FARO Reports Fourth Quarter and Fiscal Year 2018 Financial Results

LAKE MARY, Fla., Feb. 19, 2019 /PRNewswire/ -- FARO(®) (NASDAQ: FARO), the world's most trusted source for 3D measurement and imaging solutions for 3D manufacturing, construction BIM, 3D design, public safety forensics, and photonics applications, today announced its financial results for the fourth quarter and fiscal year ended December 31, 2018.

"In 2018, we achieved $425 million in new order bookings, up 12.8 percent year-over-year, and crossed the $400 million milestone in annual sales for the first time in the Company's history," stated Dr. Simon Raab, President and Chief Executive Officer. "We executed on our strategic sales growth initiative to increase our sales headcount by mid-teens for a second consecutive year. We continued our new product drumbeat with 14 new product releases. We accelerated our M&A pace with four acquisitions plus our first strategic investment and, in the process, created a new Photonics vertical. Our new product drumbeat and acquisitions expanded our product portfolio to the most technologically advanced and expansive in our history. Our platform for growth is stronger than ever."

We sell products and related services to the U.S. Government (the "Government") under General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") and have done so since 2002. Late in fourth quarter 2018, during an internal review we preliminarily determined that we may have overcharged the Government under the Contracts (the "GSA Matter"). "GSA sales represented approximately 3.5 percent of our total sales in 2018," continued Dr. Raab. "Nevertheless, we take our Government contract compliance very seriously and have begun remediation efforts with the assistance of outside legal counsel including, but not limited to, the identification of additional controls and procedures to ensure future compliance with the pricing and other requirements of the Contracts. On February 14, 2019, we reported the GSA Matter to the GSA and its Office of Inspector General."

Fourth Quarter 2018

As a result of the GSA Matter, for fourth quarter 2018 we reduced our total sales by a $4.8 million estimated cumulative sales adjustment (the "GSA cumulative sales adjustment"), representative of the last six years of estimated overcharges to the Government under the Contracts. In addition, for fourth quarter 2018 we recorded $0.5 million of imputed interest related to the GSA cumulative sales adjustment, which increased other expense and resulted in an estimated total liability of $5.3 million for the GSA Matter. This estimate is based on our preliminary review as of the date of this press release and is subject to change based on the results of a review being conducted by our outside legal counsel and discussions with the Government.

Total sales were $112.8 million for fourth quarter 2018, up 6.0% as compared with $106.4 million for fourth quarter 2017. Our sales increase was mainly driven by higher unit sales across all segments, higher average selling prices in our 3D Manufacturing reporting segment and total service revenue growth, partially offset by the GSA cumulative sales adjustment. Our new order bookings were $122.2 million for fourth quarter 2018, up 10.5% as compared with $110.6 million for fourth quarter 2017.

Gross margin was 57.2% for the quarter, down 1.1 percentage points as compared with 58.3% in the same prior year period, reflecting higher average selling prices in our 3D Manufacturing reporting segment and an improved service margin which were more than offset by the effects of the GSA cumulative sales adjustment.

Operating income was $5.8 million for the quarter, as compared with $9.2 million in the same prior year period, primarily reflecting our sales increase which was more than offset by the effects of the GSA cumulative sales adjustment. Operating margin was 5.2% for fourth quarter 2018, as compared with operating margin of 8.6% for the same prior year period.

Our net income of $5.8 million, or $0.33 per share, for fourth quarter 2018 included a $1.0 million benefit related to finalizing our transition tax under the U.S. Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform") and a $3.9 million unfavorable after-tax impact of the GSA Matter. Our net loss of $11.1 million, or $0.66 per share, for fourth quarter 2017 included a provisional charge of $19.4 million recorded in income tax expense related to the enactment of U.S. Tax Reform.

As of December 31, 2018, our balance sheet remained debt-free with cash and short-term investments totaling $133.6 million, of which $77.5 million was held by foreign subsidiaries.

Fiscal Year 2018

Total sales were $403.6 million for fiscal year 2018, up 11.8% as compared with $360.9 million for fiscal year 2017. Our sales increase was mainly driven by an increase in unit sales within our Construction BIM and Emerging Verticals reporting segments, and higher average selling prices in our 3D Manufacturing reporting segment, partially offset by the GSA cumulative sales adjustment.

New order bookings were $425.3 million for fiscal year 2018, up 12.8% as compared with $377.0 million for fiscal year 2017. With our trailing 12 months new order bookings of $425.3 million and our trailing 12 months sales full-time experienced ("FTE") headcount of 599, our trailing 12 months orders per sales FTE metric was approximately $710,000, up $4,000 from third quarter 2018.

Gross margin was 56.6% for fiscal year 2018, down 0.1 percentage points as compared with the prior year, reflecting the benefit of higher average selling prices in our 3D Manufacturing reporting segment and improved manufacturing efficiencies which were more than offset by the effects of the GSA cumulative sales adjustment and the $4.7 million increase in our inventory reserve recorded in third quarter 2018.

Operating income was $5.8 million for fiscal year 2018, an increase from $5.3 million for fiscal year 2017, primarily driven by our double-digit sales growth partially offset by our investment in increased sales headcount, the effects of the GSA cumulative sales adjustment and the increase in our inventory reserve recorded in third quarter 2018. Operating margin was 1.4% for fiscal year 2018, as compared with operating margin of 1.5% for fiscal year 2017.

Our net income of $4.9 million, or $0.29 per share, for fiscal year 2018 included a $1.0 million benefit related to finalizing our transition tax under U.S. Tax Reform and a $3.9 million unfavorable after-tax impact of the GSA Matter. Our net loss of $14.5 million, or $0.87 per share, for fiscal year 2017 included a provisional charge of $19.4 million recorded in income tax expense related to the enactment of U.S. Tax Reform.

The financial information included in this press release is preliminary as the Company has not yet issued its audited financial statements, and such information may differ from our audited results.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties, such as statements regarding FARO's estimated overcharges to the Government under the GSA Contracts, demand for and customer acceptance of FARO's products, and FARO's product development and product launches. Statements that are not historical facts or that describe the Company's plans, objectives, estimates, projections, expectations, assumptions, strategies, or goals are forward-looking statements. In addition, words such as "is," "will" and similar expressions or discussions of FARO's plans or other intentions identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to various known and unknown risks, uncertainties, and other factors that may cause actual results, performances, or achievements to differ materially from future results, performances, or achievements expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements.

Factors that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include, but are not limited to:

    --  the results of the Company's and its outside legal counsel's review of
        the GSA Matter; the outcome of the U.S. Government's review of, or
        investigation into, the GSA Matter; any resulting penalties, damages, or
        sanctions imposed on the Company and the outcome of any resulting
        litigation to which the Company may become a party; loss of future
        government sales; and potential impacts on customer and supplier
        relationships and the Company's reputation;
    --  development by others of new or improved products, processes or
        technologies that make the Company's products less competitive or
        obsolete;
    --  the Company's inability to maintain its technological advantage by
        developing new products and enhancing its existing products;
    --  declines or other adverse changes, or lack of improvement, in industries
        that the Company serves or the domestic and international economies in
        the regions of the world where the Company operates and other general
        economic, business, and financial conditions; and
    --  other risks detailed in Part I, Item 1A. Risk Factors in the Company's
        Annual Report on Form 10-K for the year ended December 31, 2017 and Part
        II, Item 1A. Risk Factors in the Company's Quarterly Report on Form 10-Q
        for the quarter ended March 31, 2018.

Forward-looking statements in this release represent the Company's judgment as of the date of this release. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law.

About FARO
FARO is the world's most trusted source for 3D measurement and imaging solutions. The Company develops and markets computer-aided measurement and imaging devices and software for the following vertical markets:

    --  3D Manufacturing - High-precision 3D measurement, imaging and comparison
        of parts and complex structures within production and quality assurance
        processes
    --  Construction BIM - 3D capture of as-built construction projects and
        factories to document complex structures and perform quality control,
        planning and preservation
    --  Public Safety Forensics - Capture and analysis of on-site real world
        data to investigate crash, crime and fire events, plan security
        activities and provide virtual reality training for public safety
        personnel
    --  3D Design - Capture and edit 3D shapes of products, people, and/or
        environments for design purposes in product development, computer
        graphics and dental and medical applications
    --  Photonics - Develop and market galvanometer-based laser measurement
        products and solutions

FARO's global headquarters is located in Lake Mary, Florida. The Company also has a technology center and manufacturing facility consisting of approximately 90,400 square feet located in Exton, Pennsylvania containing research and development, manufacturing and service operations of our FARO Laser Tracker(TM) and FARO Tracer Laser Projector product lines. The Company's European regional headquarters is located in Stuttgart, Germany and its Asia-Pacific regional headquarters is located in Singapore. FARO has other offices in the United States, Canada, Mexico, Brazil, Germany, the United Kingdom, France, Spain, Italy, Poland, Turkey, the Netherlands, Switzerland, India, China, Malaysia, Thailand, South Korea, Japan, and Australia.

More information is available at http://www.faro.com


                                                                
       
              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,                               December 31,       December 31,                 December 31,
                                                                                    2018                                        2017                2018                          2017



            Sales



            Product                                                                       $
            88,984                            $
            84,446                                $
       311,102   $
       277,922



            Service                                                              23,860                                      21,977              92,525                        82,995



            Total sales                                                         112,844                                     106,423             403,627                       360,917



            Cost of Sales



            Product                                                              36,036                                      31,957             124,802                       110,143



            Service                                                              12,257                                      12,372              50,480                        46,137



            Total cost of sales (exclusive of depreciation and                   48,293                                      44,329             175,282                       156,280
    amortization, shown separately below)



            Gross Profit                                                         64,551                                      62,094             228,345                       204,637



            Operating Expenses



            Selling and marketing                                                30,754                                      28,660             116,920                       103,544



            General and administrative                                           12,763                                      10,924              47,652                        43,807



            Depreciation and amortization                                         4,846                                       4,513              18,313                        16,588



            Research and development                                             10,342                                       8,846              39,706                        35,376



            Total operating expenses                                             58,705                                      52,943             222,591                       199,315



            Income from operations                                                5,846                                       9,151               5,754                         5,322



            Other expense (income)



            Interest income                                                       (224)                                       (73)              (429)                        (319)



            Other expense (income), net                                             271                                       (510)              1,139                         (190)



            Interest expense                                                        486                                           7                 486                             4



            Income before income tax expense                                      5,313                                       9,727               4,558                         5,827



            Income tax (benefit) expense                                          (445)                                     20,785               (372)                       20,343



            Net income (loss)                                                              $
            5,758                          $
            (11,058)                                 $
       4,930  $
       (14,516)



            Net income (loss) per share - Basic                                             $
            0.33                            $
            (0.66)                                  $
       0.29    $
       (0.87)



            Net income (loss) per share - Diluted                                           $
            0.33                            $
            (0.66)                                  $
       0.29    $
       (0.87)



            Weighted average shares - Basic                                  17,254,011                                  16,738,400          17,043,167                    16,711,534



            Weighted average shares - Diluted                                17,498,061                                  16,738,400          17,348,456                    16,711,534

                                                                                                                                                                                ===


                                                                                                       
       
          FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

                                                                                                         
       CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                                                               
              (UNAUDITED)







              
                (in thousands, except share and per share data)                                                                                December 31,             December 31,
                                                                                                                                                                   2018                      2017

    ---


              
                ASSETS



              Current assets:



              Cash and cash equivalents                                                                                                                                $
      108,783               $
      140,960



              Short-term investments                                                                                                                            24,793                    10,997



              Accounts receivable, net                                                                                                                          88,927                    72,105



              Inventories, net                                                                                                                                  65,444                    53,786



              Prepaid expenses and other current assets                                                                                                         28,795                    16,311



              Total current assets                                                                                                                             316,742                   294,159



              Property and equipment:



              Machinery and equipment                                                                                                                           76,048                    66,514



              Furniture and fixtures                                                                                                                             6,749                     6,945



              Leasehold improvements                                                                                                                            20,304                    19,872



              Property and equipment at cost                                                                                                                   103,101                    93,331



              Less: accumulated depreciation and amortization                                                                                                 (72,684)                 (61,452)



              Property and equipment, net                                                                                                                       30,417                    31,879



              Goodwill                                                                                                                                          67,274                    52,750



              Intangible assets, net                                                                                                                            33,054                    22,540



              Service and sales demonstration inventory, net                                                                                                    39,563                    39,614



              Deferred income tax assets, net                                                                                                                   14,719                    15,606



              Other long-term assets                                                                                                                             4,475                     2,030



              Total assets                                                                                                                                             $
      506,244               $
      458,578



              
                LIABILITIES AND SHAREHOLDERS' EQUITY



              Current liabilities:



              Accounts payable                                                                                                                                          $
      20,093                $
      11,569



              Accrued liabilities                                                                                                                               36,327                    27,362



              Income taxes payable                                                                                                                               5,081                     4,676



              Current portion of unearned service revenues                                                                                                      32,878                    29,674



              Customer deposits                                                                                                                                  3,144                     2,604



              Total current liabilities                                                                                                                         97,523                    75,885



              Unearned service revenues - less current portion                                                                                                  15,505                    11,815



              Deferred income tax liabilities                                                                                                                      736                       695



              Income taxes payable - less current portion                                                                                                       12,247                    15,952



              Other long-term liabilities                                                                                                                        3,624                     2,165



              Total liabilities                                                                                                                                129,635                   106,512



              Shareholders' equity:



              Common stock - par value $.001, 50,000,000 shares authorized; 18,676,059 and 18,277,142                                                               19                        18
    issued; 17,253,011 and 16,796,884 outstanding, respectively



              Additional paid-in capital                                                                                                                       251,329                   223,055



              Retained earnings                                                                                                                                175,353                   168,624



              Accumulated other comprehensive loss                                                                                                            (18,483)                  (7,822)



              Common stock in treasury, at cost - 1,423,048 shares and 1,480,258, respectively                                                                (31,609)                 (31,809)



              Total shareholders' equity                                                                                                                       376,609                   352,066



              Total liabilities and shareholders' equity                                                                                                               $
      506,244               $
      458,578

                                                                                                                                                                                                         ===


                                                                                  
       
               FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

                                                                                    
       CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                               
              (UNAUDITED)






                                                                                                                                                  
          Years Ended December 31,



              (in thousands)                                                                                                                  2018                           2017           2016



              CASH FLOWS FROM:



              OPERATING ACTIVITIES:



              Net income (loss)                                                                                                                      $
            4,930              $
       (14,516)  $
     11,107



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



              Depreciation and amortization                                                                                                 18,313                         16,588         13,868



              Compensation for stock options and restricted stock units                                                                      7,620                          6,450          5,374



              Provision for bad debts                                                                                                          907                            370            898



              Loss on disposal of assets                                                                                                       192                            451            860



              Provision for excess and obsolete inventory                                                                                    5,757                          1,734          4,134



              Deferred income tax benefit                                                                                                      689                        (1,740)       (2,002)



              Income tax benefit from exercise of stock options                                                                                  -                                       (357)



              Change in operating assets and liabilities:



              (Increase) decrease in:



              Accounts receivable, net                                                                                                    (15,995)                       (6,766)         6,727



              Inventories                                                                                                                 (20,532)                      (10,926)       (6,729)



              Prepaid expenses and other assets                                                                                           (11,310)                         (253)         3,588



              Increase (decrease) in:



              Accounts payable and accrued liabilities                                                                                      11,774                          1,103            534



              Income taxes payable                                                                                                         (3,286)                        20,011            618



              Customer deposits                                                                                                                513                          (461)       (1,310)



              Unearned service revenues                                                                                                      7,330                        (1,690)           273



              Net cash provided by operating activities                                                                                      6,902                         10,355         37,583



              INVESTING ACTIVITIES:



              (Purchases of) Proceeds from sale of investments                                                                            (14,000)                        32,000



              Purchases of property and equipment                                                                                         (11,021)                       (8,970)       (7,720)



              Payments for intangible assets                                                                                               (1,900)                       (2,377)       (1,657)



              Acquisition of business, net of cash received                                                                               (27,646)                       (5,596)      (27,708)



              Equity investments                                                                                                           (1,786)



              Net cash (used in) provided by investing activities                                                                         (56,353)                        15,057       (37,085)



              FINANCING ACTIVITIES:



              Payments on capital leases                                                                                                     (157)                         (108)           (8)



              Payments of contingent consideration for acquisitions                                                                          (888)                         (521)         (774)



              Income tax benefit from exercise of stock options                                                                                  -                                         357



              Proceeds from issuance of stock related to stock option exercises                                                             20,855                          3,594            674



              Net cash provided by financing activities                                                                                     19,810                          2,965            249



              EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH                                                                             (2,536)                         6,414        (1,934)
    EQUIVALENTS



              (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                                            (32,177)                        34,791        (1,187)



              CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                                 140,960                        106,169        107,356



              CASH AND CASH EQUIVALENTS, END OF YEAR                                                                                               $
            108,783               $
       140,960  $
     106,169

                                                                                                                                                                                                       ===


                                                           
      
                FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

                                                          
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

                                                                       
               (UNAUDITED)






                                                                                                           
             Years ended December 31,



     (in thousands)                                                                                     2018                              2017           2016



     Net income (loss)                                                                                           $
             4,930              $
       (14,516)  $
      11,107



     Currency translation adjustments, net of income tax                                            (10,661)                           16,739        (4,700)



     Comprehensive (loss) income                                                                               $
             (5,731)                $
       2,223    $
      6,407


                                                                                                                                       
              
                FARO TECHNOLOGIES, INC. AND SUBSIDIARIES


                                                                                                                                                    
              UNAUDITED SUPPLEMENTAL DATA




                                                                                         
              
                Three Months Ended                                                              
              
                Twelve Months Ended



       
                (sales in thousands)                                       Q4 2018 Sales                                    Q4 2017 Sales                           % Change                        Q4 2018 Sales                          Q4 2017 Sales           % Change

    ---


       
                Reporting Segments



       3D Manufacturing (1)                                                                     $
              75,602                                             $
              70,940                                   6.6                                             $
         264,430        $
     243,464    8.6

                                                                                                                                                                                                                     %                                                                                %



       Construction BIM (2)                                                           26,226                                            25,798                                 1.7                                              96,185                       86,349                  11.4

                                                                                                                                                                                %                                                                                                   %



       Emerging Verticals (3)                                                         11,016                                             9,685                                13.7                                              43,012                       31,104                  38.3

                                                                                                                                                                                %                                                                                                   %



       
                Total sales, as reported                                                   $
              112,844                                            $
              106,423                                   6.0                                             $
         403,627        $
     360,917   11.8

                                                                                                                                                                                                                     %                                                                                %





       
                (1) The 3D Manufacturing reporting segment (formerly known as Factory Metrology and 3D Factory) contains solely our 3D Manufacturing vertical (formerly our Factory Metrology/3D Factory and 3D Machine Vision verticals).



       
                (2) The Construction BIM reporting segment contains solely our Construction BIM vertical (formerly known as Construction BIM-CIM).



       
                (3) The Emerging Verticals reporting segment (formerly known as Other) includes our 3D Design (formerly known as Product Design), Public Safety Forensics, and Photonics verticals.


                                                                                    
              
                FARO TECHNOLOGIES, INC. AND SUBSIDIARIES


                                                                                                 
              UNAUDITED SUPPLEMENTAL DATA




           
       
          New Order Bookings                                         Ending Sales               
              
                Sales FTE        
       
                Trailing 12 Months     
     
             Trailing 12 Months Orders
             
         (in millions)                                      Headcount                                       Headcount (1)                    Sales FTE Headcount (1)                   per Sales FTE (in
                                                                                                                                                                                                 thousands) (1)


     Q2-16                             $81.6                                               468                                               424                                         419                                       $782


     Q3-16                             $79.8                                               507                                               435                                         424                                       $790


     Q4-16                             $95.8                                               536                                               454                                         432                                       $766


     Q1-17                             $86.9                                               593                                               486                                         450                                       $765


     Q2-17                             $89.0                                               627                                               516                                         473                                       $743


     Q3-17                             $90.5                                               635                                               548                                         501                                       $723


     Q4-17                            $110.6                                               631                                               568                                         530                                       $711


     Q1-18                             $96.1                                               653                                               581                                         553                                       $698


     Q2-18                            $106.5                                               672                                               591                                         572                                       $706


     Q3-18                            $100.5                                               707                                               604                                         586                                       $706


     Q4-18                            $122.2                                               733                                               621                                         599                                       $710




                 (1) Sales full-time experienced ("FTE") is a metric whereby sales headcount is measured as a time-weighted
                  average with the first year contribution of a new employee discounted by an experience factor.

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SOURCE FARO Technologies, Inc.