Pursuant to the Offer Letter, in the event that Mr. Muhich is terminated without cause, he will be eligible to receive severance benefits as a participant under our Executive Severance Plan (the “Plan”), which Plan is described in our 2019 proxy statement filed with the Securities and Exchange Commission on April 17, 2019.
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, 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, 2018.2019.
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 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;
•the outcome of the U.S. Government’s review of, or investigation into, our potential overcharging of the U.S. Government under our General Services Administration Federal Supply Schedule contracts, any resulting penalties, damages or sanctions imposed on us and the outcome of any resulting litigation to which we may become a party, loss of future government sales and potential impacts on customer and supplier relationships and our reputation;
•risks associated with expanding international operations, such as 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;
•the cyclical nature of the industries of our customers and material adverse changes in our customers’ access to liquidity and capital;
•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) manufacturing inefficiencies associated with new product 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;
•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 orand the loss of any of our executive officers or other key personnel;
•difficulties in recruiting research and development engineers and application engineers;
•the failure to effectively manage the effects of any 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 our effective income tax rate, which makes it difficult to predict our effective income tax rate on a quarterly and annual basis, and the impact of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Cuts Act”) 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 magnitude of increased warranty costs from new product introductions and enhancements to existing products;
•the sufficiency of our plants 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, 2018.2019 and risks identified on this Quarterly Report on Form 10-Q.
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
FARO Technologies, Inc.We are a global technology company that designs, develops, manufactures, markets and its subsidiaries (collectively “FARO,” the “Company,” “us,” “we” or “our”) design, develop, manufacture, market and supportsupports software driven, three-dimensional (“3D”) measurement and imaging solutions. This technology permits high-precision 3D measurement, imaging and comparison of parts and complex structures within production and quality assurance processes. Our devices are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes. We sell the majority of our products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building information modeling, construction, public safety forensics, cultural heritage, dental, and other applications. Our FaroArm®FaroArm®, FARO ScanArm®ScanArm®, FARO Laser TrackerTM, FARO Laser Projector, and their companion CAM2®CAM2®, BuildIT, and BuildIT Projector 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 3D Manufacturing vertical.the automotive, aerospace, metal and machine fabrication and other industrial manufacturing markets. Our FARO Focus Faro ScanPlan and FARO Scanner Freestyle3D XScanPlan laser scanners, and their companion FARO SCENE, BuildIT, FARO As-BuiltTM, and FARO Zone public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications primarily in our Construction Building Information Modeling (“Construction BIM”)the architecture, engineering, and Public Safety Forensics verticals.construction and public safety markets. Our FARO ScanArm®, FARO Scanner Freestyle3D X laser scannersScanArm® and theirits companion SCENE software and other 3D-structured light scanning solutions specific to the dental industry 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 3D Design vertical. 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, supporting our Photonics vertical.cycle.
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 warranties on a straight-line basis over the 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.
We manufacture our FaroArm®FaroArm® and FARO ScanArm®ScanArm® 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 facility located in Florida for customer orders from the Americas. We manufacture our FARO Focus in our manufacturing facilities located in Germany and Switzerland for customer orders from Europe, the Middle East and AfricaEMEA and the Asia-Pacific region, and in our manufacturing facility located in Pennsylvania for customer orders from the Americas. We manufacture our FARO FreestyleLaser TrackerTM3D X and our FARO Laser Projector products in our facility located in Germany. We manufacture our FARO Laser Projector and FARO Laser TrackerTM products in our facility located in Pennsylvania. We manufacture our 3D-structured light scanning solutions specific to the dental industry in our engineering and manufacturing facility in Italy. We expect all of our existing manufacturing facilities to have the production capacity necessary to support our volume requirements through the remainder of 2019.during 2020.
We account for wholly-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 20182019 or the sixthree months ended June 30, 2019.March 31, 2020.
We have sold our productsChange in Organizational Structure and related services toSegment Reporting
From the U.S. Government (the “Government”) under General Services Administrationfourth quarter of 2016 through the fourth quarter of 2019, we operated in five market verticals—3D Manufacturing, Construction Building Information Modeling (“GSA”) Federal Supply Schedule contracts (the “GSA Contracts”) since 2002 and are currently selling our products and related services to the Government under two 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”Construction BIM”), which generally requires usPublic Safety Forensics, 3D Design and Photonics—and had three reporting segments—3D Manufacturing, Construction BIM and Emerging Verticals. As discussed in our Quarterly Report on Form 10-Q for the third quarter of 2019, our new management team, led by our new Chief Executive Officer (“CEO”), formulated and began to reduceimplement a new comprehensive strategic plan for our business. As part of our strategic planning process, we identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. In the prices billedfourth quarter of 2019, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers and re-evaluated our hardware product portfolio. We also began to focus on other organizational optimization efforts, including the Government undersimplification of our overly complex management structure.
As part of our new strategic plan, and based on the GSA Contracts to correspond to the lowest prices billed to certain benchmark customers.
Laterecommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the fourth quarter of 2018, during an internal review2019, we preliminarily determinedeliminated our vertical operating structure and reorganized the Company into a functional structure. Our executive leadership team is now comprised of global functional leaders in areas such as sales, marketing, operations, research and development and general and administrative, and resources are allocated to each function at a consolidated unit level. We no longer have separate business units, or segment managers or vertical leaders who report to the CODM with respect to operations, operating results or planning for levels or components below the total Company level. Instead, our CODM now allocates resources and evaluates performance on a Company-wide basis. Based on these changes, commencing with the fourth quarter of 2019, we now report as one reporting segment that develops, manufactures, markets, supports and sells CAD-based quality assurance products integrated with CAD-based inspection and statistical process control software and 3D documentation systems. Our reporting segment sells into a variety of end markets, including automotive, aerospace, metal and machine fabrication, architecture, engineering, construction and public safety.
New Strategic Plan and Restructuring Plan
In addition to the reorganization of the Company’s structure, as part of our strategic planning process, we also evaluated our hardware product portfolio and the operations of 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”). On February 14, 2019, we reported the GSA Matter to the GSA and its Office of Inspector General.
recent acquisitions. As a result of this evaluation, we are simplifying our hardware product portfolio, ceasing to sell certain products and evaluating whether or not we will divest or shut down the GSA Matter, forrelated operations.
In addition to the implementation of our new strategic plan, on February 14, 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 are 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 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. We estimate the Restructuring Plan will reduce gross annual pre-tax expenses by approximately $40 million, to be realized in the fourth quarter of 2018,2020 on an annualized basis. In total, we reduced our total sales by a $4.8 million estimated cumulative sales adjustment, representativeestimate the implementation of the last six yearsRestructuring Plan will result in first half 2020 pre-tax charges of estimated overchargesapproximately $26 million to $36 million, which are in addition to the Government under the GSA Contracts. In addition, forpre-tax charges of approximately $49 million recorded in the fourth quarter of 2018,2019 in connection with the implementation 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 $0.5a pre-tax charge of approximately $13.7 million during the first quarter 2020 primarily consisting of severance and related benefits. We estimate an additional $13 million to $26 million of imputed interestpre-tax charges during the remainder of fiscal year 2020.
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.
Reclassification and Related Changes to Presentation
Certain prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to the current period presentation:
•Commencing with the third quarter of 2019, depreciation and amortization expenses are being reported in our statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Amounts related to the estimated cumulative sales adjustment, which increased Interest expense, netdepreciation and resulted in an estimated total liability of $5.3 millionamortization expenses for the GSA Matter. This adjustment was based on our preliminary review as of February 20, 2019, the date of our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, in first quarter 2019, we recorded an additional $0.1 million of imputed interest related to the estimated cumulative sales adjustment.
On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the review of our pricing and other practices under the GSA Contracts conducted by our outside legal counsel and forensic accountants (the “Review”). Based on the results of the Review, we reduced our total sales for second quarter 2019 by an incremental $5.8 million sales adjustment, reflecting an estimated aggregate overcharge of $10.6 million under the GSA Contracts for the period from July 2011 to March 2019. In addition, we recorded an incremental $0.4 million of imputed interest related to the estimated cumulative sales adjustment in the second quarter 2019, which increased Interest expense, net and resulted in a $6.2 million increase in the estimated total liability for the GSA Matter. As of the date of the filing of this Quarterly Report on Form 10-Q, we have recorded an aggregate estimated total liability for the GSA Matter of $11.6 million.
On April 27, 2018, we invested $1.8 million in present4D GmbH (“present4D”), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. This initial contribution represented a minority investment in present4D. This investment’s business purpose is to coordinate the design and development of modules supporting compatibility with virtual reality for our existing software offerings. During the three months ended June 30, 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net. Notwithstanding the aforementioned impairment charge based on our current valuation of present4D, we continue to believe in the benefits of present4D’s technology and intellectual property to our business. We have not provided support to present4D during 2018 or the three or six months ended June 30, 2019 outside of our initial investment of $1.8 million. However, we may provide future support in the form of loans or other credit extended to present4D or additional share capital purchases.
Since the end of the second quarter of 2018, the following changes were made to our verticals and reporting segments:
In the third quarter of 2018, we merged the historical Factory Metrology and 3D Machine Vision verticals into one vertical named “3D Factory” for greater consistency with our realigned reporting segments.
In the third quarter of 2018, we segregated the operations of our acquisitions of Laser Control Systems Limited and Lanmark Controls, Inc., along with the operations resulting from our acquisition of substantially all of the assets of Instrument Associates, LLC d/b/a Nutfield Technology, into a vertical that we named “Photonics.” The creation of this vertical enables us to better focus on our product range directed at laser steering. These operations were historically reported in the 3D Factory reporting segment in the first six months of 2018 and are now included in the Emerging Verticals (formerly known as “Other”) reporting segment.
•In the third quarter of 2018, we renamed our Product Design vertical “3D Design.”
In the fourth quarter of 2018, we renamed our 3D Factory vertical and reporting segment “3D Manufacturing.”
There has been no change in our total consolidated financial condition or results of operations previously reported as a result of these changes in our verticals and reportable segments. The amounts related to our reporting segment information for the three and six months ended June 30, 2018March 31, 2020 have been restatedreclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of depreciation and amortization expenses and to conform to the changescurrent period presentation.
•Selling and marketing expenses and general and administrative expenses are now being reported in our reporting segments. Eachthe accompanying statements of our reporting segments continuesoperations together in one line as Selling, general and administrative. Previously, those expenses were reported as two separate line items under operating expenses. Amounts related to employ consistent accounting policies.selling, general and administrative expenses for the three months ended March 31, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of selling, general and administrative expenses and to conform to the current period presentation, as set forth in the following table;
•Software maintenance revenue is now being reported in the accompanying statements of operations as a component of product sales. Previously, these revenues were reported in service sales. Amounts related to software maintenance revenue for the three months ended March 31, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance revenue and to conform to the current period presentation, as set forth in the following table; and
•Software maintenance cost of sales is now being reported in the accompanying statements of operations as a component of product cost of sales. Previously, these cost of sales was reported in service cost of sales. Amounts related to software maintenance cost of sales for the three months ended March 31, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance cost of sales and to conform to the current period presentation, as set forth in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended, March 31, 2019 | | | | | | | | | |
| As Reported | | Depreciation and Amortization Adjustment | | Selling, General and Administrative Adjustment | | Software Maintenance and Other Adjustments | | As Adjusted |
Sales | | | | | | | | | |
Product | $ | 68,800 | | | | $ | — | | | | $ | — | | | | $ | 2,777 | | | | $ | 71,577 | |
Service | 24,817 | | | | — | | | | — | | | | (2,777) | | | | 22,040 | |
Total sales | $ | 93,617 | | | | $ | — | | | | $ | — | | | | $ | — | | | | $ | 93,617 | |
| | | | | | | | | |
Cost of Sales | | | | | | | | | |
Product | $ | 26,128 | | | | $ | 1,176 | | | | $ | — | | | | $ | 647 | | | | $ | 27,951 | |
Service | 12,470 | | | | 824 | | | | — | | | | (647) | | | | 12,647 | |
Total cost of sales | $ | 38,598 | | | | $ | 2,000 | | | | $ | — | | | | $ | — | | | | $ | 40,598 | |
| | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | $ | — | | | | $ | 1,043 | | | | $ | 39,977 | | | | $ | — | | | | $ | 41,020 | |
Selling and marketing | 26,753 | | | | — | | | | (26,753) | | | | — | | | | — | |
General and administrative | 13,224 | | | | — | | | | (13,224) | | | | — | | | | — | |
Depreciation and amortization | 4,749 | | | | (4,749) | | | | — | | | | — | | | | — | |
Research and development | 9,935 | | | | 1,706 | | | | — | | | | — | | | | 11,641 | |
Total operating expenses | $ | 54,661 | | | | $ | (2,000) | | | | $ | — | | | | $ | — | | | | $ | 52,661 | |
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 March 31, | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | 2020 | | % of Sales | | 2019 | | % of Sales | | | | | | | | | | | | |
Sales | | | | | | | | | | | | | | | | | | | |
Product | $ | 56,525 | | | 71.1 | % | | $ | 71,577 | | | 76.5 | % | | | | | | | | | | | | |
Service | 22,990 | | | 28.9 | % | | 22,040 | | | 23.5 | % | | | | | | | | | | | | |
Total sales | 79,515 | | | 100.0 | % | | 93,617 | | | 100.0 | % | | | | | | | | | | | | |
Cost of Sales | | | | | | | | | | | | | | | | | | | |
Product | 23,066 | | | 29.0 | % | | 27,951 | | | 29.9 | % | | | | | | | | | | | | |
Service | 12,576 | | | 15.8 | % | | 12,647 | | | 13.5 | % | | | | | | | | | | | | |
Total cost of sales | 35,642 | | | 44.8 | % | | 40,598 | | | 43.4 | % | | | | | | | | | | | | |
Gross Profit | 43,873 | | | 55.2 | % | | 53,019 | | | 56.6 | % | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | 36,324 | | | 45.7 | % | | 41,020 | | | 43.8 | % | | | | | | | | | | | | |
Research and development | 10,415 | | | 13.1 | % | | 11,641 | | | 12.4 | % | | | | | | | | | | | | |
Restructuring costs | 13,688 | | | 17.2 | % | | — | | | — | % | | | | | | | | | | | | |
Total operating expenses | 60,427 | | | 76.0 | % | | 52,661 | | | 56.3 | % | | | | | | | | | | | | |
(Loss) income from operations | (16,554) | | | (20.8) | % | | 358 | | | 0.4 | % | | | | | | | | | | | | |
Other (income) expense | | | | | | | | | | | | | | | | | | | |
Interest expense (income), net | 34 | | | — | % | | (144) | | | (0.2) | % | | | | | | | | | | | | |
Other expense, net | 473 | | | 0.6 | % | | 195 | | | 0.2 | % | | | | | | | | | | | | |
(Loss) income before income tax (benefit) expense | (17,061) | | | (21.5) | % | | 307 | | | 0.3 | % | | | | | | | | | | | | |
Income tax (benefit) expense | (2,238) | | | (2.8) | % | | 155 | | | 0.2 | % | | | | | | | | | | | | |
Net (loss) income | $ | (14,823) | | | (18.6) | % | | $ | 152 | | | 0.2 | % | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2019 | | % of Sales | | 2018 | | % of Sales | | 2019 | | % of Sales | | 2018 | | % of Sales |
Sales | | | | | | | | | | | | | | | |
Product | $ | 67,992 |
| | 72.7 | % | | $ | 75,720 |
| | 77.1 | % | | $ | 136,792 |
| | 73.1 | % |
| $ | 146,301 |
|
| 76.6 | % |
Service | 25,499 |
| | 27.3 | % | | 22,524 |
| | 22.9 | % | | 50,316 |
| | 26.9 | % |
| 44,777 |
|
| 23.4 | % |
Total sales | 93,491 |
| | 100.0 | % | | 98,244 |
| | 100.0 | % | | 187,108 |
| | 100.0 | % |
| 191,078 |
|
| 100.0 | % |
Cost of Sales | | | | | | | | | | | | | | | |
Product | 29,037 |
| | 31.1 | % | | 27,878 |
| | 28.4 | % | | 55,165 |
| | 29.5 | % | | 54,762 |
| | 28.7 | % |
Service | 12,135 |
| | 13.0 | % | | 12,675 |
| | 12.9 | % | | 24,605 |
| | 13.2 | % | | 24,839 |
| | 13.0 | % |
Total cost of sales (exclusive of depreciation and amortization, shown separately below) | 41,172 |
| | 44.0 | % | | 40,553 |
| | 41.3 | % | | 79,770 |
| | 42.6 | % | | 79,601 |
| | 41.7 | % |
Gross Profit | 52,319 |
| | 56.0 | % | | 57,691 |
| | 58.7 | % | | 107,338 |
| | 57.4 | % | | 111,477 |
| | 58.3 | % |
Operating Expenses: | | | | | | | | | | | | | | | |
Selling and marketing | 29,124 |
| | 31.2 | % | | 30,084 |
| | 30.6 | % | | 55,877 |
| | 29.9 | % | | 58,355 |
| | 30.5 | % |
General and administrative | 14,424 |
| | 15.4 | % | | 11,320 |
| | 11.5 | % | | 27,648 |
| | 14.8 | % | | 22,393 |
| | 11.7 | % |
Depreciation and amortization | 4,573 |
| | 4.9 | % | | 4,377 |
| | 4.5 | % | | 9,322 |
| | 5.0 | % | | 8,720 |
| | 4.6 | % |
Research and development | 9,091 |
| | 9.7 | % | | 9,983 |
| | 10.2 | % | | 19,026 |
| | 10.2 | % | | 19,389 |
| | 10.1 | % |
Total operating expenses | 57,212 |
| | 61.2 | % | | 55,764 |
| | 56.8 | % | | 111,873 |
| | 59.8 | % | | 108,857 |
| | 57.0 | % |
(Loss) income from operations | (4,893 | ) | | (5.2 | )% | | 1,927 |
| | 2.0 | % | | (4,535 | ) | | (2.4 | )% | | 2,620 |
| | 1.4 | % |
Other expense (income) | | | | | | | | | | | | | | | |
Interest expense (income), net | 240 |
| | 0.3 | % | | (87 | ) | | (0.1 | )% | | 96 |
| | 0.1 | % | | (160 | ) | | (0.1 | )% |
Other expense, net | 1,689 |
| | 1.8 | % | | 509 |
| | 0.5 | % | | 1,884 |
| | 1.0 | % | | 693 |
| | 0.4 | % |
(Loss) income before income tax (benefit) expense | (6,822 | ) | | (7.3 | )% | | 1,505 |
| | 1.5 | % | | (6,515 | ) | | (3.5 | )% | | 2,087 |
| | 1.1 | % |
Income tax (benefit) expense | (417 | ) | | (0.4 | )% | | 300 |
| | 0.3 | % | | (262 | ) | | (0.1 | )% | | 427 |
| | 0.2 | % |
Net (loss) income | $ | (6,405 | ) | | (6.9 | )% | | $ | 1,205 |
| | 1.2 | % | | $ | (6,253 | ) | | (3.3 | )% | | $ | 1,660 |
| | 0.9 | % |
Consolidated Results
Three Months Ended June 30, 2019March 31, 2020 Compared to the Three Months Ended June 30, 2018March 31, 2019
Sales. Total sales decreased by $4.7$14.1 million, or 4.8%15.1%, to $93.5$79.5 million for the three months ended June 30, 2019March 31, 2020 from $98.2$93.6 million for the three months ended June 30, 2018. Based on the results of the review of the GSA Matter conducted by our outside legal counsel and forensic accountants, we reduced our total sales for second quarter 2019 by an incremental $5.8 million sales adjustment, reflecting an estimated aggregate overcharge of $10.6 million under the GSA Contracts for the period from July 2011 to March 2019, which included a $5.0 million reduction in product sales and a $0.8 million reduction in service sales (the “GSA incremental sales adjustment”).31, 2019. Total product sales decreased by $7.7$15.1 million, or 10.2%21.0%, to $68.0$56.5 million for the three months ended June 30, 2019March 31, 2020 from $75.7$71.6 million for the three months ended June 30, 2018.March 31, 2019. Our product sales decreased primarily due to the $5.0 million reductioncontinuing market softness in product sales relatedmany of our served markets, along with deterioration in the macro-economic environment and orders pushed out in March due to the GSA incremental sales adjustment, the impact of changes in foreign currencies and a decrease in unit sales within our 3D Manufacturing reporting segment, especially in our Asia-Pacific region.COVID-19 uncertainty. Service revenue increased by $3.0$1.0 million, or 13.2%4.3%, to $25.5$23.0 million for the three months ended June 30, 2019March 31, 2020 from $22.5$22.0 million for the three months ended June 30, 2018,March 31, 2019, primarily due to an increase in customer service revenue and warranty revenue driven by the growth of our installed base and our focused after-market sales initiatives partially offset byto maintain customer relationships after the $0.8 million reduction in service sales related to the GSA incremental sales adjustment.initial purchase of our measurement devices. Foreign exchange rates had a negative impact on total sales of $2.5$1.2 million, decreasingincreasing the percent that our overall sales growth ratedeclined by approximately 2.61.3 percentage points, primarily due to the weakening of the Euro and Chinese Yuan relative to the U.S. dollar.
Gross profit. Gross profit decreased by $5.4$9.1 million, or 9.3%17.3%, to $52.3$43.9 million for the three months ended June 30, 2019March 31, 2020 from $57.7$53.0 million for the three months ended June 30, 2018,March 31, 2019, and gross margin decreased to 56.0%55.2% for the three months ended June 30, 2019March 31, 2020 from 58.7%56.6% for the three months ended June 30, 2018,March 31, 2019, primarily due to the GSA incremental sales adjustment,a negative impact from hardware product mix, partially offset by the increase in gross margina positive impact from service revenue.software product mix driven by a shift from third party to FARO owned software product sales. Gross margin from product revenue decreased by 5.91.7 percentage points to 57.3%59.2% for the three months ended June 30, 2019March 31, 2020 from 63.2%60.9% for the prior year period primarily as a result ofdue to the GSA incremental sales adjustment and less favorable manufacturing cost absorption.aforementioned shifts in mix. Gross margin from service revenue increased by 8.72.7 percentage points to 52.4%45.3% for the three months ended June 30, 2019March 31, 2020 from 43.7%42.6% for the prior year period, primarily as a result ofdue to the aforementioned increase in service revenue growth and improved efficiencies in our customer service repair process.with relatively consistent fixed costs.
Selling, general and marketingadministrative expenses. Selling, general and marketingadministrative expenses decreased by $1.0$4.7 million, or 3.2%11.4%, to $29.1$36.3 million for the three months ended June 30, 2019March 31, 2020 from $30.1$41.0 million for the three months ended June 30, 2018.March 31, 2019. This decrease was driven primarily by lower marketing expensesdecreased salaries and wages and other cost savings initiatives to reduce non-personnel costs that resulted from the Restructuring Plan. Additionally, a decrease in selling commission expense was driven by lower product sales in our 3D Manufacturing reporting segment, partially offset by an increase in compensation expense related to our investment in increased selling headcount as part of our global initiatives to drive sales. Selling, general and marketingadministrative expenses as a percentage of sales increased to 31.2%45.7% for the three months ended June 30, 2019,March 31, 2020, compared with 30.6%43.8% of sales for the three months ended June 30, 2018March 31, 2019. Our worldwide period-ending selling, general and administrative headcount increaseddecreased by 91,169, or 13.5%16.4%, to 764861 at June 30, 2019,March 31, 2020, from 6731,030 at June 30, 2018.
General and administrative expenses. General and administrative expenses increased by $3.1 million, or 27.4%, to $14.4 million for the three months ended June 30, 2019 from $11.3 million for the three months ended June 30, 2018. This increase was mostly due to an aggregate incremental cost of $1.5 million related to our Chief Executive Officer (“CEO”) succession, as we recognized additional compensation expense during the second quarter of 2019 in connection with the June 2019 vesting of option awards held by our former CEO and the $0.5 million signing bonus to our current CEO, as well as advisory fees of $0.7 million incurred during the second quarter of 2019 related to the GSA Matter. General and administrative expenses increased to 15.4% of sales for the three months ended June 30, 2019 from 11.5% of sales for the three months ended June 30, 2018.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $0.2 million, or 4.5%, to $4.6 million for the three months ended June 30, 2019 from $4.4 million for the three months ended June 30, 2018. This increase was driven primarily by higher amortization of intangible assets related to our 2018 acquisitions.March 31, 2019.
Research and development expenses. Research and development expenses decreased by $0.9$1.2 million, or 8.9%10.5%, to $9.1$10.4 million for the three months ended June 30, 2019March 31, 2020 from $10.0$11.6 million for the three months ended June 30, 2018.March 31, 2019. This decrease was mainly driven by a decrease in materials and consulting costs,purchased technology intangible amortization expense as well as favorable changesa result of the impairment of certain intangible assets in foreign currencies asconnection with the U.S. dollar strengthened against the Euro, which decreased the compensation cost of foreign research and development employees.Restructuring Plan. Research and development expenses as a percentage of sales decreasedincreased to 9.7%13.1% for the three months ended June 30, 2019March 31, 2020 from 10.2%12.4% for the three months ended June 30, 2018.March 31, 2019.
Restructuring costs. In February 2020, we initiated the Restructuring 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 March 31, 2020 were $13.7 million primarily consisting of severance and related benefits charges.
Interest expense (income), net. For the three months ended June 30, 2019, weWe recorded interest expense, net of $0.2 million compared with interest income ofless than $0.1 million for the three months ended June 30, 2018. This change was mainly due to the imputedMarch 31, 2020 and interest expense recorded related to the GSA Matter inincome, net of $0.1 million the three months ended June 30,March 31, 2019.
Other expense, net. For the three months ended June 30, 2019,March 31, 2020, other expense increased by $1.2$0.3 million to $1.7$0.5 million from $0.5$0.2 million for the three months ended June 30, 2018. This change was mainly due toMarch 31, 2019. These amounts were primarily driven by the $1.5 million impairment charge related toeffect of foreign exchange rates on the value of intercompany account balances of our equity investmentsubsidiaries denominated in present4D GmbH (“present4D”) recorded in the three months ended June 30, 2019.other currencies.
Income tax (benefit) expense. For the three months ended June 30, 2019,March 31, 2020, we recorded an income tax benefit of $0.4$2.2 million compared with income tax expense of $0.3$0.2 million for the three months ended June 30, 2018.March 31, 2019. Our effective tax rate was (6.1%(13.1%) for the three months ended June 30, 2019March 31, 2020 compared with 19.9%(50.5%) in the prior year period. The changeschange in our income tax (benefit) expense and our effective tax rate werewas primarily due to a pretax loss during the secondfirst quarter of 20192020 compared to pretax income in the same period of 2018, partially offset by a $0.9 million increase in our reserve for uncertain tax positions recorded during the three months ended June 30, 2019 due to a2019. The change in our judgmenteffective tax rate was primarily due to the impact of valuation allowances on the recognition of aour deferred tax positionassets that were established in many our our foreign jurisdictions during the quarter.fourth quarter of 2019.
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.
Net (loss) incomeloss (income). Our net loss was $6.4$14.8 million for the three months ended June 30, 2019March 31, 2020 compared towith net income of $1.2$0.2 million for the prior year period, reflecting the impact of the factors described above.
Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
Sales. Total sales decreased by $4.0 million, or 2.1%, to $187.1 million for the six months ended June 30, 2019 from $191.1 million for the six months ended June 30, 2018. For the second quarter of 2019, we reduced our total sales by the $5.8 million GSA incremental sales adjustment. Total product sales decreased by $9.5 million, or 6.5%, to $136.8 million for the six months ended June 30, 2019 from $146.3 million for the six months ended June 30, 2018. Our product sales decreased primarily due to the $5.0 million reduction in product sales related to the GSA incremental sales adjustment, the impact of changes in foreign currencies and a decrease in unit sales within our 3D Manufacturing reporting segment driven by the impact of our sales portfolio realignment in the first quarter of 2019 and the decline in our 3D Manufacturing product sales in our Asia-Pacific region in the second quarter of 2019, partially offset by an increase in unit sales within our Construction BIM and Emerging Verticals reporting segments. Service revenue increased by $5.5 million, or 12.4%, to $50.3 million for the six months ended June 30, 2019 from $44.8 million for the six months ended June 30, 2018, primarily due to an increase in customer service revenue and warranty revenue driven by the growth of our installed based and our focused sales initiatives to maintain customer relationships after the initial purchase of our measurement devices, partially offset by the $0.8 million reduction in service sales related to the GSA incremental sales adjustment. Foreign exchange rates had a negative impact on sales of $6.4 million, decreasing our overall sales growth rate by approximately 3.3 percentage points, primarily due to the weakening of the Euro, Chinese Yuan, Japanese Yen, and British Pound Sterling relative to the U.S. dollar.
Gross profit. Gross profit decreased by $4.2 million, or 3.7%, to $107.3 million for the six months ended June 30, 2019 from $111.5 million for the six months ended June 30, 2018, and gross margin decreased to 57.4% for the six months ended June 30, 2019 from 58.3% for the six months ended June 30, 2018, primarily due to the GSA incremental sales adjustment in the second quarter of 2019, partially offset by the increase in gross margin from service revenue. Gross margin from product revenue decreased by 2.9 percentage points to 59.7% for the six months ended June 30, 2019 from 62.6% for the prior year period, primarily as a result of the GSA incremental sales adjustment in the second quarter of 2019. Gross margin from service revenue increased by 6.6percentage pointsto 51.1% for the six months ended June 30, 2019 from 44.5% for the prior year period, primarily as a result of service revenue growth and improved efficiencies in our customer service repair process.
Selling and marketing expenses. Selling and marketing expenses decreased by $2.5 million, or 4.2%, to $55.9 million for the six months ended June 30, 2019 from $58.4 million for the six months ended June 30, 2018. This decrease was driven primarily by lower marketing expenses and a decrease in selling commission expense due to a reduction in our product sales in our 3D Manufacturing reporting segment, partially offset by an increase in compensation expenses related to our investment in increased selling headcount as part of our global initiatives to drive sales. Selling and marketing expenses as a percentage of sales decreased to 29.9% for the six months ended June 30, 2019, compared with 30.5% of sales for the six months ended June 30, 2018. Our worldwide period-ending selling headcount increased by 91, or 13.5%, to 764 at June 30, 2019, from 673 at June 30, 2018.
General and administrative expenses. General and administrative expenses increased by $5.2 million, or 23.5%, to $27.6 million for the six months ended June 30, 2019 from $22.4 million for the six months ended June 30, 2018. This increase was mostly due to an aggregate incremental cost of $2.4 million related to our CEO succession, as we recognized additional compensation expense during 2019 in connection with the June 2019 vesting of option awards held by our former CEO and the $0.5 million signing bonus to our current CEO, as well as the advisory fees of $1.2 million incurred related to the GSA Matter. General and administrative expenses increased to 14.8% of sales for the six months ended June 30, 2019 from 11.7% of sales for the six months ended June 30, 2018.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $0.6 million, or 6.9%, to $9.3 million for the six months ended June 30, 2019 from $8.7 million for the six months ended June 30, 2018. This increase was driven primarily by higher amortization of intangible assets related to our 2018 acquisitions.
Research and development expenses. Research and development expenses decreased by $0.4 million, or 1.9%, to $19.0 million for the six months ended June 30, 2019 from $19.4 million for the six months ended June 30, 2018. This decrease was mainly driven by a decrease in materials and consulting costs, as well as favorable changes in foreign currencies as the U.S. dollar strengthened against the Euro, which decreased the compensation cost of foreign research and development employees, partially offset by higher compensation expense resulting from increased engineering headcount due to our 2018 acquisitions. Research and development expenses as a percentage of sales increased to 10.2% for the six months ended June 30, 2019 from 10.1% for the six months ended June 30, 2018.
Interest expense (income), net. For the six months ended June 30, 2019, we recorded interest expense of $0.1 million compared with interest income of $0.2 million for the three months ended June 30, 2018. This change was mainly due to the imputed interest expense recorded related to the GSA Matter in the second quarter of 2019.
Other expense, net. For the six months ended June 30, 2019, other expense increased by $1.2 million to $1.9 million from $0.7 million for the six months ended June 30, 2018. The increase was mainly due to the $1.5 million impairment charge related to our equity investment in present4D recorded in the second quarter of 2019.
Income tax (benefit) expense. For the six months ended June 30, 2019, we recorded an income tax benefit of $0.3 million compared with income tax expense of $0.4 million for the six months ended June 30, 2018. Our effective tax rate was (4.0%) for the six months ended June 30, 2019 compared with 20.5% in the prior year period. The changes in our income tax (benefit) expense and our effective tax rate were primarily due to a pretax loss during the six months ended June 30, 2019 compared to pretax income in the same period of 2018, partially offset by a $0.9 million increase in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position during the second quarter of 2019.
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 recognized during the quarter.
Net (loss) income. Our net loss was $6.3 million for the six months ended June 30, 2019 compared to net income of $1.7 million for the prior year period, reflecting the impact of the factors described above.
Segment Results
We use segment profit to evaluate the performance of our reportable segments, which are 3D Manufacturing, Construction BIM and Emerging Verticals. Segment profit is calculated as gross profit less selling and marketing expenses for the reporting segment. The discussion of segment results for the three and six months ended June 30, 2019 and 2018 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 total 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 segment profit to income from operations, see Note 15 – Segment Reporting, in Part I, Item 1 of this Quarterly Report on Form 10-Q.
For a description of the changes made to our verticals and reporting segments since the end of the second quarter of 2018, see the “Overview” section above. The amounts related to our reporting segment information for the three and six months ended June 30, 2018 have been restated below to reflect the changes in our reporting segments.
Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
Total sales by segment for the three months ended June 30, 2019 and June 30, 2018 were as follows (in thousands):
|
| | | | | | | | | | | | | |
| Three Months Ended |
| June 30, 2019 | | % of Total | | June 30, 2018 | | % of Total |
3D Manufacturing | $ | 59,002 |
| | 63.2 | % | | $ | 63,989 |
| | 65.2 | % |
Construction BIM | 24,161 |
| | 25.8 | % | | 23,567 |
| | 24.0 | % |
Emerging Verticals | 10,328 |
| | 11.0 | % | | 10,688 |
| | 10.8 | % |
Total sales | $ | 93,491 |
| | | | $ | 98,244 |
| | |
|
| | | | | | | | |
3D Manufacturing | | | | |
(dollars in thousands) | | Three Months Ended |
| | June 30, 2019 | | June 30, 2018 |
Total sales | | $ | 59,002 |
| | $ | 63,989 |
|
Segment profit | | $ | 17,819 |
| | $ | 20,898 |
|
Segment profit as a % of 3D Manufacturing segment sales | | 30.2 | % | | 32.7 | % |
Segment profit. Segment profit in our 3D Manufacturing segment decreased by $3.1 million, or 14.7%, to $17.8 million for the three months ended June 30, 2019 from $20.9 million in the prior year period. This decrease was primarily due to the $3.3 million reduction in sales related to the GSA incremental sales adjustment.
|
| | | | | | | | |
Construction BIM | | | | |
(dollars in thousands) | | Three Months Ended |
| | June 30, 2019 | | June 30, 2018 |
Total sales | | $ | 24,161 |
| | $ | 23,567 |
|
Segment profit | | $ | 6,574 |
| | $ | 5,865 |
|
Segment profit as a % of Construction BIM segment sales | | 27.2 | % | | 24.9 | % |
Sales. Total sales in our Construction BIM segment increased by $0.6 million, or 2.5%, to $24.2 million for the three months ended June 30, 2019 from $23.6 million in the prior year period, primarily due to an increase in service revenue driven by the growth of our installed, serviceable base and higher average selling prices of our products, partially offset by the $0.5 million reduction in sales related to the GSA incremental sales adjustment in the second quarter of 2019.
Segment profit. Segment profit in our Construction BIM segment increased by $0.7 million, or 12.1%, to $6.6 million for the three months ended June 30, 2019 from $5.9 million in the prior year period, primarily driven by an increase in product gross margin, reflecting improved manufacturing efficiencies and higher average selling prices.
|
| | | | | | | | |
Emerging Verticals | | |
(dollars in thousands) | | Three Months Ended |
| | June 30, 2019 | | June 30, 2018 |
Total sales | | $ | 10,328 |
| | $ | 10,688 |
|
Segment (loss) profit | | $ | (1,198 | ) | | $ | 844 |
|
Segment (loss) profit as a % of Emerging Verticals segment sales | | (11.6 | )% | | 7.9 | % |
Sales. Total sales in our Emerging Verticals segment decreased by $0.4 million, or 3.4%, to $10.3 million for the three months ended June 30, 2019 from $10.7 million in the prior year period. This decrease was primarily due to the $2.0 million reduction in sales related to the GSA incremental sales adjustment in the second quarter of 2019, partially offset by higher service revenue.
Segment (loss) profit. Segment loss in our Emerging Verticals segment was $1.2 million for the three months ended June 30, 2019 compared to a segment profit of $0.8 million in the prior year period. This change of $2.0 million was primarily due to the $2.0 million reduction in sales related to the GSA incremental sales adjustment.
Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
Total sales by segment for the six months ended June 30, 2019 and June 30, 2018 were as follows (dollars in thousands):
|
| | | | | | | | | | | | | |
| Six Months Ended |
| June 30, 2019 | | % of Total | | June 30, 2018 | | % of Total |
3D Manufacturing | $ | 115,569 |
| | 61.8 | % | | $ | 124,646 |
| | 65.2 | % |
Construction BIM | 49,600 |
| | 26.5 | % | | 46,249 |
| | 24.2 | % |
Emerging Verticals | 21,939 |
| | 11.7 | % | | 20,183 |
| | 10.6 | % |
Total sales | $ | 187,108 |
| | | | $ | 191,078 |
| | |
|
| | | | | | | | |
3D Manufacturing | | | | |
(dollars in thousands) | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 |
Total sales | | $ | 115,569 |
| | $ | 124,646 |
|
Segment profit | | $ | 36,989 |
| | $ | 39,322 |
|
Segment profit as a % of 3D Manufacturing segment sales | | 32.0 | % | | 31.5 | % |
Sales.Total sales in our 3D Manufacturing segment decreased by $9.0 million, or 7.3%, to $115.6 million for the six months ended June 30, 2019 from $124.6 million in the prior year period. This decrease was due to the $3.3 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019 and a decrease in product units sold driven by the impact of our sales portfolio realignment in the first quarter of 2019 and the decline in product sales in our Asia-Pacific region in the second quarter of 2019, partially offset by continued growth in service revenue.
Segment profit. Segment profit in our 3D Manufacturing segment decreased by $2.3 million, or 5.9%, to $37.0 million for the six months ended June 30, 2019 from $39.3 million in the prior year period. This decrease was primarily due to the $3.3 million reduction in sales related to the GSA incremental sales adjustment, partially offset by service revenue growth, a decrease in selling expense due to lower commissions and a decrease in travel expenses.
|
| | | | | | | | |
Construction BIM | | | | |
(dollars in thousands) | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 |
Total sales | | $ | 49,600 |
| | $ | 46,249 |
|
Segment profit | | $ | 15,000 |
| | $ | 12,316 |
|
Segment profit as a % of Construction BIM segment sales | | 30.2 | % | | 26.6 | % |
Sales. Total sales in our Construction BIM segment increased by $3.4 million, or 7.2%, to $49.6 million for the six months ended June 30, 2019 from $46.2 million in the prior year period, primarily due to increases in product unit sales and service revenue, partially offset by the $0.5 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019.
Segment profit. Segment profit in our Construction BIM segment increased by $2.7 million, or 21.8%, to $15.0 million for the six months ended June 30, 2019 from $12.3 million in the prior year period, primarily driven by the increase in product unit sales and an increase in product gross margin, reflecting improved manufacturing efficiencies.
|
| | | | | | | | |
Emerging Verticals | | |
(dollars in thousands) | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 |
Total sales | | $ | 21,939 |
| | $ | 20,183 |
|
Segment (loss) profit | | $ | (528 | ) | | $ | 1,484 |
|
Segment (loss) profit as a % of Emerging Verticals segment sales | | (2.4 | )% | | 7.4 | % |
Sales. Total sales in our Emerging Verticals segment increased by $1.7 million, or 8.7%, to $21.9 million for the six months ended June 30, 2019 from $20.2 million in the prior year period, primarily due to higher sales in all of our emerging verticals, as we continue to strategically invest in new markets both through acquisition and organically, partially offset by the $2.0 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019.
Segment (loss) profit. Segment loss in our Emerging Verticals segment was $0.5 million for the six months ended June 30, 2019 compared to segment profit of $1.5 million in the prior year period. This change of $2.0 million was primarily due to the $2.0 million reduction in sales related to the GSA incremental sales adjustment.
Liquidity and Capital Resources
Cash and cash equivalents increased by $11.8$23.6 million to $120.6$157.2 million at June 30, 2019March 31, 2020 from $108.8$133.6 million at December 31, 2018.2019. The increase was primarily driven by net cash provided by operating activities, partially offset by net cash used inand investing and financing activities. Cash provided by operating activities was $17.7$16.3 million during the sixthree months ended June 30, 2019,March 31, 2020, compared to less than $0.1$5.8 million of cash provided by operations during the sixthree months ended June 30, 2018.March 31, 2019. The increase was mainly due to changes in working capital accounts, primarily a decrease in accounts receivable, and an increase in the GSA liability, partially offsetaccrued liabilities driven by an increase in inventoryseverance and related benefit charges as a result of our restructuring plan and a decrease in accounts payable, accrued liabilities and lease liability.our inventories.
Cash provided by investing activities during the three months ended March 31, 2020 was $7.8 million compared to cash used in investing activities during the six months ended June 30, 2019 was $4.9 million compared to $12.1of $2.1 million during the sixthree months ended June 30, 2018.March 31, 2019. The decreasechange was primarily due to $4.0the maturity of U.S. Treasury Bills amounting to $9.0 million in cash paid for acquisitions and $1.8 million in cash paid for equity investments and advances to affiliates during the sixthree months ended June 30, 2018 compared to noMarch 31, 2020 without such activity during the same period inthree months ended March 31, 2019.
Cash used inprovided by financing activities was $1.1 million during the sixthree months ended June 30, 2019March 31, 2020 compared to cash provided byused in financing activities of $7.1$1.2 million for the sixthree months ended June 30, 2018.March 31, 2019. The change was primarily due to $7.1$2.8 million in cash received from the exercise of employee stock options during the sixthree months ended June 30, 2018March 31, 2020 compared to $0.7$0.3 million during the sixthree months ended June 30, 2019 and payments for taxes related to the net share settlement of equity awards of $1.4 million during the six months ended June 30, 2019 compared to no such payments during the six months ended June 30, 2018.March 31, 2019.
Of our cash and cash equivalents, $80.9$91.9 million was held by foreign subsidiaries as of June 30, 2019.March 31, 2020. On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing tax law, which included a transition tax on the mandatory deemed repatriation of foreign earnings. Despite the changes in U.S. tax law, our current intent is to indefinitely reinvest these funds in our foreign operations, as the cash is needed to fund ongoing operations.
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 sixthree month period ended June 30, 2019March 31, 2020 under this program. As of June 30, 2019,March 31, 2020, we had 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 next 12 months.
We have no off-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 June 30, 2019,March 31, 2020, we had $49.1$54.0 million in purchase commitments that are expected to be delivered within the next 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, 2018.2019.
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. A discussion of our critical accounting policies is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission on February 21, 2019.19, 2020. As of June 30, 2019,March 31, 2020, our critical accounting policies have not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
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 sixthree months ended June 30, 2019, 62%March 31, 2020, 58% of our revenue was invoiced, and a significant portion of our operating expenses were paid, in foreign currencies, and 48%38% 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, Swiss Franc, Japanese Yen, Chinese Yuan and Brazilian 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 20182019 or the sixthree months ended June 30, 2019.March 31, 2020.
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 Securities and Exchange Commission’s (“SEC’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 June 30, 2019.March 31, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019March 31, 2020 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 June 30, 2019,March 31, 2020, 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, including routine litigation arising in the normal course of business, that 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, 2018,2019, 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, 20182019 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 to be immaterial to our business. AsExcept as set forth below, as of June 30, 2019,March 31, 2020, 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, 2018.2019:
The risk factor entitled “Our operations are vulnerable to the effects of epidemics, such as the coronavirus, which could materially disrupt our business.” has been updated to read as follows:
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. Our operations are significantly vulnerable to the effects of pandemics, such as COVID-19, which have, and could continue to materially impact our business. We are significantly vulnerable to the economic effects of pandemics and other public health crises, including the ongoing COVID-19 outbreak that has surfaced in every country of our global operating footprint. The impact of COVID-19, including disruptions to our business, changes in consumer behaviors, restrictions on individual and business activities, changes in consumer behavior, and financial liquidity concerns, has created significant volatility in the macro-economic environment and led to reduced economic activity. There have been material actions taken by global government authorities to contain and slow the spread of COVID-19, including travel bans, quarantines, and stay-at-home orders to restrict activities for individuals and businesses.
In response to mandates ordered by global government authorities, our non-manufacturing and technical service personnel have been ordered to work from home beginning in March 2020. Our global manufacturing operations, including facilities located in Exton, Pennsylvania, Lake Mary, Florida, Germany, Switzerland and Singapore have been designated as essential business and therefore continue to operate. In the best interest of our employees and regions in which our teams operate, we have implemented significant preventative measures to ensure the health and safety of our employees, including temperature screenings prior to entering our plants, enforcement of safe distancing between employees within our plants, encouragement that employees wash hands often, and stay-at-home measures if symptoms of COVID-19 arise during work hours or prior to entering our plants.
The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future events and developments, such as the duration and magnitude of the outbreak, impact on our suppliers and customers, the demand for our products and services, and whether the pandemic leads to recessionary conditions in any of our key markets. Additionally, our supply and distribution chains may be disrupted or their operations discontinued permanently. As such, the ultimate impact on our financial condition and results of operations cannot be determined at this time. In 2020, we expect our business, financial condition and results of operations to be adversely affected.
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 sixthree month period ended June 30, 2019March 31, 2020 under this program. As of June 30, 2019,March 31, 2020, we had authorization to repurchase $18.3 million remaining under the repurchase program.
Item 6. Exhibits
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101.INS101.SCH | | XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | 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 |
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: April 28, 2020 | By: | | FARO Technologies, Inc./s/ Allen Muhich |
| | | (Registrant)Name: Allen Muhich |
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Date: July 24, 2019 | By: | | /s/ Robert Seidel |
| | | Name: Robert Seidel |
| | | Title: Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial Officer) |