FARO Technologies(FARO) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements for Q3 2020 show decreased assets, a narrowed Q3 net loss, but a widened nine-month net loss, with increased cash from investments Condensed Consolidated Balance Sheets Total assets decreased to $451.7 million, driven by lower receivables and liquidated investments, while liabilities and equity also declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $163,637 | $133,634 | | Accounts receivable, net | $47,533 | $76,162 | | Inventories, net | $50,004 | $58,554 | | Total current assets | $284,740 | $322,216 | | Goodwill | $55,640 | $49,704 | | Total assets | $451,726 | $486,842 | | Liabilities & Equity | | | | Total current liabilities | $93,453 | $105,965 | | Total liabilities | $138,396 | $154,850 | | Retained earnings | $86,100 | $112,879 | | Total shareholders' equity | $313,330 | $331,992 | Condensed Consolidated Statements of Operations Q3 2020 sales decreased to $70.7 million, resulting in a $3.0 million net loss, while the nine-month net loss widened to $26.8 million Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total sales | $70,736 | $90,516 | $210,815 | $277,624 | | Gross Profit | $36,298 | $50,772 | $109,067 | $154,531 | | Loss from operations | $(4,858) | $(5,891) | $(33,374) | $(10,426) | | Net loss | $(3,024) | $(6,199) | $(26,779) | $(12,452) | | Net loss per share - Diluted | $(0.17) | $(0.36) | $(1.51) | $(0.72) | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased, but cash and cash equivalents increased by $30.0 million, primarily due to proceeds from investment sales Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,816 | $23,466 | | Net cash provided by (used in) investing activities | $16,086 | $(8,506) | | Net cash provided by (used in) financing activities | $1,846 | $(2,435) | | Increase in cash and cash equivalents | $30,003 | $10,300 | | Cash and cash equivalents, end of period | $163,637 | $119,083 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, COVID-19 impact, a global restructuring plan, a U.S. government contract liability, and the acquisition of Advanced Technical Solutions - The company designs, develops, and manufactures 3D measurement and imaging solutions, reorganizing into a single reporting segment with a functional structure in Q4 2019[28] - The COVID-19 pandemic caused a significant decline in demand for products and services in Q2 and Q3 2020, leading to increased use of virtual sales demonstrations and training seminars[37] - A global restructuring plan approved in Q1 2020 targeted a headcount reduction of approximately 500 employees, resulting in pre-tax charges of $14.6 million for the nine months ended Sep 30, 2020, primarily for severance[69][72] - An internal review found potential overcharges to the U.S. Government under GSA contracts, leading to an aggregate estimated total liability of $13.1 million as of September 30, 2020[73][75] - On August 21, 2020, the company acquired Advanced Technical Solutions in Scandinavia AB (ATS) for a purchase price of €5.1 million ($6.0 million) plus potential contingent consideration[84] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes sales decline to COVID-19, implemented restructuring to reduce SG&A, narrowed Q3 net loss, and maintains strong liquidity Results of Operations Q3 2020 sales declined 21.9% due to COVID-19, gross margin contracted, but SG&A reduction helped narrow the net loss despite increased nine-month losses Q3 2020 vs Q3 2019 Performance (in millions) | Metric | Q3 2020 | Q3 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Sales | $70.7 | $90.5 | -21.9% | | Gross Profit | $36.3 | $50.8 | -28.5% | | Gross Margin | 51.3% | 56.1% | -4.8 p.p. | | SG&A Expenses | $30.2 | $45.9 | -34.3% | | Net Loss | $(3.0) | $(6.2) | 51.7% (Improvement) | Nine Months 2020 vs 2019 Performance (in millions) | Metric | Nine Months 2020 | Nine Months 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Sales | $210.8 | $277.6 | -24.1% | | Gross Profit | $109.1 | $154.5 | -29.4% | | Restructuring Costs | $14.6 | $0.0 | N/A | | Net Loss | $(26.8) | $(12.5) | -114.4% (Worsened) | Liquidity and Capital Resources Cash and cash equivalents increased to $163.6 million, primarily from investing activities, with $18.3 million remaining for share repurchases - Cash and cash equivalents increased by $30.0 million to $163.6 million at September 30, 2020[117] - The company made no stock repurchases during the nine-month period and has $18.3 million remaining under its share repurchase authorization[117] - As of September 30, 2020, the company had $49.3 million in purchase commitments expected to be delivered within the next 12 months[118] Quantitative and Qualitative Disclosures About Market Risk The company faces significant unhedged foreign currency exchange risk, with 59% of nine-month revenue invoiced in major foreign currencies - 59% of revenue for the nine months ended September 30, 2020, was invoiced in foreign currencies, creating significant foreign exchange exposure[121] - The company's most significant currency exposures are to the Euro, Swiss Franc, Japanese Yen, Chinese Yuan, and Brazilian Real[121] - The company did not use any hedging instruments to manage foreign currency risk in 2019 or the first nine months of 2020[121] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal controls during Q3 2020 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[123] - No material changes to the company's internal control over financial reporting occurred during the quarter ended September 30, 2020[124] PART II. OTHER INFORMATION Legal Proceedings The company is not involved in any legal proceedings expected to materially adversely affect its business or financial condition - The company is not involved in any legal proceedings expected to have a material adverse effect on its business[126] Risk Factors The ongoing COVID-19 pandemic poses significant risks, including production slowdowns, reduced demand, supply chain disruptions, and financial market volatility - The COVID-19 pandemic is identified as a significant risk, with the company's operations being vulnerable to its economic effects and disruptions[127] - Specific pandemic-related risks include potential production slowdowns, reduced product demand, supply chain disruption, and disruption of global financial markets[127] - The ultimate impact of the pandemic on financial condition and results cannot be determined at this time, but the company expects its business to continue to be adversely affected[129] Unregistered Sales of Equity Securities and Use of Proceeds No stock repurchases were made during the nine-month period, with $18.3 million remaining under the authorized share repurchase program - The company made no stock repurchases during the nine months ended September 30, 2020[130] - As of September 30, 2020, $18.3 million remained available for repurchase under the company's $50.0 million share repurchase program[130] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, executive agreements, and required CEO/CFO certifications Signatures The quarterly report was duly signed on October 28, 2020, by Allen Muhich, Chief Financial Officer of FARO Technologies, Inc