The following information should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, included in Part II, Item 8 of this Annual Report on Form 10-K.
Overview
We are a global technology company that designs, develops, manufactures, markets
and supports software driven, three-dimensional ("3D") measurement, imaging, and
realization solutions for the 3D metrology, architecture, engineering and
construction ("AEC"), Operations and Maintenance ("O&M") and public safety
analytics markets. We enable our customers to capture, measure, manipulate,
interact with and share 3D and 2D data from the physical world in a virtual
environment and then translate this information back into the physical domain.
Our broad technology set equips our customers with a wide range of 3D capture
technologies that range from ultra-high accuracy laser scanner based technology
to lower accuracy, photogrammetry based technology. Our FARO suite of 3D
products and software solutions are used for inspection of components and
assemblies, rapid prototyping, reverse engineering, documenting large volume or
structures in 3D, surveying and construction, construction management, assembly
layout, machine guidance as well as in investigation and reconstructions of
crash and crime scenes. We sell the majority of our solutions through a direct
sales force, with an increasing volume being sold through an indirect channel
across a range of industries including automotive, aerospace, metal and machine
fabrication, surveying, architecture, engineering and construction, public
safety forensics and other industries.
We derive our revenues primarily from the sale of our measurement equipment and
related multi-faceted software programs. Revenue related to these products is
generally recognized upon shipment. In addition, we sell extended warranties and
training and technology consulting services relating to our products. We
recognize the revenue from hardware service contracts and software maintenance
contracts on a straight-line basis over the contractual term, and revenue from
training and technology consulting services when the services are provided.
We operate in international markets throughout the world and maintain sales
offices in Australia , Brazil , Canada , China , France , Germany , India , Italy ,
Japan , Malaysia , Mexico , the Netherlands , Poland , Portugal , Singapore , South
Korea , Spain , Switzerland , Thailand , Turkey , the United Kingdom , and the United
States .
We manufacture our FARO Quantum Max Arm products in our manufacturing facility
located in Florida for customer orders from Europe , the Middle East and Africa
("EMEA"), in our manufacturing facility located in Singapore for customer orders
from the Asia-Pacific region , and in our manufacturing facility located in
Florida for customer orders from the Americas . We manufacture our FARO
Focus laser scanner in our manufacturing facilities located in Germany for
customer orders from EMEA and the Asia-Pacific region , and in our manufacturing
facility located in Pennsylvania for customer orders from the Americas . We
manufacture our FARO Laser Tracker and our FARO Laser Projector products in our
facility located in Pennsylvania . Under the manufacturing services agreement
dated July 15, 2021 and in connection with the Restructuring Plan, Sanmina will
provide manufacturing services for the Company's measurement device products
currently manufactured by the Company at the aforementioned manufacturing
facilities. A phased transition to a Sanmina production facility is expected to
be completed by the end of the second quarter of 2022 as part of our cost
reduction initiative. We expect all of our existing manufacturing facilities and
future third party manufacturing facilities to have the production capacity
necessary to support our volume requirements during 2022.
We account for wholly-owned foreign subsidiaries in the currency of the
respective foreign jurisdiction; therefore, fluctuations in exchange rates may
have an impact on the value of the intercompany account balances denominated in
different currencies and reflected in our consolidated financial statements. We
are 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. However, we have not used
such instruments in the past, and none were utilized in 2021, 2020 or 2019.
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Abstract
COVID-19 and impact on our business
Our business is significantly vulnerable to the economic effects of pandemics
and other public health crises, including the ongoing novel coronavirus
("COVID-19") pandemic that has surfaced in virtually every country of our global
operating footprint. During 2020, we experienced a significant decline in the
demand for our products and services across all of our served markets as a
result of the impact of the spread of COVID-19. While COVID-19 has negatively
impacted demand for our products and services overall, it has provided us with
the opportunity to adapt to operating in a virtual environment. We significantly
increased the utilization of our existing virtual sales demonstration
infrastructure which has enabled ongoing customer product education. We launched
an updated web-based learning system with FARO Academy that has resulted in an
increase in the attendance of our virtual training and product information
seminars as our customers take advantage of the opportunity to remotely
participate and to better understand the capabilities of our products and
software offerings.
In 2021, as we saw a recovery in our revenues across our served segments, we continued to assess the continued impact of COVID-19 on our business results and remained committed to taking steps to ensure the health and safety of our employees and customers, as well as the adverse effects of demand disruptions and production impacts, including, but not limited to, the following:
•Operating our business with a focus on our employee health and safety, which includes minimizing travel, implementing remote work policies, maintaining employee distancing and enhancing the sanitation of all of our facilities; •Recommending that our employees receive vaccinations to help protect our colleagues, families, and communities; •Confidentially collecting proof of vaccination from our employees or requiring weekly COVID-19 testing to use certain facilities; •Monitoring our liquidity, disciplined inventory management, and limiting capital expenditures; and •Continuously reviewing our financial strategy to enhance financial flexibility in these volatile financial markets.
We continue to maintain a strong capital structure with a cash balance of
Future developments, such as the potential resurgence of COVID-19 in countries that have begun to recover from the early impact of the pandemic and actions taken by governments in response to future resurgence, are highly uncertain. Therefore, the Company is not able to predict the extent to which the COVID-19 outbreak continues to impact the Company's results of operations and financial conditions. See Item 1A, Risk Factors, included in Part I of this Annual Report on Form 10-K for an additional discussion of risks related to COVID-19. Our total sales increased by$34.0 million , or 11.2%, to$337.8 million for the year endedDecember 31, 2021 from$303.8 million for the year endedDecember 31, 2020 . Our product sales increased by$32.5 million , or 14.9%, to$251.1 million for the year endedDecember 31, 2021 from$218.6 million for the year endedDecember 31, 2020 primarily due to the recovery from the economic effect of the COVID-19 pandemic which adversely affected the prior year. Service revenue increased$1.5 million , or 1.8%, to$86.7 million for the year endedDecember 31, 2021 remaining fairly consistent with the$85.2 million for the year endedDecember 31, 2020 . Also, foreign exchange rates had a positive impact on sales of$4.1 million , or 1.3 percentage points, primarily due to the strengthening of the Euro and the Renminbi relative to theU.S. dollar.
Change in organizational structure and sector reports
As part of our new strategic plan, and based on the recommendation of our CEO,
who is also our Chief Operating Decision Maker ("CODM"), in the fourth quarter
of 2019, we eliminated our vertical structure in favor of a functional
structure. Our new executive leadership team is comprised of functional leaders
in areas such as sales, marketing, operations, research and development and
general and administrative, and resources are allocated to each function at a
consolidated unit level. We no longer have separate business units, segment
managers or vertical leaders who report to the CODM with respect to operations,
operating results or planning for levels or components below the total Company
level. Instead, our CODM now allocates resources and evaluates performance on a
company-wide basis. Based on these changes, commencing with the fourth quarter
of 2019, we report as one reporting segment that develops, manufactures,
markets, supports and sells a suite of 3D imaging and software solutions.
In addition to the reorganization of the Company's structure, we evaluated our
hardware and software product portfolio and the operations of certain of our
recent acquisitions. As a result of this evaluation, we simplified our hardware
and software product portfolio and divested our Photonics business and 3D Design
related assets obtained from our acquisition of Opto-Tech SRL and its subsidiary
Open Technologies SRL (collectively, "Open Technologies") in the second quarter
of 2020.
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OnFebruary 14, 2020 , our Board of Directors approved a global restructuring plan (the "Restructuring Plan"), which supports our strategic plan in an effort to improve operating performance and ensure that we are appropriately structured and resourced to deliver sustainable value to our shareholders and customers. Key activities under the Restructuring Plan have achieved$39.6 million in annualized Non-GAAP savings that were realized by the end of fiscal year 2021 and included decreasing total headcount by approximately 500 employees upon the completion of the Restructuring Plan. The elimination of our vertical structure allowed us to successfully complete our redefined go-to-market strategy which placed increased focus on our customers and enabled our sales employees, supported by our talented pool of field application engineers, to sell all product lines globally. Our new marketing leadership team has focused its efforts on gaining an increased understanding of customer applications and workflows which enables value-based product positioning while optimizing our customer's total cost of ownership. By strengthening our understanding of customer applications and workflows, we will continue to develop high-value solutions across our product and software platforms. Also, our marketing leadership team has transformed our lead generation process and implemented technology to provide our sales organization with higher quality leads which optimizes the time and effort spent by our newly organized sales team. We continue to focus on organizational optimization and improved decision making throughout the Company. Prior to the execution of the Restructuring Plan, the Company had strong geographic organizations with decentralized decision making. Additionally, the previous vertical structure layered on top of the geographic organization led to an overly complex and costly management structure. The newly formed global functional organization has enabled centralized management and clear process ownership, eliminating redundant resources and increasing the Company's agility and ability to execute the new strategic plan during the COVID-19 global pandemic. We recorded a pre-tax charge of approximately$15.8 million and paid$13.1 million during the year endedDecember 31, 2020 primarily consisting of severance and related benefits, professional fees and other related charges. We have continued to make significant progress in executing the Restructuring Plan during 2021. We recorded a pre-tax charge of approximately$7.4 million and paid$5.8 million during the year endedDecember 31, 2021 primarily consisting of severance and related benefits, professional fees and other related charges and costs. OnJuly 15, 2021 , we entered into a manufacturing services agreement (the "Agreement") with Sanmina Corporation ("Sanmina"), in connection with the Restructuring Plan. Under the Agreement, Sanmina will provide manufacturing services for the Company's measurement device products currently manufactured by the Company at the Company'sLake Mary, Florida ,Exton, Pennsylvania , andStuttgart, Germany manufacturing sites. A phased transition to a Sanmina production facility is expected to be completed by the end of the second quarter of 2022 as part of our cost reduction initiative. The Company expects to pay approximately$4 million in fiscal year 2022, primarily consisting of severance and related benefits. 33
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We continue to evaluate our key initiatives and execution of the Restructuring Plan, and expect to incur additional pre-tax charges in the range of$6 million to$10 million through the end of fiscal year 2022.
Faro Sphere and the Unified Software Environment
FARO Sphere is our new cloud-based platform that is the foundation to our new software and solution strategy. Our objective is to provide differentiated value by offering workflow enhancements which include automated laser scan, data uploads from any location, access to our existing suite of 3D software applications, cloud-based data analysis and global user access as well as ultimately, the ability for our customers to purchase, renew or manage all of their FARO software and hardware assets. FARO Sphere represents the first step into expansion of our cloud-based software offerings that we believe will deliver greater value to our customers and to our shareholders. The FARO Sphere environment could be adopted globally across a wide range of markets, including construction management, facilities, operations and maintenance, robotic simulation and incident preplanning. This potential adoption would lead to an increase in the number of users and thus enable revenue growth of our software and a shift toward increased levels of recurring revenue over time. We anticipate FARO Sphere to be released to our customers within the second quarter of 2022. Revenue from our current software products was$45.1 million ,$38.3 million and$46.9 million for the years endedDecember 31, 2021 ,December 31, 2020 , andDecember 31, 2019 , respectively. Our recurring revenue which is comprised of hardware service contracts, software maintenance contracts, and subscription based software applications was$64.1 million ,$61.2 million , and$56.1 million for the years endedDecember 31, 2021 ,December 31, 2020 , andDecember 31, 2019 , respectively. Acquisition of Holobuilder OnJune 4, 2021 , we acquired all of the outstanding shares ofHolobuilder, Inc. ("Holobuilder"), a company focused on 3D photogrammetry-based technology for a purchase price of$33.8 million paid, net of cash acquired and was paid with cash on hand. We believe this acquisition enables the Company to provide reality-capture photo documentation and added remote access capability for industries such as construction management further expanding the Company's Digital Twin solution portfolio. The results of Holobuilder's operations as of and after the date of acquisition have been included in our consolidated financial statements as ofDecember 31, 2021 .
Presentation of information
Amounts reported in millions within this Annual Report on Form 10-K are computed
based on the amounts in thousands. As a result, the sum of the components
reported in millions may not equal the total amount reported in millions due to
rounding. Certain columns and rows within the tables that follow may not add due
to the use of rounded numbers. Percentages presented are calculated based on the
respective amounts in thousands.
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Results of Operations
2021 Compared to 2020
Years ended December 31,
2021 2020 Change ($)
(dollars in millions) % of Sales % of Sales 2021 vs 2020
SALES
Product $ 251.1 74.3 % $ 218.6 72.0 % $ 32.5
Service 86.7 25.7 % 85.2 28.0 % 1.5
Total sales 337.8 100.0 % 303.8 100.0 % 34.0
COST OF SALES
Product 109.0 32.3 % 98.9 32.5 % 10.2
Service 44.9 13.3 % 45.1 14.8 % (0.2)
Total cost of sales 153.9 45.6 % 143.9 47.4 % 10.0
GROSS PROFIT 183.9 54.4 % 159.8 52.6 % 24.1
OPERATING EXPENSES
Selling, general and administrative 136.2 40.3 % 131.8 43.4 % 4.4
Research and development 48.8 14.4 % 42.9 14.1 % 5.9
Restructuring costs 7.4 2.2 % 15.8 5.2 % (8.4)
Total operating expenses 192.4 57.0 % 190.5 62.7 % 1.9
LOSS FROM OPERATIONS (8.5) (2.5) % (30.7) (10.1) % 22.2
Other expense 0.1 - % 0.1 - % -
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) (8.6) (2.5) % (30.8) (10.1) % 22.2
INCOME TAX EXPENSE (BENEFIT) 31.4 9.3 % (31.4) (10.3) % 62.8
NET (LOSS) INCOME $ (40.0) (11.8) % $ 0.6 0.2 % $ (40.6)
Consolidated Results
Sales. Total sales increased by $34.0 million , or 11.2%, to $337.8 million for
the year ended December 31, 2021 from $303.8 million for the year ended
December 31, 2020 . Total product sales increased by $32.5 million , or 14.9%, to
$251.1 million for the year ended December 31, 2021 from $218.6 million for the
year ended December 31, 2020 . The increase in product sales is primarily due to
the recovery from the economic effect of the COVID-19 pandemic which adversely
affected the prior year. Service revenue increased by $1.5 million , or 1.8%, to
$86.7 million for the year ended December 31, 2021 remaining fairly consistent
with the $85.2 million for the year ended December 31, 2020 . Foreign exchange
rates had a positive impact on sales of $4.1 million , or 1.3 percentage points,
primarily due to the strengthening of the Euro and the Renminbi relative to the
U.S. dollar.
Gross profit. Gross profit increased by $24.1 million , or 15.1%, to $183.9
million for the year ended December 31, 2021 from $159.8 million for the year
ended December 31, 2020 . Gross margin increased to 54.4% for the year ended
December 31, 2021 from 52.6% in the prior year period. Gross margin from product
revenue increased by 1.8 percentage points to 56.6% for the year ended December
31, 2021 from 54.8% in the prior year period. This increase in gross margin from
product revenue was primarily due to change in product mix, and the favorable
impact of the recovery from the economic effect of the COVID-19 pandemic which
adversely affected our product fixed cost absorption in the prior year,
partially offset by unfavorable price variances of purchased materials in the
current year due to global supply shortages. Gross margin from service revenue
increased by 1.1 percentage points to 48.2% for the year ended December 31, 2021
from 47.1% for the prior year period, primarily due to a reduction in
departmental costs as a result of the Restructuring Plan.
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Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses increased by $4.4 million , or 3.3%, to $136.2
million , for the year ended December 31, 2021 from $131.8 million for the year
ended December 31, 2020 . This increase was driven primarily by an increase in
selling commission expense due to higher global sales and an increase in travel
expense as there were pandemic stay-at-home orders in the prior year. SG&A
expenses as a percentage of sales decreased to 40.3% for the year ended December
31, 2021 from 43.4% for the year ended December 31, 2020 .
Research and development expenses. Research and development expenses increased
$5.9 million , or 13.7%, to $48.8 million for the year ended December 31, 2021
from $42.9 million for the year ended December 31, 2020 . This increase was
primarily driven by higher compensation expense resulting from increased
engineering headcount and costs to accelerate new product development. Research
and development expenses as a percentage of sales increased to 14.4% for the
year ended December 31, 2021 from 14.1% for the year ended December 31, 2020 .
Restructuring costs. In February 2020 , we initiated the Restructuring Plan to
improve business effectiveness, streamline operations and achieve a stated
target cost level for the Company as a whole. Restructuring costs included in
operating expenses decreased by $8.4 million , or 53.4% to $7.4 million for the
year ended December 31, 2021 from $15.8 million for the year ended December 31,
2020 . The decrease was driven primarily by a reduction in severance and related
benefit charges from lower headcount reduction in the current year.
Other expenses. Other expenses were
Income tax expense (benefit). Income tax expense for the year endedDecember 31, 2021 was$31.4 million compared with an income tax benefit of$31.4 million for the year endedDecember 31, 2020 . Our effective tax rate was (366.8)% for the year endedDecember 31, 2021 compared to 102.0% for the year endedDecember 31, 2020 . The change was primarily due to a$26.5 million expense attributable to a valuation allowance against US and certain other jurisdictions deferred tax assets for the year endedDecember 31, 2021 compared to a deferred tax asset benefit of$19.2 million pursuant to an intra-entity transfer of certain intellectual property rights ("IP Rights"), based on the fair value of the IP rights transferred inDecember 2020 . Net (loss) income. Net loss was$40.0 million for the year endedDecember 31, 2021 compared with net income of$0.6 million for the year endedDecember 31, 2020 , reflecting the impact of the factors described above. 36
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2020 Compared to 2019
Years ended December 31,
2020 2019 Change ($)
(dollars in millions) % of Sales % of Sales 2020 vs 2019
SALES
Product $ 218.6 72.0 % $ 289.7 75.9 % $ (71.1)
Service 85.2 28.0 % 92.1 24.1 % (6.9)
Total sales 303.8 100.0 % 381.8 100.0 % (78.0)
COST OF SALES
Product 98.9 32.5 % 133.2 34.9 % (34.4)
Service 45.1 14.8 % 50.4 13.2 % (5.3)
Total cost of sales 143.9 47.4 % 183.6 48.1 % (39.7)
GROSS PROFIT 159.8 52.6 % 198.1 51.9 % (38.3)
OPERATING EXPENSES
Selling, general and administrative 131.8 43.4 % 177.4 46.5 % (45.6)
Research and development 42.9 14.1 % 44.2 11.6 % (1.3)
Restructuring costs 15.8 5.2 % - - % 15.8
Impairment loss - - % 35.2 9.2 % (35.2)
Total operating expenses 190.5 62.7 % 256.8 67.3 % (66.3)
LOSS FROM OPERATIONS (30.7) (10.1) % (58.7) (15.4) % 28.0
Other expense 0.1 - % 2.4 0.6 % (2.3)
LOSS BEFORE INCOME TAX (BENEFIT) EXPENSE (30.8) (10.1) % (61.0) (16.0) % 30.2
INCOME TAX (BENEFIT) EXPENSE (31.4) (10.3) % 1.1 0.3 % (32.5)
NET INCOME (LOSS) $ 0.6 0.2 % $ (62.1) (16.3) % $ 62.7
Consolidated Results
Sales. Total sales decreased by $78.0 million , or 20.4%, to $303.8 million for
the year ended December 31, 2020 from $381.8 million for the year ended December
31, 2019 . Total product sales decreased by $71.1 million , or 24.5%, to $218.6
million for the year ended December 31, 2020 from $289.7 million for the year
ended December 31, 2019 . Our product sales decreased due to the unfavorable
impact of end market demand softness related to the COVID-19 pandemic and other
fluctuations in market conditions. Service sales decreased by $6.9 million , or
7.5%, to $85.2 million for the year ended December 31, 2020 from $92.1 million
for the year ended December 31, 2019 , primarily due to the unfavorable impact of
end market demand softness related to the COVID-19 pandemic and other
fluctuations in market conditions. Foreign exchange rates had a positive impact
on sales of $0.7 million , reducing our overall sales decline by approximately
0.2 percentage points, primarily due to the strengthening of the Euro relative
to the U.S. dollar.
Gross profit. Gross profit decreased by $38.3 million , or 19.3%, to $159.8
million for the year ended December 31, 2020 from $198.1 million for the year
ended December 31, 2019 . Gross margin increased to 52.6% for the year ended
December 31, 2020 from 51.9% in the prior year period. Gross margin from product
revenue increased by 0.8 percentage points to 54.8% for the year ended December
31, 2020 from 54.0% in the prior year period. This increase in gross margin from
product revenue was primarily due to 2019 including a $12.8 million increase in
our reserve for excess and obsolete inventory recorded in connection with our
strategic decisions to simplify our hardware and software product portfolio and
cease selling certain products. Gross margin from service revenue increased by
1.8 percentage points to 47.1% for the year ended December 31, 2020 from 45.3%
for the prior year period, primarily due to a reduction in departmental costs as
a result of the Restructuring Plan.
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Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses decreased by $45.6 million , or 25.7%, to $131.8
million , for the year ended December 31, 2020 from $177.4 million for the year
ended December 31, 2019 . This decrease was driven primarily by decreased
salaries and wages and other cost savings initiatives to reduce non-personnel
costs that resulted from the Restructuring Plan. Additionally, a decrease in
selling commission expense and travel expense was driven by reduced global sales
and pandemic stay-at-home orders, respectively. SG&A expenses as a percentage of
sales decreased to 43.4% for the year ended December 31, 2020 from 46.5% for the
year ended December 31, 2019 .
Research and development expenses. Research and development expenses decreased
$1.3 million , or 2.9%, to $42.9 million for the year ended December 31, 2020
from $44.2 million for the year ended December 31, 2019 . This decrease was
mainly driven by a decrease in purchased technology intangible amortization
expense as a result of the impairment of certain intangible assets in connection
with the Restructuring Plan. Research and development expenses as a percentage
of sales increased to 14.1% for the year ended December 31, 2020 from 11.6% for
the year ended December 31, 2019 .
Restructuring costs. In February 2020 , we initiated the Restructuring Plan to
improve business effectiveness, streamline operations and achieve a stated
target cost level for the Company as a whole. Restructuring costs included in
operating expenses for the year ended December 31, 2020 were $15.8 million
primarily consisting of severance and related benefits charges.
Impairment loss. As a result of our annual goodwill and intangible asset
impairment test performed in the prior year, we recorded an impairment loss of
$35.2 million in the fourth quarter of 2019, which included $21.2 million in
goodwill, $10.5 million in intangible assets associated with recent
acquisitions, $1.4 million in intangible assets related to capitalized patents,
and $2.1 million in other asset write-downs. There were no similar impairments
in 2020.
Other expense. Other expense was $0.1 million for the year ended December 31,
2020 compared to $2.4 million for the year ended December 31, 2019 . This
decrease was primarily driven by the impairment charge related to our equity
investment in present4D GmbH ("present4D") recorded in the second quarter of
2019 and the impairment charge related to our note receivable due from present4D
recorded in the fourth quarter of 2019.
Income tax (benefit) expense. Income tax benefit for the year ended December 31,
2020 was $31.4 million compared with an income tax expense of $1.1 million for
the year ended December 31, 2019 . Our effective tax rate was 102.0% for the year
ended December 31, 2020 compared to 1.9% for the year ended December 31, 2019 .
The change in income tax (benefit) expense was primarily due to the Company
completing an intra-entity transfer of certain intellectual property rights ("IP
Rights") which resulted in the Company establishing a deferred tax asset benefit
of $19.2 million , based on the fair value of the IP rights transferred in
December 2020 .
Net income (loss). Net income was $0.6 million for the year ended December 31,
2020 compared with net loss of $62.1 million for the year ended December 31,
2019 , reflecting the impact of the factors described above.
Cash and capital resources
Cash and cash equivalents decreased by$63.6 million to$122.0 million atDecember 31, 2021 from$185.6 million atDecember 31, 2020 . The decrease was primarily driven by net cash used in operating and investing activities. Cash used in operating activities was$13.5 million during the year endedDecember 31, 2021 compared to$21.4 million of cash provided by operating activities during the year endedDecember 31, 2020 . The change was due to changes in working capital accounts, primarily an increase in net accounts receivable from higher sales, a decrease in accounts payable and accrued liabilities driven by the$12.3 million settlement of liability related to the GSA matter, as well as an increase in raw material inventories in preparation for our phased transition to our third party contract manufacturer, Sanmina. Cash used in investing activities during the year endedDecember 31, 2021 was$45.7 million compared with cash flows provided by investing activities of$13.9 million during the year endedDecember 31, 2020 . The change was primarily due to$33.8 million used in the acquisition of Holobuilder during the year endedDecember 31, 2021 , as compared to the maturity ofU.S. Treasury Bills amounting to$25.0 million during the year endedDecember 31, 2020 without such activity during the year endedDecember 31, 2021 . Cash flows provided by financing activities during the year endedDecember 31, 2021 was$1.6 million compared with$11.1 million during the year endedDecember 31, 2020 . The change was primarily due to less proceeds from fewer exercises of stock options during the year endedDecember 31, 2021 as compared to during the year endedDecember 31, 2020 . 38
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Of our cash and cash equivalents,$95.2 million was held by foreign subsidiaries as ofDecember 31, 2021 . OnDecember 22, 2017 ,the United States enacted theU.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing law, which included a transition tax on the mandatory deemed repatriation of foreign earnings. As a result of theU.S. Tax Cuts and Jobs Act, the Company can repatriate foreign earnings and profits to theU.S. with minimalU.S. income tax consequences, other than the transition tax and global intangible low-taxed income ("GILTI") tax. The Company reinvested a large portion of its undistributed foreign earnings and profits in acquisitions and other investments and intends to bring back a portion of foreign cash in certain jurisdictions where the Company will not be subject to local withholding taxes and which were subject already to transition tax and GILTI tax. OnNovember 24, 2008 , our Board of Directors approved a$30.0 million share repurchase program. Subsequently, inOctober 2015 , our Board of Directors authorized an increase to the existing share repurchase program from$30.0 million to$50.0 million . InDecember 2018 , our Board of Directors authorized management to utilize the share repurchase program, beginningJanuary 1, 2019 , to maintain the number of our issued and outstanding shares to address the dilutive impact of stock options exercises and the settlement of restricted stock units. Acquisitions for the share repurchase program may be made from time to time at prevailing prices as permitted by securities laws and other legal requirements and subject to market conditions and other factors under this program. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. We made no stock repurchases during the years endedDecember 31, 2021 , 2020 and 2019 under this program. As ofDecember 31, 2021 , we had authorization to repurchase$18.3 million of the$50.0 million authorized by our Board of Directors under the existing share repurchase program. We believe that our working capital and anticipated cash flow from operations will be sufficient to fund our long-term liquidity operating requirements for at least the next 12 months.
We have no off-balance sheet arrangements.
Inflation
Inflation did not have a material impact on our results of operations in recent years. However, we are closely monitoring the current economic climate and its continued impact on our business to adequately respond to price changes which may impact our profitability. In the second half of 2021, we observed raw material cost increases specifically amongst various electronic components we use in our products, and we expect to see the continued pressure on material cost through 2022 to impact our global businesses, worldwide. We have also observed salary pressures on existing and new headcount.
Critical accounting policies
The preparation of our consolidated financial statements requires our 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. We base our estimates on historical experience, along with various other factors 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 our management that there may be other estimates or assumptions that are reasonable, we believe 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. In response to theSEC's financial reporting release, FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we have selected our critical accounting policies for purposes of explaining the methodology used in our calculation, in addition to any inherent uncertainties pertaining to the possible effects on our financial condition. The critical policies discussed below are our processes of recognizing revenue, the reserve for excess and obsolete inventory, income taxes, the reserve for warranties, goodwill impairment, business combinations and stock-based compensation. These policies affect current assets, current liabilities and operating results and are therefore critical in assessing our financial and operating status. These policies involve certain assumptions that, if incorrect, could have an adverse impact on our operating results and financial position. 39
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Revenue recognition
For arrangements with multiple performance obligations, which represent promises
within an arrangement that are capable of being distinct, we allocate revenue to
all distinct performance obligations based on their relative standalone selling
prices ("SSP"). When available, we use observable prices to determine the SSP.
When observable prices are not available, SSPs are established that reflect our
best estimates of what the selling prices of the performance obligations would
be if they were sold regularly on a standalone basis.
Revenue related to our measurement and imaging equipment and related software is
generally recognized upon shipment from our facilities or when delivered to the
customer's location, as determined by the agreed upon shipping terms, at which
time we are entitled to payment and title and control has passed to the
customer. Fees billed to customers associated with the distribution of products
are classified as revenue. We generally warrant our products against defects in
design, materials and workmanship for one year. A provision for estimated future
costs relating to warranty expense is recorded when products are shipped. To
support our product lines, we also sell hardware service contracts that
typically range from one year to three years. Hardware service contract revenues
are recognized on a straight-line basis over the term of the contract. Costs
relating to hardware service contracts are recognized as incurred. Revenue from
sales of licensed software only is recognized when no further significant
production, modification or customization of the software is required and when
the risks and rewards of ownership have passed to the customer. These software
arrangements generally include short-term maintenance that is considered
post-contract support ("PCS"), which is considered to be a separate performance
obligation. We generally establish a standalone sales price for this PCS
component based on our software maintenance contract renewals. Software
maintenance contracts, when sold, are recognized on a straight-line basis over
the term of the contract. Revenue from sales of subscription based software are
recognized as such services are performed and are deferred when billed in
advance of the performance of services. Revenues resulting from sales of
comprehensive support, training and technology consulting services are
recognized as such services are performed and are deferred when billed in
advance of the performance of services. Payment for products and services is
collected within a short period of time following transfer of control or
commencement of delivery of services, as applicable. Revenues are presented net
of sales-related taxes.
Reserve for Excess and Obsolete Inventory
Because the value of inventory that will ultimately be realized cannot be known with exact certainty, we rely upon both past sales history and future sales forecasts to provide a basis for the determination of the reserve. Inventory is considered potentially obsolete if we have withdrawn those products from the market or had no sales of the product for the past 12 months and have no sales forecasted for the next 12 months. Inventory is considered potentially excess if the quantity on hand exceeds 12 months of expected remaining usage. The resulting obsolete and excess parts are then reviewed to determine if a substitute usage or a future need exists. Items without an identified current or future usage are reserved in an amount equal to 100% of the first-in first-out cost of such inventory. Our products are subject to changes in technologies that may make certain of our products or their components obsolete or less competitive, which may increase our historical provisions to the reserve. We review these assumptions regularly for all of our inventories which include sales demonstration and service inventories.
Income taxes
We review our deferred tax assets on a regular basis to evaluate their
recoverability based upon expected future reversals of deferred tax liabilities,
projections of future taxable income, and tax planning strategies that we might
employ to utilize such assets, including net operating loss carryforwards. Based
on the positive and negative evidence of recoverability, we establish a
valuation allowance against the net deferred assets of a taxing jurisdiction in
which we operate, unless it is "more likely than not" that we will recover such
assets through the above means. Our evaluation of the need for the valuation
allowance is significantly influenced by our ability to achieve profitability
and our ability to predict and achieve future projections of taxable income.
Significant judgment is required in determining our worldwide provision for
income taxes. In the ordinary course of operating a global business, there are
many transactions for which the ultimate tax outcome is uncertain. We establish
provisions for income taxes when, despite the belief that tax positions are
fully supportable, there remain certain positions that do not meet the minimum
probability threshold as described by FASB ASC Topic 740, which is a tax
position that is more likely than not to be sustained upon examination by the
applicable taxing authority. In the ordinary course of business, we are examined
by various federal, state, and foreign tax authorities. We regularly assess the
potential outcome of these examinations and any future examinations for the
current or prior years in determining the adequacy of our provision for income
taxes. We assess the likelihood and amount of potential adjustments and adjust
the income tax provision, the current tax liability and deferred taxes in the
period in which the facts that gave rise to a revision become known.
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Reserve for guarantees
We establish at the time of sale a liability for the one-year warranty included with the initial purchase price of our products, based upon an estimate of the repair expenses likely to be incurred for the warranty period. The warranty period is measured in installation-months for each major product group. The warranty reserve is included in accrued liabilities in the accompanying consolidated balance sheets. The warranty expense is estimated by applying the actual total repair expenses for each product group in the prior period and determining a rate of repair expense per installation-month. This repair rate is multiplied by the number of installation-months of warranty for each product group to determine the provision for warranty expenses for the period. We evaluate our exposure to warranty costs at the end of each period using the estimated expense per installation-month for each major product group, the number of units remaining under warranty, and the remaining number of months each unit will be under warranty. We have a history of new product introductions and enhancements to existing products, which may result in unforeseen issues that increase our warranty costs. While such expenses have historically been within expectations, we cannot guarantee this will continue in the future.
Impairment of goodwill
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. We do not amortize goodwill; however, we perform an annual review each year, or more frequently if indicators of potential impairment exist (i.e., that it is more likely than not that the fair value of the reporting unit is less than the carrying value), to determine if the carrying value of the recorded goodwill or indefinite lived intangible assets is impaired. Each period, we can elect to perform a qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we believe, as a result of our qualitative assessment, that it is not more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. If we elect to bypass the qualitative assessment option, or if the qualitative assessment was performed and resulted in the Company being unable to conclude that it is not more likely than not that the fair value of a reporting unit containing goodwill is greater than its carrying amount, we will perform the quantitative goodwill impairment test. We perform the quantitative goodwill impairment test by calculating the fair value of the reporting unit using a discounted cash flow method and market approach method, and then comparing the respective fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, we impair goodwill for the excess amount of the reporting unit compared to its fair value, not to be reduced below zero. Management concluded there was no goodwill impairment for the years endedDecember 31, 2021 and 2020. However, during 2019 as a result of this test and under our historical reporting unit structure, the estimated fair value of each of the Photonics reporting unit, which included goodwill recognized with theInstrument Associates, LLC d/b/aNutfield Technology ("Nutfield"),Laser Control Systems Limited ("Laser Control Systems") andLanmark Controls, Inc. ("Lanmark") acquisitions, and the 3D Design reporting unit, which included goodwill recognized with the acquisition of Opto-Tech SRL and its subsidiary Open Technologies SRL (collectively, "Open Technologies"), were determined to be significantly less than the carrying value of such reporting unit, indicating a full impairment. This impairment was driven primarily by historical and projected financial performance lower than our expectations and changes in our go-forward strategy in connection with our new strategic plan. Business Combinations We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based generally on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which include consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Critical estimates are also made in valuing contingent considerations, which represent arrangements to pay former owners based on the satisfaction of performance criteria. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Stock-based compensation
We measure and record compensation expense using the applicable accounting
guidance for share-based payments related to stock options, restricted stock
awards, restricted stock units and market-based awards granted to our directors
and employees. The fair value of stock options, including performance awards,
without a market condition is determined by using the Black-Scholes option
valuation model. The fair value of restricted stock units and stock options with
a market condition is
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estimated, at the date of grant, using the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our stock options, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical and implied volatility of our own common stock while the volatility for our restricted stock units with a market condition is based on the historical volatility of our own stock and the stock of companies within our defined peer group. The expected life of stock options is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date of stock options, these assumptions may be difficult to measure, as they represent future expectations based on historical experience. Further, our expected volatility and expected life may change in the future, which could substantially change the grant-date fair value of future awards of stock options and, ultimately, the expense we record. The fair value of restricted stock, including performance awards, without a market condition is estimated using the current market price of our common stock on the date of grant. We elect to account for forfeitures related to the service condition-based awards as they occur. We expense stock-based compensation for stock options, restricted stock awards, restricted stock units and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with both performance and service conditions, we expense the stock-based compensation on a straight-line basis over the requisite service period for each separately vesting portion of the award, taking into account the probability that we will satisfy the performance condition. Furthermore, we expense awards with a market condition over the three-year vesting period regardless of the value that the award recipients ultimately receive. Our non-employee directors may elect to have their annual cash retainers and annual equity retainers paid in the form of deferred stock units pursuant to the 2014 Equity Incentive Plan and the 2018 Non-Employee Director Deferred Compensation Plan. Each deferred stock unit represents the right to receive one share of our common stock upon the non-employee director's separation of service from the Company. We record compensation cost associated with our deferred stock units over the period of service.
Impact of recently adopted accounting standards
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13, and subsequent related amendments to ASU 2016-13, replace the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We adopted ASU 2016-13 effective as ofJanuary 1, 2020 , and the adoption of the new guidance did not have a material impact on our consolidated financial statements. InDecember 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which amends and aims to simplify accounting disclosure requirements regarding a number of topics including: intraperiod tax allocation, accounting for deferred taxes when there are changes in consolidation of certain investments, tax basis step up in an acquisition and the application of effective rate changes during interim periods, amongst other improvements. We adopted ASU 2019-12 effective as ofJanuary 1, 2021 , and the adoption of the new guidance did not have a material impact on our consolidated financial statements. InOctober 2021 , the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Asset and Contract Liabilities from Contracts with Customers which intends to simplify the accounting for acquired revenue contracts with customers in a business combination and to also remove inconsistencies in this topic related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. ASU No. 2021-08 allows an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in a similar manner to how they are recorded on the acquiree's financial statements at book value. Early adoption is permitted and we early adopted ASU No. 2021-08 in the fourth quarter of 2021. As a result of the early adoption of ASU No.2021-08 we recorded the deferred revenue associated with the acquisition of Holobuilder at its book value of approximately$4.0 million . 42
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