Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File Number 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as Specified in Its Charter)
Florida
(State or Other Jurisdiction
of Incorporation or Organization)
59-3157093
(I.R.S. Employer
Identification Number)
250 Technology Park,
(Address of Principal Executive Offices)
Lake Mary, Florida
32746
(Zip Code)
Registrant’s telephone number, including area code: (407) 333-9911
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.001
Trading Symbols(s)
FARO
Name of each exchange on which registered
Nasdaq Global Select Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Table of Contents
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on June 30, 2020 (the last business day of the
Registrant’s most recently completed second fiscal quarter) was $944,801,358 based on the closing price of the Registrant’s common stock on such date on
the Nasdaq Global Select Market, and assuming solely for the purposes of this calculation that all directors and executive officers of the Registrant are
“affiliates.”
As of February 15, 2021, there were outstanding 18,018,797 shares of the Registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the 2021 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on
Form 10-K.
Table of Contents
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
i
Page
4
4
13
25
26
26
26
27
27
29
30
43
44
80
81
83
84
84
84
84
84
84
85
85
89
Table of Contents
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
FARO Technologies, Inc. (“FARO,” the “Company,” “us,” “we” or “our”) has made “forward-looking statements” in this Annual Report on Form
10-K within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. 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 further penetrate our customer base and target markets;
our ability 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 exit costs, and our inability to realize the expected benefits of such plans;
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 our 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 used as raw
materials 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;
change 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;
1
Table of Contents
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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, and (xvii) compliance
with government regulations including health, safety, and environmental matters;
changes in gross margin 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 (“ROHS2”) Directive and the Waste
Electrical and Electronic Equipment (“WEEE”) 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 retain our executive officers and other key personnel;
delays and disruption in delivery of materials and services from suppliers;
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 make it difficult to predict our effective income tax rate on a quarterly and annual basis;
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 effect of changes in political conditions in the U.S. and other countries in which we operate, including the effect of changes in U.S. trade
policies or the United Kingdom’s withdrawal from the European Union, on general market conditions, global trade policies and currency exchange
rates;
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; and
our ability to comply with the requirements for favorable income tax rates in foreign jurisdictions.
2
Table of Contents
A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-
looking statements is included throughout this filing and particularly in Part I, Item 1A of this Annual Report on Form 10-K. 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 Annual
Report on Form 10-K, unless otherwise required by law.
3
Table of Contents
ITEM 1. BUSINESS
FARO was founded in 1982 and re-incorporated in Florida in 1992. Our worldwide headquarters are located at 250 Technology Park, Lake Mary,
Florida 32746 and our telephone number is (407) 333-9911.
We are a global technology company that designs, develops, manufactures, markets and supports software driven, three-dimensional (“3D”)
measurement, imaging, and realization solutions 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 enables highly accurate 3D measurement, imaging, comparison and projection of
parts and complex structures within production, assembly and quality assurance processes. Our FARO 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 in investigation and reconstructions of crash and crime scenes. We sell the majority of our
solutions through a direct sales force across a range of industries including automotive, aerospace, metal and machine fabrication, surveying, architecture,
engineering and construction, public safety forensics and other industries.
COVID-19
Our business is significantly vulnerable to the economic effects of pandemics and other public health crises, including the ongoing novel coronavirus
(“COVID-19”) pandemic that has surfaced in virtually every country of our global operating footprint. During 2020, we experienced a significant decline
in the demand for our products and services across all of our served markets as a result of the impact of the spread of COVID-19. While COVID-19 has
negatively impacted demand for our products and services overall, it has provided us with the opportunity to adapt to operating in a virtual environment.
We significantly increased the utilization of our existing virtual sales demonstration infrastructure which has enabled ongoing customer product education.
We launched an updated web-based learning system with Faro Academy that has resulted in an increase in the attendance of our virtual training and
product information seminars as our customers take advantage of the opportunity to remotely participate and to better understand the capabilities of our
products and software offerings.
We continue to assess the ongoing impact of COVID-19 on our business results and remain committed to taking actions to address the health and
safety of our employees and customers, as well as the negative effects from demand disruption and production impacts, including, but not limited to, the
following:
• Operating our business with a focus on our employee health and safety, which includes minimizing travel, implementing remote work policies,
maintaining employee distancing and enhancing the sanitation of all of our facilities;
• Monitoring of our liquidity, reduction of supply flows into our manufacturing facilities, disciplined inventory management, and limiting capital
expenditures; and
Continuously reviewing our financial strategy to enhance financial flexibility in these volatile financial markets.
•
We continue to maintain a strong capital structure with a cash balance of $185.6 million and no debt as of December 31, 2020. We believe that our
liquidity position is adequate to meet our projected needs in the reasonably foreseeable future.
Strategy
Historically, we operated in five verticals—3D Manufacturing, Construction Building Information Modeling (“Construction BIM”), Public Safety
Forensics, 3D Design and Photonics—and had three reporting segments—3D Manufacturing, Construction BIM and Emerging Verticals. During the
second half of 2019, our Chief Executive Officer (“CEO”) and FARO's management team formulated and began to implement a new comprehensive
strategic plan for our business. Our strategic planning process included extensive conversations with employees, customers, investors and suppliers to
identify both where the Company can provide sustained and differentiated customer value and where opportunities existed to improve operating
efficiencies. We identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. As part of our
strategic plan, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers, re-evaluated our hardware
and software product portfolio and examined how key decisions are made throughout our global organization. Additionally, we focused on other
organizational optimization efforts, including the simplification of our overly complex management structure.
4
Table of Contents
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the
fourth quarter of 2019, we eliminated our vertical structure in favor of a functional structure. Our new executive leadership team is comprised of 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, 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 report as one reporting
segment that develops, manufactures, markets, supports and sells a suite of 3D imaging and software solutions.
In addition to the reorganization of the Company’s structure, we evaluated our hardware and software product portfolio and the operations of certain
of our recent acquisitions. As a result of this evaluation, we simplified our hardware and software product portfolio and divested our Photonics business
and 3D Design related assets obtained from our acquisition of Opto-Tech SRL and its subsidiary Open Technologies SRL (collectively, “Open
Technologies”) in the second quarter of 2020.
On February 14, 2020, our Board of Directors approved a global restructuring plan (the “Restructuring Plan”), which supports our strategic plan in an
effort to improve operating performance and ensure that we are appropriately structured and resourced to deliver sustainable value to our shareholders and
customers. Key activities under the Restructuring Plan, which targeted $40 million in annualized savings to be realized by the fourth quarter of 2020,
include decreasing total headcount by approximately 500 employees upon the completion of the Restructuring Plan. The elimination of our vertical
structure allowed us to successfully complete our redefined go-to-market strategy which placed increased focus on our customers and enabled our sales
employees, supported by our talented pool of field application engineers, to sell all product lines globally.
Our new marketing leadership team has focused its efforts on gaining an increased understanding of customer applications and workflows which
enables value-based product positioning while optimizing our customer's total cost of ownership. By strengthening our understanding of customer
applications and workflows, we will continue to develop high-value solutions across our product and software platforms. Also, our marketing leadership
team has transformed our lead generation process and implemented technology to provide our sales organization with higher quality leads which optimizes
the time and effort spent by our newly organized sales team.
We continue to focus on organizational optimization and improved decision making throughout the Company. Prior to the execution of the
Restructuring Plan, the Company had strong geographic organizations with decentralized decision making. Additionally, the previous vertical structure
layered on top of the geographic organization led to an overly complex and costly management structure. The newly formed global functional organization
has enabled centralized management and clear process ownership, eliminating redundant resources and increasing the Company's agility and ability to
execute the new strategic plan during the COVID-19 global pandemic.
We made significant progress executing the Restructuring Plan during 2020. We recorded a pre-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. The reduction of our global workforce and new
cost structure allowed the Company to maintain a strong capital structure despite depressed sales levels primarily as a result of the COVID-19 pandemic.
At this time, we are continuing to evaluate the future key activities by which these additional charges will originate. We estimate additional pre-tax
charges of $5 million to $15 million for fiscal year 2021. These activities are expected to be substantially completed by the end of 2021.
Acquisition
On August 21, 2020, FARO Technologies, Inc. issued a press release announcing that it has acquired Advanced Technical Solutions in Scandinavia
AB (“Open Technologies”), a Swedish company focused on 3D digital twin solution technology. ATS software and proprietary traceable 3D system enables
highly accurate and repeatable 3D scans. High accuracy 3D digital twin simulations allow capital intensive industries such as automotive and aerospace to
reduce their time to market and cost.
5
Table of Contents
Industry Background
We have a wide variety of customers that support a large number of industries, including automotive, aerospace, metal and machine fabrication,
surveying, architecture, engineering and construction, as well as, public safety forensics. The pressures in improving overall manufacturing costs,
improving profitability in AEC and the need for more complete information in public safety all are driving the need for more accurate 3D data faster, more
automated and available remotely, world-wide. In each of the industries we serve, there is a growing need for accurate 3D information for high accuracy
inspection, machine alignment and calibration, as-built modeling and design, quality control, digital twin and crash and crime scene investigations as well
as pre-incident planning. Each of these industries are undergoing some form of a digital transformation that drives the need for our solutions to help
improve our customers’ yields, reduce costs and drive additional profitability.
In the manufacturing industry, the continued focus on higher yields, cost reductions and decreased time to market drive the need for more accurate
information to support overall manufacturing processes including part quality, machine down time and overall manufacturing yield. The dimensional
metrology market will be challenged to continue to provide higher accuracy results to meet the continuing demand of ever tightening tolerances in both the
automotive and aerospace industries. The higher accuracy requirements will also result in trends away from hand measurement tools towards more
automated and integrated equipment. With increasing pressure on costs, the need for tighter quality control and increased automation will drive the
adoption of applications and processes with the need for real-time 3D information to make quick, accurate decisions to optimize the manufacturing process.
Industry 4.0 will also continue to drive the need to have 3D information available on-demand across the entire manufacturing ecosystem.
The emergence of building information modeling (“BIM”) in the AEC market has required improvements in 3D documentation, coordination and
simulation across the entire building lifecycle. BIM, in part, is the compilation of a 3D model representation of a project that can be updated real time and
compare actual to design. BIM is believed to become more prevalent as it aides in reducing cost associated with scrap and overruns. The ability to obtain
accurate, real-time 3D measurements and information will help to replace existing methodologies such as tape measures and chalk lines. In addition, an
increase in modular and pre-fab construction is being driven by growing urbanization, government initiatives and a need for affordable housing. Modular
and pre-fab construction allow for building all, or large portions, of a building and then assembling these on-site. The processes of creating such structures
resembles more traditional manufacturing flows where real-time 3D measurements and information can vastly improve the costs associated with re-work of
materials and poor quality.
The increased focus in public safety around cost, technology adoption and public scrutiny will increase the acceptance of 3D solutions to accurately
capture and analyze crime and crash scenes. Body cams, drones, and advanced analytical software are all examples of increased technology adoption in the
public safety sector. Laser scanning technology is used today to capture crime scenes quickly and accurately before leaving the scene. The 3D point cloud
that is generated from this data allows for further detailed analysis around bullet trajectory, blood spatter and cast off with full confidence and without the
need to revisit the crime scene. This information can be easily shared between police investigators, district attorneys and defense attorneys across multiple
jurisdictions. In addition, crash scenes can also be reconstructed by using the 3D information collected while on-site. This information can also be easily
shared among different departments, insurance companies and investigators. 3D data capture and analysis allows pre-incident planning activities to prepare
in the event of an emergency such as fires or for tactical planning of safety-relevant events like political summits or schools. The time savings and
confidence in data collection and analysis will continue to result in 3D technology becoming an integral set of tools in public safety analytics.
FARO Products
®
FaroArm Portfolio. The FaroArm portfolio consists of a combination of a portable, articulated measurement arm available in various sizes, a
computer, and CAM2 software programs, which are described below under “FARO Software”, and optional laser line probes (“LLP”) for scanning larger
objects. They are primarily sold to customers in the automotive, aerospace, metal and machine fabrication industries.
®
®
• Quantum Arm – The Quantum series of articulated arms comes in various sizes ranging from 1.5 meters up to 4.0 meters in probing diameter to
®
allow for measuring a large array of part sizes. The 1.5 meter FaroArm and FARO Gage, offer the highest accuracy for measuring small parts,
molds and assemblies replacing the need for small handheld tools such as micrometers, calipers and height gauges. The Quantum V2 Arms are
ergonomically designed 6-axis articulated ARMs that have the ability to measure across a wide range of sizes and accuracies in various
applications and industries. FaroArm 8-axis allows additional degrees of freedom to capture the most complex parts.
®
6
Table of Contents
•
TM
TM
LLP - FAROBlu and Prizm line of laser line probes offer the ability to upgrade a Quantum Arm into a ScanArm providing high accuracy, 3D
point-cloud data in full color. As with the Quantum, the ScanArm is available from 2.5 meters to 4.0 meters measuring diameter to allow for a
wide range of applications at a wide range of part sizes. The LLP provides the user the ability to achieve high-speed point cloud capture with
different density through basic, standard and high-definition models. The ScanArm offers the same portability and ease of use as the Quantum
series.
®
FARO Laser Tracker. The FARO Vantage Laser Tracker combines a portable, large-volume laser measurement tool, a computer, and CAM2
®
software programs, representing a product offering primarily sold to customers in the aerospace, automotive, metal and machine fabrication industries.
•
•
Laser Tracker Vantage – The FARO Laser Tracker Vantage utilizes a laser beam for ultra-precise measurement of objects of up to 80 meters. It
enables manufacturing, engineering, and quality control professionals to build, measure and inspect large parts, machine tools and other large
objects on-site and in-process.
®
6DoF FARO Vantage Laser Tracker – Together with the hand-held 6Probe, a fully-integrated hand-held probe, the 6DoF FARO Vantage Laser
Tracker expands the capabilities of large volume measurement by allowing users to access hidden, hard-to-reach locations by probing and
scanning.
®
®
®
FARO Laser Projector. The FARO Tracer and Tracer accurately project a laser outline onto a 3D surface or object, providing a virtual template
M
SI
that operators and assemblers can use to quickly and accurately position components. The laser template is created using a 3D Computer-Aided Design
(“CAD”) model that enables the system to visually project a laser outline of parts, reference points, or areas of interest. The result is a virtual and
collaborative 3D template to eliminate scrap and streamline a wide range of assembly and production applications. This product is primarily sold to
customers in the aerospace, metal working and AEC industries.
FARO Laser Scanning Portfolio. The laser scanning portfolio utilizes laser technology to measure and collect a cloud of data points, allowing for
the detailed and precise 3D rendering of an object or area. This technology is used for factory planning, facility life-cycle management, quality control,
forensic analysis and capturing large volumes of 3D data.
• Focus - The FARO Focus laser scanner utilizes laser technology to measure and collect a cloud of data points, allowing for the detailed and
precise 3D rendering of an object or an area as large as an industrial facility. The Focus is available in several models which allow the customer to
choose the best capability for their applications. Faro Focus M70 is ultra-portable and captures high accuracy point cloud data for short range
measurements. Faro Focus S150 and S350 are designed to capture high accurate and dense point cloud data at mid to long range distances,
respectively. The large distant range of measurement capability ensures there is a model to capture 3D information of almost any device, structure
or facility. This product is primarily sold to customers in the AEC and public safety industries.
•
•
•
Freestyle 2 - The FARO Freestyle 2 is a high-quality, portable 3D scanner designed for photorealistic 3D reality capture. It is a lightweight,
handheld device with a high degree of flexibility, allowing operators to scan anywhere in most conditions. This product is primarily sold to
customers in the AEC and public safety industries.
ScanPlan - The FARO ScanPlan is a handheld mapper that captures two-dimensional (“2D”) floor plans. The FARO ScanPlan performs real-time
capturing and diagramming of as-built floor plans of buildings for threat assessment, pre-incident planning, fire protection engineering and facility
management. This product is primarily sold to customers in the AEC and public safety industries.
Swift - The FARO Swift is designed to accurately and quickly capture large areas. The Faro Swift combines the laser scanning capability of the
Focus along with the ScanPlan handheld mapper to allow for quickly capturing manufacturing areas or documenting existing buildings. FARO
Webshare software allows for an easy to use web based platform to easily view the 3D point cloud data captured by Swift. This solution is
primarily sold to customers in the AEC and public safety industries.
FARO Software. We provide a complete portfolio of software solutions that integrate with FARO hardware products to merge data and provide
collaborative workflows and applications.
• CAM2 allows users in the 3D metrology market to efficiently fulfill quality assurance and inspection tasks.
®
•
•
BuildIT Construction is a construction quality control software solution that leverages reality data to uncover design deviations compared to
construction industry standards.
BuildIT Metrology is a 3D metrology software platform for alignment, inspection and build applications.
7
Table of Contents
•
•
•
•
BuildIT Projector allows manufacturers to plan and operate imaging laser projection and verification workflows to improve the quality and speed
of assembly processes.
FARO SCENE software combines ease-of-use, networking, and an enhanced 3D experience to deliver a complete scan processing solution. With
SCENE, customers can display, analyze, administer and edit 3D measurements in point clouds.
FARO Zone allows public safety professionals to diagram, analyze and share any scene, available in both 2D and 3D. The software combines
data to accelerate forensic crime investigations, crashes and pre-incident planning.
FARO As-Built
enables AEC professionals to integrate reality data into any CAD and virtual design environment for buildings.
TM
• Webshare is a native cloud platform that allows users to collaborate, view, share and explore 3D reality data security and directly from any
common web browser.
Warranties, Software Maintenance and Services. We generally warrant our products against defects in design, materials and workmanship for one
year. To support our product lines, we also separately sell hardware service contracts that typically range from one year to three years, software
maintenance contracts which enable our customers to receive the latest software updates and typically range from one year to three years, and
comprehensive support, training and technology consulting services to our customers.
Customers
Our sales are diversified across a broad number of over 15,000 customers worldwide in a range of metrology, reverse engineering, factory
automation, building information modeling, public safety and other applications. Our metrology, reverse engineering and factory automation applications
are purchased primarily by customers in the automotive and aerospace markets and a diverse array of manufacturing customers from small machine shops
to large industrial manufacturers. Applications are used by these customers for alignment, part inspection, dimensional analysis, first article inspection,
incoming and in-process inspection, machine calibration, non-contact inspection, robot calibration, tool building and setup, and assembly guidance. Our
building information modeling applications are purchased primarily by customers in the AEC markets. Applications are used by these customers for as-
built documentation, construction monitoring, surveying, asset and facility management, and heritage preservation. Our public safety applications are
purchased primarily by law enforcement agencies, private investigators, and forensic experts and are used for capturing environmental or situational scenes,
crash and fire scene investigations and environmental safety evaluations. Our ten largest customers by revenue represented an aggregate of approximately
3.8% of our total sales in 2020. No customer represented more than 1.0% of our sales in 2020.
Sales and Marketing
We sell our products worldwide through direct sales and service offices, as well as third-party distributors and resellers. We have direct sales
personnel in Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Portugal, Singapore, South
Korea, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and the United States. Our sales and marketing efforts use a process of
integrated lead qualification and sales demonstration. Once a customer opportunity is identified, we employ a team-based sales approach involving inside
and outside sales personnel. Each team has the ability to sell multiple product lines. We employ a variety of marketing techniques to promote brand
awareness and customer identification. As of December 31, 2020, we employed 511 sales and marketing specialists globally.
Research and Development
We believe that our future success depends, in part, on our ability to maintain what we believe to be our technological leadership, which will require
ongoing enhancements of both our hardware and software products and the development of new applications and products that provide 3D measurement
and imaging solutions. The field of 3D measurement and imaging continues to expand, and new technologies and applications will be essential to
competing in this market. Accordingly, we intend to continue to make substantial investments in the development of new technologies, the
commercialization of new products that build on our existing technological base, and the enhancement and development of additional applications for our
products.
8
Table of Contents
Our research and development efforts are directed primarily at enhancing the functional adaptability of our current products and developing new and
innovative products that respond to specific requirements of the emerging market for 3D measurement and imaging solutions. Research and development
activities, especially with respect to new products and technologies, are subject to significant risks, and there can be no assurance that any of our research
and development activities will be completed successfully or on schedule, or, if completed, will be commercially accepted.
At December 31, 2020, we employed 258 scientists and technicians in our research and development efforts. Research and development expenses
were approximately $42.9 million in 2020, compared to $44.2 million in 2019 and $46.1 million in 2018.
Intellectual Property
We own approximately 702 patents and pending patent applications worldwide, which generally expire on a rolling basis between 2021 and 2045. We
also own approximately 90 trademark registrations worldwide, with 46 pending trademark applications.
Our success and ability to maintain a competitive position depends, in large part, on our ability to protect our intellectual property. We rely on a
combination of contractual provisions and trade secret laws to protect our proprietary information. However, there can be no assurance that the steps taken
by us to protect our trade secrets and proprietary information will be sufficient to prevent misappropriation of our proprietary information or preclude third-
party development of similar intellectual property.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. We intend to vigorously defend our proprietary rights against infringement by third parties. However, policing
unauthorized use of our products is difficult, particularly in foreign countries, and we may be unable to determine the extent, if any, to which unauthorized
uses of our products exist. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United
States.
We do not believe that any of our products infringe on the valid, proprietary rights of third parties. There can be no assurance, however, that third
parties will not claim infringement by us with respect to current or future products. Such claims, with or without merit, could be time consuming, result in
costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements, which could have a material adverse effect upon
our business, operating results and financial condition. In addition, such royalty or licensing agreements, if required, may not be available on terms
acceptable to us, if at all.
Manufacturing and Assembly
Manufacturing consists primarily of assembling and integrating components and subassemblies purchased from suppliers into finished products. The
primary components, which include machined parts and electronic circuit boards, are produced by subcontractors according to our specifications. Products
are assembled, calibrated and tested for accuracy and functionality before shipment. We perform limited in-house circuit board assembly and component
part machining. Typically, we enter into purchase commitments for manufacturing components to cover production requirements for 60 to 120 days. We
have entered, and may continue to enter, into longer agreements to purchase sufficient inventory to satisfy warranty commitments or to ensure adequate
component availability. To date, we have not experienced any significant difficulty in locating and obtaining the materials necessary to fulfill our
production schedules.
Our manufacturing, engineering, and design headquarters have been registered to the ISO 9001 standard since July 1998. Semi-annual surveillance
audits have documented continuous improvement to this multinational standard. Currently, our manufacturing sites in Lake Mary, Florida; Exton,
Pennsylvania; Stuttgart, Germany; Schaffhausen, Switzerland; and Singapore are jointly registered to ISO 9001. Our FARO Laser Tracker, FaroArm , and
FAROBlu and Prizm laser line probe products are all registered to ISO 17025:2005. We continue to examine our scope of registration as our business
evolves, and we have chosen English as the standard business language for our operations.
TM
TM
®
Our efforts to register our manufacturing, engineering and design headquarters to the ISO 9001 standard in concert with the ISO 9001:2015 Quality
Management System Certification verifies our commitment to quality through an internationally recognized standard. Additionally, we take a global
approach to ISO 17025:2005 regarding the recognition of the Competence of Calibration and Testing Laboratories, seeking to have all locations registered
with similar scopes of accreditation and capabilities for the products generated and serviced.
9
Table of Contents
We manufacture our FARO Quantum 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
facility located in Florida for customer orders from the Americas. We manufacture our FARO Focus laser scanner in our manufacturing facilities located in
Germany and Switzerland for customer orders from EMEA and the Asia-Pacific region, and in our manufacturing facility located in Pennsylvania for
customer orders from the Americas. We manufacture our FARO Laser Tracker and our FARO Laser Projector products in our facility located in
Pennsylvania. We expect all of our existing manufacturing facilities to have the production capacity necessary to support our volume requirements during
2021.
Competition
Our measurement systems compete in the broad and highly competitive market for measurement devices for manufacturing and industrial
applications, which, in addition to portable articulated arms, laser trackers, 3D imaging and laser scanner products, consist of fixed-base CMMs, templates
and go/no-go gages, check fixtures, handheld measurement tools, and various categories of surveying equipment. In the FaroArm portfolio, FARO Laser
Tracker, and FARO Focus solution lines, we compete primarily with Hexagon Manufacturing Intelligence, a division of Hexagon AB; Automated
Precision, Inc.; Artec Europe, S.a.r.l.; Leica Geosystems AG, a division of Hexagon AB; and Trimble Inc. In the FARO Laser Projector product line, we
compete primarily with Virtek Vision International, a division of Gerber Technology LLC. We also compete in these product lines with a number of other
smaller companies. We compete on the basis of technical innovation, product performance, quality and value with respect to all of our products.
®
We will be required to make continued investments in technology and product development to maintain and extend the technological advantage that
we believe we currently have over our competition. However, we cannot be certain that our technology or our product development efforts will allow us to
successfully compete as the industry evolves. As the market for our measurement systems expands, additional competition may emerge, and our existing
and future competitors may commit more resources to the markets in which we participate.
Government Regulation
Our operations are subject to numerous governmental laws and regulations, including those governing antitrust and competition, the environment,
collection, recycling, treatment and disposal of covered electronic products and components, import and export of products, currency conversions and
repatriation, taxation of foreign earnings, and the use of local employees and suppliers. Our foreign operations are subject to the U.S. Foreign Corrupt
Practices Act, or FCPA, and similar foreign anti-corruption laws, which makes illegal any payments to government officials or government employees that
are intended to induce their influence to assist us or to gain any improper advantage for us. We operate in certain regions in the Middle East, Africa, Latin
America and Asia-Pacific that are more prone to risk under these anti-corruption laws.
Manufacturers of electrical goods are subject to the European Union’s RoHS2 and WEEE directives, which took effect during 2006. RoHS2 prohibits
the use of lead, mercury and certain other specified substances in electronics products, and WEEE makes producers of electrical goods financially
responsible for specified collection, recycling, treatment, and disposal of covered electronic products and components. We currently hold RoHS2 and
WEEE registration, and we believe we are in compliance with such directives of the European Union.
In addition, a number of data protection laws impact, or may impact, the manner in which we collect, process and transfer personal data. Most
notably, the European Union’s General Data Protection Regulation (“GDPR”), which went into effect in May 2018, expands data protection compliance
obligations and authorizes significantly increased fines for noncompliance, requiring additional compliance resources and efforts on our part. Further, a
number of other regions where we do business, including the United States, the Asia-Pacific region and Latin America, have enacted or are considering
new data protection regulations that may impact our business activities that involve the processing of personal data. In addition, U.S. and international laws
that have been applied to protect user privacy (including laws regarding unfair and deceptive practices in the U.S. and GDPR in the EU) may be subject to
evolving interpretations or applications in light of privacy developments. For example, evolution of laws governing the cross-border transfer of data, such
as the invalidation of the EU–U.S. Privacy Shield, creates additional uncertainty around the legality and logistics of such transfers. Compliance with
enhanced data protection laws requires additional resources and efforts, and noncompliance with personal data protection regulations could result in
increased regulatory enforcement and significant monetary fines and costs.
10
Table of Contents
We currently sell our products and related services to the U.S. Government (the “Government”) under two General Services Administration (“GSA”)
Federal Supply Schedule contracts (the “GSA Contracts”). The Government, as well as state and local governments, can typically terminate or modify their
contracts with us either at their discretion or if we default by failing to perform under the terms of the applicable contract, which could expose us to liability
and impede our ability to compete in the future for contracts and orders. Our sales to the Government under the GSA Contracts represented approximately
2.8% of our total sales for 2020.
Backlog and Seasonality
At December 31, 2020, we had orders representing approximately $19.7 million in sales outstanding, of which $7.9 million related to services that
we expect to deliver within one year. The product-related outstanding orders as of December 31, 2020 were $11.8 million, of which $4.2 million were
shipped by February 15, 2021. As of February 15, 2021, we had orders representing approximately $16.4 million in sales outstanding, inclusive of 2020
open and undelivered orders, of which $8.1 million related to service orders and $8.3 million were product-related orders. We believe that a significant
portion of the outstanding product-related orders as of February 15, 2021 will be shipped during 2021. At December 31, 2019 and 2018, we had orders
representing approximately $28.0 million and $17.5 million in sales outstanding, respectively.
We typically experience greater order volume during the fourth quarter, as customers spend the remaining balances of their capital expenditure
budgets.
Human Capital
At December 31, 2020, we had 1,364 full-time employees worldwide, consisting of 511 sales and marketing professionals, 265 customer
service/training/application engineering specialists, 192 production and supply chain staff, 258 research and development staff, and 138 administrative
staff. We are not a party to any collective bargaining agreements and believe our employee relations are satisfactory.
The Company believes that our future growth and success will depend in part on our ability to attract and retain highly-skilled personnel. The
executive management team is responsible for developing and executing the Company's human capital strategy. The human capital strategy includes the
attraction, acquisition, engagement and development of the Company's employees necessary to execute on our strategy and design of employee
compensation and benefits programs to fit the needs of our worldwide employees. The CEO and Chief People Officer regularly update the Company's
board of directors on key areas of our human capital strategy, including the following:
Diversity and Inclusion: FARO believes in the benefits workforce diversity can provide. Innovation is critical for any technology company – and we
believe that it benefits by the creative thinking that happens when people with different perspectives and backgrounds come together. We believe diverse
teams can better relate to the many and varied needs of our customers. We promote a culture where individual differences are valued which also allows us
to attract the very best talent further encouraging our people to reach their full potential. As part of this cultural commitment, we also invest in formal
programs designed to foster diversity through networking, talent management and targeted career development.
We conduct regular workforce engagement surveys to take the “pulse” of our people and gather their insights. We are committed to making all
benefit and employment-related decisions in compliance with established equal employment opportunity statutes and without regard to religion, national
origin, age, gender, race, color, ancestry, sexual orientation, disability, marital status, citizenship, pregnancy, medical condition or any other protected class
status, as defined by local, state or federal laws.
We believe strongly in building a global workforce that is diverse and that can build strong working relationships with our customers in the countries
we operate. We support an inclusive culture and motivate our workforce to be themselves while at work. We are committed to providing our employees
with a positive and safe work environment that is free of discrimination, harassment and workplace violence. We encourage our employees to embrace
different ideas, strengths, interests and cultural backgrounds. People development, and inclusion are important to us. We understand the importance of
giving back to the communities in which we live and work.
11
Table of Contents
Health and Safety: Health, safety, and the well-being of our employees is one of our top priorities. We strive to achieve world-class safety levels on
an annual basis. Our safety culture focuses on reducing workplace injuries and is supported by effective communication and reporting of workplace
injuries. Due to the COVID-19 pandemic, most of our non-manufacturing and technical service personnel continue to work remote from our offices. Our
global manufacturing operations, including facilities located in Exton, Pennsylvania, Lake Mary, Florida, Germany, Switzerland and Singapore continue to
be designated as essential business and therefore continue to operate. To protect our employees in facilities in which our teams operate, we have employed
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.
Available Information
We make available, free of charge on our Internet website at www.faro.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. You can find these
reports on our website at www.faro.com by first clicking “Investor Relations” and then “SEC Filings.” We have included our website address throughout
this filing as textual references only. The information on, or accessible through, our website is not a part of, or incorporated into, this Annual Report on
Form 10-K. You may also access this information at the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
12
Table of Contents
ITEM 1A. RISK FACTORS
The statements under this heading describe the most significant risks to our business identified by management and should be considered carefully in
conjunction with the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of
this Annual Report on Form 10-K and in our Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this Annual Report on Form
10-K before deciding to invest in, or retain, shares of our common stock.
Any of the following risks and uncertainties could materially and adversely affect our business, results of operations, liquidity, and financial
condition. These 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 do not consider to be material to our business.
Risks Related to Our Business and Industry
Competitors may develop products that make our products obsolete or less competitive.
The 3D measurement and imaging solutions market is characterized by rapid technological change. Competitors may develop new or improved
products, processes or technologies that may make our products obsolete or less competitive.
As a result, our success depends, in part, on our ability to maintain our technological advantage by developing new products and applications and
enhancing our existing products, which can be complex and time-consuming and require substantial investment. Significant delays in new product releases
or difficulties in developing new products could adversely affect our business and results of operations. We can provide no assurance that we will be able to
adapt to evolving markets and technologies or maintain our technological advantage.
Our growth depends on the ability of our products to attain broad market acceptance.
The market for traditional fixed-base coordinate measurement machines, or CMMs, check fixtures, handheld measurement tools, and surveying
equipment is mature. Part of our strategy is to continue to displace these traditional measurement devices. Displacing traditional measurement devices and
achieving broad market acceptance for our products requires significant effort to convince customers to reevaluate their historical measurement procedures
and methodologies.
We market closely interdependent hardware products and related software for use in measurement, inspection, and high density surveying
applications. Substantially all of our revenues are currently derived from sales of these products and software, and we plan to continue our business strategy
of focusing on the software-driven, 3D measurement and imaging solutions market. Consequently, our financial performance will depend, in large part, on
computer-based measurement, inspection and high density surveying products achieving broad market acceptance. If our products cannot attain broad
market acceptance, we will not grow as anticipated and may be required to make increased expenditures on research and development for new applications
or new products.
We may not be able to identify or consummate acquisitions or achieve expected benefits from or effectively integrate acquisitions, which could harm
our growth.
Our growth strategy partly depends on our ability to obtain additional technologies, complementary product lines and sales channels through selective
acquisitions and strategic investments. We may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future
acquisitions, if necessary, on satisfactory terms or otherwise complete acquisitions in the future. In the past, we have used our stock as consideration for
acquisitions. Our common stock may not remain at a price at which it can be used as consideration for acquisitions without diluting our existing
shareholders, and potential acquisition candidates may not view our stock attractively.
In addition, realization of the benefits of acquisitions often requires integration of some or all of the sales and marketing, distribution, manufacturing,
engineering, software development, customer service, finance and administrative organizations of the acquired companies. The integration of acquisitions
demands substantial attention from senior management and the management of the acquired companies. Our recent acquisitions are, and any future
acquisitions may be, subject to a variety of risks and uncertainties including:
•
•
•
the inability to assimilate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be
located in diverse geographic regions);
the inability of the acquired business to meet our performance expectations;
the inability to maintain uniform standards, controls, procedures and policies;
13
Table of Contents
•
•
the need or obligation to divest portions of the acquired companies; and
the potential impairment of relationships with customers.
We cannot offer any assurance that we will be able to identify, complete or successfully integrate any suitable acquisitions, that any acquired
companies will operate profitably, or that we will realize the expected synergies and other benefits from any acquisition.
The buying process for most of our customers for our measurement products is highly decentralized and typically requires significant time and expense
for us to further penetrate the potential market of a specific customer, which may delay our ability to generate additional revenue.
Our success depends, in part, on our ability to further penetrate our customer base. During 2020, approximately 81% of our revenue was attributable
to sales to our existing customers. If we are not able to continue to further penetrate our existing customer base, our future sales may decline. However,
most of our customers have a decentralized buying process for measurement devices, and we must spend significant time and resources to increase
revenues from a specific customer. For example, we may provide products to only one of our customer’s manufacturing facilities or for a specific product
line within a manufacturing facility. We cannot offer any assurance that we will be able to maintain or increase the amount of sales to our existing
customers, which could adversely affect our financial results.
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 the severity of a “second wave” or other additional
periods of increases or spikes in the number of COVID-19 cases in areas in which we operate, disruptions to our business, changes in consumer behaviors,
restrictions on individual and business activities, and financial liquidity concerns, has created significant volatility in the macro-economic environment and
led to reduced economic activity. There have been and continues to be 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.
Most of our non-manufacturing and technical service personnel continue to work from home, which began in March 2020. Our global manufacturing
operations, including facilities located in Exton, Pennsylvania, Lake Mary, Florida, Germany, Switzerland and Singapore continue to be designated as
essential business and therefore continue to operate. To protect our employees in facilities in which our teams operate, we have and continue to employ
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 and future possible subsequent outbreaks. The impacts of the pandemic include, but are not limited to, the
following:
•
•
•
•
•
•
Potential production slowdowns of our factories in impacted countries or potential supply and distribution chain disruption, which could in the
future result in increased costs and decreased efficiency, and which have and could impact our ability to respond to rapid changes in demand;
The demand for our products and services, and whether the pandemic leads to recessionary conditions in any of our key markets, including
potential trade customer financial restructuring or insolvency and increases in accounts receivable balances with our trade customer base; Potential
future impairment in value of our tangible or intangible assets could be recorded as a result of weaker economic conditions;
Potential significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future, and
which has, together with operational impacts noted above, necessitated certain recent liquidity creation and preservation actions as a precautionary
measure;
Fluctuations in forecasted earnings before tax and corresponding volatility in our effective tax rate;
Potential operational disruption if key employees terminate their employment or become ill, as well as diversion of our management team's
attention from non-COVID-19 related matters; and
Potential investigations, legal claims or litigation against us for actions we have taken or may take, or decisions we have made or may make, as a
consequence of the pandemic;
14
Table of Contents
As such, the ultimate impact on our financial condition and results of operations cannot be determined at this time. In 2020, we have been adversely
affected and continue to expect our business, financial condition and results of operations to be adversely affected.
In addition, we cannot predict the impact that COVID-19 will have on our trade customers, suppliers, consumers, and each of their financial
conditions; however, any material effect on these parties could adversely impact us. The impact of COVID-19 may also exacerbate other risks discussed for
the year ended December 31, 2020, any of which could have a material adverse effect on our business, financial condition and results of operations.
We have experienced a significant transition in our executive management team in the last two years. Any delay in the integration of our executive
management team or our failure to successfully attract and retain qualified personnel could have an adverse effect on our business and results of
operations.
Our executive management team has gone through a significant transition in the last two years, including the hiring of a new President and Chief
Executive Officer and the hiring of a new Chief Financial Officer. Any delay in the integration of our executive management team could affect our ability
to develop, implement and execute our business strategies and plans, which could have an adverse effect on our business and results of operations.
In addition, if we fail to successfully attract qualified personnel or to retain our executive management team and other key personnel, our sales,
profitability and growth and our ability to execute our business strategies and plans could be adversely impacted. Turnover of management could also
adversely impact our stock price and our client relationships and could make recruiting for future management positions more difficult. We face
competition for qualified personnel, which could result in increased salaries and other compensation expenses and could negatively affect our profitability.
We derive a substantial part of our revenues from our international operations, which are subject to greater volatility and often require more
management time and expense to achieve profitability than our domestic operations.
We derive more than half of our revenues from international operations. Our international operations are subject to various risks, including:
•
•
•
•
•
•
•
difficulties in staffing and managing foreign operations;
political and economic instability;
unexpected changes in regulatory requirements and laws;
longer customer payment cycles and difficulty collecting accounts receivable;
compliance with export and import regulations, including tariffs, and trade restrictions;
governmental restrictions on the transfer of funds to us from our operations outside the United States; and
burdens of complying with a wide variety of foreign laws and labor practices.
Several of the countries where we operate have emerging or developing economies, which may be subject to greater currency volatility, negative
growth, high inflation, limited availability of foreign exchange and other risks. These factors may harm our results of operations and any measures that we
may implement to reduce the effect of volatile currencies and other risks of our international operations may not be effective.
We may experience volatility in our stock price.
The price of our common stock has been, and may continue to be, highly volatile in response to various factors, many of which are beyond our
control, including:
•
•
•
•
•
fluctuations in demand for, and sales of, our products or prolonged downturns in the industries that we serve;
actual or anticipated variations in quarterly or annual operating results;
general economic uncertainties;
speculation in the press or investment community; and
announcements of technological innovations or new products by us or our competitors.
The market price of our common stock may also be affected by our inability to meet analyst and investor expectations and failure to achieve projected
financial results. Any failure to meet such expectations or projected financial results, even if minor, could cause the market price of our common stock to
decline significantly. Volatility in our stock price may result in the inability of our shareholders to sell their shares at or above the price at which they
purchased them.
15
Table of Contents
Our relatively small public float and daily trading volume have in the past caused, and may in the future result in, significant volatility in our stock
price. At December 31, 2020, we had approximately 17.9 million shares outstanding held by non-affiliates. Our daily trading volume for the year ended
December 31, 2020 averaged approximately 103,881 shares.
In addition, stock markets have experienced in the past and may in the future experience a high level of price and volume volatility, and the market
prices of equity securities of many companies have experienced in the past and may in the future experience wide price fluctuations not necessarily related
to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past,
securities class action lawsuits frequently have been instituted against companies following periods of volatility in the market price of such companies’
securities. If any such litigation is instigated against us, it could result in substantial costs and a diversion of management’s attention and resources, which
could have a material adverse effect on our results of operations and financial condition.
We are subject to risks of natural disasters and other catastrophic events.
The occurrence of one or more natural disasters, such as fires, explosions, tornadoes, hurricanes, earthquakes, floods and other forms of severe
weather, or the occurrence of acts of war, political unrest, terrorist activities or labor issues, including due to public health crises such as pandemics and
epidemics, where we have a manufacturing facility could result in physical damage to, and complete or partial closure of, our manufacturing facilities,
which could adversely affect our business, operations and financial performance. Interruptions in our manufacturing operations or damage to our
manufacturing facilities could reduce our revenues and increase our costs, and the extent of losses from natural disasters, severe weather and such other
events will be a function of both the severity of the event and the total amount of insured exposure. Although we maintain insurance coverage, we can offer
no assurance that our insurance coverage will be adequate to cover any losses or that we will be able to maintain insurance at a reasonable cost in the
future. If losses from business interruption or property damage exceed the amounts for which we are insured, our business, results of operations and
financial condition could be adversely affected.
Developments relating to the United Kingdom's (“UK”) exit from European Union membership could adversely impact our business.
On June 23, 2016, the UK held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.”
Following a protracted period of negotiation, the UK ceased to be a member of the European Union on January 31, 2020, after the ratification and approval
of a withdrawal agreement by the European Union and the UK. The withdrawal agreement provided for a transition period until December 31, 2020 (the
“Transition Period”), during which the terms of the future trading relationship between the European Union and the UK were negotiated. Throughout the
Transition Period, the legal and regulatory framework between the UK and the European Union had remained the same.
Brexit and the perceptions as to its potential impact have and may continue to adversely affect business activity and economic conditions in Europe
and globally and could contribute to instability in global financial and foreign exchange markets after the Transition Period. Brexit could also have the
effect of imposing greater restrictions on, and costs associated with, imports and exports between the UK and European Union member states, including,
without limitation, the imposition of tariffs and increased regulatory complexities. The hiring and retention of skilled labor may also become more
challenging if the free movement of workers between the European Union and the UK ends. We may also be impacted by potential exchange rate volatility.
Any of these factors could adversely affect our business and operating results by adversely affecting customer demand and our relationships with customers
in the UK and the European Union. In addition, as a result of Brexit, other European countries may seek to conduct referenda with respect to their
continuing membership with the European Union.
Given these possibilities and others we may not anticipate, as well as the lack of comparable precedent, the full extent to which we will be affected by
Brexit is uncertain. Any of the potential negative effects of Brexit could adversely affect our business, results of operations and financial condition.
We may face difficulties managing the effects of any future growth.
If our business grows rapidly in the future, we expect it to result in:
•
•
•
increased complexity;
increased responsibility for existing and new management personnel; and
incremental strain on our operations and financial and management systems.
If we are not able to manage the effects of any future growth, our business, financial condition and operating results may be harmed.
16
Table of Contents
Reductions in defense spending could adversely affect our business.
Certain of our customers operate in the defense sector and depend significantly on U.S. government spending. In August 2011, Congress enacted the
Budget Control Act of 2011, which imposed spending caps and certain reductions in defense spending through 2021. Automatic spending reductions,
referred to as sequestration, were implemented in March 2013. Ongoing budgetary discussions in the federal government may result in other cuts to defense
spending. Reductions in defense spending that impact the aerospace and defense industries, or uncertainty regarding future levels of government
expenditures, could have an adverse effect on our results of operations. Additionally, if Congress is unable to pass appropriations bills in a timely manner, a
government shutdown could result, which may have impacts in addition to those resulting from budget cuts, sequestration impacts or program-level
appropriations, including payment delays, impairment of our ability to perform work on existing contracts and reductions in future orders.
Anti-takeover provisions in our articles of incorporation, bylaws and provisions of Florida law could delay or prevent a change of control that you
may favor.
Our articles of incorporation, bylaws and provisions of Florida law could make it more difficult for a third party to acquire us. Although we believe
such provisions are appropriate to protect long-term value for our shareholders, these provisions could discourage potential takeover attempts and could
adversely affect the market price of our shares. Because of these provisions, you might not be able to receive a premium on your investment. These
provisions include:
•
•
•
•
a limitation on shareholders’ ability to call a special meeting of our shareholders;
advance notice requirements to nominate directors for election to our board of directors or to propose matters that can be acted on by shareholders
at shareholder meetings;
our classified board of directors, which means that approximately one-third of our directors are elected each year; and
the authority of the board of directors to issue, without shareholder approval, preferred stock with such terms as the board of directors may
determine.
The provisions described above could delay or make more difficult transactions involving a change in control of the Company or our management.
Risks Related to Our Financial Position and Need for Additional Capital
Our financial performance is dependent on the conditions of various industries, including the automotive, aerospace, and heavy-equipment industries,
which have from time to time experienced, and may again experience, significant disruptions in the economic environment.
A significant portion of our sales are to manufacturers in the automotive, aerospace, and heavy equipment industries. We are dependent upon the
continued viability and financial stability of our customers in these industries, which are highly cyclical and dependent upon the general health of the
economy and consumer spending.
Because a significant portion of our revenues and expenses are denominated in foreign currencies, we face significant exposure to foreign exchange
rate risk.
Our results of operations are affected by fluctuations in exchange rates, which have caused, and may in the future cause, significant fluctuations in our
quarterly and annual results of operations. Fluctuations in exchange rates may have a material adverse effect on our results of operations and financial
condition and could result in potentially significant foreign exchange gains and losses. Additionally, currency fluctuations could require us to increase
prices to foreign customers, which could result in lower net sales by us to those customers. If we do not adjust the prices for our products in response to
unfavorable currency fluctuations, we could be forced to sell our products at a lower margin or at a net loss. 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
will increase.
17
Table of Contents
We may be unable to recognize the anticipated benefits of our Restructuring Plan and our new strategic plan.
On February 14, 2020, our Board of Directors approved a global Restructuring Plan, which is intended to support our new strategic plan in an effort
to improve operating performance and ensure that we are appropriately structured and resourced to deliver 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 completion of the Restructuring Plan. These activities are expected to be substantially complete by the
end of 2021. 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.
Changes in tariffs and other export regulations could increase the cost of our products sold to our international customers, which could negatively
impact our sales and profitability.
Our international sales operations are subject to extensive laws, governmental regulations and policies, including but not limited to tariffs and other
export regulations. Changes in export regulations could increase the cost of our products sold as exports to our international customers. If our international
customers are not willing to absorb the incremental costs resulting from those tariffs or other export regulations, it could negatively impact our sales to such
customers, as well as our profitability.
We may not be able to achieve financial results within our target goals, and our operating results may fluctuate due to a number of factors, many of
which are beyond our control.
Our ability to achieve financial results that are within our goals is subject to a number of factors beyond our control. Moreover, our annual and
quarterly operating results have varied significantly in the past and likely will vary significantly in the future. Factors that cause our financial results to
fluctuate include, but are not limited to, the following:
•
•
•
•
•
•
adverse changes in the manufacturing industry and general economic conditions;
the effectiveness of sales promotions;
geographic expansion in our regions;
training and ramp-up time for new sales people;
investments in strategic sales, product or other initiatives;
investments in technologies and new products and product enhancements, including costs associated with new development and product
introductions, and the timing and market acceptance of new products and product enhancements;
• manufacturing inefficiencies related to new product introductions;
•
excess or obsolete inventory, shrinkage or other inventory losses due to product obsolescence, change in demand for our products, scrap or
material price changes;
impairment charges of goodwill or intangible assets;
expansion of our manufacturing capability;
the size and timing of customer orders, many of which are received towards the end of a quarter;
the amount of time that it takes to fulfill orders and ship our products;
the length of our sales cycle to new customers;
customer order deferrals in anticipation of new products and product enhancements;
start-up costs and ramp-up time associated with opening new sales offices outside of the United States;
variations in our effective income tax rate and difficulty in predicting our effective tax rate on a quarterly and annual basis; and
litigation and regulatory action brought against us.
•
•
•
•
•
•
•
•
•
Any one or a combination of these factors could adversely affect our annual and quarterly operating results in the future and could cause us to fail to
achieve our target financial results.
18
Table of Contents
Future impairments of our goodwill, intangible and long-lived assets could adversely affect our financial condition and results of operations.
Because the historical and projected future performance of certain of our recently acquired operations were lower than our expectations, the
technologies, intellectual property, know-how and related intangibles were no longer aligned with our go-forward strategies, and due to other initiatives in
connection with our new strategic plan, in the fourth quarter of 2019, we recorded an impairment of $35.2 million on our non-current assets, which charge
was included in operating expenses. Further, we disposed of certain of our operations in the second quarter of 2020. See Note 7, “Goodwill” and Note 8,
“Intangible Assets” to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further
information regarding the impairment. We currently hold a total of $13.3 million in intangible assets, net of accumulated amortization, and $57.5 million in
goodwill at December 31, 2020. Events may occur or circumstances may change such that the carrying value is not recoverable or it becomes more likely
than not that the fair value of long-lived assets is reduced below the carrying value of the assets, which could result in a further write-down of our assets.
In addition, certain of our long-lived assets such as leasehold improvements, machinery, equipment, and sales demonstration assets may experience
impairment as a result of events such as the closure of sites, introduction of new products, decisions to exit certain products or markets, and changes in
technology. We depreciate long-lived assets and amortize intangible assets at levels we believe are adequate; however, an impairment of these assets could
have a material adverse impact on our business, financial condition and results of operations.
If we fail to establish and maintain effective internal controls over financial reporting, our financial statements could contain a material misstatement,
which could adversely affect our business and financial condition.
Under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated by the SEC, companies are required to conduct a comprehensive
evaluation of their internal controls over financial reporting. As part of this process, we are required to document and test our internal controls over
financial reporting, management is required to assess and issue a report concerning our internal controls over financial reporting, and our independent
registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting. Our internal controls over
financial reporting may not prevent or detect misstatements because of their inherent limitations, including the possibility of human error, the
circumvention or overriding of controls, or fraud. Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and may not be prevented or detected on a timely basis. Even effective internal controls over financial reporting can provide only reasonable
assurance with respect to the preparation and fair presentation of financial statements. If we fail to adequately establish and maintain effective internal
controls over financial reporting, our financial statements may contain material misstatements, and we could be required to restate our financial results.
This could cause us to fail to meet our reporting obligations, lead to a loss of investor confidence and adversely affect our business, our financial condition,
and the trading price of our common stock.
Our financial results may be adversely affected by exposure to additional tax liabilities.
As a multinational corporation, we are subject to income tax in the United States and numerous foreign jurisdictions. Our effective tax rate is directly
impacted by the application of complex tax laws and regulations and is highly dependent upon the geographic mix of our worldwide earnings or losses, the
tax regulations in each country or geographic region in which we operate, and the availability of tax credits and loss carry-forwards. Our provision for
income taxes and tax liability in the future could be adversely affected by many factors including, but not limited to, income before taxes being lower than
anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretation of accounting principles. Application of tax
laws and regulations is also subject to legal and factual interpretation, judgment, and uncertainty. Further, tax laws are subject to change as a result of
changes in fiscal policy and legislation and the evolution of regulations and court rulings.
The income and non-income tax regimes we are subject to or operate under may be subject to significant change. Changes in tax laws or tax rulings,
or changes in interpretations of existing laws, could materially affect our financial position and results of operations. Certain countries in Europe, as well as
a number of other countries and organizations, have recently proposed or recommended changes to existing tax laws that could significantly increase our
tax obligations in many countries where we do business or require us to change the manner in which we operate our business. The Organization for
Economic Cooperation and Development (“OECD”) has continued to issue guidelines and proposals related to its Base Erosion and Profit Sharing
initiative, which could potentially result in legislative changes to the tax treatment of our foreign operations, as well as impact our effective tax rate and the
value of our deferred tax assets.
19
Table of Contents
A valuation allowance may be required for our U.S. deferred tax assets, which may reduce our earnings and have a material adverse effect on our
business, results of operations and financial condition.
Our balance sheet includes $47.5 million in deferred tax assets. Approximately half of that amount relates to U.S. deferred tax assets. On a quarterly
basis, we assess our ability to realize our deferred tax assets to ensure no valuation allowance is required. The ultimate realization of our U.S. deferred tax
assets is dependent upon our ability to generate future U.S. taxable income during the periods in which those deferred tax assets would be deductible. Our
inability to realize our U.S. deferred tax assets may reduce our earnings and have a material adverse effect on our business, results of operations and
financial condition. Based on an evaluation we conducted, we determined that it was not necessary to establish a valuation allowance against any of our
U.S. deferred tax assets as of December 31, 2020. However, we will continue to monitor whether a valuation allowance is necessary, and if we are required
to establish a valuation allowance against our deferred tax assets, it could have a material adverse effect on our results of operations and financial condition
Risks Related To Product Development And Regulatory Process
Product failures or product availability and performance issues could result in increased warranty costs and delays in new product introductions and
enhancements, and could adversely affect our business and financial condition.
We regularly introduce new products and enhance existing products. The impact of new product introductions, including the costs associated with
new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, and
manufacturing inefficiencies associated with new product introductions could have an adverse effect on our business and financial condition. Failures in, or
performance issues impacting, our new or existing products could result in increased warranty costs, product recall costs, delays in new product
introductions or existing product enhancements, and a loss of sales and customers, which would have an adverse effect on our business and financial
condition. The supply of raw materials for a new or existing product could be delayed or constrained, or a key vendor could delay shipments, which may
decrease product availability, causing a loss of sales and customers.
Increases in the cost of raw materials or components used in our products could negatively impact our business and profitability.
Our products contain various raw materials, including steel, steel byproducts, aluminum and aluminum byproducts. We use raw materials directly in
manufacturing and in components that we purchase from our suppliers. These raw materials are subject to extensive laws, governmental regulations and
policies, including tariffs and other import restrictions. Changes to the laws, governmental regulations and policies governing these raw materials,
including tariffs and other import restrictions, have increased and could continue to increase the cost of such raw materials and, correspondingly, the cost of
manufacturing our products. If the costs of our raw materials further increase, whether due to changes in laws, governmental regulations or policies or for
other reasons, we may not be able to pass on these costs to our customers, which could have a material adverse effect on our business, results of operations
and financial condition. Even in the event that increased costs can be passed through to our customers, our gross margin percentages would decline.
Additionally, our suppliers are also subject to fluctuations in the prices of raw materials and may attempt to pass all or a portion of such increases on to us.
In the event they are successful in doing so, our margins would decline.
We compete with manufacturers of measurement systems and traditional measurement devices, many of which have more resources than us and may
develop new products and technologies.
Our measurement systems compete in the broad and highly competitive market for measurement devices for manufacturing and industrial
applications, which, in addition to portable articulated arms, laser trackers, 3D imaging and laser scanner products, consist of fixed-base CMMs, templates
and go/no-go gages, check fixtures, handheld measurement tools, and various categories of surveying equipment. In the FaroArm , FARO ScanArm,
FARO Laser Tracker
, and FARO Focus product lines, we compete primarily with Hexagon Manufacturing Intelligence, a division of Hexagon AB;
Automated Precision, Inc.; Artec Europe, S.a.r.l.; Leica Geosystems AG, a division of Hexagon AB; and Trimble Inc. In the FARO Laser Projector product
line, we compete primarily with Virtek Vision International, a division of Gerber Technology LLC. We also compete in these product lines with a number
of other smaller companies. We compete on the basis of technical innovation, product performance, quality and price with respect to all of our products.
TM
®
20
Table of Contents
We will be required to make continued investments in technology and product development to maintain the technological advantage that we believe
we currently have over our competition. Some of our competitors possess substantially greater financial, technical, and marketing resources than we
possess. Moreover, we cannot be certain that our technology or our product development efforts will allow us to successfully compete as the industry
evolves. If the market for our measurement systems expands, additional competition may emerge and our existing and future competitors may commit
more resources to the markets in which we participate. Our results of operations could be adversely affected by pricing strategies pursued by competitors or
technological or product developments by competitors.
We are subject to the impact of governmental and other similar certification processes and regulations, which could adversely affect our business and
results of operations.
Our operations are subject to numerous governmental laws and regulations, including those governing antitrust and competition, the environment,
collection, recycling, treatment and disposal of covered electronic products and components, import and export of products, currency conversions and
repatriation, taxation of foreign earnings and use of local employees and suppliers. An inability to comply with these regulations or obtain any necessary
certifications in a timely manner could have an adverse effect on our business and results of operations.
Manufacturers of electrical goods are subject to the European Union’s RoHS2 and WEEE directives, which took effect during 2006. RoHS2 prohibits
the use of lead, mercury and certain other specified substances in electronics products, and WEEE makes producers of electrical goods financially
responsible for specified collection, recycling, treatment, and disposal of covered electronic products and components. While we currently hold WEEE
registration and believe we are in compliance with the directives of the European Union, including the RoHS2 directive, parallel initiatives are being
proposed in other jurisdictions, including several states in the United States and China. If we do not comply with any such initiatives, our sales and results
of operations could be materially impacted.
In addition, a number of data protection laws impact, or may impact, the manner in which we collect, process and transfer personal data. Most
notably, the GDPR, which went into effect in May 2018, expands data protection compliance obligations and authorizes significantly increased fines for
noncompliance, requiring additional compliance resources and efforts on our part. Further, a number of other regions where we do business, including the
United States, the Asia-Pacific region and Latin America, have enacted or are considering new data protection regulations that may impact our business
activities that involve the processing of personal data. Compliance with enhanced data protection laws requires additional resources and efforts, and
noncompliance with personal data protection regulations could result in increased regulatory enforcement and significant monetary fines and costs, which
could have an adverse effect on our business, results of operations and financial condition.
Our sales to the U.S. government are subject to compliance with regulatory and contractual requirements, and noncompliance could expose us to
liability or impede current or future business.
The Government, as well as state and local governments, can typically terminate or modify their contracts with us either at their discretion or if we
default by failing to perform under the terms of the applicable contract, which could expose us to liability and impede our ability to compete in the future
for contracts and orders. The failure to comply with regulatory and contractual requirements could subject us to investigations, price reductions, up to treble
damages, fines or other sanctions and penalties. Additionally, violations of certain regulatory and contractual requirements could also result in us being
suspended or debarred from future government contracting.
We have sold our products and related services to the Government under General Services Administration Federal Supply Schedule contracts since
2002 and are currently selling our products and related services to the Government under two such GSA Contracts. Our sales to the Government under the
GSA Contracts were approximately $8.5 million, or approximately 2.8% of our total sales, for the year ended December 31, 2020. 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.
21
Table of Contents
As a result of the GSA Matter, for the fourth quarter 2018, we reduced our total sales by a $4.8 million estimated cumulative sales adjustment,
representative of the last six years of estimated overcharges to the Government under the GSA Contracts. In addition, for the fourth quarter of 2018, we
recorded $0.5 million of imputed interest related to the estimated cumulative sales adjustment, which increased Interest expense, net and resulted in an
estimated total liability of $5.3 million 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 conducted by our
outside legal counsel and forensic accountants. 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 $0.7 million of imputed interest related to the estimated cumulative sales adjustment for the
remainder of 2019, which increased Interest expense, net and resulted in a $6.5 million total incremental increase in the estimated total liability for the GSA
Matter.
In January 2020, we received requests for additional information from the GSA and its Office of Inspector General to which we corresponded through
June 2020. As a result of this continuing investigation, we reduced our total sales for the second quarter 2020 by an incremental $0.6 million sales
adjustment, reflecting an estimated aggregate overcharge of $11.2 million under the GSA Contracts for the period from July 2011 to September 2020. We
are working with the GSA in responding to any additional inquiries arising from the investigation. We recorded an incremental $0.2 million of imputed
interest related to the estimated cumulative sales adjustment for the third quarter of 2020 and determined in the fourth quarter of 2020 that an adjustment to
reduce imputed interest by $0.7 million was required. As of the date of the filing of this Annual Report on Form 10-K, we have recorded an aggregate
estimated total liability for the GSA Matter of $12.3 million.
We intend to cooperate fully with this and any other Government inquiries. The Government’s review of, or investigation into, this matter could result
in civil and criminal penalties, administrative sanctions, and contract remedies being imposed on us, including but not limited to, termination of the GSA
Contracts, repayments of amounts already received under the GSA Contracts, forfeiture of profits, damages, suspension of payments, fines, and suspension
or debarment from doing business with the Government and possibly U.S. state and local governments. We may also be subject to litigation and recovery
under the federal False Claims Act and possibly similar state laws, which could include claims for treble damages, penalties, fees and costs. As a result, we
cannot reasonably predict the outcome of the Government’s review of, or investigation into, this matter at this time or the resulting future financial impact
on us. Any of these outcomes could have a material adverse effect on our reputation, our sales, results of operations, cash flows and financial condition, and
the trading price of our common stock. In addition, we have incurred, and will continue to incur, legal and related costs in connection with the Review and
the Government’s response to this matter.
Any failure to comply with the Foreign Corrupt Practices Act or similar anti-corruption laws could subject us to fines and penalties.
In 2012, our monitorship expired pursuant to our settlement with the SEC and the United States Department of Justice, or DOJ, concerning certain
payments made by our subsidiary in China that may have violated the FCPA and other applicable laws. We are, of course, still subject to such laws and
have adopted and maintain a compliance program designed to ensure compliance with these laws; however, in light of our prior conduct, any future failure
to comply with any such continuing obligations could result in the SEC and the DOJ aggressively seeking to impose penalties against us. In addition, many
countries in which we operate have increased regulation regarding anti-corruption practices generally. Compliance with such regulations could be costly
and could adversely impact our results of operations or delay entry into new markets.
Risks Related to Intellectual Property
Any failure to protect our patents and proprietary rights in the United States and foreign countries could adversely affect our revenues.
Our success depends, in large part, on our ability to obtain and maintain patents and other proprietary rights protection for our processes and products
in the United States and other countries. We also rely upon trade secrets, technical know-how and continuing inventions to maintain our competitive
position. We seek to protect our technology and trade secrets, in part, by confidentiality agreements with our employees and contractors. However, our
employees may breach these agreements, or our trade secrets may otherwise become known or be independently discovered by inventors. If we are unable
to obtain or maintain protection of our patents, trade secrets and other proprietary rights, we may not be able to prevent third parties from using our
proprietary rights, which could have a material adverse effect on our results of operations.
22
Table of Contents
In addition, despite our efforts to protect our patents and other proprietary rights, unauthorized parties may attempt to copy aspects of our products or
to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, particularly in foreign countries, and we
may be unable to determine the extent, if any, to which unauthorized uses of our products exist. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the United States.
Our patent protection involves complex legal and technical questions. Our patents may be challenged, narrowed, invalidated or circumvented.
Further, we may be able to protect our proprietary rights from infringement by third parties only to the extent that our proprietary processes and products
are covered by valid and enforceable patents or are effectively maintained as trade secrets. Furthermore, others may independently develop similar or
alternative technologies or design around our patented technologies. Litigation or other proceedings to defend or enforce our intellectual property rights
could require us to spend significant time and money, which could have an adverse impact on our financial condition.
Claims from others that we infringed on their intellectual property rights may adversely affect our business and financial condition.
From time to time, we receive notices from others claiming that we infringed on their intellectual property rights. Resolving these claims may require
us to enter into royalty or licensing agreements on unfavorable terms, require us to stop selling or to redesign affected products, or require us to pay
damages. In addition, from time to time, we are involved in intellectual property lawsuits. We could, in the future, incur judgments or enter into settlements
of lawsuits and claims that could have a material adverse effect on our financial condition. Any litigation or interference proceedings, regardless of their
outcome, may be costly and may require significant time and attention of our management and technical personnel.
Risks Related To Reliance On Third Parties
Our dependence on suppliers for materials could impair our ability to manufacture our products.
Outside vendors provide key components, such as electronic components and semiconductors, used in the manufacture of our products. Any supply
interruption in a limited source component would hinder our ability to manufacture our products until a new source of supply is identified. In addition, an
uncorrected defect or supplier’s variation in a component, either known or unknown, or incompatibility with our manufacturing processes, could hinder our
ability to manufacture our products. We may not be able to find a sufficient alternative supplier in a reasonable period of time, or on commercially
reasonable terms, if at all. If we fail to obtain a supplier for the manufacture of components of our products, we may experience delays or interruptions in
our operations, which would adversely affect our business, results of operations and financial condition.
Risks generally associated with our information systems could adversely affect our business reputation and results of operations.
We rely on our information systems to obtain, rapidly process, analyze and manage data to, among other things:
•
•
•
•
•
facilitate the purchase and distribution of thousands of inventory items;
receive, process and ship orders on a timely basis;
accurately bill and collect from customers;
process payments to suppliers and employees; and
summarize results and manage our business.
Our primary and back-up computer systems are subject to damage or interruption from power outages, computer and telecommunication failures,
security breaches, natural disasters and errors by employees. Though losses arising from some of these issues may be covered by insurance, interruptions of
our critical business computer systems or failure of our back-up systems could lead to a loss of sales or decreased profitability.
23
Table of Contents
A cyberattack or security breach of our systems may compromise the confidentiality, integrity, or availability of our internal data and the availability
of our products and websites designed to support our customers or their data. Computer hackers, foreign governments or cyber terrorists may attempt to
penetrate our network security and our website. Unauthorized access to our proprietary business information or customer data may be obtained through
break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse
or other misconduct. Cyber incidents have been increasing in sophistication and frequency and can include third parties gaining access to employee or
customer data using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks, ransomware, card skimming code, and other
deliberate attacks and attempts to gain unauthorized access. Because the techniques used by computer programmers who may attempt to penetrate and
sabotage our network security or our website change frequently and may not be recognized until launched against a target, we may be unable to anticipate
these techniques.
It is also possible that unauthorized access to customer data may be obtained through inadequate use of security controls by customers, suppliers or
other vendors. While we are not currently aware of any impact that the SolarWinds supply chain attack had on our business, this is a recent event, and the
scope of the attack is yet unknown. Therefore, there is residual risk that we may experience a security breach arising from the SolarWinds supply chain
attack.
Any security breach, cyberattack or cyber security breach, and any incident involving the misappropriation, loss or other unauthorized disclosure of,
or access to, sensitive or confidential customer information, whether involving us or involving one of our vendors, could require us to expend significant
resources to remediate any damage, could interrupt our operations and damage our reputation, and could also result in regulatory enforcement actions,
material fines and penalties, litigation or other actions which could have a material adverse effect on our business, reputation and results of operations. We
have in the past experienced security incidents, and we may in the future experience other data security incidents or breaches affecting personally
identifiable information or other confidential business information. If new customers or existing customers believe that our systems do not provide
adequate security for the storage of personally identifiable information or other confidential or sensitive information, they may choose not to engage in
business with us. Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel
and protection technologies, train employees, and engage third-party experts and consultants. Although we maintain cyber liability insurance, we cannot be
certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable
terms, or at all.
24
Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
25
Table of Contents
ITEM 2. PROPERTIES
The Americas
Our headquarters is located in a leased building in Lake Mary, Florida containing approximately 46,500 square feet. This facility houses our sales,
marketing, customer service/application operations and administrative staff. Our U.S. production, research and development, service operations and
manufacturing are located in another leased building in Lake Mary, Florida, which consists of approximately 35,000 square feet, as well as a leased facility
consisting of approximately 90,400 square feet located in Exton, Pennsylvania containing research and development, manufacturing and service operations
of our FARO Laser Tracker™, FARO Focus, and FARO Laser Projector product lines. We also lease a facility in Nuevo Leon, Mexico containing service
and sales operations, which consists of approximately 36,000 square feet.
Europe/Middle East/Africa
In EMEA, our primary operations are located in a leased building in Stuttgart, Germany containing approximately 105,300 square feet. This facility
houses the manufacturing, research and development, administration, sales, marketing and service management personnel for our EMEA operations.
Additionally, we have a leased facility consisting of approximately 15,900 square feet located in Schaffhausen, Switzerland containing manufacturing
operations for our products shipped to customers in EMEA. We also have a leased service and sales facility located in Warwickshire, Great Britain
consisting of approximately 12,700 square feet.
Asia-Pacific
In APAC, our primary operations are located in a leased building in Singapore containing approximately 22,000 square feet. This facility houses the
administration, sales, marketing, service management personnel and manufacturing for our Asia-Pacific operations. Our Japan operations are located in a
leased building in Nagoya, Japan containing approximately 15,900 square feet. This facility houses our Japanese sales, marketing and service operations.
Our China operations are located in a leased building in Shanghai, China containing approximately 24,700 square feet for sales, marketing and service
operations.
We believe our current facilities will be adequate for our needs in 2021 and that we will be able to locate suitable space for additional regional offices
or enhanced production needs as necessary.
The information required by the remainder of this Item is incorporated herein by reference to Exhibit 99.1 to this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of which we believe will
have a material adverse effect on our business, financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
26
Table of Contents
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
PART II
Market Information and Holders
Our common stock is listed and traded on the Nasdaq Global Select Market under the symbol “FARO”.
As of February 15, 2021, we had 37 holders of record of our common stock.
Dividends
To date, we have not paid any cash dividends on our common stock. We expect to retain future earnings for use in operating and expanding our
business, and we do not anticipate paying any cash dividends in the reasonably foreseeable future.
Recent Sales of Unregistered Securities
During the years ended December 31, 2020, 2019 and 2018, we did not sell any equity securities that were not registered under the Securities Act.
Purchases of Equity Securities
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Subsequently, in October 2015, our Board of
Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. In December 2018, our Board of Directors
authorized management to utilize the share repurchase program, beginning January 1, 2019, to maintain the number of our issued and outstanding shares to
address the dilutive impact of stock options exercises and the settlement of restricted stock units. 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
under this program. 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. We made no stock repurchases during the years ended December 31, 2020, 2019 and 2018 under
this program. As of December 31, 2020, we had authorization to repurchase $18.3 million of the $50.0 million authorized by our Board of Directors under
the existing share repurchase program.
Performance Graph
The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall
such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically
incorporate it by reference into such filing.
The following line graph compares the cumulative five-year returns of our common stock with (1) the cumulative returns of the Nasdaq Composite-
Total Returns and (2) the Morningstar Scientific & Technical Instruments Index.
For purposes of preparing the graph, we assumed that an investment of $100 was made at market close on December 31, 2015, the last trading day
before the beginning of our fifth preceding fiscal year, with reinvestment of any dividends at the time they were paid. We did not pay any dividends during
the period indicated.
27
Table of Contents
The comparison in the graph below is based on historical data. The stock price performance shown on the graph is not necessarily indicative of future
price performance. Information used in the graph and table was obtained from Zacks Investment Research, a source believed to be reliable, but we are not
responsible for any errors or omissions in such information.
Company/Market/Peer Group
FARO Technologies, Inc.
Nasdaq Composite-Total Returns
Morningstar Scientific & Technical
Instruments Index
$
$
$
2015
2016
2017
2018
2019
2020
100.00 $
100.00 $
121.95 $
108.87 $
159.22 $
141.14 $
137.68 $
137.13 $
170.57 $
185.45 $
239.27
271.64
100.00 $
120.91 $
167.48 $
151.66 $
209.65 $
258.49
28
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
in thousands, except share and per-share data
Consolidated Statement of Operations Data:
Sales
(Loss) Income from operations
(Loss) Income before income tax (benefit)
expense
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Consolidated Balance Sheet Data:
Working capital
Total assets
Total debt-capital leases
Total shareholders’ equity
2020
2019
(2)
Year ended December 31,
2018
2017
2016
$
$
$
$
303,768 $
(30,682)
381,765 $
(58,634)
403,627 $
5,754
360,917 $
5,322
(30,773)
629
(61,014)
(62,147)
0.04 $
0.04 $
(3.58) $
(3.58) $
4,558
4,930
0.29 $
0.29 $
5,827
(14,516)
(0.87) $
(0.87) $
325,584
13,284
12,626
11,107
0.67
0.67
17,769,958
17,926,324
17,383,415
17,383,415
17,043,167
17,348,456
16,711,534
16,711,534
16,654,786
16,681,710
2020
2019
As of December 31,
2018
2017
2016
(1)
215,988 $
525,592
424
360,303
216,251 $
486,842
751
331,992
219,219 $
506,244
360
376,609
218,274 $
458,578
475
352,066
212,055
423,714
21
339,657
(1)
(2)
In 2017, we adopted Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU
2015-17”), as issued by the Financial Accounting Standards Board, which requires that deferred tax liabilities and assets be classified as non-
current in a classified balance sheet. We adopted ASU 2015-17 on a retrospective basis. As a result, the working capital amounts as of December
31, 2016 have been reduced by $7.6 million to conform with the current year presentation of deferred tax assets as non-current assets.
As part of our new strategic plan, in the fourth quarter of 2019, we began reorganizing the Company into a functional structure and evaluated our
hardware product portfolio and the operations of certain of our recent acquisitions. As a result of our annual goodwill and intangible asset
impairment test in December 2019 performed in connection with the preparation of our financial statements for the fourth quarter and year ended
December 31, 2019, we recorded an impairment charge of $35.2 million in the fourth quarter of 2019, which included $21.2 million in goodwill,
$10.5 million in intangible assets associated with recent acquisitions, $1.4 million in intangible assets related to capitalized patents and $2.1 million
in other asset write-downs. We also recorded a charge of $12.8 million in the fourth quarter of 2019, increasing our reserve for excess and obsolete
inventory, based on our analysis of our inventory reserves in connection with our strategy to simplify our hardware product portfolio and cease
selling certain products.
29
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, included in Part II,
Item 8 of this Annual Report on Form 10-K.
Overview
We are a global technology company that designs, develops, manufactures, markets and supports software driven, three-dimensional (“3D”)
measurement, imaging, and realization solutions 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 enables highly accurate 3D measurement, imaging, comparison and projection of
parts and complex structures within production, assembly and quality assurance processes. Our FARO 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 in investigation and reconstructions of crash and crime scenes. We sell the majority of our
solutions through a direct sales force across a range of industries including automotive, aerospace, metal and machine fabrication, surveying, architecture,
engineering and construction, public safety forensics and other 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 hardware service contracts and software maintenance contracts on a straight-line basis over the contractual term,
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 FARO Quantum 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
facility located in Florida for customer orders from the Americas. We manufacture our FARO Focus laser scanner in our manufacturing facilities located in
Germany and Switzerland for customer orders from EMEA and the Asia-Pacific region, and in our manufacturing facility located in Pennsylvania for
customer orders from the Americas. We manufacture our FARO Laser Tracker and our FARO Laser Projector products in our facility located in
Pennsylvania. We expect all of our existing manufacturing facilities to have the production capacity necessary to support our volume requirements during
2021.
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 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
2020, 2019 or 2018.
30
Table of Contents
Executive Summary
COVID-19 and Impact On Our Business
Our business is significantly vulnerable to the economic effects of pandemics and other public health crises, including the ongoing COVID-19
pandemic that has surfaced in virtually every country of our global operating footprint. During the second and third quarter of 2020, we experienced a
significant decline in the demand for our products and services across all of our served markets as a result of the impact of the spread of COVID-19.
Although COVID-19 has negatively impacted demand for our products and services overall, the global pandemic also has provided us with the opportunity
to adapt to a virtual environment and to capitalize on our existing virtual sales demonstration infrastructure which we have had in place for several years.
We launched an updated web-based learning system with Faro Academy that has resulted in an increase in the attendance of our virtual training and
product information seminars as our customers take advantage of the opportunity to remotely participate and to better understand the capabilities of our
products and software offerings.
We continue to assess the ongoing impact of COVID-19 on our business results and remain committed to taking actions to address the health and
safety of our employees and customers, as well as the negative effects from demand disruption and production impacts, including, but not limited to, the
following:
• Operating our business with a focus on our employee health and safety, which includes minimizing travel, remote work policies, maintaining
employee distancing and enhanced sanitation of all of our facilities;
• Monitoring of our liquidity, reduction of supply flows into our manufacturing facilities, disciplined inventory management, and scrutinization of
our capital expenditures; and
•
Continuously reviewing our financial strategy to strengthen financial flexibility in these volatile financial markets.
We continue to maintain a strong capital structure with a cash balance of $185.6 million and no debt as of December 31, 2020. We believe that our
liquidity position is adequate to meet our projected needs in the reasonably foreseeable future.
Future developments, such as the potential resurgence of COVID-19 in countries that have begun to recover from the early impact of the pandemic
and actions taken by governments in response to future resurgence, that are highly uncertain and not able to be predicted will determine the extent to which
the COVID-19 outbreak continues to impact the Company’s results of operations and financial conditions. See Item 1A, Risk Factors, included in Part I of
this Annual Report on Form 10-K for an additional discussion of risks related to COVID-19.
Our total sales decreased $78.0 million, or 20.4%, to $303.8 million for the year ended December 31, 2020 from $381.8 million for the year ended
December 31, 2019. Our product sales decreased $71.1 million, or 24.5%, primarily due to the unfavorable impact of end market demand softness related
to the COVID-19 pandemic and other fluctuations in market conditions. Our service revenue decreased $6.9 million, or 7.5%, primarily due to the
unfavorable impact of end market demand softness related to the COVID-19 pandemic. Also, foreign exchange rates had a positive impact on total sales of
$0.7 million, decreasing the percent that our overall sales declined by approximately 0.2 percentage points, primarily due to the strengthening of the Euro
relative to the U.S. dollar.
Change in Organizational Structure and Segment Reporting
Historically, we operated in five verticals—3D Manufacturing, Construction Building Information Modeling (“Construction BIM”), Public Safety
Forensics, 3D Design and Photonics—and had three reporting segments—3D Manufacturing, Construction BIM and Emerging Verticals. During the
second half of 2019, our Chief Executive Officer (“CEO”) and FARO's management team formulated and began to implement a new comprehensive
strategic plan for our business. Our strategic planning process included extensive conversations with employees, customers, investors and suppliers to
identify both where the Company can provide sustained and differentiated customer value and where opportunities existed to improve operating
efficiencies. We identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. As part of our
strategic plan, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers, re-evaluated our hardware
and software product portfolio and examined how key decisions are made throughout our global organization. Additionally, we focused on other
organizational optimization efforts, including the simplification of our overly complex management structure.
31
Table of Contents
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the
fourth quarter of 2019, we eliminated our vertical structure in favor of a functional structure. Our new executive leadership team is comprised of 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, 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 report as one reporting
segment that develops, manufactures, markets, supports and sells a suite of 3D imaging and software solutions.
In addition to the reorganization of the Company’s structure, we evaluated our hardware and software product portfolio and the operations of certain
of our recent acquisitions. As a result of this evaluation, we simplified our hardware and software product portfolio and divested our Photonics business
and 3D Design related assets obtained from our acquisition of Opto-Tech SRL and its subsidiary Open Technologies SRL (collectively, “Open
Technologies”) in the second quarter of 2020.
On February 14, 2020, our Board of Directors approved a global restructuring plan (the “Restructuring Plan”), which supports our strategic plan in an
effort to improve operating performance and ensure that we are appropriately structured and resourced to deliver sustainable value to our shareholders and
customers. Key activities under the Restructuring Plan, which targeted $40 million in annualized savings to be realized by the fourth quarter of 2020,
include decreasing total headcount by approximately 500 employees upon the completion of the Restructuring Plan. The elimination of our vertical
structure allowed us to successfully complete our redefined go-to-market strategy which placed increased focus on our customers and enabled our sales
employees, supported by our talented pool of field application engineers, to sell all product lines globally.
Our new marketing leadership team has focused its efforts on gaining an increased understanding of customer applications and workflows which
enables value-based product positioning while optimizing our customer's total cost of ownership. By strengthening our understanding of customer
applications and workflows, we will continue to develop high-value solutions across our product and software platforms. Also, our marketing leadership
team has transformed our lead generation process and implemented technology to provide our sales organization with higher quality leads which optimizes
the time and effort spent by our newly organized sales team.
We continue to focus on organizational optimization and improved decision making throughout the Company. Prior to the execution of the
Restructuring Plan, the Company had strong geographic organizations with decentralized decision making. Additionally, the previous vertical structure
layered on top of the geographic organization led to an overly complex and costly management structure. The newly formed global functional organization
has enabled centralized management and clear process ownership, eliminating redundant resources and increasing the Company's agility and ability to
execute the new strategic plan during the COVID-19 global pandemic.
We made significant progress executing the Restructuring Plan during 2020. We recorded a pre-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. The reduction of our global workforce and new
cost structure allowed the Company to maintain a strong capital structure despite depressed sales levels primarily as a result of the COVID-19 pandemic.
At this time, we are continuing to evaluate the future key activities by which these additional charges will originate. We estimate additional pre-tax
charges of $5 million to $15 million for fiscal year 2021. These activities are expected to be substantially completed by the end of 2021.
Acquisition of ATS
On August 21, 2020, we acquired all of the outstanding shares of Advanced Technical Solutions in Scandinavia AB (“ATS”), a Swedish company
focused on 3D digital twin solution technology for a purchase price of €5.1 million ($6.0 million) paid, net of cash acquired, subject to certain additional
post-closing adjustments, and up to €1.0 million ($1.2 million) in contingent consideration that may be earned by the former owners if certain product
development milestones are met in a three-year period. The U.S. Dollar amounts have been converted from Euros based on the foreign exchange rate in
effect on the closing date of the acquisition. We believe this acquisition enables the Company to provide high accuracy 3D digital twin simulations for
industries such as automotive and aerospace. The results of ATS’s operations as of and after the date of acquisition have been included in our consolidated
financial statements as of December 31, 2020.
32
Table of Contents
Presentation of Information and Reclassifications
Amounts reported in millions within this Annual Report on Form 10-K 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.
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 depreciation and amortization expenses for the year ended December
31, 2018 have been restated throughout this Annual Report on Form 10-K to reflect this reclassification of depreciation and amortization expenses and to
conform to the current period presentation.
Selling and marketing expenses and general and administrative expenses are now being reported in the accompanying statements of operations
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 selling, general and administrative expenses for the year ended December 31, 2018 have been restated throughout this Annual Report
on Form 10-K to reflect this reclassification of selling, general and administrative expenses and to conform to the current period presentation.
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 year ended December 31, 2018 have been restated
throughout this Annual Report on Form 10-K to reflect this reclassification of software maintenance revenue and to conform to the current period
presentation.
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 year ended December 31,
2018 have been restated throughout this Annual Report on Form 10-K to reflect this reclassification of software maintenance cost of sales and to conform
to the current period presentation.
33
Table of Contents
Results of Operations
2020 Compared to 2019
(dollars in millions)
Product
Service
Total sales
Product
Service
Total cost of sales
Gross profit
Operating expenses
Selling, general and administrative
Research and development
Restructuring costs
Impairment loss
Total operating expenses
Other expense
Years ended December 31,
2020
% of Sales
2019
% of Sales
Change ($)
2020 vs 2019
$
218.6
85.2
303.8
98.9
45.1
143.9
159.8
131.8
42.9
15.8
—
190.5
0.1
72.0 % $
28.0 %
100.0 %
32.5 %
14.8 %
47.4 %
52.6 %
43.4 %
14.1 %
5.2 %
— %
62.7 %
— %
289.7
92.1
381.8
133.2
50.4
183.6
198.1
177.4
44.2
—
35.2
256.8
2.4
1.1
75.9 % $
24.1 %
100.0 %
34.9 %
13.2 %
48.1 %
51.9 %
46.5 %
11.6 %
— %
9.2 %
67.3 %
0.6 %
0.3 %
(71.1)
(6.9)
(78.0)
(34.4)
(5.3)
(39.7)
(38.3)
(45.6)
(1.3)
15.8
(35.2)
(66.3)
(2.3)
(32.5)
62.7
Income tax (benefit) expense
(31.4)
(10.3)%
Net income (loss)
$
0.6
0.2 % $
(62.1)
(16.3)% $
Consolidated Results
Sales. Total sales decreased by $78.0 million, or 20.4%, to $303.8 million for the year ended December 31, 2020 from $381.8 million for the year
ended December 31, 2019. Total product sales decreased by $71.1 million, or 24.5%, to $218.6 million for the year ended December 31, 2020 from $289.7
million for the year ended December 31, 2019. Our product sales decreased due to the unfavorable impact of end market demand softness related to the
COVID-19 pandemic and other fluctuations in market conditions. Service sales decreased by $6.9 million, or 7.5%, to $85.2 million for the year ended
December 31, 2020 from $92.1 million for the year ended December 31, 2019, primarily due to the unfavorable impact of end market demand softness
related to the COVID-19 pandemic and other fluctuations in market conditions. Foreign exchange rates had a positive impact on sales of $0.7 million,
reducing our overall sales decline by approximately 0.2 percentage points, primarily due to the strengthening of the Euro relative to the U.S. dollar.
Gross profit. Gross profit decreased by $38.3 million, or 19.3%, to $159.8 million for the year ended December 31, 2020 from $198.1 million for the
year ended December 31, 2019. Gross margin increased to 52.6% for the year ended December 31, 2019 from 51.9% in the prior year period. Gross margin
from product revenue increased by 0.8 percentage points to 54.8% for the year ended December 31, 2020 from 54.0% in the prior year period. This
increase in gross margin from product revenue was primarily due to 2019 being burdened by a $12.8 million increase in our reserve for excess and obsolete
inventory recorded in connection with our strategic decisions to simplify our hardware and software product portfolio and cease selling certain products.
Gross margin from service revenue increased by 1.8 percentage points to 47.1% for the year ended December 31, 2020 from 45.3% for the prior year
period, primarily due to a reduction in departmental costs as a result of the Restructuring Plan.
34
Table of Contents
Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses decreased by $45.6 million, or 25.7%, to
$131.8 million, for the year ended December 31, 2020 from $177.4 million for the year ended December 31, 2019. This decrease was driven primarily by
decreased 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 and travel expense was driven by reduced global sales and pandemic stay-at-home orders, respectively. SG&A
expenses as a percentage of sales decreased to 43.4% for the year ended December 31, 2020 from 46.5% for the year ended December 31, 2019.
Research and development expenses. Research and development expenses decreased $1.3 million, or 2.9%, to $42.9 million for the year ended
December 31, 2020 from $44.2 million for the year ended December 31, 2019. This decrease was mainly driven by a decrease in purchased technology
intangible amortization expense as a result of the impairment of certain intangible assets in connection with the Restructuring Plan. Research and
development expenses as a percentage of sales increased to 14.1% for the year ended December 31, 2020 from 11.6% for the year ended December 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 year ended December 31, 2020 were $15.8
million primarily consisting of severance and related benefits charges.
Impairment loss. As a result of our annual goodwill and intangible asset impairment test performed in the prior year, we recorded an impairment loss
of $35.2 million in the fourth quarter of 2019, which included $21.2 million in goodwill, $10.5 million in intangible assets associated with recent
acquisitions, $1.4 million in intangible assets related to capitalized patents, and $2.1 million in other asset write-downs. There were no similar impairments
in 2020.
Other expense. Other expense was $0.1 million for the year ended December 31, 2020 compared to $2.4 million for the year ended December 31,
2019. This decrease was primarily driven by the impairment charge related to our equity investment in present4D GmbH (“present4D”) recorded in the
second quarter of 2019 and the impairment charge related to our note receivable due from present4D recorded in the fourth quarter of 2019.
Income tax (benefit) expense. Income tax benefit for the year ended December 31, 2020 was $31.4 million compared with an income tax expense of
$1.1 million for the year ended December 31, 2019. Our effective tax rate was 102.0% for the year ended December 31, 2020 compared to 1.9% for the
year ended December 31, 2019. The change in income tax (benefit) expense was primarily due to the Company completing an intra-entity transfer of
certain intellectual property rights (“IP Rights”) which resulted in the Company establishing a deferred tax asset benefit of $19.2 million, based on the fair
value of the IP rights transferred in December 2020.
Net income (loss). Net income was $0.6 million for the year ended December 31, 2020 compared with net loss of $62.1 million for the year ended
December 31, 2019, reflecting the impact of the factors described above.
35
Table of Contents
2019 Compared to 2018
(dollars in millions)
Product
Service
Total sales
Product
Service
Total cost of sales
Gross profit
Operating expenses
Selling, general and administrative
Research and development
Impairment loss
Total operating expenses
Other expense
Income tax expense (benefit)
Years ended December 31,
2019
% of Sales
2018
% of Sales
Change ($)
2019 vs 2018
$
289.7
92.1
381.8
133.2
50.4
183.6
198.1
177.4
44.2
35.2
256.8
2.4
1.1
75.9 % $
24.1 %
100.0 %
34.9 %
13.2 %
48.1 %
51.9 %
46.5 %
11.6 %
9.2 %
67.3 %
0.6 %
0.3 %
320.6
83.0
403.6
130.9
51.2
182.1
221.6
169.7
46.1
—
215.8
1.2
(0.4)
4.9
79.4 % $
20.6 %
100.0 %
32.4 %
12.7 %
45.1 %
54.9 %
42.0 %
11.4 %
— %
53.5 %
0.3 %
(0.1)%
(30.9)
9.0
(21.9)
2.4
(0.8)
1.6
(23.4)
7.7
(1.9)
35.2
41.0
1.2
1.5
1.2 % $
(67.0)
Net (loss) income
$
(62.1)
(16.3)% $
Consolidated Results
Sales. Total sales decreased by $21.9 million, or 5.4%, to $381.8 million for the year ended December 31, 2019 from $403.6 million for the year
ended December 31, 2018. Total product sales decreased by $30.9 million, or 9.6%, to $289.7 million for the year ended December 31, 2019 from $320.6
million for the year ended December 31, 2018. Our product sales decrease reflected lower unit sales primarily driven by continuing softness in many of our
served markets, with particular softness in the automotive and broader Asian markets. Service sales increased by $9.0 million, or 10.9%, to $92.1 million
for the year ended December 31, 2019 from $83.0 million for the year ended December 31, 2018, primarily due to an increase in warranty and customer
service revenue driven by the growth of our global installed, serviceable base and focused sales initiatives to maintain customer relationships after the
purchase of our measurement devices. Foreign exchange rates had a negative impact on sales of $13.0 million, decreasing our overall sales by
approximately 3.2%, primarily due to the weakening of the Euro and Chinese Yuan relative to the U.S. dollar.
Gross profit. Gross profit decreased by $23.4 million, or 10.6%, to $198.1 million for the year ended December 31, 2019 from $221.6 million for the
year ended December 31, 2018. Gross margin decreased to 51.9% for the year ended December 31, 2019 from 54.9% in the prior year period. Gross margin
from product revenue decreased by 5.2 percentage points to 54.0% for the year ended December 31, 2019 from 59.2% in the prior year period. This
decrease in gross margin from product revenue was primarily due to the $12.8 million increase in our reserve for excess and obsolete inventory recorded in
the fourth quarter of 2019 in connection with our strategic decisions to simplify our hardware and software product portfolio and cease selling certain
products, compared to a $4.7 million increase in our reserve for excess and obsolete inventory recorded in 2018. Gross margin from service revenue
increased by 7.0 percentage points to 45.3% for the year ended December 31, 2019 from 38.3% for the prior year period, primarily due to the leveraging
effect of higher warranty and customer service revenue as well as improved efficiencies in our customer service repair process.
36
Table of Contents
Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses increased by $7.7 million, or 4.5%, to $177.4
million, for the year ended December 31, 2019 from $169.7 million for the year ended December 31, 2018. This increase was driven primarily by executive
team transition costs, including the acceleration of stock-based compensation expense related to the accelerated vesting of stock options and restricted stock
units granted to our prior executive officers and severance costs, professional fees incurred related to the GSA Matter, and an increase in compensation
expenses related to our increased selling headcount, partially offset by lower commission expense due to the decrease in product sales. SG&A expenses as
a percentage of sales increased to 46.5% for the year ended December 31, 2019 from 42.0% for the year ended December 31, 2018.
Research and development expenses. Research and development expenses decreased $1.9 million, or 4.1%, to $44.2 million for the year ended
December 31, 2019 from $46.1 million for the year ended December 31, 2018. This decrease in research and development expenses was mainly due to 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. Research and development expenses as a percentage of sales increased to
11.6% for the year ended December 31, 2019 from 11.4% for the year ended December 31, 2018.
Impairment loss. As a result of our annual goodwill and intangible asset impairment test performed in December 2019, we recorded an impairment
loss of $35.2 million in the fourth quarter of 2019, which included $21.2 million in goodwill, $10.5 million in intangible assets associated with recent
acquisitions, $1.4 million in intangible assets related to capitalized patents, and $2.1 million in other asset write-downs. There were no similar impairments
in 2018.
Other expense. Other expense was $2.4 million for the year ended December 31, 2019 compared to $1.2 million for the year ended December 31,
2018. This increase was primarily driven by the impairment charge related to our equity investment in present4D GmbH (“present4D”) recorded in the
second quarter of 2019 and the impairment charge related to our note receivable due from present4D recorded in the fourth quarter of 2019, partially offset
by a favorable adjustment to the contingent consideration liability from a prior year acquisition.
Income tax expense (benefit). Income tax expense for the year ended December 31, 2019 was $1.1 million compared with an income tax benefit of
$0.4 million for the year ended December 31, 2018. Our effective tax rate was 1.9% for the year ended December 31, 2019 compared to (8.2%) for the year
ended December 31, 2018. The change in income tax expense (benefit) was primarily due to $8.5 million of income tax expense recorded in the year ended
December 31, 2019 resulting from our determination that it is more likely than not that certain foreign deferred tax assets will not be fully realized and the
establishment of a valuation due to a history of cumulative losses in related jurisdictions. Additionally, the year-over-year change in our income tax
expense (benefit) and our effective tax rate was partially due to a pretax book loss during the year ended December 31, 2019 as compared with pretax book
income in the year ended December 31, 2018, as well as provision-to-return adjustments recorded in 2019 and 2018.
Net (loss) income. Net loss was $62.1 million for the year ended December 31, 2019 compared with net income of $4.9 million for the year ended
December 31, 2018, reflecting the impact of the factors described above.
Liquidity and Capital Resources
Cash and cash equivalents increased by $52.0 million to $185.6 million at December 31, 2020 from $133.6 million at December 31, 2019. Cash
flows from operating activities provide our primary source of liquidity. We generated positive cash flows from operations of $21.4 million during the year
ended December 31, 2020 compared to $32.5 million during the year ended December 31, 2019. The change was mainly due to a decrease in non-cash
adjustments to reconcile net income more than offsetting an increase due to certain working capital reductions.
Cash flows provided by investing activities during the year ended December 31, 2020 were $13.9 million compared with cash flows used in investing
activities of $9.3 million during the year ended December 31, 2019. The change was primarily due to proceeds from sales of investments of $25.0 million
during the year ended December 31, 2020, compared to no such activity in the year ended December 31, 2019.
Cash flows provided by financing activities during the years ended December 31, 2020 and December 31, 2019 were $11.1 million and $2.2 million,
respectively. The increase was primarily driven by higher proceeds from the issuance of stock relating to the exercise of stock options during the year
ended December 31, 2020 compared to the prior year and decreased contingent consideration paid in connection with our recent acquisitions in the year
ended December 31, 2020.
37
Table of Contents
Of our cash and cash equivalents, $119.2 million was held by foreign subsidiaries as of December 31, 2020. On December 22, 2017, the United
States enacted the U.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing law, which included a transition tax on the mandatory
deemed repatriation of foreign earnings. As a result of the U.S. Tax Cuts and Jobs Act, the Company can repatriate foreign earnings and profits to the U.S.
with minimal U.S. income tax consequences, other than the transition tax and global intangible low-taxed income (“GILTI”) tax. The Company 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 subject to local withholding taxes 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. Subsequently, in October 2015, our Board of
Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. In December 2018, our Board of Directors
authorized management to utilize the share repurchase program, beginning January 1, 2019, to maintain the number of our issued and outstanding shares to
address the dilutive impact of stock options exercises and the settlement of restricted stock units. 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
under this program. 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. We made no stock repurchases during the years ended December 31, 2020, 2019 and 2018 under
this program. As of December 31, 2020, we had authorization to repurchase $18.3 million of the $50.0 million authorized by our Board of Directors under
the existing share 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 are party to capital leases on equipment with an initial term of 36 to 60 months and other non-cancellable operating leases. These obligations are
presented below as of December 31, 2020 (dollars in thousands):
Contractual Obligations
Operating lease obligations
Capital lease obligations
Purchase obligations
Transition tax liability
Other obligations
Total
Total
< 1 Year
Payments Due by Period
1-3 Years
3-5 Years
> 5 Years
$
$
33,322 $
445
45,138
11,080
1,056
91,041 $
6,914 $
292
44,196
1,166
—
52,568 $
10,193 $
134
942
3,353
1,056
15,678 $
7,611 $
19 $
—
6,561
—
14,191 $
8,604
—
—
—
—
8,604
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
December 31, 2020, we had approximately $44.2 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, we also had $0.9 million in long-term commitments for purchases to be
delivered after 12 months. During the fourth quarter of 2017, we recorded a provisional amount of $17.4 million related to the increase to our taxes payable
pursuant to the U.S. Tax Cuts and Jobs Act associated with the mandatory deemed repatriation of the earnings of our foreign subsidiaries, or transition tax.
During the fourth quarter of 2018, we decreased the provisional estimate of the one-time transition tax by $2.8 million upon completing our analysis of
earnings and profits of our foreign subsidiaries and utilization of foreign tax credits. $1.8 million of the decrease related to a change in our deferred tax
assets, and $1.0 million was an income tax benefit recorded in the fourth quarter of 2018. We made our first three transition tax payments in 2018, 2019,
and 2020 and will pay the remaining liability over the next five years. Other obligations included in the table primarily represent estimated payments due
for acquisition related earn-outs of $1.1 million.
38
Table of Contents
Inflation
Inflation did not have a material impact on our results of operations in recent years, and we do not expect inflation to have a material impact on our
operations in 2021.
Critical Accounting Policies
The preparation of our 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 the financial statements.
In response to the SEC's financial reporting release, FR-60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have
selected 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, current liabilities 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 operating results and financial position.
Revenue Recognition
For arrangements with multiple performance obligations, which represent promises within an arrangement that are capable of being distinct, we
allocate revenue to all distinct performance obligations based on their relative standalone selling prices (“SSP”). When available, we use observable prices
to determine the SSP. When observable prices are not available, SSPs are established that reflect our best estimates of what the selling prices of the
performance obligations would be if they were sold regularly on a standalone basis.
Revenue related to our measurement and imaging equipment and related software is generally recognized upon shipment from our facilities or when
delivered to the customer's location, as determined by the agreed upon shipping terms, at which time we are entitled to payment and title and control has
passed to the customer. Fees billed to customers associated with the distribution of products are classified as revenue. We generally 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. To support our product lines, we also sell hardware service contracts that typically range from one year to three years. Hardware
service contract revenues are recognized on a straight-line basis over the term of the contract. Costs relating to hardware service contracts 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 risks and rewards of ownership have passed to the customer. These software arrangements generally include short-term maintenance
that is considered post-contract support (“PCS”), which is considered to be a separate performance obligation. We generally establish a standalone sales
price for this PCS component based on our software maintenance contract renewals. Software maintenance contracts, when sold, are recognized on a
straight-line basis over the term of the contract. 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. Payment for products and services is
collected within a short period of time following transfer of control or commencement of delivery of services, as applicable. Revenues are presented net of
sales-related taxes.
39
Table of Contents
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 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, 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. Our evaluation of the need for the valuation
allowance is significantly influenced by our ability to achieve profitability and our ability to predict and achieve future projections of taxable income.
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 ASC Topic 740,
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 our products, 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 liabilities in the accompanying 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 each year, or more frequently if indicators of potential impairment exist (i.e., that it is more likely than not that the fair value of
the reporting unit is less than the carrying value), to determine if the carrying value of the recorded goodwill or indefinite lived intangible assets is
impaired.
40
Table of Contents
Each period, and for any of our reporting units, we can elect to 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 not more likely than not that the fair value
of a reporting unit containing goodwill is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. If we elect to bypass
the qualitative assessment option, or if the qualitative assessment was performed and resulted in the Company 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 its carrying amount, we will perform the quantitative goodwill
impairment test. We perform the quantitative goodwill impairment test by calculating the fair value of the reporting unit using a discounted cash flow
method and market approach method, and then comparing the respective fair value with the carrying amount of the reporting unit. If the carrying amount of
the reporting unit exceeds its fair value, we impair goodwill for the excess amount of the reporting unit compared to its fair value, not to be reduced below
zero. Management concluded there was no goodwill impairment for the years ended December 31, 2020 and 2018. However, during 2019 as a result of this
test and under our historical reporting unit structure, the estimated fair value of each of the Photonics reporting unit, which included goodwill recognized
with the Instrument Associates, LLC d/b/a Nutfield Technology (“Nutfield”), Laser Control Systems Limited (“Laser Control Systems”) and Lanmark
Controls, Inc. (“Lanmark”) acquisitions, and the 3D Design reporting unit, which included goodwill recognized with the acquisition of Opto-Tech SRL and
its subsidiary Open Technologies SRL (collectively, “Open Technologies”), were determined to be significantly less than the carrying value of such
reporting unit, indicating a full impairment. This impairment was driven primarily by historical and projected financial performance lower than our
expectations and changes in our go-forward strategy in connection with our new strategic plan.
Business Combinations
We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based 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.
Critical estimates are also made in valuing earn-outs, which represent arrangements to pay former owners based on the satisfaction of performance criteria.
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 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, including performance awards, without a market
condition is estimated using the current market price of our common stock on the date of grant. We elect to account for forfeitures related to the service
condition-based awards as they occur.
41
Table of Contents
We expense stock-based compensation for stock options, restricted stock awards, restricted stock units and performance awards over the requisite
service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service
period for the entire award. For awards with both performance and service conditions, we expense the stock-based compensation on a straight-line basis
over the requisite service period for each separately vesting portion of the award, taking into account the probability that we will satisfy the performance
condition. Furthermore, we expense awards with a market condition over the three-year vesting period regardless of the value that the award recipients
ultimately receive.
Also, beginning in October 2018, our non-employee directors may elect to have their annual cash retainers and annual equity retainers paid in the
form of deferred stock units pursuant to the 2014 Equity Incentive Plan and the 2018 Non-Employee Director Deferred Compensation Plan. Each deferred
stock unit represents the right to receive one share of our common stock upon the non-employee director's separation of service from the Company. We
record compensation cost associated with our deferred stock units over the period of service.
Impact of Recently Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from
leases. ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, was issued by the FASB in July 2018 and allows for a cumulative-effect adjustment
transition method of adoption. We adopted ASU 2016-02 effective as of January 1, 2019 utilizing the cumulative-effect adjustment transition method of
adoption, which resulted in the recognition on our consolidated balance sheet as of December 31, 2019 of $18.4 million of right-of-use assets for operating
leases, $19.6 million of lease liability for operating leases, $0.8 million of property and equipment, net for finance leases and $0.8 million of lease liability
for finance leases under which we function as a lessee. We elected certain practical expedients available under the transition provisions to (i) allow
aggregation of non-lease components with the related lease components when evaluating accounting treatment, (ii) apply the modified retrospective
adoption method, utilizing the simplified transition option, which allows us to continue to apply the legacy guidance in FASB ASC Topic 840, including its
disclosure requirements, in the comparative periods presented in the year of adoption, and (iii) use hindsight in determining the lease term (that is, when
considering our options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of our right-of-use assets. The
adoption of ASU 2016-02 also required us to include any initial direct costs, which are incremental costs that would not have been incurred had the lease
not been obtained, in the right-of-use assets. The recognition of these costs in connection with our adoption of this guidance did not have a material impact
on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangible - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under
the new guidance, we perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge
is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value up to the amount of the goodwill allocated to the
reporting unit. The new guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the
goodwill impairment test if it fails the qualitative assessment. We adopted this guidance in connection with our annual impairment test for the fiscal year
ended December 31, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU
2016-13, and subsequent related amendments to ASU 2016-13, replace the existing incurred loss impairment model with an expected loss model that
requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and
requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the
amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We adopted ASU 2016-13 effective as of January 1,
2020, and the adoption of the new guidance did not have a material impact on our consolidated financial statements.
42
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Exposure
We conduct a significant portion of our business outside the United States. In 2020, 61% of our revenue was invoiced, and a significant portion of
our operating expenses were paid, in foreign currencies. At December 31, 2020, 42% 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 adverse 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 the constantly changing exposure to various currencies, the fact that all foreign currencies do not react in the same manner in
relation to the U.S. dollar and the number of currencies involved, although our most significant exposures are to the Euro, Swiss franc, Japanese yen, 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 2020, 2019 or 2018.
43
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
FARO Technologies, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of FARO Technologies, Inc. (a Florida corporation) and subsidiaries (the “Company”) as of
December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 17, 2021 expressed an unqualified
opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Reserve for excess and obsolete inventory
As described further in Note 1 to the financial statements, the reserve for excess and obsolete inventory is established utilizing the Company’s past sales
history and future sales forecasts. Inventory is considered to be potentially obsolete if the product has been withdrawn from the market or the product had
no sales for the past 12 months and the product has 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 items are then reviewed to determine if a substitute usage exists,
and items without an identified current or future usage are reserved in an amount equal to 100% of the first-in first-out cost of the inventory. We identified
the reserve for excess and obsolete inventory as a critical audit matter.
The principal consideration for our determination that the reserve for excess and obsolete inventory was a critical audit matter was the high risk of
estimation uncertainty due to significant judgments in management’s analysis, which included
management’s assessment of current and future usage of identified potentially excess and obsolete inventory. Management’s assessment was based on
qualitative and quantitative factors, such as the impact from competitors, impact of competing
products, product market acceptance, introduction of newer product offerings, product failures, dependence on suppliers for materials, and other
considerations evaluated by management in making its assessment of excess and obsolete inventories.
44
Table of Contents
Our audit procedures related to the reserve for excess and obsolete inventory included the following, among others:
• We evaluated the design and tested the operating effectiveness of the key controls relating to the excess and obsolete reserve.
• We tested the calculation of current inventories within the excess and obsolete reserve by recalculating the analysis of the previous 12 months'
usage and evaluating the reasonableness of forecasted sales.
• We tested the significant assumptions made by management for not reserving potentially excess and obsolete inventory. As part of our procedures,
we obtained and inspected corroborating information to support the expectation of future usage, which included evidence such as forecasts of
future sales, evaluation of product repair rates, outstanding products in the field, as well as need for replacement parts. We also inquired if any
outstanding purchase orders from customers, or any other relevant evidence was available to corroborate management’s assertions, as applicable.
Income taxes
As described further in Note 12 to the financial statements, the Company is a multinational corporation that is subject to income taxes in the United States
and numerous foreign jurisdictions. The Company’s effective tax rate is directly impacted by the application of complex tax laws and regulations, which
are highly dependent upon the geographic mix of worldwide earnings or losses, the tax regulations in each country or geographic region in which they
operate, and the availability of tax credit and loss carryforwards. In addition, the recoverability of deferred tax assets in both domestic and foreign
jurisdictions is based on the weight of positive and negative evidence of recoverability, which includes future reversals of deferred tax liabilities,
projections of future taxable income, and tax planning strategies. We identified income tax (benefit) expense and the deferred tax assets and
liabilities as a critical audit matter.
The principal consideration for our determination that the income tax (benefit) expense and valuation and recoverability of deferred tax assets and liabilities
was a critical audit matter were due to the multinational presence of the Company in numerous foreign jurisdictions, with varying complex tax laws and
regulations. These rules may be subject to interpretation depending on the jurisdiction and may involve significant management judgment. In addition,
there is a high risk of estimation uncertainty due to significant management judgment related to establishing or reversing a valuation allowance against a
deferred tax asset in a jurisdiction, which may be based on various forms of positive and negative evidence regarding the recoverability of a deferred tax
asset. The audit effort involved the use of professionals with specialized skills and knowledge to assist in evaluating the audit evidence obtained.
Our audit procedures related to the income tax (benefit) expense and deferred tax asset and liability amounts included the
following, among others:
• We evaluated the design and tested the operating effectiveness of the key controls relating to the income tax provision and deferred tax asset and
liability amounts, including the development of future earnings and assumptions around the timing of reversals of existing taxable temporary
differences. We also tested management’s controls around the review of the completeness and accuracy of the qualitative and quantitative
valuation allowance analysis.
• We involved foreign tax professionals from member firms to assess significant income tax positions and calculations for completeness and
accuracy. In addition, we reconciled the tax provision calculations to the underlying accounting records, tax returns, and other supporting
documentation.
• We involved international tax professionals from the firm to test the Company’s assumptions regarding its geographic mix of worldwide earnings
or losses. As part of those procedures, we noted the Company’s geographic mix of earnings or losses was calculated pursuant to third party
transfer pricing studies performed by qualified parties. In addition, we involved specialists to review the Company’s transfer pricing assertions.
• We tested the Company’s analysis of recoverability of its deferred tax assets in each of its jurisdictions based on evidence received from
management to support the balances.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2004.
Orlando, Florida
February 17, 2021
45
Table of Contents
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Non-current assets:
Property, plant and equipment, net
Operating lease right-of-use asset
Goodwill
Intangible assets, net
Service and sales demonstration inventory, net
Deferred income tax assets, net
Other long-term assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
Current portion of unearned service revenues
Customer deposits
Lease liability
Total current liabilities
Unearned service revenues - less current portion
Lease liability - less current portion
Deferred income tax liabilities
Income taxes payable - less current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies - See Note 13
Shareholders’ equity:
Preferred stock - par value $0.01, 10,000,000 shares authorized; none issued
Common stock - par value $0.001, 50,000,000 shares authorized; 19,384,350, 18,988,379 issued;
17,990,707 and 17,576,618 outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost - 1,393,643 shares and 1,411,761, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31, 2020
December 31, 2019
$
$
$
$
185,633 $
—
64,616
47,391
26,295
323,935
23,091
26,107
57,541
13,301
31,831
47,450
2,336
525,592 $
14,121 $
42,593
3,442
39,149
2,807
5,835
107,947
21,757
22,131
787
11,583
1,084
165,289
—
19
287,979
113,508
(10,160)
(31,043)
360,303
525,592 $
133,634
24,870
76,162
58,554
28,996
322,216
26,954
18,418
49,704
14,471
33,349
18,766
2,964
486,842
13,718
38,072
5,182
39,211
3,108
6,674
105,965
20,578
13,698
357
13,177
1,075
154,850
—
19
267,868
112,879
(17,399)
(31,375)
331,992
486,842
The accompanying notes are an integral part of these consolidated financial statements.
46
Table of Contents
(in thousands, except share and per share data)
SALES
Product
Service
Total sales
COST OF SALES
Product
Service
Total cost of sales
GROSS PROFIT
OPERATING EXPENSES
Selling, general and administrative
Research and development
Restructuring costs
Impairment loss
Total operating expenses
(LOSS) INCOME FROM OPERATIONS
OTHER EXPENSE (INCOME)
Interest income
Other expense, net
Interest expense
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
$
$
$
$
2020
Years ended December 31,
2019
2018
218,587 $
85,181
303,768
289,679 $
92,086
381,765
98,864
45,057
143,921
159,847
131,827
42,896
15,806
—
190,529
(30,682)
(340)
431
—
(30,773)
(31,402)
629 $
0.04 $
0.04 $
133,246
50,387
183,633
198,132
177,378
44,175
—
35,213
256,766
(58,634)
(714)
2,313
781
(61,014)
1,133
(62,147) $
(3.58) $
(3.58) $
320,584
83,043
403,627
130,876
51,198
182,074
221,553
169,717
46,082
—
—
215,799
5,754
(429)
1,139
486
4,558
(372)
4,930
0.29
0.29
17,769,958
17,926,324
17,383,415
17,383,415
17,043,167
17,348,456
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE
INCOME TAX (BENEFIT) EXPENSE
NET INCOME (LOSS)
NET INCOME (LOSS) PER SHARE - BASIC
NET INCOME (LOSS) PER SHARE - DILUTED
Weighted average shares - Basic
Weighted average shares - Diluted
The accompanying notes are an integral part of these consolidated financial statements.
47
Table of Contents
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Currency translation adjustments, net of income tax
Comprehensive income (loss)
2020
Years ended December 31,
2019
2018
$
$
629 $
7,239
7,868 $
(62,147) $
1,084
(61,063) $
4,930
(10,661)
(5,731)
The accompanying notes are an integral part of these consolidated financial statements.
48
Table of Contents
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
Common Stock
Shares
16,796,884
$
Amounts
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Common
Stock in
Treasury
Total
18
$
223,055
$
168,624
$
(7,822)
$
(31,809)
$
352,066
(in thousands, except share data)
BALANCE JANUARY 1, 2018
Net income
Currency translation adjustment, net of income tax
Stock-based compensation
Common stock issued, net of shares withheld for
employee taxes
Cumulative effect of the adoption of ASU 2014-09
—
456,127
7,620
20,654
1
BALANCE DECEMBER 31, 2018
17,253,011
$
19
$
251,329
$
Net loss
Currency translation adjustment, net of income tax
Stock-based compensation
Common stock issued, net of shares withheld for
employee taxes
Cumulative effect of the adoption of ASU 2016-02
323,607
11,071
5,468
BALANCE DECEMBER 31, 2019
17,576,618
$
19
$
267,868
$
Net income
Currency translation adjustment, net of income tax
Stock-based compensation
Common stock issued, net of shares withheld for
employee taxes
BALANCE DECEMBER 31, 2020
—
414,089
17,990,707
$
8,314
11,797
287,979
19
$
4,930
1,799
175,353
(62,147)
(10,661)
200
$
(18,483)
$
(31,609)
$
1,084
234
(17,399)
$
(31,375)
$
7,239
(327)
112,879
$
629
4,930
(10,661)
7,620
20,855
1,799
376,609
(62,147)
1,084
11,071
5,702
(327)
331,992
629
7,239
8,314
$
113,508
$
(10,160)
$
332
(31,043)
$
12,129
360,303
The accompanying notes are an integral part of these consolidated financial statements.
49
Table of Contents
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
2020
Years Ended December 31,
2019
2018
$
629 $
(62,147) $
4,930
Depreciation and amortization
Compensation for stock options and restricted stock units
Provision for bad debts (net of recoveries)
Loss on disposal of assets
Provision for excess and obsolete inventory
Impairment of goodwill
Impairment of acquired intangibles
Impairment of loan to affiliate
Deferred income tax (benefit) expense
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Increase (decrease) in:
Accounts payable and accrued liabilities
Income taxes payable
Customer deposits
Unearned service revenues
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchases of investments
Proceeds from sale of investments
Purchases of property and equipment
Payments for internally capitalized patents
Acquisition of business, net of cash received
Other
Net cash provided (used in) by investing activities
FINANCING ACTIVITIES:
Payments on capital leases
Payments of contingent consideration for acquisitions
Payments for taxes related to net share settlement of equity awards
Proceeds from issuance of stock related to stock option exercises
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
14,239
8,314
440
383
1,349
—
—
—
(28,444)
12,346
10,343
3,862
2,390
(3,357)
(374)
(726)
21,394
—
25,000
(4,774)
(1,298)
(6,036)
1,015
13,907
18,516
11,071
2,090
2,639
16,886
21,233
10,548
549
(6,304)
10,406
(4,136)
1,188
(2,518)
1,041
(30)
11,436
32,468
(50,000)
50,000
(6,675)
(2,118)
—
(549)
(9,342)
(338)
(733)
(2,602)
14,731
11,058
5,640
51,999
133,634
185,633 $
(358)
(3,101)
(2,199)
7,901
2,243
(518)
24,851
108,783
133,634 $
$
18,313
7,620
907
192
5,757
—
—
—
689
(15,995)
(20,532)
(11,310)
11,195
(3,286)
513
7,330
6,323
(47,000)
33,000
(11,021)
(1,900)
(27,067)
(1,786)
(55,774)
(157)
(888)
—
20,855
19,810
(2,536)
(32,177)
140,960
108,783
The accompanying notes are an integral part of these consolidated financial statements.
50
Table of Contents
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020, 2019 and 2018
(in thousands, except share and per share data or as otherwise noted)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business—FARO Technologies, Inc. and its subsidiaries (collectively “FARO,” the “Company,” “us,” “we” or “our”) design,
develop, manufacture, market and support software driven, three-dimensional (“3D”) measurement, imaging, and realization solutions 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 enables highly accurate 3D measurement, imaging, comparison and projection of parts and complex structures within production, assembly
and quality assurance processes. Our FARO 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
in investigation and reconstructions of crash and crime scenes. We sell the majority of our solutions through a direct sales force across a range of industries
including automotive, aerospace, metal and machine fabrication, surveying, architecture, engineering and construction, public safety forensics and other
industries.
Historically, we operated in five verticals—3D Manufacturing, Construction Building Information Modeling (“Construction BIM”), Public Safety
Forensics, 3D Design and Photonics—and had three reporting segments—3D Manufacturing, Construction BIM and Emerging Verticals. During the
second half of 2019, our Chief Executive Officer (“CEO”) and FARO's management team formulated and began to implement a new comprehensive
strategic plan for our business. Our strategic planning process included extensive conversations with employees, customers, investors and suppliers to
identify both where the Company can provide sustained and differentiated customer value and where opportunities existed to improve operating
efficiencies. We identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. As part of our
strategic plan, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers, re-evaluated our hardware
and software product portfolio and examined how key decisions are made throughout our global organization. Additionally, we focused on other
organizational optimization efforts, including the simplification of our overly complex management structure.
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the
fourth quarter of 2019, we eliminated our vertical structure and began reorganizing the Company into a functional structure. Our executive leadership team
is now comprised of 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 are now reporting 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.
Principles of Consolidation—Our consolidated financial statements include the accounts of FARO Technologies, Inc. and its subsidiaries, all of
which are wholly owned. All intercompany transactions and balances have been eliminated. The financial statements of our foreign subsidiaries are
translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and average exchange rates during each reporting period for
results of operations. Adjustments resulting from financial statement translations are reflected as a separate component of accumulated other
comprehensive loss. Foreign currency transaction gains and losses are included in net income (loss).
51
Table of Contents
Revenue Recognition, Product Warranty and Extended Warranty Contracts—Revenue is recognized as performance obligations within a contract
are satisfied in an amount that reflects the consideration we expect to receive in exchange for satisfaction of those performance obligations, or standalone
selling price. Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each
performance obligation based on its relative standalone selling price. We make this allocation estimate utilizing data from the sale of our applicable
products and services to customers separately in similar circumstances. Revenue related to our measurement and imaging equipment and related software is
generally recognized upon shipment from our facilities or when delivered to the customer's location, as determined by the agreed upon shipping terms, at
which time we are entitled to payment and title and control has passed to the customer. Fees billed to customers associated with the distribution of products
are classified as revenue. We generally 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. To support our product lines, we also sell hardware service contracts
which revenues are recognized on a straight-line basis over the term of the contract. Hardware service contracts generally extend between one
month and three years. Costs relating to hardware service contracts 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 risks and rewards of ownership have passed to the
customer. These software arrangements generally include short-term maintenance that is considered post-contract support (“PCS”), which is considered to
be a separate performance obligation. We generally establish a standalone sales price for this PCS component based on our software maintenance contract
renewals. Software maintenance contracts, when sold, are recognized on a straight-line basis over the term of the contract. 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. Payment for products and services is collected within a short period of time following transfer of control or commencement
of delivery of services, as applicable. Revenues are presented net of sales-related taxes.
Cash and Cash Equivalents—We consider cash on hand and amounts on deposit with financial institutions with maturities of three months or less
when purchased to be cash and cash equivalents. We had deposits with foreign banks totaling $119.2 million and $89.3 million as of December 31, 2020
and 2019, respectively.
Accounts Receivable and Related Allowance for Credit Losses—Credit is extended to customers based on an evaluation of a customer’s financial
condition and, generally, collateral is not required. Accounts receivable are generally due within 30 to 90 days and are stated at amounts due from
customers, net of an allowance for credit losses. Accounts outstanding longer than the contractual payment terms are considered past due. We make
judgments as to the collectability of accounts receivable based on historical trends and future expectations. Management estimates an allowance for credit
losses, which adjusts gross trade accounts receivable to their net realizable value. The allowance for credit losses is based on an analysis of all receivables
for possible impairment issues and historical write-off percentages. We write off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for credit losses. We do not generally charge interest on past due receivables.
Inventories—Inventories are stated at the lower of cost or net realizable value using the first-in first-out (“FIFO”) method. Shipping and handling
costs are classified as a component of cost of sales in the consolidated statements of operations. Sales demonstration inventory is comprised of measuring
and imaging devices utilized by sales representatives to present our products to customers. Management expects sales demonstration inventory to be held
by our sales representatives for up to three years, at which time it is refurbished and transferred to finished goods as used equipment, stated at the lower of
cost or net realizable value. Management expects these refurbished units to remain in finished goods inventory and be sold within 12 months at prices that
produce reduced gross margins. Sales demonstration inventory remains classified as inventory, as it is available for sale and any required refurbishment
prior to sale is minimal.
Service inventory is typically used to provide a temporary replacement product to a customer covered by a premium warranty 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 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 its remaining useful life,
typically three years. See Note 6, “Inventories” for further information regarding inventories.
52
Table of Contents
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
potentially 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 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.
Property and Equipment—Property and equipment purchases exceeding one thousand dollars are capitalized and recorded at cost. Depreciation is
computed beginning on the date that the asset is placed into service using the straight-line method over the estimated useful lives of the various classes of
assets as follows:
Machinery, equipment and software
Furniture and fixtures
2 to 5 years
3 to 10 years
Leasehold improvements are amortized on a straight-line basis over the lesser of the life of the asset or the remaining term of the lease.
Depreciation expense was $10.8 million, $13.0 million and $12.9 million in 2020, 2019 and 2018, respectively. Accelerated methods of depreciation
are used for income tax purposes in contrast to book purposes, and as a result, appropriate provisions are made for the related deferred income taxes.
Balances of major classes of depreciable assets and total accumulated depreciation as of December 31, 2020 and 2019 are as follows:
Property, plant and equipment:
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Property, plant and equipment at cost
Less: accumulated depreciation and amortization
Property, plant and equipment, net
December 31, 2020
December 31, 2019
$
$
91,984
6,620
21,414
120,018
(96,927)
23,091
$
$
83,900
6,377
21,397
111,674
(84,720)
26,954
Business Combinations—We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values
at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these 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. Critical estimates are also made in valuing earn-outs, which represent arrangements to pay former owners based on the satisfaction of
performance criteria. 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.
Goodwill and Intangible Assets—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 each year, or more frequently if indicators of potential impairment exist (i.e., that it is more
likely than not that the fair value of the reporting unit is less than the carrying value), to determine if the carrying value of the recorded goodwill or
indefinite lived intangible assets is impaired.
53
Table of Contents
Each period, and for our single reporting unit, we can elect to perform a qualitative assessment to determine whether it is necessary to perform a
quantitative goodwill impairment test. If we believe, as a result of our qualitative assessment, that it is not more likely than not that the fair value of our
reporting unit containing goodwill is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. If we elect to bypass the
qualitative assessment option, or if the qualitative assessment was performed and resulted in the Company 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 its carrying amount, we will perform the quantitative goodwill
impairment test. We calculate the fair value of the reporting unit using a discounted cash flow method and market approach method, and then comparing
the respective fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, we record the
amount of the impairment loss, if any.
Management concluded there was no goodwill impairment for the year ended December 31, 2020, $21.2 million impairment loss for the year ended
December 31, 2019 and no goodwill impairment for the year ended December 31, 2018. We test goodwill for impairment annually on December 31 of each
reporting year or more frequently if an event occurs or circumstances would indicate that it is more likely than not the fair value of the reporting unit is less
than the carrying value. We performed our annual quantitative test of goodwill during 2020 and 2018 as of December 31. We changed the timing of our
annual test of goodwill during 2019 to align with our updated strategic plan and annual budgetary process. Accordingly, we performed our annual
quantitative test for impairment of our recorded goodwill as of December 10, 2019. As a result of this test, the estimated fair value of each of the Photonics
reporting unit, which included goodwill recognized with the Instrument Associates, LLC d/b/a Nutfield Technology (“Nutfield”), Laser Control Systems
Limited (“Laser Control Systems”) and Lanmark Controls, Inc. (“Lanmark”) acquisitions, and the 3D Design reporting unit, which included goodwill
recognized with the acquisition of Opto-Tech SRL and its subsidiary Open Technologies SRL (collectively, “Open Technologies”), were determined to be
significantly less than the carrying value of such reporting unit, indicating a full impairment. This $21.2 million impairment loss was driven primarily by
historical and projected financial performance lower than our expectations and changes in our go-forward strategy in connection with our new strategic
plan. See Note 7, “Goodwill” for further information regarding goodwill.
Other intangible assets principally include patents, existing product technology and customer relationships that arose in connection with our
acquisitions. Other intangible assets are recorded at fair value at the date of acquisition and are amortized over their estimated useful lives of 3 to 20 years.
As of December 31, 2020 and 2019, there were no indefinite-lived intangible assets.
Product technology and patents are recorded at cost. Amortization expense is computed using the straight-line method over the lives of the product
technology and patents of 7 to 20 years.
The remaining weighted-average amortization period for all our intangible assets is 5 years.
As a result of historical and projected financial performance being lower than our expectations and changes in our go-forward strategy in connection
with our new strategic plan, the estimated fair value of acquired intangibles recognized with the Nutfield, Laser Control Systems, Lanmark and Open
Technologies acquisitions were determined to be less than the net carrying value for such assets. We recognized an impairment charge related to such
acquired intangibles of $10.5 million in 2019. We recognized no impairment charges related to intangibles in 2020 or 2018. See Note 8, “Intangible Assets”
for further information regarding intangible assets.
Research and Development—Research and development costs incurred in the discovery of new knowledge and the resulting translation of this new
knowledge into plans and designs for new products prior to the attainment of the related products’ technological feasibility are recorded as expenses in the
period incurred. To date, the time incurred between the attainment of the related products' technological feasibility and general release to customers has
been short.
Reserve for Warranties—We establish at the time of sale a liability for the one-year warranty included with the initial purchase price of our products,
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 liabilities in the accompanying 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.
54
Table of Contents
Income Taxes—We review our deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of deferred
tax assets and liabilities, projections of future taxable income, and tax planning strategies that we might employ to utilize such assets, including net
operating loss carryforwards. Based on the positive and negative evidence for recoverability, we establish a valuation allowance against the net deferred tax
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. Our
evaluation of the need for the valuation allowance is significantly influenced by our ability to maintain profitability and our ability to predict and achieve
future projections of taxable income.
We recognize tax benefits related to uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination
by taxing authorities. For those positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the
financial statements. In the ordinary course of business, we are examined by various federal, state, and foreign tax authorities. We regularly assess the
potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for
income taxes. See Note 12, “Income Taxes” for further information regarding income taxes.
Earnings (Loss) Per Share (“EPS”)—Basic (loss) earnings per share is computed by dividing net (income) income by the weighted average number
of shares outstanding. Diluted earnings per share is computed by also considering the impact of potential common stock on both net income and the
weighted average number of shares outstanding. Our potential common stock consists of employee stock options, restricted stock, restricted stock units and
performance-based awards. Our potential common stock is excluded from the basic earnings per share calculation and is included in the diluted earnings
per share calculation when doing so would not be anti-dilutive. Performance-based awards are included in the computation of diluted earnings per share
only to the extent that the underlying performance conditions (and any applicable market condition) (i) are satisfied as of the end of the reporting period or
(ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the
treasury stock method. When we report a loss for the period presented, the diluted loss per share calculation does not include our potential common stock,
as the inclusion of these shares in the calculation would have an anti-dilutive effect. A reconciliation of the number of common shares used in the
calculation of basic and diluted EPS is presented in Note 15, “(Loss) Earnings Per Share.”
Accounting for Stock-Based Compensation—We have two stock-based employee and director compensation plans, which are described more fully
in Note 14, “Stock Compensation Plans.”
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 estimated, at the date of grant, using the Black-Scholes option-valuation model. The fair value of restricted stock unit
awards 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
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.
55
Table of Contents
We expense stock-based compensation for stock options, restricted stock awards, restricted stock units and performance awards over the requisite
service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service
period for the entire award. For awards with both performance and service conditions, we expense the stock-based compensation on a straight-line basis
over the requisite service period for each separately vesting portion of the award, taking into account the probability that we will satisfy the performance
conditions. Furthermore, we expense awards with a market condition over the three-year vesting period regardless of the value that the award recipients
ultimately receive. All income tax-related cash flows resulting from share-based payments are reported as operating activities in the statement of cash flows
in the deferred income tax benefit line item. We elect to account for forfeitures related to the service condition-based awards as they occur.
Concentration of Credit Risk—Financial instruments that expose us to concentrations of credit risk consist principally of short-term investments and
operating demand deposit accounts. Our policy is to place our operating demand deposit accounts with high credit quality financial institutions, the
balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and believe we are not exposed to any
significant credit risk on our operating demand deposit accounts.
Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Impact of Recently Adopted Accounting Standards—In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842) (“ASU 2016-02”), which is intended to increase transparency and comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key information about leasing arrangements to enable users of financial statements to assess the amount,
timing and uncertainty of cash flows arising from leases. ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, was issued by the FASB in July
2018 and allows for a cumulative-effect adjustment transition method of adoption. We adopted ASU 2016-02 effective as of January 1, 2019 utilizing the
cumulative-effect adjustment transition method of adoption, which resulted in the recognition on our consolidated balance sheet as of December 31, 2019
of $18.4 million of right-of-use assets for operating leases, $19.6 million of lease liability for operating leases, $0.8 million of property and equipment, net
for finance leases and $0.8 million of lease liability for finance leases under which we function as a lessee. We elected certain practical expedients available
under the transition provisions to (i) allow aggregation of non-lease components with the related lease components when evaluating accounting treatment,
(ii) apply the modified retrospective adoption method, utilizing the simplified transition option, which allows us to continue to apply the legacy guidance in
FASB ASC Topic 840, including its disclosure requirements, in the comparative periods presented in the year of adoption, and (iii) use hindsight in
determining the lease term (that is, when considering our options to extend or terminate the lease and to purchase the underlying asset) and in assessing
impairment of our right-of-use assets. The adoption of ASU 2016-02 also required us to include any initial direct costs, which are incremental costs that
would not have been incurred had the lease not been obtained, in the right-of-use assets. The recognition of these costs in connection with our adoption of
this guidance did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangible - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under
the new guidance, we perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge
is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value up to the amount of the goodwill allocated to the
reporting unit. The new guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the
goodwill impairment test if it fails the qualitative assessment. We adopted this guidance in connection with our annual impairment test for the fiscal year
ended December 31, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements.
56
Table of Contents
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU
2016-13, and subsequent related amendments to ASU 2016-13, replace the existing incurred loss impairment model with an expected loss model that
requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and
requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the
amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We adopted ASU 2016-13 effective as of January 1,
2020, and the adoption of the new guidance did not have a material impact on our consolidated financial statements.
Reclassifications—Certain prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to the
current period presentation:
• Depreciation and amortization expenses are being reported in the accompanying statements of operations to reflect departmental costs. Previously,
those expenses were reported as a separate line item under operating expenses. Amounts related to depreciation and amortization expenses for the
year ended December 31, 2018 has been restated throughout this Annual Report on Form 10-K to reflect this reclassification of depreciation and
amortization expenses and to conform to the current period presentation, as set forth in the following tables;
• Selling and marketing expenses and general and administrative expenses are now being reported in the accompanying statements of operations
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 selling, general and administrative expenses for the year ended December 31, 2018 have been reclassified
throughout this Annual Report on Form 10-K to reflect this reclassification of selling, general and administrative expenses and to conform to the
current period presentation, as set forth in the following tables;
• 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 sales for the year ended December 31, 2018 have been
reclassified throughout this Annual Report on Form 10-K to reflect this reclassification of software maintenance sales and to conform to the
current period presentation, as set forth in the following tables; 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 year ended
December 31, 2018 have been reclassified throughout this Annual Report on Form 10-K to reflect this reclassification of software maintenance
cost of sales and to conform to the current period presentation, as set forth in the following tables.
57
Table of Contents
For the twelve months ended December 31, 2018:
Sales
Product
Service
Total sales
Cost of Sales
Product
Service
Total cost of sales
Operating Expenses
Selling, general and administrative
Selling and marketing
General and administrative
Depreciation and amortization
Research and development
Total operating expenses
As Reported
Depreciation and
Amortization
Adjustment
Selling, General and
Administrative
Adjustment
Software
Maintenance
Adjustment
As Adjusted
311,102 $
92,525
403,627 $
— $
—
— $
124,802 $
50,480
175,282 $
3,406 $
3,386
6,792 $
— $
—
— $
— $
—
— $
9,482 $
(9,482)
— $
320,584
83,043
403,627
2,668 $
(2,668)
— $
130,876
51,198
182,074
— $
116,920
47,652
18,313
39,706
222,591 $
5,145 $
—
—
(18,313)
6,376
(6,792) $
164,572 $
(116,920)
(47,652)
—
—
— $
— $
—
—
—
—
— $
169,717
—
—
—
46,082
215,799
$
$
$
$
$
$
2. SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and non-cash activities were as follows:
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental noncash investing and financing activities:
Transfer of service and sales demonstration inventory to fixed assets
Assumption of contingent consideration from acquisition
2020
Years ended December 31,
2019
2018
$
$
$
$
21 $
3,409 $
1,688 $
980 $
6 $
5,498 $
3,044 $
— $
4
5,813
964
6,751
58
Table of Contents
3. REVENUES
The following tables present our revenues by sales type as presented in our consolidated statements of operations disaggregated by the timing of
transfer of goods or services (in thousands):
Product Sales
Products transferred to a customer at a point in time
Products transferred to a customer over time
Service Sales
Service transferred to a customer at a point in time
Service transferred to a customer over time
2020
Years ended December 31,
2019
2018
205,849 $
12,738
218,587 $
277,841 $
11,838
289,679 $
311,102
9,482
320,584
2020
Years ended December 31,
2019
2018
36,732 $
48,449
85,181 $
48,593 $
43,493
92,086 $
42,932
40,111
83,043
$
$
$
$
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in thousands):
(1)
Total Sales to External Customers
United States and Canada
EMEA
Other APAC
China
Other Americas
(1)
(1)
2020
Years ended December 31,
2019
2018
$
$
119,769 $
91,390
51,804
31,748
9,057
303,768 $
151,646 $
122,279
60,796
32,934
14,110
381,765 $
156,242
127,261
68,908
36,130
15,086
403,627
(1)
Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific, excluding China (Other APAC); and Mexico and Brazil (Other Americas).
We capitalize commission expenses related to deliverables transferred to a customer over time and amortize such costs ratably over the term of the
contract. As of December 31, 2020, the deferred cost asset related to deferred commissions was approximately $4.1 million. For classification
purposes, $2.6 million and $1.5 million are comprised within the Prepaid expenses and other current assets and Other long-term assets, respectively, on our
consolidated balance sheet as of December 31, 2020. As of December 31, 2019, the deferred cost asset related to deferred commissions was approximately
$3.1 million. For classification purposes, $2.1 million and $1.0 million are comprised within the Prepaid expenses and other current assets and Other long-
term assets, respectively, on our consolidated balance sheet as of December 31, 2019.
59
Table of Contents
The unearned service revenue liabilities reported on our consolidated balance sheets reflect the contract liabilities to satisfy the remaining
performance obligations for extended warranties and software maintenance. The current portion of unearned service revenues on our consolidated balance
sheets is what we expect to recognize to revenue within twelve months after the applicable balance sheet date relating to extended warranty and software
maintenance contract liabilities. The Unearned service revenues - less current portion on our consolidated balance sheets is what we expect to recognize to
revenue extending beyond twelve months after the applicable balance sheet date relating to extended warranty and software maintenance contract
liabilities. Customer deposits on our consolidated balance sheets represent customer prepayments on contracts for performance obligations that we must
satisfy in the future to recognize the related contract revenue. These amounts are generally related to performance obligations which are delivered in less
than 12 months. During the year ended December 31, 2020, we recognized $35.2 million of revenue that was deferred on our consolidated balance sheet as
of December 31, 2019. During the year ended December 31, 2019, we recognized $30.2 million of revenue that was deferred on our consolidated balance
sheet as of December 31, 2018.
The nature of certain of our contracts gives rise to variable consideration, primarily related to an allowance for sales returns. We are required to
estimate the contract asset related to sales returns and record a corresponding adjustment to Cost of Sales. Our allowance for sales returns for December 31,
2020 and December 31, 2019 was approximately $0.3 million and $0.1 million, respectively.
Shipping and handling fees billed to customers in a sales transaction are recorded in Product Sales and shipping and handling costs incurred are
recorded in Cost of Sales. We exclude from Sales any value-added, sales and other taxes that we collect concurrently with revenue-producing activities.
4. ALLOWANCE FOR CREDIT LOSSES
Activity in the allowance for credit losses was as follows:
Balance, beginning of year
Provision (net of recovery)
Amounts written off, net of recoveries
Balance, end of year
5. SHORT-TERM INVESTMENTS
2020
Years ended December 31,
2019
2018
$
$
3,449 $
440
(1)
3,888 $
1,748 $
2,090
(389)
3,449 $
1,957
907
(1,116)
1,748
We had no short-term investments at December 31, 2020. Short-term investments at December 31, 2019 were comprised of U.S. Treasury Bills
totaling $24.8 million, consisting of $8.9 million that matured on March 12, 2020 and $15.9 million that matured on June 11, 2020. The interest rates on the
U.S. Treasury Bills held on December 31, 2019 that matured on March 12, 2020 and June 11, 2020 were 1.8% and 1.4%, respectively. The investments are
classified as held-to-maturity and recorded at cost plus accrued interest, which approximates fair value.
6. INVENTORIES
Inventories are stated at the lower of cost or net realizable value using the first-in first-out 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 held for
sale; and 3) service inventory - completed product and parts used to support our service department and held for sale. Shipping and handling costs are
classified as a component of cost of sales in our consolidated statements of operations. Sales demonstration inventory is held by our sales representatives
for up to three years, at which time it is refurbished and transferred to finished goods as used equipment, stated at the lower of cost or net realizable value.
We expect these refurbished units to remain in finished goods inventory and to be sold within 12 months at prices that produce reduced gross margins.
Service inventory is used to provide a temporary replacement product to a customer covered by a premium warranty 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 the remaining life, typically three
years.
60
Table of Contents
Inventories consist of the following:
Raw materials
Finished goods
Inventories, net
Service and sales demonstration inventory, net
7. GOODWILL
December 31, 2020
December 31, 2019
$
$
$
29,955 $
17,436
47,391 $
31,831 $
36,956
21,598
58,554
33,349
We had approximately $57.5 million and $49.7 million of goodwill as of December 31, 2020 and 2019, respectively. Changes in these balances are
shown below:
(in thousands)
Goodwill, beginning
Recognized goodwill
Impairment of goodwill
Foreign currency translation
Goodwill, ending
December 31, 2020
December 31, 2019
$
$
49,704 $
5,467
—
2,370
57,541 $
67,274
4,443
(21,233)
(780)
49,704
We test goodwill for impairment annually on December 31 of each reporting year or more frequently if an event occurs or circumstances would
indicate that it is more likely than not the fair value of the reporting unit is less than the carrying value. We performed our annual quantitative test of
goodwill during 2020 as of December 31, 2020, and recorded no impairment expense for the year ended December 31, 2020. During 2019, we changed the
timing of our annual test of goodwill to align with our updated strategic plan and annual budgetary process. Accordingly, in connection with the preparation
of our financial statements for the year ended December 31, 2019, we performed our annual quantitative test for impairment of our recorded goodwill as of
December 10, 2019. As a result of this test, the estimated fair value of each of the Photonics reporting unit, which included goodwill recognized with the
Nutfield, Laser Control Systems and Lanmark acquisitions, and the 3D Design reporting unit, which included goodwill recognized with the Open
Technologies acquisition, were determined to be less than the carrying value of such reporting unit, indicating a full impairment. This impairment was
driven primarily by historical and projected financial performance lower than our expectations and changes in our go-forward strategy in connection with
our new strategic plan.
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our CODM, in the fourth quarter of 2019, we eliminated
our vertical structure and began reorganizing the Company into a functional structure. Our executive leadership team is now comprised of 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 are now reporting 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. Accordingly, there are no reporting segment goodwill
balances at December 31, 2020 and 2019, respectively.
61
Table of Contents
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
Amortizable intangible assets:
Product technology
Patents and trademarks
Customer relationships
Other
Total
Amortizable intangible assets:
Product technology
Patents and trademarks
Customer relationships
Other
Total
Carrying Value
As of December 31, 2020
Accumulated
Amortization
Net Intangible
14,625 $
14,325
6,541
5,265
40,756 $
10,785 $
7,495
4,002
5,173
27,455 $
3,840
6,830
2,539
92
13,301
Carrying Value
As of December 31, 2019
Accumulated
Amortization
Net Intangible
24,135 $
13,726
5,150
8,875
51,886 $
19,798 $
6,894
2,509
8,214
37,415 $
4,337
6,832
2,641
661
14,471
$
$
$
$
For the year ended, December 31, 2019, as a result of historical and projected financial performance lower than our expectations and changes in our
go-forward strategy in connection with our new strategic plan, the estimated fair value of acquired intangibles recognized with the Nutfield, Laser Control
Systems, Lanmark and Open Technologies acquisitions were determined to be less than the carrying value of the net carrying value for such assets. We
recognized an impairment charge related to such acquired intangibles of $10.5 million in the fourth quarter of 2019. This impairment charge was primarily
related to customer relationship and technology intangible assets.
Amortization expense was $3.4 million, $5.6 million and $5.4 million in 2020, 2019 and 2018, respectively. The estimated amortization expense for
each of the years 2021 through 2025 and thereafter is as follows:
Years ending December 31,
2021
2022
2023
2024
2025
Thereafter
$
$
Amount
3,760
2,536
1,903
1,569
1,394
2,139
13,301
62
Table of Contents
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Accrued compensation and benefits
Accrued restructuring costs
Accrued warranties
Professional and legal fees
Taxes other than income
General services administration contract contingent liability (see Note 13)
Other accrued liabilities
Activity related to accrued warranties was as follows:
Balance, beginning of year
Provision for warranty expense
Fulfillment of warranty obligations
Balance, end of year
10. FAIR VALUE MEASUREMENTS
As of December 31,
2020
2019
$
$
17,457 $
2,347
1,683
1,810
5,013
12,325
1,958
42,593 $
2020
Years ended December 31,
2019
2018
$
$
2,090 $
2,727
(3,134)
1,683 $
2,571 $
3,600
(4,081)
2,090 $
15,366
—
2,090
1,793
4,077
11,886
2,860
38,072
2,628
4,096
(4,153)
2,571
The guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and requires enhanced
disclosures about assets and liabilities measured at fair value. Fair value is defined as the price at which an asset could be exchanged in a current
transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new
obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are used to determine fair
value. These models employ valuation techniques that involve some level of management estimation and judgment, the degree of which is dependent on
the price transparency for the instruments or market and the instruments’ complexity.
Assets and liabilities recorded at fair value on a recurring basis in our consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. Hierarchical levels, defined by the guidance on fair value measurements, are directly related to
the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and are as follows:
Level 1 - Valuation is based upon quoted market prices for identical instruments traded in active markets.
Level 2 - Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the
market.
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. Valuation
techniques include use of discounted cash flow models and similar techniques.
63
Table of Contents
Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to
the valuations. Historically, we have presented short-term investments in the fair value table presented below. As our short-term investments in the
accompanying consolidated balance sheets are comprised of U.S. Treasury Bills, these investments are classified as held-to-maturity investments and are
not recorded at fair value on a recurring basis in our consolidated balance sheets. As such, we have removed short-term investments from the table below.
Liabilities:
Contingent consideration
(1)
Total
Liabilities:
Contingent consideration
(1)
Total
(1)
Level 1
December 31, 2020
Level 2
Level 3
— $
— $
— $
— $
1,056
1,056
Level 1
December 31, 2019
Level 2
Level 3
— $
— $
— $
— $
733
733
$
$
$
$
Contingent consideration liability represents arrangements to pay the former owners of certain companies we acquired based on the former owners
attaining future product release milestones. We use a probability-weighted discounted cash flow model to estimate the fair value of contingent
consideration liabilities. These probability-weightings are developed internally and assessed on a quarterly basis. The change in the fair value of the
contingent consideration from December 31, 2019 to December 31, 2020 were primarily related to the execution of our new strategic plan where
we disposed of the acquired company that was related to the arrangement to pay former owners, as well as the consummation of a new arrangement
to pay the former owners of our recent acquisition. The undiscounted maximum payment as of December 31, 2020 under the arrangements
was $1.2 million, based on certain milestones.
11. OTHER EXPENSE (INCOME), NET
Other expense (income), net consists of the following:
Foreign exchange transaction losses
Present4D impairment
Contingent consideration fair value adjustment
Other
Total other expense, net
2020
Years ended December 31,
2019
2018
$
$
1,680 $
—
—
(1,249)
431 $
1,211 $
2,152
(1,562)
512
2,313 $
1,386
—
—
(247)
1,139
12. INCOME TAXES
Income (loss) before income tax (benefit) expense consists of the following:
Domestic
Foreign
(Loss) Income before income taxes
Years ended December 31,
2019
(40,963) $
(20,051)
(61,014) $
2020
(33,991) $
3,218
(30,773) $
$
$
2018
(1,723)
6,281
4,558
64
Table of Contents
The components of the income tax expense (benefit) for income taxes are as follows:
Current:
Federal
State
Foreign
Current income tax (benefit) expense
Deferred:
Federal
State
Foreign
Deferred income tax benefit
Income tax (benefit) expense
Years ended December 31,
2019
2018
2020
$
$
(3,557) $
169
(2,032)
(5,420)
(2,886)
(2,937)
(20,159)
(25,982)
(31,402) $
3,215 $
400
3,809
7,424
(7,630)
(1,667)
3,006
(6,291)
1,133 $
(1,694)
120
1,394
(180)
(486)
(153)
447
(192)
(372)
During fiscal 2020, we completed intra-entity transfers of certain intellectual property rights (“IP Rights”) which resulted in the Company
establishing deferred tax assets and related tax benefits of $19.2 million, based on fair value of the IP rights transferred in December 2020. The
determination of the fair value involves significant judgment on future revenue growth, operating profit and discount rates. Unforeseen events and
circumstances may occur that could affect either the accuracy or validity or such assumptions, estimates or actual results. The sustainability of our future
tax benefits may be dependent upon the acceptance of the valuation estimates and assumptions by the taxing authorities in those jurisdictions impacted by
the intra-entity transfers of IP rights.
65
Table of Contents
Reconciliations of the income tax expense at the U.S. federal statutory income tax rate compared to our actual income tax (benefit) expense are
summarized below:
Tax expense at statutory rate
State income taxes, net of federal benefit
Foreign tax rate difference
Research and development credit
Change in valuation allowance
Equity based compensation
Impact of permanent differences of non-deductible cost
Provision to return adjustments & deferred adjustments
Change in enacted tax rates
Global intangible low-taxed income (“GILTI”)
Intangible & goodwill impairment
Other
Impact of intra-entity IP transfers
Income tax (benefit) expense
The components of our net deferred income tax assets and liabilities are as follows:
Net deferred income tax asset - Non-current
Warranty cost
Inventory reserve
Unearned service revenue
Employee stock options
Tax credits
Loss carryforwards
Depreciation
Other, net
Intangibles & goodwill
Lease liability
Total deferred tax assets
Valuation allowance
Total deferred tax assets net of valuation allowance
Net deferred income tax liability - Non-current
Intangibles & goodwill
Right of use asset
Total deferred tax liabilities
Net deferred tax assets
66
$
$
$
$
2020
Years ended December 31,
2019
(12,812) $
(1,564)
(1,954)
(753)
8,485
(25)
1,550
356
359
1,795
4,999
697
—
1,133 $
(6,462) $
(1,400)
1,999
(662)
(3,736)
(42)
(602)
(572)
(1,138)
—
—
440
(19,227)
(31,402) $
As of December 31,
2020
2019
310
5,234
11,607
3,271
2,828
8,530
1,419
735
19,295
6,986
60,215
(6,916)
53,299
—
(6,636)
(6,636)
46,663
$
$
2018
956
(13)
(1,003)
(919)
464
(390)
727
(654)
58
402
—
—
—
(372)
616
4,820
11,616
4,157
1,207
7,481
345
1,760
—
4,591
36,593
(10,419)
26,174
(3,174)
(4,591)
(7,765)
18,409
Table of Contents
Our domestic entities had deferred income tax assets in the amount of $21.4 million and $15.3 million as of December 31, 2020 and December 31,
2019, respectively. At December 31, 2020 we had U.S. federal and state net operating loss carryforwards of $1.3 million and $28.4 million, respectively.
Federal and state net operating loss carryforwards will begin to expire in 2035 and 2029, respectively. We also had federal and state R&D credits of
$2.3 million and $0.4 million, respectively. The federal credits will begin to expire in 2039 and our state credits carryforward indefinitely. At December 31,
2020, our foreign subsidiaries had deferred tax assets primarily relating to Intangibles of $19.4 million and net operating losses of $7.1 million, the majority
of which can be carried forward indefinitely. At December 31, 2019, our foreign subsidiaries had deferred tax assets primarily relating to net operating
losses of $7.2 million. The valuation allowance for deferred tax assets as of December 31, 2020 and 2019 was $6.9 million and $10.4 million, respectively.
The net change in the total valuation allowance for each of the years ended December 31, 2020, 2019 and 2018 was a $3.7 million decrease, an $8.5 million
increase and a $0.5 million increase, respectively.
The valuation allowance as of December 31, 2020 and 2019 was primarily related to foreign net operating loss carryforwards that, in the judgment of
management, were not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of
future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax
liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this
assessment.
On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing law, which
included a transition tax on the mandatory deemed repatriation of foreign earnings. As a result of the U.S. Tax Cuts and Jobs Act, the Company can
repatriate foreign earnings and profits to the U.S. with minimal U.S. income tax consequences, other than the transition tax and GILTI tax. The Company
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 subject to local withholding taxes and which were subject already to transition tax and
GILTI tax. At December 31, 2020, we have not provided for approximately $0.4 million of withholding tax on foreign earnings and profits in certain
jurisdictions that we intend to invest these earnings indefinitely.
Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of a global business, there are
many transactions for which the ultimate tax outcome is uncertain. We review our tax contingencies on a regular basis and make appropriate accruals as
necessary.
As of December 31, 2020, 2019 and 2018, our unrecognized tax benefits totaled $1.9 million, $1.9 million and $0.3 million, respectively, which are
included in Income taxes payable - less current portion in our consolidated balance sheet.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Lapse of statute of limitations
Balance at December 31
Years ended December 31,
2019
2018
2020
$
$
1,924 $
273
—
(324)
1,873 $
324 $
314
1,675
(389)
1,924 $
324
—
—
—
324
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The table below summarizes the open tax years
and ongoing tax examinations in major jurisdictions as of December 31, 2020
Jurisdiction
United States - Federal Income Tax
United States - various states
Germany
Switzerland
Singapore
Open Years
2016-2020
2016-2020
2013-2020
2018-2020
2016-2020
Examination
in Process
2016
N/A
2013-2014
N/A
N/A
67
Table of Contents
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized tax
benefits that, if recognized, would affect the effective tax rate is $1.9 million. We do not currently anticipate that the total amount of unrecognized tax
benefits will result in material changes to our financial position. We are subject to income taxes at the federal, state and foreign country level. Our tax
returns are subject to examination at the U.S. state level are subject to a three to four year statute of limitations, depending on the state.
13. COMMITMENTS AND CONTINGENCIES
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 December 31, 2020, we had approximately $44.2 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 December 31, 2020, we also had $0.9
million in long-term commitments for purchases to be delivered after 12 months.
Legal Proceedings — We are not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of
which 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 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”), 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.
As a result of the GSA Matter, for the fourth quarter of 2018, we reduced our total sales by a $4.8 million estimated cumulative sales adjustment,
representative of the last six years of estimated overcharges to the Government under the GSA Contracts. In addition, for the fourth quarter of 2018, we
recorded $0.5 million of imputed interest related to the estimated cumulative sales adjustment, which increased Interest expense, net and resulted in an
estimated total liability of $5.3 million for the GSA Matter. This estimate 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.
On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review conducted by our
outside legal counsel and forensic accountants. 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 $0.7 million of imputed interest related to the estimated cumulative sales adjustment during 2019,
which increased Interest expense, net and resulted in a $6.5 million total incremental increase in the estimated total liability for the GSA Matter.
In January 2020, we received requests for additional information from the GSA and its Office of Inspector General to which we corresponded through
June 2020. As a result of this continuing investigation, we reduced our total sales for the second quarter 2020 by an incremental $0.6 million sales
adjustment, reflecting an estimated aggregate overcharge of $11.2 million under the GSA Contracts for the period from July 2011 to December 2020. We
are working with the GSA in responding to any additional inquiries arising from the investigation. We recorded an incremental $0.2 million of imputed
interest related to the estimated cumulative sales adjustment for the third quarter of 2020 and determined in the fourth quarter of 2020 that an adjustment to
reduce imputed interest by $0.7 million was required. As of the date of the filing of this Annual Report on Form 10-K, we have recorded an aggregate
estimated total liability for the GSA Matter of $12.3 million. This estimate is based on the information we have as of the date of this Annual Report on
Form 10-K and is subject to change based on discussions with our outside legal counsel and the Government.
68
Table of Contents
We intend to cooperate fully with this and any other Government inquiries. The Government’s review of, or investigation into, this matter could result
in civil and criminal penalties, administrative sanctions, and contract remedies being imposed on us, including but not limited to, termination of the GSA
Contracts, repayments of amounts already received under the GSA Contracts, forfeiture of profits, damages, suspension of payments, fines, and suspension
or debarment from doing business with the Government and possibly U.S. state and local governments. We may also be subject to litigation and recovery
under the federal False Claims Act and possibly similar state laws, which could include claims for treble damages, penalties, fees and costs. As a result, we
cannot reasonably predict the outcome of the Government’s review of, or investigation into, this matter at this time or the resulting future financial impact
on us. Any of these outcomes could have a material adverse effect on our reputation, our sales, results of operations, cash flows and financial condition, and
the trading price of our common stock. In addition, we have incurred, and will continue to incur, legal and related costs in connection with the Review and
the Government’s response to this matter.
14. STOCK COMPENSATION PLANS
We have two compensation plans that provide for the granting of stock options and other share-based awards to key employees and non-employee
members of the Board of Directors. The 2009 Equity Incentive Plan (“2009 Plan”), and the 2014 Equity Incentive Plan (“2014 Plan”) provide for granting
options, restricted stock, restricted stock units or stock appreciation rights to employees and non-employee directors.
We were authorized to grant awards for up to 1,781,546 shares of common stock under the 2009 Plan, as well as any shares underlying awards
outstanding under our 2004 Equity Incentive Plan (the “2004 Plan”) as of the effective date of the 2009 Plan that thereafter terminated or expired
unexercised or were canceled, forfeited or lapsed for any reason. There were 17,150 options outstanding at December 31, 2020 under the 2009 Plan at an
exercise price of $57.54. The options outstanding under the 2009 Plan have a 7-year term.
In May 2014, our shareholders approved the 2014 Plan authorizing us to grant awards for up to 1,974,543 shares of common stock, as well as any
shares underlying awards outstanding under the 2004 Plan and 2009 Plan as of the effective date of the 2014 Plan that thereafter terminate or expire
unexercised or are canceled, forfeited or lapse for any reason. In May 2018, our shareholders approved an amendment to the 2014 Plan, which increased
the number of shares available for issuance under the 2014 Plan by 1,000,000 shares. A maximum of 2,974,543 shares are available for issuance under the
2014 Plan, as amended, plus the number of shares (not to exceed 891,960) underlying awards outstanding under the 2004 Plan and the 2009 Plan as of May
29, 2014 that thereafter terminate or expire unexercised or are canceled, forfeited or lapse for any reason. There were 137,898 options outstanding at
December 31, 2020 under the 2014 Plan at exercise prices between $33.05 and $61.30. The options outstanding under the 2014 Plan have a 7-year term and
generally vest over a 3-year period.
Upon election to the Board, each non-employee director receives an initial equity grant of shares of restricted common stock with a value equal to
$100,000, calculated using the closing share price on the date of the non-employee director’s election to the Board. The initial restricted stock grant vests
on the third anniversary of the grant date, subject to the non-employee director’s continued membership on the Board. Annually, the non-employee
directors are granted restricted shares equal to $100,000 on the first business day following the annual meeting of shareholders, calculated using the closing
price of our common stock on that day. In addition, the independent Chairman of the Board is annually granted restricted shares with a value equal to
$50,000, and the Lead Director, if one has been appointed, would be annually granted restricted shares with a value equal to $40,000 on the first business
day following the annual meeting of shareholders, calculated using the closing price of our common stock on that day. The shares of restricted stock
granted annually to our non-employee directors, our independent Chairman of the Board and, if applicable, our Lead Director vest on the day prior to the
following year’s annual meeting date, subject to a non-employee director’s continued membership on the Board. We record compensation cost associated
with our restricted stock grants on a straight-line basis over the vesting term. Our non-employee directors also may elect to have their annual cash retainers
and annual equity retainers paid in the form of deferred stock units pursuant to the 2014 Plan and the 2018 Non-Employee Director Deferred Compensation
Plan. Each deferred stock unit represents the right to receive one share of our common stock upon the non-employee director's separation of service from
the Company. We record compensation cost associated with our deferred stock units over the period of service.
69
Table of Contents
Annually, upon approval by our Compensation Committee, we grant stock-based awards, which historically have been in the form of stock options
and/or restricted stock units, to certain employees. We also grant stock-based awards, which historically have been in the form of stock options and/or
restricted stock units, to certain new employees throughout the year. The fair value of these stock-based awards is determined by using (a) the current
market price of our common stock on the grant date in the case of restricted stock units without a market condition, (b) the Monte Carlo Simulation
valuation model in the case of performance-based restricted stock units with a market condition, or (c) the Black-Scholes option valuation model in the case
of stock options.
For the stock-based awards granted in 2019 and 2020, the time-based restricted stock units vest in three equal annual installments beginning one year
after the grant date. The performance-based restricted stock unit awards vest at the end of the 3-year performance period if the applicable performance
measure is achieved. The related stock-based compensation expense will be recognized over the requisite service period, taking into account the probability
that we will satisfy the performance measure. The performance-based restricted stock units granted in 2020 will be earned and will vest based upon our
total shareholder return (“TSR”) relative to the TSR attained by companies within our defined benchmark group, the Russell 2000 Growth Index. Due to
the TSR presence in these performance-based restricted stock units, the fair value of these awards was determined using the Monte Carlo Simulation
valuation model. We expense these market condition awards over the three-year vesting period regardless of the value the award recipients ultimately
receive.
The Monte Carlo Simulation valuation model incorporates assumptions as to stock price volatility, the expected life of options or awards, a risk-free
interest rate and dividend yield. The weighted-average grant-date fair value of the performance-based restricted stock units that were granted during 2020
and 2019 valued using the Monte Carlo Simulation valuation model was $80.38 and $66.16, respectively. For performance-based restricted stock units
granted during 2020 and 2019 valued using the Monte Carlo Simulation valuation model, we used the following assumptions:
Risk-free interest rate
Expected dividend yield
Term
Expected volatility
Weighted-average expected volatility
Year ended December 31
2020
1.2 %
— %
3 years
40.0 %
40.0 %
2019
1.8% - 2.48%
— %
3 years
45.0 %
45.0 %
Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options.
The risk-free interest rate was based on the yields of U.S. zero coupon issues and U.S. Treasury issues, with a term equal to the expected life of the option
being valued.
A summary of stock option activity and weighted average exercise prices follows:
Outstanding at January 1, 2020
Granted
Forfeited
Exercised
Outstanding at December 31, 2020
Options exercisable at December 31, 2020
Options
486,682 $
—
(34,605)
(297,029)
155,048 $
148,469 $
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
(Years)
Aggregate Intrinsic
Value as of
December 31, 2020
52.37
—
57.51
49.60
56.53
56.31
2.3 $
0.8 $
2,187
2,125
The aggregate intrinsic value of stock options exercised during the years ended December 31, 2020, 2019, and 2018 was $4.2 million, $3.4 million
and $7.5 million, respectively. The total fair value of stock options vested during the years ended December 31, 2020, 2019, and 2018 was $0.8 million,
$5.1 million and $3.7 million, respectively.
70
Table of Contents
The following table summarizes the restricted stock and restricted stock unit activity and weighted-average grant date fair values for the year ended
December 31, 2020:
Non-vested at January 1, 2020
Granted
Forfeited
Vested
Non-vested at December 31, 2020
Shares
Weighted-Average
Grant Date
Fair Value
398,318 $
208,405
(56,850)
(172,426)
377,447 $
49.53
65.36
56.56
41.46
60.92
We recorded total stock-based compensation expense associated with our stock incentive plans of $8.3 million, $11.1 million and $7.6 million in
2020, 2019 and 2018, respectively.
As of December 31, 2020, there was $13.6 million in total unrecognized stock-based compensation expense related to non-vested stock-based
compensation arrangements. The expense is expected to be recognized over a weighted-average period of 1.9 years.
The following table summarizes total stock-based compensation expense for each of the line items on our consolidated statement of operations:
Cost of Sales
Product
Service
Total cost of sales
Operating Expenses
Selling, general and administrative
Research and development
Total operating expenses
2020
Years ended December 31,
2019
2018
$
$
$
$
356 $
346
702 $
6,327 $
1,285
7,612 $
628 $
373
1,001 $
8,786 $
1,282
10,068 $
477
351
828
5,210
1,583
6,793
71
Table of Contents
15. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share is
computed by also considering the impact of potential common stock on both net income and the weighted average number of shares outstanding. Our
potential common stock consists of employee stock options, restricted stock, restricted stock units and performance-based awards. Our potential common
stock is excluded from the basic earnings per share calculation and is included in the diluted earnings per share calculation when doing so would not be
anti-dilutive. Performance-based awards are included in the computation of diluted earnings per share only to the extent that the underlying performance
conditions (and any applicable market condition) (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the
reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. When we report a net loss
for the period presented, the diluted loss per share calculation does not include our potential common stock, as the inclusion of these shares in the
calculation would have an anti-dilutive effect. A reconciliation of the number of common shares used in the calculation of basic and diluted earnings per
share is presented below:
Basic earnings per share
Effect of dilutive securities
Diluted earnings per share
Securities excluded from the determination
of weighted average shares for the
calculation of diluted earnings per share, as
they were potentially antidilutive
2020
Shares
17,769,958
156,366
17,926,324 — $
$
Per-Share
Amount
0.04
—
0.04
Years Ended December 31,
2019
Shares
17,383,415 $
—
17,383,415 $
Per-Share
Amount
(3.58)
—
(3.58)
2018
Shares
17,043,167 $
305,289
17,348,456 $
Per-Share
Amount
0.29
—
0.29
—
886,274
393,970
16. EMPLOYEE RETIREMENT BENEFIT PLAN
We maintain a 401(k) defined contribution retirement plan for our eligible U.S. employees. Costs charged to operations in connection with the 401(k)
plan during 2020, 2019 and 2018 aggregated to $1.8 million, $2.2 million, and $2.1 million, respectively.
17. VARIABLE INTEREST ENTITY
A variable interest entity (“VIE”) is an entity that has one of three characteristics: (1) it is controlled by someone other than its shareowners or
partners, (2) its shareowners or partners are not economically exposed to the entity's earnings (for example, they are protected against losses), or (3) it lacks
sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties.
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 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.
72
Table of Contents
As of our investment date, present4D was thinly capitalized and lacked the sufficient equity to finance its activities without additional subordinated
financial support and is classified as a VIE. We do not have power over decisions that significantly affect present4D’s economic performance and do not
represent its primary beneficiary. After April 27, 2020, present4D may request additional equity financing of up to $1.8 million from us in exchange for
additional share capital, which additional equity financing would be at our discretion. In July 2019, we originated a $0.5 million note with present4D,
which we may convert into additional equity in present4D at our discretion in the event of a default. Further, the note is collateralized by the perpetual and
royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D’s software.
We do not intend to provide future support to present4D or to obtain the aforementioned additional share capital in the future. We do not intend to use
the perpetual and royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D’s software. During the year ended
December 31, 2019, we wrote off our investment in, and our note receivable with, present4D and recognized a total loss of $2.2 million. Our portion of
present4D’s net loss for the year ended December 31, 2019 was approximately $0.2 million. We had no remaining asset related to present4D at December
31, 2020 and December 31, 2019. We have no remaining exposure to loss for our involvement with present4D.
18. GEOGRAPHIC INFORMATION
Historically, we operated in five verticals—3D Manufacturing, Construction Building Information Modeling (“Construction BIM”), Public Safety
Forensics, 3D Design and Photonics—and had three reporting segments—3D Manufacturing, Construction BIM and Emerging Verticals. During the
second half of 2019, our Chief Executive Officer (“CEO”) and FARO's management team formulated and began to implement a new comprehensive
strategic plan for our business. Our strategic planning process included extensive conversations with employees, customers, investors and suppliers to
identify both where the Company can provide sustained and differentiated customer value and where opportunities existed to improve operating
efficiencies. We identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. As part of our
strategic plan, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers, re-evaluated our hardware
and software product portfolio and examined how key decisions are made throughout our global organization. Additionally, we focused on other
organizational optimization efforts, including the simplification of our overly complex management structure.
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the
fourth quarter of 2019, we eliminated our vertical structure and began reorganizing the Company into a functional structure. Our executive leadership team
is now comprised of 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 are now reporting 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. These activities
represent more than 99% of consolidated sales.
73
Table of Contents
Total sales to external customers is based upon the geographic location of the customer.
Total sales to external customers
United States and Canada
Americas-Other
Germany
Europe-Other
Japan
China
Asia-Other
2020
For the Years Ended December 31,
2019
2018
$
$
119,769 $
9,057
46,166
45,224
4,998
31,748
46,806
303,768 $
151,646 $
14,110
52,083
70,196
33,361
32,934
27,435
381,765 $
156,242
15,086
53,251
74,010
37,607
36,130
31,301
403,627
Long-lived assets consist primarily of property, plant, and equipment, goodwill, and intangible assets, and are attributed to the geographic area in
which they are located or originated, as applicable.
Long-Lived Assets
United States
Americas-Other
Germany
Europe-Other
Japan
Asia-Other
19. LEASES
2020
As of December 31,
2019
2018
$
$
42,729 $
10,415
26,671
10,966
1,192
1,960
93,933 $
45,225 $
10,889
26,295
4,984
1,423
2,313
91,129 $
61,557
10,702
30,154
24,935
1,039
2,358
130,745
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 eight years, and some of which include options to
terminate the leases within three months. We currently do not sublease any of our leased assets.
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 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.
74
Table of Contents
The components of lease expense were as follows:
Operating lease cost
Finance lease cost:
Amortization of ROU assets
Interest on lease liabilities
Total finance lease cost
Year Ended
December 31, 2020
Year Ended
December 31, 2019
$
$
$
$
8,506
307
29
336
$
$
$
$
8,114
363
45
408
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 year ended December 31, 2020 and December 31, 2019 was $0.1 million and $0.2 million respectively.
75
Table of Contents
Supplemental balance sheet information related to leases was as follows:
Operating leases:
Operating lease right-of-use asset
Current operating lease liability
Operating lease liability - less current portion
Total operating lease liability
Finance leases:
Property and equipment, at cost
Accumulated depreciation
Property and equipment, net
Current finance lease liability
Finance lease liability - less current portion
Total finance lease liability
Weighted Average Remaining Lease Term (in years):
Operating leases
Finance leases
Weighted Average Discount Rate:
Operating leases
Finance leases
Supplemental cash flow information related to leases was as follows:
As of
December 31, 2020
As of
December 31, 2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
26,107
5,557
21,985
27,542
1,813
(1,415)
398
278
146
424
6.55
1.93
5.66 %
5.07 %
18,418
6,349
13,272
19,621
1,870
(1,150)
720
325
426
751
4.48
2.48
5.10 %
5.09 %
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
ROU assets obtained in exchange for lease obligations:
Operating leases
Year Ended
December 31, 2020
Year Ended
December 31, 2019
$
$
$
$
8,272
29
309
13,611
$
$
$
$
8,037
45
358
8,970
76
Table of Contents
Maturities of lease liabilities are as follows:
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Total
Operating leases
Finance leases
$
$
$
6,914
5,472
4,721
4,341
3,270
8,604
33,322
(5,780)
27,542
$
$
$
292
89
45
17
2
—
445
(21)
424
20. BUSINESS COMBINATIONS
On August 21, 2020, we acquired all of the outstanding shares of Advanced Technical Solutions in Scandinavia AB (“ATS”), a Swedish company
focused on 3D digital twin solution technology for a purchase price of €5.1 million ($6.0 million) paid, net of cash acquired, subject to certain additional
post-closing adjustments, and up to €1.0 million ($1.2 million) in contingent consideration that may be earned by the former owners if certain product
development milestones are met in a three-year period. The U.S. Dollar amounts have been converted from Euros based on the foreign exchange rate in
effect on the closing date of the acquisition. We believe this acquisition enables the Company to provide high accuracy 3D digital twin simulations for
industries such as automotive and aerospace. The results of ATS’s operations as of and after the date of acquisition have been included in our consolidated
financial statements as of December 31, 2020, and for the year ended December 31, 2020.
The acquisition of ATS constitutes a business combinations as defined by 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 finalized
determination of the fair value of the assets acquired and liabilities assumed for the acquisition.
77
Table of Contents
Following is a summary of our allocations of the purchase price to the fair values of the assets acquired and liabilities assumed as of the date of the
acquisition:
Fair Value
(2)
Tangible assets acquired:
Accounts receivable
Inventory
Other assets
Total tangible assets acquired
Liabilities assumed:
Accounts payable and accrued liabilities
Total liabilities assumed
Intangible assets
Net assets acquired
Deferred income tax liability
Goodwill
Contingent consideration
(1)
Purchase price paid, net of cash acquired
Contingent consideration
(1)
Total purchase price
$
$
$
185
312
389
886
(355)
(355)
1,295
1,826
(277)
5,467
(980)
6,036
980
7,016
(1)
(2)
This total consists primarily of the fair value of the projected contingent consideration.
Amounts converted from Euros to U.S. Dollars based on the foreign exchange rate on the closing date of the acquisition.
The goodwill arising from the acquisition consists largely of the expected synergies from combining operations as well as the value of the workforce.
This goodwill is not tax deductible. 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 not incurred any material acquisition or integration costs for the ATS acquisition.
Pro forma financial results for ATS has not been presented because the effect of this transaction was not material to our consolidated financial results.
Following are the details of the purchase price allocated to the intangible assets acquired for the ATS acquisition:
Brand
Technology
Customer relationships
Fair value of intangible assets acquired
Amount
33
767
495
1,295
$
$
Weighted
Average Life
(Years)
1
5
10
7
78
Table of Contents
21. RESTRUCTURING
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 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. Pre-tax charges of approximately $49 million were recorded in the
fourth quarter of 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; and
$3.4 million impairment of other assets and other charges.
In connection with the Restructuring Plan, we recorded a pre-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 cash payments for the disposal of our Photonics
business and 3D Design related assets in the second quarter. We estimate total additional pre-tax charges of $5 million to $15 million for fiscal year 2021.
At this time, we are continuing to evaluate the future key activities by which these additional charges will originate. 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 approximately $13.1 million during the year ended December 31, 2020 primarily consisting of
severance and related benefits. We expect an additional $7 million to $9 million of cash payments to be made for fiscal year 2021 related to the
Restructuring Plan. Activity related to the accrued restructuring charge and cash payments during the year ended December 31, 2020 was as follows:
Balance at February 14, 2020
Additions/Reductions charged to expense
Cash payments
Balance at December 31, 2020
Severance and other benefits
Professional fees and other
related charges
— $
— $
12,107
(10,626)
1,481
3,349
(2,483)
866
Total
—
15,456
(13,109)
2,347
$
79
Table of Contents
22. QUARTERLY RESULT OF OPERATIONS (UNAUDITED)
Quarter ended
(1)
Sales
Gross profit
Net (loss) income
Net (loss) income per share:
(2)
Basic
Diluted
March 31,
2020
June 30,
2020
September 30,
2020
December 31,
2020
$
$
$
79,515 $
43,873
(14,823)
(0.84) $
(0.84) $
60,564 $
28,896
(8,932)
(0.50) $
(0.50) $
70,736 $
36,298
(3,024)
(0.17) $
(0.17) $
92,953
50,780
27,408
1.53
1.52
(1)
(2)
For the second quarter of 2020, sales were reduced by an incremental $0.6 million sales adjustment related to our GSA Contracts based on the
results of the Review conducted by our outside legal counsel and forensic accountants.
During 2020, in connection with the Restructuring Plan, we recorded a pre-tax charge of approximately $13.7 million during the first quarter
2020, $0.6 million during the second quarter, $0.3 million during the third quarter and $1.2 million during the fourth quarter 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.
Quarter ended
(1)
Sales
Gross profit
Net income (loss)
Net income (loss) per share:
(2)
(3)
Basic
Diluted
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
$
$
$
93,617 $
53,018
152
0.01 $
0.01 $
93,491 $
50,741
(6,405)
(0.37) $
(0.37) $
90,516 $
50,772
(6,199)
(0.36) $
(0.36) $
104,141
43,601
(49,695)
(2.85)
(2.85)
(1)
(2)
(3)
For the second quarter of 2019, sales were reduced by an incremental $5.8 million sales adjustment related to our GSA Contracts based on the
results of the Review conducted by our outside legal counsel and forensic accountants.
For the fourth quarter of 2019, gross profit was reduced by a $15.1 million inventory reserve charge primarily driven by the evaluation of our
hardware and software product portfolio, which increased our reserve for excess and obsolete inventory.
For the fourth quarter of 2019, we incurred an impairment loss of $35.2 million, which included $21.2 million in goodwill, $10.5 million in
intangible assets associated with recent acquisitions, $1.4 million in intangible assets related to capitalized patents, and $2.1 million in other asset
write-downs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
80
Table of Contents
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. 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”)) are designed
to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s 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.
The evaluation of our disclosure controls and procedures included a review of the control objectives and design, our implementation of the controls
and the effect of the controls on the information generated for use in this Annual Report on Form 10-K. In conducting this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as defined by Rule 13a-15(e) under the Exchange Act, were
effective as of December 31, 2020 to provide reasonable assurance that information required to be disclosed in this Annual Report on Form 10-K 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
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act). Internal control over financial reporting is the process designed under the Chief Executive Officer’s and the Chief Financial Officer’s
supervision, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
There are inherent limitations in the effectiveness of internal control over financial reporting, including the possibility that misstatements may not be
prevented or detected. Accordingly, an effective control system, no matter how well designed and operated, can provide only reasonable assurance of
achieving the designed control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. The design of any system of controls is also based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020, as required by Exchange Act Rule
13a-15(c). In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the
2013 Internal Control - Integrated Framework. Based on our assessment under the framework in the 2013 Internal Control - Integrated Framework,
management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Grant Thornton LLP, the independent registered public accounting firm that audited our consolidated financial statements and internal control over
financial reporting, has issued an attestation report on our internal control over financial reporting as of December 31, 2020, which appears below.
FARO Technologies, Inc.
Lake Mary, Florida
February 17, 2021
81
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
FARO Technologies, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of FARO Technologies, Inc. (a Florida corporation) and subsidiaries (the “Company”) as of
December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
financial statements of the Company as of and for the year ended December 31, 2020, and our report dated February 17, 2021 expressed an unqualified
opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Orlando, Florida
February 17, 2021
82
Table of Contents
ITEM 9B. OTHER INFORMATION
None.
83
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to directors and executive officers is incorporated herein by reference to the information under the
headings “Election of Directors” and “Executive Officers” contained in our definitive proxy statement for our 2021 Annual Meeting of Shareholders,
which we refer to as the Proxy Statement.
The information required by this Item regarding compliance with Section 16(a) of the Exchange Act appears under the heading “Delinquent
Section 16(a) Reports” in the Proxy Statement and is incorporated herein by reference.
The information required by this Item with respect to corporate governance and our Code of Ethics is incorporated herein by reference to the
information contained in the Proxy Statement under the heading “Corporate Governance and Board Matters.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item regarding executive compensation is incorporated herein by reference to the information contained in the
Proxy Statement under the headings “Executive Compensation” and “2020 Director Compensation.”
The information required by this Item regarding Compensation Committee interlocks and insider participation is incorporated herein by reference to
the information contained in the Proxy Statement under the heading “Corporate Governance and Board Matters.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item regarding security ownership of certain beneficial owners and management and related stockholder matters is
incorporated herein by reference to the information contained in the Proxy Statement under the headings “Security Ownership of Certain Beneficial
Owners and Management” and “Equity Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item about certain relationships and related transactions appears under the heading “Certain Relationships and
Related Transactions” in the Proxy Statement and is incorporated herein by reference.
The information required by this Item regarding director independence is incorporated herein by reference to the information contained in the Proxy
Statement under the heading “Corporate Governance and Board Matters.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item about principal accountant fees and services as well as related pre-approval policies appears under the heading
“Independent Public Accountants” in the Proxy Statement and is incorporated herein by reference.
84
Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements.
The following consolidated financial statements required by this item are included in Part II, Item 8 of this Annual Report on Form 10-K under the
caption “Financial Statements and Supplementary Data”:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules have been omitted as they are either not required or not applicable, or the required information is otherwise
included in our consolidated financial statements or the notes thereto.
(b) Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.
85
Table of Contents
Exhibit No.
Description
EXHIBIT INDEX
2.1
2.2
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Stock Purchase Agreement, dated as of August 26, 2016, by and among FARO Technologies, Inc., Laser Projection
Technologies, Inc., each of the shareholders of Laser Projection Technologies, Inc. and Steven P. Kaufman in the
capacity of the Seller Representative (Filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K filed August 30,
2016, and incorporated herein by reference)**
Quota Purchase Agreement, dated as of July 13, 2018, by and among FARO Technologies, Inc., Opto-Tech SRL, each
of the shareholders of Opto-Tech SRL, and Mr. Gianfranco Chiapparini, in the capacity as the Seller Representative
(Filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K, filed July 19, 2018, and incorporated herein by
reference)**
Amended and Restated Articles of Incorporation, as amended (Filed as Exhibit 3.1 to Registrant’s Registration
Statement on Form S-1/A filed September 10, 1997, No. 333-32983, and incorporated herein by reference)
Amended and Restated Bylaws (Filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K, filed March 31,
2020, and incorporated herein by reference)
Specimen Stock Certificate (Filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-1/A , filed
September 10, 1997, No. 333-32983, and incorporated herein by reference)
Description of the Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934 (Filed
as Exhibit 4.2 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019, filed February 19,
2020, and incorporated herein by reference)
2009 Equity Incentive Plan (Filed as Appendix A to Registrant’s Definitive Proxy Statement on Schedule 14A filed
April 15, 2009, and incorporated herein by reference)*
First Amendment to the 2009 Equity Incentive Plan (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K,
filed April 15, 2011, and incorporated herein by reference)*
2014 Incentive Plan (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed June 3, 2014, and
incorporated herein by reference)*
2014 Incentive Plan, as amended May 11, 2018 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K
filed May 15, 2018, and incorporated herein by reference)*
Summary of Director Compensation Program (Filed as Exhibit 10.7 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2015, and incorporated herein by reference)*
Form of Intellectual Property and Confidentiality Agreement between FARO Technologies, Inc. and new employees
(Filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2015, and
incorporated herein by reference)
Form of Stock Option Award Agreement under the 2009 Equity Incentive Plan (Filed as Exhibit 10.10 to Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated herein by reference)*
Form of performance-based Stock Option Award Agreement under the 2014 Incentive Plan (Filed as Exhibit 10.12 to
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated herein by
reference)*
Form of performance-based Restricted Stock Unit Award Agreement under the 2014 Incentive Plan (Filed as Exhibit
10.13 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated herein by
reference)*
Form of Restricted Stock Unit Award Agreement under the 2014 Incentive Plan (Filed as Exhibit 10.4 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, and incorporated herein by reference)*
Form of time-based Stock Option Award Agreement under the 2014 Incentive Plan (Filed as Exhibit 10.15 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 2016, and incorporated herein by
reference)*
86
Table of Contents
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Form of Restricted Stock Award Agreement under the 2014 Incentive Plan (Filed as Exhibit 10.14 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 2017, and incorporated herein by reference)*
Form of 2019 Restricted Stock Unit Award Agreement under the 2014 Incentive Plan (Filed as Exhibit 10.5 to
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, and incorporated herein by
reference)*
Form of 2019 Restricted Stock Unit Award Agreement (Performance-Based) under the 2014 Incentive Plan (Filed as
Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, and incorporated
herein by reference)*
Form of Amendment to 2019 Performance-Based Restricted Stock Unit Award Agreement (Filed as Exhibit 10.15 to
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019, filed February 19, 2020, and
incorporated herein by reference)*
Employment Agreement between FARO Technologies, Inc. and Joseph Arezone, dated as of April 27, 2016 (Filed as
Exhibit 10.2 to Registrant’s Current Report on Form 8-K, filed April 29, 2016, and incorporated herein by reference)*
Letter Agreement between FARO Technologies, Inc. and Joseph Arezone dated March 5, 2018 (Filed as Exhibit 10.1
to Registrant's Current Report on Form 8-K filed March 5, 2018, and incorporated herein by reference)*
Transition and Separation Agreement between FARO Technologies, Inc. and Joseph Arezone effective June 5, 2018
(Filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K filed June 8, 2018, and incorporated herein by
reference)*
Amended and Restated Employment Agreement between FARO Technologies, Inc. and Kathleen J. Hall, dated as of
April 27, 2016 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed April 29, 2016, and
incorporated herein by reference)*
Addendum to Amended and Restated Employment Agreement between FARO Technologies, Inc. and Kathleen J. Hall
dated June 17, 2019 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed June 18, 2019, and
incorporated herein by reference)*
Confidential Separation Agreement and General Release by and between FARO Technologies, Inc. and Kathleen J.
Hall, dated August 26, 2019 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed August 27, 2019,
and incorporated herein by reference)*
Amended and Restated Employment Agreement between FARO Technologies, Inc. and Jody S. Gale, dated as of April
27, 2016 (Filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed April 29, 2016, and incorporated
herein by reference)*
Employment Agreement between FARO Technologies, Inc. and Robert E. Seidel, dated December 21, 2016 (Filed as
Exhibit 10.1 to Registrant's Current Report on Form 8-K filed December 21, 2016, and incorporated herein by
reference)*
Transition and Separation Agreement by and between FARO Technologies, Inc. and Robert E. Seidel, dated July 31,
2019 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed August 2, 2019, and incorporated herein
by reference)*
Letter Agreement between FARO Technologies, Inc. and Simon Raab dated January 9, 2019 (Filed as Exhibit 10.1 to
Registrant's Current Report on Form 8-K filed January 11, 2019, and incorporated herein by reference)*
Employment Agreement between FARO Technologies, Inc. and Michael Burger dated April 5, 2019 (Filed as Exhibit
10.1 to Registrant’s Current Report on Form 8-K, filed April 9, 2019, and incorporated herein by reference)*
Offer Letter between FARO Technologies, Inc. and Allen Muhich, dated July 15, 2019 (Filed as Exhibit 10.1 to
Registrant’s Current Report on Form 8-K, filed July 16, 2019, and incorporated herein by reference)*
FARO Technologies, Inc. Amended and Restated Change in Control Severance Policy, dated as of April 9, 2015 (Filed
as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed April 10, 2015, and incorporated herein by
reference)*
2018 Non-Employee Director Deferred Compensation Plan (Filed as Exhibit 10.24 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 2018, and incorporated herein by reference)*
87
Table of Contents
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
21.1
23.1
24.1
31-A
Form of Deferred Stock Unit Award Agreement under the 2014 Incentive Plan and the 2018 Non-Employee Director
Deferred Compensation Plan (Filed as Exhibit 10.25 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2018, and incorporated herein by reference)*
Form of Restricted Stock Unit Award Agreement under the 2014 Incentive Plan and the 2018 Non-Employee Director
Deferred Compensation Plan (Filed as Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2018, and incorporated herein by reference)*
FARO Technologies, Inc. Executive Severance Plan and Summary Plan Description, dated as of February 14, 2019
(Filed as Exhibit 10.27 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2018, and
incorporated herein by reference)*
Office Flex Lease, dated September 26, 2007, by and between FARO Technologies, Inc. and Sun Life Assurance
Company of Canada (Filed as Exhibit 10.15 to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2007, and incorporated herein by reference)
First Amendment to Lease Agreement, dated October 1, 2009, by and between FARO Technologies, Inc. and Sun Life
Assurance Company of Canada (Filed as Exhibit 10.27 to Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2009, and incorporated herein by reference)
Second Amendment to Office Flex Lease between RCS - Tech Park, LLC and FARO Technologies, Inc., dated as of
February 27, 2019 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed March 5, 2019, and
incorporated herein by reference)*
Amended and Restated Lease Agreement, dated October 1, 2009, by and between FARO Technologies, Inc. and
Emma Investments, LLC (Filed as Exhibit 10.26 to Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2009, and incorporated herein by reference)
First Amendment to Amended and Restated Lease Agreement between Emma Investments, LLC and FARO
Technologies, Inc., dated as of May 14, 2014 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed
May 16, 2014, and incorporated herein by reference)
Second Amendment to Amended and Restated Lease Agreement, dated as of January 29, 2019, by and between FARO
Technologies, Inc. and Emma Investments, LLC (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K
filed January 31, 2019, and incorporated herein by reference)
Agreement of Lease (Amendment and Restatement) between 290 National Road Limited Partnership and FARO
Technologies, Inc., dated as of September 9, 2014 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K
filed September 12, 2014, and incorporated herein by reference)
Assignment and Assumption of Lease, dated April 21, 2017, by and between FARO Technologies, Inc., Instrument
Associates, LLC and Century Park, L.L.C. (Filed as Exhibit 10.27 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 2017, and incorporated herein by reference)
Non-residential Tenancy Agreement, dated July 1, 2017, by and between Eredi Martinelli Marmi E Graniti S.p.A. and
Opto-tech S.R.L. (Filed as Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended December
31, 2018, and incorporated herein by reference)
Form of Director Indemnification Agreement (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed
October 28, 2020.
Form of Officer Indemnification Agreement (Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed
October 28, 2020.
List of Subsidiaries
Consent of Grant Thornton LLP
Power of Attorney relating to subsequent amendments (included on the signature page(s) of this report).
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
88
Table of Contents
31-B
32-A
32-B
99.1
101
104
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Properties
The following information from our Annual Report on Form 10-K for the year ended December 31, 2020, formatted in
Inline XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated
Statements of Comprehensive (Loss) Income; (iv) Consolidated Statements of Shareholders' Equity; (v) Consolidated
Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements
Cover Page Interactive Data File (Formatted in Inline XBRL and contained in Exhibit 101)
Indicates management contracts or compensatory plans or arrangements
*
** Schedules and exhibits are omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant agrees to furnish supplementally a copy of any
omitted schedules or exhibits to the Securities and Exchange Commission upon request.
ITEM 16. FORM 10-K SUMMARY
None.
89
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date:
February 17, 2021
By:
/s/ Allen Muhich
Allen Muhich, Chief Financial Officer
(Duly Authorized Officer)
FARO TECHNOLOGIES, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose signature appears below constitutes and appoints each of MICHAEL
BURGER AND ALLEN MUHICH his or her true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Signature
Title
Date
/s/ Michael Burger
Michael Burger
/s/ Allen Muhich
Allen Muhich
/s/ John Donofrio
John Donofrio
/s/ John Caldwell
John Caldwell
/s/ Lynn Brubaker
Lynn Brubaker
/s/ Stephen R. Cole
Stephen R. Cole
/s/ Jeffrey A. Graves
Jeffrey A. Graves
/s/ Yuval Wasserman
Yuval Wasserman
Director, President and Chief Executive Officer (Principal Executive
Officer)
February 17, 2021
Chief Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
February 17, 2021
Chairman of the Board and Director
February 17, 2021
Director
Director
Director
Director
Director
90
February 17, 2021
February 17, 2021
February 17, 2021
February 17, 2021
February 17, 2021
FARO TECHNOLOGIES, INC. LIST OF SUBSIDIARIES
Name
Jurisdiction of Organization
EXHIBIT 21.1
Antares-Desenvolvimento de Software, Lda.
Cam2 SRL
FARO Benelux BV
FARO Business Technologies India Pvt. Ltd
FARO Cayman LP
FARO Cayman Ltd
FARO Delaware LLC
FARO Europe GmbH
FARO FHN Netherlands Holdings BV
FARO Japan Inc.
FARO International (Shanghai) Co., Ltd
FARO Singapore Pte Ltd
FARO Spain SLU
FARO Swiss Holding GmbH
FARO Swiss Manufacturing GmbH
FARO Technology Polska sp.zo.o
FARO Turkey Olcu Sistemleri Ltd. Sti
FARO Technologies (Thailand) Ltd
3D Measurement Technologies, S de RL de CV
OOO FARO RUS
FARO Technologies UK Ltd.
FARO Technologies do Brasil Ltda
FARO Technologies Canada, Inc.
Open Technologies SRL
Laser Control Systems Limited.
Photocore AG
Advanced Technical Solutions in Scandinavia AB
ATS Real Reality AB
ATS China Ltd.
Portugal
Italy
Netherlands
India
Cayman Islands
Cayman Islands
Delaware
Germany
Netherlands
Japan
China
Singapore
Spain
Switzerland
Switzerland
Poland
Turkey
Thailand
Mexico
Russia
United Kingdom
Brazil
Canada
Italy
United Kingdom
Switzerland
Sweden
Sweden
China
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We have issued our reports dated February 17, 2021, with respect to the consolidated financial statements and internal control over financial
reporting included in the Annual Report of FARO Technologies, Inc. and subsidiaries on Form-10-K for the year ended December 31, 2020.
We consent to the incorporation by reference of said reports in the Registration Statements of FARO Technologies, Inc. and subsidiaries on
Forms S-8 (File No. 333-160660, File No. 333-197762 and File No. 333-226491).
/s/ GRANT THORNTON LLP
Orlando, Florida
February 17, 2021
FARO Technologies, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31-A
I, Michael Burger, certify that:
1. I have reviewed this Annual Report on Form 10-K of FARO Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: February 17, 2021
/s/ Michael Burger
Name: Michael Burger
Title: President and Chief Executive Officer (Principal Executive Officer)
FARO Technologies, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31-B
I, Allen Muhich, certify that:
1. I have reviewed this Annual Report on Form 10-K of FARO Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: February 17, 2021
/s/ Allen Muhich
Name: Allen Muhich
Title: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
FARO Technologies, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32-A
Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the
undersigned President and Chief Executive Officer of FARO Technologies, Inc. (the Company), hereby certify that the Annual Report on Form 10-K for
the year ended December 31, 2020 (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 17, 2021
/s/ Michael Burger
Name: Michael Burger
Title: President and Chief Executive Officer (Principal Executive Officer)
FARO Technologies, Inc.
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32-B
Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the
undersigned Chief Financial Officer of FARO Technologies, Inc. (the Company), hereby certify that the Annual Report on Form 10-K for the year ended
December 31, 2020 (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 17, 2021
/s/ Allen Muhich
Name: Allen Muhich
Title: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
FARO TECHNOLOGIES INC. PROPERTIES
EXHIBIT 99.1
Location
Sq. Ft.
35,000
Owned/
Leased
Leased Manufacturing, research and development,
Purposes
46,500
Leased
service
Headquarters, sales, marketing,
administration
No.
1
2
3
4
125 Technology Park, Lake
Mary, Florida
250 Technology Park, Lake
Mary, Florida
290 National Road
Exton, Pennsylvania
Lingwiesenstrasse 11/2
70825 Korntal-Muenchingen
BW, Germany
5 Wiesengasse 20
CH-8222 Beringen
Switzerland
Unit 1° Great Central Way
Butlers Leap
Rugby
Warwickshire
CV21 3Xh, Great Britain
716 Kumada Nagakute-shi,
Aichi 480-1144, Japan
188 Pingfu Road, Shanghai,
China
No. 3 Changi South St 2
#01-01 Xilin Districentre
Building B, Singapore
215 Avenida Centuria, Parque Indutrial, Apodaca, Nuevo Leon 66600 -
Mexico
6
7
8
9
10
90,400
Leased Manufacturing, research and development,
105,300
Leased
service
European headquarters, manufacturing,
sales, research and development, service
15,900
Leased Manufacturing
12,700
Leased
Sales, service
15,900
Leased
Sales, service
24,700
Leased
Sales, service
22,000
Leased
Asia headquarters, manufacturing, sales,
service
36,000
Leased
Sales, service