Edgar Filing: FARO TECHNOLOGIES INC

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-23081

FARO TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)


Florida		59-3157093
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

250 Technology Park, Lake Mary, Florida		32746
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, including area code: (407) 333-9911

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were outstanding 16,921,321 shares of the registrant’s common stock as of April 25, 2012.

FARO TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q

Quarter Ended March 31, 2012

INDEX


		PAGE NUMBER
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

a)	Consolidated Balance Sheets As of March 31, 2012 (Unaudited) and December 31, 2011		1

b)	Consolidated Statements of Operations (Unaudited) For the Three Months Ended March 31, 2012 and April 2, 2011		2

c)	Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended March 31, 2012 and April 2, 2011		3

d)	Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2012 and April 2, 2011		4

e)	Notes to Consolidated Financial Statements (Unaudited) For the Three Months Ended March 31, 2012 and April 2, 2011		5-13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		22

Item 4.	Controls and Procedures		22

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		23-24

Item 1A.	Risk Factors		24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 6.	Exhibits		25

SIGNATURES			26

CERTIFICATIONS

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)	March 31, 2012 (Unaudited)			December 31, 2011
ASSETS
Current Assets:
Cash and cash equivalents	$	73,588		$	64,540
Short-term investments		64,993			64,997
Accounts receivable, net		48,731			57,512
Inventories, net		56,342			49,934
Deferred income taxes, net		5,295			5,297
Prepaid expenses and other current assets		11,426			9,207

Total current assets		260,375			251,487

Property and Equipment:
Machinery and equipment		30,248			29,171
Furniture and fixtures		6,066			5,963
Leasehold improvements		10,343			10,233

Property and equipment at cost		46,657			45,367
Less: accumulated depreciation and amortization		(30,677	)		(29,134	)

Property and equipment, net		15,980			16,233

Goodwill		18,962			18,610
Intangible assets, net		6,790			6,849
Service inventory		18,477			17,316
Deferred income taxes, net		2,349			2,296


Total Assets	$	322,933		$	312,791

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	10,745		$	13,396
Accrued liabilities		16,753			18,076
Income taxes payable		746			2,682
Current portion of unearned service revenues		16,475			15,638
Customer deposits		3,933			4,072
Current portion of obligations under capital leases		57			84

Total current liabilities		48,709			53,948
Unearned service revenues - less current portion		9,575			9,540
Deferred tax liability, net		1,159			1,148
Obligations under capital leases - less current portion		392			257

Total Liabilities		59,835			64,893

Commitments and contingencies - See Note Q

Shareholders’ Equity:
Common stock - par value $.001, 50,000,000 shares authorized; 17,601,556 and 17,381,110 issued; 16,921,321 and 16,700,875 outstanding, respectively		18			17
Additional paid-in capital		176,897			169,780
Retained earnings		88,110			81,360
Accumulated other comprehensive income		7,148			5,816
Common stock in treasury, at cost - 680,235 shares		(9,075	)		(9,075	)

Total Shareholders’ Equity		263,098			247,898


Total Liabilities and Shareholders’ Equity	$	322,933		$	312,791

The accompanying notes are an integral part of these consolidated financial statements.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended
(in thousands, except share and per share data)	March 31, 2012			April 2, 2011
SALES
Product	$	54,424		$	42,958
Service		10,805			9,608


Total Sales		65,229			52,566

COST OF SALES
Product		20,506			15,573
Service		7,537			6,721

Total Cost of Sales (exclusive of depreciation and amortization, shown separately below)		28,043			22,294

GROSS PROFIT		37,186			30,272

OPERATING EXPENSES:
Selling		16,038			14,152
General and administrative		6,628			6,590
Depreciation and amortization		1,679			1,614
Research and development		4,408			3,632


Total operating expenses		28,753			25,988


INCOME FROM OPERATIONS		8,433			4,284


OTHER (INCOME) EXPENSE
Interest income		(101	)		(26	)
Other (income) expense, net		(140	)		(129	)
Interest expense		13			29


INCOME BEFORE INCOME TAX EXPENSE		8,661			4,410

INCOME TAX EXPENSE		1,911			1,167


NET INCOME	$	6,750		$	3,243


NET INCOME PER SHARE - BASIC	$	0.40		$	0.20


NET INCOME PER SHARE - DILUTED	$	0.39		$	0.20


Weighted average shares - Basic		16,788,241			16,253,121


Weighted average shares - Diluted		17,162,959			16,598,797

The accompanying notes are an integral part of these consolidated financial statements.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended
(in thousands)	March 31, 2012		April 2, 2011
Net income	$	6,750	$	3,243
Currency translation adjustments		1,334		2,571

Comprehensive income	$	8,084	$	5,814

The accompanying notes are an integral part of these consolidated financial statements.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three Months Ended
(in thousands)	March 31, 2012			April, 2, 2011
CASH FLOWS FROM:
OPERATING ACTIVITIES:
Net income	$	6,750		$	3,243
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,679			1,614
Compensation for stock options and restricted stock units		773			642
Provision for bad debts		11			329
Deferred income tax (benefit) expense		(5	)		291
Change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable		9,254			5,412
Inventories, net		(6,432	)		(7,525	)
Prepaid expenses and other current assets		(1,979	)		(509	)
Income tax benefit from exercise of stock options		(1,056	)		(237	)
Increase (decrease) in:
Accounts payable and accrued liabilities		(4,290	)		(2,447	)
Income taxes payable		(774	)		(742	)
Customer deposits		(258	)		762
Unearned service revenues		661			1,389

Net cash provided by operating activities		4,334			2,222


INVESTING ACTIVITIES:
Purchases of property and equipment		(703	)		(1,183	)
Payments for intangible assets		(193	)		(294	)

Net cash (used in) investing activities		(896	)		(1,477	)


FINANCING ACTIVITIES:
Payments on capital leases		(131	)		(22	)
Income tax benefit from exercise of stock options		1,056			237
Proceeds from issuance of stock, net		5,288			2,529

Net cash provided by financing activities		6,213			2,744


EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(603	)		(929	)


INCREASE IN CASH AND CASH EQUIVALENTS		9,048			2,560

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		64,540			50,722


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	73,588		$	53,282

The accompanying notes are an integral part of these consolidated financial statements.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2012 and April 2, 2011

(Unaudited)

(in thousands, except share and per share data, or as otherwise noted)

NOTE A – DESCRIPTION OF BUSINESS

FARO Technologies, Inc. and subsidiaries (collectively, the “Company” or “FARO”) design, develop, manufacture, market and support software-based three-dimensional measurement devices for manufacturing, industrial, building construction and forensic applications. The Company’s principal products include the FaroArm, FARO Laser Scan Arm and FARO Gage, all articulated electromechanical measuring devices, and the FARO Laser Tracker ION, FARO Focus 3D and FARO 3D Imager AMP, all laser-based measuring devices. Primary markets for the Company’s products include automobile, aerospace, heavy equipment, light manufacturing and machine shops. The Company sells the vast majority of its products through a direct sales force located in many of the world’s largest industrialized countries.

NOTE B – PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts of FARO Technologies, Inc. and all of the Company’s subsidiaries. All intercompany transactions and balances have been eliminated. The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from financial statement translations are reflected as a separate component of accumulated other comprehensive income.

NOTE C – BASIS OF PRESENTATION

The consolidated financial statements of the Company include all normal recurring accruals and adjustments considered necessary by management for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The consolidated results of operations for the three months ended March 31, 2012 are not necessarily indicative of results that may be expected for the year ending December 31, 2012 or any future period.

The information included in this Quarterly Report on Form 10-Q, including the interim consolidated financial statements and the accompanying notes, should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

NOTE D – RECLASSIFICATIONS

From time to time the Company may reclassify certain amounts to conform to the current period presentation.

NOTE E – IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the changes in shareholders’ equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 during the quarter ended March 31, 2012 only impacted presentation and has not had any effect on the Company’s condensed consolidated financial statements or on its financial condition.

In December 2011, the FASB issued ASU No. 2011-12: Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. As part of this update, the FASB did not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. ASU 2011-12 was adopted during the quarter ended March 31, 2012, and had no impact.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition — Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-13 effective January 1, 2011. The adoption of ASU 2009-13 did not have an impact on the Company’s consolidated financial statements.

NOTE F – SHARE-BASED COMPENSATION

Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is typically the same as the vesting period. The vesting period for the share-based compensation awarded by the Company is generally three years. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option grants. The Company uses the closing market price of its common stock on the date of grant to determine the fair value of restricted stock and restricted stock units.

The Company used the following assumptions for the Black-Scholes option-pricing model to determine the fair value of options granted during the three months ended March 31, 2012 and April 2, 2011:


	For the Three Months Ended
	March 31, 2012			April 2, 2011
Risk-free interest rate		0.66	%		1.55% and 1.69	%
Expected dividend yield		0	%		0	%
Expected option life		4 years			4 years
Expected volatility		50.7	%		48.7	%
Weighted-average expected volatility		50.7	%		48.7	%

Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The risk-free interest rate was based on yields of U.S. zero coupon issues and U.S. Treasury issues, with a term equal to the expected life of the option being valued.

The Company recorded total share-based compensation expense of $836 and $671 for the three months ended March 31, 2012 and April 2, 2011, respectively.

A summary of stock option activity and weighted average exercise prices for the three months ended March 31, 2012 follows:


	Options			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value as of March 31, 2012
Outstanding at January 1, 2012		865,445		$	26.72
Granted		240,366			57.01
Forfeited		(10,387	)		31.40
Exercised		(215,878	)		24.50

Outstanding at March 31, 2012		879,546		$	35.48		5.2	$	20,096

Options exercisable at March 31, 2012		412,020		$	24.42		3.9	$	13,973

The weighted-average grant-date fair value of the stock options granted during the three months ended March 31, 2012 and April 2, 2011 was $22.57 and $14.15 per option, respectively. The total intrinsic value of stock options exercised during the three months ended March 31, 2012 and April 2, 2011 was $6.1 million and $1.85 million, respectively. The aggregate intrinsic values at December 31, 2011 noted in the table above represent the closing price of our common stock traded on NASDAQ, less the weighted average exercise price at period end multiplied by the number of options outstanding and exercisable. The fair value of stock options vested during the three months ended March 31, 2012 and April 2, 2011 was $1.7 million and $1.6 million, respectively.

The following table summarizes the restricted stock and restricted stock unit activity and weighted average grant-date fair values for the three months ended March 31, 2012:


	Shares			Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2012		43,527		$	32.31
Granted		2,948			57.01
Forfeited		(1,619	)		27.39
Vested		(5,685	)		24.74

Non-vested at March 31, 2012		39,171		$	39.07

As of March 31, 2012, there was $9.6 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements. The expense is expected to be recognized over a weighted average period of 2.6 years.

NOTE G – SUPPLEMENTAL CASH FLOW INFORMATION

Selected cash payments and non-cash activity were as follows:


	Three Months Ended
	March 31, 2012		April 2, 2011
Cash paid for interest	$	11	$	11

Cash paid for income taxes	$	2,358	$	1,270

NOTE H – CASH AND CASH EQUIVALENTS

The Company considers cash on hand and all short-term, highly liquid investments that have maturities of three months or less at the time of purchase to be cash and cash equivalents.

NOTE I – SHORT-TERM INVESTMENTS

Short-term investments at March 31, 2012 and December 31, 2011 include U.S. Treasury Bills totaling $65.0 million that mature through September 13, 2012. The weighted average interest rate on the U.S. Treasury bills is less than one percent. The investments are classified as held-to-maturity and recorded at cost. The fair value of the U.S. Treasury Bills at March 31, 2012 approximated cost.

NOTE J – ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:


	As of March 31, 2012			As of December 31, 2011
Accounts receivable	$	53,403		$	62,097
Allowance for doubtful accounts		(4,672	)		(4,585	)


Total	$	48,731		$	57,512

NOTE K – INVENTORIES

Inventories consist of the following:


	As of March 31, 2012			As of December 31, 2011
Raw materials	$	34,001		$	28,675
Finished goods		8,019			7,251
Sales demonstration inventory		17,352			16,794
Reserve for excess and obsolete		(3,030	)		(2,786	)

Inventory	$	56,342		$	49,934


Service inventory	$	18,477		$	17,316

NOTE L – EARNINGS PER SHARE

A reconciliation of the number of common shares used in the calculation of basic and diluted earnings per share (EPS) is presented below:


	Three Months Ended
	March 31, 2012					April 2, 2011
	Shares		Per-Share Amount			Shares		Per-Share Amount
Basic EPS		16,788,241	$	0.40			16,253,121	$	0.20

Effect of dilutive securities		374,718		(0.01	)		345,676		—


Diluted EPS		17,162,959	$	0.39			16,598,797	$	0.20

The effect of 240,116 and 253,961 securities were not included for the three months ended March 31, 2012 and April 2, 2011, respectively, as they were antidilutive.

NOTE M – ACCRUED LIABILITIES

Accrued liabilities consist of the following:


	As of March 31, 2012		As of December 31, 2011
Accrued compensation and benefits	$	9,022	$	10,665
Accrued warranties		2,470		2,365
Professional and legal fees		1,236		966
Other accrued liabilities		4,025		4,080

	$	16,753	$	18,076

Activity related to accrued warranties was as follows:


	Three Months Ended
	March 31, 2012			April 2, 2011
Beginning Balance	$	2,365		$	1,857
Provision for warranty expense		805			487
Warranty expired		(700	)		(517	)

Ending Balance	$	2,470		$	1,827

NOTE N – INCOME TAXES

Total deferred tax assets for the Company’s foreign subsidiaries relating to net operating loss carryforwards were $14.8 million and $14.9 million at March 31, 2012 and December 31, 2011, respectively. The related valuation allowance was $11.9 million and $11.8 million at March 31, 2012 and December 31, 2011, respectively. The Company’s effective tax rate was 22.1% for the three months ended March 31, 2012 and 26.5% for the three months ended April 2, 2011 and included a reduction in the income tax rates of 5.0% and 3.5%, respectively, related to the tax benefit of the exercise of employee stock options. The Company’s tax rate continues to be lower than the statutory tax rate in the United States primarily as a result of favorable tax rates in foreign jurisdictions. Significant judgment is required in determining the Company’s worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. The Company reviews its tax contingencies on a regular basis and makes appropriate accruals as necessary.

The effective income tax rate for 2012 and 2011 includes a reduction in the statutory corporate tax rates for the Company’s operations in Switzerland. The favorable tax rate ruling requires the Company to maintain a certain level of manufacturing operations in Switzerland. The aggregate dollar effect of this favorable tax rate was approximately $0.3 million, or $.02 per share, in the three month period ended March 31, 2012, and $0.0 million, or $0.0 per share, in the three month period ended April 2, 2011.

In 2005, the Company opened a regional headquarters and began to manufacture its products in Singapore. In the third quarter of 2006, the Company received confirmation of a tax holiday for its operations from the Singapore Economic Development Board for a period of four years commencing January 1, 2006 and an additional six year extension at favorable tax rates subject to certain terms and conditions including employment, spending, and capital investment. The aggregate dollar effect of this favorable tax rate was approximately $0.1 million, or $.01 per share, during the three month period ended March 31, 2012, and $0.1 million, or $0.01 per share, in the three month period ended April 2, 2011.

NOTE O – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accruals. The carrying amounts of such financial instruments approximate their fair value due to the short-term nature of these instruments.

NOTE P – SEGMENT REPORTING

The Company has three reportable segments based upon geographic regions: Americas, Europe/Africa and Asia Pacific. The Company does not allocate corporate expenses to Europe/Africa or Asia Pacific regions. These corporate expenses are included in the Americas region. The Company does not incur R&D expenses in its Asia Pacific region.

The Company develops, manufactures, markets, supports and sells Computer-Aided Design (“CAD”)-based quality assurance products integrated with CAD-based inspection and statistical process control software in each of these regions. These activities represent approximately 99% of consolidated sales. The Company evaluates performance and allocates resources based upon profitable growth and assets deployed.

The following table presents information about the Company’s reportable segments:


	Three Months Ended
	March 31, 2012		April 2, 2011
Americas Region
Net sales to external customers	$	25,059	$	19,327
Operating income		538		467
Long-lived assets		22,829		22,645
Capital expenditures		562		885
Total assets		171,145		140,772

Europe/Africa Region
Net sales to external customers	$	23,046	$	19,022
Operating income (loss)		2,304		(308	)
Long-lived assets		16,851		18,203
Capital expenditures		182		270
Total assets		97,454		87,547

Asia Pacific Region
Net sales to external customers	$	17,124	$	14,217
Operating income		5,591		4,125
Long-lived assets		2,051		2,030
Capital expenditures		254		287
Total assets		54,334		46,710

Totals
Net sales to external customers	$	65,229	$	52,566
Operating income		8,433		4,284
Long-lived assets		41,731		42,878
Capital expenditures		998		1,442
Total assets		322,933		275,029

The geographical sales information presented above represents sales to customers located in each respective region, whereas the long-lived assets information represents assets held in the respective regions. There were no customers that individually accounted for 10% or more of total revenue in each of the periods presented above.

NOTE Q – COMMITMENTS AND CONTINGENCIES

Leases—The Company is a party to leases arising in the normal course of business that expire on or before 2019. Total obligations under these leases are approximately $6.3 million for 2012.

Purchase Commitments—The Company enters into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 90 days. As of March 31, 2012, the Company does not have any long-term commitments for purchases.

Patent Matters—On July 11, 2008, Metris USA, Inc. and its affiliates, Metris N.V., Metris IPR N.V. and 3-D Scanners Ltd., filed a complaint against the Company for patent infringement in the U.S. District Court for the District of Massachusetts (the “Massachusetts Court”) concerning U.S. Patent Nos. 6,611,617 and 7,313,264 (hereinafter, the “patents-in-suit”). Following an acquisition by Nikon Corporation in late 2009, Metris USA, Inc. subsequently changed its name to Nikon Metrology, Inc., Metris N.V. changed its name to Nikon Metrology NV, and Metris IPR N.V. was dissolved and merged into Nikon Metrology NV. We refer to each of Nikon Metrology, Inc., Nikon Metrology NV, and 3-D Scanners Ltd. as “Plaintiffs” or “Nikon”.

The Company responded to the complaint with counterclaims alleging that the patents-in-suit, which are generally directed to laser scanning devices, are invalid, non-infringed, and unenforceable due to fraud during prosecution of the patents in the U.S. Patent and Trademark Office. On August 31, 2009, the Massachusetts Court granted the Company’s motion to add counterclaims and defenses for violation of federal and state antitrust and unfair competition laws based on the alleged knowing assertion of invalid and fraudulent patents. The Company also filed an amended counterclaim to add the Plaintiff’s parent company, Nikon Corporation, as a counterclaim defendant.

On January 29, 2010, the Company filed a motion for summary judgment that the patents-in-suit are unenforceable due to inequitable conduct during patent prosecution. On July 14, 2010, the Company filed a motion for summary judgment of non-infringement of both patents-in-suit. In addition, during the first quarter of 2010, Nikon served a supplemental interrogatory answer revising its alleged date of conception of the patents-in-suit to an earlier date. The Company filed a motion to strike the supplemental interrogatory answer. On August 31, 2010, Nikon filed a motion for summary judgment against the Company’s counterclaims for antitrust violations and unfair trade practices. The Company filed its opposition on October 12, 2010.

A mediation hearing held on February 18, 2011 to settle the matter was unsuccessful. On February 22, 2011, the Massachusetts Court denied Nikon’s motion for summary judgment on the Company’s counterclaims for antitrust violations and unfair trade practices without prejudice. On February 24, 2011, the Massachusetts Court denied the Company’s motion for summary judgment of non-infringement without prejudice. On May 4, 2011, the Massachusetts Court found that, with respect to U.S. Patent No. 6,611,617, Nikon’s patent is unenforceable due to inequitable conduct.

On May 26, 2011, the Company renewed its motion for summary judgment of non-infringement. On June 28, 2011, the Massachusetts Court heard oral arguments on the Company’s motion, as well as on Nikon’s renewed motion for summary judgment on the Company’s counterclaims for anti-trust violations and unfair trade practices. The Massachusetts Court also heard oral arguments regarding an intervening change in the law of inequitable conduct and whether it changes the Massachusetts Court’s May 4, 2011 finding that Nikon’s U.S. Patent No. 6,611,617 is unenforceable due to inequitable conduct.

On September 19, 2011, as a result of these changes in the law of inequitable conduct, the Massachusetts Court vacated its May 4, 2011 decision that U.S. Patent No. 6,611,617 is unenforceable. However, in the same order, the Massachusetts Court ruled that the Company did not infringe U.S. Patent No. 6,611,617. The Massachusetts Court also granted Nikon’s motion for summary judgment on the Company’s counterclaims for anti-trust violations and unfair trade practices. The Massachusetts Court denied the Company’s motion for summary judgment of non-infringement of U.S. Patent No. 7,313,264. The effect of the ruling is to reduce or eliminate the Company’s exposure with respect to claims associated with US. Patent No. 6,611,617, while the patent dispute with respect to U.S. Patent No. 7,313,264 remains ongoing. A jury

trial on the remaining claims is scheduled to begin in the Massachusetts Court on July 30, 2012. The Company believes it does not infringe U.S. Patent No. 7,313,264 and that the patent is invalid and unenforceable, and the Company will continue to vigorously defend itself against these claims.

While it is not possible to predict the outcome of this lawsuit, we believe an adverse determination could have a material impact on the Company’s business, financial condition or results of operations.

Other than the litigation mentioned above, the Company is not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of which the Company believes will have a material adverse effect on the Company’s business, financial condition or results of operations.

NOTE R – LINES OF CREDIT

On July 11, 2006, the Company entered into a loan agreement providing for an available line of credit of $30.0 million, which was most recently amended effective March 15, 2012. Loans under the Amended and Restated Loan Agreement, as amended, bear interest at the rate of LIBOR plus a fixed percentage between 1.50% and 2.00% and require the Company to maintain a minimum cash balance and tangible net worth measured at the end of the Company’s fiscal quarters. As of March 31, 2012, the Company was in compliance with all of the covenants under the Amended and Restated Loan Agreement, as amended. The term of the Amended and Restated Loan Agreement, as amended, extends to March 31, 2015. The Company has not drawn on this line of credit.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, included elsewhere in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

FARO Technologies, Inc. (“FARO”, the “Company”, “us”, “we”, or “our”) has made “forward-looking statements” in this report (within the meaning of the Private Securities Litigation Reform Act of 1995). Statements that are not historical facts or that describe our plans, beliefs, goals, intentions, objectives, projections, expectations, assumptions, strategies, or future events are forward-looking statements. In addition, words such as “may,” “will,” “believe,” “plan,” “should,” “could,” “seek,” “expect,” “anticipate,” “intend,” “estimate,” “project” and similar words, or discussions of our strategy or other intentions identify forward-looking statements. Specifically, this Quarterly Report on Form 10-Q contains, among others, forward-looking statements regarding:

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the Company’s ability to achieve and maintain profitability;

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the impact of fluctuations in exchange rates;

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the effect of estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements;

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the impact of changes in technologies on the competitiveness of the Company’s products or their components;

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the magnitude of increased warranty costs from new product introductions and enhancements to existing products;

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the sufficiency of the Company’s plants to meet its manufacturing requirements;

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the outcome of litigation and its effect on the Company’s business, financial condition or results of operations;

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the continuation of the Company’s share repurchase program;

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the sufficiency of the Company’s working capital, cash flow from operations, and credit facility to fund its long-term liquidity requirements;

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the impact of geographic changes in the manufacturing or sales of the Company’s products on its tax rate; and

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the imposition of penalties against the Company for failure to comply with its continuing obligations with respect to the Foreign Corrupt Practices Act (“FCPA”) Matter.

Forward-looking statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. The Company does not intend to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Important factors that could cause actual results to differ materially from those contemplated in such forward-looking statements include, among others, the following:

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economic downturn in the manufacturing industry or the domestic and international economies in the regions of the world where the Company operates;

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the Company’s inability to further penetrate its customer base and target markets;

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development by others of new or improved products, processes or technologies that make the Company’s products obsolete or less competitive;

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the Company’s inability to maintain its technological advantage by developing new products and enhancing its existing products;

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the Company’s inability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consummated;

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the cyclical nature of the industries of the Company’s customers and material adverse changes in its customers’ access to liquidity and capital;

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the market potential for the computer-aided measurement (“CAM2”) market and the potential adoption rate for the Company’s products are difficult to quantify and predict;

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the inability to protect the Company’s patents and other proprietary rights in the United States and foreign countries;

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fluctuations in the Company’s annual and quarterly operating results and the inability to achieve its financial operating targets as a result of a number of factors, including, without limitation (i) litigation and regulatory action brought against the Company, (ii) quality issues with its products, (iii) excess or obsolete inventory, (iv) raw material price fluctuations, (v) expansion of the Company’s 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 the Company’s products, (viii) the length of the Company’s sales cycle to new customers and the time and expense incurred in further penetrating its 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) the Company’s success in expanding its 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 FCPA matter; and (xxii) other factors noted herein;

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changes in gross margins due to changing product mix of products sold and the different gross margins on different products, or as a result of extraordinary production costs associated with the roll-out of new products:

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the Company’s inability to successfully maintain the requirements of Restriction of use of Hazardous Substances (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) compliance in its products;

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the inability of the Company’s products to displace traditional measurement devices and attain broad market acceptance;

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the impact of competitive products and pricing in the CAM2 market and the broader market for measurement and inspection devices;

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the effects of increased competition as a result of recent consolidation in the CAM2 market;

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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;

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the loss of the Company’s Chief Executive Officer or other key personnel;

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difficulties in recruiting research and development engineers and application engineers;

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the failure to effectively manage the effects of the Company’s growth;

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variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis;

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the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms; and

other risks and uncertainties discussed in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

The Company designs, develops, manufactures, markets and supports portable, software driven, 3-D measurement and imaging systems that are used in a broad range of manufacturing, industrial, building construction and forensic applications. The Company’s FaroArm^®, FARO Laser ScanArm^® and FARO Gage articulated measuring devices, the FARO Laser Tracker ION™, the FARO Focus^3D, the FARO 3D Imager AMP and their companion CAM2^® software, provide for Computer-Aided Design, or CAD,-based inspection and/or factory-level statistical process control, and high-density surveying. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD software to improve productivity, enhance product quality and decrease rework and scrap in the manufacturing process. The Company uses the acronym “CAM2” for this process, which stands for computer-aided measurement.

As of March 31, 2012, the Company’s products have been purchased by approximately 13,000 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace, Caterpillar, Daimler Chrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu America International, Lockheed Martin, Nissan, Siemens and Volkswagen, among many others.

The Company derives revenues primarily from the sale of its FaroArm, FARO Laser ScanArm, FARO Gage, FARO Laser Tracker ION and FARO Focus^3D measurement equipment, and their related multi-faceted software. Revenue related to these products is generally recognized upon shipment. In addition, the Company sells one and three-year extended warranties and training and technology consulting services relating to its products. The Company recognizes the revenue from extended warranties on a straight-line basis. The Company also receives royalties from licensing agreements for its historical medical technology and recognizes the revenue from these royalties as licensees use the technology.

The Company manufactures its FaroArm, FARO Gage, FARO 3D Imager AMP, and FARO Laser Tracker ION products in the Company’s manufacturing facilities located in Florida and Pennsylvania for customer orders from the Americas, in its manufacturing facility located in Switzerland for customer orders from the Europe/Africa region and in its manufacturing facility located in Singapore for customer orders from the Asia/Pacific region. The Company manufactures its FARO Focus^3Dproduct in its facility located in Stuttgart, Germany. The Company expects all its existing plants to have the production capacity necessary to support its volume requirements through 2012.

The Company operates in international markets throughout the world. It maintains sales offices in the United States, Brazil, Mexico, France, Germany, Great Britain, Italy, Netherlands, Poland, Spain, China, India, Japan, Malaysia, Singapore, Thailand, and Vietnam. The Company manages and reports its global sales in three regions: the Americas, Europe/Africa and Asia/Pacific.

In the first quarter of 2012, 38.4% of the Company’s sales were in the Americas compared to 36.8% in the first three months of 2011, 35.3% were in the Europe/Africa region compared to 36.2% in the first quarter of 2011, and 26.3% were in the Asia/Pacific region compared to 27.0% in the same prior year period. In the first quarter of 2012, new order bookings increased $6.2 million, or 11.1%, to $62.1 million from $55.9 million in the prior year period. New orders in the first quarter of 2012 increased $1.4 million, or 6.9%, in the Americas to $21.8 million from $20.4 million in the prior year period. New orders in the first quarter of 2012 increased $1.4 million, or 6.5%, to $22.8 million in Europe/Africa from $21.4 million in the first quarter of 2011. In Asia/Pacific, new orders in the first three months of 2012 increased $3.4 million, or 24.1% to $17.5 million from $14.1 million in the first quarter of 2011.

The Company accounts for wholly owned foreign subsidiaries in the currency of the respective foreign jurisdiction; therefore, fluctuations in exchange rates may have an impact on inter-company accounts reflected in the Company’s consolidated financial statements. The Company is aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options (see Foreign Exchange Exposure below). However, it does not regularly use such instruments, and none were utilized in 2011 or the three months ended March 31, 2012.

The Company was profitable in each quarter in the years ended December 31, 2011 and December 31, 2010. The Company incurred a net loss in the year ended December 31, 2009, primarily as a result of a decrease in product sales. The Company attributes the decrease in product sales principally to the decline of the global economy. Prior to 2009, the Company had a history of sales and earnings growth and 26 consecutive profitable quarters through December 31, 2008. Its historical sales and earnings growth were the result of a number of factors, including: continuing market demand for and acceptance of the Company’s products; increased sales activity in part through additional sales staff worldwide, new products and product enhancements such as the FARO Edge Arm and FARO Focus^3D, and the effect of acquisitions. However, the Company’s historical financial performance is not indicative of its future financial performance.

FCPA Update

As previously reported by the Company, the Company conducted an internal investigation in 2006 into certain payments made by its China subsidiary that may have violated the Foreign Corrupt Practices Act, or the FCPA, and other applicable laws, which we refer to as the FCPA Matter, and entered into settlement agreements and related documents with the SEC and the U.S. Department of Justice, or the DOJ, in 2008 related to the FCPA Matter. Under the terms of the agreements with the SEC and the DOJ, the Company assumed a two-year monitoring obligation and other continuing obligations with respect to compliance with the FCPA and other laws, including full cooperation with the U.S. government and the adoption of a compliance code containing specific provisions intended to prevent violations of the FCPA. During the second quarter of 2010, the Company, in conjunction with the SEC and the DOJ, completed the selection of the FCPA monitor. As a result of delays in the SEC/DOJ approval of the monitor, the Company is currently still in the monitoring period, which otherwise would have already expired. The Company is cooperating with the monitor as the monitor completes a work plan to assess the Company’s compliance with the requirements of the settlement agreements. Failure to comply with any continuing obligations with respect to the FCPA Matter could result in the SEC and the DOJ seeking to impose penalties against the Company in the future.

Results of Operations

Three Months Ended March 31, 2012 Compared to the Three Months Ended April 2, 2011

Sales increased by $12.6 million, or 24.1%, to $65.2 million in the three months ended March 31, 2012 from $52.6 million for the three months ended April 2, 2011. This increase resulted primarily from an increase in worldwide demand for our products. Product sales increased by $11.4 million, or 26.7%, to $54.4 million for the three months ended March 31, 2012 from $43.0 million for the first quarter of 2011. Service revenue increased by $1.2 million, or 12.5%, to $10.8 million for the three months ended March 31, 2012 from $9.6 million in the same period during the prior year, primarily due to an increase in warranty revenue.

Sales in the Americas region increased $5.8 million, or 29.7%, to $25.1 million for the three months ended March 31, 2012 from $19.3 million in the three months ended April 2, 2011. Product sales in the Americas region increased by $5.4 million, or 35.0%, to $20.6 million for the three months ended March 31, 2012 from $15.2 million in the first quarter of the prior year. Service revenue in the Americas region increased by $0.4 million, or 9.8%, to $4.5 million for the three months ended March 31, 2012 from $4.1 million in the same period during the prior year, primarily due to an increase in Customer Service revenue.

Sales in the Europe/Africa region increased $3.9 million, or 21.2%, to $23.0 million for the three months ended March 31, 2012 from $19.1 million in the three months ended April 2, 2011. Product sales in the Europe/Africa region increased by $3.5 million, or 23.7%, to $18.8 million for the three months ended March 31, 2012 from $15.3 million in the first quarter of the prior year. Service revenue in the Europe/Africa region increased $0.4 million, or 10.9%, to $4.2 million for the three months ended March 31, 2012 from $3.8 million in the same period during the prior year.

Sales in the Asia/Pacific region increased $2.9 million, or 20.4%, to $17.1 million for the three months ended March 31, 2012 from $14.2 million in the three months ended April 2, 2011. Product sales in the Asia/Pacific region increased by $2.5 million, or 20.2%, to $15.0 million for the three months ended March 31, 2012 from $12.5 million in the first quarter of the prior year. Service revenue in the Asia/Pacific region increased by $0.4 million, or 22.1%, to $2.1 million for the three months ended March 31, 2012 from $1.7 million in the same period during the prior year.

Gross profit increased by $6.9 million, or 22.8%, to $37.2 million for the three months ended March 31, 2012 from $30.3 million for the three months ended April 2, 2011. Gross margin decreased to 57.0% for the three months ended March 31, 2012 from 57.6% for the three months ended April 2, 2011. The decrease in gross margin is primarily due to a decrease in gross margin from product sales to 62.3% in the three months ended March 31, 2012 from 63.7% for the three months ended April 2, 2011. Gross margin from product sales decreased primarily as a result of a change in the historical product sales mix caused by the increase in sales of the new Laser Scanner product which currently has a lower gross margin. Gross margin from service revenues was 30.0% both periods.

Selling expenses increased by $1.8 million, or 13.3%, to $16.0 million for the three months ended March 31, 2012 from $14.2 million for three months ended April 2, 2011. This increase was primarily due to an increase in compensation expense of $0.8 million, an increase in marketing and advertising costs of $0.4 million and an increase in travel related costs of $0.4 million.

Worldwide sales and marketing headcount increased by 15, or 4.6%, to 338 at March 31, 2012 from 323 at April 2, 2011. Regionally, the Company’s sales and marketing headcount increased by 7, or 8.0%, to 94 from 87 for the Americas; decreased by 4, or 3.4%, in Europe/Africa to 113 from 117; and increased by 12, or 10.1%, in Asia/Pacific to 131 from 119.

As a percentage of sales, selling expenses decreased to 24.6% of sales in the three months ended March 31, 2012 from 26.9% of sales in the three months ended April 2, 2011. Regionally, selling expenses were 22.4% of sales in the Americas for the quarter compared to 22.9% of sales in the first quarter of 2011; 27.8% of sales for Europe/Africa compared to 32.4% of sales from the same period in the prior year; and 23.4% of sales for Asia/Pacific compared to 25.1% of sales from the same period in the prior year.

General and administrative expenses were flat at $6.6 million for the three months ended March 31, 2012 and for the three months ended April 2, 2011.

Depreciation and amortization expenses increased slightly to $1.7 million for the three months ended March 31, 2012 from $1.6 million for the three months ended April 2, 2011.

Research and development expenses increased to $4.4 million for the three months ended March 31, 2012 from $3.6 million for the three months ended April 2, 2011 primarily as a result of an increase in compensation expense of $0.5 million. Research and development expenses as a percentage of sales decreased to 6.8% for the three months ended March 31, 2012 from 6.9% for the three months ended April 2, 2011.

Other (income) expense, net remained flat at $0.1 million of income for the three months ended March 31, 2012, and for the three months ended April 2, 2011, and consisted primarily of net foreign currency transaction gains resulting from changes in foreign exchange rates on the value of the current intercompany account balances of the Company’s subsidiaries denominated in different currencies.

Income tax expense increased by $0.7 million to $1.9 million for the three months ended March 31, 2012 from $1.2 million for the three months ended April 2, 2011. This increase was primarily due to an increase in pretax income. The Company’s effective tax rate decreased to 22.1% for the three months ended March 31, 2012 from 26.5% in the prior year period, primarily as a result of a decrease in taxable income in jurisdictions with higher tax rates, and included a reduction in the income tax rates of 5.0% and 3.5%, respectively, related to the tax benefit of the exercise of employee stock options. The Company’s tax rate continues to be lower than the statutory tax rate in the United States, primarily as a result of favorable tax rates in foreign jurisdictions. However, the Company’s tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of its products and the resulting effect on taxable income in each jurisdiction.

Net income increased by $3.5 million to $6.7 million for the three months ended March 31, 2012 from $3.2 million for the three months ended April 2, 2011 as a result of the factors described above.

Liquidity and Capital Resources

Cash and cash equivalents increased by $9.1 million to $73.6 million at March 31, 2012 from $64.5 million at December 31, 2011. The increase was primarily attributable to an increase in net income and non-cash expenses of $9.2 million and proceeds from stock option exercises of $5.2 million, offset by an increase in working capital of $3.8 million, purchases of equipment and intangible assets of $0.9 million, and the effect of exchange rate changes on cash of $0.6 million.

The Company believes that its working capital, anticipated cash flow from operations, and credit facility will be sufficient to fund its long-term liquidity requirements for the foreseeable future.

The Company has no off balance sheet arrangements.

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience, along with various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by the Company’s management there may be other estimates or assumptions that are reasonable, the Company believes that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements.

In response to the SEC’s financial reporting release, FR-60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” the Company has selected its critical accounting policies for purposes of explaining the methodology used in its calculation, in addition to any inherent uncertainties pertaining to the possible effects on its financial condition. The critical policies discussed below are the Company’s processes of recognizing revenue, the reserve for excess and obsolete inventory, income taxes, the reserve for warranties and goodwill impairment. These policies affect current assets and operating results and are therefore critical in assessing the Company’s financial and operating status. These policies involve certain assumptions that, if incorrect, could have an adverse impact on the Company’s operations and financial position.

Revenue Recognition

Revenue related to the Company’s measurement equipment and related software is generally recognized upon shipment, as the Company considers the earnings process substantially complete as of the shipping date. Revenue from sales of software only is recognized when no further significant production, modification or customization of the software is required and where persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and deemed collectible. Revenues resulting from sales of comprehensive support, training and technology consulting services are recognized as such services are performed. Extended maintenance plan revenues are recognized on a straight-line basis over the life of the plan. The Company warrants its products against defects in design, materials and workmanship for one year. A provision for estimated future costs relating to warranty expense is recorded when products are shipped. Costs relating to extended maintenance plans are recognized as incurred. Revenue from the licensing agreements for the use of the Company’s historical technology for medical applications is recognized when the technology is sold by the licensees.

Reserve for Excess and Obsolete Inventory

Since the value of inventory that will ultimately be realized cannot be known with exact certainty, the Company relies upon both past sales history and future sales forecasts to provide a basis for the determination of the reserve. Inventory is considered obsolete if the Company has withdrawn those products from the market or had no sales of the product for the past 12 months and has no sales forecasted for the next 12 months. Inventory is considered excess if the quantity on hand exceeds 12 months of expected remaining usage. The resulting obsolete and excess parts are then reviewed to determine if a substitute usage or a future need exists. Items without an identified current or future usage are reserved in an amount equal to 100% of the FIFO cost of such inventory. The Company’s products are subject to changes in technologies that may make certain of its products or their components obsolete or less competitive, which may increase its historical provisions to the reserve.

Income Taxes

The Company reviews its deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of deferred tax liabilities, projections of future taxable income over a two-year period, and tax planning strategies that it might employ to utilize such assets, including net operating loss carryforwards. Based on the positive and negative evidence of recoverability, the Company establishes a valuation allowance against the net deferred assets of a taxing jurisdiction in which it operates unless it is “more likely than not” that it will recover such assets through the above means. In the future, the Company’s evaluation of the need for the valuation allowance will be significantly influenced by its ability to achieve profitability and its ability to predict and achieve future projections of taxable income.

Significant judgment is required in determining the Company’s worldwide provision for income taxes. In the ordinary course of global business, there are many transactions for which the ultimate tax outcome is uncertain. The Company establishes provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold as described by Accounting Standards Codification 740, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the ordinary course of business, the Company and its subsidiaries are examined by various federal, state, and foreign tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. The Company assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that gave rise to a revision become known.

Reserve for Warranties

The Company establishes at the time of sale a liability for the one year warranty included with the initial purchase price of equipment, based upon an estimate of the repair expenses likely to be incurred for the warranty period. The warranty period is measured in installation-months for each major product group. The warranty reserve is reflected in accrued liabilities in the accompanying consolidated balance sheets. The warranty expense is estimated by applying the actual total repair expenses for each product group in the prior period and determining a rate of repair expense per installation-month. This repair rate is multiplied by the number of installation-months of warranty for each product group to determine the provision for warranty expenses for the period. The Company evaluates its exposure to warranty costs at the end of each period using the estimated expense per installation-month for each major product group, the number of units remaining under warranty and the remaining number of months each unit will be under warranty. The Company has a history of new product introductions and enhancements to existing products, which may result in unforeseen issues that increase its warranty costs. While such expenses have historically been within expectations, the Company cannot guarantee this will continue in the future.

Goodwill Impairment

Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. Indefinite-life identifiable intangible assets and goodwill are not amortized but are tested for impairment. The Company performs an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. If an asset is impaired, the difference between the value of the asset reflected on the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.

The Company first performs a qualitative assessment to determine whether it is necessary to perform the two-step goodwill impairment test. If the Company believes, as a result of its qualitative assessment, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. The Company elected to early adopt this accounting guidance at the beginning of its fourth quarter of 2011 on a prospective basis for goodwill impairment tests.

If the Company believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the resultant annual goodwill impairment test is applied using a two-step approach. In performing the first step, the Company calculates the fair values of the reporting units using discounted cash flows (“DCF”) of each reporting unit. If the carrying amount of the reporting unit exceeds the fair value, the second step is performed to measure the amount of the impairment loss, if any. In the second step, the implied fair value of the goodwill is estimated as the fair value of the reporting unit as calculated in the first step, less the fair values of the net tangible and intangible assets of the reporting unit other than goodwill. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. Management has concluded there was no goodwill impairment in the year ended December 31, 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Exposure

The Company conducts a significant portion of its business outside the United States. At present, 61.5% of its revenues are invoiced, and a significant portion of its operating expenses are paid, in foreign currencies. Fluctuations in exchange rates between the U.S. dollar and such foreign currencies may have a material adverse effect on the business, results of operations and financial condition, and could specifically result in foreign exchange gains and losses. The impact of future exchange rate fluctuations on the results of the Company’s operations cannot be accurately predicted. To the extent that the percentage of its non-U.S. dollar revenues derived from international sales increases (or decreases) in the future, the Company’s exposure to risks associated with fluctuations in foreign exchange rates may increase (or decrease).

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company’s management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as defined by Rule 13a-15(e) under the Exchange Act, were effective as of March 31, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. These risks could materially and adversely affect the Company’s business, financial condition, and results of operations. The risks described in the Company’s Form 10-K for the year ended December 31, 2011 are not the only risks it faces. The Company’s operations could also be affected by additional factors that are not presently known to the Company or by factors that it currently considers immaterial to its business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer Under the Share Repurchase Program

On November 24, 2008, the Company’s Board of Directors approved a $30 million share repurchase program. Acquisitions for the share repurchase program will be made from time to time at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no restriction date or other restriction governing the period over which the Company can repurchase shares under the program. The Company made no stock repurchases under this program during the first quarter of fiscal 2012.

Other Purchases of Equity Securities by the Issuer

During the first quarter of fiscal 2012, the Company indirectly repurchased shares outside of the share repurchase program through net share settlement to satisfy minimum statutory tax withholding requirements upon vesting of shares of restricted stock held by employees. The following table summarizes this repurchase activity during the three months ended March 31, 2012:


Period	Total Number of Shares Purchased (a)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
January 1 – January 31		—	$	—		—	$	21,094,621
February 1 – February 29		482		58.55		—	$	21,094,621
March 1 – March 31		635		55.91		—	$	21,094,621
Total		1,117	$	57.05		—	$	21,094,621

Item 6. Exhibits



3.1		Articles of Incorporation, as amended (Filed as Exhibit 3.1 to Registrant’s Registration Statement on Form S-1, No. 333-32983, and incorporated herein by reference)

3.2		Amended and Restated Bylaws (Filed as Exhibit 3.1 to current Report on Form 8-K, dated January 28, 2010 and incorporated herein by reference)

4.1		Specimen Stock Certificate (Filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-1, No. 333-32983, and incorporated herein by reference)

10.1		Fourth Amendment to Amended and Restated Loan Agreement, dated March 15, 2012, between FARO Technologies, Inc. and SunTrust Bank (Filed as Exhibit 10.1 to current report on Form 8-K, dated March 19, 2012 and incorporated herein by reference)

31-A		Certification of the President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31-B		Certification of the Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32-A		Certification of the President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32-B		Certification of the Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.DEF		XBRL Definition Linkbase Document

101.LAB		XBRL Label Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		FARO Technologies, Inc.
		(Registrant)

Date: May 1, 2012	By:	/s/ Keith S. Bair
		Keith S. Bair
		Senior Vice President and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

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