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| FARO > SEC Filings for FARO > Form 10-Q on 1-May-2009 | All Recent SEC Filings |
1-May-2009
Quarterly Report
The following information should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, included elsewhere in this Form 10-Q, and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2008 Annual Report, Form 10-K, for the year ended December 31, 2008.
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," "will," "believe," "plan," "should," "could," "seek," "expect," "anticipate," "intend," "estimate," "goal," "objective," "project," "forecast," "target" and similar words, or discussions of our strategy or other intentions identify forward-looking statements. Other written or oral statements that constitute forward-looking statements also may be made by the Company from time to time. Specifically, this Quarterly Report on Form 10-Q contains, among others, forward-looking statements regarding:
• the Company's ability to achieve and maintain profitability;
• the impact of fluctuations in exchange rates;
• the effect or estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements;
• the impact of changes in technologies on the competitiveness of the Company's products or their components;
• the magnitude of increased warranty costs from new product introductions and enhancements to existing products;
• the outcome of litigation and its effect on the Company's business, financial condition or results of operations;
• the continuation of the Company's share repurchase program;
• the sufficiency of the Company's working capital, cash flow from operations, and credit facility to fund its long-term liquidity requirements;
• the impact of geographic changes in the manufacturing or sales of the Company's products on its tax rate; and
• the imposition of penalties against the Company for failure to comply with its continuing obligations with respect to the FCPA Matter.
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. The Company does 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:
• the slowdown in the manufacturing industry or the domestic and international economies in the regions of the world where the Company operates;
• the Company's inability to further penetrate its customer base;
• development by others of new or improved products, processes or technologies that make the Company's products obsolete or less competitive;
• the Company's inability to maintain its technological advantage by developing new products and enhancing its existing products;
• the cyclical nature of the industries of the Company's customers and material adverse changes in its customers access to liquidity and capital;
• the difficulty quantifying and predicting market potential for the computer-aided measurement ("CAM2") market and the potential adoption rate for the Company's products;
• the inability to protect the Company's patents and other proprietary rights in the United States and foreign countries;
• fluctuations in the Company's annual and quarterly operating results and the inability to achieve its financial operating targets;
• the Company's inability to successfully maintain the requirements of Restriction of use of Hazardous Substances ("RoHS") and Waste Electrical and Electronic Equipment ("WEEE") compliance into its products;
• the inability of the Company's products to displace traditional measurement devices and attain broad market acceptance;
• the impact of competitive products and pricing in the CAM2 market and the broader market for measurement and inspection devices;
• the effects of increased competition as a result of recent consolidation in the CAM2 market;
• risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, political and economic instability, compliance with 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;
• the loss of the Company's Chief Executive Officer or other key personnel;
• difficulties in recruiting research and development engineers, and application engineers;
• the failure to effectively manage the Company's growth;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis; and
• the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms; and
• other risks and uncertainties discussed in Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Overview
The Company designs, develops, manufactures, markets and supports portable, software driven, 3-D measurement systems that are used in a broad range of manufacturing, industrial, building construction and forensic applications. The Company's FaroArm, FARO Laser ScanArm and FARO Gage articulated measuring devices, the FARO Laser Scanner LS, the FARO Laser Tracker, and their companion CAM2 software, provide for Computer-Aided Design ("CAD")-based inspection and/or factory-level statistical process control, and high-density surveying. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD software to improve productivity, enhance product quality and decrease rework and scrap in the manufacturing process. The Company uses the acronym "CAM2" for this process, which stands for computer-aided measurement. As of April 4, 2009, the Company's
products have been purchased by approximately 9,200 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace, Caterpillar, Daimler Chrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Nissan, Siemens and Volkswagen, among many others.
The Company derives revenues primarily from the sale of its FaroArm, FARO Laser ScanArm, FARO Gage, FARO Laser Tracker and FARO Laser Scanner LS 3-D measurement equipment, and their related multi-faceted software. Revenue related to these products is generally recognized upon shipment. In addition, the Company sells one and three-year extended warranties and training and technology consulting services relating to its products. The Company recognizes the revenue from extended warranties on a straight-line basis. The Company also receives royalties from licensing agreements for its historical medical technology and recognizes the revenue from these royalties as licensees use the technology.
The Company operates in international markets throughout the world. It maintains sales offices in China, France, Germany, Great Britain, Italy, India, Japan, Malaysia, Netherlands, Poland, Spain, Singapore and Vietnam. The Company manages and reports its global sales in three regions: the Americas, Europe/Africa and Asia/Pacific. In the first quarter of 2009, 39.8% of the Company's sales were in the Americas compared to 41.5% in the first three months of 2008, 39.3% were in the Europe/Africa region compared to 40.9% in the first quarter of 2008 and 20.9% were in the Asia/Pacific region, compared to 17.6% in the same prior year period. In the first quarter of 2009, new order bookings decreased $19.6 million, or 41.7%, to $27.4 million from $47.0 million in the prior year period. New orders decreased $8.0 million, or 43.5%, in the Americas to $10.4 million, from $18.4 million in the prior year period. New orders decreased $7.7 million, or 39.7%, to $11.7 million in Europe/Africa from $19.4 in the first quarter of 2008. In Asia/Pacific, new orders decreased $3.9 million, or 42.4%, to $5.3 million, from $9.2 million in the first quarter of 2008.
The Company manufactures its FaroArm, FARO Gage, and FARO Laser Tracker products in the Company's manufacturing facilities located in Florida and Pennsylvania for customer orders from the Americas. The Company manufactures its FaroArm, FARO Gage, and FARO Laser Tracker products in its manufacturing facility located in Switzerland for customer orders from the Europe/Africa region and in its manufacturing facility located in Singapore for customer orders from the Asia/Pacific region. The Company manufactures its FARO Laser Scanner LS product in its facility located in Stuttgart, Germany. The Company expects all its existing plants to have the production capacity necessary to support its volume requirements through 2009.
The Company's effective tax rate decreased to 19.1% for the three months ended April 4, 2009 from 21.8% in the prior year period. The Company's tax rate continues to be lower than the statutory tax rate in the United States primarily as a result of favorable tax rates in foreign jurisdictions. However, the Company's tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of its products. The Company has received a favorable income tax rate commitment from the Swiss government as an incentive to establish a manufacturing plant in Switzerland. In 2006, the Company received approval from the Singapore Economic Development Board for a favorable multi-year income tax holiday for its Singapore headquarters and manufacturing operations subject to certain terms and conditions including employment, spending and capital investment.
Accounting for wholly owned foreign subsidiaries is maintained in the currency of the respective foreign jurisdiction and, therefore, fluctuations in exchange rates may have an impact on inter-company accounts reflected in the Company's consolidated financial statements. The Company is 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 (see Foreign Exchange Exposure below). However, it does not regularly use such instruments, and none were utilized in 2008 or the three months ended April 4, 2009.
The Company implemented two reductions-in-force during the quarter ended April 4, 2009 as a result of deteriorating global economic conditions. The first reduction-in-force was announced on February 20, 2009, and affected approximately 7% of the Company's workforce. As a result of this first reduction-in-force, the Company expects to save approximately $4.5 million in compensation costs on an annualized basis. Severance costs were $0.7 million. The second reduction-in-force was announced on April 6, 2009, effective April 3, 2009, and affected approximately 14% of the Company's workforce. As a result of this second reduction-in-force, the Company expects to save $7.4 million in compensation costs on an annualized basis. Severance costs for the second reduction-in-force were $1.0 million.
The Company has incurred a net loss in the quarter ended April 4, 2009, primarily as a result of a decrease in product sales, due to the deterioration of the global economy. Prior to the first quarter of 2009, the Company had a history of sales and earnings growth and 26 consecutive profitable quarters through December 31, 2008. Its sales and earnings growth were the result of a number of factors, including: continuing market demand for and acceptance of the Company's products; increased sales activity in part through additional sales staff worldwide, new products and product enhancements such as the FARO Gage and Laser Scanner; and the effect of acquisitions. However, the Company's historical financial performance is not indicative of its future financial performance, and the Company can offer no assurance as to when or if it will be profitable again in the future.
FCPA Update
As previously reported by the Company, the Company conducted an internal investigation in 2006 into certain payments made by its China subsidiary that may have violated the FCPA and other applicable laws (the "FCPA Matter") and entered into settlement agreements and documents with the U.S. Securities and Exchange Commission (the "SEC") and the U.S. Department of Justice (the "DOJ") in 2008 concerning the FCPA Matter. The Company incurred expenses of $3.8 million in 2006, $3.1 million in 2007, and $0.3 million in 2008 relating to the FCPA Matter and $2.95 million in fines, penalties, and interest to the DOJ and SEC in 2008 pursuant to settlement agreements and documents with the SEC and DOJ concerning the FCPA Matter. The Company has a two-year monitoring obligation and other continuing obligations with the SEC and the DOJ with respect to compliance with the FCPA and other laws, full cooperation with the government, and the adoption of a compliance code containing specific provisions intended to prevent violations of the FCPA. The selection process of the monitor is not yet complete. Failure to comply with any such continuing obligations could result in the SEC and the DOJ seeking to impose penalties against the Company in the future.
Results of Operations
Three Months Ended April 4, 2009 Compared to the Three Months Ended March 29, 2008
Sales decreased by $14.7 million, or 31.8%, to $31.4 million in the three months ended April 4, 2009 from $46.1 million for the three months ended March 29, 2008. This decrease resulted primarily due to a decrease in unit sales in all regions related to the weakness in the global economy. Product sales decreased by $15.1 million or, 38.4%, to $24.2 million for the three months ended April 4, 2009 from $39.3 million in the first quarter of the prior year. Service revenue increased by $0.4 million, or 7.0%, to $7.2 million for the three months ended April 4, 2009 from $6.8 million in the same period during the prior year. This increase was due primarily to an increase in warranty revenue.
Sales in the Americas region decreased $6.6 million, or 34.5%, to $12.5 million for the three months ended April 4, 2009 from $19.1 million in the three months ended March 29, 2008. Product sales in the Americas region decreased by $6.7 million, or 41.4%, to $9.5 million for the three months ended April 4, 2009 from $16.2 million in the first quarter of the prior year. Service revenue in the Americas region increased by $0.2 million, or 6.9%, to $3.1 million for the three months ended April 4, 2009 from $2.9 million in the same period during the prior year. This increase was due primarily to an increase in warranty revenue.
Sales in the Europe/Africa region decreased $6.5 million, or 34.5%, to $12.4 million for the three months ended April 4, 2009 from $18.9 million in the three months ended March 29, 2008. Product sales in the Europe/Africa region decreased by $6.8 million, or 42.2%, to $9.3 million for the three months ended April 4, 2009 from $16.1 million in the first quarter of the prior year. Service revenue in the Europe/Africa region increased by $0.3 million, or 10.7%, to $3.1 million for the three months ended April 4, 2009 from $2.8 million in the same period during the prior year. This increase was due primarily to an increase in warranty and training revenue.
Sales in the Asia/Pacific region decreased $1.5 million, or 19.0%, to $6.6 million for the three months ended April 4, 2009 from $8.1 million in the three months ended March 29, 2008. Product sales in the
Asia/Pacific region decreased by $1.5 million, or 21.4%, to $5.5 million for the three months ended April 4, 2009 from $7.0 million in the first quarter of the prior year. Service revenue in the Asia/Pacific region remained the same at $1.1 million for the three months ended April 4, 2009 from the same period during the prior year.
Gross profit decreased by $11.4 million, or 41.3%, to $16.3 million for the three months ended April 4, 2009 from $27.7 million for the three months ended March 29, 2008. Gross margin decreased to 51.7% for the three months ended April 4, 2009 from 60.1% for the three months ended March 29, 2008. The decrease in gross margin is primarily due to a change in the sales mix between product sales and service revenue resulting from a decrease in product sales. Gross margin from product sales decreased to 62.3% in the three months ended April 4, 2009 from 65.6% for the three months ended March 29, 2008, primarily as a result of a change in the sales mix resulting from an increase in sales of product lines with lower gross margins. Gross margin from service revenues decreased to 16.2% in the three months ended April 4, 2009 from 28.3% for the three months ended March 29, 2008 primarily as a result of severance costs of $0.6 million related to the reductions-in-force in the first quarter of 2009.
Selling expenses decreased by $1.6 million, or 11.1%, to $12.8 million for the three months ended April 4, 2009 from $14.4 million for three months ended March 29, 2008. This decrease was primarily due to a decrease in commission and compensation expense of $1.0 million and lower travel related costs of $0.7 million, offset by severance costs of $0.6 million.
Worldwide sales and marketing headcount increased by 30, or 8.8%, to 369 at April 4, 2009 from 339 at March 29, 2008. Regionally, the Company's sales and marketing headcount remained at 121 for the Americas; decreased by 3, or 2.3%, in Europe/Africa to 127 at April 4, 2009 from 130 at March 29, 2008; and increased by 33, or 37.5%, in Asia/Pacific to 121 at April 4, 2009 from 88 at March 29, 2008.
As a percentage of sales, selling expenses increased to 40.8% of sales in the three months ended April 4, 2009 from 31.3% in the three months ended March 29, 2008. Regionally, selling expenses were 36.8% of sales in the Americas for the quarter, compared to 28.5% of sales in the first quarter of 2008, 44.8% of sales for Europe/Africa compared to 33.2% of sales from the same period in the prior year, and 40.9% of sales compared to 33.5% of sales for Asia/Pacific from the same period in the prior year.
General and administrative expenses increased by $0.7 million, or 11.6%, to $6.3 million for the three months ended April 4, 2009 from $5.6 million for the three months ended March 29, 2008, primarily due to an increase in professional and legal fees of $0.4 million, increased costs related to the additional leased space to expand the Company's corporate offices of $0.4 million and severance costs of $0.2 million related to the reductions-in-force in the first quarter of 2009.
Depreciation and amortization expenses increased by $0.3 million to $1.3 million for the three months ended April 4, 2009 from $1.0 million for the three months ended March 29, 2008.
Research and development expenses increased to $3.5 million for the three months ended April 4, 2009 from $2.7 million for the three months ended March 29, 2008, primarily as a result of an increase in staffing levels and compensation expense of $0.5 million related to continuing product development and an increase in materials of $0.2 million. Severance costs related to the reductions-in-force in the first quarter of 2009 were $0.1 million. Research and development expenses as a percentage of sales increased to 11.1% for the three months ended April 4, 2009 from 5.9% for the three months ended March 29, 2008.
Interest income decreased by $0.4 million to $0.2 million for the three months ended April 4, 2009 from $0.6 million for the three months ended March 29, 2008, due to a decrease in interest rates related to cash and short term investments.
Interest expense decreased by $0.4 million to $0.0 million for the three months ended April 4, 2009 from $0.4 million for the three months ended March 29, 2008, due to interest accrued on the estimated fines and penalties to the SEC and DOJ related to the FCPA matter accrued in the first quarter of 2008.
Other expense (income), net changed by $0.9 million to $0.7 million of expense for the three months ended April 4, 2009, from income of $0.2 million for the three months ended March 29, 2008, primarily as a result of foreign currency transaction losses.
Income tax (benefit) expense decreased by $2.5 million to a benefit of $1.6 million for the three months ended April 4, 2009 from expense of $0.9 million for the three months ended March 29, 2008. This decrease was primarily due to a decrease in pretax income. Total deferred taxes for the Company's foreign subsidiaries relating to net operating loss carryforwards were $11.0 million and $10.2 million at April 4, 2009 and December 31, 2008, respectively. The related valuation allowance was $9.6 million and $8.7 million at April 4, 2009 and December 31, 2008, respectively. The Company's effective tax rate decreased to 19.1% for the three months ended April 4, 2009 from 21.8% in the prior year period, primarily as a result of a decrease in taxable income in jurisdictions with higher tax rates. The Company's tax rate continues to be lower than the statutory tax rate in the United States primarily as a result of favorable tax rates in foreign jurisdictions. However, the Company's tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of its products and the resulting effect on taxable income in each jurisdiction.
Net income decreased by $10.0 million to a net loss of $6.6 million for the three months ended April 4, 2009 from net income of $3.4 million for the three months ended March 29, 2008 as a result of the factors described above.
Liquidity and Capital Resources
The Company has financed its operations primarily from cash provided by operating activities, proceeds of approximately $31.5 million from its 1997 initial public offering of common stock, the Company's 2003 private placement of common stock with various institutional investors totaling approximately $24.9 million, and the Company's 2007 sale of 1,650,000 shares of common stock in a registered direct offering pursuant to a Form S-3 Registration Statement to certain institutional investors at $34.00 per share, with net proceeds after deducting placement fees and other offering expenses of approximately $53.0 million.
Cash and cash equivalents increased by $37.7 million to $61.2 million at April 4, 2009, from $23.5 million at December 31, 2008. Cash and cash equivalents include $32.0 million of U.S. Treasury Bills having a maturity of less than 90 days. The increase was primarily attributable to net proceeds of $17.0 million from the sale of $82.0 million of the Company's variable rate demand bonds and purchases of $65.0 million of U.S. Treasury Bills and an increase in working capital of $4.4 million, offset by purchases of $8.9 million of the Company's common stock as part of the Company's share repurchase program, a net loss and non-cash expenses of $4.5 million, $1.8 million in purchases of equipment and intangible assets, and the effect of exchange rate changes on cash of $0.5 million.
On July 11, 2006, the Company entered into a loan agreement providing for an available line of credit of $30.0 million, which was most recently amended on April 22, 2009. Loans under the Amended and Restated Loan Agreement, as amended, bear interest at the rate of LIBOR plus a fixed percentage between 2.25% - 2.50% and require the Company to maintain certain ratios with respect to a debt covenant agreement, including current ratio, minimum tangible net worth, and senior funded debt to EBITDA. As of April 4, 2009 the Company was in compliance with all of the covenants under the Amended and Restated Loan Agreement, as amended. The term of the Amended and Restated Loan Agreement, as amended, extends to March 31, 2012. The Company has not drawn on this line of credit.
The Company believes that its working capital, anticipated cash flow from operations, and credit facility will be sufficient to fund its long-term liquidity requirements for the foreseeable future.
Critical Accounting Policies
In response to the SEC's financial reporting release, FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company has selected its critical accounting policies for purposes of explaining the methodology used in the calculation in addition to any inherent uncertainties pertaining to the possible effects on its financial condition. The critical policies discussed below are the Company's processes of recognizing revenue, the reserve for excess and obsolete inventory, income taxes, and the reserve for warranties. These policies affect current assets and operating results and are therefore critical in assessing the Company's financial and operating status. These policies involve certain assumptions that, if incorrect, could create an adverse impact on the Company's operations and financial position.
The preparation of these consolidated financial statements requires the Company's 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. The Company bases its estimates on historical experience along with various other factors that are 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. While for any given estimate or assumption made by the Company's management there may be other estimates or assumptions that are reasonable, the Company believes that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements.
Revenue Recognition-Revenue related to the Company's measurement equipment and related software is generally recognized upon shipment as the Company considers the earnings process substantially complete as of the shipping date. Revenue from sales of software only is recognized when no further significant . . .
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