Q2 2007 Form 10Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q



(Mark One)
 
 x
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 30, 2007 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:
 
                                                                                                                         YesNo __


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

Large accelerated filer [ ]   Accelerated filer [ X ]   Non-accelerated filer [ ]

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 June 7, 2007 was 6,389,720.



 

 


HURCO COMPANIES, INC.
April 2007 Form 10-Q Quarterly Report


Table of Contents



Part I - Financial Information


Item 1.
Financial Statements
 
     
 
Condensed Consolidated Statement of Operations ………………………………………..
Three and six months ended April 30, 2007 and 2006
3
     
 
Condensed Consolidated Balance Sheet …………………………………………………..
As of April 30, 2007 and October 31, 2006
4
     
 
Condensed Consolidated Statement of Cash Flows………………………………………..
Three and six months ended April 30, 2007 and 2006
5
     
 
Condensed Consolidated Statement of Changes in Shareholders' Equity…………………
Three and six months ended April 30, 2007 and 2006
6
     
 
Notes to Condensed Consolidated Financial Statements…………………………………..
7
     
Item 2.
Management's Discussion and Analysis of Financial ……………………………………..
Condition and Results of Operations
11
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk …………………………….
18
     
Item 4.
Controls and Procedures …………………………………………………………………...
20
     

Part II - Other Information


Item 1.
Legal Proceedings…………………………………...…………………………………...
21
     
Item 1A.
Risk Factors…………..……………………………...…………………………………...
21
     
Item 4.
Submission of Matters to a Vote of Security Holders……………………………………
21
     
Item 5.
Other Information…..……......................................................................................................
21
     
Item 6.
Exhibits…..…………………..................................................................................................
22
     
Signatures
…………………………………………………………………………………………….
23





PART I - FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS


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


   
Three Months Ended
 
Six Months Ended
 
   
April 30,
 
April 30,
 
   
2007
 
2006
 
2007
 
2006
 
   
(unaudited)
 
(unaudited)
 
                   
Sales and service fees
 
$
42,494
 
$
36,861
 
$
89,372
 
$
68,755
 
                           
Cost of sales and service
   
26,145
   
23,682
   
55,700
   
44,649
 
                           
Gross profit
   
16,349
   
13,179
   
33,672
   
24,106
 
                           
Selling, general and administrative expenses
   
9,405
   
7,140
   
18,655
   
13,436
 
                           
Operating income
   
6,944
   
6,039
   
15,017
   
10,670
 
                           
Interest (income) expense, net
   
(5
)
 
80
   
39
   
164
 
                           
Other expense, net
   
495
   
220
   
858
   
325
 
                           
Income before taxes
   
7,444
   
6,179
   
15,836
   
10,831
 
                           
Provision for income taxes
   
2,764
   
2,250
   
5,761
   
3,869
 
                           
Net income
 
$
4,680
 
$
3,929
 
$
10,075
 
$
6,962
 
                           
Earnings per common share:
                         
                           
Basic
 
$
.73
 
$
.62
 
$
1.58
 
$
1.11
 
Diluted
 
$
.73
 
$
.62
 
$
1.57
 
$
1.09
 
                           
Weighted-average common shares outstanding:
                         
                           
Basic
   
6,373
   
6,291
   
6,373
   
6,291
 
Diluted
   
6,431
   
6,377
   
6,427
   
6,377
 








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

3


HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands)

   
April 30
 
October 31
 
   
2007
 
2006
 
   
(unaudited)
 
(audited)
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
 
$
34,457
 
$
29,846
 
Accounts receivable
   
24,122
   
22,248
 
Inventories
   
45,149
   
43,343
 
Deferred tax assets 
   
2,987
   
2,768
 
Other
   
3,796
   
2,677
 
Total current assets
   
110,511
   
100,882
 
               
Property and equipment:
             
Land
   
761
   
761
 
Building
   
7,234
   
7,234
 
Machinery and equipment
   
13,633
   
12,952
 
Leasehold improvements
   
1,241
   
1,147
 
     
22,869
   
22,094
 
Less accumulated depreciation and amortization
   
(13,580
)
 
(12,944
)
     
9,289
   
9,150
 
Non-current assets:
             
Deferred tax assets
   
1,021
   
1,121
 
Software development costs, less accumulated amortization
   
6,341
   
5,580
 
Investments and other assets
   
8,235
   
7,381
 
   
$
135,397
 
$
124,114
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
Current liabilities:
             
Accounts payable
 
$
27,883
 
$
26,605
 
Accrued expenses
   
20,690
   
17,599
 
Current portion of long-term debt
   
-
   
136
 
Total current liabilities
   
48,573
   
44,340
 
               
Non-current liabilities:
             
Long-term debt 
   
-
   
3,874
 
Deferred credits and other 
   
625
   
525
 
Total liabilities
   
49,198
   
48,739
 
               
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, and 6,389,720 and 6,346,520
             
shares issued and outstanding, respectively
   
639
   
635
 
Additional paid-in capital 
   
50,760
   
50,011
 
Retained earnings 
   
38,555
   
28,480
 
Accumulated other comprehensive income 
   
(3,755
)
 
(3,751
)
Total shareholders’ equity
   
86,199
   
75,375
 
   
$
135,397
 
$
124,114
 


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

4


HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
 
   
Three Months Ended
 
Six Months Ended
 
   
April 30,
 
April 30,
 
   
2007
 
2006
 
2007
 
2006
 
   
(unaudited)
 
(unaudited)
 
Cash flows from operating activities:
                 
Net income
 
$
4,680
 
$
3,929
 
$
10,075
 
$
6,962
 
Adjustments to reconcile net income to
Net cash provided by (used for) operating activities:
                         
Provision for doubtful accounts
   
281
   
67
   
243
   
83
 
Equity in income of affiliates
   
(416
)
 
(205
)
 
(620
)
 
(301
)
Depreciation and amortization
   
396
   
367
   
787
   
732
 
Stock-based compensation
   
58
         
366
   
8
 
Change in operating assets and liabilities:
                         
(Increase) decrease in accounts receivable
   
1,370
   
(5,400
)
 
(1,217
)
 
(4,178
)
(Increase) decrease in inventories
   
(4,219
)
 
(4,189
)
 
(524
)
 
(5,168
)
Increase (decrease) in accounts payable
   
3,770
   
7,984
   
1,136
   
9,951
 
Increase (decrease) in accrued expenses
   
2,292
   
1,558
   
497
   
(1,001
)
Increase (decrease) in deferred asset
   
(573
)
 
457
   
(496
)
 
867
 
Other
   
(1,590
)
 
(1,290
)
 
(1,285
)
 
(1,213
)
Net cash provided by operating activities
   
6,049
   
3,278
   
8,962
   
6,742
 
                           
Cash flows from investing activities:
                         
Purchase of property and equipment 
   
(441
)
 
(236
)
 
(592
)
 
(297
)
Software development costs capitalized 
   
(543
)
 
(468
)
 
(1,050
)
 
(900
)
Other investments 
   
139
   
(182
)
 
(160
)
 
(341
)
Net cash used for investing activities
   
(845
)
 
(886
)
 
(1,802
)
 
(1,538
)
                           
Cash flows from financing activities:
                         
Repayment on first mortgage 
   
(3,976
)
 
(32
)
 
(4,010
)
 
(62
)
Tax benefit from exercise of stock options 
   
153
   
--
   
268
   
499
 
Proceeds from exercise of common stock options 
   
22
   
--
   
119
   
530
 
Net cash provided by (used for)
financing activities
   
(3,801
)
 
(32
)
 
(3,623
)
 
967
 
                           
Effect of exchange rate changes on cash 
   
728
   
288
   
1,074
   
480
 
                           
Net increase in cash and
cash equivalents
   
2,131
   
2,648
   
4,611
   
6,651
 
                           
Cash and cash equivalents
at beginning of period
   
32,326
   
21,562
   
29,846
   
17,559
 
                           
Cash and cash equivalents
at end of period
 
$
34,457
 
$
24,210
 
$
34,457
 
$
24,210
 




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

5


HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended April 30, 2007 and 2006
(Dollars in thousands except Shares Issued and Outstanding)

   
 
 
Common Stock
 
 
 
Additional
 
 
 
Retained
 
Accumulated
Other
Comprehensive
     
   
Shares Issued
& Outstanding
 
 
Amount
 
Paid-In
Capital
 
Earnings
(Deficit)
 
Income
(Loss)
 
 
Total
 
   
(Dollars in thousands)
 
                           
Balances, October 31, 2005
   
6,220,220
 
$
622
 
$
48,701
 
$
13,001
 
$
(3,380
)
$
58,944
 
                                       
Net income
   
--
   
--
   
--
   
6,962
   
--
   
6,962
 
                                       
Translation of foreign currency financial statements
   
--
   
--
   
--
   
--
   
1,306
   
1,306
 
                                       
Unrealized gain on derivative instruments
   
--
   
--
   
--
   
--
   
(625
)
 
(625
)
                                       
Comprehensive income
   
--
   
--
   
--
   
--
   
--
   
7,643
 
                                       
Exercise of common stock options
   
120,800
   
12
   
518
   
--
   
--
   
530
 
                                       
Tax benefit from exercise of stock options
   
--
   
--
   
499
   
--
   
--
   
499
 
                                       
Stock-based compensation expense
   
--
   
--
   
8
   
--
   
--
   
8
 
                                       
Balances, April 30, 2006
   
6,341,020
 
$
634
 
$
49,726
 
$
19,963
 
$
(2,699
)
$
67,624
 
                                       
                                       
Balances, October 31, 2006 
   
6,346,520
 
$
635
 
$
50,011
 
$
28,480
 
$
(3,751
)
$
75,375
 
                       
Net income
   
--
   
--
   
--
   
10,075
   
--
   
10,075
 
                                       
Translation of foreign currency financial statements
   
--
   
--
   
--
   
--
   
1,365
   
1,365
 
                                       
Unrealized loss on derivative instruments
   
--
   
--
   
--
   
--
   
(1,369
)
 
(1,369
)
                                       
Comprehensive income
   
--
   
--
   
--
   
--
   
--
   
10,071
 
                                       
Exercise of common stock options
   
43,200
   
4
   
115
   
--
   
--
   
119
 
                                       
Tax benefit from exercise of stock options
   
--
   
--
   
268
   
--
   
--
   
268
 
                                       
Stock-based compensation expense
   
--
   
--
   
366
   
--
   
--
   
366
 
                                       
Balances, April 30, 2007
   
6,389,720
 
$
639
 
$
50,760
 
$
38,555
 
$
( 3,755
)
$
86,199
 
                                       








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 April 30, 2007 and for the three and six months ended April 30, 2007 and April 30, 2006 is unaudited; however, in our opinion, the interim data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our results for, and our financial position 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, 2006.

2.  
HEDGING

We enter into foreign currency forward exchange contracts periodically to hedge certain forecast inter-company sales and forecast inter-company and third party 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 Other Current Assets and Accrued Expenses. Gains and losses resulting from changes in the fair value of these hedge contracts are deferred in Accumulated Other Comprehensive Income and recognized as an adjustment to Cost of Sales in the period that the sale 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.

At April 30, 2007, we had $1,817,000 of losses related to cash flow hedges deferred in Accumulated Other Comprehensive Income, net of tax. Of this amount, $1,442,000 represented unrealized losses related to future cash flow hedge instruments that remain subject to currency fluctuation risk. These deferred losses will be recorded as an adjustment to Cost of Sales in the periods through December 2007, in which the sale that is the subject of the related hedge contract is recognized, as described above. Net losses on cash flow hedge contracts, which we reclassified from Other Comprehensive Income to Cost of Sales in the quarter ended April 30, 2007, were $273,000 compared to net gains of $346,000 for the same period in the prior year.

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 Statement of Financial Accounting Standards No. 133, “Accounting Standards for Derivative Instruments and Hedging Activities” (SFAS 133), and, as a result, changes in their fair value are reported currently as Other Expense (Income), Net in the Consolidated Statement of Operations consistent with the transaction gain or loss on the related foreign denominated receivable or payable. Such net transaction losses were $27,000 and $71,000 for the quarters ended April 30, 2007 and 2006, respectively.

7


3. STOCK OPTIONS

We have a stock option plan that allows us to grant awards of options to purchase shares of our common stock, stock appreciation rights, restricted shares and performance shares. Options granted under the plan are exercisable for a period up to ten years after the date of grant and vest in equal annual installments as specified by the Compensation Committee of our Board of Directors at the time of grant. The exercise price of options intended to qualify as incentive stock options may not be less than 100% of the fair market value of a share of common stock on the date of grant. During the first six months of fiscal 2007, options to purchase 43,200 shares were exercised, resulting in cash proceeds of approximately $119,000 and an additional tax benefit of approximately $268,000, compared to 120,800 shares exercised in the prior year period resulting in cash proceeds of $530,000 and an additional tax benefit of approximately $499,000.

Effective November 1, 2005, we adopted SFAS No. 123(R), “Share Based Payment,” using the modified prospective method, and began applying its provisions to all options granted as well as to the nonvested portion of previously granted options outstanding at that date. Compensation expense is determined at the date of grant using the Black-Scholes valuation model.

On November 16, 2006, the Compensation Committee of the Board of Directors granted 40,000 shares under the 1997 Plan to certain employees and directors. The fair value of options awarded was estimated on the date of grant using a Black-Scholes valuation model with assumptions for expected volatility based on the historical volatility of the Company’s stock, contractual term of the options of ten years and a risk-free interest rate based upon a three-year U.S. Treasury yield as of the date of grant. The options granted to employees vest in three equal annual installments and the directors’ options were granted with immediate vesting as of the date of grant.

The weighted-average fair value of options granted during the six months ended April 30, 2007 was $22.84 and $24.97 for employees and directors, respectively. During the six months ended April 30, 2007 approximately $366,000 of stock-based compensation expense had been recorded related to options granted under the 1997 Plan compared to $8,000 for the same period in the prior year. As of April 30, 2007 there was approximately $571,000 of total unrecognized stock-based compensation cost that is expected to be recognized over the next three years.

A summary of stock option activity for the six-month period ended April 30, 2007, is as follows:
   
 
 
Stock Options
 
Weighted Average Exercise Price
 
           
Outstanding at October 31, 2006
   
88,700
 
$
2.46
 
               
Options granted
   
40,000
 
$
26.69
 
Options exercised
   
(43,200
)
$
2.78
 
Options cancelled
   
-
   
-
 
               
Outstanding at April 30, 2007
   
85,500
 
$
13.63
 
               

The total intrinsic value of stock options exercised during the six-month periods ended April 30, 2007 and 2006 was approximately $1.8 million and $3.2 million, respectively. The intrinsic value is calculated as the difference between the stock price as of April 30, 2007 and the exercise price of the stock option multiplied by the number of shares exercised.


8



Summarized information about outstanding stock options as of April 30, 2007, that is already vested and those that we expect to vest, as well as stock options that are currently exercisable, is as follows:

   
Outstanding Stock Options Already Vested and Expected to Vest
 
 
Options that are outstanding and Exercisable
 
           
Number of outstanding options
   
85,500
   
55,500
 
               
Weighted average remaining contractual life
   
7.9
   
4.7
 
Weighted average exercise price per share
 
$
13.63
 
$
6.57
 
               
Intrinsic value
 
$
2,606,000
 
$
2,083,000
 
               

4.  
EARNINGS PER SHARE

Basic and diluted earnings per common share are based on the weighted average number of our shares of common stock outstanding. Diluted earnings per common share give effect to outstanding stock options using the treasury method. The dilutive number of shares for the three months ended April 30, 2007 and 2006 was 58,000 and 86,000, respectively.

5.  
ACCOUNTS RECEIVABLE

Accounts receivable are net of allowance for doubtful accounts of $904,000 as of April 30, 2007 and $635,000 as of October 31, 2006.

6.  
INVENTORIES

Inventories, priced at the lower of cost (first-in, first-out method) or market, are summarized below (in thousands):
 
   
April 30, 2007
 
October 31, 2006
 
Purchased parts and sub-assemblies
 
$
10,231
 
$
7,645
 
Work-in-process
   
8,166
   
7,608
 
Finished goods
   
26,752
   
28,090
 
   
$
45,149
 
$
43,343
 

 
7.  
SEGMENT INFORMATION
 
We operate in a single segment: industrial automation systems. We design and produce computerized machine tools, interactive computer control systems and software for sale through our distribution network to the worldwide metal cutting machine tool market. We also provide software options, computer control upgrades, accessories and replacement parts for our products, as well as customer service and training support.

8.  
GUARANTEES
 
From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of certain machines to customers that use financing. At April 30, 2007 we had 54 outstanding third party guarantees totaling approximately $1.6 million. The terms of our subsidiaries’ guarantees are consistent with the underlying customer financing terms. Upon shipment, the customer has the risk of ownership, but does not obtain title until the machine is paid in full. A retention of title clause allows us to recover the machine if the customer defaults on the lease. We believe that the proceeds obtained from liquidation of the machine would cover any payments required by the guarantee.
 
9

 
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):

   
Six months ended
 
   
4/30/07
 
4/30/06
 
Balance, beginning of period
 
$
1,926
 
$
1,618
 
Provision for warranties during the period
   
1,202
   
782
 
Charges to the accrual
   
(1,049
)
 
(542
)
Impact of foreign currency translation
   
65
   
72
 
Balance, end of period
 
$
2,144
 
$
1,930
 

9.  
COMPREHENSIVE INCOME

A reconciliation of our net income to comprehensive income is as follows (in thousands):
   
Three months ended
 
   
4/30/07
 
4/30/06
 
Net income
 
$
4,680
 
$
3,929
 
Translation of foreign currency financial statements
   
727
   
750
 
Unrealized gain (loss) on derivative instruments
   
(1,134
)
 
(1,209
)
Comprehensive income
 
$
4,273
 
$
3,470
 


 
10.  
DEBT AGREEMENT

Effective February 27, 2007, we amended our domestic bank credit agreement to allow us to pay dividends and redeem or purchase our capital stock at any time unless we are then or would become in default. All other terms and conditions under this bank credit agreement remain unchanged.

10


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 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 discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

Our computerized metal cutting machine tools are manufactured in Taiwan to our specifications by our wholly owned subsidiary, Hurco Manufacturing Limited (HML), and a minority owned affiliate. We sell our products through more than 150 independent agents and distributors in countries throughout North America, Europe and Asia. We also have direct sales and service organizations in England, France, Germany, Italy, Singapore and China.

As part of our ongoing product development strategy, during the second quarter of fiscal 2007 we introduced two new products: WinMax Control Software and the VMX 84. The WinMax Control Software has a Windows(R) based interface and is designed to reduce setup time and improve surface finish. The new WinMax Control Software has 25 key new features and more than 200 enhancements. The VMX 84 with X/Y/Z Axis travels of 84/34/30 inches is our largest machining center and broadens our product line to meet the needs of customers who produce large parts, molds, and dies.

Approximately 88% of worldwide demand for machine tools comes from outside the United States. During fiscal 2005 and 2006, over two-thirds of our sales and service fees were attributable to customers located abroad. 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 consolidated statement of operations and balance sheet as reported under U.S. generally accepted accounting principles. For example, when a foreign currency increases in value relative to the U.S. Dollar, 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 that currency has a lower value relative to the U.S. Dollar. In the comparisons of our period-to-period results, we discuss not only the increases or decreases in those results as reported in our financial statements (which reflect translation to U.S. Dollars at prevailing exchange rates), but 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 hedging instruments - principally foreign currency forward exchange contracts.

The volatility of demand for machine tools can significantly impact our working capital requirements and, therefore, our cash flow from operations and our operating profits. Because our products are manufactured in Taiwan, manufacturing and ocean transportation lead times require that we schedule machine tool production based on forecasts of customer orders for a future period of four or five months. We continually monitor order activity levels and adjust future production schedules to reflect changes in demand, but a significant unexpected decline in customer orders from forecasted levels can temporarily increase our finished goods inventories and our use of working capital.

Our financial results for the second quarter of fiscal 2007 reflect increased revenues and operating income compared to the corresponding period of the prior year as a result of significant improvement in foreign markets, primarily in Europe, as well as increased shipments of our larger and higher-priced machines in those markets. The second quarter results also reflect the benefit of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes.

11

 
RESULTS OF OPERATIONS
 
Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006

Sales and Service Fees. Sales and service fees for the second quarter of fiscal 2007 were $42.5 million, an increase of $5.6 million, or 15%, from the amount reported for the prior year period. The growth of second quarter revenues was the result of significant improvement in demand, primarily in European markets, as well as increased shipments of our larger and higher-priced machines in those markets. As noted below, approximately 68% of our sales during the second quarter of fiscal 2007 were derived from European markets. Due to the effects of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes, sales and service fees for the second quarter of fiscal 2007 were approximately $2.8 million, or 8%, more than would have been the case if the foreign sales had been translated at the same rate of exchange that was utilized for the second quarter of fiscal 2006.

The following tables set forth net sales (in thousands) by geographic region and product category for the second quarter of 2007 and 2006:

Net Sales and Service Fees by Geographic Region
 
   
April 30,
 
Increase
 
   
2007
 
2006
 
Amount
 
%
 
North America
 
$
11,581
   
27.3
%
$
12,550
   
34.1
%
$
(969
)
 
(7.7
%)
Europe
   
28,694
   
67.5
%
 
22,134
   
60.0
%
 
6,560
   
29.6
%
Asia Pacific
   
2,219
   
5.2
%
 
2,177
   
5.9
%
 
42
   
1.9
%
Total
 
$
42,494
   
100.0
%
$
36,861
   
100.0
%
$
5,633
   
15.3
%

Sales and service fees in Europe increased by 30% during the 2007 second quarter primarily due to continued market demand and increased penetration into new and existing markets, which resulted in a 22% increase in total unit shipments. The increased sales and service fees also reflect a favorable mix of higher-priced VMX product line shipments compared to the same period in the prior year. Sales and service fees in Europe for the second quarter of fiscal 2007 were favorably impacted by $2.6 million, or 12%, when compared to the same period in the prior year, due to the effect of a weaker U.S. Dollar.

Sales and service fees in Asia increased 2% compared to the prior year period primarily due to a favorable shift in unit shipments from the TM and VM product lines to the higher-priced VMX product line.

Sales and service fees in North America decreased 8% compared to the prior year period primarily due to softening in the market, which resulted in decreased unit shipments of 7%.

Net Sales and Service Fees by Product Category
 
   
April 30,
 
Increase
 
   
2007
 
2006
 
Amount
 
%
 
                           
Computerized Machine Tools
 
$
37,246
   
87.7
%
$
31,903
   
86.5
%
$
5,343
   
16.7
%
Service Fees, Parts and Other
   
5,248
   
12.3
%
 
4,958
   
13.5
%
 
290
   
5.8
%
Total
 
$
42,494
   
100.0
%
$
36,861
   
100.0
%
$
5,633
   
15.3
%

Sales of computerized machine tools during the second quarter of fiscal 2007 increased 17% over the corresponding period in fiscal 2006. The increase was driven by a 6% increase in overall unit shipments combined with the impact of a favorable product mix, particularly higher-priced VMX products, and the impact of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes.

12

 
Orders. New orders booked during the second quarter of fiscal 2007 totaled $48.5 million, an increase of $11.5 million, or 31%, over the amount recorded in the second quarter of fiscal 2006. Orders increased in Europe and Asia by 50% and 23%, respectively, compared to the second quarter of 2006 as a result of continued market demand and increased market penetration. North American orders decreased by 1% due to softening market conditions. Orders for the second quarter of fiscal 2007 were favorably impacted by $3.2 million, or 9%, when compared to the same period in the prior year due to the effect of a weaker U.S. Dollar.

Gross Margin. Gross margin for the second quarter of fiscal 2007 was 39% compared to 36% for the prior year period, as a result of higher volume and a more favorable product mix.

Operating Expenses. Selling, general and administrative expenses were $9.4 million, an increase of 32%, from the $7.1 million reported for the prior year period. The increase was due to the effects of translation of foreign operating expenses for financial reporting purposes, as well as incremental variable expenses related to market expansion, commissions and compensation.

Operating Income. Operating income was $6.9 million, or 16%, of sales and service fees, compared to $6.0 million, or 16%, of sales and service fees for the prior year period.

Other Expense (Income). The increase in other income is the result of improved earnings of our affiliates accounted for using the equity method and increased interest income earned on short-term cash investments.

Income Taxes. Our provision for income taxes during the second quarter of fiscal 2007 was approximately $514,000 higher than in the same period in fiscal 2006 as a result of increased operating income. Our effective tax rate for the second quarter of fiscal 2007 was 37% compared to 36% for the second quarter of 2006.

Six Months Ended April 30, 2007 Compared to Six Months Ended April 30, 2006

Sales and Service Fees. Sales and service fees for the first half of fiscal 2007 were $89.4 million, an increase of $20.6 million, or 30%, from the amount reported for the prior year period. The growth in revenues was primarily the result of significant improvement in demand, primarily in the European market, as well as increased shipments of our larger and higher-priced machines in that market. As noted below, approximately 67% of our sales during the first half of fiscal 2007 were derived from Europe. Due to the effects of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes, sales and service fees for the first half of fiscal 2007 were approximately $5.7 million, or 8%, more than would have been the case if foreign sales had been translated at the same rate of exchange that was utilized for the first half of fiscal 2006.

The following tables set forth net sales (in thousands) by geographic region and product category for the first half of 2007 and 2006:

Net Sales and Service Fees by Geographic Region
 
   
April 30,
 
Increase
 
   
2007
 
2006
 
Amount
 
%
 
North America
 
$
24,804
   
27.8
%
$
24,880
   
36.2
%
$
(76
)
 
(.3
%)
Europe
   
60,188
   
67.3
%
 
40,178
   
58.4
%
 
20,010
   
49.8
%
Asia Pacific
   
4,380
   
4.9
%
 
3,697
   
5.4
%
 
683
   
18.5
%
Total
 
$
89,372
   
100.0
%
$
68,755
   
100.0
%
$
20,617
   
30.0
%

Sales and service fees in Europe increased by 50% during the first half of fiscal 2007, primarily due to favorable market conditions and increased market penetration, which resulted in a 37% increase in total unit shipments. The increased sales and service fees also reflect a favorable mix of higher-priced VMX product line shipments compared to the same period in the prior year. Sales and service fees in Europe for the first half of fiscal 2007 were favorably impacted by $5.4 million, or 14% when compared to the same period in the prior year due to the effect of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes.

13

 
Sales and service fees in Asia increased 19% compared to the prior year period primarily due to a favorable shift in unit shipments from the TM and VM product lines to the higher-priced VMX product line.

Unit shipments in North America were unchanged year over year, reflecting softening in the market.

Net Sales and Service Fees by Product Category
 
   
April 30,
 
Increase
 
   
2007
 
2006
 
Amount
 
%
 
                           
Computerized Machine Tools
 
$
78,993
   
88.4
%
$
59,267
   
86.2
%
$
19,726
   
33.3
%
Service Fees, Parts and Other
   
10,379
   
11.6
%
 
9,488
   
13.8
%
 
891
   
9.4
%
Total
 
$
89,372
   
100.0
%
$
68,755
   
100.0
%
$
20,617
   
30.0
%

Sales of computerized machine tools during the first half of fiscal 2007 increased 33% over the corresponding period in fiscal 2006. The increase was driven by a 17% increase in overall unit shipments combined with the impact of a more favorable mix, particularly higher-priced VMX products, and the impact of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes.

Orders. New orders booked during the first half of fiscal 2007 totaled $95.6 million, an increase of $20.8 million, or 28%, over the amount recorded in the first half of fiscal 2006. Orders increased in Europe by 51.3% compared to the first half of 2006. Orders decreased in North America and Asia by 5% and 2%, respectively,` due to softening in the U.S. machine tool market and timing of order activity in Asia. Orders for the first half of fiscal 2007 were favorably impacted by $6.2 million, or 8%, when compared to the same period in the prior year due to the effect of a weaker U.S. Dollar when translating foreign orders for financial reporting purposes.

Gross Margin. Gross margin for the first half of fiscal 2007 was 38% compared to 35% for the prior year period, as a result of higher volume and more favorable mix.

Operating Expenses. Selling, general and administrative expenses were $18.7 million, an increase of 40%, from the $13.4 million reported for the prior year period. The increase was due to the effects of translation of foreign operating expenses for financial reporting purposes, as well as incremental variable expenses related to market expansion, commissions and compensation.

Operating Income. Operating income was $15.0 million, or 17%, of sales and service fees, compared to $10.7 million, or 16% of sales and service fees for the prior year period.

Other Expense (Income). The increase in other income is the result of improved earnings of our affiliates accounted for using the equity method and increased interest income earned on short-term cash investments.

Income Taxes. Our provision for income taxes during the first half of fiscal 2007 was approximately $1.9 million higher than in the same period in fiscal 2006 as a result of increased operating income. Our effective tax rate for the first half of fiscal 2007 was unchanged at 36% compared to the first half of 2006.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2007, we had cash and cash equivalents of $34.5 million, compared to $29.8 million at October 31, 2006. Approximately 45% of the $34.5 million of cash and cash equivalents is denominated in U.S. Dollars. The remaining balances are held outside the U.S. in the local currencies of our various foreign entities and are subject to fluctuations in currency exchange rates. Cash generated from operations totaled $9.0 million for the first half of fiscal 2007, compared to $6.7 million in the prior year period, and was driven by increased net income.

Working capital, excluding short-term debt, was $61.9 million at April 30, 2007, compared to $56.7 million at October 31, 2006.

14

 
Capital investments during the first half of fiscal 2007 included normal expenditures for software development projects and purchases of equipment. We funded these expenditures with cash flow from operations.

We eliminated our debt balance by repaying the $4.0 million mortgage for the Indianapolis facility on April 30, 2007. We have an $11.4 million credit facility, which had no outstanding borrowings as of April 30, 2007.

Effective February 27, 2007, we amended our domestic bank credit agreement to allow us to pay dividends and redeem or purchase our capital stock at any time unless we are then or would become in default. All other terms and conditions under this bank credit agreement remain unchanged.

Although we have not made any significant acquisitions in the recent past, we may acquire other businesses and assets, including intellectual property assets, in the future. Should attractive opportunities arise, we believe that our earnings, cash flow from operations and balance sheet will allow us to obtain any necessary additional capital.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB released Interpretation No. 48 “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 which clarifies the accounting and reporting for uncertainties in income taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expect to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We will be required to adopt and report the impact of FIN No. 48 in the first quarter of fiscal year 2008. We have not begun implementation of FIN No. 48 and therefore cannot report the potential impact of implementation.

During 2006, the FASB released Statement No. 157, “Fair Value Measurements”, a new standard which provides further guidance on using fair value to measure assets and liabilities, the information used to measure fair value and the effect of fair value measurements on earnings. Statement No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. We will be required to adopt and report the impact of Statement No. 157 in the first quarter of fiscal year 2008. We have not begun implementation of Statement No. 157 and therefore cannot report the potential impact of the implementation.

In February 2007, the FASB released Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, a new standard that permits an entity to choose to measure many financial instruments and certain other items at fair value. The objective of this statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Statement No. 159 is effective in the first quarter of fiscal 2008. We have not begun implementation of Statement No. 159 and therefore cannot report the potential impact of the implementation.

In September 2006, the U.S. Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 must be implemented by the end of fiscal 2007. We have not begun implementation of SAB 108 and therefore cannot report the potential impact of the implementation.


15


CRITICAL ACCOUNTING POLICIES

Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2006, require our 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 half of 2007.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2006.

OFF BALANCE SHEET ARRANGEMENTS

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of certain machines to customers that use financing. At April 30, 2007 we had 54 outstanding third party guarantees totaling approximately $1.6 million. The terms of our subsidiaries’ guarantees are consistent with the underlying customer financing terms. Upon shipment, the customer has the risk of ownership, but does not obtain title until the machine is paid in full. A retention of title clause allows us to recover the machine if the customer defaults on the lease. We believe that the proceeds obtained from liquidation of the machine would cover any payments required by the guarantee.
 

16


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;
·  
The risks of our international operations;
·  
The limited number of our manufacturing sources;
·  
The effects of changes in currency exchange rates;
·  
Our dependence on new product development;
·  
The need to make technological advances;
·  
Competition with larger companies that have greater financial resources;
·  
Changes in the prices of raw materials, especially steel and iron products;
·  
Possible obsolescence of our technology;
·  
Impairment of our goodwill or other assets;
·  
The need to protect our intellectual property assets; and
·  
The effect of the loss of key personnel.

We discuss these and other important risks and uncertainties that may affect our future operation in Part I, Item 1A - Risk Factors in our most recent Annual Report on Form 10-K and may update that discussion in Part II, Item 1A - Risk Factors in this or another 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.

17



Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on borrowings on our bank credit facilities are tied to prevailing U.S. and European interest rates. At April 30, 2007, there were no outstanding borrowings under our bank credit facilities.

Foreign Currency Exchange Risk

In fiscal 2007, over two-thirds of our sales and service fees, including export sales, were derived from foreign markets. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.

Our products are sourced from foreign suppliers or built to our specifications by either our wholly owned subsidiary in Taiwan or overseas contract manufacturers. 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 forecasted inter-company and third party 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 April 30, 2007 which are designated as cash flow hedges under SFAS No. 133 were as follows:

   
Notional Amount
 
Weighted Avg.
 
Contract Amount at Forward Rates in U.S. Dollars
     
Forward Contracts
 
in Foreign Currency
 
Forward Rate
 
Contract Date
 
April 30, 2007
 
Maturity Dates
 
Sale Contracts:
                     
Euro
   
32,275,000
   
1.3234
   
42,712,735
   
44,273,048
   
May 2007 -
April 2008
 
Pound Sterling
   
4,585,000
   
1.9287
   
8,843,090
   
9,150,531
   
May 2007 -
April 2008
 
Purchase Contracts:
                               
New Taiwan Dollar
   
825,000,000
   
32.48*
   
25,401,498
   
24,885,122
   
May 2007 -
January 2008
 

*NT Dollars per U.S. Dollar


18



Forward contracts for the sale or purchases of foreign currencies as of April 30, 2007, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables and are not designated as hedges under SFAS 133, “Accounting Standards for Derivative Instruments and Hedging Activities” 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
 
April 30, 2007
 
Maturity Dates
 
Sale Contracts:
                     
Euro
   
12,713,322
   
1.3467
   
17,121,030
   
17,380,961
   
May 2007 -
June 2007
 
Singapore Dollar
   
6,305,636
   
0.6607
   
4,166,261
   
4,170,241
   
May 2007 -
July 2007
 
Pound Sterling
   
1,329,254
   
1.9863
   
2,640,297
   
2,657,156
   
May 2007 -
June 2007
 
Purchase Contracts:
                               
New Taiwan Dollar
   
354,100,000
   
33.06*
   
10,712,265
   
10,627,628
   
May 2007 -
July 2007
 

* NT Dollars per U.S. Dollar


19


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 April 30, 2007 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 April 30, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


20



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, 2006.

Item 4. SUMBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual meeting of the shareholders was held on March 14, 2007. The election of seven directors to the Board of Directors was the only matter submitted to a vote.

The following table sets forth the results of voting on this matter.

Election of Directors
Name
 
Number of Votes FOR
 
Number of Votes AGAINST or WITHHELD
 
Abstentions or Broker Non-Votes
Stephen H. Cooper
 
5,576,883
 
321,321
 
482,316
Robert W. Cruickshank
 
5,244,271
 
653,933
 
482,316
Michael Doar
 
5,594,770
 
303,434
 
482,316
Michael P. Mazza
 
5,600,726
 
297,478
 
482,316
Richard T. Niner
 
5,595,193
 
303,011
 
482,316
O. Curtis Noel
 
5,587,693
 
310,511
 
482,316
Charlie Rentschler
 
5,590,493
 
307,711
 
482,316

In addition, as previously reported, on April 5, 2007 the board of directors elected Philip James as an eighth director. All of our directors serve annual terms of office.

Item 5. OTHER INFORMATION

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


21


Item 6. EXHIBITS

 
10.1
 
Second Amendment to Third Amended and Restated Credit Agreement between the Registrant and JPMorgan Chase Bank, N.A. dated as of February 27, 2007.
 
 
11
 
Computation of per share earnings.
 
 
31.1
 
Certification by the Chief Executive Officer, pursuant to Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended.
 
 
31.2
 
Certification by the Chief Financial Officer, pursuant to Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended.
 
 
32.1
 
Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
 
Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 


22


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





June 8, 2007
 
23

SECOND AMENDMENT TO THIRD RESTATED CREDIT AGREEMENT
Exhibit 10.1
SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT


SECOND AMENDMENT
TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT

 
THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 27, 2007 (this "Amendment"), is between HURCO COMPANIES, INC., an Indiana corporation (the "Borrower") and JPMORGAN CHASE BANK, N.A., a national banking association, successor by merger to Bank One, NA (Main Office Chicago) (the "Bank").


INTRODUCTION
 
A. The Borrower and the Bank have entered into the Third Amended and Restated Credit Agreement and Amendment to Reimbursement Agreement dated as of December 1, 2003, as amended by First Amendment to Third Amended and Restated Credit Agreement, dated as of October 26, 2004 (the "Credit Agreement").
 
B. The Borrower desires to amend the Credit Agreement as herein provided, and the Bank is willing to so amend the Credit Agreement on the terms set forth herein.
 
NOW, THEREFORE, in consideration of the premises, the parties hereto agree as follows:


ARTICLE 1. AMENDMENT TO CREDIT AGREEMENT
 
1.1 Section 6.10 is amended and restated to read in full as follows:
 
6.10 Dividends. If any Default or Unmatured Default then has occurred and is continuing or would be caused thereby, the Borrower will not, nor will it permit any Subsidiary to, declare or pay any dividends or make any distributions on its Capital Stock (other than dividends payable in its own Capital Stock) or redeem, repurchase or otherwise acquire or retire any of its Capital Stock at any time outstanding.


ARTICLE 2. REPRESENTATIONS AND WARRANTIES
 
In order to induce the Bank to enter into this Amendment, the Borrower represents and warrants that:
 
2.1 The execution, delivery and performance by the Borrower of this Amendment is within its powers, have been duly authorized, and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Borrower's organizational documents, or of any contract or undertaking to which the Borrower is a party or by which the Borrower or its property is or may be bound or affected.
 
2.2 This Amendment is the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms.
 
2.3 No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor or member of the Borrower is required on the part of the Borrower in connection with the execution, delivery and performance of this Amendment or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Amendment.
 
2.4 After giving effect to the amendment contained in Article 1 of this Amendment, the representations and warranties contained in Article V of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof and no Default or Unmatured Default exists under the Credit Agreement as of the date hereof.


ARTICLE 3. CONDITIONS TO EFFECTIVENESS
 
This Amendment shall not become effective until the Bank has received the following documents and the following conditions have been satisfied, each in form and substance satisfactory to the Bank:
 
3.1 This Amendment duly executed on behalf of the Borrower and the Bank and the Consent and Agreement at the end of this Amendment duly executed on behalf of each Guarantor; and
 
3.2 Such additional agreements and documents, fully executed by the Borrower, as are reasonably requested by the Bank before the Bank executes this Amendment.


ARTICLE 4. MISCELLANEOUS
 
4.1 If the Borrower shall fail to perform or observe any term, covenant or agreement in this Amendment, or any warranty made by the Borrower in this Amendment shall prove to have been incorrect in any material respect when made, such occurrence shall be deemed to constitute a Default.
 
4.2 All references to the Credit Agreement in any of the Loan Documents or any other document, instrument or certificate referred to in the Credit Agreement or delivered in connection therewith or pursuant thereto, hereafter shall be deemed references to the Credit Agreement, as amended hereby.
 
4.3 Except as expressly amended hereby, the Borrower agrees that all Loan Documents are ratified and confirmed and shall remain in full force and effect and that it has no set off, counterclaim, defense or other claim or dispute with respect to any of the foregoing.
 
4.4 The Borrower agrees to pay and save the Bank harmless from liability for all costs and expenses of the Bank arising in respect of this Amendment, including the reasonable fees and expenses of Dickinson Wright PLLC, counsel to the Bank, in connection with preparing and reviewing this Amendment and any related agreements and documents.
 
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4.5 Capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement.
 
4.6 This Amendment shall be governed by and construed in accordance with the laws of the State of Indiana.
 
4.7 This Amendment may be executed upon any number of counterparts with the same effect as if the signatures thereto were upon the same instrument.

[The remainder of this page intentionally left blank. Signature blocks appear on the next page.]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first-above written.


HURCO COMPANIES, INC.

By:    /s/ John Oblazney 
Print Name:  John Oblazney
Its:   Vice-President, Chief Financial Officer


JPMORGAN CHASE BANK, N.A.

By:   /s/ John Otteson
Print Name:  John Otteson
Its:   Vice-President




26


 
CONSENT AND AGREEMENT
 
As of the date and year first above written, each of the undersigned hereby:
 
(a) fully consent to the terms and provisions of the above Amendment and the consummation of the transactions contemplated thereby, and agree to all terms and provisions of the above Amendment;
 
(b) agrees that its guaranty and all other agreements and documents executed by the undersigned in connection with the Credit Agreement or otherwise in favor of the Bank (as defined in the above Amendment (collectively, the "Guarantor Documents") are hereby ratified and confirmed and shall remain in full force and effect, and acknowledges that it has no setoff, counterclaim, defense or other claim or dispute with respect to any Guarantor Document or any transactions in connection therewith; and
 
(c) acknowledges that it is in its interest and to its financial benefit to execute this consent and agreement.


    HURCO INTERNATIONAL , INC.

    By:    /s/ John Oblazney 
    Print Name:  John Oblazney
    Its:   Vice-President, Chief Financial Officer


    HURCO INTERNATIONAL HOLDINGS, INC.

    By:    /s/ John Oblazney 
    Print Name:  John Oblazney
    Its:   Vice-President, Chief Financial Officer
 
27

COMPUTATION OF PER SHARE EARNINGS
Exhibit 11
 
Computation of Per Share Earnings
 
   
   
Three Months Ended
 
Six Months Ended
 
   
April 30,
 
April 30,
 
   
2007
 
2006
 
2007
 
2006
 
(in thousands, except per share data)
                                 
   
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
 
                                   
Net income
 
$
4,680
 
$
4,680
 
$
3,929
 
$
3,929
 
$
10,075
 
$
10,075
 
$
6,962
 
$
6,962
 
                                                   
Weighted-average shares
                                                 
outstanding
   
6,373
   
6,373
   
6,291
   
6,291
   
6,373
   
6,373
   
6,291
   
6,291
 
                                                   
Dilutive effect of stock options
   
--
   
58
   
--
   
86
   
--
   
54
   
--
   
86
 
     
6,373
   
6,431
   
6,291
   
6,377
   
6,373
   
6,427
   
6,291
   
6,377
 
                                                   
Income per common share
 
$
0.73
 
$
0.73
 
$
0.62
 
$
0.62
 
$
1.58
 
$
1.57
 
$
1.11
 
$
1.09
 
 
 
 
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CERTIFICATION OF CEO
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Michael Doar, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hurco Companies, Inc.;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have:

(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(c)  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's first fiscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
June 8, 2007
 
 
29

CERTIFICATION OF CFO
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, John G. Oblazney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hurco Companies, Inc.;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have:

(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(c)  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's first fiscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ John G. Oblazney
John G. Oblazney
Vice President & Chief Financial Officer
June 8, 2007
 
 
30

CERTIFICATION OF CEO
 
Exhibit 32.1 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002
 
 
In connection with the Quarterly Report of Hurco Companies, Inc. (the "Company") on Form 10‑Q for the period ending April 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes‑Oxley Act of 2002, that:
(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
  /s/ Michael Doar                              
Michael Doar
Chairman & Chief Executive Officer
June 8, 2007
 
 
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CERTIFICATION OF CFO
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002
 
 
In connection with the Quarterly Report of Hurco Companies, Inc. (the "Company") on Form 10‑Q for the period ending April 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes‑Oxley Act of 2002, that:
(1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
 
 
/s/ John G. Oblazney                                      
John G. Oblazney
Vice President & Chief Financial Officer
June 8, 2007
 
 
 
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