FRGO Fargo Electronics (MM)

Fargo Electronics, Inc. (NASDAQ:FRGO) today reported net sales for the third quarter ended September 30, 2005, of $22,456,000, an increase of 14% over net sales of $19,626,000 reported in the third quarter of 2004. Net income for the third quarter was $3,071,000, an increase of 33% over the $2,305,000 achieved in the third quarter of 2004. Earnings per diluted share for the third quarter were $0.23 compared to $0.18 in the third quarter of 2004. "Revenues, net income and earnings per share each represented record quarterly results for Fargo," said Gary R. Holland, Fargo's president and chief executive officer. "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 is delivering results. In September, we launched several new products at the ASIS tradeshow. Initial reactions from our distribution channel to these have been very favorable." Gross profit margins for the quarter were 43% compared to 41% in the third quarter of 2004. The improvement is due to lower manufacturing costs and the mix of product sales. Operating expenses were $5,412,000 compared to $4,909,000 last year. The increase is primarily a result of higher compensation expense due to growth and professional fees. Operating income for the quarter was $4,325,000, an increase of 37% over the $3,159,000 achieved last year. For the nine months ended September 30, 2005, the company reported net sales of $59,999,000, an increase of 14% over the $52,725,000 reported for the same period in 2004. Operating income was $10,323,000 compared to $7,855,000 in 2004. Net income for the first nine months of 2005 was $7,586,000, or $0.58 per diluted share, compared to $5,479,000, or $0.43 per diluted share in 2004. Other accomplishments in the quarter include: -- Launched the Persona C30 card printer and the DTC550 secure card printer/encoder. -- Received and shipped an order for 290 HDP600-LC laminating card printer/encoders for use by the National Guard Bureau as part of the U.S. Department of Defense Common Access Card project. -- Received and shipped an order for 50 HDP600 card printer/encoders for the U.S. Department of State. These printer/encoders will be used to provide smart cards for embassy officials to securely access facilities and information systems. -- Launched the SecureVault(TM) ID Management System to assist users in securing and managing card production materials. -- Received three new patents issued by the United States Patent and Trademark Office. In addition, received a notice of allowance on the first SecureMark(R) patent from the European Patent and Trademark Office. Outlook Fargo presently anticipates that earnings per diluted share for the fourth quarter of fiscal 2005 will be in the range of $0.18 to $0.21. This represents a range for the full fiscal year 2005 of $0.76 to $0.79. 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. 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, Minn., 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) September 30, December 31, ASSETS 2005 2004 ------------- ------------ Current assets: Cash and cash equivalents $34,231 $23,435 Accounts receivable, net 11,414 9,702 Inventories, net 6,535 6,219 Prepaid expenses 544 271 Deferred income taxes 3,259 3,259 ------------- ------------ Total current assets 55,983 42,886 Equipment and leasehold improvements, net 3,238 2,026 Deferred income taxes 14,792 16,966 Other 21 27 ------------- ------------ Total assets $74,034 $61,905 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $8,479 $6,018 Accrued liabilities 3,615 2,806 ------------- ------------ Total current liabilities 12,094 8,824 ------------- ------------ Commitments and contingencies - - Stockholders' equity: Common stock, $.01 par value; 50,000 shares authorized, 12,772 and 12,603 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively 128 126 Additional paid-in capital 151,574 150,303 Accumulated deficit (89,762) (97,348) ------------- ------------ Total stockholders' equity 61,940 53,081 ------------- ------------ Total liabilities and stockholders' equity $74,034 $61,905 ============= ============ FARGO ELECTRONICS, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2005 2004 2005 2004 --------- -------- -------- -------- Net sales $22,456 $19,626 $59,999 $52,725 Cost of sales 12,719 11,558 33,999 31,324 --------- -------- -------- -------- Gross profit 9,737 8,068 26,000 21,401 --------- -------- -------- -------- Operating expenses Research and development 1,428 1,337 4,225 3,841 Selling, general and administrative 3,984 3,572 11,452 9,705 --------- -------- -------- -------- Total operating expenses 5,412 4,909 15,677 13,546 --------- -------- -------- -------- Operating income 4,325 3,159 10,323 7,855 --------- -------- -------- -------- Other income Interest, net 246 52 556 106 Other, net - - 393 - --------- -------- -------- -------- Total other income 246 52 949 106 --------- -------- -------- -------- Income before provision for income taxes 4,571 3,211 11,272 7,961 Provision for income taxes 1,500 906 3,686 2,482 --------- -------- -------- -------- Net income $3,071 $2,305 $7,586 $5,479 ========= ======== ======== ======== Net income per common share Basic earnings per share $0.24 $0.18 $0.60 $0.44 Diluted earnings per share $0.23 $0.18 $0.58 $0.43 Weighted average common shares outstanding Basic 12,756 12,519 12,683 12,494 Diluted 13,145 12,780 13,127 12,817 FARGO ELECTRONICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, ------------------- 2005 2004 --------- --------- Cash flows from operating activities: Net income $7,586 $5,479 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 820 781 Provision for excess and obsolete inventory 303 103 Loss on disposal of equipment 8 - Deferred income taxes 2,174 2,385 Tax benefit recognized for stock options - 16 Changes in operating assets and liabilities Accounts receivable (1,712) (3,829) Inventories (619) (878) Prepaid expenses and other assets (273) (27) Accounts payable 2,145 2,785 Accrued liabilities 809 (191) --------- --------- Net cash provided by operating activities 11,241 6,624 --------- --------- Cash flows from investing activities: Purchases of equipment and leasehold improvements (1,718) (681) --------- --------- Net cash used in investing activities (1,718) (681) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 1,273 464 --------- --------- Net cash provided by financing activities 1,273 464 --------- --------- Net increase in cash and cash equivalents 10,796 6,407 Cash and cash equivalents, beginning of period 23,435 13,445 --------- --------- Cash and cash equivalents, end of period $34,231 $19,852 ========= ========= Significant noncash activities: Purchases of equipment included in accounts payable $316 $105 FARGO ELECTRONICS, INC. SUPPLEMENTAL SALES INFORMATION (In thousands) (Unaudited) Sales by Product Category Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Secure printers/encoders $8,981 $7,454 $23,322 $19,840 Secure materials 13,475 12,172 36,677 32,885 ---------- ---------- ---------- ---------- Total sales $22,456 $19,626 $59,999 $52,725 ========== ========== ========== ========== Sales by Geographic Region Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- U.S. $13,217 $11,133 $33,780 $29,623 International 9,239 8,493 26,219 23,102 ---------- ---------- ---------- ---------- Total sales $22,456 $19,626 $59,999 $52,725 ========== ========== ========== ========== *T