PR Newswire | Feb 17, 2021 04:16PM EST

02/17 15:15 CST

FARO Announces Fourth Quarter and Full Year Financial Results LAKE MARY, Fla., Feb. 17, 2021

LAKE MARY, Fla., Feb. 17, 2021 /PRNewswire/ -- FARO(r) (Nasdaq: FARO), a leading global source for 3D measurement and imaging solutions for the 3D Metrology, AEC (Architecture, Engineering & Construction), and Public Safety Analytics applications, today announced its financial results for the fourth quarter and full year ended December 31, 2020.

"FARO delivered strong fourth quarter results, closing out a transformational year amid uncertainty caused by the pandemic. Our fourth quarter performance demonstrates the effectiveness of our more efficient sales organization and the profit potential of our lower cost structure. We enter 2021 as a stronger, more efficient business with a highly scalable financial model," stated Michael Burger, President and Chief Executive Officer. "As the business environment returns to normalized levels and we execute on our software and solution development initiatives, we believe we are well positioned to generate significant shareholder returns in the years ahead."

Fourth Quarter 2020 Financial SummaryTotal sales were $93.0 million for fourth quarter 2020 representing a 31% sequential quarterly increase when compared to $70.7 million in the third quarter 2020, and an 11% decrease when compared with $104.1 million for fourth quarter 2019. The sales level fluctuations were primarily a result of the COVID-19 impact on customer demand in our served markets. Similarly, new order bookings of $95.1 million increased 32% sequentially compared to $72.0 million in the third quarter 2020, but were down 19% when compared to $116.9 million for the fourth quarter 2019.

Gross margin was 54.6% for the fourth quarter 2020, as compared to 41.9% for the same prior year period. Non-GAAP gross margin was 54.9% for the fourth quarter 2020 compared to 55.7% for the fourth quarter 2019. The annual decrease in non-GAAP gross margin was primarily a result of the impact of lower sales resulting from the COVID-19 pandemic.

Operating expense, which includes $2.9 million of non-recurring charges, was $48.1 million for the fourth quarter 2020, as compared to $91.8 million for the same prior year period. Non-GAAP operating expense was $43.0 million for the fourth quarter 2020 compared to $53.3 million for the fourth quarter 2019.

Net income was $27.4 million, or $1.52 per share, for the fourth quarter 2020, as compared to a net loss of $49.7 million, or $2.85 per share, for the fourth quarter 2019. GAAP Net Income included a $19 million gain that resulted from the booking of a deferred tax asset associated with the completion of a fourth quarter tax structure restructuring. Non-GAAP net income was $6.3 million, or $0.35 per share, for the fourth quarter 2020 compared to Non-GAAP net income of $3.1 million, or $0.18 per share, for the fourth quarter 2019.

Adjusted EBITDA was $11.1 million, or 12% of Non-GAAP total sales, for the fourth quarter of 2020 compared to Adjusted EBITDA of $8.1 million, or 8% of Non-GAAP total sales, for the fourth quarter of 2019.

*A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is provided in the financial schedules portion at the end of this press release. An additional explanation of these measures is included below under the heading "Non-GAAP Financial Measures".

The Company's cash and short-term investments increased $22.0 million to $185.6 million as of the end of the fourth quarter of 2020, and the Company remained debt-free.

Full Year 2020 Financial SummaryTotal sales were $303.8 million for the full year 2020, as compared with $381.8 million for 2019. Non-GAAP total sales were $304.4 million for 2020 compared to $387.6 million for 2019. New order bookings were $306.4 million for 2020, as compared to $418.4 million for 2019.

Gross margin was 52.6% for 2020, as compared to 51.9% for 2019. Non-GAAP gross margin was 52.9% for 2020 compared to 56.5% for 2019.

Net income was $0.6 million, or $0.04 per share, for 2020, as compared to net loss of $62.1 million, or $3.58 per share, for 2019. Non-GAAP net loss was $1.8 million, or $0.10 per share, for 2020 compared to net income of $11.2 million, or $0.65 per share, for 2019.

Conference CallThe Company will host a conference call to discuss these results on Thursday, February 18, 2021 at 8:00 a.m. ET. Interested parties can access the conference call by dialing (877) 876-9174 (U.S.) or +1 (785) 424-1669 (International) and using the passcode FARO. A live webcast will be available in the Investor Relations section of FARO's website at: https://www.faro.com/about-faro/investor-relations/events

A replay webcast will be available in the Investor Relations section of the company's web site approximately two hours after the conclusion of the call and will remain available for approximately 30 calendar days.

About FAROFor 40 years, FARO has provided industry-leading technology solutions that enable customers to quickly and easily measure their world, and then use that data to make smarter decisions faster. FARO continues to be a pioneer in bridging the digital and physical worlds through data-driven reliable accuracy, precision and immediacy. For more information, visit http://www.faro.com

Non-GAAP Financial MeasuresThis press release contains information about our financial results that are not presented in accordance with U.S. generally accepted accounting principles ("GAAP"). These non-GAAP financial measures, including non-GAAP total sales, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income (loss) from operations, non-GAAP other expense, net, non-GAAP net income (loss) and non-GAAP net income (loss) per share, exclude the GSA sales adjustment (as defined in the tables below), the impact of purchase accounting intangible amortization expense, stock-based compensation, advisory fees incurred related to the GSA Matter (as defined in the tables below), imputed interest expense recorded related to the GSA Matter, costs incurred in connection with our executive officer transitions, including severance costs, sign-on bonuses and relocation costs, charges increasing our reserve for excess and obsolete inventory, product recall charges, restructuring charges, strategic impairment charges and write-offs, the impairment charge related to our equity investment in present4D GmbH, contingent consideration fair value adjustment, and other tax adjustments, and are provided to enhance investors' overall understanding of our historical operations and financial performance.

In addition, we present EBITDA, which is calculated as net (loss) income before interest (income) expense, net, income tax expense (benefit) and depreciation and amortization, and Adjusted EBITDA, which is calculated as EBITDA, excluding loss on foreign currency transactions, the GSA sales adjustment, stock-based compensation, advisory fees incurred related to the GSA Matter, costs incurred in connection with our executive officer transitions, including severance costs, sign-on bonuses and relocation costs, charges increasing our reserve for excess and obsolete inventory, product recall charges, restructuring charges, strategic impairment charges and write-offs, the impairment charge related to our equity investment in present4D GmbH, and contingent consideration fair value adjustment, as measures of our operating profitability. The most directly comparable GAAP measure to EBITDA and Adjusted EBITDA is net (loss) income. We also present Adjusted EBITDA margin, which is calculated as Adjusted EBITDA as a percent of Non-GAAP total sales.

Management believes that these non-GAAP financial measures provide investors with relevant period-to-period comparisons of our core operations using the same methodology that management employs in its review of the Company's operating results. These financial measures are not recognized terms under GAAP and should not be considered in isolation or as a substitute for a measure of financial performance prepared in accordance with GAAP. These non-GAAP financial measures have limitations that should be considered before using these measures to evaluate a company's financial performance. These non-GAAP financial measures, as presented, may not be comparable to similarly titled measures of other companies due to varying methods of calculation. The financial statement tables that accompany this press release include a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995This 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 about demand for and customer acceptance of FARO's products, FARO's product development and product launches, FARO's growth, strategic and restructuring plans and initiatives, including but not limited to the additional restructuring charges expected to be incurred in connection with our restructuring plan and the timing and amount of cost savings and other benefits expected to be realized from the restructuring plan and other strategic initiatives, and FARO's growth potential and profitability. Statements that are not historical facts or that describe the Company's plans, objectives, 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 Company's ability to realize the intended benefits of its undertaking to transition to a company that is reorganized around functions to improve the efficiency of its sales organization and to improve operational effectiveness; * the Company's inability to successfully execute its new strategic plan and restructuring plan, including but not limited to additional impairment charges and/or higher than expected severance costs and exit costs, and its inability to realize the expected benefits of such plans; * 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; * the effect of the COVID-19 pandemic, including on our business operations, as well as its impact on general economic and financial market conditions; * the impact of fluctuations in foreign exchange rates; 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, 2020 that will be filed with the SEC following this earnings release.

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.

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, 2020 2019 2020 2019

Sales

Product $ 71,721 $ 80,267 $ 218,587 $ 289,679

Service 21,232 23,874 85,181 92,086

Total sales 92,953 104,141 303,768 381,765

Cost of Sales

Product 32,052 47,706 98,864 133,246

Service 10,121 12,834 45,057 50,387

Total cost of sales 42,173 60,540 143,921 183,633

Gross Profit 50,780 43,601 159,847 198,132

Operating Expenses

Selling, general and administrative 35,304 45,469 131,827 177,378

Research and development 11,541 11,127 42,896 44,175

Restructuring costs 1,243 - 15,806 -

Impairment loss - 35,213 - 35,213

Total operating expenses 48,088 91,809 190,529 256,766

Income (loss) from operations 2,692 (48,208) (30,682) (58,634)

Other (income) expense

Interest income (747) (155) (340) (714)

Other expense (income), net 97 (85) 431 2,313

Interest expense - 150 - 781

Income (loss) before income tax expense (benefit)3,342 (48,118) (30,773) (61,014)

Income tax (benefit) expense (24,066) 1,577 (31,402) 1,133

Net income (loss) $ 27,408 $ (49,695)$ 629 $ (62,147)

Net income (loss) per share - Basic $ 1.53 $ (2.85) $ 0.04 $ (3.58)

Net income (loss) per share - Diluted $ 1.52 $ (2.85) $ 0.04 $ (3.58)

Weighted average shares - Basic 17,872,307 17,427,143 17,769,958 17,383,415

Weighted average shares - Diluted 18,064,754 17,427,143 17,926,324 17,383,415

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(in thousands, except share and per share data) December 31,December 31, 2020 2019

ASSETS

Current assets:

Cash and cash equivalents $185,633 $133,634

Short-term investments - 24,870

Accounts receivable, net 64,616 76,162

Inventories, net 47,391 58,554

Prepaid expenses and other current assets 26,295 28,996

Total current assets 323,935 322,216

Non-current assets:

Property, plant and equipment, net 23,091 26,954

Operating lease right-of-use asset 26,107 18,418

Goodwill 57,541 49,704

Intangible assets, net 13,301 14,471

Service and sales demonstration inventory, net 31,831 33,349

Deferred income tax assets, net 47,450 18,766

Other long-term assets 2,336 2,964

Total assets $525,592 $486,842

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable $14,121 $13,718

Accrued liabilities 42,593 38,072

Income taxes payable 3,442 5,182

Current portion of unearned service revenues 39,149 39,211

Customer deposits 2,807 3,108

Lease liability 5,835 6,674

Total current liabilities 107,947 105,965

Unearned service revenues - less current portion 21,757 20,578

Lease liability - less current portion 22,131 13,698

Deferred income tax liabilities 787 357

Income taxes payable - less current portion 11,583 13,177

Other long-term liabilities 1,084 1,075

Total liabilities 165,289 154,850

Shareholders' equity:

Common stock - par value $0.001, 50,000,000 shares authorized; 19,382,430 and 19 19 18,988,379 issued; 17,983,989 and 17,576,618 outstanding, respectively

Additional paid-in capital 287,979 267,868

Retained earnings 113,508 112,879

Accumulated other comprehensive loss (10,160) (17,399)

Common stock in treasury, at cost - 1,411,761 shares and 1,411,761, (31,043) (31,375) respectively

Total shareholders' equity 360,303 331,992

Total liabilities and shareholders' equity $525,592 $486,842

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



Years Ended December 31,

(in thousands) 2020 2019

CASH FLOWS FROM:

OPERATING ACTIVITIES:

Net income (loss) $ 629 $ (62,147)

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

Depreciation and amortization 14,239 18,516

Compensation for stock options and restricted stock units 8,314 11,071

Provision for bad debts (net of recoveries) 440 2,090

Loss on disposal of assets 383 2,639

Provision for excess and obsolete inventory 1,349 16,886

Impairment of goodwill - 21,233

Impairment of acquired intangibles - 10,548

Impairment of loan to affiliate - 549

Deferred income tax benefit (28,444) (6,304)

Change in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable, net 12,346 10,406

Inventories 10,343 (4,136)

Prepaid expenses and other assets 3,862 1,188

Increase (decrease) in:

Accounts payable and accrued liabilities 2,390 (2,518)

Income taxes payable (3,357) 1,041

Customer deposits (374) (30)

Unearned service revenues (726) 11,436

Net cash provided by operating activities 21,394 32,468

INVESTING ACTIVITIES:

Purchases of investments - (50,000)

Proceeds from sale of investments 25,000 50,000

Purchases of property and equipment (4,774) (6,675)

Payments for internally capitalized patents (1,298) (2,118)

Acquisition of business, net of cash received (6,036) -

Other 1,015 (549)

Net cash provided by (used in) investing activities 13,907 (9,342)

FINANCING ACTIVITIES:

Payments on capital leases (338) (358)

Payments of contingent consideration for acquisitions (733) (3,101)

Payments for taxes related to net share settlement of equity awards (2,602) (2,199)

Proceeds from issuance of stock related to stock option exercises 14,731 7,901

Net cash provided by financing activities 11,058 2,243

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 5,640 (518)

INCREASE IN CASH AND CASH EQUIVALENTS 51,999 24,851

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 133,634 108,783

CASH AND CASH EQUIVALENTS, END OF YEAR $ 185,633$ 133,634

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) 2020 2019 2020 2019

Total sales, as reported $92,953 $ 104,141 $303,768 $381,765

GSA sales adjustment^ (1) - - 608 5,840

Non-GAAP total sales $92,953 $ 104,141 $304,376 $387,605



Gross profit, as reported $50,780 $ 43,601 $159,847 $198,132

GSA sales adjustment ^(1) - - 608 5,840

Stock-based compensation ^(2) 211 231 702 1,001

Inventory reserve charge ^(3) - 12,800 - 12,800

Product recall charge ^(4) - 1,328 - 1,328

Non-GAAP adjustments to gross profit 211 14,359 1,310 20,969

Non-GAAP gross profit $50,991 $ 57,960 $161,157 $219,101

Gross margin, as reported 54.6 % 41.9 % 52.6 % 51.9 %

Non-GAAP gross margin 54.9 % 55.7 % 52.9 % 56.5 %



Operating expenses, as reported $48,088 $ 91,809 $190,529 $256,766

Advisory fees for GSA Matter ^(5) - - - (1,244)

Stock-based compensation ^(2) (1,675) (2,137) (7,612) (10,068)

Restructuring costs ^(6) (1,243) - (15,806) -

Other product charge ^(4) (1,644) - (1,644) -

Executive severance costs - - - (1,217)

Executive sign-on bonuses & relocation costs - (215) - (1,060)

Strategic impairments and write-offs ^(7) - (35,213) - (35,213)

Purchase accounting intangible amortization (604) (974) (2,069) (3,639)

Non-GAAP adjustments to operating expenses (5,166) (38,539) (27,131) (52,441)

Non-GAAP operating expenses $42,922 $ 53,270 $163,398 $204,325



Income (loss) from operations, as reported $2,692 $ (48,208) $(30,682) $(58,634)

Non-GAAP adjustments to gross profit 211 14,359 1,310 20,969

Non-GAAP adjustments to operating expenses 5,166 38,539 27,131 52,441

Non-GAAP income (loss) from operations $8,069 $ 4,690 $(2,241) $14,776



Other (income) expense, net, as reported $(650) $ (90) $91 $2,380

Interest adjustment due to GSA sales adjustment^ (1) 727 (147) 168 (779)

Contingent consideration fair value adjustment - 926 - 926

Present4D impairment ^(8) - (617) - (2,152)

Non-GAAP adjustments to other (income) expense, net 727 162 168 (2,005)

Non-GAAP other expense, net $77 $ 72 $259 $375



Net income (loss), as reported $27,408 $ (49,695) $629 $(62,147)

Non-GAAP adjustments to gross profit 211 14,359 1,310 20,969

Non-GAAP adjustments to operating expenses 5,166 38,539 27,131 52,441

Non-GAAP adjustments to other (income) expense, net (727) (162) (168) 2,005

Income tax effect of non-GAAP adjustments (2,305) (6,180) (7,235) (10,665)

Other tax adjustments ^(9) (23,501) 6,209 (23,501) 8,628

Non-GAAP net income (loss) $6,252 $ 3,070 $(1,834) $11,231



Net income (loss) per share - Diluted, as reported $1.52 $ (2.85) $0.04 $(3.58)

GSA sales adjustment ^(1) - - 0.03 0.34

Stock-based compensation ^(2) 0.11 0.14 0.46 0.64

Product recall and other product charges ^(4) 0.09 0.08 0.09 0.08

Inventory reserve charge ^(3) - 0.73 - 0.73

Advisory fees for GSA Matter ^(5) - - - 0.07

Restructuring costs ^(6) 0.07 - 0.88 -

Executive severance costs - - - 0.07

Executive sign-on bonuses & relocation costs - 0.01 - 0.06

Strategic impairments and write-offs ^(7) - 2.02 - 2.03

Purchase accounting intangible amortization 0.03 0.06 0.12 0.21

Interest expense increase due to GSA sales adjustment ^(1)(0.04) 0.01 (0.01) 0.04

Contingent consideration fair value adjustment - (0.05) - (0.05)

Present4D impairment ^(8) - 0.03 - 0.12

Income tax effect of non-GAAP adjustments (0.13) (0.36) (0.40) (0.61)

Other tax adjustments ^(9) (1.30) 0.36 (1.31) 0.50

Non-GAAP net income (loss) per share - Diluted $0.35 $ 0.18 $(0.10) $0.65

^(1) Late in the fourth quarter of 2018, during an internal review wepreliminarily determined that certain of our pricing practices may haveresulted in the U.S. Government being overcharged under our General ServicesAdministration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the"GSA Matter"). We retained outside legal counsel and forensic accountants toconduct a comprehensive review of our pricing and other practices under theContracts (the "Review"). During the twelve months ended December 31, 2019, wereduced our total sales $5.8 million (the "GSA sales adjustment") and recordedimputed interest expense of $0.1 million and $0.8 million related to the GSAMatter for the three and twelve months ended December 31, 2019, respectively.During the twelve months ended December 31, 2020, we reduced our total sales$0.6 million. During the first nine months of 2020 we recorded an incremental$0.6 million of imputed interest related to the estimated cumulative salesadjustment and in the fourth quarter of 2020 we determined that an adjustmentto reduce imputed interest by $0.7 million was required.

^(2) We exclude stock-based compensation, which is non-cash, from the non-GAAPfinancial measures because the Company believes that such exclusion provides abetter comparison of results of ongoing operations for current and futureperiods with such results from past periods. This adjustment includesaccelerated vesting of equity awards in connection with the transition of ourprior executives totaling $3.5 million for the twelve months ended December 31,2019.

^(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 analysisof our inventory reserves in connection with our strategy to simplify ourhardware product portfolio and cease selling certain products.

^(4) During the fourth quarter of 2019, we accrued a recall charge for laborand parts related to a small portion of previously sold measurement devicesthat were outside the manufacturer's standard warranty due to safety concerns.During the fourth quarter of 2020, we recognized a charge related to thereplacement of a prior generation product that was exhibiting lower thandesired reliability as part of our ongoing focus on customer satisfaction.

^(5) In connection with the GSA Matter, we retained outside legal counsel andforensic accountants to conduct the Review, which resulted in $1.2 million inadvisory fees incurred during 2019.

^(6) On February 14, 2020, our Board of Directors approved a globalrestructuring plan (the "Restructuring Plan"), which is intended to support ourstrategic plan in an effort to improve operating performance and ensure that weare appropriately structured and resourced to deliver increased and sustainablevalue to our shareholders and customers. In connection with the RestructuringPlan, we recorded a pre-tax charge of approximately $15.8 million during thetwelve months ended December 31, 2020 primarily consisting of severance andrelated benefits.

^(7) Because the historical and projected future performance of certain of ourrecently acquired operations were lower than our expectations, and due tochanges 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 of2019, which included $21.2 million in goodwill, $10.5 million in intangibleassets associated with recent acquisitions, $1.4 million in intangible assetsrelated to capitalized patents and $2.1 million in other asset write-downs.

^(8) On April 27, 2018, we invested $1.8 million in present4D GmbH("present4D"), a software solutions provider for professional virtual realitypresentations and training environments, in the form of an equity capitalcontribution. In July 2019, we originated a $0.5 million note with present4D,which we may convert into additional equity in present4D at our discretion inthe event of a default. As we no longer intend to provide future support topresent4D or obtain the aforementioned additional share capital in the futureand no longer intend to use the perpetual and royalty-free, non-exclusive,transferable and sublicensable license granted to us to use present4D'ssoftware, we wrote off the investment in, and our note receivable with,present4D and recognized a total loss of $2.2 million during the twelve monthsended December 31, 2019, which is included in Other expense, net.

^(9) The 2019 tax adjustments were driven primarily by return-to-provisionadjustments identified in the preparation of our 2018 U.S. tax return, anincrease in our valuation allowance primarily related to foreign net operatingloss carryforwards that, in the judgment of management, were not more likelythan not to be realized, and changes in our reserve for uncertain tax positionsdue to a change in our judgment on the recognition of a tax position. The 2020tax adjustments were driven primarily by the establishment of deferred taxassets in relation to intra-entity transfers of certain intellectual propertyrights in December 2020.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

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

(UNAUDITED)



Three Months Ended December 31,Twelve Months Ended December 31,

(in thousands) 2020 2019 2020 2019

Net income (loss) $ 27,408 $ (49,695) $ 629 $ (62,147)

Interest (income) expense, net (747) (5) (340) 67

Income tax benefit (24,066) 1,577 (31,402) 1,133

Depreciation and amortization 3,608 4,428 14,239 18,548

EBITDA 6,203 (43,695) (16,874) (42,399)

Loss (Gain) on foreign currency transactions 97 224 431 1,087

Stock-based compensation 1,886 2,368 8,314 11,071

GSA sales adjustment ^(1) - - 608 5,840

Advisory fees for GSA Matter ^(2) - - - 1,244

Inventory reserve charge ^(3) - 12,800 - 12,800

Product recall and other product charges ^(4) 1,644 1,328 1,644 1,328

Executive severance costs - 215 - 1,432

Executive sign-on bonuses & relocation costs - - - 845

Present4D impairment ^(5) - 617 - 2,152

Restructuring costs ^(6) 1,243 - 15,806 -

Strategic impairments and write-offs ^(7) - 35,213 - 35,213

Contingent consideration fair value adjustment- (926) - (926)

Adjusted EBITDA $ 11,073 $ 8,144 $ 9,929 $ 29,687

Adjusted EBITDA margin ^(8) 11.9 % 7.8 % 3.3 %7.7 %

^(1) Late in the fourth quarter of 2018, during an internal review wepreliminarily determined that certain of our pricing practices may haveresulted in the U.S. Government being overcharged under our General ServicesAdministration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the"GSA Matter"). We retained outside legal counsel and forensic accountants toconduct a comprehensive review of our pricing and other practices under theContracts (the "Review"). During the twelve months ended December 31, 2020 andDecember 31, 2019, we reduced our total sales by $0.6 million and $5.8 million,respectively (the "GSA sales adjustment").

^(2) In connection with the GSA Matter, we retained outside legal counsel andforensic accountants to conduct the Review, which resulted in $1.2 million inadvisory fees incurred during 2019.

^(3) During the fourth quarter of 2019, we recorded a charge of $12.8, millionincreasing our reserve for excess and obsolete inventory, based on our analysisof our inventory reserves in connection with our strategy to simplify ourhardware product portfolio and cease selling certain products.

^(4) During the fourth quarter of 2019, we accrued a recall charge for laborand parts related to a small portion of previously sold measurement devicesthat were outside the manufacturer's standard warranty due to safety concerns.During the fourth quarter of 2020, we recognized a charge related to thereplacement of a prior generation product that was exhibiting lower thandesired reliability as part of our ongoing focus on customer satisfaction.

^(5) On April 27, 2018, we invested $1.8 million in present4D GmbH("present4D"), a software solutions provider for professional virtual realitypresentations and training environments, in the form of an equity capitalcontribution. In July 2019, we originated a $0.5 million note with present4D,which we may convert into additional equity in present4D at our discretion inthe event of a default. As we no longer intend to provide future support topresent4D or obtain the aforementioned additional share capital in the futureand no longer intend to use the perpetual and royalty-free, non-exclusive,transferable and sublicensable license granted to us to use present4D'ssoftware, we wrote off the investment in, and our note receivable with,present4D and recognized a total loss of $2.2 million during the twelve monthsended December 31, 2019, which is included in Other expense, net.

^(6) On February 14, 2020, our Board of Directors approved a globalrestructuring plan (the "Restructuring Plan"), which is intended to support ourstrategic plan in an effort to improve operating performance and ensure that weare appropriately structured and resourced to deliver increased and sustainablevalue to our shareholders and customers. In connection with the RestructuringPlan, we recorded a pre-tax charge of approximately $15.8 million during thetwelve months ended December 31, 2020 primarily consisting of severance andrelated benefits.

^(7) Because the historical and projected future performance of certain of ourrecently acquired operations were lower than our expectations, and due tochanges 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 of2019, which included $21.2 million in goodwill, $10.5 million in intangibleassets associated with recent acquisitions, $1.4 million in intangible assetsrelated to capitalized patents and $2.1 million in other asset write-downs.

^(8) Calculated as Adjusted EBITDA as a percentage of Non-GAAP total sales,which adjusts for the GSA sales adjustment.

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SOURCE FARO