Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 979K
2: EX-31.A Certification -- §302 - SOA'02 HTML 28K
3: EX-31.B Certification -- §302 - SOA'02 HTML 28K
4: EX-32.A Certification -- §906 - SOA'02 HTML 24K
5: EX-32.B Certification -- §906 - SOA'02 HTML 24K
34: R1 Cover page HTML 76K
76: R2 Condensed Consolidated Balance Sheets HTML 146K
54: R3 Condensed Consolidated Balance Sheets HTML 35K
(Parenthetical)
20: R4 Condensed Consolidated Statements of Operations HTML 86K
33: R5 Condensed Consolidated Statements of Comprehensive HTML 35K
Loss
75: R6 Condensed Consolidated Statements of Cash Flows HTML 118K
53: R7 Consolidated Statements of Shareholders' Equity HTML 81K
22: R8 Description of Business HTML 151K
29: R9 Principles of Consolidation HTML 26K
63: R10 Basis of Presentation HTML 28K
70: R11 Impact of Recently Issued Accounting HTML 33K
Pronouncements
48: R12 Revenues HTML 103K
18: R13 Stock-Based Compensation HTML 119K
64: R14 Short-term Investments HTML 26K
71: R15 Accounts Receivable HTML 33K
49: R16 Inventories HTML 36K
19: R17 Loss Per Share HTML 65K
61: R18 Accrued Liabilities HTML 49K
72: R19 Fair Value of Financial Measurements HTML 47K
30: R20 Variable Interest Entity HTML 29K
23: R21 Segment Reporting HTML 107K
51: R22 Commitments and Contingencies HTML 34K
77: R23 Leases HTML 162K
32: R24 Business Combinations HTML 90K
24: R25 Principles of Consolidation (Policies) HTML 55K
52: R26 Description of Business (Tables) HTML 82K
78: R27 Revenues (Tables) HTML 95K
36: R28 Stock-Based Compensation (Tables) HTML 118K
21: R29 Accounts Receivable (Tables) HTML 33K
16: R30 Inventories (Tables) HTML 37K
47: R31 Earnings (Loss) Per Share (Tables) HTML 63K
74: R32 Accrued Liabilities (Tables) HTML 51K
66: R33 Fair Value of Financial Measurements (Tables) HTML 48K
15: R34 Segment Reporting (Tables) HTML 106K
46: R35 Leases (Tables) HTML 115K
73: R36 Business Combinations (Tables) HTML 85K
65: R37 Description of Business (Details) HTML 62K
17: R38 Impact of Recently Issued Accounting HTML 31K
Pronouncements - Additional Information (Details)
45: R39 Revenues - Disaggregation of Revenue (Details) HTML 50K
27: R40 Revenues - Narrative (Details) HTML 34K
41: R41 Stock-Based Compensation - Additional Information HTML 114K
(Details)
80: R42 Stock-Based Compensation - Assumptions Used to HTML 46K
Estimate The Fair Value of Time-Based Stock
Options (Details)
56: R43 Stock-Based Compensation - Schedule of Stock HTML 68K
Option Activity and Weighted Average Exercise
Prices (Details)
26: R44 Stock-Based Compensation - Schedule of Restricted HTML 49K
Stock Unit Activity and Weighted Average Grant
Date Fair Value (Details)
40: R45 Stock-Based Compensation - Expense (Details) HTML 41K
79: R46 Short-term Investments - Narrative (Details) HTML 46K
55: R47 Accounts Receivable - Additional Information HTML 32K
(Details)
28: R48 Inventories - Additional Information (Details) HTML 29K
39: R49 Inventories - Schedule of Inventory (Details) HTML 33K
42: R50 Earnings (Loss) Per Share - Reconciliation of HTML 49K
Number of Common Shares Used in Calculation of
Basic and Diluted Earnings Per Share (Eps)
(Details)
12: R51 Accrued Liabilities - Summary (Details) HTML 44K
59: R52 Accrued Liabilities - Activity Related to Accrued HTML 32K
Warranties (Details)
67: R53 Fair Value of Financial Measurements - Assets and HTML 36K
Liabilities Measured at Fair Value on a Recurring
Basis (Details)
43: R54 Fair Value of Financial Measurements - Assets and HTML 39K
Liabilities Measured at Fair Value on a Recurring
Basis - Footnotes (Details)
14: R55 Variable Interest Entity (Details) HTML 44K
60: R56 Segment Reporting - Additional Information HTML 26K
(Details)
68: R57 Segment Reporting - Summary of Reportable Segment HTML 49K
Information (Details)
44: R58 Commitments and Contingencies - Additional HTML 51K
Information (Details)
11: R59 Leases - Narrative (Details) HTML 34K
57: R60 Leases - Lease Cost (Details) HTML 34K
81: R61 Leases Supplemental Balance Sheet Information HTML 59K
Related to Leases (Details)
37: R62 Leases - Supplemental Cash Flows (Details) HTML 37K
25: R63 Leases - Maturities of lease liabilities (Details) HTML 64K
58: R64 Business Combinations - Additional Information HTML 57K
(Details)
82: R65 Business Combinations - Purchase Price Allocation HTML 72K
(Details)
38: R66 Business Combinations - Summary of the Purchase HTML 71K
Price Allocated to the Intangible Assets (Details)
31: R9999 Uncategorized Items - faro-20190930.htm HTML 28K
13: XML IDEA XML File -- Filing Summary XML 145K
35: XML XBRL Instance -- faro-20190930_htm XML 2.60M
50: EXCEL IDEA Workbook of Financial Reports XLSX 85K
7: EX-101.CAL XBRL Calculations -- faro-20190930_cal XML 245K
8: EX-101.DEF XBRL Definitions -- faro-20190930_def XML 666K
9: EX-101.LAB XBRL Labels -- faro-20190930_lab XML 1.57M
10: EX-101.PRE XBRL Presentations -- faro-20190930_pre XML 921K
6: EX-101.SCH XBRL Schema -- faro-20190930 XSD 153K
62: JSON XBRL Instance as JSON Data -- MetaLinks 336± 505K
69: ZIP XBRL Zipped Folder -- 0000917491-19-000078-xbrl Zip 299K
(Registrant’s Telephone Number, including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $.001
iFARO
iNasdaq
Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
Common
stock - par value $.001, 50,000,000 shares authorized; 18,816,598 and 18,676,059 issued, respectively; 17,404,087 and 17,253,011 outstanding, respectively
i19
i19
Additional
paid-in capital
i260,737
i251,329
Retained
earnings
i162,574
i175,353
Accumulated
other comprehensive loss
(i24,430)
(i18,483)
Common
stock in treasury, at cost; 1,412,511 and 1,423,048 shares, respectively
(i31,375)
(i31,609)
Total
shareholders’ equity
i367,525
i376,609
Total
liabilities and shareholders’ equity
$
i508,030
$
i506,244
The
accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share and per share data, or as otherwise noted)
NOTE
1 – iDESCRIPTION OF BUSINESS
FARO Technologies, Inc. and its subsidiaries (collectively “FARO,” the “Company,”“us,”“we” or “our”) design, develop, manufacture, market and support software driven, three-dimensional (“3D”) measurement and imaging solutions. This technology permits high-precision 3D measurement, imaging and comparison of parts and complex structures within production and quality assurance processes. Our devices are
used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes. We sell the majority of our products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building information modeling, construction, public safety forensics, cultural heritage, dental, and other applications. Our FaroArm®, 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 our 3D Manufacturing vertical. Our FARO Focus, FARO ScanPlan and FARO Scanner Freestyle3D X laser scanners, and their companion FARO SCENE, BuildIT, FARO As-BuiltTM, and FARO Zone public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications in our Construction Building Information Modeling (“Construction BIM”) and Public Safety Forensics verticals. Our FARO ScanArm®, FARO Scanner Freestyle3D X
laser scanners and their companion SCENE software, and other 3D-structured light scanning solutions specific to the dental industry, also enable a fully digital workflow used to capture real world geometry for the purpose of empowering design, enabling innovation, and speeding up the design cycle, supporting our 3D Design vertical. Our line of galvanometer-based scan heads and laser scan controllers are used in a variety of laser applications and are integrated into larger components and systems, supporting our Photonics vertical.
We report our segment information in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“FASB ASC Topic 280”). We evaluate business performance based upon several metrics, using revenue growth and segment profit as the primary financial
measures. In the fourth quarter of 2018, we renamed our 3D Factory vertical and reporting segment “3D Manufacturing.” There was no change in our total consolidated financial condition or results of operations previously reported as a result of this change.
We report our activities in the following ithree reportable segments:
•The 3D Manufacturing reporting segment contains our 3D Manufacturing vertical and provides both standardized and customized
solutions for 3D measurement and inspection in an industrial or manufacturing environment. Applications include alignment, part inspection, dimensional analysis, first article inspection, incoming and in-process inspection, machine calibration, non-contact inspection, robot calibration, tool building and set-up, and assembly guidance.
•The Construction BIM reporting segment contains our Construction BIM vertical and provides solutions for as-built data capturing and 3D visualization in building information modeling applications, allowing our customers in the architecture, engineering and construction markets to quickly and accurately extract two-dimensional (“2D”) and 3D measurement points. Applications include as-built documentation, construction monitoring, surveying, asset and facility management, and heritage preservation.
•The
Emerging Verticals reporting segment includes our 3D Design, Public Safety Forensics, and Photonics verticals. Our 3D Design vertical provides advanced 3D solutions to capture and edit 3D shapes of products, people and/or environments for design purposes in product development, computer graphics and dental and medical applications. Our Public Safety Forensics vertical provides solutions to public safety officials and professionals to capture environmental or situational scenes in 2D and 3D for crime, crash and fire scene investigations and environmental safety evaluations. Our Photonics vertical develops and markets galvanometer-based laser measurement products and solutions.
All
operating segments that do not meet the criteria to be reportable segments are aggregated in the Emerging Verticals reporting segment and have been combined based on the aggregation criteria and quantitative thresholds in accordance with the provisions of FASB ASC Topic 280. Our reporting segments have been determined in accordance with our internal management structure, which is based on operating activities. Each segment is responsible for its own product management, sales, strategy and profitability. Each reporting segment employs consistent accounting policies. See Note 14 – Segment Reporting for further information.
Reclassification and Related Changes to Presentation
Commencing with the third quarter of 2019, diepreciation
and amortization expenses are being reported in the accompanying statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Amounts related to depreciation and amortization expenses for the three and nine months ended September 30, 2018 have been restated 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, as follows:
iOur condensed consolidated financial statements include the accounts of
FARO Technologies, Inc. and its subsidiaries, all of which are wholly-owned. All intercompany transactions and balances have been eliminated.iThe financial statements of our foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting
from financial statement translations are reflected as a separate component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in net loss.
iThe
accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements include all normal recurring accruals and adjustments considered necessary by management for a fair presentation in conformity with U.S. GAAP.iPreparing financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The condensed consolidated results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019 or any future period.
The information included in this Quarterly Report on Form 10-Q, including the interim condensed consolidated financial statements and the accompanying notes, should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2018. The accompanying December 31, 2018 condensed consolidated balance sheet has been derived from those audited consolidated financial statements. As described in Note 1 – Description of Business, commencing with the third quarter of 2019, depreciation and amortization expenses are being reported in the accompanying statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Amounts related to depreciation and amortization expenses for the three and nine months ended September 30, 2018 have been restated 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.
NOTE
4 – iIMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
i
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. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years.
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 condensed consolidated balance sheet as of September 30, 2019 of $i18.7 million of right-of-use assets for operating leases, $i19.7
million of lease liability for operating leases, $i0.8 million of property and equipment, net for finance leases and $i0.8 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 condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - 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 current guidance, performance of Step 2 requires us to calculate the implied fair value of goodwill by following procedures that would be required to determine the fair value of assets acquired and liabilities assumed in a business combination. Under the new guidance, we will perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be 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. As a result, all reporting units will be subject to the same impairment assessment. We will still have the option to perform the qualitative assessment for a reporting
unit to determine if the quantitative impairment test is necessary. ASU 2017-04 becomes effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or any interim goodwill impairment tests after January 1, 2017. The amendments in this ASU will be applied on a prospective basis. Disclosure of the nature and reason for the change in accounting principle is required upon transition. This disclosure is required in the first annual period and in the interim period within the first annual period when we initially adopt the amendments in this ASU. We plan to adopt this guidance for our fiscal year ending December 31, 2020. We do not expect that the adoption of this guidance will have a material impact on our condensed 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 will adopt ASU 2016-13 effective January 1, 2020. We are currently evaluating the effect of the adoption of ASU 2016-13, but we do not expect that the adoption of this guidance will have a material impact on our condensed consolidated financial statements.
The
following tables present our revenues by sales type as presented in our condensed consolidated statements of operations disaggregated by the timing of transfer of goods or services (in thousands, unaudited):
(1) Regions
represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific, excluding China (Other APAC); and Canada, Mexico, and Brazil (Other Americas).
For revenue related to our measurement and imaging equipment and related software, we allocate the contract price to performance obligations based on our best estimate of the standalone selling price. We make this allocation estimate utilizing data from the sale of our applicable products and services to customers separately in similar circumstances, with the exception of software licenses. With respect to software licenses, we use the residual method for allocating the contract price to performance obligations. 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 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. 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 maintenance renewal rate. Maintenance renewals, when sold, are recognized on a straight-line basis over the term of the maintenance agreement. Payments for products and services are collected within a short period of time following transfer of control or commencement of delivery of services, as applicable.
Further,
customers frequently purchase extended warranties with the purchase of measurement equipment and related software. Warranties are considered a performance obligation when services are transferred to a customer over time, and, as such, we recognize revenue on a straight-line basis over the warranty term. Extended warranty sales primarily include contract periods that extend between one month and three years.
We capitalize commission expenses related to deliverables transferred to a customer over time and amortize such costs ratably over the term of the contract. As of September 30, 2019, the deferred cost asset related to deferred commissions was approximately $i2.8
million. For classification purposes, $i1.9 million and $i0.9 million are comprised within the Prepaid expenses and other current assets and Other long-term assets, respectively, on our condensed
consolidated balance sheet as of September 30, 2019. As of December 31, 2018, the deferred cost asset related to deferred commissions was approximately $i2.7 million. For classification purposes, $i1.8 million
and $i0.9 million were comprised within the Prepaid expenses and other current assets and Other long-term assets, respectively, on our condensed consolidated balance sheet as of December 31, 2018.
The unearned service revenue
liabilities reported on our condensed consolidated balance sheets reflect the contract liabilities to satisfy the remaining performance obligations for extended warranties and software maintenance. The current portion of unearned service revenues on our condensed consolidated balance sheets is what we expect to recognize to revenue within twelve months after the applicable balance sheet date relating to extended warranty and software maintenance contract liabilities. The Unearned service revenues - less current portion on our condensed consolidated balance sheets is what we expect to recognize to revenue extending beyond twelve months after the applicable balance sheet date relating to extended warranty and software maintenance contract
liabilities. During the three and nine months ended September 30, 2019, we recognized $i6.3 million and $i25.9 million,
respectively, of service revenue that was deferred on our condensed consolidated balance sheet as of December 31, 2018. During the three and nine months ended September 30, 2018, we recognized $i5.3 million and $i21.5 million,
respectively, of service revenue that was deferred on our consolidated balance sheet as of December 31, 2017.
The nature of certain of our contracts gives rise to variable consideration, which may be constrained, primarily related to an allowance for sales returns and contracts with certain government customers. We are required to estimate the contract asset related to sales returns and record a corresponding adjustment to Cost of Sales. Our allowance for sales returns was approximately $i0.1 million as
of both September 30, 2019 and September 30, 2018.
Shipping and handling fees billed to customers in a sales transaction are recorded in Product Sales and shipping and handling costs incurred are recorded in Cost of Sales. We exclude from Sales any value-added sales and other taxes that we collect concurrently with revenue-producing activities.
NOTE 6 – iSTOCK-BASED
COMPENSATION
Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date. 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 taking into account the probability that we will satisfy the performance condition.
We have itwo
compensation plans that provide for the granting of stock options and other share-based awards to key employees and non-employee members of the Board of Directors (the “Board”). The 2009 Equity Incentive Plan (the “2009 Plan”) and the 2014 Equity Incentive Plan (the “2014 Plan”) provide for granting options, restricted stock, restricted stock units or stock appreciation rights to employees and non-employee directors. In May 2018, our shareholders approved an amendment to the 2014 Plan, which increased the number of shares available for issuance under the 2014 Plan by i1,000,000
shares. A maximum of i2,974,543 shares are available for issuance under the 2014 Plan, as amended, plus the number of shares (not to exceed i891,960)
that were underlying awards outstanding under the 2004 Equity Incentive Plan (the “2004 Plan”) and the 2009 Plan as of May 29, 2014 that thereafter terminate or expire unexercised or are canceled, forfeited or lapse for any reason. iNo awards were outstanding under the 2004 Plan as of September 30, 2019, and no further grants will be made
under the 2004 Plan or the 2009 Plan.
Upon election to the Board, each non-employee director receives an initial equity grant of shares of restricted common stock with a value equal to $i100,000, calculated using the closing price of our common stock on the date of the non-employee director’s election to the Board. The initial restricted stock grant vests on the third anniversary of the grant date, subject to the non-employee director’s continued membership on the Board. Annually,
the non-employee directors are granted restricted shares with a value equal to $i100,000 on the first business day following the annual meeting of shareholders, calculated using the closing price of our common stock on that day. In addition, the independent Chairman of the Board is annually granted restricted shares with a value equal to $i50,000,
and the Lead Director, if one has been appointed, would be annually granted restricted shares with a value of $i40,000, on the first business day following the annual meeting of shareholders, calculated using the closing price of our common stock on that day. The shares of restricted stock granted annually to our non-employee directors, our independent Chairman of the Board and, if applicable, our Lead Director vest on the day prior to the following year’s annual meeting date, subject to the non-employee director’s continued
membership on the Board. We record compensation expense associated with our restricted stock grants on a straight-line basis over the vesting term. 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 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 expense associated with our deferred stock units over the period of service.
Annually, upon approval by our Compensation Committee, we grant stock-based awards, which historically have been in the form of stock options and/or restricted stock units, to certain employees. We also grant stock-based awards, which historically have been in the form of stock options and/or restricted stock units, to certain new employees throughout the year. The fair value of these stock-based awards is determined by using (a) the current market price of our common stock on the grant date in the case of restricted stock units without a market condition, (b) the Monte Carlo Simulation valuation model in the case of performance-based restricted stock units with a market condition, or (c) the Black-Scholes option valuation model in the case of stock options.
Our annual grants in February 2019 and the stock-based awards granted to Michael D. Burger upon the commencement
of his service as our President and Chief Executive Officer in June 2019 and to Allen Muhich upon the commencement of his service as our Chief Financial Officer in July 2019 consisted of performance-based restricted stock units and time-based restricted stock units. Our annual grants in March 2018 consisted of time-based stock options and time-based restricted stock units. The number of stock options and/or restricted stock units granted was based on the employee’s individual objectives, performance against operational metrics assigned to the employee and overall contribution to the Company over the last year.
For the stock-based awards granted in 2019, the time-based restricted stock units vest in three equal annual installments beginning one year after the grant
date. The performance-based restricted stock unit awards vest at the end of the 3-year performance period if the applicable performance measure is achieved. The related stock-based compensation expense will be recognized over the requisite service period, taking into account the probability that we will satisfy the performance measure. The performance-based restricted stock units granted in 2019 will be earned and will vest based upon our total shareholder return (“TSR”) relative to the TSR attained by companies within our defined benchmark group, the Russell 2000 Growth Index. Due to the TSR presence in these performance-based restricted stock units, the fair value of these awards was determined using the Monte Carlo Simulation valuation model. We expense these market condition awards over the three-year vesting period regardless of the value the award recipients ultimately receive.
For 2018 grants, stock options vest
in three equal annual installments beginning one year after the grant date and time-based restricted stock unit awards vest in full on the three-year anniversary of the grant date. The fair value of these stock-based awards is determined by using (a) the Black-Scholes option valuation model in the case of stock options or (b) the current market price of our common stock on the grant date in the case of restricted stock units.
The Black-Scholes option 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. The weighted-average grant-date fair value of the performance-based restricted stock units that were granted during the nine months ended September 30, 2019 and valued using the Monte Carlo Simulation valuation model was $i66.16.
No performance-based restricted stock units were granted during the nine months ended September 30, 2018. iFor performance-based restricted stock units granted during the nine months ended September 30, 2019 valued using the Monte Carlo Simulation valuation model, we used the following assumptions:
The
weighted-average grant-date fair value of the stock options that were granted during the nine months ended September 30, 2018 and valued using the Black-Scholes option valuation model was $i23.43 per option. iNo
stock options were granted during the nine months ended September 30, 2019. iFor stock options granted during the nine months ended September 30, 2018 valued using the Black-Scholes option valuation model, we used the following assumptions:
Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The risk-free interest rate was based on the yields of U.S. zero coupon issues and U.S. Treasury issues, with a term approximating the expected life of the option being valued.
i
A summary of stock option activity and weighted-average exercise prices during the nine months ended September 30,
2019 follows:
Options
Weighted- Average Exercise Price
Weighted-Average Remaining Contractual Term (Years)
The
total intrinsic value of stock options exercised during the three months ended September 30, 2019 and September 30, 2018 was $i1.0 million and $i4.7
million, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2019 and September 30, 2018 was $i1.3 million and $i7.5
million, respectively. The fair value of stock options vested during the three months ended September 30, 2019 and September 30, 2018 was $i0.6 million and $i0.1
million, respectively. The fair value of stock options vested during the nine months ended September 30, 2019 and September 30, 2018 was $i4.9 million and $i3.2
million, respectively.
i
The following table summarizes the restricted stock and restricted stock unit activity and weighted average grant-date fair values for the nine months ended September 30, 2019:
We
recorded total stock-based compensation expense of $i3.4 million and $i2.3 million for the three months
ended September 30, 2019 and September 30, 2018, respectively, and $i8.7 million and $i5.7
million for the nine months ended September 30, 2019 and September 30, 2018, respectively.
As of September 30, 2019, there was $i12.2 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation
arrangements. The expense is expected to be recognized over a weighted average period of i2.1 years.
The
following table summarizes total stock-based compensation expense for each of the line items on our condensed consolidated statement of operations:
Short-term investments at September 30, 2019 were composed of U.S. Treasury Bills totaling $i24.9
million, consisting of $i8.9 million maturing on March 12, 2020 and $i16.0 million maturing on December 12,
2019. The interest rates on the U.S. Treasury Bills held on September 30, 2019 that are maturing on March 12, 2020 and December 12, 2019 were i1.8% and i1.9%,
respectively. Short-term investments at December 31, 2018 were composed of U.S. Treasury Bills totaling $i24.8 million, consisting of $i9.0 million, $i10.9
million, and $i4.9 million that matured on March 14, 2019, June 6, 2019, and June 20, 2019, respectively. The interest rates on the U.S. Treasury Bills held on December 31, 2018 that matured on March 14, 2019, June 6, 2019, and June 20, 2019
were i2.2%, i2.4%, and i2.3%,
respectively. These investments are classified as held-to-maturity and recorded at cost plus accrued interest, which approximates fair value. We do not intend to sell these investments, and it is not more likely than not that we will be required to sell the investments before we recover their amortized cost bases.
iInventories are stated at the lower of cost or net realizable value using the first-in first-out (FIFO) method. We have three principal categories of inventory: 1) manufactured product to be sold; 2) sales
demonstration inventory - completed product used to support our sales force for demonstrations and held for sale; and 3) service inventory - completed product and parts used to support our service department and held for sale. Shipping and handling costs are classified as a component of Cost of Sales in our condensed consolidated statements of operations. Sales demonstration inventory is held by our sales representatives for up to ithree years, at which time it would be refurbished and transferred to finished goods as used equipment, stated at the lower of cost or net realizable value. We expect these refurbished units
to remain in finished goods inventory and sold within i12 months at prices that produce reduced gross margins. Service inventory is used to provide a temporary replacement product to a customer covered by a premium warranty when the customer’s unit requires service or repair and as training equipment. Service inventory is available for sale; however, management does not expect service inventory to be sold within 12 months and, as such, classifies this inventory as a long-term asset. Service inventory that we utilize for training or repairs and which we deem as no longer available for sale is transferred
to fixed assets at the lower of cost or net realizable value and depreciated over its remaining life, typically ithree years./
Basic earnings (loss) per share is computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings (loss) per share is computed by also considering the impact of potential common stock on both net income and the weighted average number of shares outstanding. Our potential common stock consists of employee stock options, restricted stock units and performance-based awards. Our potential common stock is included in the diluted earnings per share calculation when adding such potential common
stock would not be anti-dilutive. Performance-based awards are included in the computation of diluted earnings per share only to the extent that the underlying performance conditions (and any applicable market condition) (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. When we report a net loss for the period presented, the calculation of diluted net loss per share excludes our potential common stock, as the effect would be anti-dilutive.
For the three and nine months ended September 30, 2019, there were approximately ii1,050,039/
shares issuable upon the exercise of options and the contingent vesting of performance-based restricted stock units that were excluded from the dilutive calculations, as they were anti-dilutive. For the three and nine months ended September 30, 2018, there were approximately i546,538 and i627,733
shares, respectively, issuable upon the exercise of options that were excluded from the dilutive calculations, as they were anti-dilutive.
i
A reconciliation of the number of common shares used in the calculation of basic and diluted loss per share is presented below:
Our financial instruments include cash and cash equivalents, short-term investments, accounts receivable, customer deposits, accounts payable and accrued liabilities. The carrying amounts of such financial instruments approximate their fair value due to the short-term nature of these instruments.
i
Liabilities
measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations:
(1)Contingent
consideration liability represents arrangements to pay the former owners of certain companies we acquired based on the former owners attaining future product release milestones. We use a probability-weighted discounted cash flow model to estimate the fair value of contingent consideration liabilities. These probability weightings are developed internally and assessed on a quarterly basis. As of September 30, 2019, $i2.0 million of these arrangements are reported in Accrued
liabilities in our condensed consolidated balance sheet. As of December 31, 2018, $i3.4 million of these arrangements were reported in Accrued liabilities and $i2.1
million were reported in Other long-term liabilities in our condensed consolidated balance sheet. The remaining undiscounted maximum payment under these arrangements was $i2.2 million as of September 30, 2019. The change in the fair value of the contingent consideration from December
31, 2018 to September 30, 2019 was primarily related to our payment of $i3.1 million as part of these arrangements during the nine months ended September 30, 2019, as well as changes in our estimates regarding the probability that the former owners will attain certain product release milestones.
A variable interest entity (“VIE”) is an entity that has one of three characteristics: (1) it is controlled by someone other than its shareowners or partners, (2) its shareowners or partners are not economically exposed to the entity’s earnings (for example, they are protected against losses), or (3) it lacks sufficient equity to permit the entity to finance its activities without additional subordinated
financial support from other parties.
On April 27, 2018, we invested $i1.8 million in present4D GmbH (“present4D”), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. This initial contribution represented a minority investment in present4D. This investment’s business purpose is to coordinate the design and development
of modules supporting compatibility with virtual reality for our existing software offerings.
As of our April 27, 2018 investment date, present4D was thinly capitalized and lacked sufficient equity to finance its activities without additional subordinated financial support and is classified as a VIE. We do not have power over decisions that significantly affect present4D’s economic performance and do not represent its primary beneficiary. After April 27, 2020, present4D may request additional equity financing up to $i1.8
million from us in exchange for additional share capital, which additional equity financing would be at our discretion. We did not provide support to present4D during 2018 or the first six months of 2019 outside of our initial investment of $i1.8 million. During the three months ended September 30, 2019, we originated a $i0.5 million
note with present4D, which we may convert into additional equity in present4D at our discretion in the event of a default. Further, the note is collateralized by the perpetual and royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D’s software. Our i16.5% portion of present4D’s net loss for each of the three and nine month periods ended September 30, 2019 was less than $i0.1
million. Present4D is currently accounted for using the equity method of accounting. Our equity in the net loss from this equity-method investment is recorded as loss with a corresponding decrease in the investment.
During the three months ended June 30, 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $i1.5 million, which is included
in Other expense, net on our statement of operations for the nine months ended September 30, 2019. Our investment in this unconsolidated VIE at September 30, 2019 was $i0.2 million and at December 31, 2018 was $i1.7
million and is included in Other long-term assets in our condensed consolidated balance sheets.
We have ithree
reportable segments: 3D Manufacturing, Construction BIM, and Emerging Verticals. These segments are based upon the vertical markets that we currently serve. Business activities that do not meet the criteria to be reportable segments are aggregated in the Emerging Verticals segment. Each of our reporting segments employs consistent accounting policies.
We develop, manufacture, market, support and sell CAD-based quality assurance products integrated with CAD-based inspection and statistical process control software and 3D documentation systems in each of these reportable segments. These activities represent more than i99%
of consolidated sales.
Our Chief Operating Decision Maker (CODM), our Chief Executive Officer, evaluates segment performance and allocates resources based upon profitable growth. We use segment profit to evaluate the performance of our reportable segments. Segment profit is calculated as gross profit, net of selling and marketing expenses, for the reporting segment. Our definition of segment profit may not be comparable to similarly titled measures reported by other companies.
In the fourth quarter of 2018, we renamed our 3D Factory vertical and reporting segment “3D Manufacturing.” Additionally, commencing with the third quarter of 2019, depreciation and amortization expenses are being reported in the accompanying statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Amounts related
to depreciation and amortization expenses for the three and nine months ended September 30, 2018 have been restated 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.
i
The following tables present information about our reportable segments, including a reconciliation of segment profit to loss from operations included
in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018:
Purchase Commitments — We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for i60 to i120
days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As of September 30, 2019, we had approximately $i54.0 million in purchase commitments that are expected to be delivered within the next 12 months.
Legal Proceedings — We are not involved in any legal proceedings, including routine litigation arising in the normal course of business, that we believe will
have a material adverse effect on our business, financial condition or results of operations.
U.S. Government Contracting Matter — We have sold our products and related services to the U.S. Government (the “Government”) under General Services Administration (“GSA”) Federal Supply Schedule contracts (the “GSA Contracts”) since 2002 and are currently selling our products and related services to the Government under two such GSA Contracts. Each GSA Contract is subject to extensive legal and regulatory requirements and includes,
among other provisions, a price reduction clause (the “Price Reduction Clause”), which generally requires us to reduce the prices billed to the Government under the GSA Contracts to correspond to the lowest prices billed to certain benchmark customers.
Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the Government being overcharged under the Price Reduction Clauses of the GSA Contracts (the “GSA Matter”). As a result, we performed remediation efforts, including but not limited to, the identification of additional controls and procedures to ensure future compliance with the pricing and other requirements of the GSA Contracts.
We also retained outside legal counsel and forensic accountants to assist with these efforts and to conduct a comprehensive review of our pricing and other practices under the GSA Contracts (the “Review”). On February 14, 2019, we reported the GSA Matter to the GSA and its Office of Inspector General.
As a result of the GSA Matter, for fourth quarter 2018, we reduced our total sales by a $i4.8
million estimated cumulative sales adjustment, representative of the last six years of estimated overcharges to the Government under the GSA Contracts. In addition, for the fourth quarter of 2018, we recorded $i0.5 million of imputed interest related to the estimated cumulative sales adjustment, which increased Interest expense, net and resulted in an estimated total liability of $i5.3 million
for the GSA Matter. This adjustment was based on our preliminary review as of February 20, 2019, the date of our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, in first quarter 2019, we recorded an additional $i0.1 million of imputed interest related to the estimated cumulative sales adjustment.
On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review conducted by our outside legal counsel and forensic accountants. Based on the results of the Review, we reduced our total sales for second quarter 2019 by an incremental $i5.8 million sales adjustment, reflecting an estimated aggregate overcharge of $i10.6
million under the GSA Contracts for the period from July 2011 to March 2019. In addition, we recorded an incremental $i0.4 million of imputed interest related to the estimated cumulative sales adjustment in the second quarter 2019, which increased Interest expense, net and resulted in a $i6.2
million total incremental increase in the estimated total liability for the GSA Matter. We recorded an incremental $0.1 million of imputed interest related to the estimated cumulative sales adjustment in the third quarter 2019. As of the date of the filing of this Quarterly Report on Form 10-Q, we have recorded an aggregate estimated total liability for the GSA Matter of $i11.7 million.
While we have reported this matter and submitted the findings of the Review to the GSA, the Government
may conduct its own investigation or review (including an audit). We intend to cooperate fully with any Government inquiry. The Government’s review of, or investigation into, this matter could result in civil and criminal penalties, administrative sanctions, and contract remedies being imposed on us, including but not limited to, termination of the GSA Contracts, repayments of amounts already received under the GSA Contracts, forfeiture of profits, damages, suspension of payments, fines, and suspension or debarment from doing business with the Government and possibly U.S. state and local governments. We may also be subject to litigation and recovery under the federal False Claims Act and possibly similar
state laws, which could include claims for treble damages, penalties, fees and costs. As a result, we cannot reasonably predict the outcome of the Government’s review of, or investigation into, this matter at this time or the resulting future financial impact on us. Any of these outcomes could have a material adverse effect on our reputation, our sales, results of operations, cash flows and financial condition, and the trading price of our common stock. In addition, we have incurred, and will continue to incur, legal and related costs in connection with the Review and the Government’s response to this matter.
We
have operating and finance leases for manufacturing facilities, corporate offices, research and development facilities, sales and training facilities, vehicles, and certain equipment under which we assume the role of lessee. We do not lease assets as a lessor. Our leases have remaining lease terms of less than ione year to approximately iseven
years, some of which include options to extend the leases for up to ieight years, and some of which include options to terminate the leases within ithree months. We currently do not sublease any of our leased assets.
We determine if an arrangement is a lease
at inception. Operating leases are included in Operating lease right-of-use (“ROU”) asset, Lease liability, and Lease liability - less current portion in our condensed consolidated balance sheets. Finance leases are included in Property and equipment, net, Lease liability, and Lease liability - less current portion in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term. Variable lease payments that depend on an index or rate include the variable portion when calculating ROU assets and lease liabilities. Variable lease payments that do not depend on an index or rate are expensed as incurred. As
most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the commencement date of the lease to determine the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option at the time the lease is commenced. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
While we have lease agreements with lease and non-lease components, we account for the lease and non-lease components as a single lease component.
We
recognize lease payments made for short-term leases where terms are 12 months or less as the payments are incurred. Our short-term lease cost for the three and nine months ended September 30, 2019 was less than $i0.1 million and $i0.2
million, respectively.
On March 9, 2018, we acquired all of the outstanding shares of Laser Control Systems Limited (“Laser Control Systems”), a laser component technology business located in Bedfordshire, United Kingdom, which specializes in the design and manufacture of advanced digital scan heads and laser software, for a purchase price of $i1.7 million.
This acquisition supports our Photonics vertical and our long-term strategy to expand our presence and product portfolio in Photonics applications. The results of Laser Control Systems’ operations as of and after the date of acquisition have been included in our condensed consolidated financial statements as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and September 30, 2018.
On March 16, 2018, we acquired all of the outstanding shares of Photocore AG (“Photocore”), a vision-based 3D measurement application and software developer in Zurich, Switzerland, for a total purchase
price of $i2.4 million. This acquisition supports our Construction BIM vertical and our long-term strategy to improve our existing software offerings with innovative technology in photogrammetry. The results of PhotoCore’s operations as of and after the date of acquisition have been included in our condensed consolidated financial statements as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30,
2019 and September 30, 2018.
On July 6, 2018, we acquired all of the outstanding shares of Lanmark Controls, Inc. (“Lanmark”), a high-speed laser marking control boards and laser marking software provider located in Acton, Massachusetts, for a purchase price of $i6.3 million. This acquisition supports the development of components used
in new 3D laser inspection product development in order to further expand the product portfolio of our Photonics vertical. The results of Lanmark’s operations as of and after the date of acquisition have been included in our condensed consolidated financial statements as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and September 30, 2018.
On July 13, 2018, we acquired all of the issued and outstanding corporate capital of Opto-Tech SRL and its subsidiary Open Technologies SRL (collectively, “Open Technologies”), a 3D-structured light scanning solution company located in Brescia,
Italy, for an aggregate purchase price of up to €i18.5 million ($i21.6 million),
subject to post-closing adjustments based on actual net working capital, net financial position and transaction expenses. The aggregate purchase price included up to €i4.0 million ($i4.7
million) in contingent consideration that may be earned by the former owners if certain product development milestones are met. 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. This acquisition supports our 3D Design vertical and our long-term strategy to establish a presence in 3D measurement technology used in other industries and applications, especially dental and medical. The results of Open Technologies’ operations as of and after the date of acquisition have been included in our condensed consolidated financial statements as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and September 30, 2018.
The acquisitions of Laser Control Systems, Photocore, Lanmark and Open Technologies constitute business combinations as defined by ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the date of acquisition. The purchase price allocations below represent our final determination of the fair value of the assets acquired and liabilities assumed for such acquisitions. In the nine months ended September 30, 2019, certain refinements were booked for the Open Technologies acquisition as part of the finalization process, which included a reduction of $i2.6
million to the valuation of the customer relationship intangible and the recognition of a deferred tax liability of $i1.9 million. Goodwill increased $i4.5 million
as result of these changes in the finalization process.
Following is a summary of our allocations of the purchase price to the fair values of the assets acquired and liabilities assumed as of the date of each acquisition:
Laser
Control Systems
Photocore
Lanmark
Open Technologies (2)
Accounts receivable
$
i—
$
i—
$
i610
$
i2,735
Inventory
i—
i—
i299
i1,852
Other
assets
i—
i—
i76
i634
Intangible
assets
i1,400
i1,435
i1,366
i7,821
Goodwill
i928
i1,010
i5,355
i13,573
Accounts
payable and accrued liabilities
i—
i—
(i159)
(i2,926)
Other
liabilities (1)
(i579)
i—
(i971)
(i5,201)
Deferred
income tax liabilities
i—
i—
(i325)
(i1,876)
Total
purchase price, net of cash acquired
$
i1,749
$
i2,445
$
i6,251
$
i16,612
(1)
For Laser Control Systems, Lanmark and Open Technologies, this total consists primarily of the fair value of the projected contingent consideration.
(2) Amounts converted from Euros to U.S. Dollars based on the foreign exchange rate on the closing date of the acquisition.
/
i
Following
are the details of the purchase price allocated to the intangible assets acquired for the acquisitions noted above:
Laser Control Systems
Photocore
Lanmark
Open
Technologies
Amount
Weighted Average Life (Years)
Amount
Weighted Average Life (Years)
Amount
Weighted Average Life (Years)
Amount
Weighted Average Life (Years)
Brand
i26
i1
i22
i1
i26
i1
i103
i1
Non-competition
agreement
i29
i3
i9
i3
i—
i0
i—
i0
Technology
i1,319
i7
i1,343
i7
i760
i7
i4,441
i7
Customer
relationship
i26
i10
i61
i10
i580
i10
i3,277
i10
Fair
value of intangible assets acquired
$
i1,400
i7
$
i1,435
i7
$
i1,366
i8
$
i7,821
i8
/
The
goodwill for the Laser Control Systems, Lanmark and Open Technologies acquisitions has been allocated to the Emerging Verticals reporting segment. The goodwill for the Photocore acquisition has been allocated to the Construction BIM reporting segment.
Acquisition and integration costs are not included as components of consideration transferred, but are recorded as expense in the period in which such costs are incurred. To date, we have incurred approximately $i0.8
million in acquisition and integration costs for the Laser Control Systems, Photocore, Lanmark and Open Technologies acquisitions. Pro forma financial results for Laser Control Systems, Photocore, Lanmark and Open Technologies have not been presented because the effects of these transactions, individually and in the aggregate, were not material to our consolidated financial results.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the condensed consolidated financial statements,
including the notes thereto, included elsewhere in this Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018.
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;
•our inability to further penetrate our customer base and target markets;
•development by others of new or improved products, processes or technologies that make our products less competitive or obsolete;
•our inability to maintain what we believe to be our technological advantage by developing new products and enhancing our existing products;
•the outcome of the U.S. Government’s review of, or investigation into, our potential overcharging of the U.S. Government under our General Services Administration Federal Supply Schedule contracts,
any resulting penalties, damages or sanctions imposed on us and the outcome of any resulting litigation to which we may become a party, loss of future government sales and potential impacts on customer and supplier relationships and our reputation;
•risks associated with expanding international operations, such as difficulties in staffing and managing foreign operations, increased political and economic instability, compliance with potentially evolving import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
•changes in trade regulation, which result in rising prices of imported steel, steel byproducts, aluminum and aluminum byproducts and various other raw materials that we use in the production of measurement devices, and our ability to pass
those costs on to our customers or require our suppliers to absorb such costs;
•changes in foreign regulation which may result in rising prices of our measurement devices sold as exports to our international customers, our customers’ willingness to absorb incremental import tariffs, and the corresponding impact on our profitability;
•our inability to successfully identify and acquire target companies and achieve expected benefits from, and effectively integrate, acquisitions that are consummated;
•the cyclical nature of the industries of our customers and material adverse changes in our customers’ access to liquidity and capital;
•changes in the potential for the computer-aided measurement market and
the potential adoption rate for our products, which are difficult to quantify and predict;
•our inability to protect our patents and other proprietary rights in the United States and foreign countries;
•our inability to adequately establish and maintain effective internal controls over financial reporting;
•fluctuations in our annual and quarterly operating results and the inability to achieve our financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought
against us, (ii) quality issues with our products, (iii) excess or obsolete inventory, shrinkage or other inventory losses due to product obsolescence, change in demand for our products, scrap or material price changes, (iv) raw material price fluctuations and other inflationary pressures, (v) expansion of our manufacturing capability, (vi) the size and timing of customer orders, (vii) the amount of time that it takes to fulfill orders and ship our products, (viii) the length of our sales cycle to new customers and the time and expense incurred in further penetrating our existing customer base, (ix) manufacturing inefficiencies associated with new product introductions, (x) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (xi) the timing and market acceptance of new products and product enhancements, (xii) customer order deferrals in anticipation of new
products and product enhancements, (xiii) the inability of our sales and marketing programs to achieve their sales targets, (xiv) start-up costs associated with opening new sales offices outside of the United States, (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) inefficiencies in the management of our inventories and fixed assets, (xvii) compliance with government regulations including health, safety, and environmental matters, and (xviii) costs associated with the training and ramp-up time for new sales people;
•changes in gross margins due to a changing mix of products sold and the different gross margins on different products and sales channels;
•changes in applicable laws, rules or regulations, or their interpretation or enforcement, or the enactment of new laws, rules or regulations that apply
to our business operations or require us to incur significant expenses for compliance;
•our inability to successfully comply with the requirements of the Restriction of Hazardous Substances Directive and the Waste Electrical and Electronic Equipment Directive in the European Union;
•the inability of our products to displace traditional measurement devices and attain broad market acceptance;
•the impact of competitive products and pricing on our current offerings;
•our ability to successfully complete our executive officer transitions 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 the U.S. Tax Cuts and Jobs Act of 2017 on the global intangible low-taxed income of foreign subsidiaries;
•the loss of key suppliers and the inability to find
sufficient alternative suppliers in a reasonable period of time or on commercially reasonable terms;
•the impact of fluctuations in exchange rates;
•the effect of estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements;
•the magnitude of increased warranty costs from new product introductions and enhancements to existing products;
•the sufficiency of our plants to meet manufacturing requirements;
•the continuation of our share repurchase program;
•the sufficiency of our working
capital and cash flow from operations to fund our long-term liquidity requirements;
•the impact of geographic changes in the manufacturing or sales of our products on our effective income tax rate;
•our ability to comply with the requirements for favorable tax rates in foreign jurisdictions; and
•other risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018.
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.
FARO Technologies, Inc. and its subsidiaries (collectively “FARO,” the “Company,”“us,”“we” or “our”) design, develop, manufacture, market and support software driven, three-dimensional (“3D”) measurement and imaging solutions. This technology permits high-precision 3D measurement, imaging and comparison of parts and complex structures within production and quality assurance processes. Our devices are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes. We sell the majority of our products through a direct sales force across a broad
number of customers in a range of manufacturing, industrial, architecture, surveying, building information modeling, construction, public safety forensics, cultural heritage, dental, and other applications. Our FaroArm®, 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 our 3D Manufacturing vertical. Our FARO Focus, Faro ScanPlan and FARO Scanner Freestyle3D X laser scanners, and their companion FARO SCENE, BuildIT, FARO As-BuiltTM, and FARO Zone public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications in our Construction Building Information Modeling (“Construction BIM”) and Public Safety Forensics verticals. Our FARO ScanArm®, FARO Scanner Freestyle3D X laser scanners and their companion SCENE software, and other 3D-structured light scanning solutions specific to the dental industry, also enable a fully digital workflow used to capture real world geometry for the purpose of empowering design, enabling innovation, and speeding up the design cycle, supporting
our 3D Design vertical. Our line of galvanometer-based scan heads and laser scan controllers are used in a variety of laser applications and are integrated into larger components and systems, supporting our Photonics vertical.
We derive our revenues primarily from the sale of our measurement equipment and related multi-faceted software programs. Revenue related to these products is generally recognized upon shipment. In addition, we sell extended warranties and training and technology consulting services relating to our products. We recognize the revenue from extended warranties on a straight-line basis over the term of the warranty, and revenue from training and technology consulting services when the services are provided.
We operate in international markets throughout the world and maintain sales offices in Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan,
Malaysia, Mexico, the Netherlands, Poland, Portugal, Singapore, South Korea, Spain, Switzerland, Thailand, Turkey, the United Kingdom, and the United States.
We manufacture our FaroArm® and FARO ScanArm® products in our manufacturing facility located in Switzerland for customer orders from Europe, the Middle East and Africa, in our manufacturing facility located in Singapore for customer orders from the Asia-Pacific region, and in our manufacturing facility located in Florida for customer orders from the Americas. We manufacture our FARO Focus in our manufacturing facilities located in Germany and Switzerland for customer orders from Europe, the Middle East and Africa (“EMEA”) and the Asia-Pacific region, and in our manufacturing facility located in Pennsylvania for customer orders from the Americas. We manufacture our FARO Freestyle3D
X products in our facility located in Germany. We manufacture our FARO Laser Projector and FARO Laser TrackerTM products in our facility located in Pennsylvania. We manufacture our 3D-structured light scanning solutions specific to the dental industry in our engineering and manufacturing facility in Italy. We expect all of our existing manufacturing facilities to have the production capacity necessary to support our volume requirements through the remainder of 2019.
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 2018 or the nine months ended September 30, 2019.
We have sold our products and related services to the U.S. Government (the “Government”) under General Services Administration (“GSA”) Federal Supply Schedule contracts (the “GSA Contracts”) since 2002 and are currently selling our
products and related services to the Government under two such GSA Contracts. Each GSA Contract is subject to extensive legal and regulatory requirements and includes, among other provisions, a price reduction clause (the “Price Reduction Clause”), which generally requires us to reduce the prices billed to the Government under the GSA Contracts to correspond to the lowest prices billed to certain benchmark customers.
Late
in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the Government being overcharged under the Price Reduction Clauses of the GSA Contracts (the “GSA Matter”). On February 14, 2019, we reported the GSA Matter to the GSA and its Office of Inspector General.
As a result of the GSA Matter, for the fourth quarter of 2018, we reduced our total sales by a $4.8 million estimated cumulative sales adjustment, representative of the last six years of estimated overcharges to the Government under the GSA Contracts. In addition, for the fourth quarter of 2018, we recorded $0.5 million of imputed interest related
to the estimated cumulative sales adjustment, which increased Interest expense, net and resulted in an estimated total liability of $5.3 million for the GSA Matter. This adjustment was based on our preliminary review as of February 20, 2019, the date of our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, in the first quarter 2019, we recorded an additional $0.1 million of imputed interest related to the estimated cumulative sales adjustment.
On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the review of our pricing and other practices under the GSA Contracts conducted by our outside legal counsel
and forensic accountants (the “Review”). Based on the results of the Review, we reduced our total sales for second quarter 2019 by an incremental $5.8 million sales adjustment, reflecting an estimated aggregate overcharge of $10.6 million under the GSA Contracts for the period from July 2011 to March 2019. In addition, we recorded an incremental $0.4 million of imputed interest related to the estimated cumulative sales adjustment in the second quarter 2019, which increased Interest expense, net and resulted in a $6.2 million total incremental increase in the estimated total liability for the GSA Matter. We recorded an incremental $0.1 million of imputed interest related to the estimated cumulative sales adjustment in the third quarter 2019. As of the date of the filing of this Quarterly Report on Form 10-Q, we have recorded an aggregate estimated total liability for the
GSA Matter of $11.7 million.
On April 27, 2018, we invested $1.8 million in present4D GmbH (“present4D”), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. This initial contribution represented a minority investment in present4D. This investment’s business purpose is to coordinate the design and development of modules supporting compatibility with virtual reality for our existing software offerings. During the three months ended June 30, 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net. Notwithstanding the aforementioned impairment charge, based on our current valuation of present4D,
we continue to believe in the benefits of present4D’s technology and intellectual property to our business. We did not provide support to present4D during 2018 or the first six months of 2019 outside of our initial investment of $1.8 million. During the three months ended September 30, 2019, we originated a $0.5 million note with present4D, which we may convert into additional equity in present4D at our discretion in the event of a default. Further, the note is collateralized by the perpetual and royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D’s software.
Under our new management team, we have begun to formulate our strategic plan. As part of our strategic planning process, we have identified areas of our business that need enhanced focus or change, including our go-to-market strategy and marketing engagement with our customers.
While our full strategic plan remains in process, we expect to disclose more information regarding our plan in early 2020.
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.
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 nine
months ended September 30, 2018 have been restated 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.
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.
Sales. Total sales decreased by $9.2 million, or 9.2%, to $90.5 million for the three months ended September 30, 2019 from $99.7 million for the three months ended September 30, 2018. Total product sales decreased by $12.2 million, or 16.1%, to $63.6 million for the three months ended September 30, 2019 from $75.8 million for the three months ended September 30, 2018. Our product sales decreased primarily due to a decrease
in unit sales within our 3D Manufacturing reporting segment, especially in our Asia-Pacific region and broader automotive industry, primarily due to the uncertainty surrounding ongoing trade disputes. Service revenue increased by $3.0 million, or 12.5%, to $26.9 million for the three months ended September 30, 2019 from $23.9 million for the three months ended September 30, 2018, primarily due to an increase in repair revenue and warranty revenue driven by the growth of our installed base and our focused sales initiatives to maintain customer relationships after the initial purchase of our measurement devices. Foreign exchange rates had a negative impact on total sales of $1.1 million, increasing the percent that our overall sales declined by approximately 1.1 percentage points, primarily due to the weakening of the Euro relative to the U.S. dollar.
Gross profit. Gross profit increased by $0.2 million, or 0.3%, to $50.8 million for the three months ended September 30, 2019 from $50.6 million for the three months ended September 30, 2018, and gross margin increased to 56.1% for the three months ended September 30, 2019 from 50.8% for the three months ended September 30, 2018, primarily due to a charge recorded in the third quarter of 2018 for excess and obsolete inventory based on the determination that quantities on-hand for certain legacy products exceeded sales projections, which charge did not recur in the three months ended September 30, 2019, and an increase in gross margin
from service revenue. Gross margin from product revenue increased by 4.4 percentage points to 58.4% for the three months ended September 30, 2019 from 54.0% for the prior year period, primarily due to the charge for excess and obsolete inventory recorded in the three months ended September 30, 2018. Gross margin from service revenue increased by 10.3 percentage pointsto 50.7% for the three months ended September 30, 2019 from 40.4% for the prior year period, primarily as a result of service revenue growth and improved efficiencies in our customer service repair process.
Selling and marketing expenses. Selling and marketing expenses increased by $1.7 million, or 6.1%, to $30.2 million for the three months ended
September 30, 2019 from $28.5 million for the three months ended September 30, 2018. This increase was driven primarily by an increase in compensation expense resulting from higher selling headcount, partially offset by lower selling commission expense driven by lower product sales. Selling and marketing expenses as a percentage of sales increased to 33.4% for the three months ended September 30, 2019, compared with 28.6% of sales for the three months ended September 30, 2018. Our worldwide period-ending selling headcount increased by 46, or 6.5%, to 753 at September 30, 2019, from 707 at September 30, 2018.
General
and administrative expenses. General and administrative expenses increased by $2.6 million, or 19.5%, to $15.7 million for the three months ended September 30, 2019 from $13.1 million for the three months ended September 30, 2018. This increase was mostly due to an aggregate incremental cost of $2.7 million related to executive team transition costs, as we recognized additional compensation expense during the third quarter of 2019 in connection with the accelerated vesting of equity awards and severance costs. General and administrative expenses increased to 17.3% of sales for the three months ended September 30, 2019 from 13.1% of sales for the three months ended September 30, 2018.
Research and development
expenses. Research and development expenses decreased by $0.9 million, or 8.2%, to $10.8 million for the three months ended September 30, 2019 from $11.7 million for the three months ended September 30, 2018. This decrease was mainly driven by a decrease in materials and consulting costs, as well as favorable changes in foreign currencies as the U.S. dollar strengthened against the Euro, which decreased the compensation cost of foreign research and development employees. Research and development expenses as a percentage of sales increased to 11.9% for the three months ended September 30, 2019 from 11.8% for the three months ended September 30, 2018.
Interest (income) expense, net.
For the three months ended September 30, 2019, we recorded interest income of less than $0.1 million compared with interest income of $0.1 million for the three months ended September 30, 2018. This change was mainly due to the imputed interest expense recorded related to the GSA Matter in the three months ended September 30, 2019.
Other expense, net. For the three months ended September 30, 2019, other expense increased by $0.3 million to $0.5 million from $0.2 million for the three months ended September 30, 2018. These amounts were primarily driven by the effect of foreign exchange rates on the value of intercompany account balances of our subsidiaries
denominated in other currencies.
Income tax (benefit) expense. For the three months ended September 30, 2019, we recorded an income tax benefit of $0.2 million compared with $0.4 million for the three months ended September 30, 2018. Our effective tax rate was (2.9%) for the three months ended September 30, 2019 compared with (12.5%) in the prior year period. The changes in our income tax benefit and our effective tax rate were primarily due to return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return and a change in our reserve for uncertain tax positions recorded during the three months ended September 30, 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 $6.2 million for the three months ended September 30, 2019 compared with a net loss of $2.5 million for the prior year period, reflecting the impact of the factors described above.
Sales. Total sales decreased by $13.2 million, or 4.5%, to $277.6 million for the nine months ended September 30, 2019 from $290.8 million for the nine months ended September 30, 2018. Based on the results of the review of the GSA Matter conducted by our outside legal counsel and forensic accountants, we reduced our total sales for second quarter 2019 by an incremental $5.8 million sales adjustment, reflecting an estimated aggregate overcharge of $10.6 million under the GSA Contracts for the period from July 2011 to March 2019, which
included a $5.0 million reduction in product sales and a $0.8 million reduction in service sales (the “GSA incremental sales adjustment”). Total product sales decreased by $21.7 million, or 9.8%, to $200.4 million for the nine months ended September 30, 2019 from $222.1 million for the nine months ended September 30, 2018. Our product sales decreased primarily due to a decrease in unit sales within our 3D Manufacturing reporting segment driven by the impact of our sales portfolio realignment in the first quarter of 2019 and the decline in our 3D Manufacturing product sales in our Asia-Pacific region and broader automotive industry primarily due to the uncertainty surrounding ongoing trade disputes, which negatively impacted sales in the second and third quarters of 2019, as well as the reduction in product sales related to the GSA incremental sales adjustment and
the impact of changes in foreign currencies, partially offset by an increase in unit sales within our Construction BIM and Emerging Verticals reporting segments. Service revenue increased by $8.5 million, or 12.4%, to $77.2 million for the nine months ended September 30, 2019 from $68.7 million for the nine months ended September 30, 2018, primarily due to an increase in repair revenue and warranty revenue driven by the growth of our installed base and our focused sales initiatives to maintain customer relationships after the initial purchase of our measurement devices. Foreign exchange rates had a negative impact on sales of $7.5 million, increasing the percent that our overall sales declined by approximately 2.6 percentage points, primarily due to the weakening of the Euro, Chinese Yuan, and British Pound Sterling relative to the U.S. dollar.
Gross
profit. Gross profit decreased by $4.2 million, or 2.6%, to $154.5 million for the nine months ended September 30, 2019 from $158.7 million for the nine months ended September 30, 2018, primarily due to our reduction in sales related to the GSA incremental sales adjustment. Gross margin increased to 55.7% for the nine months ended September 30, 2019 from 54.6% for the nine months ended September 30, 2018, primarily due to the increase in gross margin from service revenue and the charge recorded in the third quarter of 2018 increasing our reserve for excess and obsolete inventory, which did not recur in the nine months ended September 30, 2019, partially offset by the GSA incremental sales adjustment
in the second quarter of 2019. Gross margin from product revenue decreased by 0.6 percentage points to 58.3% for the nine months ended September 30, 2019 from 58.9% for the prior year period, primarily as a result of the GSA incremental sales adjustment in the second quarter of 2019, partially offset by the charge recorded in the third quarter of 2018 increasing our reserve for excess and obsolete inventory, which did not recur in the nine months ended September 30, 2019. Gross margin from service revenue increased by 8.2percentage pointsto 48.9% for the nine months ended September 30, 2019 from 40.7% for the prior year period, primarily as a result of service revenue growth and improved efficiencies in our customer service repair
process.
Selling and marketing expenses. Selling and marketing expenses decreased by $0.5 million, or 0.5%, to $87.4 million for the nine months ended September 30, 2019 from $87.9 million for the nine months ended September 30, 2018. This decrease was driven primarily by lower marketing expenses and a decrease in selling commission expense due to a reduction in our 3D Manufacturing product sales, partially offset by an increase in compensation expenses related to our increased selling headcount. Selling and marketing expenses as a percentage of sales increased to 31.5% for the nine months ended September 30, 2019, compared with 30.2% of sales for the nine months ended September 30, 2018.
Our worldwide period-ending selling headcount increased by 46, or 6.5%, to 753 at September 30, 2019, from 707 at September 30, 2018.
General and administrative expenses. General and administrative expenses increased by $7.7 million, or 20.9%, to $44.5 million for the nine months ended September 30, 2019 from $36.8 million for the nine months ended September 30, 2018. This increase was mostly due to executive team transition costs, as we recognized an additional $4.7 million of compensation expense in connection with the accelerated vesting of equity grants and severance costs, as well as the advisory fees of $1.2 million incurred related to the GSA Matter. General and administrative
expenses increased to 16.0% of sales for the nine months ended September 30, 2019 from 12.7% of sales for the nine months ended September 30, 2018.
Research and development expenses. Research and development expenses decreased by $1.1 million, or 3.2%, to $33.0 million for the nine months ended September 30, 2019 from $34.1 million for the nine months ended September 30, 2018. This decrease was mainly driven by a decrease in materials and consulting costs, as well as favorable changes in foreign currencies as the U.S. dollar strengthened against the Euro, which decreased the compensation cost of foreign research and development employees, partially offset by higher compensation expense resulting from increased
engineering headcount due to our 2018 acquisitions. Research and development expenses as a percentage of sales increased to 11.9% for the nine months ended September 30, 2019 from 11.7% for the nine months ended September 30, 2018.
Interest (income) expense, net. For the nine months ended September 30, 2019, we recorded interest expense of $0.1 million compared with interest income of $0.2 million for the nine months ended September 30, 2018.
This change was mainly due to the imputed interest expense recorded related to the GSA Matter in the second and third quarters of 2019.
Other expense, net. For the nine months ended September 30, 2019, other expense increased by $1.5 million to $2.4 million from $0.9 million for the nine months ended September 30, 2018. The increase was mainly due to the $1.5 million impairment charge related to our equity investment in present4D recorded in the second quarter of 2019.
Income tax (benefit) expense. For the nine months ended September 30, 2019, we recorded an income tax benefit of $0.4 million compared with income tax expense of $0.1 million for the nine months ended September
30, 2018. Our effective tax rate was (3.4%) for the nine months ended September 30, 2019 compared with 9.7% in the prior year period. The changes in our income tax (benefit) expense and our effective tax rate were primarily due to an increase in our pretax loss during the nine months ended September 30, 2019 compared to the same period of 2018 and return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return during the three months ended September 30, 2019.
Our quarterly estimate of our annual effective tax rate and our quarterly provision for income tax expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which
they relate, as well as the amount of pretax income or loss recognized during the quarter.
Net loss. Our net loss was $12.5 million for the nine months ended September 30, 2019 compared to $0.8 million for the prior year period, reflecting the impact of the factors described above.
We use segment profit to evaluate the performance of our reportable segments, which are 3D Manufacturing, Construction BIM and Emerging Verticals. Segment profit is calculated
as gross profit less selling and marketing expenses for the reporting segment. The discussion of segment results for the three and nine months ended September 30, 2019 and 2018 presented below is based on segment profit, as described above, and segment profit as a percent of sales, which is calculated as segment profit divided by total sales for such reporting segment, which we believe will aid investors in understanding and analyzing our operating results. Our definition of segment profit may not be comparable to similarly-titled measures reported by other companies. For additional information, including a reconciliation of segment profit to loss from operations, see Note 14 – Segment Reporting, in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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. Our reporting segment information for the three and nine months ended September 30, 2018 have been restated below to reflect this reclassification of depreciation and amortization expenses and to conform to the current period presentation.
Segment profit as a % of 3D Manufacturing segment sales
24.4
%
23.7
%
Sales.Total sales in our 3D Manufacturing segment decreased by $8.2 million, or 12.7%, to $56.0 million for the three months ended September
30, 2019 from $64.2 million in the prior year period. This decrease was primarily due to a decrease in product units sold, especially in our Asia-Pacific region and broader automotive industry, partially offset by continued growth in service revenue.
Segment profit. Segment profit in our 3D Manufacturing segment decreased by $1.5 million, or 10.1%, to $13.7 million for the three months ended September 30, 2019 from $15.2 million in the prior year period. This decrease was primarily due to increased compensation expenses associated with higher selling headcount and the decrease in 3D Manufacturing sales, partially offset by the charge increasing the reserve for excess and obsolete inventory recorded in the three months ended September 30, 2018, which did not recur in the three months ended September
30, 2019.
Segment profit as a % of Construction BIM segment sales
28.1
%
25.8
%
Sales.
Total sales in our Construction BIM segment increased by $0.2 million, or 0.7%, to $23.9 million for the three months ended September 30, 2019 from $23.7 million in the prior year period, primarily due to an increase in service revenue driven by the growth of our installed, serviceable base.
Segment profit. Segment profit in our Construction BIM segment increased by $0.6 million, or 10.1%, to $6.7 million for the three months ended September 30, 2019 from $6.1 million in the prior year period, primarily driven by an increase in product gross
margin, reflecting the charge increasing the reserve for excess and obsolete inventory recorded in the three months ended September 30, 2018, which did not recur in the three months ended September 30, 2019.
Segment
profit as a % of Emerging Verticals segment sales
1.6
%
7.1
%
Sales. Total sales in our Emerging Verticals segment decreased by $1.2 million, or 10.1%, to $10.6 million for the three months ended September 30, 2019 from $11.8 million in the prior year period. This decrease was primarily due to a decrease in unit sales for our 3D Design vertical.
Segment profit. Segment profit in our Emerging Verticals segment decreased to $0.2 million for the three months ended September 30,
2019 compared to $0.8 million in the prior year period. This decrease of $0.6 million was primarily due to the decrease in unit sales for our 3D Design vertical.
Segment profit as a % of 3D Manufacturing segment sales
28.0
%
27.5
%
Sales.Total sales in our 3D Manufacturing segment decreased by $19.0 million, or 10.0%, to $171.6 million for the nine months ended September
30, 2019 from $190.6 million in the prior year period. This decrease was primarily due to the $3.3 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019, a decrease in product units sold driven by the impact of our sales portfolio realignment in the first quarter of 2019 and the decline in product sales in our Asia-Pacific region and broader automotive industry, partially offset by continued growth in service revenue.
Segment profit. Segment profit in our 3D Manufacturing segment decreased by $4.5 million, or 8.5%, to $48.0 million for the nine months ended September 30, 2019 from $52.5 million in the prior year period. This decrease was primarily due to the decrease in product sales, the $3.3 million reduction in sales related to the GSA incremental sales adjustment recorded in the second
quarter of 2019, and higher compensation expense associated with higher selling headcount, partially offset by the charge increasing the reserve for excess and obsolete inventory recorded in the nine months ended September 30, 2018, which did not recur in the nine months ended September 30, 2019.
Segment profit as a % of Construction BIM segment sales
27.4
%
24.3
%
Sales. Total sales in our Construction BIM segment increased by $3.5 million, or 5.0%, to $73.5 million for the nine months ended September
30, 2019 from $70.0 million in the prior year period, primarily due to increases in product unit sales and service revenue, partially offset by the $0.5 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019.
Segment profit. Segment profit in our Construction BIM segment increased by $3.1 million, or 18.3%, to $20.1 million for the nine months ended September 30, 2019 from $17.0 million in the prior year period, primarily driven by the increase in product unit sales and an increase in product gross margin, reflecting improved manufacturing efficiencies, as well as by the charge increasing the reserve for excess and obsolete inventory recorded in the nine months ended September 30, 2018, which did not recur in the nine months ended September
30, 2019, partially offset by the $0.5 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019.
Segment
(loss) profit as a % of Emerging Verticals segment sales
(3.1)
%
4.5
%
Sales. Total sales in our Emerging Verticals segment increased by $2.4 million, or 7.8%, to $32.6 million for the nine months ended September 30, 2019 from $30.2 million in the prior year period, primarily due to higher sales in our Photonics vertical, partially offset by the $2.0 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019.
Segment (loss) profit. Segment loss in our Emerging Verticals
segment was $1.0 million for the nine months ended September 30, 2019 compared to segment profit of $1.3 million in the prior year period. This change of $2.3 million was primarily due to the $2.0 million reduction in sales related to the GSA incremental sales adjustment recorded in the second quarter of 2019.
Cash and cash equivalents increased by $10.3 million to $119.1 million at September
30, 2019 from $108.8 million at December 31, 2018. The increase was primarily driven by net cash provided by operating activities, partially offset by net cash used in investing and financing activities. Cash provided by operating activities was $23.5 million during the nine months ended September 30, 2019, compared to $4.9 million of cash provided by operations during the nine months ended September 30, 2018. The increase was mainly due to changes in working capital accounts, primarily a decrease in accounts receivable and an increase in GSA liability, partially offset by an increase in inventory and a decrease in accounts payable and accrued liabilities.
Cash used in investing activities during the nine months ended September
30, 2019 was $8.5 million compared to $47.0 million during the nine months ended September 30, 2018. The decrease was primarily due to $27.6 million in cash paid for acquisitions during the nine months ended September 30, 2018 compared to no such activity during the same period in 2019.
Cash used in financing activities was $2.4 million during the nine months ended September 30, 2019 compared to cash provided by financing activities of $20.2 million for the nine months ended September 30, 2018. The change was primarily due to $20.9 million in cash received from the exercise of employee stock options during the nine months ended September 30, 2018 compared to $2.3 million during
the nine months ended September 30, 2019 and payments for taxes related to the net share settlement of equity awards of $1.4 million during the nine months ended September 30, 2019 compared to no such payments during the nine months ended June 30, 2018.
Of our cash and cash equivalents, $83.1 million was held by foreign subsidiaries as of September 30, 2019. On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing tax law, which included a transition tax on the mandatory deemed repatriation of foreign earnings. Despite
the changes in U.S. tax law, our current intent is to indefinitely reinvest these funds in our foreign operations, as the cash is needed to fund ongoing operations.
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. In October 2015, our Board of Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. We made no stock repurchases during the nine month period ended September
30, 2019 under this program. As of September 30, 2019, we had authorization to repurchase $18.3 million remaining under the repurchase program.
We believe that our working capital and anticipated cash flow from operations will be sufficient to fund our long-term liquidity operating requirements for at least the next 12 months.
We have no off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 120 days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As of September
30, 2019, we had $54.0 million in purchase commitments that are expected to be delivered within the next 12 months. Other than as described in the preceding sentences, there have been no material changes to the contractual obligations and commercial commitments table included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates on historical experience, along with various other factors believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on February 21, 2019. As of September 30, 2019, our critical accounting policies have not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Exposure
We conduct a significant portion of our business outside the United States. As of and for the nine months ended September 30, 2019, 61% of our revenue was invoiced, and a significant portion of our operating expenses were paid, in foreign currencies, and 45% of our assets were denominated in foreign currencies. Fluctuations in exchange rates between the U.S. dollar and such foreign currencies may have a material effect on our results of operations and financial condition and could specifically result in foreign exchange gains and losses. The impact of future exchange rate fluctuations on the results of our operations cannot be accurately predicted due to our constantly changing
exposure to various currencies, and the fact that all foreign currencies do not react in the same manner in relation to the U.S. dollar. Our most significant exposures are to the Euro, Swiss Franc, Japanese Yen, Chinese Yuan and Brazilian Real. To the extent that the percentage of our non-U.S. dollar revenues derived from international sales increases in the future, our exposure to risks associated with fluctuations in foreign exchange rates may increase. We are aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options. However, we have not used such instruments in the past, and none were utilized in 2018 or the nine months ended September 30, 2019.
We are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC’s”) rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to provide reasonable assurance that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019 to provide reasonable assurance that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2019, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are not involved in any legal proceedings, including routine litigation arising in the normal course of business, that we believe will have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2018, as filed with the SEC, and in this Item 1A before deciding to invest in, or retain, shares of our common stock. These risks could materially and adversely affect our business, financial condition, and results of operations. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2018 are not the only risks we face. Our operations could also be affected by additional factors that are not presently known by us or by factors that we currently consider to be immaterial to our business. Except as set forth below, as of September 30, 2019, there have been no material changes in our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2018:
The risk factor entitled “Our
failure to successfully execute our Chief Executive Officer transition or to attract and retain qualified personnel could lead to a loss of sales or decreased profitability.” has been updated to read as follows:
We have experienced a significant transition in our executive management team in the last year. Any delay in the integration of our management team or our failure to successfully attract and retain qualified personnel could have an adverse effect on our business and results of operations.
Our executive management team has gone through a significant transition in the last year, including the hiring of a new president and chief executive officer and the hiring of a new chief financial officer. Any delay in the integration of our management team could affect our ability to develop, implement and execute our business strategies
and plans, which could have an adverse effect on our business and results of operations.
In addition, if we fail to successfully attract qualified personnel or to retain our executive management team and other key personnel, our sales, profitability and growth and our ability to execute our business strategies and plans could be adversely impacted. Turnover of management could also adversely impact our stock price and our client relationships and could make recruiting for future management positions more difficult. We face competition for qualified personnel, which could result in increased salaries and other compensation expenses and could negatively affect our profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases
of Equity Securities by the Issuer Under the Share Repurchase Plan
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. In October 2015, our Board of Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. We made no stock repurchases during the nine month period ended September 30, 2019 under this program. As of September
30, 2019, we had authorization to repurchase $18.3 million remaining under the repurchase program.
The following information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Loss; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders' Equity; and (vi) Notes to Condensed Consolidated Financial Statements
104
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.