FARO Technologies(US:FARO)2023-02-14 16:00Part I Business FARO Technologies provides 3D measurement and imaging solutions, focusing on a subscription model, strategic acquisitions, and global restructuring for efficiency - FARO designs and manufactures 3D measurement, imaging, and realization solutions for metrology, AEC, O&M, and public safety markets27 - A global restructuring plan initiated in 2020 achieved approximately $40 million in annualized savings, with manufacturing outsourced to Sanmina Corporation by Q3 20222933 - Strategic acquisitions include Holobuilder (2021), GeoSLAM (2022), and SiteScape (2022) to enhance software and mobile scanning capabilities353637 Research and Development Expenses | Year | Expense (in millions) | | :--- | :--- | | 2022 | $49.4 | | 2021 | $48.8 | | 2020 | $42.9 | Order Backlog | Date | Backlog (in millions) | | :--- | :--- | | Dec 31, 2022 | $29.9 | | Dec 31, 2021 | $26.1 | | Dec 31, 2020 | $19.7 | - As of December 31, 2022, FARO had 1,490 full-time employees worldwide, with 24% female global workforce and 31% minorities in the US workforce7477 Risk Factors The company faces significant risks from intense competition, technological change, acquisition integration, financial volatility, and compliance with complex regulations - Business and industry risks include intense competition, the need for broad market acceptance, and challenges in integrating acquisitions889092 - Financial and capital risks include dependence on cyclical industries, foreign currency exposure, goodwill impairment, and potential need for additional capital124126133 - The $75 million convertible notes issuance poses risks of cash shortages for settlement and potential stockholder dilution143145 - Product and regulatory risks encompass product failures, supply chain constraints, and compliance with environmental and data privacy regulations153155157 - Cybersecurity risks include data security attacks leading to penalties and reputational damage, alongside critical compliance with global laws like FCPA164171 - Intellectual property risks involve protecting patents, avoiding infringement claims, and managing reliance on third-party vendors for key components175178180 Unresolved Staff Comments The company reports no unresolved staff comments - None Properties FARO operates from leased facilities across Americas, EMEA, and APAC, including headquarters in Lake Mary, Florida, and major hubs in Stuttgart and Singapore - Americas operations include a 46,500 sq. ft. headquarters in Lake Mary, FL, and R&D/service facilities in Lake Mary and Exton, PA186 - EMEA operations are primarily in a 105,300 sq. ft. facility in Stuttgart, Germany, with an additional 8,300 sq. ft. in Nottingham, UK from GeoSLAM acquisition187 - APAC operations are centered in a 22,000 sq. ft. facility in Singapore, with other key sites in Nagoya, Shanghai, and New Delhi188 Legal Proceedings The company is not involved in any material legal proceedings beyond routine litigation in the normal course of business - The company reports no material legal proceedings, only routine litigation incidental to its business190 Mine Safety Disclosures The company reports no mine safety disclosures - None Part II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities FARO's common stock trades on Nasdaq, with no cash dividends paid or planned, and $18.3 million remaining in its share repurchase program - The company's common stock trades on the Nasdaq Global Select Market under the symbol 'FARO'194 - FARO has never paid cash dividends and plans to retain future earnings for business operations, with no foreseeable dividend payments196 - No stock repurchases occurred in 2020-2022; $18.3 million remained authorized under the $50.0 million repurchase program as of December 31, 2022200 Stock Performance vs. Indices (Cumulative Total Return) | Company/Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | FARO Technologies, Inc. | $100.00 | $86.47 | $107.13 | $150.28 | $148.98 | $62.57 | | Nasdaq Composite | $100.00 | $97.16 | $132.81 | $192.47 | $235.15 | $158.65 | | Russell 2000 | $100.00 | $88.99 | $111.70 | $134.00 | $153.85 | $122.41 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, total sales increased 2.4% to $345.8 million, but gross margin declined, resulting in a $26.8 million net loss and reduced cash, offset by a subsequent $75 million convertible note issuance Results of Operations: 2022 vs 2021 (in millions) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Sales | $345.8 | $337.8 | $8.0 | 2.4% | | Gross Profit | $175.8 | $183.9 | ($8.1) | -4.4% | | Gross Margin | 50.8% | 54.4% | -3.6 p.p. | N/A | | Loss from Operations | ($24.9) | ($8.5) | ($16.4) | 192.9% | | Net Loss | ($26.8) | ($40.0) | $13.2 | -33.0% | - Total sales increased 2.4% in 2022, driven by a $14.2 million (5.6%) rise in product sales, partially offset by a $6.2 million (7.2%) decline in service sales and a $20.4 million negative FX impact235 - Gross margin decreased to 50.8% in 2022 from 54.4% in 2021, mainly due to unfavorable product manufacturing cost variances from global supply shortages236 - Recurring revenue, including service contracts, software maintenance, and subscriptions, grew to $68.3 million in 2022 from $64.1 million in 2021225 - Cash and cash equivalents decreased by $84.2 million to $37.8 million at year-end 2022, primarily due to $24.9 million used in operating and $49.9 million in investing activities254255 - Subsequent to year-end, on January 24, 2023, the company issued $75 million of 5.50% Convertible Senior Notes due 2028 for working capital and general corporate purposes260 Quantitative and Qualitative Disclosures About Market Risk The company faces significant market risks from foreign exchange exposure, with 60% of 2022 revenue in foreign currencies, and global inflation impacting costs and customer spending - In 2022, 60% of revenue and 45% of assets were foreign currency denominated, with the company relying on natural hedges instead of hedging instruments283 - Rising global inflation negatively impacts the business by increasing raw material and salary costs, potentially reducing customer capital spending and orders284 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2022, including balance sheets, income statements, cash flows, and detailed notes on accounting policies, acquisitions, restructuring, and subsequent events - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2022287288 Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $219,365 | $273,450 | | Total Assets | $473,347 | $479,740 | | Total Current Liabilities | $106,239 | $98,881 | | Total Liabilities | $162,298 | $153,281 | | Total Shareholders' Equity | $311,049 | $326,459 | Consolidated Statement of Operations Data (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Sales | $345,765 | $337,814 | $303,768 | | Gross Profit | $175,763 | $183,927 | $159,847 | | Loss from Operations | ($24,923) | ($8,436) | ($30,682) | | Net (Loss) Income | ($26,756) | ($39,964) | $629 | - In 2022, FARO acquired GeoSLAM for $44.9 million ($29.1 million cash, $15.9 million stock) and SiteScape for $1.9 million cash, adding $25.4 million and $1.1 million in goodwill respectively412416419 - A $4.6 million pre-tax charge was recorded in 2022 for restructuring, with $25.3 million in cash payments, primarily for severance, since the plan's inception424 - Subsequent events include the January 24, 2023 issuance of $75 million in 5.50% Convertible Senior Notes due 2028 and a new Integration Plan approved February 7, 2023, projecting $10-16 million in charges and $10 million in annualized savings425432 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with the auditor issuing an unqualified opinion - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2022436 - Internal control over financial reporting was effective as of December 31, 2022, excluding 2022 acquisitions (GeoSLAM and SiteScape) representing approximately 2% of total assets and sales441 - Grant Thornton LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2022444 - No material changes in internal control over financial reporting occurred during the year437 Other Information The company reports no other information - None Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no disclosures regarding foreign jurisdictions that prevent inspections - None Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders454 Executive Compensation Information on executive compensation is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders - Information is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders455 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders456 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders457 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting of Shareholders458 Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits, with consolidated financial statements in Part II, Item 8, and an Exhibit Index detailing filed documents - Consolidated financial statements are included in Part II, Item 8 of the Annual Report460 - All financial statement schedules are omitted as not required, not applicable, or included elsewhere in the report461 - Key exhibits include the Indenture for the 5.50% Convertible Senior Notes due 2028, the 2022 Equity Incentive Plan, and the Manufacturing Services Agreement with Sanmina Corporation465466468 Form 10-K Summary The company provides no summary under this item - None