Victor Allgeier - TTC Group, IR Jay Freeland - President and CEO Peter Abram - SVP and CFO.

Patrick Newton - Stifel Nicolaus Mark Jordan - Noble Financial Jim Ricchiuti - Needham & Company Ben Rose - Battle Road Research Rob Mason - Robert W. Baird Hendi Susanto - Gabelli & Company.

Good morning, everyone. Welcome to FARO Technologies Conference Call in conjunction with its Second Quarter 2014 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 is being recorded.

For opening remarks and introductions, I will now turn the call over to Vic Allgeier. Please go ahead, sir..

Thank you, and good morning, everyone. My name is Vic Allgeier, the TTC Group, FARO's Investor Relations firm. Yesterday after the market closed, FARO released its second 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 Peter Abram, Senior Vice President and Chief Financial Officer. Peter 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 expect, will, believe, potential, continue, predict, target, growth targets, goals, 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 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 Peter to review the financial results for the quarter..

Thank you, Vic, and good morning, everybody. Sales in the second quarter of 2014 were 82.1 million, an increase of 13.7 million or 20% as compared to 68.3 million in the second quarter of 2013. Sales through distributors represented 10.2% of total sales this quarter.

Product sales in the second quarter were 67.4 million, an increase of 12.2 million or 22% as compared to 55.2 million in the second quarter of 2013. The increase was primarily driven by double-digit sales growth in all product lines with especially strong market demand for our new X 130 and X 330 laser scanners.

Service revenue in the second quarter was 14.7 million, an increase of 1.5 million or 12% as compared to 13.2 million in the second quarter of 2013. The increase was primarily driven by higher premium, warranty and service revenue repair or repair revenue. Turning to a regional overview of sales.

In the Americas region, sales in the quarter were 32.9 million, an increase of 4.5 million or 16% as compared to 28.4 million in the second quarter of 2013.

This increase was primarily driven by a 127% growth in laser scanner revenue through a combination of more than doubling the number of units paired with a higher average sales price with the new X 330 launch.

In Europe/Africa region, sales in the second quarter were 28.9 million, an increase of 5.7 million or 25% as compared to 23.2 million in the second quarter of 2013. This increase was primarily a result of strong volume increases in laser scanners and trackers as well as a higher average sales price on laser scanners with the new X 330.

In the Asia-Pacific region, sales in the quarter were 20.2 million, an increase of 3.5 million or 21% as compared to 16.7 million in the second quarter of 2013. This increase was primarily driven by strong volume in metrology and similar to other regions, a higher average selling price in the laser scanners with the new X 330.

Sales to new customers in the second quarter represented 37% of total sales. The top five customers by sales volume in the second quarter of 2014 represented only 2.4% of sales. The top 10 customers in the quarter collectively represented only 3.9% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

The effective changes in foreign exchange rates on sales was an increase of 0.7 million in the second quarter of 2014 as compared to the second quarter of 2013. Turning to business development and new orders. New orders increased 26% in the second quarter to 83.9 million as compared to 66.7 million in the second quarter of 2013.

This represents a book-to-bill ratio of 1.02 for the quarter. In the Americas region, in the second quarter, orders were 34.3 million, an increase of 6.8 million or 25% as compared to 27.5 million in the second quarter of 2013 primarily driven by a $4.6 million in laser scanner orders.

In the Europe/Africa region, orders in the second quarter were 30.4 million, an increase of 8.7 million or 40% as compared to 21.7 million in the second quarter of 2013 primarily due to increased laser scanner orders again.

In the Asia-Pacific region, orders in the second quarter were 19.2 million, an increase of 1.7 million or 10% as compared to 17.5 million in the second quarter of 2013 primarily on stronger demand in China for all products and increased demand in Japan from metrology products. Turning to margins and expense.

Gross margin in the second quarter was 55.5%, an increase of 150 basis points as compared to 54% in the second quarter of 2013. Gross margin from product sales in the second quarter of 2014 was 60.8%, an increase of 230 basis points as compared to 58.5% in the second quarter of 2013.

This increase was primarily a result of lower metrology product costs from manufacturing efficiencies and higher manufacturing cost absorption across all product lines offset partially by less favorable overall sales mix.

Gross margin from service revenues in the second quarter of 2014 was 30.8%, a decrease of 470 basis points as compared to 35.5% in the second quarter of 2013. This decrease was primarily due to higher warranty expenses and an increase in customer service costs in Europe to reduce customer turnaround times on service units.

Prior year warranty expense also included 110 basis point favorable year-to-date adjustment to the warranty accrual. Selling expenses were 24% of sales in the second quarter as compared to 24.5% in the second quarter of 2013 on better sales productivity defined as sales generated per account manager.

Selling expenses in the second quarter were 19.7 million, an increase of 3 million or 18% as compared to 16.7 million in the second quarter of 2013. This increase is primarily due to increased compensation expense and higher sales commissions and headcount.

General and administrative expenses in the second quarter were 8.9 million or 10.8% of sales compared to 7.8 million or 11.5% of sales in the second quarter of 2013. The increase of 1.1 million was primarily due to higher compensation expenses of 0.7 million and one-time corporate expenses related to our vertical market strategy development.

Research and development expenses in the second quarter were 6.7 million or 8.1% of sales as compared to 5.2 million or 7.6% of sales in the second quarter of 2013. This increase of 1.5 million is primarily driven by accelerated research project spending on both next generation and new product development.

As communicated previously, the FARO senior management team made a strategic decision to accelerate spending in this area in 2014. Operating margin in the second quarter increased to 10.2% as compared to 8% in the second quarter of 2013.

Operating margin was favorably impacted in the quarter by leverage on the top line sales growth, manufacturing efficiency gains and good cost management. Other income and expense in the second quarter of 2014 was 0.2 million of income as compared to 0.5 million of expense in the second quarter of 2013.

This favorable change primarily relates to net foreign currency transaction gains and losses resulting from changes in foreign exchange rate on the value of the current intercompany account balances of the company’s subsidies denominated in different currencies.

Income tax expense in the second quarter of 2014 was 2.3 million, an increase of 0.9 million or 64% as compared to 1.4 million in the second quarter of 2013. The effective income tax rate decreased to 26.2% in the second quarter of 2014 as compared to 27.4% in the second quarter of 2013.

Net income increased to 6.3 million or $0.36 per share in the second quarter of 2014 as compared to 3.6 million or $0.21 per share in the second quarter of 2013. This beats analysts’ consensus by $0.05 in the quarter with revenue exceeding the high end of analysts’ expectations. I will now briefly discuss a few balance sheet and cash flow items.

Cash and short-term investments were 194.8 million as of June 28, 2014 as compared to 189.6 million as of December 31, 2013. Accounts receivable was 66 million as of June 28, 2014 as compared to 66.3 million as of December 31, 2013.

Days sales outstanding as of June 28, 2014 increased to 73 days from 67 days as of December 31, 2013, primarily related to the Europe/Africa region. Inventories were 75.2 million as of June 28, 2014 as compared to 68 million as of December 31, 2013.

This increase of 7.2 million was primarily related to higher sales levels with an increase in service inventory of 2.9 million, finished goods of 2.6 million and demonstration inventory of 2 million. Accounts payable and accrued liabilities of 75.5 million as of June 28, 2014 remain flat to December 31, 2013.

Finally, I’ll conclude with some statistics regarding our headcount numbers. Globally, worldwide sales headcount increased by 51 or 13.6% to 425 as of June 28, 2014 from 374 as of June 29, 2013. Globally, account manager headcount increased by 11 or 5.2% to 222 as of June 28, 2014 from 211 as of June 29, 2013.

On a regional basis in the Americas region, account manager headcount increased by seven or 10% to 80 as of June 28, 2014. In Europe/Africa region, account manager headcount increased by five or 8% to 68 as of June 28, 2014. In the Asia-Pacific region, account manager headcount decreased by one or 1% to 74 as of June 28, 2014.

We had 1,138 employees as of June 28, 2014 as compared to 1,031 as of June 29, 2013, an increase of 107 employees or 10%. Geographically, we now have 459 employees in the Americas region, 389 in the Europe/Africa region and 290 in the Asia-Pacific region. I will now hand the call over to Jay for his comments on the business..

Thanks, Peter, and good morning, everyone. The FARO team performed well in the second quarter and exceeded internal expectations by driving 26% orders growth and 20% sales growth increasing gross margin by 150 basis points and delivering $0.36 of earnings per share for our shareholders.

By all measures, the second quarter was strong for FARO and keeps us on track to deliver overall mid-teens sales growth in 2014. Globally, market conditions continued to be stronger than they were at this time last year. However, there are continuing pockets of weakness in Europe as well as Southeast Asia.

Regardless of that, each region posted double-digit percent sales growth versus prior year on strong unit sales volume gains.

The Europe/Africa team led the global business by posting 40% orders growth and 25% sales growth in higher tracker and laser scanner unit sales volume, a remarkable result considering the weakness we saw in Europe throughout 2013 and even in 2012.

The Americas also had strong double-digit orders and sales growth and across all three regions, we remain well positioned to achieve our internal targets for 2014. All product lines showed growth this year – year-over-year even with sales volume increases.

We are most excited by the strong unit sales volume growth of laser scanner in all regions especially within the Americas where unit sales volume more than doubled.

Based on feedback from our customers, the value proposition of the X 130 and X 330 laser scanner is compelling and we are encouraged by the potential growth across all of our vertical markets. While they are still very new products in the market, it gives us significant technical advantages over our competitors’ products.

The FARO X 130 and X 330 products have enabled to achieve and maintain target price levels since their introduction. However, price competition in our own product line remained difficult but manageable.

In summary, we grew top line sales in the second quarter by driving unit sales volume growth across all regions and product lines, especially laser scanners.

However, even with the strong focus by FARO employees on delivering an excellent second quarter, the team also remained dedicated to laying the foundation for strong growth in our future quarters by executing on several key strategic growth initiatives. The first is to ensure we remain highly focused on disruptive product innovation.

We’re dedicated to our stated commitment to develop new disruptive products in our research labs by increasing our R&D spending this quarter by $1.5 million or 29% to 6.7 million. The research and development organization is being pressed to deliver new or upgraded products at faster intervals.

Through the rest of this year and 2015 as well, we will expect to see the tangible benefits of this effort. Our second strategic focus, as communicated in last quarter’s earnings call, is to accelerate the evaluation of potential acquisition of new technology.

FARO’s senior management team is looking aggressively beyond our own research labs to identify disruptive, complementary products and solutions especially in optical technologies and software capability. As you now know, last night we announced our first acquisition for 2014 with the acquisition of CAD Zone.

CAD Zone’s point cloud offering is a perfect match to our vertical market strategic initiative and they are considered one of the pioneers in forensic software.

By integrating CAD Zone’s software products like CZ Point Cloud, Crime Zone and Crash Zone into our FARO portfolio, we will offer a turnkey, easy-to-use, hardware and software solution for laser scanning in the forensics market.

Law enforcement agencies, insurance companies and accident re-constructionists will have a complete solution to step-up the 3D point cloud technology to diagram crime or crash sheets. We believe this represents at least a $300 million annual opportunity for FARO to pursue in this space.

We welcome the CAD Zone team to FARO and are excited by the growth possibilities offered in this vertical for introducing a simple integrated solution for customers. Our third strategic priority in 2014 focuses on investing in our infrastructure to drive future growth.

By the end of this year, we will open the doors of our new Exton, Pennsylvania facility to modernize our laser tracker manufacturing processes, ensure substantial manufacturing capacity for our next generation imager product line and significantly upgrade our optical metrology research capability.

The facility construction and build-out was currently on schedule both in time and dollars, and when complete will create a state-of-the-art 90,000 square foot technical center. In the fourth quarter of 2014, we’ll also go live in the Americas with our new SAP enterprise system.

Design and testing is being conducted now and we remain on schedule both in time and dollars as well. Rollout to Europe and Asia is scheduled to be complete by the end of 2015. In summary, the hard work and dedication of the FARO team has driven excellent results in the first half of 2014.

Those results establish a strong foundation for continued mid-teen growth in the second half of the year. We will continue to push aggressively to grow sales, invest in R&D, integrate CAD Zone and its software products, execute the Exton and SAP projects and search for additional acquisition opportunities.

We have a great team in place globally to realize the visions of the company and as always I’d like to thank that team for their dedication for the FARO mission. Finally, I’d like to thank all of you for your continued support and I will now open the call to questions..

(Operator Instructions). We’ll take the first question from Patrick Newton with Stifel. Please go ahead. Your line is open..

Thank you. Good morning, Jay and Peter. I guess jumping right in, your laser scanner clearly had a solid quarter.

I just wondered if you could provide us with distribution as a percentage of the laser scanner revenue? And is it fair to assume that the scanner is pulled away from the laser tracker to firmly entrench itself as your number two product?.

So, Patrick, this is Peter. The percentage as of our laser scanners is 53% and I would say that in this quarter, it has exceeded the tracker and is the number two product line at this point for the quarter..

Perfect. And then Jay, can you talk about pricing in the quarter and specifically drilling down on arm? I think in your prepared remarks, you characterized the environment is difficult but manageable.

And I was hoping you could help us understand what that means on a sequential basis when last quarter you talked about the arm seeing slight peak expansion in Asia and Europe and then somewhat of a stabilization in the Americas?.

So manageable is the right word. It’s obviously nowhere near where we’d like the pricing to be. It continues to be driven aggressively by our competitor. I think last quarter we did see a slight uptick and we said, well, let’s hold off before we call it a trend because you just don’t know.

I’d say we’re down slightly sequentially from Q1 but not a whole lot different from pricing we are seeing at the end of last year, which is why I’d say it’s certainly manageable. It’s not ideal. We will continue to be aggressive when we need to be.

At the same time, the R&D team continues to be extraordinarily aggressive of the arm in terms of where they are looking to take cost out without sacrificing any of the functionality of the device and so the combination of those two makes it manageable..

And can you comment on – is the costing out already impacting the arm or will that impact future shipments? And then can you comment on arm volumes on either year-over-year or sequential basis?.

Predominately, on a go-forward basis, a little bit of it is getting (indiscernible) right now but the major changes involve redesign and so some of those are still going through the entire approval process for integration into the product itself.

Relative to unit volume, obviously, we did not see the type of growth we saw in laser scanner for the quarter but we did see good unit growth in the quarter for arms..

Okay. And then Jay if we think about seasonality for the September quarter from a revenue perspective, it’s typically relatively flat. You talked about mid-teens growth through the remainder of the year.

Is there anything that would make you think that would deviate substantially up or down from normal seasonality in mid-September?.

So, Patrick, this is Peter. I think we would have our typical seasonality. So I think your thoughts on mid-teens growth with flat to slightly down is correct..

Okay. And then Peter on the gross margin side, should we look at the current services gross margin is representing trough levels and if that is the case if we think about seasonality and fixed cost absorption, should we expect to see and also I guess what Jay talked about on the arm side with some of the cost reductions.

Should we expect to see a generally expensive gross margin trend through the remainder of the year?.

I think you should continue to think of the gross margins as we’ve talked about in the 55% to 57% on an overall basis. The service margins for the quarter were slightly lower given some of the investments that we made in the European community as well as some higher warranty costs on our first year new products.

But I think you’ll continue to see that in that range, Patrick..

Great. Thank you. Good luck..

Thanks, Patrick..

We’ll take the next question from Mark Jordan with Noble Financial. Please go ahead..

Good morning, gentlemen. A question on the account manager numbers. You’ve only grown on a net basis one rep in the first six months of the year. I’m curious as to what your overall plans are with regards to sales rep growth for the year? And by the way congratulations on the significant improvement productivity results..

Thanks, Mark. Yes, so I think what you would expect to see is we always target sort of the mid-teens growth rate on the account manager basis for the year. We’d have to get pretty aggressive in the second half to have mid-teens for the full year.

But I think when you look at how we’re adding account managers right now, the people that are coming on board we clearly anticipate adding value in the tail end of second quarter and predominately third and fourth quarters of next year. So you will see account manager increases for sure. It’s mostly in preparation for 2015 volume at this point..

Okay. On the R&D front, there was a significant sequential increase.

What percent of your R&D dollars is contracted out? And where do you see the absolute dollar spend going in the third and fourth quarters relative to the second?.

So let me take the second question. Then Jay, you can talk about contracting out. I think from an absolute perspective dollar-wise, you should think about R&D in the second half as slightly higher from the first half. As we’ve communicated we’re really investing in this in 2014.

Given our seasonality as a percentage of revenue, you should think about it as fairly flat to where you’re seeing it in Q2. Obviously it’s a little bit higher potentially in Q3 which is slightly lower in Q4..

Relative to the percent that’s contracted out, I don’t think we’ve ever disclosed the exact percentage. I would tell you that it’s relatively small. It’s not immaterial which would not be a surprise either.

Our strategy continues to be that we want to own the bulk of the extra piece where it makes sense than what we tend to contract out is really unique, specifics are one-off developments where it does not make sense to maintain one or two or three heads in a particular functional area for a short time period.

So it’s things where we know and it’s eight months worth of work that doesn’t make sense for us to own that personally as we won’t need that to be done again for two more years and we’re not going to have them sitting around just for the sake of having that expertise.

So that’s where we draw the dividing line but it’s still a relatively small portion of the overall step..

Okay. Final question from me.

CAD Zone, could you talk about what the size of investment does it represent? And secondly, how long will it take you to deliver an integrated platform?.

So let me take the first question and then Jay, you can add on to the second piece of it. We did not disclose financial terms on the acquisition but we did disclose in our Q that the average annual revenue of the company currently is about $1 million. So from a materiality perspective, it’s small..

Yes. And then in terms of how long it takes, we actually already today sell CAD Zone software with the FARO laser scanner, so it’s already a good match there.

There are what I consider to be sort of three major milestones over the coming year, year and a quarter that will improve the product for – and to making a better match to the FARO laser scanner as a packaged offering. And that was agreed to upfront with the CAD Zone team.

They were actually already in that direction anyway, so there was perfect alignment of the vision of what needed to happen next. And not surprisingly given how small the revenue is currently today, a lot of this acquisition is about how it positions us as a bundled solution and the future revenue that comes with the combined products.

So it’s not – we didn’t look at this as just a standalone revenue product obviously. And the other piece of that of course is that while the laser scanner today is doing well in law enforcement, we’ve seen very nice growth there even without owning CAD Zone. Now owning it will make a significant difference in the marketplace.

And then getting the next generation laser scanner into the market which will have a meaningful price reduction again and get it closer to the types of budgets your typical municipalities can afford that will also help create disruptive solution, and so we’re trying to the best we can.

I don’t see the exact timing on the hardware side of it, but obviously we’re trying to dovetail them as close together as possible is what we’re trying to do for the market..

Good. Thank you very much..

Thanks, Mark..

We’ll take our next question from Jim Ricchiuti with Needham & Company. Please go ahead..

Hi, Jay, good morning.

The CAD Zone acquisition from a revenue standpoint is clearly fairly small, but I wonder if you could talk a little bit about their channel position in terms of – is there anything they bring in terms of you going to this vertical and being able to address it more directly?.

Sure. So it’s a relatively small team, mostly software developers and a couple of account managers comparable to what we have in FARO.

In preparation for this and also just because we have wanted to be so aggressive on the law enforcement space within FARO, we ourselves already have two experts from the law enforcement side that are part of the sales and marketing organization before even bringing CAD Zone into the equation. In the near term, it’s predominately a U.S.

focused exercise but very rapidly will be expanded into logical countries that follow closely behind where we are with the U.S. submarket today. They have a substantial installed base.

That was one of the things that we really liked about CAD Zone from an acquisition standpoint and we have not disclosed what the size of that installed base is but it is meaningful in a FARO sense for engaging against that and that is not insignificant, so that gives us the opportunity to immediately go to all the customers with laser scanners and start talking to them about the opportunity to couple the data together, because not every – certainly by [anyone’s] (ph) imagination, most sheets at CAD Zone have been sold without a laser scanner as part of their solution and so this is our opportunity to help expand that right out of the gate..

Got it. And Jay you characterize this as the first acquisition in 2014.

Can you talk a little bit about the pipeline in terms of other acquisitions that you might be looking at?.

Yes. So what I’ll say is the pipeline is deep. Over the last six months in particular, the senior team has made a very focused and concerted effort to reinvigorate the list, for lack of a better word and we do in fact have a list as we call it, of opportunities that cover predominately the key verticals that we sell into today.

So we thought a lot about auto, aero, machine and metalworking, architecture engineering construction, law enforcement and energy. Those are the ones where we still can generate the bulk of our revenue volume today. We’ve identified a live acquisition that fit into that space. Many of them are a perfect fit.

Some of them are working the fringes and so we just signed out what we consider to be the high priority ones. Each of the managing directors has taken a few of those with their teams to go off and take a more detailed look at; and where appropriate have initial discussion with.

So, we are in the process of building what I’d call sort of the machine, for lack of a better word, on how we will look at, analyze, prioritize and then move forward with the acquisitions that we see that are interesting.

I think the new team that’s in place when we look at how quickly CAD Zone went from significant interest to closed transaction was rapid and granted some of that was helped by the size of the deal but a lot of it was helped by having the new faces in position here at FARO and that was exactly one of the reasons that I brought in those folks in the first place..

Peter, normally we see a step down in G&A in Q3.

Can it continue to be the case this year?.

Yes, I don’t think in G&A you’re going to see a step down. You may see a slight step down on selling just purely because of both the volumes and the revenue but not in – we don’t anticipate any step downs in G&A..

Okay. And I wonder if – last question.

Can you give the product book-to-bill for the quarter?.

I don’t have that number at the tip of my fingers but we can get that to you..

Okay. Thanks..

Thanks, Jim..

We’ll take the next question from Ben Rose with Battle Road Research. Please go ahead..

Good morning. A question for Peter on the gross margin.

Is it possible to identify how much of the improvement is due to selling the laser scanner on a more direct basis versus through channel previously? And then for Jay with regard to the impressive sales that you’ve achieved particularly with regard to the X 130 and the 330, can you talk about your anticipation for what kind of follow through maybe available or will be likely during the rest of the year?.

Yes, on the first part I would say that the margin improvements really were not helped by more going through a direct channel. If you look quarter-over-quarter, our percentage going through the distribution was relatively flat and so actually the increase in scanners negatively impacted our margin as we talked about.

As the mix of scanners goes up, it’s going to have some negative impact just because of the amount that goes through distribution channels. All of the improvements in our margin was driven by manufacturing efficiencies across the globe..

Okay..

I want to make sure I understand the question, so the answer would properly match. So you talk about follow though.

Are you looking for – do we anticipate similar growth rates in the back half of Europe revenue? Is that what you’re looking at or…?.

Yes. I mean I guess to sort of try and clarify, I apologize if the question was somewhat clumsy.

Sometimes when companies introduce major product introductions, there is something of a backlog of demand in anticipation of the new release and I guess just to get a sense from you as to what kind of follow through you might anticipate exactly?.

Yes, I got you. So I don’t think – particularly when you look at the X 330 which isn’t – the X 330 has the substantially longer range than the 130. I’m not sure I would say there was a whole bunch of pent-up demand waiting for it because we had not forecast that product coming or anything of the like.

So while I think there was obviously always an initial stir of activity when you have something that disruptive and due to a marketplace, but when we look at sustainability I think there’s a lot of sustainability both in the X 330 and the X 130 and I would not characterize it as being a short spike of pent-up demand and then some sort of snapback to normality.

I think we’re seeing real traction on the scanner. We’ve long said that at some point the scanner will probably become the number one product line. Well, it’s obviously still not there yet but it has got all the right sort of gears and momentum in place to keep moving in that direction..

Okay. Thank you. That’s helpful. And then with regard to the Far East, it looks like the growth there was pretty strong this quarter. In your prepared remarks you identified some possible pockets of weakness I believe in Southeast Asia.

Can you give us a flavor currently for what market conditions are like there? Some of the companies that we cover have complained of increased government agency scrutiny, for example, in China and just wanted to get your sense of the kind of state of the union there?.

Yes. The easy [hits] (ph) I guess Japan is strong. China is strong though the financing credit markets still are a little bit difficult there. But generally speaking the market has been strong there also.

The pockets of weakness Southeast Asia for us is – the bigger one is India where I think there is some slowdown and delay in the election cycle and we would expect to see that improve in the third quarter. Thailand, which is not a huge piece of our business but is a growing piece, has a lot of good manufacturing there.

Thailand has not been great in the last quarter and a couple of other really small pockets in Southeast Asia, Indonesia and places where we don’t have a direct presence but we do sell through distribution and/or shipping account managers that’s needed because of the manufacturing activity there makes it a little bit slower also.

So it’s having some drain on – some pullback on Asia in total, but not a significant impact at this point..

Okay. Thanks very much..

We’ll take the next question from Rob Mason with Robert W. Baird. Please go ahead..

Yes. Good morning, guys. Jay, could you just go back to the laser scanner sales and add a little more color around the strength you’re seeing in that product line.

I think you mentioned that the units were basically doubled in the Americas and just where that strength is coming from, from a vertical standpoint? Is it AEC, new surveying, is it an uptick in forensics? And does that more or less that sales rate, is that representative of sell-through to the in-customer as well?.

Yes. So it is predominately AEC and some of it is forensic. Forensic is the advantage of having a lower starting point, so the growth rate there is higher. The contribution is still not nearly as large as the contribution from AEC, so start with that. At lot of it is – I’d say there is sell-through for sure to the customer base.

So when you look at distribution revenue versus direct revenue, they are pretty evenly matched with each other within the laser scanner product line not across the company in total obviously. But within laser scanner they’re pretty [invest] (ph).

So anything that’s a direct sell from the FARO team is going straight to customer and then anything that’s going to distribution, obviously there’s the cycle of how long does it take to go from distributor to customer and back out the door. I don’t think we’ve seen anything where we would be concerned about cycles there.

The sell-in relative to how long it takes for the sell-through has been good. I think what it does show is that our approach to having a mix of direct sales and really strong distributors maybe not as many as we’ve got in the past but having really strong ones has proven to be successful.

I think the Americas was most aggressive in their approach to getting that setup, so they were ahead of the curve compared to Europe and [Asia] (ph) and as a result I think that’s why you see their results being just so far over the top.

Not that Europe and Asia didn’t have bad quarters as it related to scanner too, but they were obviously not quite in the range of doubling like we did in the Americas..

Okay. And then just to circle back to Asia-Pac a moment, I mean you mentioned China and Japan strong and some of the smaller influences there, countries there may be less so. You didn’t sound overly concerned about it, but year-to-date the book-to-bill there is below one, it’s like 0.91.

Is that a concern to you?.

It’s not. I think if that book-to-bill – if you go another quarter, certainly if we went two more quarters where it’d remain below there, then I would be concerned.

A couple of quarters in a row where it’s below one doesn’t bother me as much because we get – as you know, we get these fluctuations that tend to come in peaks and valleys and just like last quarter, the book-to-bill for the whole company was I think 0.9. This quarter it’s back to 1.02.

We’re always going to have this fluctuation above and below the line there for periods of time..

Okay. Peter, it’s good to continue to see some leverage out of the selling expenses in the quarter and first half.

But being able to generate that kind of leverage, is that something you’d expect to continue this year?.

I think you’re going to continue to see slight improvements quarter-over-quarter in our leverage as we look at it..

Okay. And then, Jay, if I could, just circle back. I didn’t hear you mention anything about – we know you’ve got some new products coming but I didn’t hear anything about the new product to the portfolio, any update there.

Are we still expecting to see something this year that you mentioned in the portfolio?.

Yes, definitely still expect to see a couple new product releases this year and we feel very good about – we’re already starting to talk about 2015 obviously. We feel really good about the releases coming in 2015 as well..

Okay, very good. Thanks..

We’ll take the next question from Hendi Susanto with Gabelli & Company. Please go ahead..

Good morning, Jay and Peter, and congratulations on strong sales growth in the quarter..

Thanks, Hendi..

Jay, in the Analyst Day you defined 300 million of market opportunity in law enforcement.

Post the acquisition of CAD Zone, can you help slice and dice the 8.3 billion law enforcement for I think technologies and define how much is the addressable portion now?.

Yes. So the 8 billion number is for all law enforcement technologies, and so we just look at it as that’s in general the market that we’re going after when we saw law enforcement.

We still believe and we are in the process of doing some secondary research on not just that vertical but all of our verticals to make sure that our sizing estimates for the markets are correct and that ties to obviously our R&D strategy and our M&A strategy as well.

But at first glance, we still believe the 300 million, so the number we used at the Investor Day, that’s still what we think is the current addressable opportunity for FARO which is sizable for sure relative to the size of FARO right now and meaningful and the acquisition of CAD Zone with the right bundled solution is our step to move forward on that 300 million.

So I would still think of it as – the 300 is sort of we’re targeting right now..

And then aerospace and in automotive markets are doing quite well.

Do you have any insight on FARO’s opportunity and what the market situation look like in Q2 going into Q3?.

Yes. Auto and aero are still very strong markets for us and I would include we call it MMA but metalworking and machining I would include that also because there are companies that fall into MMA that are part of supply chains partially to aero, partially to auto, sometimes they’re dedicated, sometimes they’re not. So we look at that as well.

All three of them are doing well. The growth opportunities in our opinion remains strong. The marketplace is obviously more mature than the marketplace for selling laser scanners into for forensics or for AEC applications. Clearly, customers have been using measurement technology in those verticals for a longer period of time.

And the trends that we see continue to be the same. More and more customers asking for the opportunity for optical technology to take the people out of the measurement process; those are all things that we remain keenly interested in both from a R&D standpoint. We look at our imager product line which the next generation is coming down the pipe here.

That product is a perfect fit for solving that customer problem when we talk about wanting to automate and take the man out of measurement, we clearly get that with the imager. And not surprisingly on the M&A list we have several types of technology that could be interesting there as well.

It really depends on how the imager fits, how the adoption occurs and then where we think there may still be gaps to fill if the imager isn’t solving all the problems the right way..

Thank you..

Thanks, Hendi..

(Operator Instructions). We’ll go to Jim Ricchiuti with a follow up. Please go ahead..

Jay, I think I heard you say that on the new product front you talked about new releases this year. Earlier I thought at your Investor Day you’ve been alluding to one brand new product for 2014.

Are you still on track for that introduction, that launch?.

Yes, we are on track. What I will say is that because it’s a brand new product, I want to make sure we get it right. So there is opportunity if that’s either tail end of '14 or beginning of '15 really depends on how the completion of the alpha and beta testing goes.

We are at that sort of point, so that gives you a feel for is clearly down the pipe here. We want to make sure we get the solution right for the customer. When we think about our internal estimates, we have not banked on any type of sales volume coming out of that product for the current year.

So, it’s rolled into the beginning of 2015 and certainly would not be a concern from a financial standpoint. It’s to make sure we get it right because it really targets the one that we have coming as we’ve talked about before.

It targets two different verticals that we’re already in that we know have a demand for this product and can be sold either by itself into those verticals or as an accessory to one of our other products. Either one is a perfect application for us. So I just want to make sure we get it absolutely right for the customer on that first pass..

Got it. Thanks a lot..

(Operator Instructions). Gentlemen, it appears we have no further questions at this time. So I’ll turn the program back over to our presenters for any closing remarks..

That is it from our side. Thanks everybody for the time today. We look forward to updating you again in the coming weeks and again at the end of the third quarter call. Thanks a lot. Have a great day..

Thank you..

This concludes today’s program. Thanks for your participation. You may disconnect at any time..