Inventories are stated at the lower of cost or net realizable value using the first-in first-out (FIFO) method. We have three principal categories of inventory: 1) manufactured product to be sold; 2) sales demonstration inventory - completed product used to support our sales force for demonstrations and demonstrations;held for sale; and 3) service inventory - completed product and parts used to support our service department.department and held for sale. Shipping and handling costs are classified as a component of costCost of salesSales in our condensed consolidated statements of operations.
Sales demonstration inventory is held by our sales representatives for up to three years, at which time it would be refurbished and transferred to finished goods as used equipment, stated at the lower of cost or net realizable value. Management expectsWe expect these refurbished units to remain in finished goods inventory and to be sold within 12 months at prices that may produce reduced gross margins.
Service inventory is used to provide a temporary replacement product to a customer covered by a premium warrantyhardware service contract when the customer’s unit requires service or repair and as training equipment. Service inventory is available for sale; however, management does not expect service inventory to be sold within 12 months and, as such, classifies this inventory as a long-term asset. Service inventory that we utilize for training or repairs and which we deem as no longer available for sale is transferred to fixed assets at the lower of cost or net realizable value and depreciated over theits remaining life, typically three years.
Our financial instruments include cash and cash equivalents, short-term investments, accounts receivable, customer deposits, accounts payable and accrued liabilities. The carrying amounts of such financial instruments approximate their fair value due to the short-term nature of these instruments.
| |
(2) | Contingent consideration liability represents arrangements to pay the former owners of certain companies we acquired. The remaining undiscounted maximum payment under the arrangements is $5.6 million. We estimated the fair value of the contingent consideration using a Monte Carlo Simulation, which is based on significant inputs, primarily forecasted future results of the acquired businesses not observable in the market, and thus represents a Level 3 measure. During the three and nine months ended September 30, 2017, we paid $0.5 million as part of these arrangements. During the three and nine months ended September 30, 2016, we paid $0.3 million and $0.4 million, respectively, as part of these arrangements. The remaining change in the fair value of the contingent consideration from December 31, 2016 to September 30, 2017 is related to changes in foreign currency rates. |
NOTE 1511 – SEGMENT REPORTINGRESTRUCTURING
We have three reportable segments; Factory Metrology, Construction BIM-CIM,In the first quarter of 2020, our Board of Directors approved a global restructuring plan (the “Restructuring Plan”), which is intended to support our strategic plan in an effort to improve operating performance and Other. These segmentsensure that we are basedappropriately structured and resourced to deliver increased and sustainable value to our shareholders and customers. Key activities under the Restructuring Plan include a continued focus on efficiency and cost-saving efforts, which includes decreasing total headcount by approximately 500 employees upon the vertical markets that we currently serve. Businesscompletion of the Restructuring Plan.
These activities that do not meet the criteriaare expected to be reportable segments are aggregatedsubstantially completed by the end of 2021. Pre-tax charges of approximately $49 million were recorded in the Other category.
We develop, manufacture, market, support and sell CAD-based quality assurance products integratedfourth quarter of 2019 in connection with CAD-based inspection and statistical process control software and three-dimensional documentation systems in each of these reportable segments. These activities represent more than 99% of consolidated sales.
Our Chief Operating Decision Maker (CODM), our Chief Executive Officer, evaluates segment performance and allocates resources based upon profitable growth. We use segment profit to evaluate the performanceimplementation of our reportable segments. Segment profit is calculated as gross profit, netnew strategic plan and included the following:
•$21.2 million impairment of sellinggoodwill;
•$12.8 million charge, increasing our reserve for excess and marketing expenses, forobsolete inventory;
•$10.5 million impairment of intangible assets associated with recent acquisitions;
•$1.4 million impairment of intangible assets related to capitalized patents;
•$3.4 million impairment of other assets and other charges.
In connection with the reporting segment. Our definitionRestructuring Plan, we recorded a pre-tax charge of segment profit may not be comparable to similarly-titled measures reported by other companies.
Our segment structure presented below represents a change from geographic segments due to the reorganization which took place inapproximately $15.8 million during the year ended December 31, 2016. The amounts2020 primarily consisting of severance and related benefits, professional fees and other related charges and costs including a non-cash expense of $0.4 million related to the disposal of our Photonics business and 3D Design related assets. We received $0.7 million in cash payments for the threedisposal of our Photonics business and nine3D Design related assets in the second quarter of 2020. We are continuing to execute our cost reduction initiatives to achieve our 20% target EBITDA margins that could result in pre-tax charges in the range of $5 million to $15 million for fiscal year 2021.
On July 15, 2021, we entered into a manufacturing services agreement (the “Agreement”) with Sanmina Corporation (“Sanmina”), in connection with the Restructuring Plan. Under the Agreement, Sanmina will provide manufacturing services for the Company’s measurement device products currently manufactured by the Company at the Company’s Lake Mary, Florida, Exton, Pennsylvania, and Stuttgart, Germany manufacturing sites. A phased transition to a Sanmina production facility is expected to be completed over the next twelve months as part of our cost reduction initiative. The Company expects to incur a cash charge of approximately $6 million in the second half of 2021, primarily consisting of cash severance.
Actual results, including the costs of the Restructuring Plan, may differ materially from our expectations, resulting in our inability to realize the expected benefits of the Restructuring Plan and our new strategic plan and negatively impacting our ability to execute our future plans and strategies, which could have a material adverse effect on our business, financial condition and results of operations.
In connection with the Restructuring Plan, we paid $13.1 million during the year ended December 31, 2020 and $3.5 million during the six months ended SeptemberJune 30, 2016 have been restated2021, primarily consisting of severance and related benefits. Activity related to reflect the change in reporting segments. Each of our segments employs consistent accounting policies.
The following tables present information about our reportable segments, including a reconciliation of total segment profit to Income (Loss) from Operations included in the condensed consolidated statements of operationsaccrued restructuring charge and cash payments for the three and ninesix months ended SeptemberJune 30, 2017 and 2016:2021 was as follows:
| | | | | | | | | | | | | | | | | |
| Severance and other benefits | | Professional fees and other related charges | | Total |
Balance at December 31, 2020 | $ | 1,481 | | | $ | 867 | | | $ | 2,348 | |
Additions charged to expense | 1,480 | | | 823 | | | 2,303 | |
Cash payments | (2,257) | | | (1,279) | | | (3,536) | |
Balance at June 30, 2021 | 704 | | | 411 | | | 1,115 | |
| | | | | |
| | | | | |
Balance at February 14, 2020 | $ | 0 | | | $ | 0 | | | $ | 0 | |
Additions charged to expense | 12,400 | | | 1,574 | | | 13,974 | |
Cash payments | (5,379) | | | (1,523) | | | (6,902) | |
Balance at June 30, 2020 | 7,021 | | | 51 | | | 7,072 | |
|
| | | | | | | | | | | | | | | | |
| | Factory Metrology | | Construction BIM-CIM | | Other | | Total |
Three Months Ended September 30, 2017 | | | | | | | | |
| | | | | | | | |
Total sales | | $ | 59,339 |
| | $ | 22,751 |
| | $ | 8,160 |
| | $ | 90,250 |
|
Segment profit | | $ | 20,144 |
| | $ | 5,407 |
| | $ | 493 |
| | $ | 26,044 |
|
General and administrative | | | | | | | | 10,307 |
|
Depreciation and amortization | | | | | | | | 4,368 |
|
Research and development | | | | | | | | 9,019 |
|
Income from operations | | | | | | | | $ | 2,350 |
|
|
| | | | | | | | | | | | | | | | |
| | Factory Metrology | | Construction BIM-CIM | | Other | | Total |
Three Months Ended September 30, 2016 | | | | | | | | |
| | | | | | | | |
Total sales | | $ | 58,310 |
| | $ | 15,925 |
| | $ | 5,365 |
| | $ | 79,600 |
|
Segment profit | | $ | 16,305 |
| | $ | 4,704 |
| | $ | 1,888 |
| | $ | 22,897 |
|
General and administrative | | | | | | | | 10,747 |
|
Depreciation and amortization | | | | | | | | 3,381 |
|
Research and development | | | | | | | | 7,928 |
|
Income from operations | | | | | | | | $ | 841 |
|
|
| | | | | | | | | | | | | | | | |
| | Factory Metrology | | Construction BIM-CIM | | Other | | Total |
Nine Months Ended September 30, 2017 | | | | | | | | |
| | | | | | | | |
Total sales | | $ | 173,531 |
| | $ | 60,550 |
| | $ | 20,413 |
| | $ | 254,494 |
|
Segment profit | | $ | 53,497 |
| | $ | 13,799 |
| | $ | 363 |
| | $ | 67,659 |
|
General and administrative | | | | | | | | 32,883 |
|
Depreciation and amortization | | | | | | | | 12,075 |
|
Research and development | | | | | | | | 26,530 |
|
Loss from operations | | | | | | | | $ | (3,829 | ) |
|
| | | | | | | | | | | | | | | | |
| | Factory Metrology | | Construction BIM-CIM | | Other | | Total |
Nine Months Ended September 30, 2016 | | | | | | | | |
| | | | | | | | |
Total sales | | $ | 168,418 |
| | $ | 47,529 |
| | $ | 17,939 |
| | $ | 233,886 |
|
Segment profit | | $ | 53,034 |
| | $ | 12,868 |
| | $ | 6,982 |
| | $ | 72,884 |
|
General and administrative | | | | | | | | 31,139 |
|
Depreciation and amortization | | | | | | | | 9,733 |
|
Research and development | | | | | | | | 22,344 |
|
Income from operations | | | | | | | | $ | 9,668 |
|
NOTE 1612 – COMMITMENTS AND CONTINGENCIES
Leases — We lease buildings and equipment in the normal course of business under non-cancellable operating and capital leases that expire in or before 2026. Total obligations under these leases are approximately $7.1 million for 2017.
Purchase Commitments — We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 120 days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As of SeptemberJune 30, 2017,2021, we had approximately $44.6$40.9 million in purchase commitments that are expected to be delivered within the next 12 months. To ensure adequate component availability in preparation for new product introductions, as of September 30, 2017, we also had $0.6 million in long-term commitments for purchases to be delivered after 12 months.
Legal Proceedings — We are not involved in any legal proceedings, other thanincluding routine litigation arising in the normal course of business, none of whichthat we believe will have a material adverse effect on our business, financial condition or results of operations.
U.S. Government Contracting Matter — We have sold our products and related services to the U.S. Government (the “Government”) under General Services Administration (“GSA”) Federal Supply Schedule contracts (the “GSA Contracts”) since 2002 and are currently selling our products and related services to the Government under 2 such GSA Contracts. Each GSA Contract is subject to extensive legal and regulatory requirements and includes, among other provisions, a price reduction clause (the “Price Reduction Clause”), which generally requires us to reduce the prices billed to the Government under the GSA Contracts to correspond to the lowest prices billed to certain benchmark customers.
Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the Government being overcharged under the Price Reduction Clauses of the GSA Contracts (the “GSA Matter”). As a result, we performed remediation efforts, including but not limited to, the identification of additional controls and procedures to ensure future compliance with the pricing and other requirements of the GSA Contracts. We also retained outside legal counsel and forensic accountants to assist with these efforts and to conduct a comprehensive review of our pricing and other practices under the GSA Contracts (the “Review”). On February 14, 2019, we reported the GSA Matter to the GSA and its Office of Inspector General.
Effective as of February 25, 2021, as a result of the review, we entered into a settlement agreement with the GSA. Pursuant to the settlement agreement, we agreed to, among other things, pay to the GSA $12.3 million in full and final satisfaction of any and all claims, causes of actions, appeals and the like, including damages, costs, attorney's fees and interest arising under or related to the GSA Matter. As of March 31, 2021, we settled and paid the full $12.3 million and no longer have any outstanding liability related to this matter.
NOTE 13 – LEASES
We have operating and finance leases for manufacturing facilities, corporate offices, research and development facilities, sales and training facilities, vehicles, and certain equipment under which we assume the role of lessee. We do not lease assets as a lessor. Our leases have remaining lease terms of less than one year to approximately ten years, some of which include options to extend the leases for up to fifteen years, and some of which include options to terminate the leases within three months. We do not participate in any material subleasing.
We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use (“ROU”) asset, Lease liability, and Lease liability - less current portion in our condensed consolidated balance sheets. Finance leases are included in Property and equipment, net, Lease liability, and Lease liability - less current portion in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term. Variable lease payments that depend on an index or rate include the variable portion when calculating ROU assets and lease liabilities. Variable lease payments that do not depend on an index or rate are expensed as incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the commencement date of the lease to determine the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option at the time the lease is commenced. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
While we have lease agreements with lease and non-lease components, we account for the lease and non-lease components as a single lease component.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 | | |
Operating lease cost | $ | 1,922 | | | $ | 2,006 | | | $ | 3,891 | | | $ | 4,061 | | | |
| | | | | | | | | |
Finance lease cost: | | | | | | | | | |
Amortization of ROU assets | 78 | | | 78 | | | 161 | | | 160 | | | |
Interest on lease liabilities | 4 | | | 8 | | | 10 | | | 17 | | | |
Total finance lease cost | $ | 82 | | | $ | 86 | | | $ | 171 | | | $ | 177 | | | |
| | | | | | | | | |
We recognize lease payments made for short-term leases where terms are 12 months or less as the payments are incurred. Our short-term lease cost for the three months ended June 30, 2021 and June 30, 2020 were both less than $0.1 million. Our short-term lease cost for the six months ended June 30, 2020 and June 30, 2019 was $0.1 million and less than $0.1 million, respectively.
Supplemental balance sheet information related to leases was as follows: | | | | | | | | | | | |
| As of | | As of |
| June 30, 2021 | | December 31, 2020 |
Operating leases: | | | |
Operating lease right-of-use assets | $ | 23,356 | | | $ | 26,107 | |
| | | |
Current operating lease liabilities | $ | 5,046 | | | $ | 5,557 | |
Operating lease liabilities - less current portion | 19,866 | | | 21,985 | |
Total operating lease liabilities | $ | 24,912 | | | $ | 27,542 | |
| | | |
Finance leases: | | | |
Property and equipment, at cost | $ | 1,397 | | | $ | 1,813 | |
Accumulated depreciation | (1,128) | | | (1,415) | |
Property and equipment, net | $ | 269 | | | $ | 398 | |
| | | |
Current finance lease liabilities | $ | 189 | | | $ | 278 | |
Finance lease liabilities - less current portion | 96 | | | 146 | |
Total finance lease liabilities | $ | 285 | | | $ | 424 | |
| | | |
Weighted Average Remaining Lease Term (in years): | | | |
Operating leases | 6.31 | | 6.55 |
Finance leases | 1.86 | | 1.93 |
| | | |
Weighted Average Discount Rate: | | | |
Operating leases | 5.70 | % | | 5.66 | % |
Finance leases | 5.09 | % | | 5.07 | % |
Supplemental cash flow information related to leases was as follows: | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 3,827 | | | $ | 4,141 | | | |
Operating cash flows from finance leases | $ | 9 | | | $ | 17 | | | |
Financing cash flows from finance leases | $ | 167 | | | $ | 160 | | | |
| | | | | |
ROU assets obtained in exchange for lease obligations: | | | | | |
Operating leases | $ | 614 | | | $ | 424 | | | |
Maturities of lease liabilities are as follows: | | | | | | | | | | | |
Year Ending December 31, | Operating leases | | Finance leases |
2021 (excluding the first 6 months) | $ | 6,304 | | | $ | 198 | |
2022 | 5,179 | | | 55 | |
2023 | 4,517 | | | 32 | |
2024 | 3,998 | | | 11 | |
2025 | 2,887 | | | 3 | |
Thereafter | 6,963 | | | 0 | |
Total lease payments | $ | 29,848 | | | $ | 299 | |
Less imputed interest | (4,936) | | | (14) | |
Total | $ | 24,912 | | | $ | 285 | |
NOTE 14 – INCOME TAXES
For the three months ended June 30, 2021, we recorded an income tax benefit of $0.4 million compared with income tax benefit of $3.4 million for three months ended June 30, 2020, respectively. Our effective tax rate was 25.2% for the three months ended June 30, 2021 compared with 27.3% in the prior year period. The change in our income benefit was primarily due to a lower pretax loss during the second quarter of 2021. The change in our effective tax rate was primarily associated with discrete tax items and a shift in the geographic mix of pretax income expected for the full year 2021.
Our quarterly estimate of our annual effective tax rate, and our quarterly provision for income tax (benefit) expense, are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which they relate, as well as the amount of pretax income or loss recognized during the quarter.
NOTE 17 –15 - BUSINESS COMBINATIONS
In April 2017,On June 4, 2021, we completed the acquisition of substantiallyacquired all of the assetsoutstanding shares of Instrument Associates, LLC d/b/a Nutfield TechnologyHolobuilder, Inc. (“Nutfield”Holobuilder”), a componentcompany focused on 3D photogrammetry-based technology business located in Hudson, New Hampshire, which specializes in the design and manufacture of advanced galvanometer-based optical scanners, scan heads and laser kits, for a total purchase price of approximately $5.5 million. This$34 million paid, net of cash acquired, subject to certain additional post-closing adjustments. We believe this acquisition supports our long-term strategyenables the Company to expand our presence in key marketsprovide reality-capture photo documentation and
improve our existing product lines with innovative technology. added remote access capability for industries such as construction management further expanding the Company's Digital Twin solution portfolio. The results of the acquired business’Holobuilder’s operations as of and after the date of acquisition have been included in our condensed consolidated financial statements as of June 30, 2021, and for the three and ninesix months ended SeptemberJune 30, 2017.2021.
In December 2016, we acquired MWF-technology, GmbH (“MWF”) for a purchase price, net of cash acquired, of approximately $6.6 million, paid with cash on hand. MWF, an innovator in mobile augmented reality solutions located near Frankfurt, Germany, provides technology that enables large, complex 3D CAD data to be transferred to a tablet device for use in mobile visualization and comparison to real world conditions. This enables real time, actionable manufacturing insight for in-process inspection, assembly, guidance and positioning.
In August 2016, we acquired Laser Projection Technologies, Inc. (“LPT”) for a purchase price, net of cash acquired, of approximately $17.2 million, paid with cash on hand. LPT, located in Londonderry, New Hampshire, specializes in laser projection and measurement systems used throughout manufacturing environments around the globe to maximize productivity and efficiency. The acquisition enhances our portfolio of 3D measurement solutions and supports our long-term strategy to expand our presence in key markets.
In July 2016, we acquired BuildIT Software & Solutions Ltd. (“BuildIT”) forHolobuilder constitutes a purchase price, net of cash acquired, of approximately $3.9 million, paid with cash on hand. BuildIT, a software solutions business located in Montreal, Canada, specializes in process-configurable 3D metrology software solutions with hardware agnostic interfaces. The addition of BuildIT enhances our metrology portfolio, providing customers greater software options to use in a variety of applications to reduce inspection and assembly times and increase productivity.
The acquisitions of Nutfield, MWF, LPT, and BuildIT constitute business combinationscombination as defined by FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the date of acquisition. The purchase price allocations below represent our preliminary determination of the fair value of the assets acquired and liabilities assumed for the acquisitions.
Following is a preliminary summary of our final allocations of the purchase price to the fair values of the assets acquired and liabilities assumed as of the date of eachthe acquisition:
| | | | | | | | |
| | Fair Value (Preliminary) |
Tangible assets acquired: | | |
Accounts receivable | | $ | 192 | |
Property, plant and equipment, net | | 46 | |
Other assets | | 7 | |
Total assets acquired | | 245 | |
| | |
Liabilities assumed: | | |
Accounts payable and accrued liabilities | | (56) | |
Deferred revenue | | (2,732) | |
Total liabilities assumed | | (2,788) | |
| | |
Intangible assets | | 10,470 | |
Net deferred tax asset | | 987 | |
Net assets acquired | | 8,914 | |
| | |
Goodwill | | 24,994 | |
Purchase price paid, net of cash acquired | | $ | 33,908 | |
|
| | | | | | | | | | | | | | | | |
| | BuildIT | | LPT | | MWF | | Nutfield |
Accounts receivable | | $ | 237 |
| | $ | 54 |
| | $ | 150 |
| | $ | 160 |
|
Inventory | | — |
| | 322 |
| | — |
| | 539 |
|
Other assets | | 36 |
| | 160 |
| | 666 |
| | 96 |
|
Deferred income tax assets | | — |
| | 1,112 |
| | — |
| | — |
|
Intangible assets | | 1,015 |
| | 5,474 |
| | 1,816 |
| | 2,329 |
|
Goodwill (1) | | 3,393 |
| | 11,922 |
| | 5,364 |
| | 2,488 |
|
Accounts payable and accrued liabilities | | (95 | ) | | (747 | ) | | (700 | ) | | (12 | ) |
Other liabilities | | (471 | ) | | (1,086 | ) | | (345 | ) | | (104 | ) |
Deferred income tax liabilities | | (205 | ) | | — |
| | (364 | ) | | — |
|
Total purchase price, net of cash acquired | | $ | 3,910 |
| | $ | 17,211 |
| | $ | 6,587 |
| | $ | 5,496 |
|
(1)The goodwill arising from the acquisitionsacquisition consists largely of the expected synergies from combining operations as well as the value of the workforce. This goodwill is not expected to be tax deductible.
Following are the details of the purchase price allocated to the intangible assets acquired for the acquisitions noted above:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | BuildIT | | LPT | | MWF | | Nutfield |
| | Amount | | Weighted Average Life (Years) | | Amount | | Weighted Average Life (Years) | | Amount | | Weighted Average Life (Years) | | Amount | | Weighted Average Life (Years) |
Trade name | | $ | 346 |
| | 7 | | $ | 64 |
| | 1 | | $ | 36 |
| | 1 | | $ | 29 |
| | 1 |
Non-competition agreement | | 31 |
| | 5 | | — |
| | 0 | | 3 |
| | 2 | | 144 |
| | 5 |
Technology | | 361 |
| | 7 | | 4,260 |
| | 7 | | 951 |
| | 5 | | 1,970 |
| | 10 |
Customer relationship | | 277 |
| | 7 | | 1,150 |
| | 7 | | 826 |
| | 5 | | 95 |
| | 10 |
Favorable in-place lease | | — |
| | 0 | | — |
| | 0 | | — |
| | 0 | | 91 |
| | 12 |
Fair value of intangible assets acquired | | $ | 1,015 |
| | 7 | | $ | 5,474 |
| | 7 | | $ | 1,816 |
| | 5 | | $ | 2,329 |
| | 10 |
The goodwill for the Nutfield acquisition has been allocated to the Factory Metrology reporting segment. The goodwill for the BuildIT, LPT and MWF acquisitions was allocated in connection with our organizational structure realignment during 2016 using the relative fair value approach.
Acquisition and integration costs are not included as components of consideration transferred, but are recorded as expense in the period in which such costs are incurred. To date, we have incurred approximately $0.9$0.3 million inof acquisition andor integration costs for the BuildIT, LPT, MWF and Nutfield acquisitions.
Holobuilder acquisition. Pro forma financial results for BuildIT, LPT, MWF and NutfieldHolobuilder have not been presented because the effects of these transactions, individually and in the aggregate, were not material to our consolidated resultsfinancial results.
Following are the details of operations.the preliminary purchase price allocated to the intangible assets acquired for the Holobuilder acquisition:
| | | | | | | | | | | |
| | Amount | Weighted Average Life (Years) |
Brand | | $ | 370 | | 3 |
Technology | | 6,800 | | 5 |
Customer relationships | | 3,300 | | 15 |
Fair value of intangible assets acquired | | $ | 10,470 | | 8 |
NOTE 16 - SUBSEQUENT EVENTS
On July 15, 2021, we entered into a manufacturing services agreement (the “Agreement”) with Sanmina Corporation (“Sanmina”), in connection with the Restructuring Plan. Under the Agreement, Sanmina will provide manufacturing services for the Company’s measurement device products currently manufactured by the Company at the Company’s Lake Mary, Florida, Exton, Pennsylvania, and Stuttgart, Germany manufacturing sites.
The initial term of the Agreement is three years (“Initial Term”) with automatic renewals of one year terms unless either party provides notice to the other at least twelve months prior to the end of the then-current term. The Agreement may be terminated by either party for cause and either party may terminate the Agreement for convenience after the end of the Initial Term with prior notice of twelve months. The execution of the Agreement, in connection with the Restructuring plan, does not impact the Company's previously disclosed estimate of total restructuring costs and remains inline with previous expectation.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the Condensed Consolidated Financial Statements,condensed consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
FARO Technologies, Inc. (“FARO,” the “Company,” “us,” “we” or “our”) has made “forward-looking statements” in this report (within the meaning of the Private Securities Litigation Reform Act of 1995). Statements that are not historical facts or that describe our plans, beliefs, goals, intentions, objectives, projections, expectations, assumptions, strategies, or future events are forward-looking statements. In addition, words such as “may,” “might,” “would,” “will,” “will be,” “future,” “strategy,” “believe,” “plan,” “should,” “could,” “seek,” “expect,” “anticipate,” “intend,” “estimate,” “goal,” “objective,” “project,” “forecast,” “target” and similar words identify forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. We do not intend to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Important factors that could cause actual results to differ materially from those contemplated in such forward-looking statements include, among others, the following:
•an economic downturn in the manufacturing industry or the domestic and international economies in the regions of the world where we operate;
•the effect of the COVID-19 pandemic, including on our business operations, as well as its impact on general economic and financial market conditions;
•our inability to realize the intended benefits of our undertaking to transition to a company that is reorganized around functions to improve the efficiency of our sales organization and to improve operational effectiveness;
•our inability to successfully execute our new strategic plan and restructuring plan, including but not limited to additional impairment charges and/or higher than expected severance costs and exist costs, and our inability to realize the expected benefits of such plans;
•our inability to realize the anticipated benefits of our partnership with Sanmina and to successfully transition our manufacturing operations to Sanmina’s production facility;
•our inability to further penetrate our customer base and target markets;
•development by others of new or improved products, processes or technologies that make our products less competitive or obsolete;
•our inability to maintain what we believe to be our technological advantage by developing new products and enhancing our existing products;
•risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, increased political and economic instability, compliance with potentially evolving import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
•changes in trade regulation, which result in rising prices of imported steel, steel byproducts, aluminum and aluminum byproducts and various other raw materials that we use in the production of measurement devices, and our ability to pass those costs on to our customers or require our suppliers to absorb such costs;
•changes in foreign regulation which may result in rising prices of our measurement devices sold as exports to our international customers, our customers’ willingness to absorb incremental import tariffs, and the corresponding impact on our profitability;
•our inability to successfully identify and acquire target companies and achieve expected benefits from, and effectively integrate, acquisitions that are consummated;
•our inability to realize the intended benefits of the technology, products, operations, contracts, and personnel of our acquisitions;
•the cyclical nature of the industries of our customers and material adverse changes in our customers’ access to liquidity and capital;
change•changes in the potential for the computer-aided measurement (“CAM2”) market and the potential adoption rate for our products, which are difficult to quantify and predict;
•our inability to protect our patents and other proprietary rights in the United States and foreign countries;
•our inability to adequately establish and maintain effective internal controls over financial reporting;
•fluctuations in our annual and quarterly operating results and the inability to achieve our financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought against us, (ii) quality issues with our products, (iii) excess or obsolete inventory, shrinkage or other inventory losses due to product obsolescence, change in demand for our products, scrap or material price changes, (iv) raw material price fluctuations and other inflationary pressures, (v) expansion of our manufacturing capability, (vi) the size and timing of customer orders, (vii) the amount of time that it takes to fulfill orders and ship our products, (viii) the length of our sales cycle to new customers and the time and expense incurred in further penetrating our existing customer base, (ix) increases in operating expenses required for product development andmanufacturing inefficiencies associated with new product marketing,introductions, (x) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (xi) the timing and market acceptance of new products and product enhancements, (xii) customer order deferrals in anticipation of new products and product enhancements, (xiii) the inability of our sales and marketing programs to achieve their sales targets, (xiv) start-up costs associated with opening new sales offices outside of the United States, (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) inefficiencies in the management of our inventories and fixed assets, (xvii) compliance with government regulations including health, safety, and environmental matters, and (xviii) investment costs associated with the training and ramp-up time for new sales people, and (xix) manufacturing inefficiencies associated with new product introductions;people;
our ability to achieve profitability;
•changes in gross margins due to a changing mix of products sold and the different gross margins on different products and sales channels;
•changes in applicable laws, rules or regulations, or their interpretation or enforcement, or the enactment of new laws, rules or regulations that apply to our business operations or require us to incur significant expenses for compliance;
•our inability to successfully comply with the requirements of the Restriction of Hazardous Substances Directive and the Waste Electrical and Electronic Equipment Directive in the European Union;
•the inability of our products to displace traditional measurement devices and attain broad market acceptance;
•the impact of competitive products and pricing on our current offerings;
•our ability to successfully complete our executive officer transitions and the loss of any of our Chief Executive Officerexecutive officers or other key personnel;
•difficulties in recruiting research and development engineers and application engineers;
•the failure to effectively manage the effects of ourany future growth;
•the impact of reductions or projected reductions in government spending, or uncertainty regarding future levels of government expenditures, particularly in the defense sector;
•variations in theour effective income tax rate, and the difficulty in predicting thewhich makes it difficult to predict our effective income tax rate on a quarterly and annual basis;basis, and the impact of the U.S. Tax Cuts and Jobs Act of 2017 on the global intangible low-taxed income of foreign subsidiaries;
•the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period of time or on commercially reasonable terms;
•the impact of fluctuations in exchange rates;
•the effect of estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements;
the impact of changes in technologies on the competitiveness of our products or their components;
the impact of new product introductions;
•the magnitude of increased warranty costs from new product introductions and enhancements to existing products;
•the sufficiency of our plants and third party resources to meet manufacturing requirements;
•the continuation of our share repurchase program;
•the sufficiency of our working capital and cash flow from operations to fund our long-term liquidity requirements;
•the impact of geographic changes in the manufacturing or sales of our products on our effective income tax rate;
•our ability to comply with the requirements for favorable tax rates in foreign jurisdictions; and
•other risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016,2020 and in Part II, Item 1A. Risk Factors in the Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017.other SEC filings.
Moreover, new risks and uncertainties emerge from time to time, and we undertake no obligation to update publicly or review the risks and uncertainties included in this Quarterly Report on Form 10-Q, unless otherwise required by law.
Overview
We are a global technology company that designs, develops, manufactures, markets and supports software driven, three-dimensional (“3D”) measurement, imaging, and realization systems. Thissolutions for the 3D metrology, architecture, engineering and construction (“AEC”) and public safety analytics markets. We enable our customers to capture, measure, manipulate, interact with and share data from the physical world in a virtual environment and then translate this information back into the physical domain. Our technology permits high-precisionenables highly accurate 3D measurement, imaging, comparison and comparisonprojection of parts and complex structures within production, assembly and quality assurance processes. Our devicesFARO suite of 3D products and software solutions are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, assembly layout, machine guidance as well as forin investigation and reconstructionreconstructions of accident sites orcrash and crime scenes. We sell the majority of our productssolutions through a direct sales force across a broad number of customers in a range of manufacturing, industrial,industries including automotive, aerospace, metal and machine fabrication, surveying, architecture, surveying, building information modeling,engineering and construction, public safety forensics cultural heritage and other applications. Our FaroArm®, FARO Laser ScanArm®, FARO Gage®, FARO Laser TrackerTM, FARO Laser Projector, FARO Cobalt Array Imager, and their companion CAM2® and BuildIT software solutions, provide for Computer-Aided Design (“CAD”) based inspection, factory-level statistical process control, high-density surveying and laser-guided assembly and production. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD and 3D software to improve productivity, enhance product quality, and decrease rework and scrap in the manufacturing process, mainly supporting applications in our Factory Metrology vertical. Our FARO Focus and FARO Scanner Freestyle3DX laser scanners, and their companion SCENE, FARO PointSense, and FARO public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications in our Construction Building Information Modeling - Construction Information Management (“Construction BIM-CIM”) and Public
Safety Forensics verticals. Our FARO Laser ScanArm®, FARO Cobalt Array Imager, FARO Scanner Freestyle3DX laser scanners and their companion SCENE software also enable a fully digital workflow used to capture real world geometry for the purpose of empowering design, enabling innovation, and speeding up the design cycle, supporting our Product Design vertical. FARO Visual Inspect enables large, complex 3D CAD data to be transferred to a tablet device and then used for mobile visualization and comparison to real world conditions, facilitating in-process inspection, assembly, guidance and positioning for applications in our Factory Metrology and Construction BIM-CIM verticals. Our line of galvanometer-based scan heads and laser scan controllers are used in a variety of laser applications and are integrated into larger components and systems.industries.
We derive our revenues primarily from the sale of our measurement equipment and related multi-faceted software programs. Revenue related to these products is generally recognized upon shipment. In addition, we sell extended warranties and training and technology consulting services relating to our products. We recognize the revenue from extended warrantieshardware service contracts and software maintenance contracts on a straight-line basis over the contractual term, of the warranty, and revenue from training and technology consulting services when the services are provided.
We operate in international markets throughout the world and maintain sales offices in Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Portugal, Singapore, South Korea, Spain, Switzerland, Thailand, Turkey, the United Kingdom, and the United States and Vietnam.States.
We manufacture our FaroArm®, FARO Laser ScanArm®, FARO Gage, and FARO Laser TrackerTMQuantum Arm products in our manufacturing facility located in Switzerland for customer orders from Europe, the Middle East and Africa (“EMEA”), in our manufacturing facility located in Singapore for customer orders from the Asia-Pacific region, and in our manufacturing facilitiesfacility located in Florida and Pennsylvania for customer orders from the Americas. We manufacture our FARO Focus3D laser scanner in our manufacturing facilities located in Germany and Switzerland for customer orders from Europe, the Middle East, AfricaEMEA and the Asia-Pacific region, and in our manufacturing facility located in Pennsylvania for customer orders from the Americas. We manufacture our FARO Freestyle3DX products in our facility located in Germany. We manufactureLaser Tracker and our FARO Laser ProjectionProjector products in our facility located in Pennsylvania. We expect all of our existing plantsmanufacturing facilities and third party resources to have the production capacity necessary to support our volume requirements through the remainder of 2017.during 2021.
We account for wholly ownedwholly-owned foreign subsidiaries in the currency of the respective foreign jurisdiction; therefore, fluctuations in exchange rates may have an impact on the value of the intercompany account balances denominated in different currencies and reflected in our condensed consolidated financial statements. We are aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options. However, we have not used such instruments in the past, and none were utilized in 20162020 or the ninesix months ended SeptemberJune 30, 2017.2021.
OverNew Strategic Plan and Restructuring Plan
In the past decade,first quarter of 2020, our Board of Directors approved a global restructuring plan (the “Restructuring Plan”), which is intended to support our strategic plan in an effort to improve operating performance and ensure that we have achieved profitabilityare appropriately structured and resourced to deliver increased and sustainable value to our shareholders and customers. Key activities under the Restructuring Plan include a continued focus on an annual basis,efficiency and cost-saving efforts, which includes decreasing total headcount by approximately 500 employees upon the completion of the Restructuring Plan.
These activities are expected to be substantially completed by the end of 2021. Pre-tax charges of approximately $49 million were recorded in the fourth quarter of 2019 in connection with the exceptionimplementation of our new strategic plan and included the following:
•$21.2 million impairment of goodwill;
•$12.8 million charge, increasing our reserve for excess and obsolete inventory;
•$10.5 million impairment of intangible assets associated with recent acquisitions;
•$1.4 million impairment of intangible assets related to capitalized patents;
•$3.4 million impairment of other assets and other charges.
In connection with the Restructuring Plan, we recorded a losspre-tax charge of approximately $15.8 million during the year ended December 31, 2020 primarily consisting of severance and related benefits, professional fees and other related charges and costs including a non-cash expense of $0.4 million related to the disposal of our Photonics business and 3D Design related assets. We received $0.7 million in 2009cash payments for the disposal of our Photonics business and 3D Design related assets in the second quarter of 2020. We are continuing to execute our cost reduction initiatives to achieve our 20% target EBITDA margins that resultedcould result in pre-tax charges in the range of $5 million to $15 million for fiscal year 2021.
On July 15, 2021, we entered into a manufacturing services agreement (the “Agreement”) with Sanmina Corporation (“Sanmina”), in connection with the Restructuring Plan. Under the Agreement, Sanmina will provide manufacturing services for the Company’s measurement device products currently manufactured by the Company at the Company’s Lake Mary, Florida, Exton, Pennsylvania, and Stuttgart, Germany manufacturing sites. A phased transition to a Sanmina production facility is expected to be completed over the next twelve months as part of our cost reduction initiative. The Company expects to incur a cash charge of approximately $6 million in the second half of 2021, primarily fromconsisting of cash severance.
Actual results, including the declinecosts of the global economy that year. Historically,Restructuring Plan, may differ materially from our sales have grown as a resultexpectations, resulting in our inability to realize the expected benefits of continuing market demand forthe Restructuring Plan and acceptance of our products, increased sales activity in part through additional sales staff worldwide, new product launches or enhancements,strategic plan and acquisitions. Our historical financial performance is not indicative ofnegatively impacting our ability to execute our future financial performance.
We began undertaking several important strategic initiatives in 2016 that we believe will drive our long-term growthplans and profitability, including:
reorganizingstrategies, which could have a material adverse effect on our business, to align our sales, marketing, product managementfinancial condition and research and development around specific vertical markets and to better define our end market applications;results of operations.
modernizing our sales process to improveIn connection with the efficiency of our sales organization by supplementing our current direct sales approach of conducting on-site demonstrations with multimedia, web-based demonstrations and cloud-based customer relations development;
accelerating and maintaining a consistent schedule of new product introductions; and
reorganizing all functions, processes and people to a harmonized global mindset from our historically regional business structure to improve operational efficiencies.
We successfully completed these primary initiativesRestructuring Plan, we paid $13.1 million during the first half of 2017, includingyear ended December 31, 2020 and $3.5 million during the reorganization of our business to align around specific vertical markets.
As a result of the reorganization discussed above, we realigned our business into three segments: Factory Metrology, Construction BIM-CIM and Other, as further discussed in Note 1 – Description of Business in Part I, Item 1 of this Quarterly Report on Form 10-Q. The presentation throughout this Quarterly Report on Form 10-Q for the three and ninesix months ended SeptemberJune 30, 2016 has been restated to reflect the change in reporting segments.
2021, primarily consisting of severance and related benefits.
Amounts reported in millions within this Quarterly Report on Form 10-Q are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within the tables that follow may not add due to the use of rounded numbers. Percentages presented are calculated based on the respective amounts in thousands.
Results of Operations
The following table sets forth, for the periods indicated, our unaudited results of operations expressed as dollar amounts and as a percentage of total sales. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, | | | | |
(dollars in thousands) | 2021 | | % of Sales | | 2020 | | % of Sales | | 2021 | | % of Sales | | 2020 | | % of Sales | | | | | | | | | | | | |
Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Product | $ | 60,275 | | | 73.4 | % | | $ | 42,259 | | | 69.8 | % | | $ | 114,910 | | | 72.5 | % | | $ | 98,784 | | | 70.5 | % | | | | | | | | | | | | |
Service | 21,835 | | | 26.6 | % | | 18,305 | | | 30.2 | % | | 43,531 | | | 27.5 | % | | 41,295 | | | 29.5 | % | | | | | | | | | | | | |
Total sales | 82,110 | | | 100.0 | % | | 60,564 | | | 100.0 | % | | 158,441 | | | 100.0 | % | | 140,079 | | | 100.0 | % | | | | | | | | | | | | |
Cost of Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Product | 25,455 | | | 31.0 | % | | 21,333 | | | 35.2 | % | | 50,259 | | | 31.7 | % | | 44,399 | | | 31.7 | % | | | | | | | | | | | | |
Service | 11,173 | | | 13.6 | % | | 10,335 | | | 17.1 | % | | 22,293 | | | 14.1 | % | | 22,911 | | | 16.4 | % | | | | | | | | | | | | |
Total cost of sales | 36,628 | | | 44.6 | % | | 31,668 | | | 52.3 | % | | 72,552 | | | 45.8 | % | | 67,310 | | | 48.1 | % | | | | | | | | | | | | |
Gross Profit | 45,482 | | | 55.4 | % | | 28,896 | | | 47.7 | % | | 85,889 | | | 54.2 | % | | 72,769 | | | 51.9 | % | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | 33,594 | | | 40.9 | % | | 30,036 | | | 49.6 | % | | 66,942 | | | 42.3 | % | | 66,360 | | | 47.4 | % | | | | | | | | | | | | |
Research and development | 11,760 | | | 14.3 | % | | 10,186 | | | 16.8 | % | | 23,733 | | | 15.0 | % | | 20,601 | | | 14.7 | % | | | | | | | | | | | | |
Restructuring costs | 779 | | | 0.9 | % | | 636 | | | 1.1 | % | | 2,303 | | | 1.5 | % | | 14,324 | | | 10.2 | % | | | | | | | | | | | | |
Total operating expenses | 46,133 | | | 56.2 | % | | 40,858 | | | 67.5 | % | | 92,978 | | | 58.7 | % | | 101,285 | | | 72.3 | % | | | | | | | | | | | | |
Loss from operations | (651) | | | (0.8) | % | | (11,962) | | | (19.8) | % | | (7,089) | | | (4.5) | % | | (28,516) | | | (20.4) | % | | | | | | | | | | | | |
Other (income) expense | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | 39 | | | — | % | | 212 | | | 0.4 | % | | 49 | | | — | % | | 246 | | | 0.2 | % | | | | | | | | | | | | |
Other expense (income), net | 883 | | | 1.1 | % | | 117 | | | 0.2 | % | | (732) | | | (0.5) | % | | 590 | | | 0.4 | % | | | | | | | | | | | | |
Loss before income tax benefit | (1,573) | | | (1.9) | % | | (12,291) | | | (20.3) | % | | (6,406) | | | (4.0) | % | | (29,352) | | | (21.0) | % | | | | | | | | | | | | |
Income tax benefit | (397) | | | (0.5) | % | | (3,359) | | | (5.5) | % | | (2,009) | | | (1.3) | % | | (5,597) | | | (4.0) | % | | | | | | | | | | | | |
Net loss | $ | (1,176) | | | (1.4) | % | | $ | (8,932) | | | (14.7) | % | | $ | (4,397) | | | (2.8) | % | | $ | (23,755) | | | (17.0) | % | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | 2017 | | % of Sales | | 2016 | | % of Sales | | 2017 | | % of Sales | | 2016 | | % of Sales |
Sales | | | | | | | | | | | | | | | |
Product | $ | 68,563 |
| | 76.0 | % | | $ | 61,280 |
| | 77.0 | % | | $ | 193,476 |
| | 76.0 | % | | $ | 182,232 |
| | 77.9 | % |
Service | 21,687 |
| | 24.0 | % | | 18,320 |
| | 23.0 | % | | 61,018 |
| | 24.0 | % | | 51,654 |
| | 22.1 | % |
Total sales | 90,250 |
| | 100.0 | % | | 79,600 |
| | 100.0 | % | | 254,494 |
| | 100.0 | % | | 233,886 |
| | 100.0 | % |
Cost of Sales | | | | | | | | | | | | | | | |
Product | 26,673 |
| | 29.6 | % | | 25,880 |
| | 32.5 | % | | 78,186 |
| | 30.7 | % | | 74,938 |
| | 32.0 | % |
Service | 11,543 |
| | 12.8 | % | | 11,042 |
| | 13.9 | % | | 33,765 |
| | 13.3 | % | | 29,665 |
| | 12.7 | % |
Total cost of sales | 38,216 |
| | 42.3 | % | | 36,922 |
| | 46.4 | % | | 111,951 |
| | 44.0 | % | | 104,603 |
| | 44.7 | % |
Gross Profit | 52,034 |
| | 57.7 | % | | 42,678 |
| | 53.6 | % | | 142,543 |
| | 56.0 | % | | 129,283 |
| | 55.3 | % |
Operating Expenses: | | | | | | | | | | | | | | | |
Selling and marketing | 25,990 |
| | 28.8 | % | | 19,781 |
| | 24.9 | % | | 74,884 |
| | 29.4 | % | | 56,399 |
| | 24.1 | % |
General and administrative | 10,307 |
| | 11.4 | % | | 10,747 |
| | 13.5 | % | | 32,883 |
| | 12.9 | % | | 31,139 |
| | 13.3 | % |
Depreciation and amortization | 4,368 |
| | 4.8 | % | | 3,381 |
| | 4.2 | % | | 12,075 |
| | 4.7 | % | | 9,733 |
| | 4.2 | % |
Research and development | 9,019 |
| | 10.0 | % | | 7,928 |
| | 10.0 | % | | 26,530 |
| | 10.4 | % | | 22,344 |
| | 9.6 | % |
Total operating expenses | 49,684 |
| | 55.1 | % | | 41,837 |
| | 52.6 | % | | 146,372 |
| | 57.5 | % | | 119,615 |
| | 51.1 | % |
Income (loss) from operations | 2,350 |
| | 2.6 | % | | 841 |
| | 1.1 | % | | (3,829 | ) | | (1.5 | )% | | 9,668 |
| | 4.1 | % |
Other (income) expense | | | | | | | | | | | | | | | |
Interest income, net | (78 | ) | | (0.1 | )% | | (21 | ) | | — | % | | (249 | ) | | (0.1 | )% | | (119 | ) | | (0.1 | )% |
Other (income) expense, net | (147 | ) | | (0.2 | )% | | (167 | ) | | (0.2 | )% | | 320 |
| | 0.1 | % | | 824 |
| | 0.4 | % |
Income (loss) before income tax expense (benefit) | 2,575 |
| | 2.9 | % | | 1,029 |
| | 1.3 | % | | (3,900 | ) | | (1.5 | )% | | 8,963 |
| | 3.8 | % |
Income tax expense (benefit) | 947 |
| | 1.0 | % | | (61 | ) | | (0.1 | )% | | (442 | ) | | (0.2 | )% | | 1,401 |
| | 0.6 | % |
Net income (loss) | $ | 1,628 |
| | 1.8 | % | | $ | 1,090 |
| | 1.4 | % | | $ | (3,458 | ) | | (1.4 | )% | | $ | 7,562 |
| | 3.2 | % |
Consolidated Results
Three Months Ended SeptemberJune 30, 20172021 Compared to the Three Months Ended SeptemberJune 30, 20162020
Sales. Total sales increased $10.7by $21.5 million, or 13.4%35.6%, to $90.3$82.1 million for the three months ended SeptemberJune 30, 20172021 from $79.6$60.6 million for the three months ended SeptemberJune 30, 2016.2020. The increase in sales is primarily the result of the recovery from the economic effect of the COVID-19 pandemic which adversely affected the prior year. Total product sales increased by $7.3$18.0 million, or 11.9%42.6%, to $68.6$60.3 million for the three months ended SeptemberJune 30, 20172021 from $61.3$42.3 million for the three months ended SeptemberJune 30, 2016. Our product sales increased2020 primarily due to increased unit sales in our Construction BIM-CIM vertical and in our other segment,the recovery from the economic effect of the COVID-19 pandemic which includes our Public Safety Forensics and Product Design verticals, and higher average selling prices in our Factory Metrology vertical. Serviceadversely affected the prior year. Similarly, service revenue increased by $3.4$3.5 million, or 18.4%19.3%, to $21.7$21.8 million for the three months ended SeptemberJune 30, 20172021 from $18.3 million for the three months ended SeptemberJune 30, 2016, primarily due to an increase in warranty and customer service revenue driven by the growth of our installed, serviceable base and focused sales initiatives.2020. Foreign exchange rates had a positive impact on total sales of $0.7$3.4 million, increasing the percent that our overall sales growth rateincreased by approximately 0.95.7 percentage points, primarily due to the strengthening of the Euro partially offset by the decline of the Japanese yen, relative to the U.S. dollar.
Gross profit. Gross profit increased $9.3by $16.6 million, or 21.9%57.4%, to $52.0$45.5 million for the three months ended SeptemberJune 30, 20172021 from $42.7$28.9 million for the three months ended SeptemberJune 30, 2016. Gross2020, and gross margin increased to 57.7%55.4% for the three months ended SeptemberJune 30, 20172021 from 53.6% in47.7% for the prior year period.three months ended June 30, 2020. Gross margin from product revenue increased by 3.38.3 percentage points to 61.1%57.8% for the three months ended SeptemberJune 30, 20172021 from 57.8%49.5% for the prior year period primarily due to changes in product mix, and the favorable impact of the recovery from the economic effect of the COVID-19 pandemic which adversely affected our product fixed cost absorption in the prior year period. This increase was primarily due to higher average selling prices in our Factory Metrology vertical as a result of new product introductions.year. Gross margin from service revenue increased by 7.15.3 percentage pointsto 46.8%48.8% for the three months ended SeptemberJune 30, 20172021 from 39.7%43.5% for the prior year period, primarily due to a reduction in departmental costs as a result of higher service revenue.the Restructuring Plan.
Selling, general and Marketing Expensesadministrative expenses. Selling, general and marketingadministrative expenses increased by $6.2$3.6 million, or 31.4%11.8%, to $26.0$33.6 million for the three months ended SeptemberJune 30, 20172021 from $19.8$30.0 million for the three months ended SeptemberJune 30, 2016.2020. This increase was driven primarily by higher compensation expense, reflecting an increase in selling headcountcommission expense due to higher global sales and an increase in travel expense as part of our strategic initiatives to drive sales growth.there were pandemic stay-at-home orders in the prior year. Selling, general and marketingadministrative expenses as a percentage of sales were 28.8%decreased to 40.9% for the three months ended SeptemberJune 30, 2017,2021, compared with 24.9%49.6% of sales for the three months ended SeptemberJune 30, 2016. 2020. Our worldwide period-ending selling, general and administrative headcount increased by 133,67, or 26.5%9.8%, to 635751 at SeptemberJune 30, 2017,2021, from 502684 at SeptemberJune 30, 2016.2020.
General and administrative expenses. General and administrative expenses decreased by $0.4 million, or 4.1%, to $10.3 million for the three months ended September 30, 2017 from $10.7 million for the three months ended September 30, 2016. This decrease was driven primarily by a decrease in compensation and travel expenses. General and administrative expenses decreased to 11.4% of sales for the three months ended September 30, 2017 from 13.5% of sales for the three months ended September 30, 2016.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $1.0 million, or 29.2%, to $4.4 million for the three months ended September 30, 2017 from $3.4 million for the three months ended September 30, 2016. This increase was driven primarily by higher amortization of intangible assets related to acquisitions and new production tooling for the manufacture of new products.
Research and development expenses. Research and development expenses increased by $1.1$1.6 million, or 13.8%15.5%, to $9.0$11.8 million for the three months ended SeptemberJune 30, 20172021 from $7.9$10.2 million for the three months ended SeptemberJune 30, 2016.2020. This increase was mainly due toprimarily driven by higher compensation expense resulting from increased engineering headcount in connection with our acquisitions.and costs to accelerate new product development. Research and development expenses as a percentage of sales was 10.0%decreased to 14.3% for the three months ended SeptemberJune 30, 2017 and September 30, 2016.
Other (income) expense, net. For2021 from 16.8% for the three months ended SeptemberJune 30, 2017, other income, net, which is largely driven by2020.
Restructuring costs. In February 2020, we initiated the effect of foreign exchange rates, remained unchanged when comparedRestructuring Plan to improve business effectiveness, streamline operations and achieve a stated target cost level for the Company as a whole. Restructuring costs included in operating expenses for the three months ended SeptemberJune 30, 2016.2021 and June 30, 2020 were $0.8 million and $0.6 million, respectively, primarily consisting of severance and related benefits charges.
Income taxInterest expense, (benefit)net. Income taxWe recorded interest expense, was $0.9net of less than $0.1 million and $0.2 million for the three months ended SeptemberJune 30, 2017,2021 and three months ended June 30, 2020, respectively.
Other expense (income), net. For the three months ended June 30, 2021, other expense was $0.9 million compared with an income tax benefitother expense of $0.1 million for the three months ended SeptemberJune 30, 2016.2020. This change was primarily driven by the effect of foreign exchange rates.
Income tax benefit. For the three months ended June 30, 2021, we recorded an income tax benefit of $0.4 million compared with income tax benefit of $3.4 million for the three months ended June 30, 2020. Our effective tax rate was 36.8%25.2% for the three months ended SeptemberJune 30, 20172021 compared with a 5.9% benefit27.3% in the prior year period. The change in our income benefit was primarily due to a lower pretax loss during the second quarter of 2021 and changes in our effective tax expense (benefit) and the increaserate. The change in our effective tax rate werewas primarily due toassociated with discrete tax items and a shift in the geographic mix of pretax income expected for the full year 2017. 2021.
Our quarterly estimate of our annual effective tax rate could be impacted positivelyand our quarterly provision for income tax (benefit) expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or negatively by geographic changes in the manufacturing or sales of our productsloss and the resulting effect on taxable income in each jurisdiction,mix of jurisdictions to which they relate, as well as by any change in statutory tax rates in a jurisdiction.the amount of pretax income or loss recognized during the quarter.
Net incomeloss. Our net incomeloss was $1.6$1.2 million for the three months ended SeptemberJune 30, 20172021 compared to $1.1with net loss of $8.9 million for the prior year period, reflecting the impact of the factors described above.
NineSix Months Ended SeptemberJune 30, 20172021 Compared to the NineSix Months Ended SeptemberJune 30, 20162020
Sales. Total sales increased $20.6by $18.3 million, or 8.8%13.1%, to $254.5to $158.4 million for the ninesix months ended SeptemberJune 30, 20172021 from $233.9$140.1 million for the ninesix months ended SeptemberJune 30, 2016.2020. The increase in sales is primarily the result of the recovery from the economic effect of the COVID-19 pandemic which adversely affected the prior year. Total product sales increased by $11.3$16.1 million, or 6.2%16.3%, to $193.5$114.9 million for the ninesix months ended SeptemberJune 30, 20172021 from $182.2$98.8 million for the ninesix months ended SeptemberJune 30, 2016. Our product sales increase reflected higher unit sales, especially in2020 primarily due to the Construction BIM-CIM vertical. Servicerecovery from the economic effect of the COVID-19 pandemic which adversely affected the prior year. Similarly, service revenue increased by $9.3$2.2 million, or 18.1%5.4%, to $61.0$43.5 million for the ninesix months ended SeptemberJune 30, 20172021 from $51.7$41.3 million for the ninesix months ended SeptemberJune 30, 2016, primarily due to an increase in warranty and customer service revenue driven by the growth of our installed, serviceable base and focused sales initiatives.2020. Foreign exchange rates had a negativepositive impact on total sales of $2.0$5.8 million, decreasingincreasing the percent that our overall sales growth rateincreased by approximately 0.94.1 percentage points, primarily due to the declinestrengthening of the Japanese yen, Chinese yuan renminbi, and British pound sterlingEuro relative to the U.S. dollar.dollar.
Gross profit. Gross profit increased $13.2by $13.1 million, or 10.3%18.0%, to $142.5$85.9 million for the ninesix months ended SeptemberJune 30, 20172021 from $129.3$72.8 million for the ninesix months ended SeptemberJune 30, 2016. Gross2020 and gross margin increased to 56.0%54.2% for the ninesix months ended SeptemberJune 30, 20172021 from 55.3% in51.9% for the prior year period.six months ended June 30, 2020. Gross margin from product revenue increased by 0.71.2 percentage points to 59.6%56.3% for the ninesix months ended SeptemberJune 30, 20172021 from 58.9%55.1% for the prior year period, primarily due to changes in product mix, and the favorable impact of the recovery related to the COVID-19 pandemic which adversely affected our product fixed cost absorption in the prior year period. This increase was primarily due to slightly higher average selling prices and an improvement in our manufacturing costs, particularly in our Factory Metrology vertical.year. Gross margin from service revenue increased by 2.1 4.3percentage pointsto 44.7%48.8% for the ninesix months ended SeptemberJune 30, 20172021 from 42.6%44.5% for the prior year period, primarily due to a reduction in departmental costs as a result of higher service revenue, partially offset by increased costs due to higher service-related headcount.the Restructuring Plan.
Selling, general and Marketing Expensesadministrative expenses. Selling, general and marketingadministrative expenses increased by $18.5$0.5 million, or 32.8%0.9%, to $74.9$66.9 million for the ninesix months ended SeptemberJune 30, 20172021 from $56.4$66.4 million for the ninesix months ended SeptemberJune 30, 2016.2020. This
increase was driven primarily by higher compensation expense, reflecting an increase in selling headcountcommission expense due to higher global sales and an increase in travel expense as part of our strategic initiatives to drive sales growth.there were pandemic stay-at-home orders in the prior year. Selling, general and marketingadministrative expenses as a percentage of sales were 29.4%decreased to 42.3% for the ninesix months ended SeptemberJune 30, 2017,2021, compared with 24.1%47.4% of sales for the ninesix months ended SeptemberJune 30, 2016. 2020. Our worldwide period-ending selling headcount increased by 133,67, or 26.5%9.8%, to 635751 at SeptemberJune 30, 2017,2021, from 502684 at SeptemberJune 30, 2016.2020.
General and administrative expenses. General and administrative expenses increased by $1.8 million, or 5.6%, to $32.9 million for the nine months ended September 30, 2017 from $31.1 million for the nine months ended September 30, 2016. This increase was driven primarily by higher compensation, advisory services, and global system expenses. General and administrative expenses decreased to 12.9% of sales for the nine months ended September 30, 2017 from 13.3% of sales for the nine months ended September 30, 2016, primarily due to the higher sales in the nine months ended September 30, 2017.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $2.4 million, or 24.1%, to $12.1 million for the nine months ended September 30, 2017 from $9.7 million for the nine months ended September 30, 2016. This increase was driven primarily by higher amortization of intangible assets related to acquisitions and new production tooling for the manufacture of new products.
Research and development expenses. Research and development expenses increased by $4.2$3.1 million, or 18.7%15.2%, to $26.5$23.7 million for the ninesix months ended SeptemberJune 30, 20172021 from $22.3$20.6 million for the ninesix months ended SeptemberJune 30, 2016.2020. This increase was mainly due toprimarily driven by higher compensation expense resulting from increased engineering headcount in connection with our acquisitions.and costs to accelerate new product development. Research and development expenses as a percentage of sales increased to 10.4%15.0% for the ninesix months ended SeptemberJune 30, 20172021 from 9.6%14.7% for the ninesix months ended SeptemberJune 30, 2016.2020.
Other (income) expense,Interest income, net. For the ninesix months ended SeptemberJune 30, 2017, other expense, net decreased by $0.52021, we recorded interest income of less than of $0.1 million to $0.3 million from $0.8compared with interest income of $0.2 million for the ninesix months ended SeptemberJune 30, 2016.2020.
Other expense (income), net. For the six months ended June 30, 2021, other income was $0.7 million as compared to other expense of $0.6 million for the six months ended June 30, 2020. This change was primarily driven by the effect of foreign exchange rates onas well as COVID-19 related foreign incentives received in the value of intercompany account balances of our subsidiaries denominated in other currencies.current year.
Income tax expense (benefit). Income tax benefit was $0.4 million for. For the ninesix months ended SeptemberJune 30, 2017,2021, we recorded an income tax benefit of $2.0 million compared with income tax expensebenefit of $1.4$5.6 million for the ninesix months ended SeptemberJune 30, 2016. This change of $1.8 million was due to a pretax loss during the nine months ended September 30, 2017 compared to pretax income in the same period of 2016.2020. Our effective tax rate was 11.3%31.4% for the ninesix months ended SeptemberJune 30, 20172021 compared with 15.6%19.1% in the prior year period. The change in our effective rateincome benefit was primarily due to thea lower pretax loss during the nine months ended September 30, 2017 comparedfirst half of 2021 and changes in our effective tax rate. The change in our effective tax rate was primarily associated with pretax income during the same period of 2016discrete tax items, and a shift in the geographicalgeographic mix of pretax income expected for the full year 2021.
Our quarterly estimate of our annual effective tax rate and our quarterly provision for income tax expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which they relate, as well as the amount of pretax income or loss expected forrecognized during the full year 2017. Our effective tax rate continued to be lower than the statutory tax rate in the United States, mainly due to our global footprint in foreign jurisdictions with lower tax rates. Our effective tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of our products and the resulting effect on taxable income in each jurisdiction, as well as by any change in statutory tax rates in a jurisdiction.quarter.
Net (loss) incomeloss. Our net loss was $3.5$4.4 million for the ninesix months ended SeptemberJune 30, 20172021 compared to net income of $7.6$23.8 million for the prior year period, reflecting the impact of the factors described above.
Segment Results
Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016
Total sales by segment for the three months ended September 30, 2017 and September 30, 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | % of Total | | September 30, 2016 | | % of Total |
Factory Metrology | $ | 59,339 |
| | 65.8 | % | | $ | 58,310 |
| | 73.3 | % |
Construction BIM-CIM | 22,751 |
| | 25.2 | % | | 15,925 |
| | 20.0 | % |
Other | 8,160 |
| | 9.0 | % | | 5,365 |
| | 6.7 | % |
Total sales | $ | 90,250 |
| | | | $ | 79,600 |
| | |
We use segment profit to evaluate the performanceTable of our reportable segments, which are Factory Metrology, Construction BIM-CIM and Other. Segment profit is calculated as gross profit, net of selling and marketing expenses, for the reporting segment. The discussion of segment results for the three months ended September 30, 2017 and 2016 presented below is based on segment profit, as described above, and segment profit as a percent of sales, which is calculated as segment profit divided by net sales for such reporting segment, which we believe will aid investors in understanding and analyzing our operating results. Our definition of segment profit may not be comparable to similarly-titled measures reported by other companies. For additional information, including a reconciliation of total segment profit to income (loss) from operations, see Note 15 – Segment Reporting, in Part I, Item 1 of this Quarterly Report on Form 10-Q.Contents |
| | | | | | | | |
Factory Metrology | | | | |
(dollars in thousands) | | Three Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Total sales | | $ | 59,339 |
| | $ | 58,310 |
|
Segment profit | | $ | 20,144 |
| | $ | 16,305 |
|
Segment profit as a % of Factory Metrology segment sales | | 33.9 | % | | 28.0 | % |
Sales.Total sales in our Factory Metrology segment increased $1.0 million, or 1.8%, to $59.3 million for the three months ended September 30, 2017 from $58.3 million in the prior year period. The increase was driven by higher average selling prices and growth in service revenue, partially offset by a reduction in product unit sales.
Segment profit. Segment profit in our Factory Metrology segment increased $3.8 million, or 23.5%, to $20.1 million for the three months ended September 30, 2017 from $16.3 million in the prior year period. This increase was primarily due to higher average selling prices, growth in service revenue and an improvement in manufacturing costs, partially offset by a reduction in product unit sales and higher selling and marketing expenses resulting from an increase in selling headcount as part of our strategic initiatives to drive sales growth.
|
| | | | | | | | |
Construction BIM-CIM | | | | |
(dollars in thousands) | | Three Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Total sales | | $ | 22,751 |
| | $ | 15,925 |
|
Segment profit | | $ | 5,407 |
| | $ | 4,704 |
|
Segment profit as a % of Construction BIM-CIM segment sales | | 23.8 | % | | 29.5 | % |
Sales. Total sales in our Construction BIM-CIM segment increased $6.9 million, or 42.9%, to $22.8 million for the three months ended September 30, 2017 from $15.9 million in the prior year period, primarily reflecting an increase in product unit sales and service revenue.
Segment profit. Segment profit in our Construction BIM-CIM segment increased $0.7 million, or 14.9%, to $5.4 million for the three months ended September 30, 2017 from $4.7 million in the prior year period, primarily driven by an increase in product unit sales and service revenue, partially offset by an increase in selling headcount as part of our strategic initiatives to drive sales growth.
|
| | | | | | | | |
Other | | |
(dollars in thousands) | | Three Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Total sales | | $ | 8,160 |
| | $ | 5,365 |
|
Segment profit | | $ | 493 |
| | $ | 1,888 |
|
Segment profit as a % of Other segment sales | | 6.0 | % | | 35.2 | % |
Sales. Total sales in our Other segment increased $2.8 million, or 52.1%, to $8.2 million for the three months ended September 30, 2017 from $5.4 million in the prior year period, primarily due to higher product unit sales in our Public Safety Forensics and Product Design verticals as we continue to strategically invest in new markets.
Segment profit. Segment profit in our Other segment was $0.5 million for the three months ended September 30, 2017 compared to $1.9 million in the prior year period. This decrease of $1.4 million was primarily due to higher selling and
marketing expense resulting from an increase in selling headcount as part of our strategic initiatives to staff emerging verticals with a dedicated sales force to drive sales growth.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Total sales by segment for the nine months ended September 30, 2017 and September 30, 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | % of Total | | September 30, 2016 | | % of Total |
Factory Metrology | $ | 173,531 |
| | 68.2 | % | | $ | 168,418 |
| | 72.0 | % |
Construction BIM-CIM | 60,550 |
| | 23.8 | % | | 47,529 |
| | 20.3 | % |
Other | 20,413 |
| | 8.0 | % | | 17,939 |
| | 7.7 | % |
Total sales | $ | 254,494 |
| | | | $ | 233,886 |
| | |
|
| | | | | | | | |
Factory Metrology | | | | |
(dollars in thousands) | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Total sales | | $ | 173,531 |
| | $ | 168,418 |
|
Segment profit | | $ | 53,497 |
| | $ | 53,034 |
|
Segment profit as a % of Factory Metrology segment sales | | 30.8 | % | | 31.5 | % |
Sales.Total sales in our Factory Metrology segment increased $5.1 million, or 3.0%, to $173.5 million for the nine months ended September 30, 2017 from $168.4 million in the same prior year period, mostly driven by higher product unit sales and growth in service revenue.
Segment profit. Segment profit in our Factory Metrology segment increased $0.5 million, or 0.9%, to $53.5 million for the nine months ended September 30, 2017 from $53.0 million in the same prior year period. This increase was primarily due to the higher product unit sales and growth in service revenue, partially offset by higher selling and marketing expenses resulting from an increase in selling headcount as part of our strategic initiatives to drive sales growth.
|
| | | | | | | | |
Construction BIM-CIM | | | | |
(dollars in thousands) | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Total sales | | $ | 60,550 |
| | $ | 47,529 |
|
Segment profit | | $ | 13,799 |
| | $ | 12,868 |
|
Segment profit as a % of Construction BIM-CIM segment sales | | 22.8 | % | | 27.1 | % |
Sales. Total sales in our Construction BIM-CIM segment increased $13.1 million, or 27.4%, to $60.6 million for the nine months ended September 30, 2017 from $47.5 million in the prior year period, primarily reflecting an increase in product unit sales and higher service revenue.
Segment profit. Segment profit in our Construction BIM-CIM segment increased $0.9 million to $13.8 million for the nine months ended September 30, 2017 from $12.9 million in the prior year period, primarily driven by the increase in sales, partially offset by higher selling and marketing expenses resulting from an increase in selling headcount as part of our strategic initiatives to drive sales growth.
|
| | | | | | | | |
Other | | |
(dollars in thousands) | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2016 |
Total sales | | $ | 20,413 |
| | $ | 17,939 |
|
Segment profit | | $ | 363 |
| | $ | 6,982 |
|
Segment profit as a % of Other segment sales | | 1.8 | % | | 38.9 | % |
Sales. Total sales in our Other segment increased $2.5 million, or 13.8%, to $20.4 million for the nine months ended September 30, 2017 from $17.9 million in the prior year period, primarily due to higher product unit sales in our Public Safety Forensics and 3D Machine Vision verticals.
Segment profit. Segment profit in our Other segment decreased $6.6 million to $0.4 million for the nine months ended September 30, 2017 from $7.0 million in the prior year period. This decrease of $6.6 million was primarily due to higher selling and marketing expense resulting from an increase in selling headcount as part of our strategic initiatives to staff emerging verticals with a dedicated sales force to accelerate the pace of sales growth.
Liquidity and Capital Resources
Cash and cash equivalents increaseddecreased by $23.6$52.3 million to $129.8$133.3 million at SeptemberJune 30, 20172021 from $106.2$185.6 million at December 31, 2016.2020. The increasedecrease was primarily driven by the maturity of U.S. Treasury Bills that were not re-invested, partially offset by cash paid for acquisitions of $5.5 million, property and equipment purchases of $6.1 million and $0.8 million ofnet cash used in operating activities during the nine months ended September 30, 2017.
Cash flows from operating activities provide our primary sources of liquidity.and investing activities. Cash used in operationsoperating activities was $0.8$12.3 million during the ninesix months ended SeptemberJune 30, 2017,2021, compared to $16.1 million of cash provided by operations of $28.5 million during the ninesix months ended SeptemberJune 30, 2016.2020. The changedecrease was mainly due to our net losschanges in working capital accounts, primarily a decrease in accrued liabilities driven by the nine months ended September 30, 2017, an increase in inventory to support new product introductions and a lower reduction in accounts receivable primarily due to higher sales during the three months ended September 30, 2017 compared$12.3 million settlement of liability related to the same period in the prior year.GSA matter.
Cash provided by investing activities during the nine months ended September 30, 2017 was $19.1 million compared to $16.6 million of cash used in investing activities during the ninesix months ended SeptemberJune 30, 2016.2021 was $37.8 million compared to cash provided by investing activities of $23.4 million during the six months ended June 30, 2020. The change was primarily due to the $34.0 million used in the acquisition of a business during the six months ended June 30, 2021, as compared to the maturity of U.S. Treasury Bills in 2017 that were not re-invested, partially offset by $5.5amounting to $9.0 million in cash paid for the acquisition of Instruments Associates, LLC d/b/a Nutfield Technology in April 2017 compared to $20.9 million in cash paid for acquisitions during the ninesix months ended SeptemberJune 30, 2016.2020 without such activity during the six months ended June 30, 2021.
Cash flows used inprovided by financing activities was $0.1$1.2 million during the ninesix months ended SeptemberJune 30, 2017,2021 compared to cash provided by financing activities of $0.4$1.3 million for the ninesix months ended SeptemberJune 30, 2016.2020. The change was primarily due to no income tax benefit fromlarger payments for taxes related to the exercisenet share settlement of stock options recognizedequity awards during the ninesix months ended SeptemberJune 30, 2017 as a result of our prospective adoption of ASU 2016-09 and a decrease in the proceeds from issuances of stock2021 compared to during the ninesix months ended SeptemberJune 30, 2017 compared to the prior year period.2020.
Of our cash and cash equivalents, $99.8$92.5 million was held by foreign subsidiaries. Our intent issubsidiaries as of June 30, 2021. On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act, resulting in significant modifications to indefinitely reinvest these funds in ourexisting tax law, which included a transition tax on the mandatory deemed repatriation of foreign operations, asearnings. As a result of the cash is needed to fund on-going operations. InU.S. Tax Cuts and Jobs Act, the event circumstances change, leadingCompany can repatriate foreign earnings and profits to the conclusion that these fundsU.S. with minimal U.S. income tax consequences, other than the transition tax and global intangible low-taxed income (“GILTI”) tax. The Company has reinvested a large portion of its undistributed foreign earnings and profits in acquisitions and other investments and intends to bring back a portion of foreign cash in certain jurisdictions where the Company will not be indefinitely reinvested, we would needsubject to accrue at the time of such determination for the incomelocal withholding taxes that would be triggered upon their repatriation.and which were subject already to transition tax and GILTI tax.
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. In October 2015, our Board of Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. We made no stock repurchases during the ninesix month period ended SeptemberJune 30, 20172021 under this program. As of SeptemberJune 30, 2017,2021, we had remaining authorization to repurchase $18.3 million remaining under the repurchase program.
We believe that our working capital and anticipated cash flow from operations will be sufficient to fund our long-term liquidity operating requirements for at least the foreseeable future.next 12 months.
We have no off balanceoff-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 120 days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As of SeptemberJune 30, 2017,2021, we had $44.6$40.9 million in purchase commitments that are expected to be delivered within the next 12 months. To ensure adequate component availability in preparation for new product introductions, as of September 30, 2017, we also had $0.6 million in long-term commitments for purchases to be delivered after 12 months. Other than as described in the preceding sentences, there have been no material changes to the contractual obligations and commercial commitments table included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates on historical experience, along with various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact our condensed consolidated financial statements.
In response to the Securities and Exchange Commission’s (“SEC”) financial reporting release, FR-60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have selectedA discussion of our critical accounting policies for purposes of explaining the methodology used in our calculation, in addition to any inherent uncertainties pertaining to the possible effects on our financial condition. The critical policies discussed below are our processes of recognizing revenue, the reserve for excess and obsolete inventory, income taxes, the reserve for warranties, goodwill impairment, business combinations, and stock-based compensation. These policies affect current assets and operating results and are therefore critical in assessing our financial and operating status. These policies involve certain assumptions that, if incorrect, could have an adverse impact on our operations and financial position.
Revenue Recognition
Revenue is recognized when the price is fixed, collectability is reasonably assured, the title and risks and rewards of ownership have passed to the customer, and the earnings process is complete. Revenue related to our measurement, imaging, and realization equipment and related software is generally recognized upon shipment, as we consider the earnings process complete as of the shipping date. Fees billed to customers associated with the distribution of products are classified as revenue. We warrant our products against defects in design, materials and workmanship for one year. A provision for estimated future costs relating to warranty expense is recorded when products are shipped. We separately sell extended warranties. Extended warranty revenues are recognized on a straight-line basis over the term of the warranty. Costs relating to extended warranties are recognized as incurred. Revenue from sales of software only is recognized when no further significant production, modification or customization of the software is required and when the following criteria are met: persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and deemed collectible. These software arrangements generally include short-term maintenance that is considered post-contract support (“PCS”). We generally establish vendor-specific objective evidence of fair value for this PCS component based on our maintenance renewal rate. Maintenance renewals, when sold, are recognized on a straight-line basis over the term of the maintenance agreement. Revenues resulting from sales of comprehensive support, training and technology consulting services are recognized as such services are performed and are deferred when billed in advance of the performance of services. Revenues are presented net of sales-related taxes.
Reserve for Excess and Obsolete Inventory
Because the value of inventory that will ultimately be realized cannot be known with exact certainty, we rely upon both past sales history and future sales forecasts to provide a basis for the determination of the reserve. Inventory is considered potentially obsolete if we have withdrawn those products from the market or had no sales of the product for the past 12 months and have no sales forecasted for the next 12 months. Inventory is considered potentially excess if the quantity on hand exceeds 12 months of expected remaining usage. The resulting obsolete and excess parts are then reviewed to determine if a substitute usage or a future need exists. Items without an identified current or future usage are reserved in an amount equal to 100% of the first-in first-out (“FIFO”) cost of such inventory. Our products are subject to changes in technologies that may make certain of our products or their components obsolete or less competitive, which may increase our historical provisions to the reserve.
Income Taxes
We review our deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of deferred tax liabilities, projections of future taxable income over a two-year period, and tax planning strategies that we might employ to utilize such assets, including net operating loss carryforwards. Based on the positive and negative evidence of recoverability, we establish a valuation allowance against the net deferred assets of a taxing jurisdiction in which we operate, unless it is “more likely than not” that we will recover such assets through the above means. In the future, our evaluation of the need for the valuation allowance will be significantly influenced by our ability to achieve profitability and our ability to predict and achieve future projections of taxable income over at least a two-year period.
Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of operating a global business, there are many transactions for which the ultimate tax outcome is uncertain. We establish provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold as described by FASB Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the ordinary course of business, we are examined by various federal, state, and foreign tax authorities. We regularly assess the potential outcome of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that gave rise to a revision become known.
Reserve for Warranties
We establish at the time of sale a liability for the one-year warranty included with the initial purchase price of equipment, based upon an estimate of the repair expenses likely to be incurred for the warranty period. The warranty period is measured in installation-months for each major product group. The warranty reserve is included in accrued liabilitiesPart II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the accompanying condensed consolidated balance sheets. The warranty expense is estimated by applying the actual total repair expenses for each product group in the prior period and determining a rate of repair expense per installation-month. This repair rate is multiplied by the number of installation-months of warranty for each product group to determine the provision for warranty expenses for the period. We evaluate our exposure to warranty costs at the end of each period using the estimated expense per installation-month for each major product group, the number of units remaining under warranty and the remaining number of months each unit will be under warranty. We have a history of new product introductions and enhancements to existing products, which may result in unforeseen issues that increase our warranty costs. While such expenses have historically been within expectations, we cannot guarantee this will continue in the future.
Goodwill Impairment
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. We do not amortize goodwill; however, we perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill or indefinite lived intangible assets is impaired. If an asset is impaired, the difference between the value of the asset reflected in the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.
Each period, and for any of our reporting units, we can elect to initially perform a qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of a reporting unit containing goodwill is less than the carrying amount, then the first and second steps of the quantitative goodwill impairment test are unnecessary. If we elect to bypass the qualitative assessment option, or if the qualitative assessment was performed and resulted in us being unable to conclude that it is not more likely than not that the fair value of a reporting unit containing goodwill is greater than the carrying amount, we will perform the two-step quantitative goodwill impairment test. We perform the first step of the two-step quantitative goodwill impairment test by calculating the fair value of the reporting unit using a discounted cash flow method, and then comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds the fair value, we perform the second step of the quantitative goodwill impairment test to measure the amount of the impairment loss, if any. Management has concluded there were no goodwill impairment indicators for the nine months ended September 30, 2017. There was no goodwill impairmentAnnual Report on Form 10-K for the year ended December 31, 2016.
Business Combinations
We allocate2020, as filed with the fair valueSecurities and Exchange Commission on February 17, 2021. As of purchase consideration to the assets acquired and liabilities assumed basedJune 30, 2021, our critical accounting policies have not changed from those described in our Annual Report on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which include consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in
pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Stock-Based Compensation
We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options, restricted stock, restricted stock units and performance-based awards granted to our directors and employees. The fair value of stock options, including performance awards, without a market condition is determined by using the Black-Scholes option valuation model. The fair value of restricted stock units and stock options with a market condition is estimated, at the date of grant, using the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our stock options, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical and implied volatility of our own common stock while the volatility for our restricted stock units with a market condition is based on the historical volatility of our own common stock and the stock of companies within our defined peer group. The expected life of stock options is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date of stock options, these assumptions may be difficult to measure, as they represent future expectations based on historical experience. Further, our expected volatility and expected life may change in the future, which could substantially change the grant-date fair value of future awards of stock options and, ultimately, the expense we record. The fair value of restricted stock and restricted stock units, including performance awards, without a market condition is estimated using the current market price of our common stock on the date of grant.
We expense stock-based compensation for stock options, restricted stock, restricted stock units and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation, adjusted for actual forfeitures, using the straight-line method over the requisite service periodForm 10-K for the entire award. For awards with both performance and service conditions, we expense the stock-based compensation, adjusted for actual forfeitures, on a straight-line basis over the requisite service period for each separately vesting portionyear ended December 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Exposure
We conduct a significant portion of our business outside the United States. As of and for the ninesix months ended SeptemberJune 30, 2017,2021, 61% of our revenue was invoiced, and a significant portion of our operating expenses were paid, in foreign currencies, and 59%34% of our assets were denominated in foreign currencies. Fluctuations in exchange rates between the U.S. dollar and such foreign currencies may have a material effect on our results of operations and financial condition and could specifically result in foreign exchange gains and losses. The impact of future exchange rate fluctuations on the results of our operations cannot be accurately predicted due to our constantly changing exposure to various currencies, and the fact that all foreign currencies do not react in the same manner in relation to the U.S. dollar. Our most significant exposures are to the Euro, British pound sterling, Swiss franc,Franc, Japanese yen,Yen, Chinese yuan renminbi, Mexican pesoYuan and Brazilian real.Real. To the extent that the percentage of our non-U.S. dollar revenues derived from international sales increases in the future, our exposure to risks associated with fluctuations in foreign exchange rates may increase. We are aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options. However, we have not used such instruments in the past, and none were utilized in 20162020 or the ninesix months ended SeptemberJune 30, 2017.2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of SeptemberJune 30, 2017.2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20172021 to provide reasonable assurance that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended SeptemberJune 30, 2017,2021, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any legal proceedings, other thanincluding routine litigation arising in the normal course of business, none of whichthat we believe will have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC, our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 andAs of June 30, 2017, as filed with the SEC, and in this Item 1A before deciding to invest in, or retain, shares of our common stock. These risks could materially and adversely affect our business, financial condition, and results of operations. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017 are not the only risks we face. Our operations could also be affected by additional factors that are not presently known by us or by factors that we currently consider immaterial to our business. As of September 30, 2017,2021, there have been no material changes in our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017.2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer Under the Share Repurchase Plan
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. In October 2015, our Board of Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. We made no stock repurchases during the ninesix month period ended SeptemberJune 30, 20172021 under this program. As of SeptemberJune 30, 2017,2021, we had authorization to repurchase $18.3 million remaining under the repurchase program.
Item 5. Other Information
Revised Non-Employee Director Compensation Program
On July 23, 2021, the Board approved revisions to the Non-Employee Director Compensation Policy (the “Policy”). Under these revisions, the Company’s non-employee directors will be compensated for service on the Board as set forth in the following table:
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Annual Cash Retainer: | | $ | 60,000 | | | |
Additional Annual Retainers: | | | | |
Nominating, Governance and Sustainability Committee Chairperson | | $ | 20,000 | | | |
Audit Committee Chairperson | | $ | 20,000 | | | |
Talent, Development, and Compensation Committee Chairperson | | $ | 20,000 | | | |
Non-Employee Chairman | | $ | 75,000 | | | |
Initial Equity Grant | | $ | 100,000 | | | (a) |
Annual Equity Grant | | $ | 175,000 | | | (b) |
(a) Upon election to the Board, each non-employee director receives restricted stock units with a value equal to $100,000, calculated by using the closing price of our common stock on the date of the non-employee director’s election to the Board. The initial restricted stock unit grant vests on the third anniversary of the grant date, subject to the non-employee director’s continued membership on the Board as of such date.
(b) On the day following the annual meeting of shareholders, each director receives restricted stock units with a value equal to that indicated in the above chart, calculated by using the closing price of our common stock on the day following the annual meeting of shareholders. The annual restricted stock unit grant vests the day prior to the following year’s annual meeting date, subject to a director’s continued membership on the Board as of such date.
Item 6. Exhibits
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INDEX TO EXHIBITS |
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101.INS101.SCH | | XBRL Instance Document |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB104 | | Cover Page Interactive Data File (formatted as inline XBRL Taxonomy Labels Linkbase Documentwith applicable taxonomy extension information contained in Exhibits 101.*) |
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101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
* - Furnished herewith
** - Certain portions of this Exhibit have been redacted pursuant to Item 601(b)(10) of Regulation S-K because they are both (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. The registrant agrees to furnish supplementally an unredacted copy of this Exhibit to the SEC upon request. *** - Indicates management contracts or compensatory plans or arrangements
SIGNATURE
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.
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| | | FARO Technologies, Inc. |
| | | (Registrant) |
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Date: July 28, 2021 | By: | | FARO Technologies, Inc./s/ Allen Muhich |
| | | (Registrant)Name: Allen Muhich |
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Date: October 26, 2017 | By: | | /s/ Robert Seidel |
| | | Name: Robert Seidel |
| | | Title: Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |