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

SOURCE FARO Technologies, Inc.

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