FRGO Fargo Electronics (MM)

Fargo Electronics, Inc. (NASDAQ:FRGO) today reported net sales of $21,029,000 for the fourth quarter ended December 31, 2005, an increase of 7% over the $19,668,000 reported in the fourth quarter of 2004. Net income for the quarter was $2,511,000, an increase of 12% over the $2,237,000 in the same period last year. Earnings per diluted share for the fourth quarter were $0.19 compared to $0.17 in the fourth quarter of 2004. For the full year, net sales increased 12% to $81,028,000. Operating income was $13,770,000, an increase of 27% over 2004. Net income for 2005 was $10,097,000, an increase of 31% over the $7,716,000 earned in 2004. Earnings per diluted share for the year were $0.77 compared to $0.60 in 2004. Sales, operating income and net income results were all records for the company. "Our fourth quarter results completed a very successful year for Fargo," commented Gary R. Holland, Fargo's president and chief executive officer. "We achieved record annual revenues while increasing operating margins and continuing to generate excellent cash flow. Our continued investments in sales and marketing helped drive international growth and we significantly enhanced our software development capabilities. Overall, we continue to execute on our strategy to provide end users with the most secure card identity solutions by offering secure printer/encoders linked with secure materials and secure software." Gross profit margins for the fourth quarter were 44% compared to 39% in the fourth quarter of 2004. Gross margins in the quarter benefited from an improved cost position for printer/encoders, and the mix of product sales. Fourth quarter 2004 margins were affected by large project business and the launch of new products. Operating expenses were $5,786,000 compared to $4,665,000 last year. The increase over 2004 is primarily due to higher compensation expense as a result of growth, increased marketing expenses and higher health insurance and professional fees. Operating income for the quarter was $3,447,000, an increase of 15% over the $3,008,000 reported in 2004. In fiscal 2005, Fargo: -- Increased international revenues by 15% over 2004. -- Increased the gross margin percent to 43% from 40% over 2004. -- Increased the operating margin percent to 17% from 15% over 2004. -- Generated $13.9 million cash from operations and finished the year with $36.5 million in cash. -- Increased its United States patent portfolio to 67 with approximately 50 other patent applications pending. Outlook Fargo presently anticipates that earnings per diluted share for the first quarter of fiscal 2006 will be in the range of $0.13 to $0.15. This includes an estimated $0.01 per diluted share for the expensing of stock options as required under SFAS No. 123 (R), Share-Based Payment. Historically, the first quarter has been seasonally the company's lowest revenue quarter. Forward-looking Statements Statements made in this report concerning our expectations about future results or events, are "forward-looking statements". When used in this report, words such as "anticipate," "believe," "estimate," "expect," and "forecast" as they relate to us or our management are intended to identify such forward-looking statements, but are not the exclusive means of identifying these statements. Such statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995, and are necessarily subject to risks and uncertainties. Actual results may differ materially from those reflected in these forward-looking statements. These statements are based on current expectations, forecasts and assumptions, and are subject to the risks and uncertainties inherent in general industry and market conditions, general domestic and international economic conditions, and other factors. These risks and uncertainties include, but are not limited to: product acceptance and customer demand for our card personalization systems and proprietary supplies; actions taken and alternative products marketed by our competitors; supplier relationships, including reliance on sole and single-source suppliers; manufacturing or design defects that we may discover after shipment; challenges in successfully implementing a new enterprise resource planning computer system; lack of inventories of component parts or finished goods; our focus on the identification card personalization market; continuing technological changes in our industry; our dependence on a distribution network and the reaction of this network to changes in distribution programs; domestic and international regulations and standards; our dependence on international sales and foreign suppliers; material changes in orders placed by large end users; challenges in effectively managing growth; our dependence on technologies we do not own; complex design that could result in manufacturing delays; protecting and enforcing our intellectual property rights; inadequate protection against infringement claims; the costs of implementing and complying with new regulations enacted in various countries requiring the reduction of hazardous substances in electrical and electronic equipment, including the European Union Waste Electrical and Electronic Equipment Directive and Restriction of Hazardous Substances Directive; and adverse economic and business conditions, including conditions resulting from the terrorist attack on the U.S. on September 11, 2001 and the resulting hostilities and the war with Iraq. For more detail of the risks, uncertainties and other factors that could affect our future operations and results, see our filings with the Securities and Exchange Commission, particularly the Annual Report on Form 10-K for the year ended December 31, 2004 and our Form 10-Q reports for 2005. The Company assumes no obligation to update the forward-looking statements or any other information contained in this release. About Fargo Founded in 1974, Fargo Electronics is a global leader in the development of secure technologies for identity card issuance systems, including secure card printer/encoders, materials and software. The company has sold more than 100,000 systems in the U.S. and over 80 other countries worldwide. Fargo card issuance systems reduce vulnerabilities and potential for loss of time, money and lives by continually improving the security of identity credentials. Fargo provides physical, information, and transaction security for a wide variety of applications and industries, including government, corporate, national IDs, drivers' licenses, universities, schools and membership. Based in Minneapolis, MN., Fargo markets its products through a global distribution network of professional security integrators. For more information about Fargo, visit www.fargo.com. -0- *T FARGO ELECTRONICS, INC. CONDENSED BALANCE SHEETS (In thousands, except per share data) (Unaudited) December 31, December 31, ASSETS 2005 2004 ------------ ------------ Current assets: Cash and cash equivalents $36,475 $23,435 Accounts receivable, net 10,286 9,702 Inventories, net 6,178 6,219 Other current assets 460 271 Deferred income taxes 3,423 3,259 ------------ ------------ Total current assets 56,822 42,886 Equipment and leasehold improvements, net 3,636 2,026 Deferred income taxes 14,360 16,966 Other 19 27 ------------ ------------ Total assets $74,837 $61,905 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $6,225 $6,018 Accrued liabilities 3,666 2,806 ------------ ------------ Total current liabilities 9,891 8,824 ------------ ------------ Commitments and contingencies - - Stockholders' equity: Common stock, $.01 par value; 50,000 shares authorized, 12,784 and 12,603 shares issued and outstanding at December 31, 2005 and December 31, 2004, respectively 128 126 Additional paid-in capital 152,069 150,303 Accumulated deficit (87,251) (97,348) ------------ ------------ Total stockholders' equity 64,946 53,081 ------------ ------------ Total liabilities and stockholders' equity $74,837 $61,905 ============ ============ FARGO ELECTRONICS, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended December 31, --------------------------------- 2005 2004 ---------------- ---------------- Net sales $21,029 $19,668 Cost of sales 11,796 11,995 ---------------- ---------------- Gross profit 9,233 7,673 ---------------- ---------------- Operating expenses Research and development 1,499 1,310 Selling, general and administrative 4,287 3,355 ---------------- ---------------- Total operating expenses 5,786 4,665 ---------------- ---------------- Operating income 3,447 3,008 ---------------- ---------------- Other income Interest, net 327 87 Other, net (6) (2) ---------------- ---------------- Total other income 321 85 ---------------- ---------------- Income before provision for income taxes 3,768 3,093 Provision for income taxes 1,257 856 ---------------- ---------------- Net income $2,511 $2,237 ================ ================ Net income per common share Basic earnings per share $0.20 $0.18 Diluted earnings per share $0.19 $0.17 Weighted average common shares outstanding Basic 12,777 12,575 Diluted 13,145 12,966 Twelve Months Ended December 31, --------------------------------- 2005 2004 ---------------- ---------------- Net sales $81,028 $72,393 Cost of sales 45,795 43,319 ---------------- ---------------- Gross profit 35,233 29,074 ---------------- ---------------- Operating expenses Research and development 5,724 5,151 Selling, general and administrative 15,739 13,060 ---------------- ---------------- Total operating expenses 21,463 18,211 ---------------- ---------------- Operating income 13,770 10,863 ---------------- ---------------- Other income Interest, net 884 193 Other, net 386 (2) ---------------- ---------------- Total other income 1,270 191 ---------------- ---------------- Income before provision for income taxes 15,040 11,054 Provision for income taxes 4,943 3,338 ---------------- ---------------- Net income $10,097 $7,716 ================ ================ Net income per common share Basic earnings per share $0.79 $0.62 Diluted earnings per share $0.77 $0.60 Weighted average common shares outstanding Basic 12,704 12,515 Diluted 13,072 12,869 FARGO ELECTRONICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Twelve Months Ended December 31, -------------------------------- 2005 2004 --------------- --------------- Cash flows from operating activities: Net income $10,097 $7,716 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,146 1,092 Provision for excess and obsolete inventory 333 107 Loss on disposal of equipment 16 2 Deferred income taxes 2,442 2,917 Tax benefit recognized for stock options 374 259 Changes in operating assets and liabilities Accounts receivable (584) (2,687) Inventories (292) (1,478) Prepaid expenses and other assets (189) (53) Accounts payable (317) 2,156 Accrued liabilities 860 41 --------------- --------------- Net cash provided by operating activities 13,886 10,072 --------------- --------------- Cash flows from investing activities: Purchases of equipment and leasehold improvements (2,240) (948) --------------- --------------- Net cash used in investing activities (2,240) (948) --------------- --------------- Cash flows from financing activities: Proceeds from issuance of common stock 1,394 866 --------------- --------------- Net cash provided by financing activities 1,394 866 --------------- --------------- Net increase in cash and cash equivalents 13,040 9,990 Cash and cash equivalents, beginning of period 23,435 13,445 --------------- --------------- Cash and cash equivalents, end of period $36,475 $23,435 =============== =============== Significant noncash activities: Purchases of equipment included in accounts payable $524 $60 FARGO ELECTRONICS, INC. SUPPLEMENTAL SALES INFORMATION (In thousands) (Unaudited) Sales by Product Category Three Months Ended Twelve Months Ended December 31, December 31, 2005 2004 2005 2004 --------- --------- --------- --------- Secure printers/encoders $8,351 $9,104 $31,673 $28,944 Secure materials 12,678 10,564 49,355 43,449 --------- --------- --------- --------- Total sales $21,029 $19,668 $81,028 $72,393 ========= ========= ========= ========= Sales by Geographic Region Three Months Ended Twelve Months Ended December 31, December 31, 2005 2004 2005 2004 --------- --------- --------- --------- U.S. $10,732 $10,921 $44,512 $40,544 International 10,297 8,747 36,516 31,849 --------- --------- --------- --------- Total sales $21,029 $19,668 $81,028 $72,393 ========= ========= ========= ========= *T