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)	2021	2020	2021	2020
Total sales, as reported	$ 100,204	$ 92,953	$ 337,814	$ 303,768
GSA sales adjustment⁽¹⁾	—	—	—	608
Non-GAAP total sales	$ 100,204	$ 92,953	$ 337,814	$ 304,376

Gross profit, as reported	$ 55,707	$ 50,780	$ 183,927	$ 159,847
GSA sales adjustment ⁽¹⁾	—	—	—	608
Stock-based compensation ⁽²⁾	165	211	635	702
Non-GAAP adjustments to gross profit	165	211	635	1,310
Non-GAAP gross profit	$ 55,872	$ 50,991	$ 184,562	$ 161,157
Gross margin, as reported	55.6 %	54.6 %	54.4 %	52.6 %
Non-GAAP gross margin	55.8 %	54.9 %	54.6 %	52.9 %

Selling, general and administrative, as reported	$ 35,859	$ 35,304	$ 136,234	$ 131,827
Stock-based compensation ⁽²⁾	(2,196)	(1,661)	(8,985)	(6,327)
Purchase accounting intangible amortization	(259)	(193)	(908)	(564)
Non-GAAP selling, general and administrative	$ 33,404	$ 33,450	$ 126,341	$ 124,936

Research and development, as reported	$ 12,297	$ 11,541	$ 48,761	$ 42,896
Stock-based compensation ⁽²⁾	(438)	(14)	(1,836)	(1,285)
Purchase accounting intangible amortization	(1,072)	(411)	(2,133)	(1,505)
Non-GAAP research and development	$ 10,787	$ 11,116	$ 44,792	$ 40,106

Operating expenses, as reported	$ 51,845	$ 48,088	$ 192,363	$ 190,529
Stock-based compensation ⁽²⁾	(2,634)	(1,675)	(10,821)	(7,612)
Restructuring costs ⁽³⁾	(3,689)	(1,243)	(7,368)	(15,806)
Other product charge ⁽⁴⁾	—	(1,644)	—	(1,644)
Purchase accounting intangible amortization	(1,331)	(604)	(3,041)	(2,069)
Non-GAAP adjustments to operating expenses	(7,654)	(5,166)	(21,230)	(27,131)
Non-GAAP operating expenses	$ 44,191	$ 42,922	$ 171,133	$ 163,398

Income (loss) from operations, as reported	$ 3,862	$ 2,692	$ (8,436)	$ (30,682)
Non-GAAP adjustments to gross profit	165	211	635	1,310
Non-GAAP adjustments to operating expenses	7,654	5,166	21,230	27,131
Non-GAAP income (loss) from operations	$ 11,681	$ 8,069	$ 13,429	$ (2,241)

Other expense (income), net, as reported	$ 521	$ (650)	$ 142	$ 91
Interest adjustment due to GSA sales adjustment ⁽¹⁾	—	727	—	168
Non-GAAP adjustments to other expense (income), net	—	727	—	168
Non-GAAP other expense, net	$ 521	$ 77	$ 142	$ 259

Net (loss) income, as reported	$ (31,712)	$ 27,408	$ (39,964)	$ 629
Non-GAAP adjustments to gross profit	165	211	635	1,310
Non-GAAP adjustments to operating expenses	7,654	5,166	21,230	27,131
Non-GAAP adjustments to other expense (income), net	—	(727)	—	(168)
Income tax effect of non-GAAP adjustments	(1,191)	(2,305)	(5,432)	(7,235)
Other tax adjustments ⁽⁵⁾	33,779	(23,501)	33,779	(23,501)
Non-GAAP net income (loss)	$ 8,695	$ 6,252	$ 10,248	$ (1,834)

Net (loss) income per share - Diluted, as reported	$ (1.74)	$ 1.52	$ (2.20)	$ 0.04
GSA sales adjustment ⁽¹⁾	—	—	—	0.03
Stock-based compensation ⁽²⁾	0.16	0.11	0.63	0.46
Restructuring costs ⁽³⁾	0.20	0.07	0.40	0.88
Other product charges ⁽⁴⁾	—	0.09	—	0.09
Purchase accounting intangible amortization	0.07	0.03	0.17	0.12
Interest expense increase due to GSA sales adjustment ⁽¹⁾	—	(0.04)	—	(0.01)
Income tax effect of non-GAAP adjustments	(0.06)	(0.13)	(0.30)	(0.40)
Other tax adjustments ⁽⁵⁾	1.85	(1.30)	1.86	(1.31)
Non-GAAP net income (loss) per share - Diluted	$ 0.48	$ 0.35	$ 0.56	$ (0.10)

⁽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"). During the twelve months ended December 31, 2020, we reduced our total sales by $0.6 million (the "GSA sales adjustment"). 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. Effective as of February 25, 2021, as a result of the review, we entered into a settlement agreement with the GSA and have paid in full and final satisfaction of any and all claims, causes of actions, appeals and the like, including damages, costs, attorney's fees and interest arising under or related to the GSA Matter.

⁽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.

⁽³⁾ 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, during the twelve months ended December 31, 2021 and December 31, 2020 we recorded a pre-tax charge of approximately $7.4 million and $15.8 million, respectively, primarily consisting of severance and related benefits.

⁽⁴⁾ 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⁾ The 2021 tax adjustments were driven by an increase in our valuation allowance primarily related to domestic and foreign deferred tax assets that, in the judgment of management, were not more likely than not to be realized. 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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