FARO Technologies(FARO) - 2023 Q4 - Annual Report

Part I Business FARO Technologies, Inc. is a global technology company specializing in 3D measurement, imaging, and realization solutions for various markets - FARO designs, develops, and markets 3D measurement, imaging, and realization solutions for manufacturing, AEC, O&M, and public safety analytics markets[23] - The company's strategy focuses on growth and profitability through strategic acquisitions, software development investment, and restructuring to lower operating expenses[25] - FARO has a diversified base of over 12,000 customers worldwide, with the ten largest customers accounting for only 2.3% of total sales in 2023[49] - As of December 31, 2023, the company employed 1,243 full-time employees globally, with 38% in the Americas, 41% in EMEA, and 21% in APAC[72] Strategy, Acquisitions, and Restructuring FARO's strategy focuses on software development and profitability through key acquisitions and cost-saving restructuring initiatives - Acquired Holobuilder in June 2021 for its 360° photo software platform, enhancing capabilities for the Construction and Digital Twin markets[26] - Acquired GeoSLAM in September 2022, a provider of mobile scanning solutions with proprietary SLAM software, primarily for geospatial, mining, and construction markets[27] - Acquired SiteScape in December 2022, an innovator in LiDAR 3D scanning software for mobile devices, targeting AEC and O&M markets[28] - The 2020 Restructuring Plan achieved approximately $40 million in annualized savings. The 2023 Integration Plan targeted an additional $20 million to $30 million in annualized savings, with total incurred charges of $26.1 million as of year-end 2023[29][32] - Outsourced manufacturing of key products to Sanmina Corporation, a transition completed in Q3 2022 as part of cost reduction initiatives[31] FARO Products and Software FARO offers a comprehensive portfolio of 3D hardware and software solutions, increasingly available via subscription - The FaroArm® portfolio offers portable, articulated measurement arms for probing and scanning, primarily for automotive, aerospace, and fabrication industries[42] - The FARO Laser Tracker portfolio provides ultra-precise, large-volume measurement tools for industries like aerospace and automotive[42][43] - The Laser Scanning portfolio, including the Focus and Freestyle 2 scanners, captures detailed 3D data for factory planning, quality control, and forensic analysis[43][46] - The Mobile Laser Portfolio, from the GeoSLAM acquisition, features the Orbis™ hybrid scanner and Zeb series, using SLAM technology for fast, portable 3D scanning[44][46] - FARO offers a suite of software solutions, including the cloud-based FARO Sphere® XG, CAM2®, BuildIT®, SCENE, and others, increasingly available via subscription[45][46][51] Sales, Marketing, and Competition FARO sells its products globally through direct and indirect channels, competing in a broad and highly competitive market - The company sells products worldwide through direct sales offices and third-party distributors, employing 576 sales and marketing staff as of year-end 2023[50][52] - Key competitors include Hexagon Manufacturing Intelligence (and its division Leica Geosystems), Automated Precision, Inc., Artec, Creaform (a division of Ametek), and Trimble Inc[64] - In the cloud-based software space (Holobuilder), key competitors are OpenSpace and StructionSite[64] Backlog and Seasonality The company's sales order backlog slightly decreased in 2023, with higher order volumes typically occurring in the fourth quarter Year-End Sales Order Backlog | Year | Backlog (in millions) | | :--- | :--- | | 2023 | $28.2 | | 2022 | $29.9 | | 2021 | $26.1 | - The company typically experiences greater order volume during the fourth quarter due to customer capital expenditure budget cycles[70] Risk Factors FARO faces significant risks including management transitions, intense competition, market acceptance challenges, and financial volatility - Significant transitions in the executive management team, including a new CEO and CFO in 2023-2024, pose a risk to stability and execution[87] - The business is exposed to foreign exchange rate risk, as over half of its revenues are derived from international operations[105][121] - The company may not realize the full benefits of its Restructuring and Integration plans, which could negatively impact future strategies and financial results[122] - A material weakness in internal control over financial reporting related to IT general controls was identified, which could lead to a material misstatement in financial statements[136][137] - The company's $75 million in convertible senior notes create indebtedness risk, potentially limiting cash flow and exposing the company to conversion and repurchase obligations it may not be able to meet[141][144] - Dependence on outside vendors for key components like electronic components and semiconductors creates a risk of manufacturing disruption if supply is interrupted[182] Cybersecurity FARO's Board oversees a comprehensive cybersecurity risk management program, with no material incidents to date - The Board of Directors and Audit Committee oversee cybersecurity risk, with management providing regular updates[186][195] - The company employs a comprehensive strategy including technical safeguards, an incident response plan, third-party risk management, and mandatory employee training[188][189][190][191][192] - FARO utilizes a managed security provider to identify, assess, and monitor vulnerabilities and threats to its network[189] - Although the company experiences cybersecurity incidents, they have not had, and are not reasonably likely to have, a material impact on business operations or financial condition[196] Properties FARO primarily leases its global facilities, aligning with a hybrid work strategy to reduce its real estate footprint - The company's facility strategy is to lease properties in key global regions, with a hybrid work model reducing the need for square footage[197] Key Leased Facilities | Region | Location | Approx. Square Feet | | :--- | :--- | :--- | | Americas | Lake Mary, FL | 35,000 | | Americas | Exton, PA | 90,400 | | EMEA | Stuttgart, Germany | 105,300 | | APAC | Singapore | 22,000 | - As part of the Integration Plan, the company has abandoned several office buildings under operating leases[202] 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 and a share repurchase program in place - Common stock is traded on the Nasdaq Global Select Market under the symbol 'FARO'[205] - The company has never paid cash dividends and does not plan to in the foreseeable future[207] - A share repurchase program is authorized at $50.0 million, with $18.3 million remaining available as of December 31, 2023. No shares were repurchased in 2023, 2022, or 2021[209] Stock Performance Comparison (2018-2023) | Year | FARO Technologies, Inc. | Nasdaq Composite | Russell 2000 | | :--- | :--- | :--- | :--- | | 2018 | $100.00 | $100.00 | $100.00 | | 2019 | $123.89 | $136.69 | $125.52 | | 2020 | $173.79 | $198.10 | $150.58 | | 2021 | $172.29 | $242.03 | $172.90 | | 2022 | $72.36 | $163.28 | $137.56 | | 2023 | $55.42 | $236.17 | $160.85 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, FARO's sales increased, but gross profit and margin declined due to impairment charges and higher costs, leading to a wider net loss Results of Operations (2023 vs 2022) Total sales grew in 2023, but gross profit and margin decreased significantly due to inventory impairment and higher operating expenses, resulting in a larger net loss Financial Performance (2023 vs 2022) | Metric (in thousands) | 2023 | 2022 | Change ($) | | :--- | :--- | :--- | :--- | | Total Sales | $358,831 | $345,765 | $13,066 | | Product Sales | $278,572 | $265,280 | $13,292 | | Service Sales | $80,259 | $80,485 | ($226) | | Gross Profit | $164,999 | $175,763 | ($10,764) | | Gross Margin | 46.0% | 50.8% | -4.8 pts | | Total Operating Expenses | $214,535 | $200,686 | $13,849 | | Selling, general and administrative | $157,336 | $146,657 | $10,679 | | Research and development | $41,806 | $49,415 | ($7,609) | | Restructuring costs | $15,393 | $4,614 | $10,779 | | Loss from Operations | ($49,536) | ($24,923) | ($24,613) | | Net Loss | ($56,577) | ($26,756) | ($29,821) | - Product sales increased by 5.0% due to demand for Quantum Max Arms, Laser Scanner, and Tracker products, plus a full year of GeoSLAM sales[244] - Gross margin from product revenue decreased by 7.3 percentage points, primarily due to $9.3 million in inventory impairment charges related to the Integration Plan and higher material costs[245] - Restructuring costs increased significantly to $15.4 million in 2023 from $4.6 million in 2022, driven by severance, professional fees, and asset impairments under the Integration Plan[248] Liquidity and Capital Resources FARO's cash position improved in 2023 due to convertible notes issuance, with sufficient liquidity expected for the next 12 months Cash and Liquidity Position | Metric (in millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $76.8 | $37.8 | | Short-term investments | $19.5 | $0.0 | - Cash from financing activities was $71.3 million, driven by the issuance of $75 million in 5.50% Convertible Senior Notes due 2028[256][259] - Cash used in operating activities decreased to $1.1 million in 2023 from $24.9 million in 2022, due to better working capital management[254] - Material cash requirements include lease obligations of $18.8 million (with $6.3 million due within 12 months) and interest on convertible notes of $20.7 million (with $4.1 million due within 12 months)[259][260] Critical Accounting Policies FARO's critical accounting policies involve significant estimates for revenue recognition, inventory, income taxes, goodwill, and stock-based compensation - Revenue Recognition: Revenue is allocated to distinct performance obligations based on relative standalone selling prices (SSP), using observable prices or management estimates[265] - Inventory Reserve: A reserve is established for inventory considered excess (on hand > 12 months of expected use) or obsolete (no sales in 12 months and none forecasted)[267] - Income Taxes: The company regularly assesses the recoverability of deferred tax assets and establishes a valuation allowance unless it is 'more likely than not' that the assets will be realized[268] - Goodwill Impairment: Goodwill is not amortized but tested for impairment annually (or more frequently if needed) by comparing the reporting unit's fair value to its carrying amount[271][272] - Stock-Based Compensation: Fair value is determined using Black-Scholes for stock options and Monte Carlo Simulation for market-based awards, requiring significant judgment on assumptions like volatility and expected term[275] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to significant foreign exchange risk, interest rate risk on investments, and the impact of global inflation on costs and demand - Significant foreign exchange exposure exists, with 57% of 2023 revenue invoiced in foreign currencies. The company does not currently hedge this exposure[281] - Interest rate risk is present for the company's $19.5 million in short-term investments and $9.9 million in cash equivalents, primarily U.S. Treasury obligations[282][283] - Global inflation negatively impacts the business by increasing the cost of raw materials and operating expenses, and may decrease customer demand[285] Financial Statements and Supplementary Data This section presents FARO's audited consolidated financial statements and the independent auditor's report, including an adverse opinion on internal controls - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting as of December 31, 2023[289][454] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $261,608 | $219,365 | | Goodwill | $109,534 | $107,155 | | Intangible assets, net | $47,891 | $48,978 | | Total Assets | $504,692 | $473,347 | | Loan - 5.50% Convertible Senior Notes | $72,760 | $0 | | Total Liabilities | $236,086 | $162,298 | | Total Shareholders' Equity | $268,606 | $311,049 | Consolidated Statement of Operations (in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Sales | $358,831 | $345,765 | $337,814 | | Gross Profit | $164,999 | $175,763 | $183,927 | | Loss from Operations | $(49,536) | $(24,923) | $(8,436) | | Net Loss | $(56,577) | $(26,756) | $(39,964) | | Net Loss per Share - Diluted | $(2.99) | $(1.46) | $(2.20) | Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in IT general controls, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[444] - A material weakness was identified in internal control related to ineffective IT general controls (ITGCs) in the area of user access over certain IT systems[448] - The weakness stemmed from inadequate design and maintenance of user access controls, insufficient documentation, and inadequate risk-assessment processes for IT systems[448][456] - A remediation plan is underway, including hiring new IT leadership, formalizing roles, revising user access controls, and enhancing monitoring and training. The company expects remediation to be complete before the end of fiscal 2024[451][452] - Grant Thornton LLP issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2023[454] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2024 proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement[466] Executive Compensation Information for this item is incorporated by reference from the 2024 proxy statement - Information regarding executive compensation is incorporated by reference from the 2024 proxy statement[467] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the 2024 proxy statement - Information regarding security ownership is incorporated by reference from the 2024 proxy statement[468] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the 2024 proxy statement - Information regarding related transactions and director independence is incorporated by reference from the 2024 proxy statement[469] Principal Accountant Fees and Services Information for this item is incorporated by reference from the 2024 proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the 2024 proxy statement[470] Part IV Exhibits and, Financial Statement Schedules This item lists filed financial statements and exhibits, with schedules omitted as information is provided elsewhere - The consolidated financial statements required by this item are included in Part II, Item 8 of the Annual Report[472] - All financial statement schedules have been omitted because they are not required, not applicable, or the information is included in the consolidated financial statements or notes[473] Form 10-K Summary No Form 10-K summary is provided in this report - None[481]