FARO Technologies, Inc. Q1 2010 Earnings Call Transcript

FARO Technologies, Inc. Q1 2010 Earnings Call Transcript
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FARO Technologies, Inc. (FARO)

Q1 2010 Earnings Conference Call

May 6, 2010 11:00 AM ET

Executives

Vic Allgeier – IR, TTC Group

Keith Bair – SVP and CFO

Jay Freeland – President and CEO

Analysts

Larry Solow – CJS Securities

Mark Jordan – Noble Financial Group

Jim Ricchiuti – Needham & Co.

Richard Eastman – Robert W. Baird

Ajit Pai – Thomas Weisel Partners

Presentation

Operator

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Good morning everyone, and welcome to FARO Technologies conference call in conjunction with its first quarter 2010 earnings release. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question-and-answer session.

(Operator Instructions)

Please note this call may be recorded. I will be standing by if you need any assistance. For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead.

Vic Allgeier

Thank you, and good morning, everyone.

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

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

I would like to remind you that in order to help you understand the company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as we expect, we believe, we predict, we target, our growth targets, our goals, our guidance and similar words. It is possible that the company's actual results may differ materially from those projected in these forward-looking statements.

Important factors that may cause actual results to differ materially are the risk factors set forth in yesterday's press release and in the company's filings with the Securities and Exchange Commission.

I'll now turn the call over to Keith.

Keith Bair

Thank you, Vic and good morning everyone. Sales in the first quarter of 2010 were $42.3 million, a 34.4% increase from $31.4 million in the first quarter of 2009. On a regional basis, first quarter sales in 2010 in the Americas increased $3.7 million or 29.9% to $16.3 million, compared to $12.5 million in the first quarter of 2009. Sales increased 30.4% in Europe to $16.1 million from $12.4 million in the first quarter of 2009. Sales in the Asia Pacific region increased 50.5% to $9.9 million from $6.6 million in the first quarter of 2009.

The effective changes in foreign exchange rates on sales was an increase of approximately $1 million in the first quarter of 2010. New orders increased 45.3% in the first quarter of 2010 to approximately $39.8 million compared to approximately $27.4 million in the first quarter of 2009.

On a regional basis, first quarter orders in 2010 in the Americas increased 59.6% to $16.6 million compared to $10.4 million in the first quarter of 2009. Orders increased 17.1% in Europe to $13.7 million from $11.7 million in the first quarter of 2009. Orders in the Asia Pacific region increased 79.2% to $9.5 million compared to $5.3 million in the year ago quarter.

The top five customers by sales volume in the first quarter of 2010 were the US military, Honda, the US Naval Ship repair facility in Japan, Boeing and (inaudible) and represented only 4.8% of sales. The top 10 customers in the first quarter of 2010 represented only 7.3% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 60.1% in the first quarter of 2010 compared to 51.7% in the year ago quarter. This increase was primarily due to a change in the sales mix between higher margin product sales and lower margin service revenue resulting from an increase in the higher margin product sales. As a percentage of sales, selling expenses decreased to 26.6% of sales in the first quarter of 2010 compared to 40.8% in the year ago quarter.

Selling expenses declined $1.6 million to $11.2 million in the first quarter of 2010 from $12.8 million in the first quarter of 2009. As a percentage of sales, administrative expenses were 14.8% of sales in the first quarter of 2010 compared to 20% in the first quarter of 2009.

Administrative expenses in the first quarter of 2010 decreased by $100,000 to $6.2 million from $6.3 million in the first quarter of 2009 primarily as a result of a decrease in compensation cost of $400,000, travel cost of $100,000 and training and recruiting cost of $100,000 offset by an increase in professional and legal fees of approximately $600,000 primarily related to patent litigation.

Research and development expenses were $3 million in the first quarter of 2010 or 7.1% of sales compared to $3.5 million or 11.1% of sales in the first quarter of 2009. The decrease is primarily related to a reduction in compensation and subcontractors expense.

Operating margin for the first quarter of 2010 was 8% compared to a negative operating margin of 24.3% in the year ago quarter, as a result of the previously mentioned increase in sales and gross margin.

Foreign currency transaction losses were $500,000 in the first quarter of 2010 compared to a loss of $700,000 in the first quarter of 2009. Income tax expense increased $800,000 for the first quarter of 2010 compared to a benefit of $1.6 million in the first quarter of 2009 due to an increase in pretax income.

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