FARO TECHNOLOGIES INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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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Contents

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
$122.0 million and no debt December 31, 2021. We believe that our liquidity position is sufficient to meet our projected needs for the reasonably foreseeable future.

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 ended December 31, 2021 from $303.8 million for the year ended December 31,
2020. Our 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 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 ended December
31, 2021 remaining fairly consistent with the $85.2 million for the year ended
December 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 the U.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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On February 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 ended December 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 ended December 31, 2021 primarily consisting of
severance and related benefits, professional fees and other related charges and
costs.

On July 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's Lake Mary, Florida, Exton, Pennsylvania, and
Stuttgart, 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.
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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 ended December 31, 2021, December 31, 2020, and
December 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 ended December 31, 2021, December 31, 2020, and December 31, 2019,
respectively.

Acquisition of Holobuilder

On June 4, 2021, we acquired all of the outstanding shares of Holobuilder, 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 of December 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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  Table of     Contents

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 $0.1 million for the year ended December 31, 2021 compared to $0.1 million for the year ended December 31, 2020.

Income tax expense (benefit). Income tax expense for the year ended December 31,
2021 was $31.4 million compared with an income tax benefit of $31.4 million for
the year ended December 31, 2020. Our effective tax rate was (366.8)% for the
year ended December 31, 2021 compared to 102.0% for the year ended December 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 ended December 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 in December 2020.

Net (loss) income. Net loss was $40.0 million for the year ended December 31,
2021 compared with net income of $0.6 million for the year ended December 31,
2020, reflecting the impact of the factors described above.


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  Table of     Contents

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 at
December 31, 2021 from $185.6 million at December 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 ended December
31, 2021 compared to $21.4 million of cash provided by operating activities
during the year ended December 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 ended December 31, 2021 was
$45.7 million compared with cash flows provided by investing activities of $13.9
million during the year ended December 31, 2020. The change was primarily due to
$33.8 million used in the acquisition of Holobuilder during the year ended
December 31, 2021, as compared to the maturity of U.S. Treasury Bills amounting
to $25.0 million during the year ended December 31, 2020 without such activity
during the year ended December 31, 2021.

Cash flows provided by financing activities during the year ended December 31,
2021 was $1.6 million compared with $11.1 million during the year ended December
31, 2020. The change was primarily due to less proceeds from fewer exercises of
stock options during the year ended December 31, 2021 as compared to during the
year ended December 31, 2020 .
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Of our cash and cash equivalents, $95.2 million was held by foreign subsidiaries
as of December 31, 2021. On December 22, 2017, the United States enacted the
U.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 the U.S. Tax Cuts and Jobs Act, the Company can
repatriate foreign earnings and profits to the U.S. with minimal U.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.

On November 24, 2008, our Board of Directors approved a $30.0 million share
repurchase program. Subsequently, in October 2015, our Board of Directors
authorized an increase to the existing share repurchase program from $30.0
million to $50.0 million. In December 2018, our Board of Directors authorized
management to utilize the share repurchase program, beginning January 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 ended December 31, 2021, 2020 and 2019 under this program. As of December
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 the SEC'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.
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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 ended December 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 the Instrument Associates, LLC d/b/a Nutfield
Technology ("Nutfield"), Laser Control Systems Limited ("Laser Control Systems")
and Lanmark 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

In June 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 of January 1, 2020, and the adoption of the
new guidance did not have a material impact on our consolidated financial
statements.

In December 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 of January 1, 2021, and the
adoption of the new guidance did not have a material impact on our consolidated
financial statements.

In October 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.


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