FARO TECHNOLOGIES, INC.
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.
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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.
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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 .
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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.
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Results of Operations
2020 Compared to 2019
Years ended December 31,
2020 2019 Change ($)
(dollars in millions) % of Sales % of Sales 2020 vs 2019
Product $ 218.6 72.0 % $ 289.7 75.9 % $ (71.1)
Service 85.2 28.0 % 92.1 24.1 % (6.9)
Total sales 303.8 100.0 % 381.8 100.0 % (78.0)
Product 98.9 32.5 % 133.2 34.9 % (34.4)
Service 45.1 14.8 % 50.4 13.2 % (5.3)
Total cost of sales 143.9 47.4 % 183.6 48.1 % (39.7)
Gross profit 159.8 52.6 % 198.1 51.9 % (38.3)
Operating expenses
Selling, general and administrative 131.8 43.4 % 177.4 46.5 % (45.6)
Research and development 42.9 14.1 % 44.2 11.6 % (1.3)
Restructuring costs 15.8 5.2 % - - % 15.8
Impairment loss - - % 35.2 9.2 % (35.2)
Total operating expenses 190.5 62.7 % 256.8 67.3 % (66.3)
Other expense 0.1 - % 2.4 0.6 % (2.3)
Income tax (benefit) expense (31.4) (10.3) % 1.1 0.3 % (32.5)
Net income (loss) $ 0.6 0.2 % $ (62.1) (16.3) % $ 62.7
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.
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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 $62.1 million for the year ended December 31,
2019 , reflecting the impact of the factors described above.
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2019 Compared to 2018
Years ended December 31,
2019 2018 Change ($)
(dollars in millions) % of Sales % of Sales 2019 vs 2018
Product $ 289.7 75.9 % $ 320.6 79.4 % $ (30.9)
Service 92.1 24.1 % 83.0 20.6 % 9.0
Total sales 381.8 100.0 % 403.6 100.0 % (21.9)
Product 133.2 34.9 % 130.9 32.4 % 2.4
Service 50.4 13.2 % 51.2 12.7 % (0.8)
Total cost of sales 183.6 48.1 % 182.1 45.1 % 1.6
Gross profit 198.1 51.9 % 221.6 54.9 % (23.4)
Operating expenses
Selling, general and administrative 177.4 46.5 % 169.7 42.0 % 7.7
Research and development 44.2 11.6 % 46.1 11.4 % (1.9)
Impairment loss 35.2 9.2 % - - % 35.2
Total operating expenses 256.8 67.3 % 215.8 53.5 % 41.0
Other expense 2.4 0.6 % 1.2 0.3 % 1.2
Income tax expense (benefit) 1.1 0.3 % (0.4) (0.1) % 1.5
Net (loss) income $ (62.1) (16.3) % $ 4.9 1.2 % $ (67.0)
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.
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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 .
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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):
Payments Due by Period
Contractual Obligations Total < 1 Year 1-3 Years 3-5 Years > 5 Years
Operating lease obligations $ 33,322 $ 6,914 $ 10,193 $ 7,611 $ 8,604
Capital lease obligations 445 292 134 19 $ -
Purchase obligations 45,138 44,196 942 - -
Transition tax liability 11,080 1,166 3,353 6,561 -
Other obligations 1,056 - 1,056 - -
Total $ 91,041 $ 52,568 $ 15,678 $ 14,191 $ 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 .
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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.
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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.
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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.
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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.
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