Jul 30 - FARO Q2 Revenue Up 21% to $58M with $6.4M Profit

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FARO Q2 Revenue Up 21% to $58M with $6.4M Profit

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LAKE MARY, FL, July 30, 2008 - FARO Technologies, Inc. (Nasdaq: FARO) today announced results for the second quarter ended June 28, 2008. Net income for the second quarter was $6.4 million, or $0.38 per diluted share, an increase of $0.6 million, compared to $5.8 million, or $0.39 per diluted share, in the second quarter of 2007.

Sales for the second quarter of 2008 were $57.7 million, an increase of $10.1 million, or 21.4%, from $47.6 million in the second quarter of 2007. New order bookings for the second quarter were $58.7 million, an increase of $8.3 million, or 16.5%, compared with $50.4 million in the second quarter of 2007.

"This was another solid quarter for our company with revenue growing nicely, due to ongoing demand for our products," stated Jay Freeland, FARO's President & CEO. "Our performance in both European and Asian markets was strong and more than offset weaknesses in the United States where the market has been affected by a slowing economy."

Gross margin for the second quarter of 2008 was 62.8%, compared to 61.4% in the second quarter of 2007. Gross margin increased primarily as the result of a change in the sales mix resulting from an increase in unit sales of higher margin product lines.

Selling expenses as a percentage of sales increased to 29.6% in the second quarter of 2008, essentially flat with 29.4% in the second quarter of 2007. Increases in selling expenses in absolute dollars related to new sales personnel that were added to continue driving the Company's growth.

General and administrative expenses were 12.1% of sales for the second quarter of 2008, marginally higher than the second quarter of 2007.

The Company increased spending in research and development to accelerate development of new product platforms. Accordingly, R&D costs were $3.2 million in the second quarter of 2008, an increase from $2.3 million in the second quarter of 2007.

Operating margin for the second quarter of 2008 was 13.6%, unchanged from the year ago quarter.

Income tax expense was $1.5 million for the second quarter of 2008 compared to $1.4 million in the second quarter of 2007 primarily as a result of an increase in pretax income. The Company's effective tax rate was 19.3% in the second quarter of 2008 compared to 19.6% in the second quarter of 2007 due to an increase in taxable income in jurisdictions with lower tax rates.

"Year-to-date, we continue to execute well, with 18.2% revenue growth and 61.6% gross margin. However, we expect continued weakness in the U.S. economy and modest uncertainty in several European economies through the rest of this year. Accordingly, we are lowering our full-year 2008 revenue guidance from 20-25% growth to 15-20% growth while maintaining our previously issued gross margin guidance of 58-60% of sales," Freeland concluded.

Factors that could cause actual results to differ materially from what is expressed or forecasted in forward-looking statements include, but are not limited to:

our inability to further penetrate our customer base;
development by others of new or improved products, processes or technologies that make our products obsolete or less competitive;
our inability to maintain our technological advantage by developing new products and enhancing our existing products;
our inability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consummated;
the cyclical nature of the industries of our customers and the financial condition of our customers;
the fact that the market potential for the CAM2 market and the potential adoption rate for our products are difficult to quantify and predict;
the inability to protect our patents and other proprietary rights in the United States and foreign countries;
fluctuations in our annual and quarterly operating results and the inability to achieve our financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought against us, (ii) quality issues with our products, (iii) excess or obsolete inventory, (iv) raw material price fluctuations, (v) expansion of our manufacturing capability and other inflationary pressures, (vi) the size and timing of customer orders, (vii) the amount of time that it takes to fulfill orders and ship our products, (viii) the length of our sales cycle to new customers and the time and expense incurred in further penetrating our existing customer base, (ix) increases in operating expenses required for product development and new product, marketing, (x) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (xi) the timing and market acceptance of new products and product enhancements, (xii) customer order deferrals in anticipation of new products and product enhancements, (xiii) our success in expanding our sales and marketing programs, (xiv) start- up costs associated with opening new sales offices outside of the United States, (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) the efficiencies achieved in managing inventories and fixed assets, (xvii) investments in potential acquisitions or strategic sales, product or other initiatives, (xviii) shrinkage or other inventory losses due to product obsolescence, scrap or material price changes, (xix) adverse changes in the manufacturing industry and general economic conditions, (xx) compliance with government regulations including health, safety, and environmental matters, (xxi) the ultimate costs of the Company's monitoring obligations in respect of the Foreign Corrupt Practices Act ("FCPA") matter; and (xxii) other factors noted herein;
changes in gross margins due to changing product mix of products sold and the different gross margins on different products;
our inability to successfully maintain the requirements of Restriction of use of Hazardous Substances ("RoHS") and Waste Electrical and Electronic Equipment ("WEEE") compliance into our products;
the inability of our products to displace traditional measurement devices and attain broad market acceptance;
the impact of competitive products and pricing in the CAM2 market and the broader market for measurement and inspection devices;
the effects of increased competition as a result of recent consolidation in the CAM2 market;
risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, political and economic instability, compliance with import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
the inability to reach a final resolution of the FCPA matter with the DOJ or the SEC or reaching a resolution on the FCPA matter that differs from the resolution currently anticipated by the Company whether with respect to monetary sanctions ultimately paid by the Company to the SEC or DOJ or otherwise;
unforeseen developments in our FCPA matter or in complying with the FCPA in the future;
higher than expected increases in expenses relating to our Asia Pacific expansion or our Singapore manufacturing facility;
our inability to find less expensive alternatives to stock options to attract and retain employees;
the loss of our Chief Executive Officer or other key personnel;
difficulties in recruiting research and development engineers, and application engineers;
the failure to effectively manage our growth;
variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis; and
the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms.
the other risks detailed in the Company's Annual Report on Form 10-K and other filings from time to time with the Securities and Exchange Commission.

About FARO

With approximately 17,000 installations and 7,800 customers globally, FARO Technologies, Inc. designs, develops, and markets portable, computerized measurement devices and software used to create digital models -- or to perform evaluations against an existing model -- for anything requiring highly detailed 3-D measurements, including part and assembly inspection, factory planning and asset documentation, as well as specialized applications ranging from surveying, recreating accident sites and crime scenes to digitally preserving historical sites.

FARO's technology increases productivity by dramatically reducing the amount of on-site measuring time, and the various industry-specific software packages enable users to process and present their results quickly and more effectively.

Principal products include the world's best-selling portable measurement arm -- the FaroArm; the world's best-selling laser tracker -- the FARO Laser Tracker X and Xi; the FARO Laser ScanArm; FARO Photon Laser Scanners; the FARO Gage, Gage-PLUS and PowerGAGE; and the CAM2 Q family of advanced CAD-based measurement and reporting software. FARO Technologies is ISO-9001 certified and ISO-17025 laboratory registered.

For more information, visit www.faro.com.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(in thousands,                    June 28,     December 31,
except share data                   2008          2007
    ASSETS
    Current Assets:
     Cash and cash equivalents    $16,757       $25,798
     Short-term investments        77,765        77,375
     Accounts receivable, net      52,819        54,767
     Inventories                   38,140        29,100
     Deferred income taxes, net     5,812         2,841
     Prepaid expenses and other
     current assets                 8,786         6,719
       Total current assets       200,079       196,600
    Property and Equipment:
     Machinery and equipment       16,444        12,895
     Furniture and fixtures         3,953         5,008
     Leasehold improvements         3,604         3,296
       Property and equipment
       at cost                     24,001        21,199
    Less: accumulated
depreciation and amortization     (15,853)      (13,672)
    Property and equipment, net     8,148         7,527
    Goodwill                       20,088        19,117
    Intangible assets, net          9,169         5,970
    Service inventory              12,491        10,865
    Deferred income taxes, net      1,930         3,460
    Total Assets                 $251,905      $243,539
LIABILITIES AND SHAREHOLDERS' EQUITY
    Current Liabilities:
     Accounts payable              $9,037       $12,450
     Accrued liabilities           13,163        17,989
     Income taxes payable             769         2,266
     Current portion of
unearned service revenues          10,331         8,594
     Customer deposits                308           337
     Current portion of
obligations under capital leases       32            18
       Total current liabilities   33,640        41,654
    Unearned service revenues
- less current portion              7,086         6,091
    Deferred tax liability, net     1,157         1,073
    Obligations under capital
leases - less current portion         129           222
    Total Liabilities              42,012        49,040
    Commitments and contingencies
- See Note O
    Shareholders' Equity:
     Common stock - par value $.001, 50,000,000
      shares authorized; 16,731,054 and
      16,700,966 issued; 16,634,140 and
      16,604,052 outstanding,
      respectively                     17            17
     Additional paid-in-capita    147,672       146,489
     Retained earnings             53,289        43,545
     Accumulated other
comprehensive income                9,066         4,599
     Common stock in treasury,at cost - 40,000
      shares                         (151)         (151)
    Total Shareholders' Equity    209,893       194,499
    Total Liabilities and Shareholders'
     Equity                      $251,905      $243,539

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(in thousands,      Three Months Ended    Six Months Ended
except per          June 28, June 30,   June 28, June 30,
share data)          2008      2007       2008      2007

    SALES         $57,749   $47,579    $103,839   $87,868
    COST OF SALES
(exclusive of
depreciation and
amortization,
shown separately
below)              21,510    18,355      39,894   34,808
    GROSS PROFIT    36,239    29,224      63,945   53,060
   OPERATING EXPENSES:
      Selling       17,076    14,022      31,504   26,326
      General
and administrative   7,014     5,495      12,660   10,518
      Depreciation and
       amortization 1,120       951       2,135    2,042
      Research and
development          3,172     2,276       5,885    4,248
      Total operating
expenses            28,382    22,744      52,184   43,134
    INCOME FROM
OPERATIONS           7,857     6,480      11,761    9,926
    OTHER (INCOME) EXPENSE
    Interest income   (456)     (336)     (1,077)    (592)
    Other (income)
expense, net           419      (382)        182     (707)
    Interest expense     7         2         448        4
    INCOME BEFORE
INCOME TAX           7,887     7,196      12,208   11,221
    INCOME TAX
EXPENSE              1,522     1,410       2,465    2,237
    NET INCOME      $6,365    $5,786      $9,743   $8,984
    NET INCOME PER SHARE -
     BASIC           $0.38     $0.39       $0.59    $0.61
    NET INCOME PER SHARE -
     DILUTED         $0.38     $0.39       $0.58    $0.60
    Weighted average shares -
     Basic   16,627,540 14,712,677 16,618,333 14,660,993
    Weighted average shares -
     Diluted 16,784,473 14,980,519 16,758,363 14,877,636

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

                                    Six Months Ended
(in thousands)               June 28,          June 30
                                2008             2007
    CASH FLOWS FROM:
   OPERATING ACTIVITIES:
    Net income                 $9,743           $8,984
    Adjustments to reconcile net income to net cash
     (used in) provided by operating activities:
      Depreciation and
amortization                   2,135             2,042
      Amortization of stock options and restricted
       stock units             1,060              573
      Provision for bad debts    446               28
      Deferred income tax
benefit                       (1,329)            (188)
    Change in operating assets and
       liabilities:
     Decrease (increase) in:
      Accounts receivable      4,049           (1,769)
      Inventories             (8,856)            (784)
      Prepaid expenses and
other current assets          (1,877)            (659)
      Income tax benefit from
exercise of stock options        (43)          (2,260)
    Increase (decrease) in:
      Accounts payable and
accrued liabilities           (8,962)          (1,703)
      Income taxes payable    (1,542)          (1,163)
      Customer deposits          186             (270)
      Unearned service
revenues                       1,957            3,270
       Net cash (used in)
provided by operating
activities                    (3,033)           6,101
    INVESTING ACTIVITIES:
     Purchases of property
and equipment                 (1,952)          (1,345)
     Payments for intangible
assets                        (3,333)            (148)
     Purchases of short-term
investments                     (390)          (5,230)
       Net cash used in
investing activities          (5,675)          (6,723)

     FINANCING ACTIVITIES:
      Payments on capital
leases                           (81)             (55)
      Income tax benefit from
exercise of stock options         43             2,260
      Proceeds from issuance
of stock, net                     80             3,356
        Net cash provided by
financing activities              42             5,561

    EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS                     (375)           (1,415)

    (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS     (9,041)            3,524

    CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD            25,798           15,689

    CASH AND CASH EQUIVALENTS,
END OF PERIOD                 $16,757          $19,213

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