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FARO Reports Second Quarter 2019 Financial Results

LAKE MARY, Fla. , July 24, 2019 /PRNewswire/ -- FARO ® ( 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 second quarter ended June 30, 2019 .

"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 .

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.

Non-GAAP Financial Measures
This 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 total sales by reporting segment, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share, exclude the GSA sales adjustment, advisory fees incurred related to the GSA Matter, imputed interest expense recorded related to the GSA Matter, incremental compensation expense recognized in connection with our CEO succession, the impairment charge related to our equity investment in present4D GmbH and the increase in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position during the quarter and adjust for non-GAAP income tax expense, and are provided to enhance investors' overall understanding of our historical operations and financial performance. Management believes that these non-GAAP financial measures provide investors with relevant period-to-period comparisons of our core operations. 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.

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'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


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



Three Months Ended


Six Months Ended

(in thousands, except share and per share data)

June 30, 2019


June 30, 2018


June 30, 2019


June 30, 2018

Sales








Product

$

67,992



$

75,720



$

136,792



$

146,301


Service

25,499



22,524



50,316



44,777


Total sales

93,491



98,244



187,108



191,078


Cost of Sales








Product

29,037



27,878



55,165



54,762


Service

12,135



12,675



24,605



24,839


Total cost of sales (exclusive of depreciation and
amortization, shown separately below)

41,172



40,553



79,770



79,601


Gross Profit

52,319



57,691



107,338



111,477


Operating Expenses








Selling and marketing

29,124



30,084



55,877



58,355


General and administrative

14,424



11,320



27,648



22,393


Depreciation and amortization

4,573



4,377



9,322



8,720


Research and development

9,091



9,983



19,026



19,389


Total operating expenses

57,212



55,764



111,873



108,857


(Loss) income from operations

(4,893)



1,927



(4,535)



2,620


Other expense (income)








Interest expense (income), net

240



(87)



96



(160)


Other expense, net

1,689



509



1,884



693


(Loss) income before income tax (benefit) expense

(6,822)



1,505



(6,515)



2,087


Income tax (benefit) expense

(417)



300



(262)



427


Net (loss) income

$

(6,405)



$

1,205



$

(6,253)



$

1,660


Net (loss) income per share - Basic

$

(0.37)



$

0.07



$

(0.36)



$

0.10


Net (loss) income per share - Diluted

$

(0.37)



$

0.07



$

(0.36)



$

0.10


Weighted average shares - Basic

17,341,647



16,966,928



17,323,479



16,902,390


Weighted average shares - Diluted

17,341,647



17,264,642



17,323,479



17,210,054


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per share data)

June 30,
 2019
(unaudited)


December 31,
 2018

ASSETS




Current assets:




Cash and cash equivalents

$

120,604



$

108,783


Short-term investments

24,819



24,793


Accounts receivable, net

74,430



88,927


Inventories, net

71,970



65,444


Prepaid expenses and other current assets

26,437



28,795


Total current assets

318,260



316,742


Property and equipment:




Machinery and equipment

82,909



76,048


Furniture and fixtures

6,245



6,749


Leasehold improvements

20,636



20,304


Property and equipment at cost

109,790



103,101


Less: accumulated depreciation and amortization

(79,664)



(72,684)


Property and equipment, net

30,126



30,417


Operating lease right-of-use asset

18,068




Goodwill

71,210



67,274


Intangible assets, net

28,659



33,054


Service and sales demonstration inventory, net

39,416



39,563


Deferred income tax assets, net

14,732



14,719


Other long-term assets

2,983



4,475


Total assets

$

523,454



$

506,244


LIABILITIES AND SHAREHOLDERS' EQUITY




Current liabilities:




Accounts payable

$

16,177



$

20,093


Accrued liabilities

37,865



36,327


Income taxes payable

2,386



5,081


Current portion of unearned service revenues

35,082



32,878


Customer deposits

2,701



3,144


Lease liability

6,494




Total current liabilities

100,705



97,523


Unearned service revenues - less current portion

17,355



15,505


Lease liability - less current portion

13,483




Deferred income tax liabilities

2,614



736


Income taxes payable - less current portion

11,821



12,247


Other long-term liabilities

3,137



3,624


Total liabilities

149,115



129,635


Shareholders' equity:




Common stock - par value $.001, 50,000,000 shares authorized; 18,751,573 and 18,676,059
issued, respectively; 17,339,062 and 17,253,011 outstanding, respectively

19



19


Additional paid-in capital

255,706



251,329


Retained earnings

168,773



175,353


Accumulated other comprehensive loss

(18,784)



(18,483)


Common stock in treasury, at cost; 1,412,511 and 1,423,048 shares, respectively

(31,375)



(31,609)


Total shareholders' equity

374,339



376,609


Total liabilities and shareholders' equity

$

523,454



$

506,244


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



Six Months Ended

(in thousands)

June 30, 2019


June 30, 2018

Cash flows from:




Operating activities:




Net (loss) income

$

(6,253)



$

1,660


Adjustments to reconcile net (loss) income to net cash provided by operating activities:




Depreciation and amortization

9,322



8,720


Stock-based compensation

5,316



3,400


Provisions for bad debts, net of recoveries

2



211


Loss on disposal of assets

348



165


Provision for excess and obsolete inventory

1,481



504


Deferred income tax benefit

(11)



(190)


Impairment charge on equity method investment

1,535




Change in operating assets and liabilities:




Decrease (Increase) in:




Accounts receivable

14,442



252


Inventories

(9,687)



(6,664)


Prepaid expenses and other current assets

2,282



(3,526)


(Decrease) Increase in:




Accounts payable, accrued liabilities, and lease liability

(7,793)



(2,901)


GSA liability

6,327




Income taxes payable

(3,119)



(4,378)


Customer deposits

(446)



382


Unearned service revenues

3,998



2,372


Net cash provided by operating activities

17,744



7


Investing activities:




Purchases of property and equipment

(3,693)



(5,164)


Payments for intangible assets

(1,233)



(1,186)


Acquisition of businesses



(3,965)


Equity investments and advances to affiliates



(1,786)


Net cash used in investing activities

(4,926)



(12,101)


Financing activities:




Payments on finance leases

(187)



(46)


Payments of contingent consideration for acquisitions

(250)




Payments for taxes related to net share settlement of equity awards

(1,440)




Proceeds from issuance of stock related to stock option exercises

735



7,133


Net cash (used in) provided by financing activities

(1,142)



7,087


Effect of exchange rate changes on cash and cash equivalents

145



(2,399)


Increase (decrease) in cash and cash equivalents

11,821



(7,406)


Cash and cash equivalents, beginning of period

108,783



140,960


Cash and cash equivalents, end of period

$

120,604



$

133,554



FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)



Three Months Ended


Six Months Ended

(in thousands)

June 30, 2019


June 30, 2018


June 30, 2019


June 30, 2018

Net (loss) income

$

(6,405)



$

1,205



$

(6,253)



$

1,660


Currency translation adjustments

1,263



(9,377)



(301)



(4,163)


Comprehensive loss

$

(5,142)



$

(8,172)



$

(6,554)



$

(2,503)


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED SUPPLEMENTAL DATA




Three Months Ended


Six Months Ended

(sales in thousands)


Q2 2019
Sales


Q2 2018
Sales


% Change


Q2 2019
Sales


Q2 2018
Sales


% Change

Reporting Segments













3D Manufacturing(1)


$

59,002



$

63,989



(7.8)

%


$

115,569



$

124,646



(7.3)

%

Construction BIM(2)


24,161



23,567



2.5

%


49,600



46,249



7.2

%

Emerging Verticals(3)


10,328



10,688



(3.4)

%


21,939



20,183



8.7

%

Total


$

93,491



$

98,244



(4.8)

%


$

187,108



$

191,078



(2.1)

%


(1)  The 3D Manufacturing reporting segment contains solely our 3D Manufacturing vertical.

(2)  The Construction BIM reporting segment contains solely our Construction BIM vertical.

(3)  The Emerging Verticals reporting segment includes our 3D Design, Public Safety Forensics, and Photonics verticals.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED SUPPLEMENTAL DATA



New Order
Bookings
(in millions)


Ending
Sales
Headcount


Sales FTE
Headcount (1)


Trailing 12 Months
Sales FTE
Headcount (1)


Trailing 12 Months
Orders per Sales FTE
(in thousands) (1)

Q2-16

$81.6


468


424


419


$782

Q3-16

$79.8


507


435


424


$790

Q4-16

$95.8


536


454


432


$766

Q1-17

$86.9


593


486


450


$765

Q2-17

$89.0


627


516


473


$743

Q3-17

$90.5


635


548


501


$723

Q4-17

$110.6


631


568


530


$711

Q1-18

$96.1


653


581


553


$698

Q2-18

$106.5


672


591


572


$706

Q3-18

$100.5


707


604


586


$706

Q4-18

$122.2


733


621


599


$710

Q1-19

$100.7


737


633


612


$703

Q2-19

$106.1


764


649


627


$685


(1) Sales full-time experienced ("FTE") is a metric whereby sales headcount is measured as a time-weighted average with the first year contribution of a new employee discounted by an experience factor.


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

TOTAL SALES, GROSS PROFIT AND GROSS MARGIN

(UNAUDITED)
















Three Months Ended June 30,


Six Months Ended June 30,




(dollars in thousands)


2019


2018


2019


2018
















Total sales, as reported


$

93,491



$

98,244



$

187,108



$

191,078





GSA sales adjustment (1)


5,805





5,840







Non-GAAP total sales


$

99,296



$

98,244



$

192,948



$

191,078







Three months ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


% of
Sales


2018


% of
Sales


2019


% of
Sales


2018


% of
Sales

















Gross profit and gross margin,
as reported

$

52,319



56.0

%


$

57,691



58.7

%


$

107,338



57.4

%


$

111,477



58.3

%

GSA sales adjustment (1)

5,805



6.2

%




%


5,840



3.1

%




%

Non-GAAP gross profit and
gross margin

$

58,124



58.5

%


$

57,691



58.7

%


$

113,178



58.7

%


$

111,477



58.3

%


(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"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. 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. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment").


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

TOTAL SALES BY REPORTING SEGMENT

(UNAUDITED)



Three Months Ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


2018


2019


2018









3D Manufacturing total sales, as reported

$

59,002



$

63,989



$

115,569



$

124,646


GSA sales adjustment (1)

3,280





3,315




Non-GAAP 3D Manufacturing total sales

$

62,282



$

63,989



$

118,884



$

124,646







Three Months Ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


2018


2019


2018









Construction BIM total sales, as reported

$

24,161



$

23,567



$

49,600



$

46,249


GSA sales adjustment (1)

463





463




Non-GAAP Construction BIM total sales

$

24,624



$

23,567



$

50,063



$

46,249







Three Months Ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


2018


2019


2018









Emerging Verticals total sales, as reported

$

10,328



$

10,688



$

21,939



$

20,183


GSA sales adjustment (1)

2,062





2,062




Non-GAAP Emerging Verticals total sales

$

12,390



$

10,688



$

24,001



$

20,183



(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"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. 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. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment").


FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

OPERATING (LOSS) INCOME AND OPERATING MARGIN

(UNAUDITED)



Three months ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


% of
Sales


2018


% of
Sales


2019


% of
Sales


2018


% of
Sales

















Operating (loss) income and
operating margin, as reported

$

(4,893)



(5.2)

%


$

1,927



2.0

%


$

(4,535)



(2.4)

%


$

2,620



1.4

%

GSA sales adjustment (1)

5,805



6.2

%




%


5,840



3.1

%




%

Advisory fees for GSA Matter (2)

653



0.7

%






1,244



0.7

%





CEO succession expenses (3)

1,525



1.6

%




%


2,425



1.3

%




%

Non-GAAP operating income
and operating margin

$

3,090



3.1

%


$

1,927



2.0

%


$

4,974



2.6

%


$

2,620



1.4

%


(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"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. 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. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment").


(2) In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $0.7 million and $1.2 million in advisory fees incurred during the three and six months ended June 30, 2019, respectively.


(3) In January 2019, we announced that our Chief Executive Officer, Dr. Simon Raab, would be retiring after 35 years with the company. Effective June 17, 2019, Michael D. Burger was appointed as our Chief Executive Officer ("CEO"). The CEO succession expenses reflect the additional compensation expense recognized during 2019 in connection with the June 2019 vesting of option awards held by Dr. Raab and our payment of a signing bonus to our current CEO, Mr. Burger.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

NET (LOSS) INCOME

(UNAUDITED)



Three Months Ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


2018


2019


2018









Net (loss) income, as reported

$

(6,405)



$

1,205



$

(6,253)



$

1,660


GSA sales adjustment (1)

5,805





5,840




Interest expense increase due to GSA adjustment (1)

442





487




Advisory fees for GSA Matter (2)

653





1,244




CEO succession expenses (3)

1,525





2,425




Present4D impairment (4)

1,535





1,535




Total tax impact of adjustments

(1,944)





(2,197)




Adjustments, net of tax

$

8,016



$



$

9,334



$


Tax liability for uncertain tax position (5)

864





864




Total adjustment

$

8,880



$



$

10,198



$


Non-GAAP net income

$

2,475



$

1,205



$

3,945



$

1,660



(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"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. 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. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment") and recorded imputed interest expense of $0.4 million and $0.5 million related to the GSA Matter for the three and six months ended June 30, 2019, respectively.


(2) In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $0.7 million and $1.2 million in advisory fees incurred during the three and six months ended June 30, 2019, respectively.


(3) In January 2019, we announced that our Chief Executive Officer, Dr. Simon Raab, would be retiring after 35 years with the company. Effective June 17, 2019, Michael D. Burger was appointed as our Chief Executive Officer ("CEO"). The CEO succession expenses reflect the additional compensation expense recognized during 2019 in connection with the June 2019 vesting of option awards held by Dr. Raab and our payment of a signing bonus to our current CEO, Mr. Burger.


(4) 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. During the three months ended June 30, 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net.


(5) In second quarter 2019, we recorded an increase in our reserve for uncertain tax positions of $0.9 million for the three and six months ended June 30, 2019 due to a change in our judgment on the recognition of a tax position during the quarter.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

NET (LOSS) INCOME PER SHARE

(UNAUDITED)



Three Months Ended June 30,


Six Months Ended June 30,

(dollars in thousands)

2019


2018


2019


2018









Net (loss) income per share - Diluted, as reported

$

(0.37)



$

0.07



$

(0.36)



$

0.10


GSA sales adjustment (1)

0.33





0.33




Interest expense increase due to GSA adjustment (1)

0.02





0.03




Advisory fees for GSA Matter (2)

0.04





0.07




CEO succession expenses (3)

0.09





0.14




Present4D impairment (4)

0.09





0.09




Total tax impact of adjustments

(0.11)





(0.13)




Adjustments, net of tax

$

0.46



$



$

0.53



$


Tax liability for uncertain tax position (5)

0.05





0.05




Total adjustment per share - Diluted

$

0.51



$



$

0.58



$


Non-GAAP net income per share - Diluted

$

0.14



$

0.07



$

0.22



$

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"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. 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. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment") and recorded imputed interest expense of $0.4 million and $0.5 million related to the GSA Matter for the three and six months ended June 30, 2019, respectively.


(2) In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $0.7 million and $1.2 million in advisory fees incurred during the three and six months ended June 30, 2019, respectively.


(3) In January 2019, we announced that our Chief Executive Officer, Dr. Simon Raab, would be retiring after 35 years with the company. Effective June 17, 2019, Michael D. Burger was appointed as our Chief Executive Officer ("CEO"). The CEO succession expenses reflect the additional compensation expense recognized during 2019 in connection with the June 2019 vesting of option awards held by Dr. Raab, and our payment of a signing bonus to our current CEO, Mr. Burger.


(4) 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. During the three months ended June 30, 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net.


(5) In second quarter 2019, we recorded an increase in our reserve for uncertain tax positions of $0.9 million for the three and six months ended June 30, 2019 due to a change in our judgment on the recognition of a tax position during the quarter.

Cision

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