Board of Directors and Shareholders
FARO Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of FARO Technologies, Inc. (a Florida corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FARO Technologies Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2015 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP Orlando, Florida
February 25, 2015
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2014
December 31, 2013 ASSETS
Current assets:
Cash and cash equivalents . . . $109,289 $124,630 Short-term investments . . . 64,995 64,994 Accounts receivable, net . . . 83,959 66,309 Inventories, net . . . 59,334 48,940 Deferred income taxes, net . . . 5,936 4,601 Prepaid expenses and other current assets . . . 17,021 14,645 Total current assets . . . 340,534 324,119 Property and equipment:
Machinery and equipment . . . 45,254 36,924 Furniture and fixtures . . . 6,156 6,888 Leasehold improvements . . . 19,676 11,765 Property and equipment at cost . . . 71,086 55,577 Less: accumulated depreciation and amortization . . . (41,741) (39,126)
Property and equipment, net . . . 29,345 16,451 Goodwill . . . 19,205 19,358 Intangible assets, net . . . 9,109 8,112 Service inventory . . . 20,646 19,033 Deferred income taxes, net . . . 6,624 4,423 Total assets . . . $425,463 $ 391,496 LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . $ 15,437 $ 14,881 Accrued liabilities . . . 26,127 20,141 Income taxes payable . . . - 1,690 Current portion of unearned service revenues . . . 23,572 21,331 Customer deposits . . . 2,046 2,910 Total current liabilities . . . 67,182 60,953 Unearned service revenues - less current portion . . . 13,799 13,414 Deferred income tax liability . . . - 1,171 Other long-term liabilities . . . 628 8 Total liabilities . . . 81,609 75,546 Commitments and contingencies - See Note 12
Shareholders’ equity:
Preferred stock - par value $0.01, 10,000,000 shares authorized; none
issued . . . - -Common stock - par value $.001, 50,000,000 shares authorized;
17,997,665 and 17,868,372 issued; 17,317,430 and 17,188,137
outstanding, respectively . . . 18 18 Additional paid-in capital . . . 200,090 191,874 Retained earnings . . . 159,516 125,867 Accumulated other comprehensive (loss) income . . . (6,695) 7,266 Common stock in treasury, at cost - 680,235 shares . . . (9,075) (9,075) Total shareholders’ equity . . . 343,854 315,950 Total liabilities and shareholders’ equity . . . $425,463 $ 391,496
The accompanying notes are an integral part of these consolidated financial statements.
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(in thousands, except share and per share data) 2014 2013 2012
SALES
Product . . . $ 284,147 $ 238,841 $ 227,905 Service . . . 57,679 52,943 45,490 Total sales . . . 341,826 291,784 273,395 COST OF SALES
Product . . . 114,994 97,630 94,103 Service . . . 37,918 32,261 29,673 Total cost of sales (exclusive of depreciation and
amortization, shown separately below) . . . 152,912 129,891 123,776 GROSS PROFIT . . . 188,914 161,893 149,619 OPERATING EXPENSES
Selling and marketing . . . 80,157 71,689 64,446 General and administrative . . . 36,479 30,600 29,065 Depreciation and amortization . . . 7,428 7,038 6,976 Research and development . . . 27,510 22,412 17,578 Total operating expenses . . . 151,574 131,739 118,065 INCOME FROM OPERATIONS . . . 37,340 30,154 31,554 OTHER (INCOME) EXPENSE
Interest income . . . (96) (74) (160) Other (income) expense, net . . . (94) 1,357 744 Interest expense . . . 8 9 28
INCOME BEFORE INCOME TAX EXPENSE . . . 37,522 28,862 30,942
INCOME TAX EXPENSE . . . 3,873 7,353 7,944 NET INCOME . . . $ 33,649 $ 21,509 $ 22,998 NET INCOME PER SHARE - BASIC . . . $ 1.95 $ 1.26 $ 1.36 NET INCOME PER SHARE - DILUTED . . . $ 1.93 $ 1.25 $ 1.34 Weighted average shares - Basic . . . 17,247,727 17,087,104 16,910,830 Weighted average shares - Diluted . . . 17,416,453 17,241,115 17,129,128
The accompanying notes are an integral part of these consolidated financial statements.
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31,
(in thousands) 2014 2013 2012
Net income . . . $ 33,649 $21,509 $22,998 Currency translation adjustments, net of tax . . . (13,961) 925 525 Comprehensive income . . . $ 19,688 $22,434 $23,523
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012
Common Stock Additional
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive
Income (Loss)
Common Stock in Treasury
(in thousands except share data) Shares Amounts Total
BALANCE JANUARY 1, 2012 . . . 16,700,875 $17 $169,780 $ 81,360 $ 5,816 $(9,075) $247,898
Net income . . . 22,998 22,998
Currency translation adjustment, net of
tax . . . 525 525
Restricted stock issued and stock based
compensation under incentive plans . . . . 14,339 4,018 4,018
Stock options exercised . . . 258,430 1 6,161 6,162
Income tax benefit from exercise of stock
options . . . 1,135 1,135
BALANCE DECEMBER 31, 2012 . . . 16,973,644 $18 $181,094 $104,358 $ 6,341 $(9,075) $282,736
Net income . . . 21,509 21,509
Currency translation adjustment, net of
tax . . . 925 925
Restricted stock issued and stock based
compensation under incentive plans . . . . 17,441 4,367 4,367
Stock options exercised . . . 197,052 5,444 5,444
Income tax benefit from exercise of stock
options . . . 969 969
BALANCE DECEMBER 31, 2013 . . . 17,188,137 $18 $191,874 $125,867 $ 7,266 $(9,075) $315,950
Net income . . . 33,649 33,649
Currency translation adjustment, net of
tax . . . (13,961) (13,961)
Restricted stock issued and stock based
compensation under incentive plans . . . . 24,588 4,678 4,678
Stock options exercised . . . 104,705 3,369 3,369
Income tax benefit from exercise of stock
options . . . 169 169
BALANCE DECEMBER 31, 2014 . . . 17,317,430 $18 $200,090 $159,516 $ (6,695) $(9,075) $343,854
44
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands) 2014 2013 2012
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net income . . . $ 33,649 $ 21,509 $22,998 Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization . . . 7,428 7,038 6,976 Compensation for stock options and restricted stock
units . . . 4,678 4,367 4,018 (Net recovery of) provision for bad debts . . . (306) 1,001 (23) Write-down of inventories . . . 3,272 1,167 1,978 Deferred income tax (benefit) expense . . . (4,707) 645 (2,016) Income tax benefit from exercise of stock options . . (169) (969) (1,135) Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable . . . (24,587) (4,053) (4,840) Inventories . . . (21,995) (1,286) (2,822) Prepaid expenses and other current assets . . . (3,501) (3,346) (1,870) (Decrease) increase in:
Accounts payable and accrued liabilities . . . 8,867 6,108 (3,079) Income taxes payable . . . (1,560) (2,028) 3,497 Customer deposits . . . (724) 353 (1,374) Unearned service revenues . . . 5,313 3,772 5,565 Net cash provided by operating activities . . . 5,658 34,278 27,873 INVESTING ACTIVITIES:
Purchases of property and equipment . . . (18,722) (4,350) (3,843) Payments for intangible assets . . . (1,221) (2,204) (1,361) Purchase of business acquired . . . (1,150) -
-Net cash used in investing activities . . . (21,093) (6,554) (5,204) FINANCING ACTIVITIES:
Payments on capital leases . . . (8) (93) (132) Income tax benefit from exercise of stock options . . . 169 969 1,135 Proceeds from issuance of stock, net . . . 3,369 5,444 6,162 Net cash provided by financing activities . . . 3,530 6,320 7,165 EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS . . . (3,436) (2,647) (1,141) (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS . . . (15,341) 31,397 28,693 CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR . . . 124,630 93,233 64,540 CASH AND CASH EQUIVALENTS, END OF YEAR . . . $109,289 $124,630 $ 93,233
The accompanying notes are an integral part of these consolidated financial statements.
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014, 2013 and 2012
(in thousands, except share and per share data or as otherwise noted) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business—FARO Technologies, Inc. and its subsidiaries (collectively the “Company” or
“FARO”) designs, develops, manufactures, markets and supports software driven, three-dimensional (3-D) measurement, imaging and realization systems. The Company sells the majority of its products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building construction and law enforcement applications. The Company’s FaroArm®, FARO Laser ScanArm®, FARO Gage, FARO Laser Tracker™, FARO 3D Imager AMP, and their companion CAM2® software provide for Computer-Aided Design, or CAD, based inspection and/or factory-level statistical process control and high-density surveying. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD software to improve productivity, enhance product quality and decrease rework and scrap in the manufacturing process. The Company’s FARO Focus3Dand FARO Freestyle3Dlaser scanners, and their companion SCENE and FARO forensic software, are utilized for a wide variety of 3-D modeling, documentation and high-density surveying applications, including in two of the Company’s key vertical markets – architecture, engineering and construction (AEC) and law enforcement.
Principles of Consolidation—The consolidated financial statements of the Company include the accounts of FARO Technologies, Inc. and its subsidiaries, all of which are wholly owned. All intercompany transactions and balances have been eliminated. The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from financial statement translations are reflected as a separate component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in income.
Revenue Recognition, Product Warranty and Extended Warranty Contracts—Revenue is recognized when the price is fixed, collectability is reasonably assured, the title and risks and rewards of ownership have passed to the customer and the earnings process is complete. Revenue related to the Company’s measurement, imaging, and realization equipment and related software is generally recognized upon shipment, as the Company considers the earnings process complete as of the shipping date. Fees billed to customers associated with the distribution of products are classified as revenue. The Company warrants its 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. The Company separately sells extended warranties. Extended warranty revenues are recognized on a straight-line basis over the term of the warranty. Costs relating to extended warranties are recognized as incurred. Revenue from sales of software only is recognized when no further significant production, modification or customization of the software is required and when the following criteria are met: persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and deemed collectible. 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. Revenue from the licensing agreements for the use of the Company’s technology for medical applications is generally recognized as licensees use the technology. Amounts representing royalties for the current year and not received as of year-end are estimated as due based on historical data and recognized in the current year. Revenues are presented net of sales-related taxes.
Cash and Cash Equivalents—The Company considers cash on hand and amounts on deposit with financial institutions with maturities of three months or less when purchased to be cash and cash
equivalents. The Company had deposits with foreign banks totaling $58.9 million and $66.9 million as of December 31, 2014 and 2013, respectively. The Company does not presently intend to repatriate those funds. (See Note 11,Income Taxes).
Accounts Receivable and Related Allowance for Doubtful Accounts—Credit is extended to customers based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company makes judgments as to the collectability of accounts receivable based on historical trends and future expectations. Management estimates an allowance for doubtful accounts, which adjusts gross trade accounts receivable to its net realizable value. The allowance for doubtful accounts is based on an analysis of all receivables for possible impairment issues and historical write-off percentages. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not generally charge interest on past due receivables.
Inventories—Inventories are stated at the lower of cost or net realizable value using the first-in first-out (FIFO) method. Shipping and handling costs are classified as a component of cost of sales in the consolidated statements of operations. Sales demonstration inventory is comprised of measuring, imaging, and realization devices utilized by sales representatives to present the Company’s products to customers. Management expects these products to remain in sales demonstration inventory for approximately 12 months and are subsequently sold at prices that produce slightly reduced gross margins. Service inventory is comprised of inventory that is not expected to be sold within twelve months, such as training and loaned equipment.
Reserve for Excess and Obsolete Inventory—Since the value of inventory that will ultimately be realized cannot be known with exact certainty, the Company relies 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 the Company has withdrawn those products from the market or had no sales of the product for the past 12 months and has 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 FIFO cost of such inventory. The Company’s products are subject to changes in technologies that may make certain of its products or their components obsolete or less competitive, which may increase its historical provisions to the reserve.
Property and Equipment—Property and equipment purchases exceeding a thousand dollars are capitalized and recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets as follows:
Machinery and equipment 2 to 5 years
Furniture and fixtures 3 to 10 years
Leasehold improvements are amortized on a straight-line basis over the lesser of the life of the asset or the remaining term of the lease.
Depreciation expense was $6,171, $5,825 and $5,769 in 2014, 2013 and 2012, respectively.
Accelerated methods of depreciation are used for income tax purposes in contrast to book purposes, and as a result, appropriate provisions are made for the related deferred income taxes.
Goodwill and Intangibles—Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. The Company does not amortize goodwill; however, performs an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill or indefinite lived intangible assets is impaired. If an asset is impaired, the difference between the value of the asset reflected in the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.
Each period, and for any of its reporting units, the Company can elect to initially perform a qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the Company believes, as a result of its 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 first and second steps of the quantitative goodwill impairment test are unnecessary. If the Company elects 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, the Company will perform the two-step quantitative goodwill impairment test. The Company performs the first step of the two-step quantitative goodwill impairment test by calculating the fair value of the reporting unit using a discounted cash flow method, and then comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the quantitative goodwill impairment test to measure the amount of the impairment loss, if any. Management has concluded there was no goodwill impairment for the years ended December 31, 2014, 2013 and 2012.
Other intangible assets principally include patents, existing product technology and customer relationships that arose in connection with the Company’s acquisitions of CAD Zone, iQvolution AG and Dimensional Photonics International. Other intangible assets are recorded at fair value at the date of acquisition and are amortized over their estimated useful lives of 3 to 20 years. As of December 31, 2014, there were no indefinite-lived intangible assets.
Product technology and patents are recorded at cost. Amortization is computed using the straight-line method over the lives of the patents of 17 to 20 years.
The weighted-average amortization period for all the Company’s intangible assets is nine years.
Long-Lived Assets—Long-lived assets, other than goodwill, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Management has concluded that there were no indications of impairment of these assets during the years ended December 31, 2014, 2013 and 2012.
Research and Development—Research and development costs 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, are recorded as expenses in the period incurred.
Reserve for Warranties—The Company establishes at the time of sale a liability for the one year warranty included with the initial purchase price of equipment, 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. The Company evaluates its 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. The Company has a history of new product introductions and enhancements to existing products, which may result in unforeseen issues that increase its warranty costs. While such expenses have historically been within expectations, the Company cannot guarantee this will continue in the future.
Income Taxes—The Company reviews its deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of deferred tax assets and liabilities, projections of future taxable income, and tax planning strategies that the Company might employ to utilize such assets, including net operating loss carryforwards. Based on the positive and negative evidence for recoverability, the Company establishes a valuation allowance against the net deferred tax assets of a taxing jurisdiction in which the Company operates unless it is “more likely than not” that the Company will recover such assets through the above means. In the future, the Company’s evaluation of the need for the valuation allowance will be significantly influenced by the Company’s ability to achieve profitability and the Company’s ability to predict and achieve future projections of taxable income over at least a two-year period.
The Company recognizes tax benefits related to uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities. For those positions where it is more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. In the ordinary course of business, the Company and its subsidiaries are examined by various federal, state, and foreign tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes.
Fair Value of Financial Instruments—The Company’s financial instruments include cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accrued liabilities.
In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the Company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted market price for identical instruments traded in active markets.
Level 2 - Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. Valuation techniques include use of discounted cash flow models and similar techniques.
In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, it is the Company’s policy to use observable inputs whenever reasonably practicable in order to minimize the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases, where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
Cash, cash equivalents and short-term investments - Included in cash and cash equivalents and short-term investments in the accompanying consolidated balance sheets are deposits with financial institutions and six-month U.S. Treasury Bills. The fair values of these assets are based on Level 1 inputs in the fair value hierarchy. Due to their short-term nature, the carrying amounts of such financial instruments approximate their fair values.
Accounts receivable, accounts payable and accrued liabilities - The recorded amounts of these financial instruments approximate their fair value because of the short-maturities of these instruments.
Earnings Per Share—Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the effect of all potentially dilutive common shares by applying the treasury stock method. A reconciliation of the number of common shares used in calculation of basic and diluted EPS is presented in Note 14,Earnings Per Share.
Accounting for Stock-Based Compensation—The Company has several stock-based employee and director compensation plans, which are described more fully in Note 13, Stock Compensation Plans. The Company records compensation expense using the applicable accounting guidance for share-based payments related to stock options, restricted stock, and performance share awards granted to directors and employees.
Compensation cost for share-based awards is recorded on a straight line basis over the required service period. The fair value of the stock option grants is estimated using the Black-Scholes option-pricing model, which requires the input of assumptions, including dividend yield, risk-free interest rate, the estimated length of time employees will retain their stock options before exercising them (expected term) and the estimated volatility of the Company’s common stock price over the expected term. These assumptions are generally based on historical averages of the Company. Furthermore, in calculating compensation expense for these awards, the Company is also required to estimate the extent to which options will be forfeited prior to vesting. Many factors are considered when estimating expected forfeitures, including types of awards, employee class and historical experience. To the extent actual results or updated estimates of forfeiture differ from current estimates, such amounts are recorded as a cumulative adjustment to the previously recorded amounts. Compensation expense associated with