PR Newswire | Oct 28, 2020 04:16PM EDT

10/28 15:15 CDT

FARO Announces Third Quarter Financial Results LAKE MARY, Fla., Oct. 28, 2020

LAKE MARY, Fla., Oct. 28, 2020 /PRNewswire/ -- FARO(r) (Nasdaq: FARO), a global leader of 3D measurement, imaging and realization solutions for the 3D Metrology, AEC (Architecture, Engineering & Construction), and Public Safety Analytics markets, today announced its financial results for the third quarter ended September 30, 2020.

"In the third quarter we saw improving sequential performance as global economies began to reopen and our customers resumed their capital investment plans. Additionally, we continued to progress on our strategic initiatives both organically with positive customer response to our recently announced new products and inorganically with our Digital Twin initiative enabled through the August acquisition of Advanced Technical Solutions ("ATS")," stated Michael Burger, President and Chief Executive Officer. "While near-term demand remains below the 2019 level, we have gained confidence that our second quarter represents the trough in demand, as we continue to experience increased customer activity levels. As importantly, as evidenced by our third quarter results, we expect the cost reduction actions taken earlier this year will drive strong operating leverage and profit growth as demand returns to normalized levels."

Third Quarter 2020 Financial SummaryTotal sales were $70.7 million for third quarter 2020 representing a 17% sequential quarterly increase when compared to $60.6 million in the second quarter 2020, and a 22% decrease when compared with $90.5 million for third 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 $72.0 million increased 17% sequentially compared to $61.4 million in the second quarter 2020, but were down 24% when compared to $94.9 million for the third quarter 2019.

Gross margin was 51.3% for the third quarter 2020, as compared to 56.1% for the same prior year period. Non-GAAP gross margin was 51.5% for the third quarter 2020 compared to 56.4% for the third quarter 2019. The annual decrease in gross margin was primarily a result of the impact of lower sales resulting from the COVID-19 pandemic.

Operating expense, which includes $0.2 million of non-recurring charges, was $41.2 million for the third quarter 2020, as compared to $56.7 million for the same prior year period. Non-GAAP operating expense was $38.5 million for the third quarter 2020 compared to $51.1 million for the third quarter 2019.

Net loss was $3.0 million, or $0.17 per share, for the third quarter 2020, as compared to a net loss of $6.2 million, or $0.36 per share, for the third quarter 2019. Non-GAAP net loss was $1.3 million, or $0.08 per share, for the third quarter 2020 compared to Non-GAAP net loss of $0.2 million, or $0.01 per share, for the third quarter 2019.

Adjusted EBITDA was $0.8 million, or 1% of Non-GAAP total sales, for the third quarter of 2020 compared to Adjusted EBITDA of $3.8 million, or 4% of Non-GAAP total sales, for the third 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 decreased $10.3 million to $163.6 million as of the end of the third quarter of 2020, and the Company remained debt-free.

Conference CallThe Company will host a conference call to discuss these results on Wednesday, October 29, 2020 at 8:00 a.m. ET. Interested parties can access the conference call by dialing (800) 459-5346 (U.S.) or +1 (203) 518-9544 (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 margin, non-GAAP operating expenses, non-GAAP net (loss) income and non-GAAP net (loss) income 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, executive severance costs, executive sign-on bonuses and relocation costs, Present4D impairment charges, restructuring charges, and other tax adjustments, and are provided to enhance investors' overall understanding of our historical operations and financial performance.

In addition, we present Adjusted EBITDA, which is calculated as net loss before interest expense, net, income tax benefit and depreciation and amortization, excluding (gain) loss on foreign currency transactions, the GSA sales adjustment, stock-based compensation, advisory fees incurred related to the GSA Matter, executive severance costs, executive sign-on bonuses and relocation costs, Present4D impairment charges, and restructuring costs, as measures of our operating profitability. The most directly comparable GAAP measure to Adjusted EBITDA is net loss.

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 strategic and restructuring plans and initiatives, including but not limited to the additional restructuring charges expected to be incurred in connection with FARO's restructuring plan and the timing and amount of cost savings and other benefits expected to be realized from the restructuring plan and go-to-market strategy, FARO's ability to achieve strategic objectives and other benefits expected to be realized from the Company's acquisition of the ATS business, and FARO's growth and profitability potential. 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 "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or words of similar meaning 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 inability 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 Company's inability to realize the intended benefits of the technology, products, operations, contracts and personnel of the ATS business; * 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, 2019 and in Part II, Item 1A. Risk Factors in the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020.

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 Nine Months Ended

(in thousands, September 30,September 30, 2September 30,September 30,except share and2020 019 2020 2019 per share data)

Sales

Product $48,082 $66,788 $146,866 $209,411

Service 22,654 23,728 63,949 68,213

Total sales 70,736 90,516 210,815 277,624

Cost of Sales

Product 22,413 27,086 66,812 85,542

Service 12,025 12,658 34,936 37,551

Total cost of 34,438 39,744 101,748 123,093 sales

Gross Profit 36,298 50,772 109,067 154,531

Operating Expenses

Selling, general and 30,163 45,880 96,523 131,909 administrative

Research and 10,754 10,783 31,355 33,048 development

Restructuring 239 - 14,563 - costs

Total operating 41,156 56,663 142,441 164,957 expenses

Loss from (4,858) (5,891) (33,374) (10,426) operations

Other (income) expense

Interest expense161 (24) 407 72 (income), net

Other (income) (256) 514 334 2398 expense, net

Loss before income tax (4,763) (6,381) (34,115) (12,896) benefit

Income tax (1,739) (182) (7,336) (444) benefit

Net loss $(3,024) $(6,199) $(26,779) $(12,452)

Net loss per $(0.17) $(0.36) $(1.51) $(0.72) share - Basic

Net loss per $(0.17) $(0.36) $(1.51) $(0.72) share - Diluted

Weighted average17,797,390 17,367,228 17,757,359 17,352,386 shares - Basic

Weighted average17,797,390 17,367,228 17,757,359 17,352,386 shares - Diluted

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands, except share and per share September 30, December 31,data) 2020 (unaudited)2019

ASSETS

Current assets:

Cash and cash equivalents $163,637 $133,634

Short-term investments - 24,870

Accounts receivable, net 47,533 76,162

Inventories, net 50,004 58,554

Prepaid expenses and other current assets 23,566 28,996

Total current assets 284,740 322,216

Non-current assets:

Property, plant and equipment, net 22,962 26,954

Operating lease right-of-use asset 15,060 18,418

Goodwill 55,640 49,704

Intangible assets, net 13,475 14,471

Service and sales demonstration inventory, net33,181 33,349

Deferred income tax assets, net 23,833 18,766

Other long-term assets 2,835 2,964

Total assets $451,726 $486,842

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable $9,096 $13,718

Accrued liabilities 37,622 38,072

Income taxes payable 211 5,182

Current portion of unearned service revenues 37,523 39,211

Customer deposits 3,912 3,108

Lease liability 5,089 6,674

Total current liabilities 93,453 105,965

Unearned service revenues - less current 19,354 20,578 portion

Lease liability - less current portion 11,781 13,698

Deferred income tax liabilities 734 357

Income taxes payable - less current portion 12,058 13,177

Other long-term liabilities 1,016 1,075

Total liabilities 138,396 154,850

Shareholders' equity:

Common stock - par value $.001, 50,000,000 shares authorized; 19,231,375 and 18,988,379 19 19 issued, respectively; 17,832,934 and 17,576,618 outstanding, respectively

Additional paid-in capital 276,779 267,868

Retained earnings 86,100 112,879

Accumulated other comprehensive loss (18,526) (17,399)

Common stock in treasury, at cost; 1,398,441 (31,042) (31,375) and 1,411,761 shares, respectively

Total shareholders' equity 313,330 331,992

Total liabilities and shareholders' equity $451,726 $486,842

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



Nine Months Ended

(in thousands) September 30,September 30, 2020 2019

Cash flows from:

Operating activities:

Net loss $(26,779) $(12,452)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization 10,631 14,203

Stock-based compensation 6,428 8,703

Provisions for bad debts, net of recoveries 435 1,000

Loss on disposal of assets 351 552

Provision for excess and obsolete inventory 778 2,431

Deferred income tax benefit (4,961) (69)

Impairment charge on equity method investment - 1,535

Change in operating assets and liabilities:

Decrease (Increase) in:

Accounts receivable 28,132 21,883

Inventories 5,101 (9,471)

Prepaid expenses and other current assets 9,391 640

Increase (Decrease) in:

Accounts payable and accrued liabilities (10,006) (6,934)

Income taxes payable (6,109) (3,679)

Customer deposits 815 (685)

Unearned service revenues (3,391) 5,809

Net cash provided by operating activities 10,816 23,466

Investing activities:

Purchases of property and equipment (2,833) (5,922)

Proceeds from sale of investments 25,000 33,700

Purchases of investments - (33,700)

Proceeds from asset sales 768 -

Payments for intangible assets (813) (2,035)

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

Loan originated to affiliate - (549)

Net cash provided by (used in) investing 16,086 (8,506) activities

Financing activities:

Payments on finance leases (237) (273)

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

Payments for taxes related to net share (2,568) (1,389) settlement of equity awards

Proceeds from issuance of stock related to stock5,384 2,328 option exercises

Net cash provided by (used in) financing 1,846 (2,435) activities

Effect of exchange rate changes on cash and cash1,255 (2,225) equivalents

Increase in cash and cash equivalents 30,003 10,300

Cash and cash equivalents, beginning of period 133,634 108,783

Cash and cash equivalents, end of period $163,637 $119,083

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

(UNAUDITED)



Three Months Ended September 30,Nine Months Ended September 30,

(dollars in thousands, 2020 2019 2020 2019 except per share data)

Total sales, $70,736 $90,516 $ 210,815 $ 277,624 as reported

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

Non-GAAP $70,736 $90,516 $ 211,423 $ 283,464 total sales



Gross profit,$36,298 $50,772 $ 109,067 $ 154,531 as reported

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

Stock-based compensation 127 270 491 770 ^(2)

Non-GAAP adjustments 127 270 1,099 6,610 to gross profit

Non-GAAP $36,425 $51,042 $ 110,166 $ 161,141 gross profit

Gross margin,51.3 %56.1 %51.7 % 55.7 % as reported

Non-GAAP 51.5 %56.4 %52.1 % 56.8 % gross margin



Operating expenses, as $41,156 $56,663 $ 142,441 $ 164,957 reported

Advisory fees for GSA - - - (1,244) Matter ^(3)

Stock-based compensation (1,957) (3,117) (5,937) (7,933) ^(2)

Restructuring(239) - (14,563) - costs ^(4)

Executive severance - (1,217) - (1,217) costs

Executive sign-on bonuses & - (270) - (845) relocation costs

Purchase accounting (493) (924) (1,465) (2,665) intangible amortization

Non-GAAP adjustments (2,689) (5,528) (21,965) (13,904) to operating expenses

Non-GAAP operating $38,467 $51,135 $ 120,476 $ 151,053 expenses



Loss from operations, $(4,858) $(5,891) $ (33,374) $ (10,426) as reported

Non-GAAP adjustments 127 270 1,099 6,610 to gross profit

Non-GAAP adjustments 2,689 5,528 21,965 13,904 to operating expenses

Non-GAAP (loss) income$(2,042) $(93) $ (10,310) $ 10,088 from operations



Other (income) $(95) $490 $ 741 $ 2,470 expense, net, as reported

Interest expense increase due (161) (145) (559) (632) to GSA sales adjustment^ (1)

Present4D impairment ^ - - - (1,535) (5)

Non-GAAP adjustments (161) (145) (559) (2,167) to other expense, net

Non-GAAP other $(256) $345 $ 182 $ 303 (income) expense, net



Net loss, as $(3,024) $(6,199) $ (26,779) $ (12,452) reported

Non-GAAP adjustments 127 270 1,099 6,610 to gross profit

Non-GAAP adjustments 2,689 5,528 21,965 13,904 to operating expenses

Non-GAAP adjustments 161 145 559 2,167 to other expense, net

Income tax effect of (1,292) (1,452) (4,930) (4,484) non-GAAP adjustments

Other tax adjustments ^- 1,555 - 2,419 (6)

Non-GAAP net $(1,339) $(153) $ (8,086) $ 8,164 (loss) income



Net loss per share - $(0.17) $(0.36) $ (1.51) $ (0.72) Diluted, as reported

GSA sales adjustment ^ - 0.00 0.03 0.34 (1)

Stock-based compensation 0.12 0.19 0.36 0.50 ^(2)

Advisory fees for GSA - - - 0.07 Matter ^(3)

Restructuring0.01 - 0.82 - costs ^(4)

Executive severance - 0.07 - 0.07 costs

Executive sign-on bonuses & - 0.02 - 0.05 relocation costs

Purchase accounting 0.03 0.05 0.08 0.15 intangible amortization

Interest expense increase due 0.01 0.01 0.03 0.04 to GSA sales adjustment ^ (1)

Present4D impairment ^ - - - 0.09 (5)

Income tax effect of (0.08) (0.08) (0.27) (0.26) non-GAAP adjustments

Other tax adjustments ^- 0.09 - 0.14 (6)

Non-GAAP net (loss) income$(0.08) $(0.01) $ (0.46) $ 0.47 per share - Diluted

^(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 nine months ended September 30, 2020 andSeptember 30, 2019, we reduced our total sales by $0.6 million and $5.8million, respectively, (the "GSA sales adjustment") and recorded imputedinterest expense of $0.6 million and $0.6 million, respectively, related to theGSA Matter.

^(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.

^(3) 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 the nine months ended September 30, 2019.

^(4) 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 $14.6 million during thefirst nine months of 2020 primarily consisting of severance and relatedbenefits.

^(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. During the second quarter of 2019, we determined it is morelikely than not that we will not recover our cost basis in present4D andrecorded an impairment charge of $1.5 million, which is included in Otherexpense, net.

^(6) Driven primarily by return-to-provision adjustments identified in thepreparation of our 2018 U.S. tax return and changes in our reserve foruncertain tax positions due to a change in our judgment on the recognition of atax position.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

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

(UNAUDITED)



Three Months Ended September 30,Nine Months Ended September 30,

(in 2020 2019 2020 2019 thousands)

Net loss $(3,024) $(6,199) $ (26,779) $ (12,452)

Interest expense 161 (24) 407 72 (income), net

Income tax (1,739) (182) (7,336) (444) benefit

Depreciation and 3,352 4,798 10,631 14,120 amortization

EBITDA (1,250) (1,607) (23,077) 1,296

(Gain) Loss on foreign (256) 514 334 863 currency transactions

Stock-based 2,084 3,387 6,429 8,703 compensation

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

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

Executive severance - 1,217 - 1,217 costs

Executive sign-on bonuses & - 270 - 845 relocation costs

Present4D impairment ^ - - - 1,535 (3)

Restructuring239 - 14,563 - costs ^(4)

Adjusted $817 $3,781 $ (1,143) $ 21,543 EBITDA

Adjusted EBITDA margin1.2 %4.2 %(0.5) % 7.6 % ^(5)

^(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"). In fourth quarter 2018, we reduced our total sales by anestimated cumulative adjustment of $4.8 million. We also retained outside legalcounsel and forensic accountants to conduct a comprehensive review of ourpricing and other practices under the Contracts (the "Review"). During the ninemonths ended September 30, 2020 and September 30, 2019, we reduced our totalsales by $0.6 million and $5.8 million, respectively, (the "GSA salesadjustment") and recorded imputed interest expense of $0.6 million and $0.6million, respectively, related to the GSA Matter.

^(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 the nine months ended September 30, 2019.

^(3) 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. During the second quarter of 2019, we determined it is morelikely than not that we will not recover our cost basis in present4D andrecorded an impairment charge of $1.5 million, which is included in Otherexpense, net.

^(4) 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 $14.6 million during thefirst nine months of 2020 primarily consisting of severance and relatedbenefits.

^(5) 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