FARO Announces Fourth Quarter and Full Year Financial Results

 

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 we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). We retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). During the twelve months ended December 31, 2019, we reduced our total sales $5.8 million (the "GSA sales adjustment") and recorded imputed interest expense of $0.1 million and $0.8 million related to the GSA Matter for the three and twelve months ended December 31, 2019, respectively. 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 sales adjustment and in the fourth quarter of 2020 we determined that an adjustment to reduce imputed interest by $0.7 million was required.


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


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


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


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


(6)  On February 14, 2020, our Board of Directors approved a global restructuring plan (the "Restructuring Plan"), which is intended to support our strategic plan in an effort to improve operating performance and ensure that we are appropriately structured and resourced to deliver increased and sustainable value to our shareholders and customers. In connection with the Restructuring Plan, we recorded a pre-tax charge of approximately $15.8 million during the twelve months ended December 31, 2020 primarily consisting of severance and related benefits.


(7) Because the historical and projected future performance of certain of our recently acquired operations were lower than our expectations, and due to changes in our go-forward strategy in connection with our new strategic plan, we incurred an impairment loss of $35.2 million during the fourth quarter of 2019, which included $21.2 million in goodwill, $10.5 million in intangible assets associated with recent acquisitions, $1.4 million in intangible assets related to capitalized patents and $2.1 million in other asset write-downs.


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


(9)  The 2019 tax adjustments were driven primarily by return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return, an increase in our valuation allowance primarily related to foreign net operating loss carryforwards that, in the judgment of management, were not more likely than not to be realized, and changes in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position. The 2020 tax adjustments were driven primarily by the establishment of deferred tax assets in relation to intra-entity transfers of certain intellectual property rights in December 2020.


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