SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q



(Mark One)
 
 XxQuarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JulyJanuary 31, 20062007 or
 Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________.


Commission File No. 0-9143


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

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


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





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


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 ruleRule 12b-2 of the Exchange Act. (Check one):

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

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


The number of shares of the Registrant's common stock outstanding as of August 31, 2006March 7, 2007 was 6,341,020.6,389,720.





HURCO COMPANIES, INC.
July 2006January 2007 Form 10-Q Quarterly Report


Table of Contents



Part I - Financial Information


Item 1.Financial Statements 
   
 
Condensed Consolidated StatementsStatement of Income………………………………………..Operations
Three months ended January 31, 2007 and nine months ended July 31, 2006 and 2005
3
   
 
Condensed Consolidated Balance Sheets…………………………………………………..Sheet
As of JulyJanuary 31, 20062007 and October 31, 20052006
4
   
 
Condensed Consolidated StatementsStatement of Cash Flows………………………………………Flows
Three months ended January 31, 2007 and nine months ended July 31, 2006 and 2005
5
   
 
Condensed Consolidated StatementsStatement of Changes in Shareholders' Equity………………Equity
Nine   Three months ended JulyJanuary 31, 20062007 and 20052006
6
   
 Notes to Condensed Consolidated Financial Statements…………………………………..Statements7
   
Item 2.
Management's Discussion and Analysis of Financial ……………………………………..
Condition and Results of Operations
11
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk …………………………….1716
   
Item 4.Controls and Procedures …………………………………………………………………...1918
   

Part II - Other Information


Item 1.Legal Proceedings…………………………………...…………………………………...Proceedings2019
Item 1A.Risk Factors19
Item 5.Other Information19
   
Item 6.Exhibits…..……………………… ………………………………………………………Exhibits2119
   
Signatures…………………………………………………………………………………………….
Signatures
2220





PART I - FINANCIAL INFORMATION


Item 1. CONDENSED FINANCIAL STATEMENTS


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

 Three Months Ended Nine Months Ended  
Three Months Ended
 
 July 31, July 31,  
January 31
 
  2006  2005  2006  2005  
2007
 
2006
 
 (unaudited) (unaudited) (unaudited) 
                    
Sales and service fees $36,597 $29,555 $105,352 $90,791  $46,878 $31,894 
                    
Cost of sales and service  23,762  19,692  68,412  60,421   29,554  20,967 
                    
Gross profit
  12,835  9,863  36,940  30,370   17,324  10,927 
                    
Selling, general and administrative expenses  7,392  6,637  20,828  19,187   9,250  6,296 
                    
Operating income
  5,443  3,226  16,112  11,183   8,074  4,631 
                    
Interest expense  78  79  242  248   43  84 
                    
Other income (expense), net  83  49  408  (260)
Other expense (income), net  (362) (104)
                    
Income before taxes
  5,448  3,196  16,278  10,675   8,393  4,651 
                    
Provision for income taxes  1,646  317  5,514  1,467   2,998  1,618 
                    
Net income
 $3,802 $2,879 $10,764 $9,208  $5,395 $3 ,033 
                    
Earnings per common share:
             
Earnings per common share
       
                    
Basic
 $.60 $0.46 $1.71 $1.50  $0.85 $0.49 
Diluted
 $.59 $0.45 $1.68 $1.46  $0.84 $0.48 
                    
Weighted-average common shares outstanding:
             
Weighted average common shares outstanding
       
                    
Basic
  6,308  6,206  6,308  6,156   6,362  6,242 
Diluted
  6,392  6,379  6,393  6,325   6,418  6,328 









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


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

 
July 31,
 
October 31,
  
January 31
 
October 31
 
 
2006
 
2005
  
2007
 
2006
 
  
(unaudited) 
  
(audited)
  
(unaudited)
 
(audited)
 
ASSETS
            
Current assets:
            
Cash and cash equivalents
 $24,504 $17,559  $32,326 $29,846 
Accounts receivable, net
  22,240  20,100 
Inventories, net
  43,171  29,530 
Accounts receivable
  25,169  22,248 
Inventories
  40,324  43,343 
Deferred tax assets
  2,325  3,043   1,910  2,768 
Other
  3,605  3,586   3,170  2,677 
Total current assets
  95,845  73,818   102,899  100,882 
       
Non-current assets:
       
Deferred tax assets
  1,382  1,346 
Software development costs, less accumulated amortization
  4,994  3,752 
Investments and other assets
  6,956  6,147 
              
Property and equipment:              
Land
  761  761   761  761 
Building
  7,234  7,205   7,234  7,234 
Machinery and equipment
  13,385  13,170   13,230  12,952 
Leasehold improvements
  1,136  1,102   1,167  1,147 
  22,516  22,238   22,932  22,094 
Less accumulated depreciation and amortization
  (13,681) (13,187)  (13,262) (12,944)
  8,835  9,051   9,130  9,150 
       
Non-current assets:
       
Deferred tax assets  1,088  1,121 
Software development costs, less accumulated amortization  5,894  5,580 
Investments and other assets  7,812  7,381 
 $118,012 $94,114  $126,823 $124,114 
              
LIABILITIES AND SHAREHOLDERS’ EQUITY
              
Current liabilities:
              
Accounts payable
 $28,495 $17,051  $24,227 $26,605 
Accrued expenses
  14,603  13,584   16,338  17,599 
Current portion of long-term debt
  133  126   138  136 
Total current liabilities
  43,231  30,761   40,703  44,340 
              
Non-current liabilities:
              
Long-term debt
  3,909  4,010   3,839  3,874 
Deferred credits and other obligations
  488  399 
Deferred credits and other
  588  525 
Total liabilities
  47,628  35,170   45,130  48,739 
              
Shareholders’ equity:
              
Preferred stock: no par value per share; 1,000,000 shares
              
authorized; no shares issued
  --  --        
Common stock: no par value; $0.10 stated value per share;
       
12,500,000 shares authorized, 6,341,020 and 6,220,220 shares
       
issued, respectively
  634  622 
Common stock: no par value; $.10 stated value per share;
       
12,500,000 shares authorized, and 6,380,520 and 6,346,520
       
shares issued and outstanding, respectively
  638  635 
Additional paid-in capital
  49,731  48,701   50,528  50,011 
Retained earnings
  23,765  13,001   33,875  28,480 
Accumulated other comprehensive loss
  (3,746) (3,380)
Accumulated other comprehensive income
  (3,348) (3,751)
Total shareholders’ equity
  70,384  58,944   81,693  75,375 
 $118,012 $94,114  $126,823 $124,114 


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


HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
(Dollars in thousands)
 
 Three Months Ended Nine Months Ended  
Three Months Ended
 
 July 31, July 31,  
January 31
 
 2006 2005 2006 2005  
2007
 
2006
 
 (unaudited) (unaudited) 
(unaudited)
 
Cash flows from operating activities:
                  
Net income
 $3,802 $2,879 $10,764 $9,208  $5,395 $3,033 
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
             
Adjustments to reconcile net income to
Net cash provided by (used for) operating activities:
       
Provision for doubtful accounts
  5  (34) 88  33   (38) 16 
Equity in income of affiliates
  (207) (170) (508) (257)
Equity in (income) loss of affiliates
  (204) (96)
Depreciation and amortization
  385  323  1,117  945   388  365 
Change in operating assets and liabilities:
             
Stock-based compensation  308  5 
Change in assets and liabilities:
       
(Increase) decrease in accounts receivable
  2,471  155  (1,707) (655)  (2,587) 1,606 
(Increase) decrease in inventories
  (7,307) (935) (12,475) (4,877)  3,695  (979)
Increase (decrease) in accounts payable
  1,090  (1,437) 11,041  (618)  (2,634) 1,967 
Increase (decrease) in accrued expenses
  1,735  977  734  1,507   (1,797) (2,559)
Increase (decrease) in deferred asset
  (184) --  683  -- 
Increase (decrease) in deferred taxes
  77  410 
Other
  (728) 270  (1,941) 387   306  (313)
Net cash provided by operating activities
  1,062  2,028  7,796  5,673   2,909  3,455 
                    
Cash flows from investing activities:
                    
Proceeds from sale of equipment
  30  --  30  -- 
Purchase of property and equipment
  (307) (422) (604) (1,162)  (149) (60)
Software development costs capitalized
  (614) (259) (1,514) (594)
Change in restricted cash
  --  --  --  277 
Software development costs
  (505) (432)
Other investments
  (3) 238  (344) 232   (299) (159)
Net cash used for investing activities
  (894) (443) (2,432) (1,247)  (953) (651)
                    
Cash flows from financing activities:
                    
Advances on bank credit facilities
  --  280  --  4,980 
Repayment of bank credit facilities
  --  (278) --  (5,129)
Repayment on first mortgage
  (32) (28) (94) (87)  (33) (30)
Tax benefit from exercise of stock options
  --  --  499  --   115  499 
Proceeds from exercise of common stock options
  --  32  530  760   97  530 
Net cash provided by (used for)
financing activities
  
(32
)
 
6
  
935
  
524
 
Net cash provided by financing activities
  179  999 
                    
Effect of exchange rate changes on cash
  158  (353) 646  (292)  345  200 
                    
Net increase in cash and
cash equivalents
  
294
  1.238  
6,945
  
4,658
   
2,480
  
4,003
 
                    
Cash and cash equivalents
at beginning of period
  
24,210
  
11,669
  
17,559
  
8,249
   
29,846
  
17,559
 
                    
Cash and cash equivalents
at end of period
 
$
24,504
 
$
12,907
 $24,504 
$
12,907
  
$
32,326
 
$
21,562
 




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


HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN SHAREHOLDERS’SHAREHOLDERS' EQUITY
For the ninethree months ended JulyJanuary 31, 20062007 and 20052006
(unaudited)

  Common Stock       
  
Shares
Issued &
Outstanding
 
Amount
 
Additional
Paid-In
Capital
 
Retained Earnings
(Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
      (Dollars in thousands)     
              
Balances, October 31, 2004
  
6,019,594
 
$
602
 
$
46,778
 
$
(3,442
)
$
(5,483
)
$
38,455
 
                    
Net income  --  --  --  9,208  --  9,208 
Translation of foreign currency
financial statements
  --  --  --  --  (554) (554)
Unrealized gain on derivative
instruments
  --  --  --  --  4,003  4,003 
Comprehensive Income  --  --  --  --  --  12,657 
Exercise of common stock options  194,226  19  741  --  --  760 
                    
Balances, July 31, 2005
  
6,213,820
 
$
621
 
$
47,519
 
$
5,766
 
$
(2,034
)
$
51,872
 
                    
Balances, October 31, 2005
  
6,220,220
 
$
622
 
$
48,701
 
$
13,001
 
$
(3,380
)
$
58,944
 
                    
Net income  --  --  --  10,764  --  10,764 
Translation of foreign currency
financial statements
  --  --  --  --  1,390  1,390 
Unrealized loss on derivative
instruments
  --  --  --  --  (1,756) (1,756)
Comprehensive income  --  --  --  --  --  10,398 
Exercise of common stock options  120,800  12  518  --  --  530 
Tax benefit from exercise of stock options  --  --  499  --  --  499 
Stock-based compensation expense  --  --  13  --  --  13 
                    
Balances, July 31, 2006
  
6,341,020
 
$
634
 
$
49,731
 
$
23,765
 
$
(3,746
)
$
70,384
 









 
(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  --  --  
--
  3,033  
--
  3,033 
                    
Translation of foreign currency financial statements  --  --  --  --  556  556 
                    
Unrealized gain on derivative instruments  --  --  --  --  584  584 
                    
Comprehensive income  --  --  --  --  --  4,173 
                    
Exercise of common stock options  120,800  12  
518
  --  --  530 
                    
Tax benefit from exercise of stock options  --  --  499  --  --  499 
                    
Stock-based compensation expense  --  --  5  --  --  5 
                    
Balances, January 31, 2006
  
6,341,020
 
$
634
 
$
49,723
 
$
16,034
 
$
(2,240
)
$
64,151
 
                    
                    
Balances, October 31, 2006 
  
6,346,520
 
$
635
 
$
50,011
 
$
28,480
 
$
(3,751
)
$
75,375
 
            
Net income  --  --  --  5,395  
--
  5,395 
                    
Translation of foreign currency financial statements  --  --  --  --  
638
  
638
 
                    
Unrealized loss on derivative instruments  --  --  --  --  (235) (235)
                    
Comprehensive income  --  --  --  --  --  5,798 
                    
Exercise of common stock options  34,000  3  94  --  --  97 
                    
Tax benefit from exercise of stock options  --  --  115  --  --  115 
                    
Stock-based compensation expense  --  --  308  --  --  308 
                    
Balances, January 31, 2007
  
6,380,520
 
$
638
 
$
50,528
 
$
33,875
 
$
( 3,348
)
$
81,693
 
                    








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


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 JulyJanuary 31, 20062007 and for the three and nine months ended JulyJanuary 31, 20062007 and JulyJanuary 31, 20052006 is unaudited; however, in our opinion, the interim data includesinclude all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our operating 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 consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2005.2006.

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 LossIncome and recognized as an adjustment to Cost of Sales in the period that the sale that is the subject of the related hedgedhedge 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 JulyJanuary 31, 2006,2007, we had $541,000$684,000 of net losses related to cash flow hedges deferred in Accumulated Other Comprehensive Loss.Income, net of tax. Of this amount, $482,000 represents$519,000 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 October 31,December 2007, in which the sale that is the subject of the related hedge contract is recognized, as described above. Net gainslosses on cash flow hedge contracts, which we reclassified from Accumulated Other Comprehensive LossIncome to Cost of Sales in the quarter ended JulyJanuary 31, 2006,2007, were $354,000$262,000 compared to net lossesgains of $5,000$182,000 for the same period in fiscal 2005.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 Income (Expense)Expense (Income), Net in the Consolidated StatementsStatement of IncomeOperations consistent with the transaction gain or loss on the related foreign denominated receivable or payable. SuchWe recorded net transaction losses were $239,000 and $114,000gains of $16,000 for the quartersquarter ended JulyJanuary 31, 2006 and 2005, respectively.2007 compared to net losses of $40,000 for the same period in the prior year.


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 ninethree months of fiscal 2006,2007, options to purchase 120,80034,000 shares were exercised, resulting in cash proceeds of approximately $97,000 and an additional tax benefit of approximately $115,000, 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.

Prior to fiscal 2006, we applied the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for stock-based compensation. As a result, no compensation expense was recognized for stock options granted with exercise prices equivalent to the fair market value of the stock on the date of grant. Effective November 1, 2005, we adopted SFAS No. 123(R), “Share Based Payment,” using the modified prospective method. As of November 1, 2005 wemethod, and began applying theits provisions of SFAS No. 123(R) to option grants (of which there have been none),all options granted as well as to the nonvested portion of previously granted options outstanding options granted beforeat that date. Compensation expense wasis determined at the date of grant using the Black-Scholes valuation model. We expect to record additional compensation expense of approximately $10,000 ratably through the first quarter of fiscal 2007 for the remaining options that vest during the period July 31, 2006 through January 31, 2007.

AsOn 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 resultBlack-Scholes valuation model with assumptions for expected volatility based on the historical volatility of adopting SFAS No. 123(R), our income before taxesthe Company’s stock, contractual term of the options of ten years and net income fora 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 quarter ended JulyJanuary 31, 2006 were reduced by2007 was $22.84 and $24.97 for employees and directors, respectively. During the quarter ended January 31, 2007 approximately $5,000 and $3,000, respectively, as$308,000 of stock-based compensation expense had been recorded related to options granted under the 1997 Plan compared to $5,000 for the amountssame period in the prior year. As of January 31, 2007 there was approximately $628,000 of total unrecognized stock-based compensation cost that would have been reported if we continuedis expected to account for share-based compensation under APB Opinion No. 25. There was no effect on basic and diluted earnings per share as a result ofbe recognized over the adoption of SFAS No. 123(R).next three years.

Prior to our adoptionA summary of SFAS No. 123(R), we presented all tax benefits of deductions resulting fromstock option activity for the exercisethree-month period ended January 31, 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  (34,000)$2.86 
Options cancelled  -  - 
        
Outstanding at January 31, 2007  94,700 $12.55 
        

The total intrinsic value of stock options exercised during the three-month periods ended January 31, 2007 and 2006 was approximately $1.0 million and $3.6 million, respectively. The intrinsic value is calculated as operating cash flows in the Condensed Consolidated Statementsdifference between the stock price as of Cash Flows. SFAS 123(R) requires cash flows resulting from tax deductions in excess of recognized compensation cost fromJanuary 31, 2007 and the exercise price of the stock options (excess tax benefits) to be classified as financing cash flows.

The adoptionoption multiplied by the number of this pronouncement had no effect on compensation cost recorded in fiscal 2005 related to stock options, which will continue to be disclosed on a pro forma basis only.

  
Three Months Ended
July 31, 2005
Nine Months Ended
July 31, 2005
(in thousands, except per share data)     
      
Net income, as reported
  $ 2,879 $ 9,208
      
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects  
 
(6)
 
 
(18)
      
Pro forma net income  $ 2,873 $ 9,190
      
Earnings per share:
     
      
Basic as reported
  $ 0.46 $ 1.50
Basic pro forma
  0.46 1.49
      
      
Diluted as reported
  $ 0.45 $ 1.46
Diluted pro forma
  0.45 1.45

shares exercised.




A summary of stock option activity for the nine-month period ended July 31, 2006, is as follows:
  
 
 
Stock Options
 Weighted Average Exercise Price 
        
Outstanding at October 31, 2005  215,400 $3.62 
        
Options granted  -  - 
Options exercised  (120,800)$4.39 
Options cancelled  (400)$2.15 
        
Outstanding at July 31, 2006  94,200 $2.47 
        
The total intrinsic value of stock options exercised during the nine-month periods ended July 31, 2006 and 2005 was approximately $2.0 million and $2.6 million, respectively.
Summarized information about outstanding stock options as of JulyJanuary 31, 2006,2007, that are 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  Outstanding Stock Options Already Vested and Expected to Vest 
 
Options that are outstanding and Exercisable
 
          
Number of outstanding options  94,200  86,400   94,700  64,700 
              
Weighted average remaining contractual life  4.1  3.1   7.4  4.6 
Weighted average exercise price per share $2.47 $2.50  $12.55 $5.99 
              
Intrinsic value $1,737,000 $1,591,000  $1,947,000 $1,755,000 
              

4.EARNINGS PER SHARE

Basic and diluted earnings per common share isare based on the weighted-averageweighted average number of our shares of our common stock outstanding. Diluted earnings per common share givesgive effect to outstanding stock options using the treasury method. The impactdilutive number of stock optionsshares for the three months ended JulyJanuary 31, 2007 and 2006 was 56,000 and 2005 was an increase of the weighted average basic common shares by 84,000 shares and 173,000 shares,86,000, respectively.

5.ACCOUNTS RECEIVABLE

TheAccounts receivable are net of allowance for doubtful accounts was $929,000of $605,000 as of JulyJanuary 31, 20062007 and $842,000$635,000 as of October 31, 2005. The increase in the allowance for doubtful accounts is due to the increase in accounts receivable as a result of the increase in sales and service fees.2006.

6.INVENTORIES

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

 July 31, 2006 October 31, 2005  January 31, 2007 October 31, 2006 
Purchased parts and sub-assemblies $9,698 $6,561  $8,664 $7,645 
Work-in-process  7,520  5,403   7,263  7,608 
Finished goods  25,953  17,566   24,397  28,090 
 $43,171 $29,530  $40,324 $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 JulyJanuary 31, 2006, there were 462007 we had 55 outstanding third party guarantees totaling approximately $1.7$1.6 million. A retentionThe 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. Retention of title clause allows us to obtainrecover the machine if the customer defaults on itsthe lease. We believe that the proceeds obtained from liquidation of the machine would exceed our exposure.cover any payments required by the guarantee.
 
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):


 Nine months ended  Three months ended 
 July 31, 2006 July 31, 2005  1/31/07 1/31/06 
Balance, beginning of period $1,618 $1,750  $1,926 $1,618 
Provision for warranties during the period  1,851  1,521   599  361 
Charges to the accrual  (1,371) (1,320)  (517) (275)
Impact of foreign currency translation  76  (39)  27  58 
Balance, end of period $2,174 $1,912  $2,035 $1,762 


9.COMPREHENSIVE INCOME
9.  COMPREHENSIVE INCOME

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

 Three months ended  Three months ended 
 July 31, 2006 July 31, 2005  1/31/07 1/31/06 
Net income $3,802 $2,879  $5,395 $3,033 
Translation of foreign currency financial statements  85  (959)  638  556 
Unrealized gain (loss) on derivative instruments  (1,131) 1,671   (235) 584 
Comprehensive income $2,756 $3,591  $5,798 $4,173 





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

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere herein. Certain statements made in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These 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 such forward-looking statements. These factors include, among others, changes in general economic and business conditions that affect market demand for machines tools and related computer control systems, software products, and replacement parts, changes in manufacturing markets, adverse currency movements, innovations by competitors, quality and delivery performance by our contract manufacturers and governmental actions and initiatives including import and export restrictions and tariffs.

EXECUTIVE OVERVIEW

Hurco Companies, Inc. is an industrial technology company operating in a single segment. We design and produce computerized machine tools, featuring our proprietary computer control systems and software, for sale through our own distribution network to the worldwide metal cutting market. We also provide software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support. The following 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 ana minority owned affiliate. We sell our products through approximately 230more than 150 independent agents and distributors in approximately 50 countries throughout North America, Europe and Asia. We also have our own direct sales and service organizations in England, France, Germany, Italy, Singapore and China.

The primary driversAs a continuation of our improved performance in the last two years have been increased worldwide demand for our products, our expanded product line and the impact of changes in the exchange rate between the U.S. Dollar and various foreign currencies.

We willdevelopment strategy, during fiscal 2007 we plan to introduce five new products at the International Manufacturing and Technology Show (IMTS) during the fourth quarter of fiscal 2006. Although we developed all of these products to maximize productivity for our customers, the development ofproducts: WinMax Control Software is by far the most significant product announcement Hurco will make at IMTS. Other product introductions includeControls Software; Lathes with Live Tooling (TMM8 and TMM10),Tooling; a swivel head 5-Axis machine (VMX42SR), the addition of themachine; a VMX60 vertical machining center,center; and an upgraded performance series for the VMX line.

The machine tool industry is highly cyclical Our newer models 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 discontinued 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 since then. These new models, together with an increase in worldwide demand for machine tools arehave been largely responsible for the continuing increase in our sales during the last two fiscalin recent years.

Approximately 89%88% of worldwide demand for machine tools comes from outside the United States. During fiscal 20062005 and 2005,2006, approximately 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 - currencies—primarily the Euro and Pound Sterling - Sterling—in the countries in which those customers are located, and ourlocated. Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollars.Dollar. Changes in currency exchange rates canmay have a material effect on our operating resultsconsolidated statement of operations and balance sheet as reported under U.S. generally accepted accounting principles in the United States of America.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.

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 market and 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.



RESULTS OF OPERATIONS
 
Three Months Ended JulyJanuary 31, 20062007 Compared to Three Months Ended JulyJanuary 31, 2005

Sales and Service Fees. Sales and service fees for the third quarter of fiscal 2006 totaled $36.6 million, an increase of $7.0 million (24%) from the $29.6 million reported for the third quarter of fiscal 2005. The growth of third quarter revenues was primarily the result of increased unit sales of higher priced VMX computerized machine tools, which were most pronounced in Europe and Asia geographic regions.

Approximately 60% of our sales and service fees for the third quarter of fiscal 2006 were derived from European markets. Due to the weakening of the U.S. Dollar during the third quarter of fiscal 2006, the weighted average exchange rate between the Euro and the U.S. dollar was $1.28 per €1.00, as compared to $1.22 per €1.00 for the third quarter of fiscal 2005, an increase of 5%. Sales and service fees for the third quarter of fiscal 2006 were approximately $761,000 higher than would have been the case if foreign sales had been translated at the same rate of exchange that was utilized for the third quarter of fiscal 2005.

The following tables set forth sales (in thousands) by geographic region and product category for the third quarter of fiscal 2006 and 2005:

Sales and Service Fees by Geographic Region
 
  
  Three Months Ended July 31, Increase 
  2006 2005 Amount % 
North America $11,297  31%$10,986  37%$311  3%
Europe  22,059  60% 16,407  56% 5,652  34%
Asia Pacific  3,241  9% 2,162  7% 1,079  50%
Total $36,597  100%$29,555  100%$7,042  24%
                    

Sales and service fees in the North American market were flat in the third quarter of fiscal 2006 compared to the prior year period. Sales and service fees were down approximately $1.0 million in the third quarter of fiscal 2006 from the first two quarters of fiscal 2006 due to a slight reduction in unit shipments and increased unit sales of lower priced lathe and VM products.

The 34% increase in sales and service fees in Europe reflected a 28% increase in unit sales and the favorable effect of a weaker U.S Dollar. Unit shipments of the VM and VMX product lines increased 26% and 36%, respectively over the prior year period primarily in the United Kingdom and Germany due to favorable market conditions in these regions.

The 50% increase in sales and service fees in Asia reflected a 128% increase in unit sales of the VMX product line over the prior year period. The increased unit shipments are primarily attributable to our increased market penetration in China.

Sales and Service Fees by Product Category
       
       
  Three Months Ended July 31,  Increase 
 
 
2006
 
2005
 
 Amount
 
                    % 
Computerized Machine Tools $31,755  87%$24,926  84%$6,829   27%
Service Fees, Parts and Other  4,842  13% 4,629  16% 213   5%
Total $36,597  100%$29,555  100%$7,042   24%
                      

Sales of computerized machine tools during the third quarter of fiscal 2006 increased 27% over the corresponding period in fiscal 2005. The sales growth was driven by a 22% increase in unit shipments and a 5% increase in the average net selling price per unit due to the effect of currency translation.

Orders. New orders booked in the third quarter of fiscal 2006 totaled $38.0 million, an increase of $9.1 million or 32%, from the amount recorded in the third quarter of 2005. The dollar value of orders booked was a record for the company and benefited from a significant increase in unit orders of higher priced VMX units from customers in Europe and Asia as well as the favorable currency translation effects of the weakened U.S. Dollar during the third quarter, which accounted for $1.3 million or 15% of the increase.

Gross Margin. Gross margin for the third quarter of fiscal 2006 was 35% compared to 33% for the prior year period. The improvement was primarily the result of increased unit volume.

Operating Expenses. Selling, general and administrative expenses were $7.4 million, a slight increase from the $6.6 million reported in the prior year period. The increase was primarily the result of increased sales and marketing expenses and the effect of currency translation. Selling, general and administrative expenses were 20% of sales and service fees during the third quarter of fiscal 2006 compared to 22% for the third quarter of fiscal 2005.

Operating Income. Operating income for the third quarter of fiscal 2006 was $5.4 million, or 15% of sales and service fees, compared to $3.2 million, or 11% of sales and service fees, in the prior year period. The improvement in operating income as a percentage of sales and service fees is the result of the increased unit volume of machine tool sales.

Income Tax Expense. Our provision for income taxes during the third quarter of fiscal 2006 was approximately $1.3 million higher than in the same period in fiscal 2005, primarily because we used substantially all of our domestic net operating loss carryforwards during the fourth quarter of fiscal 2005. Our effective tax rate for the third quarter of fiscal 2006 was 30% as compared to the third quarter of fiscal 2005 of 10%. The fiscal 2006 third quarter effective tax rate is lower than the effective tax rate during the first and second quarters of fiscal 2006 due to a one-time tax saving benefit of approximately $200,000, which resulted from favorable tax planning strategies implemented during the third quarter.

Nine Months Ended July 31, 2006 Compared to Nine Months Ended July 31, 2005

Sales and Service Fees. Sales and service fees for the first nine monthsquarter of fiscal 20062007 were $105.4$46.9 million, an increase of $14.6$14.9 million, (16%)or 47%, from the $90.8 millionamount reported for the prior year period. The growth of first nine monthsquarter revenues was primarily 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 67% of our sales during the first quarter of fiscal 2005. Unit shipments increased by 22% during fiscal 2006 compared to fiscal 2005 with consistent increases worldwide.

Approximately 59% of sales and service fees in the first nine months of fiscal 20062007 were derived from European markets. Due to the strengtheningeffects of thea weaker U.S. Dollar during the first nine months of the fiscal 2006, the weighted average exchange rate between the Euro and the U.S. dollar was $1.23 per €1.00, as compared to $1.28 per €1.00when translating foreign sales for the first nine months of fiscal 2005, a decrease of 4%. Salesfinancial reporting purposes, sales and service fees for the first nine monthsquarter of fiscal 20062007 were approximately $2.6$2.9 million lessmore 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 monthsquarter of fiscal 2005.2006.

The following tables set forth net sales and service fees(in thousands) by geographic region and product category for the nine monthsfirst quarter of 2007 and 2006:
Net Sales and Service Fees by Geographic Region
 
January 31,
 
Increase
 
2007
 
2006
 
Amount
 
%
            
North America$13,223 28.2% $12,331 38.6% $892 7.2%
 Europe31,494 67.2% 18,044 56.6% 13,450 74.5%
Asia Pacific2,161 4.6% 1,519 4.8% 642 42.3%
Total$46,878 100.0% $31,894 100.0% $14,984 46.9%

Sales and service fees in Europe increased by 75% during the first quarter primarily due to a 54% increase in unit shipments. Shipments of the higher-priced VMX product line increased 82% over the same period in the prior year. Sales and service fees in Europe for the first quarter of fiscal 2006 and 2005:2007 were favorably impacted by $2.8 million 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 42% 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 by Product Region (dollars are in thousands)
       
              
  Nine Months Ended July 31, Increase 
  2006 2005 Amount  % 
North America $36,177  34%$31,045  34%$5,132  17%
Europe  62,236  59% 54,407  60% 7,829  14%
Asia Pacific  6,939  7 % 5,339  6 % 1,600  30 %
Total $105,352  100%$90,791  100%$14,561  16%
                    

Sales and service fees in North America benefited from a 22% increase in unit shipments in the first nine months of fiscal 2006increased 7% compared to the prior year period. Unit shipments of our lathe, VM and VMX product lines increased in North America by 17%, 22% and 23%, respectively. These increases are attributable to strong demand and an approximately 14% increase in machine tool consumption in the United States.

Unit sales in Europe increased by 21%, but were partially offset by the effects of a stronger U.S. Dollar when translating European sales for financial reporting purposes. Sales and service fees for Europe were approximately $2.6 million less than would have been the case if translated at the same rate of exchange that was utilized for the first nine months of 2005. The increase in sales and service fees was most pronounced in the United Kingdom and Germany.

The 30% increase in our sales and service fees in Asia Pacific isperiod primarily due to a 25% increase inincreased unit shipments during the first nine months of 2006 compared to the prior year period. Unit shipments of our lathe, VM and VMX product lines increased in Asia by 50%, 13% and 33%, respectively. These increases are attributable to favorable market conditions in the Asian market, as well as our increased market penetration into China. China is the world’s largest machine tool market, accounting for over 20% of total worldwide consumption of machine tools (measured in U.S. Dollars)6%.

Sales and Service Fees by Product Category (dollars are in thousands)
       
Net Sales and Service Fees by Product Category
Net Sales and Service Fees by Product Category
             
January 31,
 
Increase
 Nine Months Ended July 31, Increase 
2007
 
2006
 
Amount
 
%
 2006 2005 Amount  %            
Computerized Machine Tools $91,023 86%$77,375 85%$13,648 18%$41,746 89.1% $27,364 85.8% $14,382 52.6%
Service Fees, Parts and Other  14,329  14% 13,416  15% 913  7%5,132 10.9% 4,530 14.2% 602 13.3%
Total $105,352  100%$90,791  100%$14,561  16%$46,878 100.0% $31,894 100.0% $14,984 46.9%
              

Sales of computerized machine tools during the first nine monthsquarter of fiscal 20062007 increased 18%53% over the corresponding period in fiscal 2005.2006. The sales growthincrease was driven by a 22%29% increase in overall unit shipments which was partially offset bycombined with the impact of a 3% decreasefavorable mix, particularly higher-priced VMX products.

Orders. New orders booked during the first quarter of fiscal 2007 totaled $47.1 million, an increase of $9.3 million, or 25% over the amount recorded in the average net selling price per unitfirst quarter of fiscal 2006. Unit orders increased in Europe, but decreased in North America due to market softening in the northern Midwest, and fluctuation of order flow in Asia. Orders for the first quarter of fiscal 2007 were favorably impacted by $2.9 million when compared to the same period in the prior year due to the effect of currency translation.

Sales of service fees, parts and other increased approximately $900,000 in the first nine months of fiscal 2006 compared to the prior year. The increase was due primarily to a $424,000 (24%) increase in software sales and a $461,000 (6%) increase in sales of service parts.weaker U.S. Dollar.

Orders.Gross Margin New orders booked for the first nine months of fiscal 2006 totaled $112.7 million, an increase of $24.0 million (27%) from the $88.7 million reported for the first nine months of fiscal 2005. New orders booked increased in the United States, Europe and Asia by $5.5 million (18%), $14.4 million (27%) and $4.0 million (71%), respectively. Orders for the first nine months of fiscal 2006 were unfavorably affected by approximately $2.5 million due to currency translation.

Gross Margin.. Gross margin for the first nine monthsquarter of fiscal 20062007 was 35%, slightly above the37% compared to 34% margin realized in the corresponding fiscal 2005 period, due principally to increased sales of computerized machine tools, but partially offset by the unfavorable effects of a stronger U.S. Dollar compared tofor the prior year period.period, as a result of higher volume and favorable mix.

Operating Expenses. Selling, general and administrative expenses during the first nine months of 2006 increased approximately $1.6were $9.3 million, an increase from the amount$6.3 million reported forin the 2005prior year period as a result of increased salesdue to selling and marketing expenses. Selling, generalexpenses related to export market expansion, increased commissions and compensation expense, and increased administrative expenses were 20%related to compliance costs under Section 404 of sales and service fees during the first nine monthsSarbanes-Oxley Act of fiscal 2006 compared to 21% for the first nine months of 2005.2002.

Operating Income. Operating income for the first nine monthswas $8.1 million, or 17% of fiscal 2006 was $16.1sales and service fees, compared to $4.6 million, or 15% of sales and service fees compared to $11.1 million, or 12% of sales and service fees infor the prior year.year period.

Other Expense.Expense (Income). The increase in other income foris the first nine months of fiscal 2006 compared to the prior year period is due primarily to approximately $350,000 of exchange losses in payables and receivables denominated in foreign currencies, primarily the NT Dollar, that were recorded in the first nine months of fiscal 2005 as a result of timing differences between the hedge contract period and when the payables and receivables were recorded. Also contributing to the increase were improved earnings of our affiliates we accounted for using the equity method.method and increased interest income earned on short-term cash investments.

Income Tax Expense.Taxes. Our provision for income taxes during the first nine monthsquarter of fiscal 20062007 was approximately $4.0$1.4 million higher than in the same period in fiscal 2005, primarily because we had used substantially all2006 as a result of our domestic netthe significant increase in operating loss carryforwards by the end of fiscal 2005.income. Our effective tax rate for the first nine monthsquarter of fiscal 20062007 was 34% as36% compared to 35% for the first nine monthsquarter of fiscal 2005 of 14%.2006.

LIQUIDITY AND CAPITAL RESOURCES

At JulyJanuary 31, 2006,2007, we had cash and cash equivalents of $24.5$32.3 million, compared to $17.6$29.8 million at October 31, 2005.2006. Approximately 51% of the $32.3 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 $7.8$2.9 millionfor the first nine months of fiscal 2006,quarter ended January 31, 2007, compared to $5.7$3.5 million in the prior year period.

Working capital, excluding cash and short-term debt, was $52.7 million at July 31, 2006 compared to $43.1 million at October 31, 2005. During the first nine monthsquarter of fiscal 2006,2007, cash flow from operations was unfavorablyfavorably affected by a $12.5$3.7 million decrease in inventories offset by a $2.6 million increase in inventory and a $1.6 increase in accounts receivable, but was partially offset by an $11.0 million increase in accounts payable. The increase in inventory and accounts payable to vendors was the result of our decision to increase production levels at our principal manufacturing facility in Taiwan in response to increased orders. Accounts receivable increasedreceivables as a result of increased unit shipments of machine tools during the quarter. Decreases in cash flow from operations during the first nine monthsquarter of fiscal 2007 for accounts payable and accrued expenses reflect vendor payments for increased production levels from the fourth quarter of fiscal 2006 and payments to employees for fiscal 2006 year-end performance bonuses. Working capital, excluding short-term debt, was $62.1 million at January 31, 2007, compared to $56.7 million at October 31, 2006.

Capital investments during the first nine monthsquarter of fiscal 20062007 included normal expenditures for software development projects and purchases of equipment. We funded these expenditures with cash flow from operations.

Total debt at July 31, 2006, was $4.0 million, representing 5% of our total capitalization of $74.4 million, compared to $4.1 million, or 7% of our total capitalization, at October 31, 2005. Our outstanding debt consisted solely of the outstanding balance of a termmortgage loan secured by our Indianapolis facility. We wereIn addition we have an $11.2 million credit facility, which has no outstanding borrowings as of January 31, 2007.

Although we have not made any significant acquisitions in compliance with all loan covenantsthe recent past, we may acquire other businesses and had unused credit availability of $10.8 million at July 31, 2006. Weassets, 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 amount we can borrow under our credit facilitiesFASB 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 sufficientrequired to meet our anticipated cash requirements foradopt and report the balanceimpact of FIN No. 48 in the first quarter of fiscal 2006.year 2008. We have not begun implementation of FIN No. 48 and therefore cannot report the potential impact of implementation.



NEW ACCOUNTING PRONOUNCEMENTSDuring 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 December 2004,February 2007, the FASB issued SFASreleased Statement No. 123(R)159, “The Fair Value Option for Financial Assets and Financial Liabilities”, “Share Based Payment”,a new standard that requires companiespermits an entity to expensechoose 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 valueopportunity 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 employee stock optionsfiscal 2008. We have not begun implementation of Statement No. 159 and similar awards for annual periods beginning after June 15, 2005 and applies to all outstanding and unvested stock-based awards at a company’s adoption date. We adopted this pronouncement effective November 1, 2005 andtherefore cannot report the condensed consolidated financial statements reflect the accounting treatment required by the pronouncement. Thepotential impact of the adoption of SFAS No. 123(R) was not material. See Note 3 to the Condensed Consolidated Financial Statements.implementation.

In November 2004,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 Accounting Standards Board (FASB)Statements” (SAB 108). SAB 108 was issued Statement of Financial Accounting Standards (SFAS) No. 151 “Inventory Costs” an amendment of ARB No. 43, Chapter 4. This Statement amendsin order to eliminate the guidancediversity in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that, under some circumstances, items such as idle facility expense, excessive spoilage, double freight and rehandling costs may be so abnormal as to require treatment as current period charges. This Statement nowpractice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that those itemsregistrants 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 recognized as current-period charges regardless of whether they meetimplemented by the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacityend of the production facilities. This statement was effective on November 1, 2005fiscal 2007. We have not begun implementation of SAB 108 and had notherefore cannot report the potential impact on our Condensed Consolidated Financial Statements.of the implementation.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of Accounting Principles Board (APB) Opinion No. 20 and FASB Statement No. 3.” This statement changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions must be followed. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.  The provisions of SFAS No. 154 are effective for fiscal years beginning after December 15, 2005.  The adoption of this statement will not have a material impact on our Condensed Consolidated Financial Statements.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 significantly revises how tax benefits are measured and reported. This interpretation also provides guidance as to how and when interest and penalties are to be recorded and classified. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are evaluating the impact that this interpretation will have 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, 2005,2006, 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 couldwould be affected. There were no material changes to our critical accounting policies during the thirdfirst quarter of fiscal 2006.2007.

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, 2005.2006.


OFF BALANCE SHEET ARRANGEMENTS

From time to time, our subsidiaries guarantee third party lease financing residualspayment obligations in connection with the sale of certain machines.machines to customers that use financing. At JulyJanuary 31, 2006, there were 462007 we had 55 outstanding third party guarantees totaling approximately $1.7$1.6 million. A retentionThe 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. Retention of title clause allows us to obtainrecover the machine if the customer defaults on itsthe lease. We believe that the proceeds obtained from liquidation of the machine would exceed our exposure.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.

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.



Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our outstanding indebtedness of $4.0 million, which consists of a term loan secured by our Indianapolis facility, is at a fixed interest rate of 7.375%.Interest rateson borrowings on our bank borrowings can be affected by changes incredit facilities are tied to prevailing U.S. and European interest rates. At JulyJanuary 31, 2006,2007, there were no outstanding borrowings under our bank credit facilities. The remaining outstanding indebtedness of $4.0 million is at a 7 3/8% fixed rate of interest.

Foreign Currency Exchange Risk

In fiscal 2006, approximately 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. basedU.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 other 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 JulyJanuary 31, 20062007 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
 Notional AmountWeighted Avg.
Contract Amount at Forward
Rates in U.S. Dollars
 
Forward Contractsin Foreign Currency
Forward
Rate
At Date of ContractJuly 31, 2006Maturity Datesin Foreign CurrencyForward RateContract DateJanuary 31, 2007Maturity Dates
Sale Contracts:
         
Euro25,200,0001.284632,371,92032,566,362
August 2006 -
October 2007
24,6000001.294931,854,54032,245,739February 2007-December 2007
     
Sterling3,600,0001.82396,566,0406,747,493
August 2006 -
October 2007
Pound Sterling4,000,0001.88917,556,4007,846,315February 2007-December 2007
Purchase Contracts:
         
New Taiwan Dollar195,000,00032.0904*6,076,5835,969,860
May 2006 -
October 2006
600,000,00032.40*18,518,51918,341,782February 2007-October 2007

*NT Dollars per U.S. Dollar




Forward contracts for the sale or purchases of foreign currencies as of JulyJanuary 31, 2006,2007, 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:

Notional AmountWeighted Avg.Contract Amount at Forward Rates in U.S. Dollars   
Contract Amount at Forward
Rates in U.S. Dollars
 
Forward Contractsin Foreign CurrencyForward RateAt Date of ContractJuly 31, 2006Maturity DatesNotional Amount in Foreign CurrencyWeighted Avg. Forward RateContract DateJanuary 31, 2007Maturity Dates
Sale Contracts:
        
Euro8,515,3741.268810,804,30610,903,469
August 2006 -
September 2006
9,329,7231.302012,147,30012,182,010February 2007-March 2007
    
Singapore Dollar10,987,5040.63246,948,8396,992,313
August 2006 -
December 2006
8,829,7380.64515,696,0645,765,939February 2007-May 2007
    
Sterling1,238,7131.85692,300,1652,316,289
August 2006 -
September 2006
Pound Sterling947,1021.94941,846,2801,859,646February 2007-March 2007
Purchase Contracts:
        
New Taiwan Dollar452,677,05932.4426*13,953,17413,832,061
August 2006 -
September 2006
363,900,00032.62*11,155,73311,081,131February 2007 - April 2007

* NT Dollars per U.S. Dollar






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 JulyJanuary 31, 20062007 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 have beenwere no changes in our internal controls over financial reporting that occurred during the quarter ended JulyJanuary 31, 20062007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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 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.

Item 6. EXHIBITS

 
11
Statement re:
Computation of Per Share Earningsper 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.

31.1Certification by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.

31.2Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.

32.1Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.







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/s/ Stephen J. Alesia        
Stephen J. AlesiaJohn G. Oblazney
Vice President and
Chief Financial Officer



By:_/s/ Sonja K. McClelland
Sonja K. McClelland
Corporate Controller and
Principal Accounting Officer





August 31, 2006March 8, 2007