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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-3157093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
125 TECHNOLOGY PARK DRIVE, LAKE MARY, FLORIDA 32746
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 407-333-9911
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of May 12,
2004 was 13,654,512.
1
FARO TECHNOLOGIES, INC.
Form 10-Q
For the Quarter Ended April 3, 2004
INDEX
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements ------
a) Consolidated Balance Sheets
As of April 3, 2004 and December 31, 2003.......................3
b) Consolidated Statements of Operations
For the Three Months Ended April 3, 2004 and March 29, 2003.......4
c) Consolidated Statements of Cash Flows
For the Three Months Ended April 3, 2004 and March 29, 2003.....5
d) Notes to Consolidated Financial Statements.....................6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........17
Item 4. Controls and Procedures.............................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................19
Item 6. Exhibits and Reports on Form 8-K....... ............................20
SIGNATURES....................................................................21
CERTIFICATIONS.............................................................22-25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 3, December 31,
2004 2003
------------ ------------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 10,855,321 $ 17,424,901
Short-term investments 22,085,000 16,037,208
Accounts receivable, net of allowance
for doubtful receivables of
$ 445,698 and $ 254,915 14,240,455 16,312,978
Inventories, net 16,868,645 14,771,792
Deferred tax asset - Current 564,841 564,841
Prepaid expenses and other current assets 1,734,173 1,465,690
------------ ------------
Total current assets 66,348,435 66,577,410
------------ ------------
PROPERTY AND EQUIPMENT
Machinery and equipment 6,090,906 5,612,391
Furniture and fixtures 2,597,152 2,552,766
Leasehold improvements 838,881 626,858
------------ ------------
Property, plant and equipment at cost 9,526,939 8,792,015
Less accumulated depreciation and amortization (6,324,203) (6,038,658)
------------ ------------
Property, plant and equipment, net 3,202,736 2,753,357
------------ ------------
Intangible assets 24,557,897 25,130,684
Less accumulated amortization (13,205,040) (13,691,309)
------------ ------------
Intangible assets, net 11,352,857 11,439,375
Deferred tax asset-net 1,212,944 1,143,746
------------ ------------
Total Assets $ 82,116,972 $ 81,913,888
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 40,807 $ 42,584
Accounts payable 3,851,723 4,713,512
Accrued liabilities 3,853,826 4,776,778
Income taxes payable 125,469 605,456
Current portion of unearned service revenues 2,223,964 2,206,167
Customer deposits 111,719 363,346
------------ ------------
Total current liabilities 10,207,508 12,707,843
Unearned Service Revenues - less current portion 409,620 220,296
Long-term debt - less current portion 59,007 64,650
------------ ------------
Total Liabilities 10,676,135 12,992,789
------------ ------------
Shareholders Equity:
Common stock - par value $.001, 50,000,000
shares authorized; 13,595,070 and
13,518,998 issued 13,555,070 and
13,478,998 outstanding, respectively 13,595 13,519
Additional paid-in-capital 76,460,381 75,133,219
Unearned compensation (731,553) (226,954)
Accumulated deficit (3,005,521) (5,853,929)
Other comprehensive loss (1,145,440) 5,869
Common stock in treasury, at cost - 40,000 shares (150,625) (150,625)
------------ ------------
Total shareholders' equity 71,440,837 68,921,099
------------ ------------
Total Liabilities and Shareholders Equity $ 82,116,972 $ 81,913,888
============ ============
See accompanying notes to consolidated financial statements
3
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
APR 3, MAR 29,
2004 2003
------------ ------------
SALES $ 21,025,192 $ 13,404,265
COST OF SALES 7,561,357 5,899,580
------------ ------------
Gross profit 13,463,835 7,504,685
OPERATING EXPENSES:
Selling 5,562,695 3,787,438
General and administrative 2,529,383 1,750,566
Depreciation and amortization 556,759 588,653
Research and development 1,441,412 877,468
Employee stock options 37,477 41,448
------------ ------------
Total operating expenses 10,127,726 7,045,573
------------ ------------
INCOME (LOSS) FROM OPERATIONS 3,336,109 459,112
------------ ------------
OTHER INCOME (EXPENSES)
Interest income 73,564 2,665
Other income, net 206,129 115,739
Interest expense (2,142) (15,897)
------------ ------------
NET INCOME BEFORE INCOME TAX 3,613,660 561,619
INCOME TAX EXPENSE 765,252 72,255
------------ ------------
NET INCOME $ 2,848,408 $ 489,364
============ ============
NET INCOME PER SHARE - BASIC $ 0.21 $ 0.04
============ ============
NET INCOME PER SHARE - DILUTED $ 0.20 $ 0.04
============ ============
See accompanying notes to consolidated financial statements
4
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------
April 3, March 29,
2004 2003
------------ ------------
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net income 2,848,408 $ 489,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 556,759 588,653
Provision for bad debts 195,660 41,927
Provision for inventory losses 705,000 96,249
Deferred income taxes 69,158 --
Employee stock options -- 41,448
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,976,772 639,144
Income taxes refundable --
Inventories (1,566,384) (1,614,265)
Prepaid expenses and other assets (302,261) 386,757
Increase (decrease) in:
Accounts payable and accrued liabilities (1,662,778) (214,917)
Income taxes payable (480,600) 47,258
Customer deposits (249,260) 181,578
Deferred revenues 272,645 248,685
------------ ------------
Net cash provided by operating activities 2,363,119 931,881
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (810,796) (486,251)
Payments for Intangible assets (210,985) (759,879)
Purchases of Investments (6,047,792) (29,556)
------------ ------------
Net cash used in investing activities (7,069,573) (1,275,686)
------------ ------------
FINANCING ACTIVITIES:
Borrowings under line of credit -- 14,733
Payments of long-term debt, capital
lease obligations and notes payable (9,824) (8,356)
Proceeds from issuance of stock, net 175,246 20,074
------------ ------------
Net cash provided by financing activities 165,422 26,451
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,028,548) 1,214,620
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,569,580) 897,266
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,424,901 4,023,615
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,855,321 $ 4,920,881
============ ============
See accompanying notes to consolidated financial statements
5
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the three months ended April 3, 2004 and March 29, 2003
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
FARO Technologies, Inc. and subsidiaries develop, manufacture, market and
support computer-based manufacturing measurement and inspection equipment and
related software.
The consolidated financial statements include the accounts of FARO
Technologies, Inc. and all wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated. The financial statements of foreign subsidiaries have been
translated into U.S. dollars using the current exchange rates in effect at each
balance sheet date, for assets and liabilities, and the average exchange rates
during each reporting period, for results of operations. Adjustments resulting
from translation of the financial statements are reflected as a separate
component of comprehensive loss in shareholders' equity.
NOTE B - BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated balance sheets
and related interim consolidated statements of operations, and cash flows
include all adjustments, consisting only of normal recurring items, necessary
for their fair presentation in conformity with accounting principles generally
accepted in the United States ("GAAP"). Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Actual results and outcomes may
differ from these estimates and assumptions.
The consolidated results of operations for the three months ended April 3,
2004 are not necessarily indicative of results that may be expected for the year
ending December 31, 2004. The information included in this Form 10-Q (including
the interim consolidated financial statements and notes that accompany these
financial statements) should be read in conjunction with the audited
consolidated financial statements reported as of December 31, 2003 and 2002, and
for each of the three years included in the Company's 2003 Annual Report on Form
10-K.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities ("VIE's") created after January 31, 2003, and to VIE's in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003 to VIE's in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 applies to public enterprises as of the beginning of the applicable
interim or annual period. The Company currently has no interest in any VIE.
6
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure (FAS 148). FAS 148 amends an earlier standard on accounting for
stock-based compensation, FAS 123, Accounting for Stock-Based Compensation (FAS
123), to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require more
prominent disclosure about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
additional disclosure requirements of FAS 148 are effective for fiscal years
ending after December 15, 2002.
The Company continues to follow the intrinsic value method of accounting
as prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, to account for employee stock options issued.
The following table illustrates the effects on net income (loss) and
earnings per share if the Company had applied the fair value recognition
provisions of FAS 123 to stock-based employee compensation.
Three Months Ended
Apr 3, 2004 Mar 29, 2003
---------- -----------
Net income, as reported $2,848,408 $ 489,364
Add: Stock-based employee
compensation expense included
in reported net income,
net of related tax effects 24,360 26,967
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects (148,483) (47,237)
---------- -----------
Pro forma net income $2,724,285 $ 469,094
========== ===========
Earnings Per share:
Basic - as reported $ 0.21 $ 0.04
========== ===========
Basic - Pro forma $ 0.20 $ 0.04
========== ===========
Diluted - as reported $ 0.20 $ 0.04
========== ===========
Diluted - Pro forma $ 0.19 $ 0.04
========== ===========
NOTE C - CASH AND CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents - We consider cash on hand, and amounts on
deposit with financial institutions, which have original maturities of three
months or less, to be cash and cash equivalents. All short-term investments in
debt securities which have maturities of three months or less are classified as
cash and equivalents, and carried at market value based upon the quoted market
prices of those investments at each respective balance sheet date. Amounts
classified as short-term investments are securities which will mature in less
than one year.
Investments - Short-term investments ordinarily consist of short-term debt
securities acquired with cash not immediately needed in operations. Such amounts
have maturities not exceeding one year. Investments ordinarily consist of debt
securities acquired with cash not immediately needed in operations. Such amounts
have maturities of at least one year.
7
Investments consisted of the following:
As of As of
Apr 3, 2004 Dec 31, 2003
----------------- -----------------
Corporate bonds $ - $ 432,153
Money market funds 120,000 -
Commercial paper 21,965,000 15,605,055
----------------- -----------------
$ 22,085,000 $ 16,037,208
================= =================
Supplemental Cash Flow Information - Selected cash payments and non cash
activities were as follows:
THREE MONTHS ENDED
---------------------------------------
APRIL 3, MARCH 29,
2004 2003
----------------- -----------------
Cash paid for interest $ 2,142 $ 14,732
================= =================
NOTE D - INVENTORIES
Inventories consist of the following:
AS OF APRIL 3, AS OF DECEMBER 31,
2004 2003
----------------- -----------------
Raw materials $ 5,288,707 $ 5,624,061
Work-in-process 849,474 352,104
Finished goods 2,832,366 1,589,759
Sales/service 8,226,754 7,360,515
Allowance for
inventory obsolesence (328,656) (154,647)
----------------- -----------------
$ 16,868,645 $ 14,771,792
================= =================
NOTE E - EARNINGS (LOSS) PER SHARE
A reconciliation of the number of common shares used in the calculation of
basic and diluted earnings per share ("EPS") is presented below:
THREE MONTHS ENDED
-----------------------------------------------
APRIL 3, 2004 MARCH 29, 2003
--------------------- ---------------------
PER-SHARE PER-SHARE
SHARES AMOUNT SHARES AMOUNT
--------------------- ---------------------
Basic EPS 13,522,921 $0.21 11,893,037 $0.04
Effect of dilutive securities 557,182 ($0.01) 203,602 $0.00
---------- ------ ---------- -----
Diluted EPS 14,080,103 $0.20 12,096,639 $0.04
========== ====== ========== ======
8
NOTE F - INCOME TAX EXPENSE
The tax provision for the three months ended April 3, 2004 differs from
the tax provision for the three months ended March 29, 2003, principally due to
increases in earnings. The effective tax rate of 21.2% is lower than current
federal statutory corporate rates primarily due to the use of previously
reserved net operating loss carry-forwards in Europe.
At April 3, 2004 the Company has deferred income tax assets of
approximately $2.7 million (including $2.2 million related to the U.S.
operations and $0.5 million related to foreign operations), which are offset by
a valuation allowance of approximately $0.5 million. These deferred income tax
assets are primarily attributable to net operating loss carry-forwards and
intangible assets for which future income tax benefits may be realized.
NOTE G - SEGMENT GEOGRAPHIC DATA
The Company develops, manufactures, markets and supports computer-based
manufacturing measurement and inspection equipment and related software. This
one line of business represents more than 98% of consolidated sales and is the
Company's only segment. The Company operates through sales teams established by
geographic regions, each team is equipped to deliver the entire line of Company
products to customers within its geographic area.
The following table presents sales information by the geographic region of
the customer:
THREE MONTHS ENDED
---------------------------------------
APRIL 03, 2004 MARCH 29, 2003
----------------- -----------------
SALES
Americas Region $ 8,531,042 $ 5,395,396
Europe/Africa Region 10,091,323 6,087,942
Asia Pacific Region 2,402,827 1,920,927
----------------- -----------------
TOTAL $ 21,025,192 $ 13,404,265
================= =================
NOTE H - COMPREHENSIVE INCOME
Comprehensive income includes the effect of currency translation
adjustments on the investments in (capitalization of) foreign subsidiaries
combined with the earnings (loss) from operations.
THREE MONTHS ENDED
------------------------------------
APR 3 MAR 29
2004 2003
------------------ -----------------
NET INCOME 2,848,408 489,364
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments (1,151,309) 663,592
------------------ -----------------
COMPREHENSIVE INCOME 1,697,099 1,152,956
================== =================
9
NOTE I - Credit Facility
On September 17, 2003 the Company established a $5 million revolving
credit facility with SunTrust Bank. This agreement, due to mature on September
16, 2004, bears an interest rate, at the borrower's option, of either the bank's
prime lending rate or the adjusted LIBOR rate, plus 1.75%. As of April 3, 2004,
there were no borrowings under this line of credit.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this Form 10-Q, and the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's 2003
Annual Report, Form 10-K, for the year ended December 31, 2003.
This report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements, other than
statements of historical fact, about our plans, beliefs, goals, intentions,
objectives, projections, expectations, assumptions, strategies, and future
events are forward-looking statements. Words such as "may," "will," "believe,"
"plan," "should," "could," "seek," "expect," "anticipate," "intend," "estimate,"
"goal," "objective" and similar words, or discussions of strategy or other
intentions identify forward-looking statements. Other written or oral
statements, which constitute forward-looking statements, also may be made by the
Company from time to time. Forward-looking statements are subject to a number of
known and unknown risks, uncertainties, and other factors that could cause
actual results to differ materially from those contemplated by such
forward-looking statements. Consequently, you should not place undue reliance on
these forward-looking statements. We do not intend to update any forward-looking
statements, whether as a result of new information, future events, or otherwise.
Important factors that could cause a material difference in the actual
results from those contemplated in such forward-looking statements include among
others the following:
o our inability to maintain historical sales growth rates,
o our inability to maintain or reduce operating expenses or maintain
our historical gross margin,
o difficulties in ramping up production in our new manufacturing
facility in Switzerland and completing the opening and staffing of
our sales office in China,
o our inability to further penetrate our customer base;
o development by others of new or improved products, processes or
technologies that make our products obsolete or less competitive;
o our inability to maintain our technological advantage by developing
new products and enhancing our existing products;
o the cyclical nature of the industries of our customers and the
financial condition of our customers;
o the inability to protect our patents and other proprietary rights in
the United States and foreign countries and the assertion of
infringement claims against us;
o fluctuations in our annual and quarterly operating results as a
result of (i) the size and timing of customer orders, (ii) the
amount of time that it takes to fulfill orders and ship our
products, (iii) the length of our sales cycle to new customers and
the time and expense incurred in further penetrating our existing
customer base, (iv) increases in operating expenses required for
product development and new product marketing, (v) costs associated
with new product introductions, such as assembly line start-up costs
and low introductory period production volumes, (vi) the timing and
market acceptance of new products and product enhancements, (vii)
customer order deferrals in anticipation of new products and product
enhancements, (viii) our success in expanding our sales and
marketing programs, (ix) start-up costs associated with opening new
sales offices outside of the United States, (x) fluctuations in
revenue and without proportionate adjustments in fixed costs, (xi)
the efficiencies achieved in managing inventories and fixed assets;
and (xii) adverse changes in the manufacturing industry and general
economic conditions;
11
o the inability of our products displacing traditional measurement
devices and attain broad market acceptance;
o the impact of competitive products and pricing in the CAM2 market
and the broad market for measurement and inspection devices;
o risks associated with expanding international operations, such as
fluctuations in currency exchange rates, difficulties in staffing
and managing foreign operations, political and economic instability,
and the burdens of complying with a wide variety of foreign laws and
labor practices;
o the loss of our Chief Executive Officer or our Executive Vice
President and Chief Financial Officer or other key personnel;
o our inability to identify, consummate, or achieve expected benefits
from acquisitions;
o the failure to effectively manage our growth;
o the loss of a key supplier and the inability to find a sufficient
alternative supplier in a reasonable period or on commercially
reasonable terms;
o other risks detailed in our Annual Report on Form 10-K and other
filings from time to time with the Securities and Exchange
Commission.
The consolidated financial statements include the accounts of FARO
Technologies, Inc. and all wholly owned subsidiaries (collectively, the
"Company"). All significant inter-company transactions and balances have been
eliminated. The financial statements of the foreign subsidiaries have been
translated into U.S. dollars using current exchange rates in effect at each
balance sheet date, for assets and liabilities and average exchange rates during
each reporting period for results of operations. Adjustments resulting from
translation of financial statements are reflected as a separate component of
accumulated comprehensive income (loss) in shareholders' equity.
OVERVIEW
The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the Faro Arm and Faro Gage articulated arm measuring devices, the Faro Laser
Tracker, a laser-based measuring device and their companion CAM2 software, which
provide for CAD-based inspection and factory-level statistical process control.
Together, these products integrate the measurement and quality inspection
function with CAD software to improve productivity, enhance product quality and
decrease rework and scrap in the manufacturing process. The Company's products
bring precision measurement, quality inspection and specification conformance
capabilities, integrated with leading CAD software, to the factory floor. The
Company is a pioneer in the development and marketing of 3-D measurement
technology in manufacturing and industrial applications and currently holds 33
patents. The Company's products have been purchased by approximately 3,500
customers worldwide, ranging from small machine shops to such large
manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British
Aerospace, Caterpillar, DaimlerChrysler, General Electric, General Motors,
Honda, Johnson Controls, Komatsu Dresser, Lockheed Martin, Siemens and
Volkswagen among many others.
In 1995, the Company made a strategic decision to target international
markets. The Company established sales offices in France and Germany in 1996,
Great Britain in 1997, Japan and Spain in 2000, Italy in 2001, and China in
2003. International sales represented 47.3%, 57.0%, and 59.1% of sales in 2003,
2002, and 2001, respectively. The Company expects higher percentage sales growth
in the Asia Pacific region than other regions in 2004 and 2005 as a result of
opening its China sales office, and the addition of sales personnel and the
opening of a service center in its Japan organization.
12
The Company derives revenues primarily from the sale of its Faro Arm and
Faro Laser Tracker 3-D measurement equipment, and its related multi-faceted CAM2
software. Going forward, the Company also expects to generate revenue from the
sale of its new Faro Gage product. Revenue related to these products is
recognized upon shipment. In addition, the Company sells one, two and three-year
maintenance contracts and training and technology consulting services relating
to its products. The Company recognizes the revenue from extended maintenance
contracts proportionately, in the same manner as costs are incurred for such
revenues. The Company also receives royalties from licensing agreements for its
historical medical technology and recognizes the revenue from these royalties as
licensees report use of the technology. In 2003 royalties from licensing
agreements were $601,000, or 0.8% of total sales.
In 2003 the Company began to manufacture its Faro Arm products in
Switzerland for customer orders from Europe and Asia. It will begin to
manufacture its Faro Laser Tracker and Faro Gage products in its Swiss plant by
mid 2004. The production of these products for customer orders from the Americas
will be done in the Company's headquarters in Florida, and its manufacturing
plant in Pennsylvania. The Company expects all its existing plants to provide
the necessary capacity for its growth, at least through 2005.
Cost of sales consists primarily of material, production overhead and
labor. Since the Company's IPO in 1997, gross margin has been in the range
54-64%. The Company expects to maintain gross margin at or near 60% going
forward. Selling expenses consist primarily of salaries and commissions to sales
and marketing personnel, and promotion, advertising, travel and
telecommunications. Selling expenses as a percentage of sales dropped
significantly in 2003 as compared to 2002, to 25.6% from 30.0% and holding
selling expenses as a percentage of sales to 25% or less will be a long-term
goal of the Company, although the addition of new sales personnel in Asia may
temporarily cause a rise in selling expenses as a percentage of sales in 2004
until these new sales people are fully trained and productive.
General and administrative expenses consist primarily of salaries for
administrative personnel, rent, utilities and professional and legal expenses.
The Company expects general and administrative expenses to drop as a percentage
of sales as higher sales should not require a proportionate increase in these
expenses. Research and development expenses represent salaries, equipment and
third-party services. The Company has a commitment to ongoing research and
development and intends to continue to fund these efforts at the level of 5-7%
of sales going forward.
The Company has received a favorable income tax rate commitment from the
Swiss government as an incentive for the Company to establish a manufacturing
plant there. As a result the Company expects its blended (consolidated) tax rate
to be in a range between 25% and 30% of consolidated taxable income for at least
2004 and 2005.
Accounting for wholly owned foreign subsidiaries is maintained in the
currency of the respective foreign jurisdiction and, therefore, fluctuations in
exchange rates may have an impact on inter-company accounts reflected in the
Company's consolidated financial statements. The Company is aware of the
availability of off-balance sheet financial instruments to hedge exposure to
foreign currency exchange rates, including cross-currency swaps, forward
contracts, and foreign currency options (see Foreign Exchange Exposure below).
However the Company does not regularly use such instruments.
13
During fiscal years 2002 and 2001, the Company's sales growth was
adversely affected by the economic slowdown, which began in 2001 in the United
States and Europe. This effect, however, was offset by sales growth resulting
from the acquisition in January 2002 of SpatialMetrix Corporation (SMX), which
manufactured the predecessor to the Faro Laser Tracker, and the introduction in
September and October 2002 of the latest generation of the Company's traditional
Faro Arm product. In 2003 sales growth resulted primarily from strong customer
response to the new Faro Arm and Laser Tracker products, and an increase in
worldwide sales and marketing activities, including an increase in headcount
from 106 in 2002 to 120 at the end of 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 2004 COMPARED TO THREE MONTHS ENDED MARCH 29, 2003
Sales increased by $7.6 million or 56.7%, from $13.4 million for the three
months ended March 29, 2003 to $21 million for the three months ended April 3,
2004. This increase resulted primarily from higher unit sales of the Faro Arm
and Laser Tracker products. Sales increased $3.1 million in the Americas, $4.0
million in Europe/Africa and $0.5 million in the Asia Pacific region.
Gross profit increased by $6.0 million or 80.0%, from $7.5 million for the
three months ended March 29, 2003 to $13.5 million for the three months ended
April 3, 2004. Gross margin percentage increased to 64.3% for the three months
ended April 3, 2004 from 56.0% for the three months ended March 29, 2003. Gross
margin increased primarily due to lower service costs, the effect of higher
volume on fixed overhead and smaller price discounts.
Selling expenses increased by $1.8 million or 47.4%, from $3.8 million for
three months ended March 29, 2003 to $5.6 million for the three months ended
April 3, 2004. This increase was due primarily to increased sales commissions,
salaries, and marketing expenses. As a percentage of sales, selling expenses
dropped to 26.7% of sales in the three months ended April 3, 2004 from 28.3% in
the three months ended March 29, 2003.
General and administrative expenses increased by $779,000 or 43.3 %, from
$1.8 million for the three months ended March 29, 2003 to $2.5 million for the
three months ended April 3, 2004. The increase was primarily in the United
States. Increases were in accrued performance bonuses ($164,000), salary
increases due to increased headcount ($114,000) and an increase in the provision
for bad debts ($112,000). General and administrative expenses in Europe
accounted for most of the remaining increase, due to higher professional fees in
Germany ($80,000) and the beginning of the Swiss operations ($100,000). General
and administrative expenses as a percentage of sales fell to 11.9% for the three
months ended April 3, 2004 from 13.4% for the three months ended March 29, 2003.
Depreciation and amortization expenses decreased by $32,000 or 5.4% from
$589,000 for the three months ended March 29, 2003 to $557,000 for the three
months ended April 3, 2004, due to a reduction in amortization of existing
product technology of $172,000, offset by an increase of $140,000 in
depreciation of new equipment and amortization of newly acquired intangibles.
Research and development expenses increased by $564,000 or 64.3%, from
$877,000 for the three months ended March 29, 2003 to $1.4 million for the three
months ended April 3, 2004. Increased costs were due primarily to higher payroll
costs and new project expenses in the U.S.
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Employee Stock Option expenses decreased by $4,000 from $41,000 for the
three months ended March 29, 2003 to $37,000 for the 3 months ended April 3,
2004.
Interest income increased by $71,000 from $3,000 for the three months
ended March 29, 2003, to $74,000 for the three months ended April 3, 2004. The
increase was primarily attributable to an increase of $20.2 million in interest
bearing investments from $1.9 million at March 29, 2003 to $22.1 million at
April 3, 2004.
Other income and expense increased by $90,000 from $116,000 for the three
months ended March 29, 2003 to $206,000 for the three months ended April 3, 2004
due primarily to favorable foreign exchange conversion.
Income tax expense increased by $693,000 from $72,000 for the three months
ended March 29, 2003 to $765,000 for the three months ended April 3, 2004. This
increase is primarily due to significant increases in taxable income in the
United States and Japan, partially offset by the utilization of net operating
losses in Europe, for which an allowance had previously been recorded.
Net income increased by $2.4 million from $0.5 million for the three
months ended March 29, 2003 to $2.9 million for the three months ended April 3,
2004 as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
On November 12, 2003, the Company sold 1,158,000 shares of its common
stock to certain institutional investors in a private placement. The shares were
sold for $21.50 per share, resulting in total proceeds before placement agent
fees and other offering expenses of $24.9 million. Total marketable securities
(cash and cash equivalents, short-term investments and investments) were
approximately $32.9 million at April 3, 2004 compared with approximately $33.5
million on December 31, 2003.
Cash flow from operations was approximately $2.4 million in the first
three months of 2004, an increase of approximately $1.4 million from the first
three months of the prior year. The increase reflects strong growth in sales and
operating income, partially offset by decreases in inventories, accounts
payable, and taxes.
Cash used in investing activities was approximately $7.1 million in the
first three months of 2004, an increase of approximately $5.8 million from the
first three months of the prior year, primarily reflecting the purchase of
capital equipment ($800,000) and the deployment of cash balances to short-term
commercial paper ($6.1 million) in the first quarter of 2004.
Cash provided by financing activities was approximately $165,000 in the
first three months of 2004, an increase of approximately $139,000 from the first
three months of the prior year, reflecting the proceeds from the exercise of
stock options.
Principal commitments at April 3, 2004 consisted of leases on the
Company's offices and manufacturing facilities, and purchase orders for goods
related to manufacturing. There were no material commitments for capital
expenditures as of that date.
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The Company believes that its cash, investments, borrowings and cash flows
from operations should be sufficient to satisfy its working capital and capital
expenditure needs for the foreseeable future. The Company has no material
long-term debt. On September 17, 2003 the Company established a new $5 million
revolving credit facility with SunTrust Bank. This agreement is due to mature on
September 16, 2004 and bears an interest rate, at the borrower's option, of
either the bank's Base rate or the adjusted LIBOR rate, plus 1.75%. No amounts
were outstanding under this line of credit on April 3, 2004.
CRITICAL ACCOUNTING POLICIES
In response to the SEC'S financial reporting release, FR-60, Cautionary
Advice Regarding Disclosure About Critical Accounting Policies, we have selected
our most subjective accounting estimation processes for purposes of explaining
the methodology used in calculating the estimate in addition to any inherent
uncertainties pertaining to the estimate and the possible effects on the
Company's financial condition. The estimation processes discussed below are the
Company's process of recognizing research and development expenditures, the
allowance for obsolete and slow-moving inventory, the allowance for doubtful
accounts, and the reserve for warranties. These estimation processes affect
current assets and operating results and are therefore critical in assessing the
financial and operating status of the Company. These estimates involve certain
assumptions that if incorrect, could create an adverse impact on the Company's
operations and financial position.
RESEARCH AND DEVELOPMENT
Costs are incurred in the discovery of new knowledge and the resulting
translation of this new knowledge into plans and designs for new products. Prior
to the attainment of the related products' technological feasibility, these
costs are recorded as expenses in the period incurred. Product design costs
incurred in the development of products after technological feasibility is
attained are capitalized and amortized using the straight-line method over the
estimated economic lives of the related products, not to exceed three years. The
Company considers technological feasibility to be established when the Company
has completed all planning, designing, coding and testing activities that are
necessary to establish design specifications including function, features and
technical performance requirements. Capitalization of product design costs
ceases and amortization of such costs begins when the product is available for
general release to customers. The Company periodically assesses the value of
capitalized product design costs and records a reserve for obsolescence or
impairment when, in the circumstances (including the discontinuance or probable
discontinuance of the related products from the market), it deems the asset to
be obsolete or impaired.
THE RESERVE FOR OBSOLETE AND SLOW-MOVING INVENTORY
Since the amount of inventoriable cost that the Company will truly recoup
through sales cannot be known with exact certainty, the Company relies upon both
past sales experience and future sales forecasts. Inventory is considered
obsolete if the Company has withdrawn those products from the market or if the
Company has had no sales of the product for the past 12 months, and has no sales
forecasted for the next 12 months. Accordingly, an allowance in an amount equal
to 100% of the average cost of such inventory is recorded. The Company
classifies as "slow-moving", inventory with on-hand quantities greater than the
amounts sold in the past 12 months or which have been forecasted to sell in the
next 12 months, and reserves such an amount adequate to reduce the carrying
value to net realizable value.
THE RESERVE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing evaluations of its customers and adjusts
their credit ratings accordingly. The Company continuously monitors collections
and payments from its customers and maintains a provision for un-collectible
amounts based on its historical experience and any other issues it has
identified. While such credit losses have historically been within its
expectations, the Company cannot guarantee this will continue in the future.
THE RESERVE FOR WARRANTIES
The Company relies upon its service data to determine the adequacy of its
warranty reserve. The Company uses the service frequencies and history to
evaluate the future service requirements. The Company continuously monitors this
data to ensure that the reserve is sufficient. While such expenses have
historically been within its expectations, the Company cannot guarantee this
will continue in the future.
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TRANSACTIONS WITH RELATED AND OTHER PARTIES
The Company leases its headquarters from Xenon Research, Inc. ("Xenon"),
all of the issued and outstanding capital stock of which is owned by Simon Raab,
the Company's President and Chief Executive Officer, and Diana Raab, his spouse.
The term of the lease expires on February 28, 2006, with two five-year renewal
options. The base rent during renewal periods will reflect changes in the U.S.
Bureau of Labor Statistics, Consumer Price Index for all Urban Consumers.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations in recent years and it does not expect inflation to have a
material impact on its operations in 2004.
FOREIGN EXCHANGE EXPOSURE
The Company conducts a significant portion of its business outside the United
States. At present, approximately 50% of the Company's revenues are invoiced,
and a significant portion of its operating expenses paid, in foreign currencies.
Fluctuations in exchange rates between the U.S. dollar and such foreign
currencies may have a material adverse effect on the Company's business, results
of operations and financial condition, and could specifically result in foreign
exchange gains and losses. The impact of future exchange rate fluctuations on
the results of the Company's operations cannot be accurately predicted. To the
extent that the percentage of the Company's non-U.S. dollar revenues derived
from international sales increases (or decreases) in the future, the Company's
exposure to risks associated with fluctuations in foreign exchange rates may
increase (or decrease).
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference herein
from the section of this Report in Part I, Item 2, under the captions
"Inflation" and "Foreign Exchange Exposure", above.
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ITEM 4. - CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic SEC reports.
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PART II. OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine litigation arising in the ordinary course of business. The Company does
not believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations.
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ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits:
31(a) Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31(b) Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32(a) Certification of the Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32(b) Certification of the Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
b.) Reports on Form 8-K
On January 13, 2004, the Company filed a Current Report on Form 8-K in
connection with a press release announcing its sales results for the year
ended December 31, 2003.
On March 15, 2004, the Company filed a Current Report on Form 8-K in
connection with a press release announcing its results of operations for
the quarter and year ended December 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2004 FARO TECHNOLOGIES, INC.
(Registrant)
By: /S/ Gregory A. Fraser
---------------------------
Gregory A. Fraser
Executive Vice President,
Secretary and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
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