"I'm excited to have joined FARO in mid-June and to lead the company through its next phase of evolution," stated Michael Burger, President and Chief Executive Officer. "I am very encouraged by our company's technological, manufacturing, and organizational strengths and FARO's potential for growth. Looking forward, we will be developing a strategy to leverage our capabilities to deliver long-term shareholder value."
Second Quarter 2019 Financial Summary
Total sales were $93.5 million for second quarter 2019, as compared with $98.2 million for second quarter 2018, which included the unfavorable impacts of $5.8 million from the GSA sales adjustment described below and $2.5 million from changes in foreign exchange rates. Excluding the impact of the GSA sales adjustment, non-GAAP* total sales were $99.3 million for second quarter 2019, up 1.1% as compared with $98.2 million for second quarter 2018. We grew our service revenue year-over-year by 13.2% in second quarter 2019, driven by the growth of our installed base and our focused after-market sales initiatives. Our product sales for second quarter 2019 decreased year-over-year primarily due to the GSA sales adjustment, the impact of changes in foreign exchange rates, and a decrease in unit sales within our 3D manufacturing segment, especially in our Asia-Pacific region. New order bookings were $106.1 million for second quarter 2019, down 0.4% as compared with $106.5 million for second quarter 2018.
As previously disclosed, we have sold our products and related services to the U.S. Government (the "Government") under General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") since 2002. On February 14, 2019, we reported to the GSA and its Office of Inspector General that our preliminary internal review determined that we may have overcharged the Government under the Contracts (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by $4.8 million and recorded $0.5 million of imputed interest in other expense related to the GSA Matter based on our preliminary internal review at that time. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review, which reflected an estimated aggregate overcharge of $10.6 million and imputed interest of $1.0 million under the Contracts. Based on the results of the Review, we reduced our total sales for second quarter 2019 by an incremental $5.8 million (the "GSA sales adjustment") and recorded an incremental $0.4 million of imputed interest in other expense.
Gross margin was 56.0% for second quarter 2019, as compared with 58.7% for the same prior year period, reflecting a strong increase in service margin, which was more than offset by the impact of the GSA sales adjustment. Non-GAAP* gross margin was 58.5% for second quarter 2019.
Operating loss was $4.9 million for second quarter 2019, as compared with operating income of $1.9 million for second quarter 2018, primarily reflecting the GSA sales adjustment and incremental general and administrative expenses of $1.5 million related to our Chief Executive Officer succession and $0.7 million related to advisory fees incurred during second quarter 2019 in connection with the GSA Matter. Non-GAAP* operating income was $3.1 million for second quarter 2019.
Other expense was $1.9 million for second quarter 2019, as compared with $0.4 million for the second quarter last year, driven by a $1.5 million impairment charge related to our strategic investment in an early stage software company, and $0.4 million of imputed interest recorded in the quarter related to the GSA Matter.
We reported a net loss of $6.4 million, or $0.37 per share, for second quarter 2019, as compared to net income of $1.2 million, or $0.07 per share, for second quarter 2018. Our non-GAAP* net income was $2.5 million, or $0.14 per share, for second quarter 2019.
We generated $11.9 million in cash flow from operations for second quarter 2019 and remained debt-free, with cash and short-term investments totaling $145.4 million.
*A reconciliation of GAAP to non-GAAP financial measures, and an explanation of these measures, is provided in the financial tables at the end of this press release and on our website. An additional explanation of these measures is included below under the heading "Non-GAAP Financial Measures".
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 about demand for and customer acceptance of FARO's products, FARO's product development and product launches, FARO's growth, strategic and continuous improvement initiatives and FARO's growth 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 "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 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 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, 2018 .
