MBA Investment Management Academy

Stock Report for THE REESE FUND

Faro Technologies (FARO 33.50)

Price Target: $44
Sector: Technical Instrument Estimates: Revenue ($MM)
% Chg.

Kevin Rippey 219.775.5075 krippey@indiana.edu

Industry: Industrials 2013E $292

8.0%

2/8/2013 CAGR 12-14E +7.8% +20.8% Neutral

2012 $267
(4.9%)

2014E $334
+14.2%

EPS (Diluted)
% Chg.

$1.24
(10.5%)

$1.69
+35.7%

$2.20
+30.1%

Consensus EPS/Trend: Valuation: P/E P/S 52-Week Range: Market Cap ($MM): Avg. Vol. (MM): Dividend Yield $31-60 $569 0.155 0.0%

$1.50 19.8x 1.9x

$1.83 15.3x 1.7x

Beta: 1.4 % Inst. Owned: 116% Insider Owned: 1.6% WACC: 12.0%

Business Overview:
Faro Technologies is the leader in the market for computer assisted manufacturing and measurement devices. Products include the FaroArm: an articulating measurement arm for measuring complex or curved surfaces for recreation in CAD environments; the FaroScanner: a laser based surveying tool which rapidly generates 3D data for large volume structures; and other portable three-dimensional measurement devices . ASPs for Faros products run $15k-$100k. The market for 3D measurement devices is $1 billion industry and is expected to triple by 2018. Industry is dominated by Faro and Swedish competitor Hexagon metrology. Industry gross margins typically exceed 50%. Operating profits typically +/-10%

Catalysts:
Sales growth driven by expanded distribution channel and new market entry: Recent OEM agreement with leading survey equipment supplier TRMB gives access to survey equipment market Improving sales mix between product sales and service revenues given top line growth Sales trend leading PMI indicators suggest Eurozone sales stabilizing

Investment Risks:
A continuation of recent discounting could drive y/y margin compression in H1 13 Deterioration in Eurozone macro environment in H2 13 possible: leading PMI data supports stabilization in H1 Competitive product environment: In medium term, Faros competitors could bring disruptive technology to market rendering one of Faros portfolio products obsolete

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Overview
Thesis Faro is the leader in the CAM2 market (Computer assisted measurement and manufacturing) and faces a long run way for growth. Recent Trimble OEM agreement could generate incremental $200 million by 2015 from 2012 base of just over $250 million in total sales. Longer term management sees industry sees TAB growing to over $4 billion by end of the decade. Current valuations provide an attractive entry point into Faro shares. The stock is down 40% from the 52 week highs reached in early 2012. FARO trades at less than 20x my 2013 EPS forecast. Historically, the stock has traded at an average of 29.5x FY1 earnings. While management poorly guided investor expectations as the European demand environment deteriorated in 2012, an improvement in the European macro picture would prove a significant catalyst near term. Global PMI indicators that historically lead Faro sales growth by six months have recently shown marked improvement. Operating margin is poised to improve 300bps in 2013. The major catalyst for operating margin expansion should be an increasing share of Scanner sales through TRMB. The recent agreement between Faro and leading survey equipment supplier Trimble (TRMB) should drive 150bps operating margin expansion on the sales expense line. Further, with the patent case between Faro and Nikon now closed, G&A improvement should further increase OM by 70bps this year. Longer term, wage inflation in China will necessitate a shift from labor to capital intensive production methods While Chinese manufacturing has enjoyed a multi-decade growth period as result of low labor costs, sustained double digit wage inflation is a long term challenge. If China wishes to maintain its competitive position as a global manufacturing power, it will need to offset rising labor cost with the type of efficiency gains derived from Faros product offerings.

Risks In light of recent promotional activity, gross margins may be slower to return to normalized levels than estimated While Faro has successfully used this strategy in previous years to push sales, gross margins may continue below trend through at least part of 2013. The major driver of an increase in prices will be improvement in the demand environment. Should there be a significant pick-up in demand, gross margins could very well exceed my estimates.

Recent disappointments in Faros operating results highlight sensitivity to global macro environment While previous years have shown that there is strong secular demand for Faros products, 2012 has demonstrated a significant degree of short term sales growth volatility. In light of economic uncertainty, purchasing managers saw budgets frozen or cut all together. This resulted in a sharp drop off in demand growth for Faro products especially in the Eurozone. The company will likely remain susceptible to similar sales volatility in the future.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Managements refusal to provide guidance and unwillingness to break out revenues by product make forecasting growth especially challenging While this is not a new practice for Faros management team, investors may be slow to return to the stock without several quarters of evidence demonstrating that the company has returned to its previous growth profile. However, should the company produce strong results in 2013; there is an excellent opportunity for significant share price appreciation.

Computer Assisted Measurement and Manufacturing (CAM2) Industry

Faros management estimate the addressable market for their products is between $3-5 billion per year. If this estimate is correct, it is likely Faro and its competitors have reached slightly more than 1/3 of the market. Currently, total sales between Faro and its competitors are closer to just over $1 billion. Faro and Hexagon each generate annual CAM2 sales of around $250 million. Market research suggests that smaller product specific competitors comprise the remaining $500 million. Gross margins in the industry are fairly high and historically exceed 50%. This reflects the high barriers to entry provided by intellectual property. Faro alone holds more than 150 patents related to CAM2 technology. The technological sophistication and sensitive calibrations required to produce CAM2 products limits potential new entry by rivals. For perspective, Faros measuring arms are accurate to the micron level or a fraction of the diameter of human hair. As such, potential for new entrants is limited based on Faros IP portfolio and the specialized processes required to manufacture CAM2 products. While the market for CAM2 products is competitive, it is dominated by two key players Faro and Hexagon. Other competition comes from various smaller players that specialize in particular product categories but not across the entire range of Faro and Hexagons offerings. Therefore only Faro and Hexagon are positioned to exploit cross-selling opportunities. Faro and Hexagons product portfolios match up well with both providing offerings for arm based measuring devices, laser trackers, and laser scanners. Management estimates that Faro controls a 70% market share in measuring arms, 50% share in trackers, and lags in scanners with only 35% share although this is a new category for Faro. Typically, Faro products command a 10-20% price premium over Hexagons offerings.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Competitors Hexagon Metrology (HEXA.B Sweden): Hexagon in Faros nearest rival in the CAM2 market. The company offers a product range that closely resembles Faros. The company itself is much larger than Faro but with respect to total CAM2 sales is quite similar (~ $250 million in sales). Faro has greater market share in arm based measuring devices but more evenly splits the market with Hexagon in the laser tracker market. Faro likely lags behind Hexagon in the scanner market as Faro has only recently entered the space. However, Faros new distribution deal with leading survey equipment supplier Trimble could likely change the competitive dynamics in the scanner market in favor of Faro Nikon (NINOY ADS): Nikon is a leading manufacturer of optical instruments. It began competing with Faro in 2009 following its acquisition of Metris, a player in the CAM2 market place. Nikon produces arm based measuring devices as well as fixed coordinate measuring machines (CMMs). For the previous two years Nikon and Faro have been locked in a patent dispute. In August 2012 the judge ruled in favor of Faro. Carl Zeiss (Private): Carl Zeiss is the leader in fixed CMMs. These machines offer comparable if slightly more accurate measurements than Faros products but at greater cost and lack portability. Zeiss actively markets Faro products on its own website.

Products

FaroArm Faros product portfolio is comprised of six devices. The oldest product in the portfolio is the FaroArm. The technology for the articulating arm dates back to the early 1980s when the forerunner to Faro licensed similar arm technology for use in operating rooms to Medtronics. Faro controls 70% of the market for measurement arm devices. FaroArm comes in a variety of sizes from 6- 12 and have selling prices that average around $50k. Important to end users, Faro Arm offers a significantly lower cost than traditional fixed-place coordinate measuring machines and offers the additional benefit of a high degree of portability. The Arm can also be equipped with a scan arm which eliminates the need for contact based measurements and can better capture complex or curved surfaces. The addition of the scan arm increases the selling price by $20k. The Gage is a smaller scale version of the Arm with a range of up to 4 and carries with it a

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

lower ASP of $15k. Applications for FaroArm include a wide range of in process quality control measurements. Customers are able to quickly and accurately compare in process goods to CAD drawings.

Laser Tracker For larger scale measuring tasks requiring a highly precise degree of accuracy, Faro offers the laser tracker. This device uses a laser projected toward a reflective target. Based on the angles and distance between the laser base station and target the laser tracker delivers measurement data that is accurate to the micron level. The tracker has an ASP of $99k. Its applications include highly precise measurement of large scale items such as aircraft wings or wind turbine blades.

Laser Scanner The latest offering in Faros product portfolio, the laser scanner was technology acquired from Qvolution in 2005. While available for sale for the most of the past seven years, significant breakthroughs lead to a major reduction in size and sales price in 2010. The scanner can capture 3D images of large objects from a distance of over 500 feet. For example, EA sports uses the Scanner to capture 3D images of all major college football stadiums for its NCAA series. The scanner has an ASP of $40k. New applications for the scanner should be a significant driver of sales growth over the next 24 months. Through a recent distribution agreement for the scanner under the Trimble brand name, Faro should gain better penetration in the architectural survey market. Additionally, Faro recently hired an individual with previous high level experience at a major insurance company with the aim of selling scanners to insurance companys so they can have 3D models of facilities for which they insure policies. Faro 3D Imager The 3D Imager captures complex shapes in three dimensions at short distances. The device works by projecting a light dot matrix on to an object and using a specialized camera to capture a precise three dimensional of the object captured by the camera. The ASP of the Imager is $85k Faro has consistently updated its product lineup with enhanced features and functionality as shown in the chart below.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

End Markets

Faro serves a wide range of manufactures both small and large as its end market. As shown in the chart above Faro products can be found in most of the worlds top manufacturers. Faros customer base is diverse without overreliance on any major accounts. This diversity insulates them from reporting disappointing results due to timing issues for a single large order. They are further insulated from any firm specific risk borne by any single large customer.

When broken down by size, 75% of Faros 30,000 customers are small and medium businesses. By end user segment, auto and aero end markets make up 60% of Faros installed base. Light and non-manufacturing type customers such as small machine shops or surveyors make up 25%. The remaining 15% are heavy manufacturers such as CAT and Deere.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Financial Performance Analysis

Revenue

Faro breaks out sales by geography but not by product line. Revenues are split between product revenue which comprises between 81-84% depending on the quarter. Strong sales periods show a greater degree of product sales. Faro sales are closely linked to global PMI readings as shown in the following exhibits. After posting top line growth in excess of 32% y/y in 2011, growth stalled in 2012. The key driver of this sales growth slowdown is economic weakness in the Eurozone. Expectations of a weak Q4 appear high especially in light of the departure of the companys US managing director (responsible for the regions entire operations). While the company says the departure is unrelated to performance, investors were quick to sell on the news, anticipating the implications on Q4 2012 results. While 2012 performance has disappointed investor expectations, recent positive readings in PMI data signal stabilization in Europe coupled with a reacceleration of growth in the US through at least the first half of 2013. The second half of 2013 is likely even more promising should Europe begin to recover as weak comps in Q3 and Q4 of next year should facilitate the company posting substantial y/y sales increases. It is again worth noting that the company does not break out revenue by product line, so sales by geography is the most appropriate way to think about the drivers of Faro sales in most instances. However, the introduction of new products or the entrance into new markets should generate sales growth in excess of the normalized sales growth/PMI relationship shown below. On the product level, the introduction of the Faro scanner into the Trimble distribution network under the Trimble TX5 brand name should provide incremental sales growth for the scanner product line. Additionally, new customers for scanner products from insurance industry should produce some degree of secular sales growth. For the purpose of my forecast these factors should generate an incremental 1-3% of revenue growth in 2013 and 3-4% growth in 2014.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Europe

Sales to Europe, primarily core EU countries plus the UK represent approximately 40% of Faros total sales. Sales in Europe during Q2 were flat y/y. They deteriorated significantly in Q3 with the region posting -17% sales growth y/y. However, PMI readings in recent quarters have shown stabilization and modest recovery. This provides a historically accurate leading indicator of Faros regional sales growth.

Data providing further positive reinforcement to the thesis of a European recovery is the divergence of PMI readings from core European countries that constitute the large majority of Faros Europe sales from the readings in the periphery constitute only a small proportion of segment revenues.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Americas

Overall, the Americas represent 40% of Faros total sales. Sales in the region during Q3 came in flat y/y. Uncertainty regarding the so called fiscal cliff likely acted as a headwind especially with respect to Faros small and medium business customers (75% of sales). While a fiscal cliff related drag is likely to carry into Q4, the ultimate resolution of the issue should result in demand being pushed into Q1 of 2013. Further, while PMI readings pointed to mild US growth in Q412 and Q113, the most recent months reading of 55.7 would indicate a dramatic pickup in sales growth towards the middle part of 2013. Above this typical PMI/sales growth relationship, the US should be the primary beneficiary of the Trimble private label scanner deal. While the company does not reveal what portion of sales are a result of the scanner, Trimbles leading position as the supplier of scanning equipment for the survey market should free up Faros own sales people to focus on other verticals including scanning for the forensic, entertainment, and preservation markets with potential new opportunities in insurance.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Asia

Asia sales have held up relatively well in Q3 with mid-single digit growth y/y. The region represents only 20% of total company revenues. Going forward, PMI readings indicate a continuation of trend from recent quarters. Taking a longer term perspective, Asia likely represents the biggest opportunity with respect to secular growth as manufacturers in Asia trade capital for labor to offset the negative impacts of wage inflation. Wage inflation in China should provide a catalyst for secular demand for Faros product offerings. Cheap labor relative to developed economies has been the key driver in Chinese manufacturing growth. However, significant wage inflation is eroding this competitive advantage. If Chinese manufacturers wish to retain their leading position in manufacturing, they will need to transition towards more efficient methods of manufacturing as facilitated by Faro products.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Gross Margin

Gross margins historically have been in excess of 55% for Faro with best years nearing 60%. Gross margins for product sales typically hover just over 60% while service gross margins are significantly lower in the mid-30s. In strong sales years product sales represent a larger share of total sales. Thus, strong sales years create a revenue mix that is accretive to gross margin. Gross margins in weaker sales periods are further eroded as product ASPs decline as result of discounting. This scenario typifies Q3 2012 where heavy discounting coupled with a service heavy sales mix compressed gross margins 300bps y/y. Discounting in the period was especially pronounced as demo inventory for an older version of the tracker was cleared in anticipation of the release of the Vantage laser tracker. Depending on the product line, product sales are split between direct sales and distributor sales. This split is most relevant for sales of the scanner product as Trimble began selling its own private label version of the Scanner in Q4 of 2012. While distributor sales carry with them lower gross margins, this gross margin erosion is typically offset by a reduction of selling expenses as a % of sales. Thus, the net effect on operating margins is neutral if not a slight net positive. Going into 2013, I forecast gross margins to remain fairly consistent from 2012. The driver of my assumption is a reduction in discounting and improved sales mix from an improved demand environment offset by an increase in sales through the distributor channel specifically Trimble.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Operating Margin

From 2010, 2011, and 2012 operating margins for Faro have been 8.8%, 12.9%, and 11.0% (estimate) respectively. I forecast operating margins to improve 300 bps for 2013. The key drivers of this operating margin expansion are a 150bps reduction in selling expense as a percent of sales driven by an increase in the level of sales through distributors, a 70bps reduction in G&A as a percent of sales as legal expenses decline, and a 40bps reduction in R&D as a percent of sales as the absolute level of R&D spend grows slower than revenues. Sales expenses represent the largest item with respect to operating expenses. Sales expense as a percent of sales has ranged between 24.4-23.3%. Sales expenses are highly variable as sales force is paid entirely on commission. Thus, the only fixed cost component of sales expenses are benefits and travel costs. I forecast sales expense as a percent of sales to decline approximately 150bps from 2012 to 2013 as a greater degree of scanner sales are sold through the distributor network. This will offset the gross margin compression caused by a lower ASP. General and administrative costs have ranged between 10.5-11.4% over the past two years. 2012 G&A expenses were elevated due to litigation costs as Faro defended itself in an IP suit with Nikon. This was especially significant in Q3 as Faro had legal expenses in excess of $1 million for the quarter. The judge ultimately ruled in Faros favor so G&A as a percent of sales should decline in 2013 back to levels in line with 2011 and Q1 of 2012. R&D typically runs between 6-7% of sales but was significantly higher in the 2008-2009 period as the company sought to maintain a fixed level of R&D spend even during the downturn. For 2013 I forecast a 40bps decline in R&D as a percent of sales to 6%. Faros operations are fairly light with respect to fixed assets. Overall, the company has $16 million in net PP&E. Depreciation charges run around 42% of net PP&E or just over $6 million annually. I forecast this to remain fairly constant going forward.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Balance Sheet Faros balance sheet is exceptionally strong. The company has $145.5 million of net cash including short term investments. The company carries just over $25 million in goodwill and intangible assets it has acquired through a number of acquisitions over the years. Faro has a substantial portion of its balance sheet tied up in net working capital. As of Q3 2012, the company had $75 million in net working capital. This figure has crept higher throughout 2012 as receivable turns have declined in light of macro weakness. The company has also been faster to pay back vendors. The overall effect has been a decline in the companys cash conversion cycle. The growth rate of net working capital should decline in 2013 assuming a return to a more normalized turnover of receivables. Faros operations run light with respect to fixed assets and require fairly low levels of capex. Limited capex are a key driver in the companys strong free cash flow generation.

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Valuation

5 Year Chart FY1 P/E and P/CF

My 43.50 price target is based on a composite of a two stage DCF valuation and assigning a 25x earnings multiple to my 2013 EPS estimate of $1.69. In my DCF, I derive a price target of $44.80. The methodology use to arrive at this target price is by starting with the current cash on the balance sheet and adding the discounted value of my FCF estimates from 2012-2015. At this point, I take my 2015 FCF estimate of $43.2 million and assign a 15% annual growth rate. This medium term growth period is assumed to last through 2022. At this point, I treat the companys residual value as a growing perpetuity with a growth rate of 3%. I assume a cost of capital of 12%. Sensitizing my medium term growth and WACC assumptions produces the following result:

WACC 10.0% 36.35 42.54 50.42 60.39 72.91 11.0% 34.61 40.27 47.47 56.57 67.99 12.0% 33.03 38.21 44.80 53.11 63.53 13.0% 31.59 36.33 42.36 49.96 59.48 14.0% 30.26 34.62 40.14 47.09 55.80

Med. Term FCF % growth

5.0% 10.0% 15.0% 20.0% 25.0%

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Comparable company valuation Finding true comps for Faro is difficult. Its closest competitor Hexagon (HEXA.B- Sweden) has a variety of other business units that do not offer the same growth profile or profitability. Other competitors pose similar problems with respect to peer valuations. Like Hexagon, Nikon (NINOY- ADS) is very large with respect to its CAM2 offerings. Other CAM2 players Carl Zeiss and Zoller + Frohlich are private. I believe 3D printer makers 3D Systems (DDD) and Stratasys (SSYS) cater to similar high tech manufacturing end users and offer better pure plays on high tech manufacturing devices when compared to Hexagon. Autodesk (ADSK) while a software manufacturer rather than device maker has similar leverage to manufacturing growth and caters to many of the same end users.

Income statement highlights

Historical Data Projections FY 2010A FY 2011A Q1 2012A Q2 2012A Q3 2012A Q4 2012A FY 2012E Q1 2013E Q2 2013E Q3 2013E Q4 2013E FY 2013E FY 2014 Margin Analysis Gross Margin EBITDA Margin Operating Margin Pretax Margin Net Margin Y/Y % Change Sales Gross profit Operating profit Pretax income Net Income EPS Q/Q % Change Sales Gross profit Operating profit Pretax income Net Income EPS 59.1% 12.1% 8.8% 7.4% 5.8% 56.5% 15.6% 12.9% 12.5% 9.2% 57.0% 15.5% 12.9% 13.3% 10.3% 55.5% 12.8% 10.3% 9.7% 7.1% 53.2% 11.2% 8.3% 8.4% 6.0% 54.0% 14.5% 12.2% 12.2% 8.9% 54.9% 13.6% 11.0% 11.0% 8.1% 55.5% 16.0% 13.5% 13.5% 9.8% 54.5% 15.7% 13.3% 13.3% 9.7% 54.6% 15.5% 13.1% 13.1% 9.5% 55.2% 17.6% 15.7% 15.7% 11.5% 55.0% 16.3% 14.0% 14.0% 10.2% 55.7% 17.7% 15.8% 15.8% 11.5%

FY 2015 56.5% 19.0% 17.1% 17.1% 12.5%

29.8% 40.5% N/A N/A N/A N/A

32.5% 26.7% 94.1% 123.0% 111.2% 105.1%

24.1% 22.8% 96.8% 96.4% 108.1% 101.3%

11.8% 10.6% 19.4% 14.4% 11.8% 9.9%

(6.3%) (11.2%) (49.6%) (44.7%) (42.9%) (44.5%)

(3.7%) (11.9%) (16.1%) (27.3%) (30.4%) ($0.33)

(4.9%) 2.1% (8.3%) (7.7%) (7.0%) (10.5%)

(6.0%) (3.0%) 3.0% 0.9% (5.5%) (7.5%)

0.0% 1.8% 27.0% 41.6% 41.6% 37.9%

15.0% 17.8% 58.1% 79.2% 81.2% 78.5%

21.0% 22.5% 45.3% 54.9% 54.9% 52.7%

8.0% 9.8% 31.6% 40.2% 37.7% 35.7%

14.2% 15.7% 23.9% 28.6% 28.6% 28.1%

13.5% 15.2% 22.1% 23.2% 23.2% 22.8%

(15.4%) (14.5%) (34.4%) (30.3%) (28.7%) (29.7%)

2.4% (0.3%) (18.5%) (25.1%) (29.9%) (29.8%)

(9.0%) (12.8%) (26.9%) (21.5%) (22.4%) (23.6%)

22.2% 24.1% 79.8% 77.6% 79.5% 78.9%

(12.5%) (10.0%) (3.3%) (3.3%) (3.3%) (3.6%)

6.5% 4.5% 5.1% 5.1% 5.1% 4.7%

0.8% 0.9% (0.7%) (0.7%) (0.7%) (1.1%)

27.7% 29.1% 53.5% 53.5% 53.5% 52.9%

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Income Statement for FARO Technologies

Dollars in millions except per share

Historical Data Projections FY 2010A FY 2011A Q1 2012A Q2 2012A Q3 2012A Q4 2012A FY 2012E Q1 2013E Q2 2013E Q3 2013E Q4 2013E FY 2013E FY 2014 Sales Americas Product Service Total Europe/Africa Product Service Total APAC Product Service Total Sales Total Cost of sales (excluding depreciation) Product Service Total COGS Gross Profit Selling General and administrative Research and development EBITDA Depreciation and amortization EBIT Other expense (income) Pretax Income Income taxes Net Income Diluted weighted average shares (in millions) Earnings Per Share

FY 2015

4 Year CAGR

$59.4 13.0 72.4 61.3 13.5 74.7 36.6 8.0 44.7 191.8 54.6 23.8 78.4 113.4 50.7 26.8 12.7 23.3 6.3 16.9 2.7 14.2 $3.1 $11.1 16.321 $0.68

$81.6 15.9 97.5 83.3 16.2 99.6 47.8 9.3 57.1 254.2 82.4 28.1 110.5 143.7 62.1 26.8 15.2 39.6 6.7 32.9 1.2 31.7 $8.3 $23.4 16.809 $1.39

$20.5 4.6 25.1 18.8 4.2 23.0 14.0 3.1 17.1 65.2 20.5 7.5 28.0 37.2 16.0 6.6 4.4 10.1 1.7 8.4 (0.2) 8.7 $1.9 $6.8 17.163 $0.39

$21.5 4.2 25.7 19.4 4.2 23.2 14.9 2.9 17.8 66.8 22.3 7.4 29.7 37.1 15.8 8.1 4.5 8.6 1.7 6.9 0.4 6.5 $1.7 $4.7 17.140 $0.28

$20.2 4.7 24.8 17.1 4.0 21.0 12.1 2.8 14.9 60.7 21.1 7.3 28.4 32.3 14.2 7.3 4.1 6.8 1.8 5.0 (0.1) 5.1 $1.4 $3.7 17.406 $0.21

$26.8 4.7 31.6 23.3 4.1 27.5 12.9 2.3 15.2 74.2 26.5 7.6 34.1 40.1 16.3 8.9 4.1 10.8 1.8 9.0 0.0 9.0 $2.4 $6.6 17.471 $0.38

$89.0 18.2 107.2 78.6 16.5 94.7 53.9 11.1 65.0 267.0 90.4 29.9 120.3 146.7 62.4 30.9 17.1 36.3 6.9 29.4 0.1 29.3 $7.5 $21.8 17.471 $1.24

$20.5 4.8 25.3 17.5 4.1 21.7 14.6 3.4 18.0 65.0 20.4 8.5 28.9 36.1 14.5 6.8 4.3 10.4 1.7 8.7 0.0 8.7 $2.4 $6.4 17.536 $0.36

$22.4 4.9 27.3 19.0 4.2 23.2 15.4 3.4 18.7 69.2 23.3 8.2 31.5 37.7 15.2 7.1 4.6 10.9 1.7 9.2 0.0 9.2 $2.5 $6.7 17.601 $0.38

$23.1 5.2 28.3 19.7 4.5 24.2 14.0 3.2 17.2 69.7 23.3 8.4 31.7 38.1 15.3 7.7 4.3 10.8 1.7 9.1 0.0 9.1 $2.5 $6.7 17.666 $0.38

$30.8 6.8 37.6 27.2 6.0 33.2 15.0 3.3 18.3 89.0 28.8 11.1 39.9 49.1 19.1 9.8 4.5 15.7 1.7 14.0 0.0 14.0 $3.8 $10.2 17.731 $0.58

$96.7 21.7 118.5 83.5 18.7 102.3 59.0 13.3 72.2 292.9 95.8 36.1 131.9 161.0 64.3 31.3 17.6 47.7 6.7 41.0 0.0 41.0 $11.1 $30.0 17.731 $1.69

$111.4 21.2 132.7 93.6 17.8 111.5 75.8 14.4 90.3 334.4 112.4 35.8 148.2 186.2 70.2 36.8 20.1 59.1 6.4 52.8 0.0 52.8 $14.2 $38.5 17.796 $2.16

$124.8 23.8 148.6 103.0 19.6 122.6 91.0 17.3 108.3 379.5 124.3 40.7 165.0 214.5 77.8 41.7 22.8 72.2 7.2 65.0 0.0 65.0 $17.6 $47.5 17.861 $2.66 20.9%

9.2%

10.0%

18.8%

22.0%

21.5%

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Balance Sheet for FARO Technologies

Dollars in millions except per share Historical Data Q1 2012A Q2 2012A $138.6 48.7 56.3 16.7 260.4 16.0 25.8 18.5 2.3 $322.9 10.7 16.8 16.5 4.7 48.7 9.6 1.6 59.8 263.1 $322.9 $139.7 53.2 54.1 16.8 263.8 16.1 25.0 18.2 2.2 $325.4 9.3 15.7 16.8 6.8 48.5 9.2 1.3 59.1 266.3 $325.4 Projections Q3 2013E $180.6 51.9 57.0 18.7 308.2 15.9 25.2 20.6 2.3 $372.2 11.6 17.7 19.0 5.1 53.5 10.1 1.3 64.9 307.3 $372.2

FY 2010A Cash and short term investments Accounts receivables, net Inventories Other current assets Total Current Assets: PP&E, net Intangible assets and goodwill Service inventory Other long-term assets Total Assets: Accounts payable Accrued liabilities Current portion of unearned revenue Other current liabilities Total Current Liabilities: Unearned revenue less current portion Other long-term liabilities Total Liabilities: Total equity Total Liabilities and Equity: $115.7 51.9 28.2 12.5 208.3 15.2 26.2 13.7 2.5 $266.0 12.0 15.2 13.4 4.9 45.5 6.8 1.3 53.5 212.5 $266.0

FY 2011A $129.5 57.5 49.9 14.5 251.5 16.2 25.5 17.3 2.3 $312.8 13.4 18.1 15.6 6.8 53.9 9.5 1.4 64.9 247.9 $312.8

Q3 2012A $145.5 51.0 53.3 16.5 266.3 15.8 25.2 19.5 2.3 $329.2 8.0 16.2 17.2 4.0 45.4 9.6 1.3 56.3 272.9 $329.2

Q4 2012A $156.7 64.3 51.2 16.3 288.5 16.1 25.2 20.0 2.3 $352.2 14.4 19.1 20.5 4.1 58.1 10.9 1.3 70.3 281.8 $352.2

FY 2012E $156.7 64.3 51.2 16.3 288.5 16.1 25.2 20.0 2.3 $352.2 14.4 19.1 20.5 4.1 58.1 10.9 1.3 70.3 281.8 $352.2

Q1 2013E $162.4 50.5 57.1 16.1 286.1 16.0 25.2 19.7 2.3 $349.4 10.6 17.3 16.2 4.6 48.7 9.2 1.3 59.3 290.1 $349.4

Q2 2013E $174.3 52.3 56.3 16.9 299.7 16.1 25.2 19.9 2.3 $363.2 11.5 17.6 18.9 5.0 53.1 10.1 1.3 64.5 298.7 $363.2

Q4 2013E $190.0 63.3 62.1 19.6 335.0 15.9 25.2 22.4 2.3 $400.9 14.6 22.3 23.9 6.4 67.3 12.8 1.3 81.4 319.5 $400.9

FY 2013E $190.0 63.3 62.1 19.6 335.0 15.9 25.2 22.4 2.3 $400.9 14.6 22.3 23.9 6.4 67.3 12.8 1.3 81.4 319.5 $400.9

FY 2014 $231.3 65.0 65.9 21.7 383.9 17.9 25.2 21.4 2.3 $450.8 18.5 20.7 25.2 7.4 71.9 11.9 1.3 85.1 365.7 $450.8

FY 2015 $279.7 69.7 73.3 22.8 445.5 20.2 25.2 24.3 2.3 $517.5 21.1 24.8 28.1 8.3 82.1 13.2 1.3 96.7 420.9 $517.5

Stock report for The Reese Fund February 8, 2013NASDAQ: FARO krippey@indiana.edu (219) 775-5075

Cash Flow Statement for FARO Technologies

Dollars in thousands except per share

FY 2010A Operating Activities Net Income Stock-based compensation expense Depreciation & Amortization Provision for bad debts Deferred income tax expense (benefit) (Increase)/decrease in working capital Cash Flow from Operating Activities: Investing Activities Capital expenditures Additions to intangibles Additions to other assets Cash Flow from Investing Activities: CASH FLOW AVAILABLE FOR FINANCING ACTIVITIES Financing Activities Issuance / (repayment) of credit facility Issuance of long-term debt (Repayment) of long-term debt Issuance/ (Repurchase) of equity Payments on capital leases Option proceeds Cash Flow from Financing Activities: Effect of foreign exchange rate change Net Change in Cash Beginning cash balance Ending cash balance $11.1 2.4 6.3 2.4 (0.7) (6.5) 15.0

FY 2011A $23.4 2.7 6.7 2.2 (0.7) (25.6) 8.7

Q1 2012A $6.8 0.8 1.7 0.0 (0.0) (4.9) 4.3

Q2 2012A $4.7 1.1 1.7 (0.1) (0.7) (4.3) 2.4

Q3 2012A $3.7 1.1 1.8 (0.1) 0.1 0.0 6.6

Q4 2012A $7.0 0.6 1.8 0.0 0.0 1.7 11.1

FY 2012E $22.2 3.6 6.9 0.0 0.0 (5.8) 26.9

Q1 2013E $6.4 0.6 1.7 0.0 0.0 (1.3) 7.4

Q2 2013E $6.7 0.6 1.7 0.0 0.0 2.6 11.7

Q3 2013E Q4 2013E FY 2013E FY 2014 $6.7 0.6 1.7 0.0 0.0 (1.8) 7.1 $10.2 0.6 1.7 0.0 0.0 (3.5) 9.0 $30.0 2.5 6.7 0.0 0.0 (3.9) 35.2 $38.5 2.5 6.4 0.0 0.0 (3.1) 44.3

FY 2015 $47.5 2.5 7.2 0.0 0.0 (2.9) 54.2

(4.0) (1.0) 0.0 (5.0) 10.0

(4.5) (0.9) 0.0 (5.4) 3.3

(0.7) (0.2) 0.0 (0.9) 3.4

(1.8) (0.3) 0.0 (2.1) 0.3

(0.6) (0.3) 0.0 (0.9) 5.7

(2.0) 0.0 0.8 (1.2) 9.9

(6.8) 0.0 (1.4) (8.2) 18.7

(1.6) 0.0 (1.4) (3.0) 4.4

(1.7) 0.0 0.6 (1.1) 10.6

(1.5) 0.0 (0.6) (2.1) 5.0

(1.7) 0.0 0.8 (0.9) 8.2

(6.5) 0.0 (0.5) (7.1) 28.2

(8.4) 0.0 0.1 (8.2) 36.1

(9.5) 0.0 (1.5) (11.0) 43.2

0.0 0.0 0.0 1.4 (0.1) 0.1 1.5 4.2 15.6 100.1 $115.7

0.0 0.0 0.0 9.2 (0.2) 1.6 10.6 (0.1) 13.8 115.7 $129.5

0.0 0.0 0.0 5.3 (0.1) 1.1 6.2 (0.6) 9.0 129.5 $138.6

0.0 0.0 0.0 0.3 0.0 0.1 0.4 0.5 1.2 138.6 $139.7

0.0 0.0 0.0 0.5 (0.0) 0.0 0.5 (0.4) 5.8 139.7 $145.5

0.0 0.0 0.0 0.0 0.0 1.3 1.3 0.0 11.2 145.5 $156.7

0.0 0.0 0.0 0.0 (0.1) 8.5 8.4 0.0 27.1 129.5 $156.7

0.0 0.0 0.0 0.0 0.0 1.3 1.3 0.0 5.7 156.7 $162.4

0.0 0.0 0.0 0.0 0.0 1.3 1.3 0.0 11.9 162.4 $174.3

0.0 0.0 0.0 0.0 0.0 1.3 1.3 0.0 6.3 174.3 $180.6

0.0 0.0 0.0 0.0 0.0 1.3 1.3 0.0 9.5 180.6 $190.0

0.0 0.0 0.0 0.0 0.0 5.2 5.2 0.0 33.4 156.7 $190.0

0.0 0.0 0.0 0.0 0.0 5.2 5.2 0.0 41.3 190.0 $231.3

0.0 0.0 0.0 0.0 0.0 5.2 5.2 0.0 48.4 231.3 $279.7