3 million at October 31, 2024. Approximately 27% of the $43.8 million of cash and cash equivalents was denominated in U.S. dollars. The balance was attributable to our foreign operations and is held in the local currencies of our various foreign entities, subject to fluctuations in currency exchange rates. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.

Working capital was $175.9 million at April 30, 2025, compared to $180.8 million at October 31, 2024. The decrease in working capital was primarily driven by decreases in inventories and accounts receivable, net, partially offset by an increase in cash and cash equivalents.

Capital expenditures of $1.4 million during the first six months of fiscal year 2025 were primarily for software development costs and capital improvements in existing facilities. We funded these expenditures with cash on hand.

On January 6, 2023, we announced a share repurchase program in an aggregate amount of up to $25.0 million. Repurchases under the program may be made in the open market or through privately negotiated transactions from time to time, subject to applicable laws, regulations, and contractual provisions. On September 25, 2024, we announced an extension of the term of this $25.0 million repurchase program from November 10, 2024 to November 10, 2026. The program may be amended, suspended, or discontinued at any time and does not commit us to repurchase any shares of our common stock. We did not repurchase any shares during the first six months of fiscal 2025. As of April 30, 2025, $21.7 million remained available under the program.

On June 14, 2024, we announced a temporary suspension of our regular quarterly cash dividend as we seek to enhance our financial flexibility and improve our ability to manage market volatility while focusing on strengthening our balance sheet, reinvesting in our core business and research and development related to emerging technologies, and returning value to shareholders via the appropriate channels in both the near and long-term. Future dividends are subject to approval of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy, and other factors deemed relevant by our Board of Directors from time to time.

On December 31, 2018, we and our subsidiary Hurco B.V. entered into the 2018 Credit Agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020, December 17, 2021, January 4, 2023 and December 19, 2023. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2025.

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the SOFR, the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $25.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. In February and December 2023, NHML and HML, respectively, renewed the above-referenced credit facilities on substantially similar terms and identical maximum aggregate limits.

As of April 30, 2025, our existing credit facilities consisted of a €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. We had no debt or borrowings under any of our credit facilities at April 30, 2025.

At April 30, 2025, we had an aggregate of approximately $50.8 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

We have an international cash pooling strategy that generally provides access to available cash deposits and credit facilities when needed in the U.S., Europe, or Asia Pacific. We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and beyond, and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, and a balanced capital allocation program.

We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase.

CRITICAL ACCOUNTING ESTIMATES

Our MD&A is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. The preparation of financial statements in conformity with those accounting principles requires us to make judgments and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Those judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates. Our critical accounting estimates, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2024, are frequently evaluated as our judgment and estimates are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. During the first six months of fiscal year 2025, there were no material changes to our critical accounting estimates as described in the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2024.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes related to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2024.

OFF BALANCE SHEET ARRANGEMENTS

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of April 30, 2025, we had seven outstanding third party payment guarantees totaling approximately $0.8 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements made in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements.

These risks, uncertainties and other factors include, but are not limited to:

• The cyclical nature of the machine tool industry;
• Uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets;
• The risks of our international operations;
• Governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to tax laws;
• The effects of changes in currency exchange rates;
• Competition with larger companies that have greater financial resources;
• Our dependence on new product development;
• The need and/or ability to protect our intellectual property assets;
• The limited number of our manufacturing and supply chain sources;
• Increases in the prices of raw materials, especially steel and iron products;
• The effect of the loss of members of senior management and key personnel;
• Our ability to integrate acquisitions;
• Acquisitions that could disrupt our operations and affect operating results;
• Failure to comply with data privacy and security regulations;
• Breaches of our network and system security measures;
• Possible obsolescence of our technology and the need to make technological advances;
• Impairment of our assets;
• Negative or unforeseen tax consequences;
• Uncertainty concerning our ability to use tax loss carryforwards;
• Changes in the SOFR rate; and
• The impact of the COVID-19 pandemic and other public health epidemics and pandemics on the global economy, our business and operations, our employees and the business, operations and economies of our customers and suppliers.

We discuss these and other important risks and uncertainties that may affect our future operations in Part I, Item 1A – Risk Factors in our most recent Annual Report on Form 10K and may update that discussion in Part II, Item 1A – Risk Factors in this report or in a Quarterly Report on Form 10 Q we file hereafter.

Readers are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement is applicable to all forward-looking statements contained in this report.

Interest Rate Risk

Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At April 30, 2025, we had no borrowings outstanding under any of our credit facilities.

Foreign Currency Exchange Risk

In the first six months of fiscal year 2025, we derived approximately 62% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. 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, the U.S., and Italy 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 and the Euro.

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 inter-company receivables, payables, and loans 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 April 30, 2025, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows (in thousands, except weighted average forward rates):

* New Taiwan Dollars per U.S. dollar

Forward contracts for the sale or purchase of foreign currencies as of April 30, 2025, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies and are not designated as hedges under FASB guidance, were as follows (in thousands, except weighted average forward rates):

* New Taiwan 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 derivative 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 2025. As of April 30, 2025, we had a realized gain of $1.2 million and an unrealized loss of $0.1 million, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to the hedging of our net investment in Euro-denominated assets. Forward contracts for the sale or purchase of foreign currencies as of April 30, 2025, which are designated as net investment hedges under this guidance, were as follows (in thousands, except weighted average forward rates):

We conducted an evaluation under the supervision and with the 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 April 30, 2025, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 control over financial reporting during the three months ended April 30, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, 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, 2024. The following new risk factor is added:

Changes in U.S. trade policy, including the imposition of tariffs and the resulting consequences, may have a material adverse impact on our business, financial condition, and results of operations.

The U.S. government has adopted new approaches to trade policy, and in some cases may renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. The U.S. government has also imposed tariffs on most foreign goods and has raised the possibility of imposing significant tariff increases or expanding the tariffs to capture other countries and types of goods. Tariffs on imports from nations from whom we procure products or materials and components used in our manufacturing process could increase our operating costs and/or require us to incur significant costs to transition to alternative manufacturers or suppliers. Future tariff increases, expanding the tariffs to cover other countries or other changes in U.S. trade policy could exacerbate these challenges.

In addition, in response to these tariffs, other countries have threatened, announced or implemented retaliatory tariffs on U.S. goods. Political tensions and uncertainty as a result of trade policies and ongoing judicial challenges to such policies could reduce trade volume, investment, technological exchange, and other economic activities between major international economies, resulting in a material adverse effect on global economic conditions and the stability of global financial markets, which could in turn have a material adverse impact on our business, financial condition and results of operations.