FARO TECHNOLOGIES, INC. The following information should be read in conjunction with the condensed consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .FARO Technologies, Inc. ("FARO," the "Company," "us," "we" or "our") has made "forward-looking statements" in this report (within the meaning of the Private Securities Litigation Reform Act of 1995). Statements that are not historical facts or that describe our plans, beliefs, goals, intentions, objectives, projections, expectations, assumptions, strategies, or future events are forward-looking statements. In addition, words such as "may," "might," "would," "will," "will be," "future," "strategy," "believe," "plan," "should," "could," "seek," "expect," "anticipate," "intend," "estimate," "goal," "objective," "project," "forecast," "target" and similar words identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. We do not intend to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Important factors that could cause actual results to differ materially from those contemplated in such forward-looking statements include, among others, the following: •an economic downturn in the manufacturing industry or the domestic and international economies in the regions of the world where we operate; •the effect of the COVID-19 pandemic, including on our business operations, as well as its impact on general economic and financial market conditions; •our inability to realize the intended benefits of our undertaking to transition to a company that is reorganized around functions to improve the efficiency of our sales organization and to improve operational effectiveness; •our inability to successfully execute our new strategic plan and restructuring plan, including but not limited to additional impairment charges and/or higher than expected severance costs and exist costs, and our inability to realize the expected benefits of such plans; •our inability to further penetrate our customer base and target markets; •development by others of new or improved products, processes or technologies that make our products less competitive or obsolete; •our inability to maintain what we believe to be our technological advantage by developing new products and enhancing our existing products; •the outcome of theU.S. Government's review of, or investigation into, our potential overcharging of theU.S. Government under our General Services Administration Federal Supply Schedule contracts, any resulting penalties, damages or sanctions imposed on us and the outcome of any resulting litigation to which we may become a party, loss of future government sales and potential impacts on customer and supplier relationships and our reputation; •risks associated with expanding international operations, such as difficulties in staffing and managing foreign operations, increased political and economic instability, compliance with potentially evolving import and export regulations, and the burdens and potential exposure of complying with a wide variety ofU.S. and foreign laws and labor practices; •changes in trade regulation, which result in rising prices of imported steel, steel byproducts, aluminum and aluminum byproducts and various other raw materials that we use in the production of measurement devices, and our ability to pass those costs on to our customers or require our suppliers to absorb such costs; •changes in foreign regulation which may result in rising prices of our measurement devices sold as exports to our international customers, our customers' willingness to absorb incremental import tariffs, and the corresponding impact on our profitability; •our inability to successfully identify and acquire target companies and achieve expected benefits from, and effectively integrate, acquisitions that are consummated; •the cyclical nature of the industries of our customers and material adverse changes in our customers' access to liquidity and capital; •changes in the potential for the computer-aided measurement market and the potential adoption rate for our products, which are difficult to quantify and predict; 25 -------------------------------------------------------------------------------- Table of Contents •our inability to protect our patents and other proprietary rights inthe 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 ofthe United States , (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) inefficiencies in the management of our inventories and fixed assets, (xvii) compliance with government regulations including health, safety, and environmental matters, and (xviii) costs associated with the training and ramp-up time for new sales people; •changes in gross margins due to a changing mix of products sold and the different gross margins on different products and sales channels; •changes in applicable laws, rules or regulations, or their interpretation or enforcement, or the enactment of new laws, rules or regulations that apply to our business operations or require us to incur significant expenses for compliance; •our inability to successfully comply with the requirements of the Restriction of Hazardous Substances Directive and the Waste Electrical and Electronic Equipment Directive in theEuropean Union ; •the inability of our products to displace traditional measurement devices and attain broad market acceptance; •the impact of competitive products and pricing on our current offerings; •our ability to successfully complete our executive officer transitions and the loss of any of our executive officers or other key personnel; •difficulties in recruiting research and development engineers and application engineers; •the failure to effectively manage the effects of any future growth; •the impact of reductions or projected reductions in government spending, or uncertainty regarding future levels of government expenditures, particularly in the defense sector; •variations in our effective income tax rate, which makes it difficult to predict our effective income tax rate on a quarterly and annual basis, and the impact of theU.S. Tax Cuts and Jobs Act of 2017 on the global intangible low-taxed income of foreign subsidiaries; •the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period of time or on commercially reasonable terms; •the impact of fluctuations in exchange rates; •the effect of estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements; •the magnitude of increased warranty costs from new product introductions and enhancements to existing products; •the sufficiency of our plants to meet manufacturing requirements; •the continuation of our share repurchase program; •the sufficiency of our working capital and cash flow from operations to fund our long-term liquidity requirements; •the impact of geographic changes in the manufacturing or sales of our products on our effective income tax rate; •our ability to comply with the requirements for favorable tax rates in foreign jurisdictions; and •other risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and risks identified on this Quarterly Report on Form 10-Q. 26 -------------------------------------------------------------------------------- Table of Contents Moreover, new risks and uncertainties emerge from time to time, and we undertake no obligation to update publicly or review the risks and uncertainties included in this Quarterly Report on Form 10-Q, unless otherwise required by law. Overview We are a global technology company that designs, develops, manufactures, markets and supports software driven, three-dimensional ("3D") measurement and imaging solutions. This technology permits high-precision 3D measurement, imaging and comparison of parts and complex structures within production and quality assurance processes. Our devices are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes. We sell the majority of our products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building information modeling, construction, public safety forensics, cultural heritage, and other applications. Our FaroArm®, FARO ScanArm®, FARO Laser TrackerTM, FARO Laser Projector, and their companion CAM2®, BuildIT, and BuildIT Projector software solutions, provide for Computer-Aided Design ("CAD") based inspection, factory-level statistical process control, high-density surveying, and laser-guided assembly and production. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD and 3D software to improve productivity, enhance product quality, and decrease rework and scrap in the manufacturing process, mainly supporting applications in the automotive, aerospace, metal and machine fabrication and other industrial manufacturing markets. Our FARO Focus and FARO ScanPlan laser scanners, and their companion FARO SCENE, BuildIT, FARO As-BuiltTM, andFARO Zone public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications primarily in the architecture, engineering, and construction and public safety markets. Our FARO ScanArm® and its companion SCENE software also enable a fully digital workflow used to capture real world geometry for the purpose of empowering design, enabling innovation, and speeding up the design cycle. We derive our revenues primarily from the sale of our measurement equipment and related multi-faceted software programs. Revenue related to these products is generally recognized upon shipment. In addition, we sell extended warranties and training and technology consulting services relating to our products. We recognize the revenue from extended warranties on a straight-line basis over the term of the warranty, and revenue from training and technology consulting services when the services are provided. We operate in international markets throughout the world and maintain sales offices inAustralia ,Brazil ,Canada ,China ,France ,Germany ,India ,Italy ,Japan ,Malaysia ,Mexico ,the Netherlands ,Poland ,Portugal ,Singapore ,South Korea ,Spain ,Switzerland ,Thailand ,Turkey , theUnited Kingdom , andthe United States . We manufacture our FaroArm® and FARO ScanArm® products in our manufacturing facility located inSwitzerland for customer orders fromEurope , theMiddle East andAfrica ("EMEA"), in our manufacturing facility located inSingapore for customer orders from theAsia-Pacific region , and in our manufacturing facility located inFlorida for customer orders from theAmericas . We manufacture our FARO Focus in our manufacturing facilities located inGermany andSwitzerland for customer orders from EMEA and theAsia-Pacific region , and in our manufacturing facility located inPennsylvania for customer orders from theAmericas . We manufacture our FARO Laser TrackerTM and our FARO Laser Projector products in our facility located inPennsylvania . We expect all of our existing manufacturing facilities to have the production capacity necessary to support our volume requirements during 2020. We account for wholly-owned foreign subsidiaries in the currency of the respective foreign jurisdiction; therefore, fluctuations in exchange rates may have an impact on the value of the intercompany account balances denominated in different currencies and reflected in our condensed consolidated financial statements. We are aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options. However, we have not used such instruments in the past, and none were utilized in 2019 or the six months endedJune 30, 2020 . 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 novel coronavirus ("COVID-19") outbreak that has surfaced in virtually every country of our global operating footprint. During the second 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. There has been 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. 27 -------------------------------------------------------------------------------- Table of Contents 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$173.7 million and no debt as ofJune 30, 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 II of this Quarterly Report on Form 10-Q for an additional discussion of risks related to COVID-19. Change in Organizational Structure and Segment Reporting From the fourth quarter of 2016 through the fourth quarter of 2019, we operated in five market verticals-3D Manufacturing, ConstructionBuilding Information Modeling ("Construction BIM"), Public Safety Forensics, 3D Design and Photonics-and had three reporting segments-3D Manufacturing, Construction BIM and Emerging Verticals. As discussed in our Quarterly Report on Form 10-Q for the third quarter of 2019, our new management team, led by our new Chief Executive Officer ("CEO"), formulated and began to implement a new comprehensive strategic plan for our business. As part of our strategic planning process, we identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. In the fourth quarter of 2019, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers and re-evaluated our hardware product portfolio. We also began to focus on other organizational optimization efforts, including the 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 operating structure and reorganized the Company into a functional structure. Our executive leadership team is now comprised of global functional leaders in areas such as sales, marketing, operations, research and development and general and administrative, and resources are allocated to each function at a consolidated unit level. We no longer have separate business units, or segment managers or vertical leaders who report to the CODM with respect to operations, operating results or planning for levels or components below the total Company level. Instead, our CODM now allocates resources and evaluates performance on a Company-wide basis. Based on these changes, commencing with the fourth quarter of 2019, we now report as one reporting segment that develops, manufactures, markets, supports and sells CAD-based quality assurance products integrated with CAD-based inspection and statistical process control software and 3D documentation systems. Our reporting segment sells into a variety of end markets, including automotive, aerospace, metal and machine fabrication, architecture, engineering, construction and public safety. New Strategic Plan and Restructuring Plan In addition to the reorganization of the Company's structure, as part of our strategic planning process, we also evaluated our hardware product portfolio and the operations of certain of our recent acquisitions. As a result of this evaluation, we are simplifying our hardware product portfolio, ceasing to sell certain products and disposed of certain of our recent acquisitions. In addition to the implementation of our new strategic plan, onFebruary 14, 2020 , our Board of Directors approved a global restructuring plan (the "Restructuring Plan"), which is intended to support our strategic plan in an effort to improve operating performance and ensure that we are appropriately structured and resourced to deliver increased and sustainable value to our shareholders and customers. Key activities under the Restructuring Plan include a continued focus on efficiency and cost-saving efforts, which includes decreasing total headcount by approximately 500 employees upon the completion of the Restructuring Plan. These activities are expected to be substantially completed by the end of 2021. 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; 28 -------------------------------------------------------------------------------- Table of Contents •$10.5 million impairment of intangible assets associated with recent acquisitions; •$1.4 million impairment of intangible assets related to capitalized patents; •$3.4 million impairment of other assets and other charges. In connection with the Restructuring Plan, we recorded a pre-tax charge of approximately$13.7 million during the first quarter 2020 and$0.6 million during the second quarter primarily consisting of severance and related benefits. We estimate total additional pre-tax charges of$12 million to$22 million for the remainder of fiscal year 2020. Actual results, including the costs of the Restructuring Plan, may differ materially from our expectations, resulting in our inability to realize the expected benefits of the Restructuring Plan and our new strategic plan and negatively impacting our ability to execute our future plans and strategies, which could have a material adverse effect on our business, financial condition and results of operations. Reclassification and Related Changes to Presentation Certain prior year amounts have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation: •Commencing with the third quarter of 2019, depreciation and amortization expenses are being reported in our statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Amounts related to depreciation and amortization expenses for the three and six months endedJune 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q 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 three and six months endedJune 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of selling, general and administrative expenses and to conform to the current period presentation, as set forth in the following 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 revenue for the three and six months endedJune 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance revenue and to conform to the current period presentation, as set forth in the following 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 three and six months endedJune 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance cost of sales and to conform to the current period presentation, as set forth in the following tables. 29 -------------------------------------------------------------------------------- Table of Contents For the three months ended,June 30, 2019 Depreciation and Amortization Selling, General and Software Maintenance As Reported Adjustment Administrative Adjustment and Other Adjustments As Adjusted Sales Product$ 67,992 $ - $ - $ 3,053$ 71,045 Service 25,499 - - (3,053) 22,446 Total sales$ 93,491 $ - $ - $ -$ 93,491 Cost of Sales Product$ 29,037 $ 796 $ - $ 672$ 30,505 Service 12,135 783 - (672) 12,246 Total cost of sales$ 41,172 $ 1,579 $ - $ -$ 42,751 Operating Expenses Selling, general and administrative $ - $ 1,459 $ 43,548 $ -$ 45,007 Selling and marketing 29,124 - (29,124) - - General and administrative 14,424 - (14,424) -
-
Depreciation and amortization 4,573 (4,573) - - - Research and development 9,091 1,535 - - 10,626 Total operating expenses$ 57,212 $ (1,579) $ - $ -$ 55,633 For the six months ended, June 30, 2019 Depreciation and Amortization Selling, General and Software Maintenance As Reported Adjustment Administrative Adjustment and Other Adjustments As Adjusted Sales Product$ 136,792 $ - $ - $ 5,830$ 142,622 Service 50,316 - - (5,830) 44,486 Total sales$ 187,108 $ - $ - $ -$ 187,108 Cost of Sales Product$ 55,165 $ 1,972 $ - $ 1,319$ 58,456 Service 24,605 1,607 - (1,319) 24,893 Total cost of sales$ 79,770 $ 3,579 $ - $ -$ 83,349 Operating Expenses Selling, general and administrative $ - $ 2,502 $ 83,525 $ - $
86,027
Selling and marketing 55,877 - (55,877) -
-
General and administrative 27,648 - (27,648) -
-
Depreciation and amortization 9,322 (9,322) - - - Research and development 19,026 3,241 - - 22,267 Total operating expenses$ 111,873 $ (3,579) $ - $ -$ 108,294 30
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Table of Contents
Amounts reported in millions within this Quarterly Report on Form 10-Q are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within the tables that follow may not add due to the use of rounded numbers. Percentages presented are calculated based on the respective amounts in thousands.
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Table of Contents
Results of Operations
The following table sets forth, for the periods indicated, our unaudited results
of operations expressed as dollar amounts and as a percentage of total sales.
Three months ended June 30 , Six Months Ended June 30 ,
(dollars in thousands) 2020 % of Sales 2019 % of Sales 2020 % of Sales 2019 % of Sales
Sales
Product $ 42,259 69.8 % $ 71,045 76.0 % $ 98,784 70.5 % $ 142,622 76.2 %
Service 18,305 30.2 % 22,446 24.0 % 41,295 29.5 % 44,486 23.8 %
Total sales 60,564 100.0 % 93,491 100.0 % 140,079 100.0 % 187,108 100.0 %
Cost of Sales
Product 21,333 35.2 % 30,505 32.6 % 44,399 31.7 % 58,456 31.2 %
Service 10,335 17.1 % 12,246 13.1 % 22,911 16.4 % 24,893 13.3 %
Total cost of sales 31,668 52.3 % 42,751 45.7 % 67,310 48.1 % 83,349 44.5 %
Gross Profit 28,896 47.7 % 50,740 54.3 % 72,769 51.9 % 103,759 55.5 %
Operating Expenses
Selling, general and
administrative 30,036 49.6 % 45,007 48.1 % 66,360 47.4 % 86,027 46.0 %
Research and development 10,186 16.8 % 10,626 11.4 % 20,601 14.7 % 22,267 11.9 %
Restructuring costs 636 1.1 % - - % 14,324 10.2 % - - %
Total operating expenses 40,858 67.5 % 55,633 59.5 % 101,285 72.3 % 108,294 57.9 % Loss from operations (11,962) (19.8) % (4,893) (5.2) % (28,516) (20.4) % (4,535) (2.4) % Other (income) expense Interest expense, net 212 0.4 % 240 0.3 % 246 0.2 % 96 0.1 % Other expense, net 117 0.2 % 1,689 1.8 % 590 0.4 % 1,884 1.0 % Loss before income tax benefit (12,291) (20.3) % (6,822) (7.3) % (29,352) (21.0) % (6,515) (3.5) % Income tax benefit (3,359) (5.5) % (417) (0.4) % (5,597) (4.0) % (262) (0.1) % Net loss$ (8,932) (14.7) %$ (6,405) (6.9) %$ (23,755) (17.0) %$ (6,253) (3.3) % Consolidated Results Three Months EndedJune 30, 2020 Compared to the Three Months EndedJune 30, 2019 Sales. Total sales decreased by$32.9 million , or 35.2%, to$60.6 million for the three months endedJune 30, 2020 from$93.5 million for the three months endedJune 30, 2019 . Total product sales decreased by$28.7 million , or 40.5%, to$42.3 million for the three months endedJune 30, 2020 from$71.0 million for the three months endedJune 30, 2019 . Our product sales decreased primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic. Service revenue decreased by$4.1 million , or 18.4%, to$18.3 million for the three months endedJune 30, 2020 from$22.4 million for the three months endedJune 30, 2019 , primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic. Foreign exchange rates had a negative impact on total sales of$0.9 million , increasing the percent that our overall sales declined by approximately 1.0 percentage points, primarily due to the weakening of the Euro, Chinese Yuan, and Brazilian Real relative to theU.S. dollar. 32 -------------------------------------------------------------------------------- Table of Contents Gross profit. Gross profit decreased by$21.8 million , or 43.1%, to$28.9 million for the three months endedJune 30, 2020 from$50.7 million for the three months endedJune 30, 2019 , and gross margin decreased to 47.7% for the three months endedJune 30, 2020 from 54.3% for the three months endedJune 30, 2019 , primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from product revenue decreased by 7.6 percentage points to 49.5% for the three months endedJune 30, 2020 from 57.1% for the prior year period primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from service revenue decreased by 1.9 percentage points to 43.5% for the three months endedJune 30, 2020 from 45.4% for the prior year period, primarily due to the aforementioned decrease in service revenue due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic with relatively consistent fixed costs. Selling, general and administrative expenses. Selling, general and administrative expenses decreased by$15.0 million , or 33.3%, to$30.0 million for the three months endedJune 30, 2020 from$45.0 million for the three months endedJune 30, 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. Selling, general and administrative expenses as a percentage of sales increased to 49.6% for the three months endedJune 30, 2020 , compared with 48.1% of sales for the three months endedJune 30, 2019 . Our worldwide period-ending selling, general and administrative headcount decreased by 370, or 35.1%, to 684 atJune 30, 2020 , from 1,054 atJune 30, 2019 . Research and development expenses. Research and development expenses decreased by$0.4 million , or 4.1%, to$10.2 million for the three months endedJune 30, 2020 from$10.6 million for the three months endedJune 30, 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 16.8% for the three months endedJune 30, 2020 from 11.4% for the three months endedJune 30, 2019 . Restructuring costs. InFebruary 2020 , we initiated the Restructuring Plan to improve business effectiveness, streamline operations and achieve a stated target cost level for the Company as a whole. Restructuring costs included in operating expenses for the three months endedJune 30, 2020 were$0.6 million primarily consisting of legal and consulting expenses. Interest expense, net. We recorded interest expense, net of less than$0.2 million for both of the three month periods endedJune 30, 2020 andJune 30, 2019 . Other expense, net. For the three months endedJune 30, 2020 , other expense decreased by$1.6 million to$0.1 million from$1.7 million for the three months endedJune 30, 2019 . The decrease is primarily driven by the$1.5 million impairment charge related to our equity investment in present4D recorded in the second quarter of 2019. Income tax benefit. For the three months endedJune 30, 2020 , we recorded an income tax benefit of$3.4 million compared with income tax benefit of$0.4 million for the three months endedJune 30, 2019 . Our effective tax rate was (27.3%) for the three months endedJune 30, 2020 compared with (6.1%) in the prior year period. The change in our income tax benefit was primarily due to the increase in our pretax loss during the second quarter of 2020 compared to the same period of 2019. The change in our effective tax rate was primarily due to the impact of a$0.9 million increase in our reserve for uncertain tax positions in the second quarter of 2019. Our quarterly estimate of our annual effective tax rate and our quarterly provision for income tax (benefit) expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which they relate, as well as the amount of pretax income or loss recognized during the quarter. Net loss. Our net loss was$8.9 million for the three months endedJune 30, 2020 compared with net loss of$6.4 million for the prior year period, reflecting the impact of the factors described above. 33 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2020 Compared to the Six Months EndedJune 30, 2019 Sales. Total sales decreased by$47.0 million , or 25.1%, to$140.1 million for the six months endedJune 30, 2020 from$187.1 million for the six months endedJune 30, 2019 . Total product sales decreased by$43.8 million , or 30.7%, to$98.8 million for the six months endedJune 30, 2020 from$142.6 million for the six months endedJune 30, 2019 . Our product sales decreased primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic. Service revenue decreased by$3.2 million , or 7.2%, to$41.3 million for the six months endedJune 30, 2020 from$44.5 million for the six months endedJune 30, 2019 , primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic. Foreign exchange rates had a negative impact on total sales of$2.1 million , increasing the percent that our overall sales declined by approximately 1.1 percentage points, primarily due to the weakening of the Euro, Chinese Yuan, and Brazilian Real relative to theU.S. dollar. Gross profit. Gross profit decreased by$31.0 million , or 29.9%, to$72.8 million for the six months endedJune 30, 2020 from$103.8 million for the six months endedJune 30, 2019 , and gross margin decreased to 51.9% for the six months endedJune 30, 2020 from 55.5% for the six months endedJune 30, 2019 , primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from product revenue decreased by 3.9% percentage points to 55.1% for the six months endedJune 30, 2020 from 59.0% for the prior year period primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from service revenue increased by 0.5% percentage points to 44.5% for the six months endedJune 30, 2020 from 44.0% for the prior year period, primarily due to an increase in recurring service contracts revenue and corresponding decrease in service contracts expenses due to the impact of the COVID-19 pandemic. Selling, general and administrative expenses. Selling, general and administrative expenses decreased by$19.6 million , or 22.9%, to$66.4 million for the six months endedJune 30, 2020 from$86.0 million for the six months endedJune 30, 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. Selling, general and administrative expenses as a percentage of sales increased to 47.4% for the six months endedJune 30, 2020 , compared with 46.0% of sales for the six months endedJune 30, 2019 . Our worldwide period-ending selling, general and administrative headcount decreased by 370, or 35.1%, to 684 atJune 30, 2020 , from 1,054 atJune 30, 2019 . Research and development expenses. Research and development expenses decreased by$1.7 million , or 7.5%, to 20.6 million for the six months endedJune 30, 2020 from$22.3 million for the six months endedJune 30, 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 14.7% for the six months endedJune 30, 2020 from 11.9% for the six months endedJune 30, 2019 . Restructuring costs. InFebruary 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 six months endedJune 30, 2020 were$14.3 million primarily consisting of severance and related benefits charges. Interest expense, net. We recorded interest expense, net of$0.2 million for the six months endedJune 30, 2020 compared to expense of$0.1 million for the six months endedJune 30, 2019 . Other expense, net. For the six months endedJune 30, 2020 , other expense decreased by$1.3 million to$0.6 million from$1.9 million for the six months endedJune 30, 2019 . The decrease is primarily driven by the$1.5 million impairment charge related to our equity investment in present4D recorded in the second quarter of 2019. Income tax benefit. For the six months endedJune 30, 2020 , we recorded an income tax benefit of$5.6 million compared with income tax benefit of$0.3 million for the six months endedJune 30, 2019 . Our effective tax rate was (19%) for the six months endedJune 30, 2020 compared with (4%) in the prior year period. The change in our income tax benefit expense was primarily due to the increase in our pretax loss during the six months endedJune 30, 2020 compared to the same period of 2019. The change in our effective tax rate was primarily due to the impact of a$0.9 million increase in our reserve for uncertain tax positions in the second quarter of 2019. Our quarterly estimate of our annual effective tax rate and our quarterly provision for income tax (benefit) expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which they relate, as well as the amount of pretax income or loss recognized during the quarter. Net loss. Our net loss was$23.8 million for the six months endedJune 30, 2020 compared with net loss of$6.3 million for the prior year period, reflecting the impact of the factors described above. 34 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash and cash equivalents increased by$40.1 million to$173.7 million atJune 30, 2020 from$133.6 million atDecember 31, 2019 . The increase was primarily driven by net cash provided by operating and investing activities. Cash provided by operating activities was$16.1 million during the six months endedJune 30, 2020 , compared to$17.7 million of cash provided by operations during the six months endedJune 30, 2019 . The decrease was mainly due to a larger net loss in the current period. Cash provided by investing activities during the six months endedJune 30, 2020 was$23.4 million compared to cash used in investing activities of$4.9 million during the six months endedJune 30, 2019 . The change was primarily due to the maturity ofU.S. Treasury Bills amounting to$25.0 million during the six months endedJune 30, 2020 without such activity during the six months endedJune 30, 2019 . Cash provided by financing activities was$1.3 million during the six months endedJune 30, 2020 compared to cash used in financing activities of$1.1 million for the six months endedJune 30, 2019 . The change was primarily due to$3.9 million in cash received from the exercise of employee stock options during the six months endedJune 30, 2020 compared to$0.7 million during the six months endedJune 30, 2019 . Of our cash and cash equivalents,$84.2 million was held by foreign subsidiaries as ofJune 30, 2020 . OnDecember 22, 2017 ,the United States enacted theU.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing tax law, which included a transition tax on the mandatory deemed repatriation of foreign earnings. Despite the changes inU.S. tax law, our current intent is to indefinitely reinvest these funds in our foreign operations, as the cash is needed to fund ongoing operations. OnNovember 24, 2008 , our Board of Directors approved a$30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. InOctober 2015 , our Board of Directors authorized an increase to the existing share repurchase program from$30.0 million to$50.0 million . We made no stock repurchases during the six month period endedJune 30, 2020 under this program. As ofJune 30, 2020 , we had authorization to repurchase$18.3 million remaining under the repurchase program. We believe that our working capital and anticipated cash flow from operations will be sufficient to fund our long-term liquidity operating requirements for at least the next 12 months. We have no off-balance sheet arrangements. Contractual Obligations and Commercial Commitments We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 120 days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As ofJune 30, 2020 , we had$48.1 million in purchase commitments that are expected to be delivered within the next 12 months. Other than as described in the preceding sentences, there have been no material changes to the contractual obligations and commercial commitments table included in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Critical Accounting Policies The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates on historical experience, along with various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSecurities and Exchange Commission onFebruary 19, 2020 . As ofJune 30, 2020 , our critical accounting policies have not changed from those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 35
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