FARO Announces Fourth Quarter Financial Results and Strategic Initiatives

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended

Twelve Months Ended

(in thousands, except share and per share data)

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Sales

Product

$

80,267

$

91,560

$

289,679

$

320,584

Service

23,874

21,284

92,086

83,043

Total sales

104,141

112,844

381,765

403,627

Cost of Sales

Product

47,706

37,550

133,246

130,876

Service

12,834

12,454

50,387

51,198

Total cost of sales

60,540

50,004

183,633

182,074

Gross Profit

43,601

62,840

198,132

221,553

Operating Expenses

Selling, general and administrative

45,469

45,052

177,378

169,717

Research and development

11,127

11,942

44,175

46,082

Impairment loss

35,213

—

35,213

—

Total operating expenses

91,809

56,994

256,766

215,799

(Loss) income from operations

(48,208)

5,846

(58,634)

5,754

Other (income) expense

Interest income

(155)

(224)

(714)

(429)

Other (income) expense, net

(85)

271

2,313

1,139

Interest expense

150

486

781

486

(Loss) Income before income tax expense (benefit)

(48,118)

5,313

(61,014)

4,558

Income tax expense (benefit)

1,577

(445)

1,133

(372)

Net (loss) income

$

(49,695)

$

5,758

$

(62,147)

$

4,930

Net (loss) income per share - Basic

$

(2.85)

$

0.33

$

(3.58)

$

0.29

Net (loss) income per share - Diluted

$

(2.85)

$

0.33

$

(3.58)

$

0.29

Weighted average shares - Basic

17,427,143

17,254,011

17,383,415

17,043,167

Weighted average shares - Diluted

17,427,143

17,498,061

17,383,415

17,348,456

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)

December 31,

2019

December 31,

2018

ASSETS

Current assets:

Cash and cash equivalents

$

133,634

$

108,783

Short-term investments

24,870

24,793

Accounts receivable, net

76,162

88,927

Inventories, net

58,554

65,444

Prepaid expenses and other current assets

28,996

28,795

Total current assets

322,216

316,742

Non-current assets:

Plant and equipment, net

26,954

30,417

Operating lease right-of-use asset

18,418

—

Goodwill

49,704

67,274

Intangible assets, net

14,471

33,054

Service and sales demonstration inventory, net

33,349

39,563

Deferred income tax assets, net

18,766

14,719

Other long-term assets

2,964

4,475

Total assets

$

486,842

$

506,244

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

13,718

$

20,093

Accrued liabilities

38,072

36,327

Income taxes payable

5,182

5,081

Current portion of unearned service revenues

39,211

32,878

Customer deposits

3,108

3,144

Lease liability

6,674

—

Total current liabilities

105,965

97,523

Unearned service revenues - less current portion

20,578

15,505

Lease liability - less current portion

13,698

—

Deferred income tax liabilities

357

736

Income taxes payable - less current portion

13,177

12,247

Other long-term liabilities

1,075

3,624

Total liabilities

154,850

129,635

Shareholders' equity:

Common stock - par value $0.001, 50,000,000 shares authorized; 18,988,379 and

18,676,059 issued; 17,576,618 and 17,253,011 outstanding, respectively

19

19

Additional paid-in capital

267,868

251,329

Retained earnings

112,879

175,353

Accumulated other comprehensive loss

(17,399)

(18,483)

Common stock in treasury, at cost - 1,411,761 shares and 1,423,048, respectively

(31,375)

(31,609)

Total shareholders' equity

331,992

376,609

Total liabilities and shareholders' equity

$

486,842

$

506,244

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Years Ended December 31,

(in thousands)

2019

2018

CASH FLOWS FROM:

OPERATING ACTIVITIES:

Net (loss) income

$

(62,147)

$

4,930

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization

18,516

18,313

Compensation for stock options and restricted stock units

11,071

7,620

Provision for bad debts

2,090

907

Loss on disposal of assets

2,639

192

Provision for excess and obsolete inventory

16,886

5,757

Impairment of goodwill

21,233

—

Impairment of acquired intangibles

10,548

—

Impairment of loan to affiliate

549

—

Deferred income tax (benefit) expense

(6,304)

689

Change in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable, net

10,406

(15,995)

Inventories

(4,136)

(20,532)

Prepaid expenses and other assets

1,188

(11,310)

Increase (decrease) in:

Accounts payable and accrued liabilities

(2,518)

11,195

Income taxes payable

1,041

(3,286)

Customer deposits

(30)

513

Unearned service revenues

11,436

7,330

Net cash provided by operating activities

32,468

6,323

INVESTING ACTIVITIES:

Purchases of investments

(50,000)

(47,000)

Proceeds from sale of investments

50,000

33,000

Purchases of property and equipment

(6,675)

(11,021)

Payments for internally capitalized patents

(2,118)

(1,900)

Acquisition of business, net of cash received

—

(27,067)

Other

(549)

(1,786)

Net cash used in investing activities

(9,342)

(55,774)

FINANCING ACTIVITIES:

Payments on capital leases

(358)

(157)

Payments of contingent consideration for acquisitions

(3,101)

(888)

Payments for taxes related to net share settlement of equity awards

(2,199)

—

Proceeds from issuance of stock related to stock option exercises

7,901

20,855

Net cash provided by financing activities

2,243

19,810

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

(518)

(2,536)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

24,851

(32,177)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

108,783

140,960

CASH AND CASH EQUIVALENTS, END OF YEAR

$

133,634

$

108,783

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

(UNAUDITED)

Three Months Ended December 31,

Twelve Months Ended December 31,

(dollars in thousands, except per share data)

2019

2018

2019

2018

Total sales, as reported

$

104,141

$

112,844

$

381,765

$

403,627

GSA sales adjustment ⁽¹⁾

—

4,789

5,840

4,789

Non-GAAP total sales

$

104,141

$

117,633

$

387,605

$

408,416

Gross profit, as reported

$

43,601

$

62,840

$

198,132

$

221,553

GSA sales adjustment ⁽¹⁾

—

4,789

5,840

4,789

Stock-based compensation ⁽²⁾

231

208

1,001

828

Inventory reserve charge ⁽³⁾

12,800

—

12,800

4,734

Product recall charge ⁽⁴⁾

1,328

—

1,328

—

Non-GAAP adjustments to gross profit

14,359

4,997

20,969

10,351

Non-GAAP gross profit

$

57,960

$

67,837

$

219,101

$

231,904

Gross margin, as reported

41.9

%

55.7

%

51.9

%

54.9

%

Non-GAAP gross margin

55.7

%

57.7

%

56.5

%

56.8

%

Operating expenses, as reported

$

91,809

$

56,994

$

256,766

$

215,799

Advisory fees for GSA Matter ⁽⁵⁾

—

—

(1,244)

—

Stock-based compensation ⁽²⁾

(2,137)

(1,696)

(10,068)

(6,793)

Executive severance costs

—

—

(1,217)

—

Executive sign-on bonuses & relocation costs

(215)

—

(1,060)

—

Strategic impairments and write-offs ⁽⁶⁾

(35,213)

—

(35,213)

—

Purchase accounting intangible amortization

(974)

(983)

(3,639)

(3,584)

Non-GAAP adjustments to operating expenses

(38,539)

(2,679)

(52,441)

(10,377)

Non-GAAP operating expenses

$

53,270

$

54,315

$

204,325

$

205,422

(Loss) Income from operations, as reported

$

(48,208)

$

5,846

$

(58,634)

$

5,754

Non-GAAP adjustments to gross profit

14,359

4,997

20,969

10,351

Non-GAAP adjustments to operating expenses

38,539

2,679

52,441

10,377

Non-GAAP income from operations

$

4,690

$

13,522

$

14,776

$

26,482

Other expense (income), net, as reported

$

(90)

$

533

$

2,380

$

1,196

Interest expense increase due to GSA sales adjustment ⁽¹⁾

(147)

(478)

(779)

(478)

Contingent consideration fair value adjustment

926

—

926

—

Present4D impairment ⁽⁷⁾

(617)

—

(2,152)

—

Non-GAAP adjustments to other expense (income), net

162

(478)

(2,005)

(478)

Non-GAAP other expense, net

$

72

$

55

$

375

$

718

Net (loss) income, as reported

$

(49,695)

$

5,758

$

(62,147)

$

4,930

Non-GAAP adjustments to gross profit

14,359

4,997

20,969

10,351

Non-GAAP adjustments to operating expenses

38,539

2,679

52,441

10,377

Non-GAAP adjustments to other expense (income), net

(162)

478

2,005

478

Income tax effect of non-GAAP adjustments

(6,180)

(2,137)

(10,665)

(4,263)

Other tax adjustments ⁽⁸⁾

6,209

(1,000)

8,628

(1,000)

Non-GAAP net income

$

3,070

$

10,775

$

11,231

$

20,873

Net (loss) income per share - Diluted, as reported

$

(2.85)

$

0.33

$

(3.58)

$

0.29

GSA sales adjustment ⁽¹⁾

—

0.27

0.34

0.27

Stock-based compensation ⁽²⁾

0.14

0.11

0.64

0.44

Product recall charge ⁽⁴⁾

0.08

—

0.08

—

Inventory reserve charge ⁽³⁾

0.73

—

0.73

0.27

Advisory fees for GSA Matter ⁽⁵⁾

—

—

0.07

—

Executive severance costs

—

—

0.07

—

Executive sign-on bonuses & relocation costs

0.01

—

0.06

—

Strategic impairments and write-offs ⁽⁶⁾

2.02

—

2.03

—

Purchase accounting intangible amortization

0.06

0.06

0.21

0.21

Interest expense increase due to GSA sales

adjustment ⁽¹⁾

0.01

0.03

0.04

0.03

Contingent consideration fair value adjustment

(0.05)

—

(0.05)

—

Present4D impairment ⁽⁷⁾

0.03

—

0.12

—

Income tax effect of non-GAAP adjustments

(0.36)

(0.12)

(0.61)

(0.25)

Other tax adjustments ⁽⁸⁾

0.36

(0.06)

0.50

(0.06)

Non-GAAP net income per share - Diluted

$

0.18

$

0.62

$

0.65

$

1.20

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million and recorded imputed interest expense of $0.5 million related to the GSA Matter. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million and recorded imputed interest expense of $0.1 million and $0.8 million related to the GSA Matter for the three and twelve months ended December 31, 2019, respectively.

(2)

We exclude stock-based compensation, which is non-cash, from the non-GAAP financial measures because the Company believes that such exclusion provides a better comparison of results of ongoing operations for current and future periods with such results from past periods. This adjustment includes accelerated vesting of equity awards in connection with the transition of our prior executives totaling $3.5 million for the twelve months ended December 31, 2019.

(3)

During the third quarter of 2018, we performed an analysis of our inventory reserves in connection with our new product introductions and acquisitions and recorded a charge of $4.7 million, increasing our reserve for excess and obsolete inventory, based on the determination that quantities on-hand for certain legacy products exceeded our revised sales projections. During the fourth quarter of 2019, we recorded a charge of $12.8 million, increasing our reserve for excess and obsolete inventory, based on our analysis of our inventory reserves in connection with our strategy to simplify our hardware product portfolio and cease selling certain products.     

(4)

During the fourth quarter of 2019, we accrued a recall charge for labor and parts related to a small portion of previously sold measurement devices that were outside the manufacturer's standard warranty due to safety concerns.

(5)

In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $1.2 million in advisory fees incurred during 2019.

(6)

Because the historical and projected future performance of certain of our recently acquired operations were lower than our expectations, and due to changes in our go-forward strategy in connection with our new strategic plan, we incurred an impairment loss of $35.2 million during 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.

(7)

On April 27, 2018, we invested $1.8 million in present4D GmbH ("present4D"), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. In July 2019, we originated a $0.5 million note with present4D, which we may convert into additional equity in present4D at our discretion in the event of a default. As we no longer intend to provide future support to present4D or obtain the aforementioned additional share capital in the future and no longer intend to use the perpetual and royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D's software, we wrote off the investment in, and our note receivable with, present4D and recognized a total loss of $2.2 million during the twelve months ended December 31, 2019, which is included in Other expense, net.

(8)

Driven primarily by return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return, an increase in our valuation allowance primarily related to foreign net operating loss carryforwards that, in the judgment of management, were not more likely than not to be realized, and changes in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF NET INCOME (LOSS) TO EBITDA AND ADJUSTED EBITDA

(UNAUDITED)

Three Months Ended

(in thousands)

March 31,

2018

June 30,

2018

September 30,

2018

December 31,

2018

Net income (loss)

$

455

$

1,205

$

(2,488)

$

5,758

Interest (income) expense, net

(73)

(87)

(96)

313

Income tax expense (benefit)

127

300

(354)

(445)

Depreciation and amortization

4,343

4,377

4,747

4,846

EBITDA

4,852

5,795

1,809

10,472

Loss on foreign currency transactions

184

509

226

220

Stock-based compensation

1,551

2,000

2,166

1,904

GSA sales adjustment ⁽¹⁾

—

—

—

4,789

Inventory reserve charge ⁽²⁾

—

—

4,734

—

Adjusted EBITDA

$

6,587

$

8,304

$

8,935

$

17,385

Adjusted EBITDA margin ⁽³⁾

7.1

%

8.5

%

9.0

%

14.8

%

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million and recorded imputed interest expense of $0.5 million related to the GSA Matter.

(2)

During the third quarter of 2018, we performed an analysis of our inventory reserves in connection with our new product introductions and acquisitions and recorded a charge of $4.7 million, increasing our reserve for excess and obsolete inventory, based on the determination that quantities on-hand for certain legacy products exceeded our revised sales projections.

(3)

Calculated as Adjusted EBITDA as a percentage of Non-GAAP total sales, which adjusts for the GSA sales adjustment.

Three Months Ended

(in thousands)

March 31,

2019

June 30,

2019

September 30,

2019

December 31,

2019

Net income (loss)

$

152

$

(6,405)

$

(6,199)

$

(49,695)

Interest (income) expense, net

(144)

240

(24)

(5)

Income tax expense (benefit)

155

(417)

(182)

1,577

Depreciation and amortization

4,749

4,573

4,798

4,428

EBITDA

4,912

(2,009)

(1,607)

(43,695)

Loss on foreign currency transactions

195

154

514

224

Stock-based compensation

2,564

2,752

3,387

2,368

GSA sales adjustment ⁽¹⁾

35

5,805

—

—

Advisory fees for GSA Matter ⁽²⁾

591

653

—

—

Inventory reserve charge ⁽³⁾

—

—

—

12,800

Product recall charge ⁽⁴⁾

—

—

—

1,328

Executive severance costs

—

—

1,217

215

Executive sign-on bonuses & relocation costs

—

575

270

—

Strategic impairments and write-offs ⁽⁵⁾

—

—

—

35,213

Contingent consideration fair value adjustment

—

—

—

(926)

Present4D impairment ⁽⁶⁾

—

1,535

—

617

Adjusted EBITDA

$

8,297

$

9,465

$

3,781

$

8,144

Adjusted EBITDA margin ⁽⁷⁾

8.9

%

9.5

%

4.2

%

7.8

%

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million related to the GSA Matter. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment") and recorded imputed interest expense of $0.1 million and $0.8 million related to the GSA Matter for the three and twelve months ended December 31, 2019, respectively.

(2)

In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $1.2 million in advisory fees incurred during 2019.

(3)

During the fourth quarter of 2019, we recorded a charge of $12.8, million increasing our reserve for excess and obsolete inventory, based on our analysis of our inventory reserves in connection with our strategy to simplify our hardware product portfolio and cease selling certain products.   

(4)

During the fourth quarter of 2019, we accrued a recall charge for labor and parts related to a small portion of previously sold measurement devices that were outside the manufacturer's standard warranty due to safety concerns.  

(5)

Because the historical and projected future performance of certain of our recently acquired operations were lower than our expectations, and due to changes in our go forward strategy in connection with our new strategic plan, we incurred an impairment loss of $35.2 million during 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.

(6)

On April 27, 2018, we invested $1.8 million in present4D GmbH ("present4D"), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. In July 2019, we originated a $0.5 million note with present4D, which we may convert into additional equity in present4D at our discretion in the event of a default. As we no longer intend to provide future support to present4D or obtain the aforementioned additional share capital in the future and no longer intend to use the perpetual and royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D's software, we wrote off the investment in, and our note receivable with, present4D and recognized a total loss of $2.2 million during the twelve months ended December 31, 2019, which is included in Other expense, net.

(7)

Calculated as Adjusted EBITDA as a percentage of Non-GAAP total sales, which adjusts for the GSA sales adjustment.