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Article by DailyStocks_admin    (02-01-08 03:24 AM)

The Daily Magic Formula Stock for 02/01/2008 is Hurco Companies Inc. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

General

Hurco Companies, Inc. is an industrial technology company. We design, manufacture and sell computerized machine tools to companies in the metal working industry through a worldwide sales, service and distribution network. Although 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. As used in this report, the words “we”, “us” and “our” refer to Hurco Companies, Inc. and its consolidated subsidiaries.

Since our founding in 1968, we have been a leader in the introduction of interactive computer control systems that automate manufacturing processes and improve productivity in the metal parts manufacturing industry. Hurco pioneered the application of microprocessor technology and conversational programming software for use on machine tools. We have concentrated on designing “user-friendly” computer control systems that can be operated by both skilled and unskilled machine tool operators and yet are capable of instructing a machine to perform complex tasks. The combination of microprocessor technology and patented interactive, conversational programming software in our computer control systems enables operators on the production floor to quickly and easily create a program for machining a particular part from a blueprint or computer-aided design file and immediately begin machining that part.

Our executive offices and principal design and engineering operations are headquartered in Indianapolis, Indiana. Sales, application engineering and service offices are located in Indianapolis, Indiana; Mississauga, Canada; High Wycombe, England; Munich, Germany; Paris, France; Milan, Italy; Singapore and Taichung, Taiwan. We also have a representative sales office in Shanghai, China, and a technical center in Shenzhen, China. Distribution facilities are located in Los Angeles, California, Venlo, the Netherlands, and Singapore, and our principal manufacturing facility is located in Taiwan. In November 2006, we registered a distribution company in India and throughout 2007 we established distributor relationships that enable us to sell our products throughout India. As part of our plan to increase capacity and reduce manufacturing costs, we also opened a new manufacturing facility in Ningbo, China. This facility currently focuses on machining castings and components to support our manufacturing operation in Taiwan. In the future, the Ningbo facility can be expanded to include sub-assembly operations. Eventually, machines designed specifically for the Chinese market will be produced at the Ningbo facility.

Our strategy is to design, manufacture and sell to the global metalworking market a comprehensive line of computerized machine tools that incorporate our proprietary, interactive computer control technology. Our technology is designed to enhance the machine tool user's productivity through ease of operation and higher levels of machine performance (speed, accuracy and surface finish quality). We use an open system software architecture that permits our computer control systems and software to be produced using standard PC hardware. We have emphasized a “user-friendly” design that employs both interactive conversational and graphical programming software. Each year we have expanded our product offering to meet customer needs, which has led us to design and manufacture more complex machining centers with advanced capabilities. We utilize a disciplined approach to strategically enter new geographic markets, as appropriate. Our introduction of new, technologically advanced products, combined with our expansion into new markets, has resulted in our significant growth over the last several years. In addition to this strong organic growth, our recent performance and current financial strength also provide us with the capability to pursue opportunistic acquisitions that are consistent with our strategic focus on expanding our product line and entering new markets.


Industry

Machine tool products are considered capital goods, which makes them part of an industry that has historically been highly cyclical.


Although, industry association data for the U.S. machine tool market is available, that market accounts for only 11% of worldwide consumption. Reports available for the U.S. machine tool market include:



•

United States Machine Tool Consumption – generated by the Association for Manufacturing Technology and American Machine Tool Distributor Association, this report includes metal cutting machines of all types and sizes, including segments in which we do not compete



•

Purchasing Manager’s Index - developed by the Institute for Supply Management and reports activity levels in U.S. manufacturing plants that purchase machine tools



•

Capacity Utilization of Manufacturing Companies – issued by the Federal Reserve Board

A limited amount of information for foreign markets is available, and different reporting methodologies are used by various countries. Machine tool consumption data published by Gardner Publications, Inc., calculates machine tool consumption annually by country. It is important to note that data for foreign countries is based on government reports that may lag six to twelve months and therefore is unreliable for forecasting purposes.

Demand for capital equipment can fluctuate during periods of changing economic conditions. Manufacturers and suppliers of capital goods, such as Hurco, are often the first to experience these changes in demand. Additionally, since our order backlog is approximately 60 days, it is difficult to estimate demand with any reasonable certainty. Therefore, we do not have the benefit of relying on the common leading indicators that are available to many other industries for market analysis and forecasting purposes.

Products

Our core products consist of general purpose computerized machine tools for the metal cutting industry. These are, principally, vertical machining centers (mills) and turning centers (lathes), with which our proprietary software and computer control systems are fully integrated. We also produce computer control systems and related software for press brake applications that are sold as retrofit control systems. Additionally, we produce and distribute software options, control upgrades, hardware accessories and replacement parts for our machine tool product lines and provide operator training and support services to our customers.

Computerized Machine Tools – Machining Centers

We design, manufacture and sell computerized machine tools equipped with a fully integrated interactive computer control system. During fiscal 2007 our twin touch-screen control console and our single touch-screen control console were shipped with our new WinMax ® software. Our computer control system enables a machine tool operator to create complex two-dimensional or three-dimensional machining programs directly from an engineering drawing or computer aided design geometry file. An operator with little or no machine tool programming experience can successfully create a program with minimal training and begin machining the part in a short period of time. The control features an operator console with a liquid crystal display (LCD), and incorporates an upgradeable personal computer (PC) platform using a Pentium ® * class processor with solid rendering graphical programming. In addition, WinMax ® has a Windows ® ** based operating system to enable users to improve shop floor flexibility and software productivity. File management, process control, networking, and combining programming formats are enhanced with the new WinMax ® control software.

In the intensely competitive global manufacturing marketplace, significant increases in productivity are being derived from control and software technologies. Companies using computer controlled machine tools are better able to:



• maximize the efficiency of their human resources

• continue to expand their capability of making more advanced and complex parts from a wide range of materials and multiple processes

• maintain the ability to incorporate fast moving changes in technology into their operations to keep their competitive edge

• continue to integrate themselves into the global supply chain of their customers by supporting small to medium lot sizes for “just in time” initiatives Our Windows ® ** based control facilitates our ability to meet these customer needs. Companies are finding that the familiar Windows ® ** operating system coupled with the Hurco conversational style of program creation means that their operators are capable of creating and editing part programs without the overhead of specialized computer aided design and computer aided manufacturing programmers. With the ability to transfer most computer aided design data directly into a Hurco program, programming time becomes minutes instead of hours.

Products today are being designed to meet the demand for machining complex parts with greater part accuracies. Our proprietary controls with WinMax ® software and Pentium ® * processors are capable of processing the large amounts of data required for these parts to be processed at world-class speeds and accuracies. We continue to add technology to our control design as it becomes available.

Our offering of machining centers, currently equipped with either a twin touch-screen or single touch-screen control console, consists of the following four product lines:

VM Product Line

The VM product line consists of moderately priced vertical machining centers for the entry-level market. Their design premise of a machining center with a large work cube and a small footprint optimizes the use of available floor space. The VM line consists of four models in three sizes with X-axis (horizontal) travels of 26, 40, and 50 inches. The base prices of the VM machines range from $40,000 to $80,000.

VMX Product Line

The VMX product line consists of higher performing vertical machining centers aimed at manufacturers that require greater part accuracy. It is our signature product line. The VMX line consists of 14 models in seven sizes with X-axis travels of 24, 30, 40, 50, 60, 64, and 84 inches. The base prices of VMX machines range from $50,000 to $200,000.

Five-Axis and Horizontal Machining Centers

The Five-Axis and Horizontal product line is targeted at manufacturers seeking to produce complex multi-sided parts in a single setup. Purchasing one of these machining centers can yield significant productivity gains for operations that previously processed each side of a part individually. The Five-Axis and Horizontal product line in 2007 consisted of four models, three vertical cutting machines and one horizontal cutting machine. The base prices of the five-axis and horizontal machines range from $160,000 to $180,000.

TM/TMM Product Line

Since its introduction in fiscal 2005, we have continued to expand the TM turning center (horizontal slant-bed lathe) product line. The TM series is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. The TM is offered in three models with chucks of 6, 8, and 10 inches respectively. In September 2006, we further enhanced the capability of the TM turning centers with the addition of “live” or powered tooling on the lathe turret. Designated as the TMM product line, these machines allow our customers to complete a number of secondary milling, drilling and tapping operations, while the part is still held in the chuck after the turning operations are complete. This ability to “mill/turn” or “multi-task” on the same machine in a single setup can provide significant productivity gains. Two TMM models with this capability are being offered. The base prices of the TM/TMM machines range from $40,000 to $85,000.

Computer Control Systems and Software

The following machine tool computer control systems and software products are sold directly to end-users and/or to original equipment manufacturers.

Autobend ®

Autobend ® computer control systems are applied to metal bending press brake machines that form parts from sheet metal and steel plate. They consist of a microprocessor-based computer control and back gauge (an automated gauging system that determines where the bend will be made). We have manufactured and sold the Autobend ® product line since 1968. We currently market two models of our Autobend ® computer control systems for press brake machines, in combination with six different back gauges, through distributors to end-users as retrofit units for installation on existing or new press brake machines, as well as to original equipment manufacturers and importers.

Software Products

In addition to our standard computer control features, we offer software option products for two-dimensional and three-dimensional programming. These products are sold to users of our computerized machine tools equipped with our twin touch-screen or single touch-screen consoles featuring WinMax ® control software. The options include: Swept Surface, SelectSurface Finish Quality (SFQ), DXF Transfer, UltiNet TM , UltiPocket TM , Conversational Part and Tool Probing, and Advanced Verification Graphics.

Our Swept Surface software option simplifies programming of 3D contours and significantly reduces programming time. SelectSurface Finish Quality (SFQ) lets the customer control surface finish quality and run time in one easy step.

The DXF Transfer software option can substantially increase operator productivity because it eliminates manual data entry of part features by transferring AutoCAD TM drawing files directly into the Hurco computer control or into our desktop programming software, WinMax Desktop.

UltiNet Ă” is a networking software option used by our customers to transfer part design and manufacturing information to computerized machine tools at high speeds and to network computerized machine tools within the customer's manufacturing facility.

UltiPocket TM automatically calculates the tool path around islands, eliminating the arduous task of plotting these shapes. Islands can also be rotated, scaled and repeated.

Conversational Part and Tool Probing options permit the computerized dimensional measurement of machined parts and the associated cutting tools. This “on-machine” technique improves the throughput of the measurement process when compared to traditional “off-machine” approaches.

The Advanced Verification Graphics feature significantly reduces both scrap and programming time because it provides customers with three-dimensional, solid rendering of the part including dynamic rotation. This feature allows a customer to view the rendered part from any angle without needing to redraw it.

Parts and Service

Our service organization provides installation, warranty, operator training and customer support for our products on a worldwide basis. In the United States, our principal distributors have primary responsibility for machine installation and warranty service and support for product sales. Our service organization also sells software options, computer control upgrades, accessories and replacement parts for our products. Our after-sales parts and service business strengthens our customer relationships and provides continuous information concerning the evolving requirements of end-users.

Manufacturing

Our manufacturing strategy is based on sourcing of our modular designed components from a network of contract suppliers and sub-contractors who manufacture our components in accordance with our proprietary design, quality standards and cost specifications. This has enabled us to lower our production costs, reduce our working capital per sales dollar, and increase our worldwide manufacturing capacity without significant incremental investment in capital equipment or personnel.

Our computerized metal cutting machine tools are manufactured to our specifications primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited (HML). This subsidiary has increased our overall capacity and reduced our dependence on other manufacturers. In addition, we have a relationship with a contract machine manufacturer in Taiwan that produces certain models included in our product line. Both of these companies conduct final assembly operations and are supported by a network of sub-contract suppliers of components and sub-assemblies. In 2006, we opened a new manufacturing facility in Ningbo, China that focuses on the machining of castings and components to support production in Taiwan. In the future, we can expand the Ningbo facility to include sub-assembly operations. Eventually, we expect that machines designed specifically for the Chinese market will be produced at the Ningbo facility.

We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd., a Taiwanese company in which we have a 35% ownership interest. This company produces all of our computer control systems to our specifications, sources industry standard computer components and our proprietary parts, performs final assembly, and conducts test operations.

We work closely with our wholly owned subsidiaries, contract manufacturer, key component suppliers, and our minority-owned affiliate to ensure that their production capacity will be sufficient to meet the projected demand for our machine tool products. We continue to consider additional contract manufacturing resources to increase our long term capacity. Many of the key components used in our machines can be sourced from multiple suppliers. However, any prolonged interruption of operations or significant reduction in the capacity or performance capability of our Taiwanese manufacturing facilities, or key component suppliers could have a material adverse effect on our operations.

Marketing and Distribution

We sell our products through more than 170 independent agents and distributors in countries throughout North America, Europe and Asia. Although some of our distributors may carry competitive products, the Hurco line is the primary line for the majority of our distributors globally. We also have direct sales personnel in Canada, England, France, Germany, Italy, Singapore and China, which are among the world's principal machine tool consuming countries.

Approximately 89% of the worldwide demand for computerized machine tools and computer control systems is outside the United States. In fiscal 2007, more than two-thirds of our revenues were from overseas customers. No single end-user or distributor of our products accounted for more than 5% of our total sales and service fees.

The end-users of our computerized machine tools are precision tool, die and mold manufacturers, independent metal parts manufacturers, and specialized production application or prototype departments within large manufacturing companies. Industries served include aerospace, defense, medical equipment, energy, automotive/transportation , electronics and computer equipment.

Our computerized machine tool software options and accessories are sold primarily to end-users. We sell our Autobend Ă’ computer control systems to original equipment manufacturers of new machine tools who integrate them with their own products prior to the sale of those products to their own customers, to retrofitters of used machine tools who integrate them with those machines as part of the retrofitting operation, and to end-users who have an installed base of machine tools, either with or without related computer control systems.

Demand

We believe that advances in industrial technology and the related demand for automated process improvements drive demand for our products.

Other factors affecting demand include:



•

the need to continuously improve productivity and shorten cycle time


•

an aging machine tool installed base that will require replacement with more advanced and efficient technology created by shorter product life cycles


•

the industrial development of emerging markets in Asia and Eastern Europe


•

the declining supply of skilled machinists

Demand for our products is also highly dependent upon economic conditions and the general level of business confidence, as well as such factors as production capacity utilization and changes in governmental policies regarding tariffs, corporate taxation, and other investment incentives. By marketing and distributing our products on a worldwide basis, we seek to reduce the impact of adverse changes in economic conditions that might occur in a particular geographic region.

Competition

We compete with many other machine tool producers in the United States and foreign markets. Most of our competitors are larger and have greater financial resources than our company. In the United States and European metal cutting markets, major competitors include Haas Automation, Inc., Daewoo, Miltronics, Deckel Maho Gildemeister Group (DMG), Hardinge Inc. and MAG Industrial Automation Systems. There are also a large number of other foreign manufacturers, including Okuma Machinery Works Ltd., Mori Seiki Co., Ltd., Masak and Matsuura Machinery Corporation.

We strive to compete effectively by incorporating into our products unique, patented software, and other proprietary features that offer enhanced productivity, technological capabilities and ease of use. We offer our products in a range of prices and capabilities to target a broad potential market. We also believe that our competitiveness is aided by our reputation for reliability and quality, our strong international sales and distribution organization, and our extensive customer service organization.

Intellectual Property

We consider our products to be proprietary. Various features of our control systems and machine tools employ technologies covered by patents that are material to our business. We also own additional patents covering new technologies that we have acquired or developed, and that we are planning to incorporate into our control systems in the future.

Research and Development

Non-capitalized research and development expenditures for new products and significant product improvements were $3.1 million, $2.5 million and $2.4 million in fiscal 2007, 2006, and 2005, respectively. In addition, we recorded expenditures of $1.2 million in 2007, $2.1 million in 2006, and $1.2 million in 2005, related to software development projects that were capitalized.

Employees

We had approximately 380 full-time employees at the end 2007, none of whom are covered by a collective-bargaining agreement or represented by a union. We have experienced no employee-generated work stoppages or disruptions and we consider our employee relations to be satisfactory.

Geographic Areas

Financial information about geographic areas is set forth in Note 14 of Notes to Consolidated Financial Statements.

The risks of doing business on a global basis are set forth in Item 1A.

Backlog

For information on orders and backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operation.

CEO BACKGROUND

Michael Doar was elected Chairman of the Board and Chief Executive Officer on November 14, 2001. Mr. Doar had held various management positions with Ingersoll Milling Machine Company from 1989 until 2001. Mr. Doar has been a director of Hurco since 2000.

James D. Fabris was elected President and Chief Operating Officer on November 14, 2001. Mr. Fabris served as Executive Vice President - Operations from November 1997 until his current appointment and previously served as a Vice President of Hurco since February 1995.

John G. Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial Officer in September 2006. Prior to joining us, Mr. Oblazney served as the Chief Financial Officer of Carrier Corporation’s Light Commercial Business, a division of United Technologies Corporation, since December 2005. Prior to that, Mr. Oblazney served in various other financial positions with Carrier Corporation from 2000 to 2005. Prior to joining Carrier Corporation, Mr. Oblazney was employed for six years with Cooper Industries and employed three years by an international public accounting firm.

Sonja K. McClelland has been employed by Hurco since September 1996 and was elected Corporate Controller, Assistant Secretary in November 2004. Ms. McClelland served as Corporate Accounting Manager from September 1996 to 1999, then as Division Controller for Hurco USA from September 1999 to November 2004. Prior to joining Hurco, Ms. McClelland was employed for three years by an international public accounting firm.

COMPENSATION

Our executive compensation program is very simple. We pay a base salary and an annual bonus and, on occasion, have granted equity incentives under shareholder-approved plans.

Base Salary. Our industry is cyclical and, therefore, base salary is an important factor in attracting and retaining talent. Base salaries carry over from the prior year and are reviewed annually for merit increases. Our Chief Executive Officer makes a recommendation on merit increases for each of the other named executive officers. Our Chief Executive Officer bases his recommendations on his subjective assessment of our overall performance and, to a lesser extent, competitive practices in our industry and of other small public companies. The members of the Committee then use their own business experience and judgment to determine the amount of the increase, if any. The base salary of our Chief Executive Officer is determined by the Committee based on the Committee’s subjective assessment of our overall performance and the Chief Executive Officer’s individual contributions to that performance.

Annual Cash Bonuses. The Committee makes annual discretionary cash bonuses to the named executive officers to reward them for past efforts and motivate them for the future. When making its bonus determinations, the Committee has available to it our business plan for the fiscal year and our annual financial statements which detail revenue, profit margins, net income and cash flows. The Committee also considers the role of, and the contributions made by, the individual named executive officer in achieving our business plan. The Committee does not employ a specific formula for taking any of these factors into account. Rather, the Committee makes a subjective assessment of these factors in the aggregate to determine both how we performed in the year and the amount of the annual bonus to be paid to each named executive officer.

Equity Incentives. Except for an award to our newly-hired Chief Financial Officer during fiscal 2007, the Committee has not granted any equity incentives, such as stock options or restricted stock, to our executive officers since fiscal 2002. The Committee understands that equity incentives can be an effective means of aligning the interests of the participants with those of our shareholders, and to the extent that the incentives vest over a number of years, would encourage the recipients to remain our employees. The Committee expects it will consider making equity awards in the future if our shareholders approve the new equity incentive plan being considered at this meeting.

Medical, Disability and Life Insurance. The named executive officers participate in benefits coverage to help manage the financial impact of ill health, disability and death. All named executive officers are provided a supplemental disability benefit and our Chief Executive and Chief Operating Officers are provided a split dollar life insurance benefit, which has been provided for several years, although the form of the benefit changed in fiscal 2003 following passage of the Sarbanes-Oxley Act of 2002.

Retirement Benefits. We sponsor a 401(k) Plan in which full-time employees are eligible to participate. The purpose of the plan is to provide an incentive for employees to save for their retirement income needs and to assist in our attraction and retention of employees. Our named executive officers participate in the 401(k) Plan on the same basis as other eligible employees. During fiscal 2007, we made matching contributions in an amount equal to 75% of the first 6% of a participant’s annual earnings that he or she contributed, up to the maximum permitted by law. Effective January 1, 2008, we will make matching contributions in an amount equal to 100% of the first 6% of a participant’s annual earnings that he or she contributes, up to the maximum permitted by law. We also maintain a deferred compensation program in which our named executive officers and other senior management employees may voluntarily participate. For additional information regarding the deferred compensation program see “Executive Compensation—Nonqualified Deferred Compensation”.

Perquisites. The Committee believes that, even though the level of perquisites provided to the named executive officers is relatively minimal, the perquisites enhance the competitiveness of our overall compensation program. Perquisites offered to the named executive officers include reimbursement of a health club membership, personal travel, and use of company leased vehicles. For additional information regarding perquisites see “Executive Compensation – Summary Compensation Table”.

Pay Equity. The total compensation of our Chief Executive Officer and Chief Operating Officer is significantly greater than that of the other named executive officers. The principal reason for this disparity is that the Committee believes our Chief Executive Officer and our Chief Operating Officer were the most instrumental among the current executive officers in the development and implementation of the business strategies that began our turnaround in fiscal 2003 and have resulted in sustained growth and profitability since then.

Employment Contracts

We have entered into employment contracts with our Chief Executive Officer, our Chief Operating Officer and our Chief Financial Officer. These contracts generally provide for salary payments and other benefits for 12 months if the officer’s employment terminates for a qualifying event or circumstance other than gross misconduct. Additional information regarding employment contracts is found under the heading “Employment Contracts” and a quantification of benefits that would have been received by the named executive officers had termination occurred on October 31, 2007, is found under the heading “Potential Payments upon Termination”.

The Committee believes that these contracts are an important part of the overall compensation arrangements for the named executive officers. The Committee believes that these contracts will help to secure the continued employment and dedication of our named executive officers and address any concern that they might have regarding their continued employment prior to a change in control. The employment contracts do not include any specific guarantees regarding employment following, or compensation payable in connection with, a change in control of the Company. The Committee also believes that these contracts are important as a recruitment and retention device, as many of the companies with which we compete for executive talent have similar agreements in place for their senior executives.

Compensation Decisions for Fiscal 2008

On November 15, 2007, employing the methodology described above under “Elements of Compensation,” the Committee approved annual salaries for each of the named executive officers for 2008 as follows: Mr. Doar - $375,000, Mr. Fabris - $335,000, Mr. Oblazney - $185,000, and Ms. McClelland - $130,000. The Committee will consider annual bonuses for fiscal 2008 when it meets in November 2008.

Taxes and Accounting Considerations

Section 162(m) of the Internal Revenue Code limits the deductibility of non-performance-based executive compensation in excess of $1,000,000. In fiscal 2007, none of the Company’s officers covered under the law had non-performance-based annual compensation substantially in excess of $1,000,000. Thus, substantially all such compensation will be deductible for tax purposes. The Committee expects to continue to monitor future compensation decisions in relation to the possible impact of Section 162(m).

Section 409A of the Internal Revenue Code affects the payments of certain types of deferred compensation to key employees and includes requirements relating to when payments under such arrangements can be made, acceleration of benefits, and timing of elections under such arrangements. Failure to satisfy these requirements will generally lead to an acceleration of the timing for including deferred compensation in an employee’s income, as well as certain penalties and interest. We believe that our nonqualified deferred compensation arrangements meet the effective requirements of Section 409A as required by law or regulation.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE OVERVIEW

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

Our computerized metal cutting machine tools are manufactured in Taiwan to our specifications by our wholly owned subsidiary, Hurco Manufacturing Limited (HML), and an affiliate. We sell our products through more than 170 independent agents and distributors in countries throughout North America, Europe and Asia. We also have our own direct sales and service organizations in Canada, England, France, Germany, Italy, Singapore and China.

The machine tool industry is highly cyclical and changes in demand can occur abruptly. There was a significant decline in global demand that continued through the fourth quarter of fiscal 2003. During the downturn, we took actions to discontinue the production and sale of underperforming products, refocused on our core product lines and significantly reduced our operating costs. We also began introducing new product models in late fiscal 2002 and have continued this process. The primary drivers of our operational performance in the past three years have been improved worldwide demand for our products and increasing acceptance of our expanded product line.

Approximately 89% of worldwide demand for machine tools comes from outside the United States. During fiscal 2006 and 2007, more than two-thirds of our revenues 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, and our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated balance sheets as reported under U.S. Generally Accepted Accounting Principles. For example, when 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 our comparison of 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. For additional information on the impact of translation of foreign currencies and our hedging practices, see Note 1 of Notes to Consolidated Financial Statements.

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

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 produced 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.

Fiscal 2007 Compared to Fiscal 2006

Sales and Service Fees. Sales and service fees for fiscal 2007 were the highest in our 39-year history, totaling $188.0 million, an increase of $39.5 million, or 26.6%, over fiscal 2006. Of this increase, $28.5 million was attributable to operational growth and approximately $11.0 million was due to the favorable effects of a weakening U.S. dollar on currency translation. Computerized machine tool sales, which also were the highest in our history, totaled $165.8 million, an increase of 28.6% from the $128.9 million recorded in 2006, primarily driven by strong worldwide demand for our products and an increase in the percentage of sales attributable to higher price machines as a result of our expanded product line.

In the Americas, sales and service fees increased 3.1% primarily due to improved mix as unit sales volumes decreased by 4.7% a result of general weakening in demand for the domestic machine tool market.

European sales and service fees increased by 43.0%, which includes a favorable impact due to changing currency rates of $10.5 million, or 11.9%. Unit sales increased by 28.0% in fiscal 2007 compared to fiscal 2006 as a result of a strong European market and continued expansion into eastern European markets. The remaining 15.0% of growth in European sales and service fees was primarily derived by continued demand for our higher end VMX product line.

Sales and service fees in the Asia Pacific region increased by 2.4%, due to increased volume of larger higher priced machines, partially offset by a 10.1% decline in overall unit volume. The effect of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes had a favorable impact of approximately $539,000, or 5.3%, on this region’s sales comparison for the full year.

Sales of computerized machine tools totaled $165.8 million in fiscal 2007, an increase of $36.9 million, or 28.6%, primarily driven by a strong European market and continued demand for our higher end VMX product line.

Orders and Backlog. New order bookings in fiscal 2007, were $199.0 million, an increase of $44.2 million, or 28.6%, over the prior year. New order bookings increased by 6.1%, 43.6% and 5.2% in the Americas, Europe and Asia Pacific, respectively. Europe was the primary contributor to the increased orders, driven by a strong market, expansion into new markets and favorable product mix. Unit orders increased 26.1% in Europe and decreased by 6.7% and 10.7% in North America and Asia Pacific, respectively. The reduction in North America was primarily due to a general weakening in demand for the domestic machine tool market, while Asia Pacific orders were down slightly due to continued development of the selling channels in China and India. Orders for fiscal 2007 compared to fiscal 2006 were favorably affected by approximately $11.7 million, or 7.5%, due to changes in currency exchange rates. Backlog was $29.4 million at October 31, 2007, compared to $16.1 million at October 31, 2006. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2007 are expected to be fulfilled in fiscal 2008.

Gross Margin . Gross margin for fiscal 2007 was 37.8%, an increase over the 35.9% margin realized in the corresponding 2006 period, reflecting the impact of higher sales and improved mix.

Operating Expenses . Selling, general and administrative expenses for fiscal 2007 of $40.1 million increased $9.4 million, or 30.7%, from those of fiscal 2006 and includes the unfavorable effect of currency translation of $1.5 million, or 5.0%. The increase was attributable to a $571,000 increase in product development expenses, a $4.5 million increase in global sales and marketing expenditures and a $4.4 million increase in general and administrative expenses. The increased global sales and marketing expenditures include increased expenses for local trade shows, increased European agent sales commissions and marketing expenses for expansion of sales into emerging markets. General and administrative expenses increased primarily as a result of incentive compensation, incremental healthcare related benefits, and increases in other miscellaneous administrative expenses.

Operating Income . Operating income for fiscal 2007 totaled $31.0 million, or 16.5% of sales, compared to $22.6 million or 15.2% of sales, in fiscal 2006.

Other Income (Expense) . Other income (expense), net in fiscal 2007 relates primarily to increased income from investments in minority-owned contract manufacturers in Taiwan accounted for under the equity method, tax deferred income earned on investments of cash, and currency exchange gains on inter-company receivables and payables denominated in foreign currencies, net of gains or losses on related forward contracts.

Provision for Income Taxes. The effective tax rate for fiscal 2007 was 36.2%, compared to 33.0% for the same period in the prior year. The 2006 lower effective tax rate was primarily due to a deduction generated from a change in tax code.

Net Income. Net income for fiscal 2007 was $20.9 million, or $3.24 per share, which is an increase of 35.0% over fiscal 2006 net income of $15.5 million, or $2.42 per share.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 Canada, 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 89% 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 third 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 third quarter results also reflect the benefit of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes.

RESULTS OF OPERATIONS

Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006

Sales and Service Fees. Sales and service fees for the third quarter of fiscal 2007 were $48.6 million, an increase of $12.0 million, or 33%, from the amount reported for the prior year period. The growth of third 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 third quarter of fiscal 2007 were derived from European markets, which realize higher prices and margins compared to the North American and Asian 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 third quarter of fiscal 2007 were approximately $2.1 million, or 6%, 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 third quarter of fiscal 2006.

Sales and service fees in Europe increased by 50% during the 2007 third quarter primarily due to continued market demand and increased penetration into new and existing markets, which resulted in a 35% 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 third quarter of fiscal 2007 were favorably impacted by $2.1 million, or 9%, 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 North America increased 16% primarily due to a favorable mix of higher-priced VMX product line shipments, as total unit shipments remained relatively unchanged compared to the same period in the prior year.

Sales and service fees in Asia decreased 25% compared to the prior year period primarily due to the timing of two large non-recurring orders received in the third quarter of 2006. The decreased sales and service fees were partially offset by the favorable impact of a weaker U.S. Dollar.

Sales of computerized machine tools during the third quarter of fiscal 2007 increased 35% over the corresponding period in fiscal 2006. The increase was driven by a 14% 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.

Orders. New orders booked during the third quarter of fiscal 2007 totaled $48.6 million, an increase of $10.7 million, or 28%, over the amount recorded in the third quarter of fiscal 2006. Orders increased in both Europe and North America by 35% compared to the third quarter of 2006 as a result of continued market demand and increased market penetration. Asian orders decreased by 36% due to the timing of two large non-recurring orders received in the third quarter of last year. Orders for the third quarter of fiscal 2007 were favorably impacted by $2.0 million, or 5%, 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 third quarter of fiscal 2007 was 38% compared to 35% for the prior year period, as a result of increased volume in higher margin European sales regions and a more favorable product mix.

Operating Expenses. Selling, general and administrative expenses were $10.2 million, an increase of 38%, from the $7.4 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 other administrative expenses.

Operating Income. Operating income was $8.2 million, or 17%, of sales and service fees, compared to $5.4 million, or 15%, 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 effective tax rate for the third quarter of fiscal 2007 was 41% compared to 30% for the same period in the prior year. The increase is a result of an adjustment for estimated tax liability for the anticipated sale of our minority interest in Quaser, partially offset by a net reduction in domestic income tax due to changes in state tax laws. Our effective tax rate for the third quarter of fiscal 2007, excluding these adjustments, was 38%.

The 30% effective tax rate for the third quarter of fiscal 2006 included a one-time benefit as a result of tax planning strategies implemented during the quarter. The effective tax rate for the third quarter of fiscal 2006, excluding the adjustment, was 34%.

Nine Months Ended July 31, 2007 Compared to Nine Months Ended July 31, 2006

Sales and Service Fees. Sales and service fees for the first nine months of fiscal 2007 were $137.9 million, an increase of $32.6 million, or 31%, 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 68% of our sales during the first nine months of fiscal 2007 were derived from European markets, which realize higher prices and margins compared to the North American and Asian 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 first nine months of fiscal 2007 were approximately $7.8 million, or 7%, 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 nine months of fiscal 2006.

Sales and service fees in Europe increased by 50% during the first nine months of fiscal 2007, primarily due to favorable market conditions and increased market penetration, which resulted in a 36% 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 nine months of fiscal 2007 were favorably impacted by $7.5 million, or 12% 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.

Sales and service fees in North America increased 5% primarily due to a favorable mix of higher-priced VMX product line shipments, as total unit shipments remained relatively unchanged compared to the same period in the prior year.

Sales and service fees in Asia decreased 2% compared to the prior year period primarily due to the timing of two large non-recurring orders received in the third quarter of 2006. The decreased sales and service fees were partially offset by the favorable impact of a weaker U.S. Dollar.

Sales of computerized machine tools during the first nine months of fiscal 2007 increased 34% over the corresponding period in fiscal 2006. The increase was driven by a 16% 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 nine months of fiscal 2007 totaled $144.2 million, an increase of $31.5 million, or 28%, over the amount recorded in the first nine months of fiscal 2006. Orders increased in Europe and North America by 45% and 7%, respectively, compared to the first nine months of 2006 as a result of continued market demand and increased market penetration. Asian orders decreased by 12% due to the timing of two large non-recurring orders received in the third quarter of last year. Orders for the first nine months of fiscal 2007 were favorably impacted by $8.2 million, or 7%, 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 first nine months 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 $28.9 million, an increase of 39%, from the $20.8 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 administrative expenses.

perating Income. Operating income was $23.2 million, or 17%, of sales and service fees, compared to $16.1 million, or 15% 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 effective tax rate for the first nine months of fiscal 2007 was 38% compared to 34% for the same period in the prior year. The increase in the effective tax rate for the first nine months of fiscal 2007 is a result of an adjustment for estimated tax liability for the anticipated sale of our interest in Quaser, partially offset by a net reduction in domestic income tax for enacted changes in state tax laws.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2007, we had cash and cash equivalents of $37.2 million, compared to $29.8 million at October 31, 2006. Approximately 67% of the $37.2 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 $12.6 million for the first nine months of fiscal 2007, compared to $7.8 million in the prior year period, and was driven by increased net income.

Working capital, excluding short-term debt, was $69.3 million at July 31, 2007, compared to $56.7 million at October 31, 2006.

Capital investments during the first nine months 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 $11.5 million credit facility, which had no outstanding borrowings as of July 31, 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.

On July 12, 2007, we filed with the SEC a registration statement on Form S-3 utilizing the “shelf” registration process. The registration statement was declared effective on July 26, 2007. This registration statement allows us to offer and sell from time to time, in one or more transactions, a variety of securities, including common stock, preferred stock, warrants, depositary shares and debt securities, up to an aggregate amount of $200 million, if and when authorized by the Board of Directors.

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 Securities and Exchange Commission staff issued 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. During the third quarter of fiscal 2007 we adopted SAB 108. The adoption of this standard did not have an effect on the consolidated financial statements.

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 nine months 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 July 31, 2007 we had 53 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.

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.

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