FARO Technologies(FARO) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited condensed consolidated financial statements for Q1 2023 are presented, detailing balance sheets, operations, cash flows, and equity, with explanatory notes Condensed Consolidated Balance Sheets Total assets increased to $528.7 million by March 31, 2023, driven by debt issuance, while liabilities grew to $232.4 million, and equity decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $528,728 | $473,347 | | Cash and cash equivalents | $68,564 | $37,812 | | Total Liabilities | $232,415 | $162,298 | | Loan - 5.50% convertible Senior Notes | $72,379 | $— | | Total Shareholders' Equity | $296,313 | $311,049 | Condensed Consolidated Statements of Operations Q1 2023 total sales increased to $85.0 million, but gross profit declined, resulting in a wider operating loss of $18.6 million and a net loss of $21.2 million Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Total Sales | $84,967 | $76,656 | | Gross Profit | $39,716 | $41,026 | | Loss from Operations | $(18,616) | $(7,192) | | Net Loss | $(21,164) | $(9,687) | | Net Loss per Share - Diluted | $(1.12) | $(0.53) | Condensed Consolidated Statements of Cash Flows Q1 2023 net cash used in operations was $18.3 million and $23.5 million in investing, offset by $72.3 million from financing, leading to a $30.8 million net cash increase Summary of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended Mar 31, 2023 | Three Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,344) | $(7,037) | | Net cash used in investing activities | $(23,532) | $(5,054) | | Net cash provided by (used in) financing activities | $72,280 | $(974) | | Increase (Decrease) in cash and cash equivalents | $30,752 | $(14,797) | Notes to Condensed Consolidated Financial Statements Notes detail business, accounting policies, revenue, restructuring plans, acquisitions, $75 million convertible senior notes, and subsequent events like CEO transition - Total sales for Q1 2023 were $85.0 million, with the Americas region contributing the most at $42.3 million[31] - In February 2023, the Board approved an Integration Plan expected to incur $10-$16 million in charges and realize $10 million in annualized savings. In Q1 2023, $4.2 million in restructuring costs were recognized under this plan[50] - On January 24, 2023, the company issued $75 million in 5.50% Convertible Senior Notes due 2028, with net proceeds of approximately $72.2 million[72][74] - Subsequent to the quarter-end, the company announced the retirement of its CEO, effective July 1, 2023, and amended the Integration Plan to increase expected pre-tax charges to $22-$28 million and targeted annualized savings to $20-$30 million[76][77][79] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial results, noting $85.0 million sales, a gross margin decrease, and higher operating expenses, with liquidity improved by $75 million convertible notes Results of Operations Q1 2023 total sales grew 10.8% to $85.0 million, but gross profit fell to $39.7 million, with gross margin contracting to 46.7%, leading to a wider net loss of $21.2 million Q1 2023 vs Q1 2022 Performance (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Sales | $84,967 | $76,656 | | Gross Profit | $39,716 | $41,026 | | Gross Margin | 46.7% | 53.5% | | Total Operating Expenses | $58,332 | $48,218 | | Restructuring Costs | $4,238 | $600 | | Net Loss | $(21,164) | $(9,687) | - The decrease in gross margin was primarily due to unfavorable price variances from global supply shortages, particularly for semiconductor components[110] Liquidity and Capital Resources Cash and cash equivalents increased by $30.8 million to $68.6 million, driven by $72.3 million from convertible senior notes, offsetting operational and investing cash usage - Cash and cash equivalents increased to $68.6 million at March 31, 2023, from $37.8 million at December 31, 2022[120] - The increase in cash was primarily driven by the issuance of 5.50% Convertible Senior Notes, which provided net proceeds of approximately $72.2 million[123][128] - As of March 31, 2023, the company had authorization to repurchase an additional $18.3 million of its stock, though no repurchases were made in the quarter[131] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include foreign exchange exposure, with 54% of revenue in foreign currencies, and global inflation, impacting costs and demand - The company faces significant foreign exchange risk, as 54% of its revenue was invoiced in foreign currencies and 56% of its assets were denominated in foreign currencies in Q1 2023. The most significant exposures are to the Euro, Japanese Yen, Swiss Franc, Chinese Yuan, and Brazilian Real[136] - Global inflation is identified as a key risk, negatively impacting the business by increasing costs for raw materials and salaries, and potentially decreasing customer demand[137] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - Based on an evaluation as of March 31, 2023, the Principal Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[141] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[142] PART II. OTHER INFORMATION Legal Proceedings The company is not involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company is not involved in any legal proceedings expected to have a material adverse effect on its business[144] Risk Factors Updated risk factors include banking sector instability, executive management turnover, stock price volatility, and the risk of not realizing restructuring plan benefits - A new risk factor highlights that market conditions, such as the recent failures of Silicon Valley Bank and First Republic Bank, could impair the company's ability to access its cash and investments[146][147] - The company notes that significant changes in its executive management team, including the announced retirement of the CEO, could adversely affect sales, profitability, and stock price[148][149] - The company warns of potential stock price volatility due to factors like fluctuations in demand, economic uncertainties, and the issuance of shares upon conversion of its outstanding Notes[150] Unregistered Sales of Equity Securities and Use of Proceeds No stock repurchases were made in Q1 2023, with $18.3 million remaining authorized under the $50.0 million share repurchase program - No stock repurchases were made during the quarter ended March 31, 2023[155] - As of March 31, 2023, the company had authorization to repurchase $18.3 million remaining under its $50.0 million share repurchase program[155] Other Information On May 3, 2023, the Integration Plan was amended, increasing expected pre-tax charges to $22-$28 million and targeted annualized savings to $20-$30 million - On May 3, 2023, the Integration Plan was amended to increase expected pre-tax charges to $22-$28 million and targeted annualized savings to $20-$30 million[158] Exhibits This section indexes exhibits filed with Form 10-Q, including SOX certifications and documents related to convertible senior notes