FARO Technologies Q4 2008 Earnings Call Transcript

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FARO Technologies (FARO)

Q4 2008 Earnings Call

February 13, 2008 11:00 am ET

Executives

Vic Allgeier - IR, TTC Group

Keith Bair - SVP and CFO

Jay Freeland - President and CEO

Analysts

Mark Jordan - Noble Financial Group

Jim Ricchiuti - Needham & Company

Rick D'Auteuil - Columbia Management

Richard Eastman - Robert W. Baird & Co., Inc.

Jeff Bash - Private Investor

Presentation

Operator

Good morning, everyone, and welcome to FARO Technologies conference call in conjunction with its fourth quarter 2008 earnings release. (Operator Instructions).

I will now turn the program over to Mr. Vic Allgeier. Please begin, sir.

Vic Allgeier

Thank you and good morning, everyone. My name is Vic Allgeier of the TTC Group, FARO's Investor Relations firm. Yesterday, after the market closed, FARO released its fourth quarter results. By now, you should have received a copy of the press release. If you have not received the release, please call [Nancy Setteducati] at 407-333-9911. The press release is also available on FARO's website at www.faro.com.

Representing the company today are Jay Freeland, President and Chief Executive Officer and Keith Bair, Senior Vice President and Chief Financial Officer. Keith and Jay will deliver prepared remarks first and will then be available for questions.

I would like to remind you that, in order to help you understand the company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as "we expect", "we believe", "we predict", "we target", "our growth targets", "our goals", "our guidance", and similar words.

It is possible that the company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are the risk factors set forth in yesterday's press release and in the company's filings with the SEC.

I'll now turn the call over to Keith.

Keith Bair

Thank you, Vic and good morning everyone. Sales in the fourth quarter of 2008 were $56.3 million, a 4.9% decrease from $59.2 million in the fourth quarter of 2007. That brought our 2008 annual sales to $209.2 million, a 9.2% increase from $191.6 million in 2007.

On a regional basis, fourth quarter sales in 2008 in the Americas declined 5.9% to $20.6 million compared to $21.9 million in the fourth quarter of 2007. Sales decreased 3.7% in Europe to $26.2 million from $27.2 million in the fourth quarter of 2007. Sales in the Asia-Pacific region decreased 5.9% to $9.5 million from $10.1 million in the fourth quarter of 2007. The effect of changes in foreign exchange rates on sales was a decrease of $2.4 million for the fourth quarter of 2008.

Comparing year-over-year growth, [2008] sales in the Americas decreased 2.1% to $78.3 million from $80 million in 2007. Europe sales for 2008 increased 19.5% to $93.6 million from $78.3 million in 2007.In Asia, sales increased 12% in 2008 to $37.3 million from $33.3 million in 2007. The effective changes in foreign exchange rates on sales was an increase of $7.5 million in fiscal 2008.

New orders declined 13.8% in the fourth quarter of 2008 to approximately $56.4 million, compared to approximately $65.4 million in the fourth quarter of 2007. On an annual basis, new orders grew 6.8% to $211.3 million in 2008 from $197.8 million in 2007.

On a regional basis, fourth quarter orders in 2008 in the Americas decreased 7.5% to $20.9 million compared to $22.6 million in the fourth quarter of 2007. Orders decreased $19.6 million in Europe to $26.3 million from $32.7 million in the fourth quarter of 2007. Orders in the Asia-Pacific region decreased 8.9% to $9.2 million compared to $10.1 million in the year ago quarter.

Again, comparing year-over-year orders growth, new orders in the Americas decreased 4.2% to $77.1 million in 2008 from $80.5 million in 2007. Orders increased 12.2% in Europe to $95 million in 2008, compared to $84.7 million in 2007, and orders grew by 20.2% in Asia in 2008 to $39.2 million from $32.6 million in 2007.

The top five customers by sales volume in 2008 were the US military, Northrop Grumman, BMW, [Metalurgia] and Boeing and represented only 3.9% of sales. The top 10 customers in 2008 represented only 6.3% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 57.3% in the fourth quarter of 2008 compared to 60% in the year ago quarter. This decrease was due to lower product sales, which carry higher gross margins and an increase in service costs as a percentage of sales. Gross margin in fiscal 2008 was 59.8% compared to 60% in fiscal 2007.

Selling expenses were 28.6% of sales in the fourth quarter of 2008 compared to 27.3% in the year ago quarter, but remained relatively unchanged at approximately $16.1 million compared to $16.2 million in the year ago quarter. In fiscal 2008, selling expenses increased to 30.1% of sales compared to 29.3% in fiscal 2007.

Administrative expenses in the fourth quarter of 2008 were 12.2% of sales compared to 11.8% in the fourth quarter of 2007, declining by $100,000 to $6.9 million from $7 million in 2007. In fiscal 2008, general and administrative expenses were $26.1 million or 12.5% of sales compared to fiscal 2007 of $25.5 million, or 13.3% of sales.

Fiscal 2007 expenses include a $2.65 million charge for estimated fines and penalties with respect to the FCPA matter and $1.1 million of professional fees related to the company's FCPA matter and the resolution of the patent litigation.

Research and development expenses were $3.5 million for the fourth quarter of 2008, or 6.2% of sales, compared to $3.1 million or 5.3% of sales in the fourth quarter of 2007. R&D expenses for fiscal 2008 were $12.6 million or 6% of sales, an increase of $2.3 million from $10.3 million or 5.4% of sales in fiscal 2007. The increase was driven primarily by an increase in compensation costs related to the addition of new employees, primarily related to the development of the DPI technology.

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