2010 ANNUAL REPORT
With more than 20,000 installations and 11,000 customers globally, FARO Technologies, Inc. designs, develops, and markets portable, computerized measurement and imaging devices and software used to create digital models – or to perform evaluations against an existing model – for anything requiring highly detailed 3D measurements, including part and assembly inspection, factory planning and asset documentation, as well as specialized applications ranging from surveying, recreating accident sites and crime scenes to digitally preserving historical sites.
FARO‘s technology increases productivity by dramatically reducing the amount of on-site measuring time, and the various industry-specific software packages enable users to process and present their results quickly and more effectively. FARO equipment is used by companies around the
world in production and quality control. Airbus, Audi, Boeing, BMW, FORD, General Electric, General Motors, Honda, Johnson Controls, Komatsu American International, Lockheed Martin, NASA, Northrup Grumman, Siemens and Volkswagen, belong to FARO‘s extensive customer list.
Principal products include the world‘s best-selling portable measurement arm – the FaroArm®; the world‘s best-selling laser tracker – the FARO Laser Tracker IONTM; the FARO Laser ScanArm®; the FARO FOCUS3D; the FARO Gage articulate measuring devices; the FARO 3D Imager AMP; and the CAM2® family of advanced CAD-based measurement and reporting software. FARO is ISO-9001 certified and ISO-17025 laboratory registered.
For further information, visit www.faro.com
About FARO
2008 2009 2010
Sales
(in millions)
$ 2 0 9 .2 $ 1 4 7 .7 $ 1 9 1 .8
2008 2009 2010
Gross Profit
(in millions)
$ 1 2 5 .2 $ 8 0 .7 $ 1 1 3 .4
2008
Diluted EPS
(in dollars)
$ 0 .8 3 $ (0 .6 6 ) $ 0 .6 8
2009
Comparison 2008 - 2010
(In millions of dollars except EPS and Current Ratio)
Operating Results:
2008 2009 2010 Sales $ 209.2 $ 147.7 $ 191.8 Gross Profit $ 125.2 $ 80.7 $ 113.4 Gross Margin 59.8% 54.6% 59.1% Operating Income (Loss) $ 18.9 $ (11.0) $ 16.9 Operating Margin 9.1% (7.4%) 8.8% Diluted Earnings (Loss) per Share $ 0.83 $ (0.66) $ 0.68 Current Ratio 5.2 5.6 4.6
Financial Highlights for 2010
2010
Letter to
Shareholders
From the desk of Jay Freeland
Disruption is a good thing when you’re the one driving it. Inside an industry, disruption occurs as a result of new technologies, new solutions, stronger processes, and better strategies. Inside a company, disruption means constantly challenging every aspect of the business to be better, even if it is already best in class. If you can drive that kind of disruption on both fronts, it provides a substantial competitive edge and keeps other industry participants on their heels. Disruption at FARO is part of our core strategy, and we are in the midst of one of the most important periods of positive disruption in our history.
Technology Disruption
The clearest example of our technology disruption is the FARO Focus 3D Laser Scanner, released last October. The Focus 3D is five times smaller and four times lighter than our prior generation of product, and there is no other product in the market like it. We added a touch screen interface to eliminate the need for a laptop. We incorporated color into the device, rather than requiring an external high-end camera. We embedded a swappable, long life battery rather than the large, heavy external battery used in previous models. We eliminated the need for a heavy-duty industrial tripod favoring instead a standard lightweight camera tripod. Finally, we reduced the noise surrounding scan data by 10%. We did all of this without sacrificing our capture speed
of 970,000 points per second. How much do our customers have to pay for this groundbreaking new technology? Sixty percent less, and we still managed to maintain our normal margins, thanks to equally disruptive cost engineering within the device itself.
There has been strong demand for the Focus 3D since launch. After unveiling the Focus 3D at the InterGeo trade show in Germany, we immediately had distributors asking to represent the product in their territories. As a result, orders in the fourth quarter of 2010 exceeded our best full-year results for any of the previous generations. Perhaps most exciting, the vast majority of distributors who are showing interest serve a new market for us: surveying and construction. FARO has always had a strong presence in the industrial world, but the surveying and construction space is different. Customers already buy through a well-established network - the same network that is coming to us with requests to resell our product. Going forward, we see multiple new markets for the Focus 3D, particularly as the next generations are released. When we look into the future, we believe that virtually every asset, every part and every object should be documented in 3D. Our technology enables this.
We also released the first generation of our new AMP 3D Imager product in 2010. The AMP is important strategically because it is a high accuracy non-contact device. It can achieve the accuracy of our existing contact products, but can do so without ever touching the part being inspected. It has patented technology which provides a strong barrier to entry, and it has an extremely competitive price. It also has the capability to be run automatically without user involvement. Many of our existing industrial customers have already identified applications for the product. We expect to sell the AMP through our existing industrial channel, which
“The FARO team executed extremely well, generating more sales, producing more products, and delivering solid financial results with far fewer people to do it.”
should also generate cost productivity. This first generation AMP is a good start. However, the next generations, already under development, should provide dramatic improvements to form, speed and flexibility and will incorporate substantial cost reductions. The Focus 3D and the AMP are just two examples of disruptive technology releases. You will see more coming from FARO in 2011. We continue to develop breakthroughs in our core hardware and software technology, and we are researching additional applications and methods for enabling the broadest possible utilization from our portfolio.
Process and Structural Disruption
Back in 2009, we disrupted many elements of our business model, not just to deal with the economic crisis facing the world, but also to position the company for the recovery we saw coming. We cut 30% of the workforce while leaving R&D intact. We redesigned our manufacturing processes, while maintaining our history of low capital intensity. We streamlined the back office. We didn’t do all of this just to survive the downturn. The actions we took and initiatives we launched were a function of a longer-term vision. We wanted to establish the right structural and organizational platform for the future of FARO. We wanted a platform that allows the entrepreneurial spirit to thrive. We wanted a platform that is nimble, keeping us ahead of the curve and quick to respond. Finally, we wanted a platform that is lean, but able to invest heavily in areas where we believe we can get oversized returns.
In 2010, we continued disrupting and refining our model, and the benefits of this are reflected in our financial results. Gross margins returned to historical levels, and selling costs as a percentage of sales declined substantially. We remained tight with our cash,
generating $16 million of incremental cash for the year.
Continued Disruption in the Future
Overall, 2010 was a good year for FARO. The markets we serve recovered nicely. The FARO team executed extremely well, generating more sales, producing more products, and delivering solid financial results with far fewer people to do it. There continues to be
substantial opportunity for us. We believe we are approximately 5% penetrated in the markets we currently serve. As we identify additional verticals, such as surveying and construction, the opportunity is even bigger. We have a world class technology portfolio, and we’re working aggressively to expand it. We’re experimenting with new channels, looking for ways to further accelerate our growth. Finally, we continue to have an extremely clean balance sheet, which allows us to be aggressive in our execution as well as pursuing our long-term strategy.
FARO is the world leader in the capture and utilization of three dimensional data, and we intend to remain the world leader in that space.
Jay W. Freeland President & CEO March 31, 2011
Quick Glossary Guide
Technical Terms
CAD Model
“Computer-Aided Design” that is created with software on a computer that defines the exact shape and dimensions of a part.
CAD-to-Part Inspections
Measuring a part and comparing the actual part to an “ideal” CAD Model using a device like a FaroArm or FARO Laser Tracker.
CAM2®
An acronym for computer-aided measurement, the large underserved market in which the company operates.
CAM2®Measure
“Draw as you measure” inspection software used with FaroArms and FARO Laser Trackers to compare the measured part to its original design, CAD model and/or to log the data for statistical process control.
FaroArm®
A portable six or seven-axis electronic/ mechanical device used for inspecting parts between 2 inches and 12 feet in size, usually by touching the part with a hard probe attached to the end of the device. Usually complemented by “draw as you measure” software that can even compare parts back to CAD models.
FARO®Gage
A portable six-axis electronic/mechanical device used for inspecting parts up to 2 feet in size, usually by touching the part with a hard probe. The FARO Gage has a simple user interface, specifically aimed at immediate out-of-the-box measurement suitable for small machine shops as well as large factories.
FARO®Laser Scanner
A portable, high-density data collection device used for capturing the “as-built” condition of structures, such as factories or bridges, to allow the user to more efficiently design changes to or replacements for the measured structures. This device can also be used to capture accident, crime or insurance claim scenes, and cultural heritage structures for restoration or cataloging.
FARO®Laser Tracker
A portable three-axis laser-based device used for inspecting large parts or assemblies up to 361 feet in size. Set on a tripod, it operates by tracking a bounced laser beam off a movable, reflective target that is placed on the point being measured. Usually complemented by “draw as you measure” software that can even compare parts back to CAD models.
FARO Laser ScanArm®
A portable six or seven-axis electronic/ mechanical device used for inspecting parts between 2 inches and 12 feet in size, usually by scanning the part with a non- contact Laser Line Probe attached to the end of the device. Usually accompanied by point cloud software that can convert the point data into a CAD model.
Metrology
The study of measurements.
Return on Investment (ROI)
The financial benefits of using a product (i.e. faster time to market, reduced scrap) less the financial cost of the product, divided by the financial cost of the product, multiplied by 100, expressed in percent. The time it takes a product to ”pay for itself” is reached when ROI becomes a positive number.
Re-Work
The process of trying again when a part or assembly does not fit the first time. In the absence of new data this is often an expensive trial and error process. FARO’s customers often calculate their return on investment in our products by the reduction price of re-work and scrap.
Statistical Process Control (SPC)
Using data gathering equipment like FARO products to periodically check a process for deviation and using the data to fix the process before it degrades beyond an acceptable limit.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010 or
‘ 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 Number)
250 Technology Park, Lake Mary, FL 32746
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s telephone number, including area code): (407) 333-9911 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.001 NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No Í
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No Í
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 Í 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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ‘ No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Í
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ‘ Accelerated filer Í Non-accelerated filer ‘ Smaller Reporting Company ‘
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ‘ No Í
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on July 3, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $386 million (based on the last sale on such date on the NASDAQ Global Select Market).
As of February 21, 2011, there were outstanding 16,215,971 shares of the Registrant’s common stock. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the 2011 Annual Meeting of Shareholders are incorporated
TABLE OF CONTENTS
Page
PART I . . . 1
Item 1. Business. . . 2
Item 1A. Risk Factors. . . 10
Item 1B. Unresolved Staff Comments. . . 17
Item 2. Properties. . . 17
Item 3. Legal Proceedings. . . 17
Item 4. Removed and Reserved . . . 18
PART II . . . 19
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. . . 19
Item 6. Selected Financial Data. . . 21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . 31
Item 8. Financial Statements and Supplementary Data. . . 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 53
Item 9A. Controls and Procedures. . . 53
Item 9B. Other Information . . . 55
PART III . . . 56
Item 10. Directors, Executive Officers, and Corporate Governance. . . 56
Item 11. Executive Compensation. . . 56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. . . 56
Item 13. Certain Relationships and Related Transactions and Director Independence. . . 56
Item 14. Principal Accountant Fees and Services. . . 56
PART IV . . . 57
Item 15. Exhibits and Financial Statement Schedules. . . 57
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Some of the statements made in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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,” “goal,” “objective,” “project,” “forecast,” “target” and similar words identify forward-looking statements.
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:
• economic downturn in the manufacturing industry or the domestic and international economies in the regions of the world where the Company operates;
• the Company’s inability to further penetrate its customer base and target markets;
• development by others of new or improved products, processes or technologies that make the Company’s products obsolete or less competitive;
• the Company’s inability to maintain its technological advantage by developing new products and enhancing its existing products;
• the Company’s inability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consummated;
• the cyclical nature of the industries of the Company’s customers and material adverse changes in its customers access to liquidity and capital;
• 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;
• the inability to protect the Company’s patents and other proprietary rights in the United States and foreign countries;
• 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 Foreign Corrupt Practices Act (“FCPA”) matter; and (xxii) other factors noted herein;
• changes in gross margins due to changing product mix of products sold and the different gross margins on different products;
• 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 into its products;
• the inability of the Company’s products to displace traditional measurement devices and attain broad market acceptance;
• the impact of competitive products and pricing in the CAM2 market and the broader market for measurement and inspection devices;
• the effects of increased competition as a result of recent consolidation in the CAM2 market;
• risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, political and economic instability, compliance with import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
• the loss of the Company’s Chief Executive Officer or other key personnel;
• difficulties in recruiting research and development engineers and application engineers;
• the failure to effectively manage the effects of the Company’s growth;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis; and
• the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms;
as well as other risks and uncertainties discussed in Part I. Item 1A. Risk Factors in this Annual Report on Form 10-K. Moreover, new risks and uncertainties emerge from time to time, and we undertake no obligation to update publicly or review the risks and uncertainties included in this Annual Report on Form 10-K.
ITEM1. BUSINESS.
The Company designs, develops, manufactures, markets and supports portable, software driven, 3-D measurement and imaging systems 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 Focus3D, 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 December 2010, the Company’s
products have been purchased by approximately 11,000 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Boeing, Bombadier, Ford, General Electric, General Motors, Honda, Johnson Controls, Komatsu America International, Lockheed Martin, NASA, Northrup Grumman, Siemens and Volkswagen, among many others.
The Company was founded in 1982 and re-incorporated in Florida in 1992. The Company’s worldwide headquarters are located at 250 Technology Park, Lake Mary, Florida 32746, and its telephone number is (407) 333-9911.
Industry Background
The Company believes four principal forces drive the need for its products and services: 1) the widespread use by manufacturers of CAD in product development, which shortens product cycles; 2) the adoption by manufacturers of quality standards such as Six Sigma and ISO-9000 (and its offshoot QS-9000), which stress the measurement of every step in a manufacturing process to reduce or eliminate defects, 3) the inability of
traditional measurement devices to address many manufacturing problems such as throughput, efficiency, and accuracy, especially with respect to large components for products such as automobiles, aircraft, heavy duty construction equipment and factory retrofits, and 4) the growing demand to capture large volumes of three- dimensional data for modeling and analysis.
CAD improves the manufacturing process.The creation of physical products involves the processes of design, engineering, production and measurement and quality inspection. These basic processes have been profoundly affected by the computer hardware and software revolution that began in the 1980s. CAD software was developed to automate the design process, providing manufacturers with computerized 3-D design capability and shortening the time between design changes. Today, most manufacturers use some form of CAD software to create designs and engineering specifications for new products and to quantify and modify designs and
specifications for existing products. While manufacturers previously designed their products to remain in production for longer periods of time, current manufacturing practices must accommodate more frequent product introductions and modifications, while satisfying more stringent quality and safety standards. Assembly fixtures and measurement tools must be linked to the CAD design to enable production to keep up with the rate of design change.
Quality standards dictate measurement to reduce defects.QS-9000 is the name given to the Quality System Requirements of the automotive industry developed by Chrysler, Ford, General Motors and major truck manufacturers. Companies registered under QS-9000 are considered to have higher standards and better quality products. Six Sigma is a set of quality standards that embodies the principles of total quality management focused on measuring results and reducing product or service failure rates to 3.4 per million. All aspects of a Six Sigma company’s infrastructure must be analyzed, and if necessary, restructured to increase revenues and raise customer satisfaction levels. The all-encompassing nature of these and other quality standards has resulted in manufacturers measuring every aspect of their process, including stages of product assembly that may never have been measured before, in part because of the lack of suitable measurement equipment.
Traditional products do not measure up. A significant aspect of the manufacturing process is measurement and quality inspection. Historically, manufacturers have measured and inspected products using
hand-measurement tools such as scales, calipers, micrometers and plumb lines for simple measuring tasks, test (or check) fixtures for certain large manufactured products, and traditional (or fixed) coordinate measurement machines, or CMM, for objects that require higher precision measurement. However, the broader utility of each of these measurement methods is limited.
Although hand-measurement tools are often appropriate for simple geometric measurements, including hole diameters or length and width of a rectangular component, their use for complex part measurements, such as the fender of a car, is limited. Also, these devices do not allow for the measurements to be directly compared
electronically to the CAD model of the part. Test fixtures (customized fixed tools used to make comparative measurements of complex production parts to “master parts”) are relatively expensive and must be reworked or discarded each time a dimensional change is made in the part being measured. In addition, these manual measuring devices do not permit the manufacturer to electronically compare the dimensions of an object with its CAD model.
Conventional CMMs are generally large, fixed-base machines that provide very high levels of precision and provide a link to the CAD model of the object being measured. However, fixed-base CMMs require that the object being measured be brought to the CMM and fit within the CMMs measurement grid. As manufactured subassemblies increase in size and become integrated into even larger assemblies, they become less
transportable, thus diminishing the utility of a conventional CMM. Consequently, manufacturers must continue to use hand-measuring tools, or expensive customized test fixtures, to measure large or unconventionally shaped objects. In addition, some parts or assemblies are not easily accessible and cannot be measured using traditional devices.
The market demands three-dimensional data.Conventional surveying equipment is limited to single-point measurements and does not have the capacity to capture and analyze large volumes of three-dimensional data. As data requirements for construction, civil engineering and forensic inspection projects become more complex, single-point measurement devices will become increasingly more difficult to utilize in those applications.
Escalating global competition has created a demand for higher quality products with shorter life cycles. Customers require more rapid design, greater control of the manufacturing process, tools to compare components to their CAD specifications, the ability to precisely measure components that cannot be measured or inspected by conventional devices, and the ability to capture and analyze large volumes of three-dimensional data. Moreover, they increasingly require measurement capabilities to be integrated into manufacturing processes and to be available on the factory floor. These changing demands have driven the demand for FARO’s products and services.
FARO Products
The FaroArm.The FaroArm is a combination of a portable, six or seven-axis, instrumented articulated measurement arm, a computer, and CAM2 software programs, which are described below under “CAM2 Software”.
• Articulated Arm—The articulated arm is comprised of three major joints, each of which may consist of one, two or three axes of motion. The articulated arm is available in a variety of sizes, configurations and precision levels suitable for a broad range of applications. To take a measurement, the operator simply touches the object to be measured with a probe at the end of the arm and presses a button. Data can be captured at either individual points or a series of points. Digital rotational transducers located at each of the joints of the arm measure the angles at those joints, and this rotational measurement data is transmitted to an on-board controller that converts the arm angles to precise locations in 3-D space using “xyz” position coordinates and “ijk” orientation coordinates.
• Computer—The Company pre-installs its CAM2 software on either a notebook or desktop style computer, depending on the customer’s need, and the measurement arm, computer and installed software are sold as a system. The Company purchases the computers sold with its products from various suppliers.
The FARO Laser ScanArm.The FARO Laser ScanArm is a FaroArm equipped with a combination of a hard probe (like that in the FaroArm) and a non-contact line laser probe. This product provides the Company’s customers the ability to measure products without touching them and offers a seven-axis contact/non-contact
measurement device with a fully integrated laser scanner. The ScanArm is used for non-contact measurement applications, including inspection, cloud-to-CAD comparison, rapid prototyping, reverse engineering and 3-D modeling.
The FARO Gage.Sold as a combination of an articulated arm device with a computer and software, the FARO Gage is a smaller, higher-accuracy version of the FaroArm. The FARO Gage is also distinguished from the FaroArm by the special mounting features and software unique to the FARO Gage. The FARO Gage is targeted at machine tools and bench tops around machine tools, where basic measurements of smaller machined parts must be measured. As such, the CAM2 FARO Gage software developed for this device, described below, features basic 2-D and 3-D measurements common to these applications.
The FARO Laser Tracker ION.The FARO Laser Tracker ION combines a portable, large-volume laser measurement tool, a computer, and CAM2 software programs.
• Laser Tracker—The FARO Laser Tracker ION utilizes an ultra-precise laser beam to measure objects of up to 230 feet. It enables manufacturing, engineering, and quality control professionals to measure and inspect large parts, machine tools and other large objects on-site and in-process. With its greater angular resolution, repeatability, and accuracy, the FARO Laser Tracker ION advances already-proven tracker technology. Among its many enhanced features is AgileADM™, which improves upon existing Absolute Distance Measurement technology by providing the time-saving ability to reacquire the laser beam without the need to return to a known reference point or the need to hold the target stationary.
• Computer—The FARO Laser Tracker ION includes a notebook or desktop style computer, depending on the customer’s requirements, that includes the pre-installed CAM2 Software.
The FARO Focus3D.The FARO Focus3Dutilizes laser technology to measure and collect a cloud of data points, allowing for the detailed and precise three-dimensional rendering of an object or an area as large as a factory. This technology is currently used for factory planning, facility life-cycle management, quality control, forensic analysis and capturing large volumes of three-dimensional data. The FARO Focus3Dsimplifies modeling, reduces project time and maintains or increases the accuracy of the image. The resulting data is used with major CAD systems or FARO’s own proprietary CAM2 software.
The FARO 3D Imager AMP. The FARO 3D Imager AMP is a high-performance non-contact 3D Imager, capable of collecting millions of points to generate infinitely-focused fringe patterns. The FARO 3D Imager AMP creates a highly-accurate point cloud of objects in the AMP’s field of view. This technology is used in quality control to improve product quality and reduce scrap, as well as for reverse engineering and rapid manufacturing.
CAM2 Software.CAM2 is the Company’s family of proprietary CAD-based measurement and statistical process control software used with the Company’s measurement devices. The CAM2 product line includes the following software programs, many of which are translated into multiple languages:
• CAM2 Qallows the FARO Laser ScanArm to automatically recognize geometric features for non-contact inspection. In addition, customers can measure with multiple FaroArms and FARO Laser Tracker IONs simultaneously to achieve geometry calculations accurate to one half-micron. CAM2 Q also contains a new fully customizable user interface, allowing users to create and organize a work environment that best meets the user’s needs.
• CAM2 Measure Xallows customers to compare measurements of manufactured components or assemblies with the corresponding CAD data for the components or assemblies. CAM2 Measure X is offered with the FaroArm and the FARO Laser Tracker ION.
• Soft Check Toolis a custom software program designed to lead an operator through a measurement process on the FaroArm or FARO Laser Tracker ION with minimal training. These programs are created by the Company from specifications provided by the customer.
• FARO Gage Software, used with the FARO Gage, includes a dedicated graphical interface designed for the ease of use of the operator. Capable of producing graphical and tabular reports, the software runs a library of gauging and Soft Check tools.
• FARO Focus3DSoftware.The Company has a number of programs available for use with its Focus3D product, as follows:
• FARO Scoutis a software tool for displaying 3-D measurements and navigation in huge pointclouds.
• FARO Scenedisplays, analyzes, administers and edits 3-D measurements in pointclouds, including registration of multiple pointclouds.
• FARO Cloud for AutoCADsupports the visualization and analysis of millions of 3-D points in the well known AutoCAD software environment and makes possible as-built documentation of industrial structures, historic buildings and many more applications.
• FARO Worksis a web-based tool for the administration of complex projects and navigation from floor plan to scan with links to measurements.
To support its product lines, the Company also offers extended warranties and comprehensive support, training and technology consulting services to its customers.
Customers
As of December 2010, the Company’s products have been purchased by approximately 11,000 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace, Caterpillar, Daimler AG, General Electric, General Motors, Honda, Johnson Controls, Komatsu America International, Lockheed Martin, Nissan, Siemens and Volkswagen, among many others, as well as universities and law enforcement agencies. The Company’s ten largest customers by revenue represented an aggregate of approximately 5.4% of the Company’s total revenues in 2010. No customer represented more than 1.3% of the Company’s sales in 2010.
Sales and Marketing
The Company conducts its sales and marketing efforts on a decentralized basis in three main regions around the world: Americas, Europe/Africa and Asia/Pacific. The regional headquarters for the Americas is located in the Company’s headquarters in Lake Mary, Florida; the Europe/Africa regional headquarters is located in Stuttgart, Germany; and the regional headquarters for the Asia/Pacific region is located in Singapore. At December 31, 2010, the Company employed 81, 111, and 108 sales and marketing specialists in the Americas, Europe/Africa, and Asia/Pacific regions, respectively. The Company sells most of its products through direct sales representation in the United States, Canada, Mexico, Brazil, Germany, the United Kingdom, France, Spain, Italy, Poland, Turkey, the Netherlands, India, China, Singapore, Malaysia, Vietnam, Thailand, and Japan. The Company also sells its products through distributors, although this has historically represented a small percentage of total sales. Note 17 to the Company’s “Notes to Consolidated Financial Statements” included in Part II. Item 8 of this Annual Report on Form 10-K includes financial information about the Company’s foreign and domestic operations and export sales.
The Company’s sales and marketing efforts use a process of integrated lead qualification and sales demonstration. Once a customer opportunity is identified, the Company employs a team-based sales approach involving inside and outside sales personnel who are supported by application engineers. Each team has the ability to sell multiple product lines. The Company employs a variety of marketing techniques to promote brand awareness and customer identification.
Research and Development
The Company believes that its future success depends on its ability to maintain technological leadership, which will require ongoing enhancements of its products and the development of new applications and products that provide 3-D measurement solutions. Accordingly, the Company intends to continue to make substantial investments in the development of new technologies, the commercialization of new products that build on the Company’s existing technological base and the enhancement and development of additional applications for its products.
The Company’s research and development efforts are directed primarily at enhancing the functional adaptability of its current products and developing new and innovative products that respond to specific requirements of the emerging market for 3-D measurement systems. The Company’s research and development efforts have been devoted primarily to mechanical hardware, electronics and software. The Company’s
engineering development efforts will continue to focus on enhancing its existing products and developing new products for the CAM2 market. The field of CAM2 and more broadly, 3-D measurement, continues to expand and new technologies and applications will be essential to competing in this market. Research and development activities, especially with respect to new products and technologies, are subject to significant risks, and there can be no assurance that any of the Company’s research and development activities will be completed successfully or on schedule, or, if completed, will be commercially accepted.
At December 31, 2010, the Company employed 87 scientists and technicians in its research and
development efforts. Research and development expenses were approximately $12.7 million in 2010, compared to $12.6 million in 2009 and 2008.
Intellectual Property
The Company holds or has pending 133 patents in the United States and related patents worldwide which generally expire on a rolling basis between 2011 and 2029. The Company also has 23 registered or pending trademarks in the United States and worldwide which generally expire on a rolling basis between 2011 and 2021.
The Company relies on a combination of contractual provisions and trade secret laws to protect its proprietary information. There can be no assurance that the steps taken by the Company to protect its trade secrets and proprietary information will be sufficient to prevent misappropriation of its proprietary information or preclude third-party development of similar intellectual property.
Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company’s products or to obtain and use information that the Company regards as proprietary. The Company intends to vigorously defend its proprietary rights against infringement by third parties. However, policing unauthorized use of the Company’s products is difficult, particularly overseas, and the Company is unable to determine the extent to which piracy of its software products exists. In addition, the laws of some foreign countries do not protect the Company’s proprietary rights to the same extent as the laws of the United States. The Company’s success and its ability to maintain its competitive position depends, in large part, on its ability to protect its intellectual property.
The Company does not believe that any of its products infringe on the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, which could have a material adverse effect upon the Company’s business, operating results and financial condition
Manufacturing and Assembly
The Company manufactures its FaroArm, FARO Gage, FARO 3D Imager 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 Focus3Dproduct 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 2011.
Manufacturing consists primarily of assembling and integrating components and subassemblies purchased from suppliers, into finished products. The primary components, which include machined parts and electronic circuit boards, are produced by subcontractors according to the Company’s specifications. All products are assembled, calibrated and tested for accuracy and functionality before shipment. The Company performs limited in-house circuit board assembly and component part machining. Typically, the Company enters into purchase commitments for manufacturing components to cover production requirements for 60 to 90 days.
The Company’s manufacturing, engineering, and design headquarters have been registered to the ISO-9001 standard since July 1998. Semi-annual surveillance audits have documented continuous improvement to this multinational standard. The Company continues to examine its scope of registration as its business evolves and has chosen English as the standard business language for its operations.
This has been done in concert with the ISO9001:2008 Quality Management System Certification, and is expected to increase the quality of the Company’s processes, products and services worldwide. Additionally, the Company takes a global approach to ISO17025:2005 regarding the recognition of the Competence of Calibration and Testing Laboratories, seeking to have all locations registered with similar scopes of accreditation and capabilities for the products generated and serviced.
Currently the Company’s manufacturing sites in Lake Mary, Florida, Kennett Square, Pennsylvania, Stuttgart, Germany, Schaffhausen, Switzerland and Singapore are jointly registered to ISO-9001 and ISO17025. In addition, the Company’s service sites in the United States, Germany, India, Japan, China, Singapore and Brazil have joint certification and accreditation to these key standards.
Competition
The Company’s portable measurement systems compete in the broad and highly competitive market for measurement devices for manufacturing and industrial applications, which, in addition to portable articulated arms, laser tracker, 3D imaging and laser scanner products, consist of fixed-base CMMs, templates and go/no-go gages, check fixtures, handheld measurement tools, and various categories of surveying equipment. In the FARO Gage product line, the Company competes with a number of manufacturers of handheld measurement tools and fixed-base CMMs, including some large, well-established companies. In the FaroArm, FARO Laser ScanArm, FARO Laser Tracker ION, FARO Focus3Dand FARO 3D Imager AMP product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon, and with Steinbichler Optotechink GmbH and GOM mbh in the 3D Imager product lines. The Company also competes in these product lines with a number of other smaller competitors. The Company competes on the basis of technical innovation, product performance, quality and price with respect to all of its products.
The Company will be required to make continued investments in technology and product development to maintain and extend the technological advantage that it believes it currently has over its competition. Some of the Company’s competitors, including some manufacturers of fixed-based CMMs and Hexagon, possess
substantially greater financial, technical, and marketing resources than the Company possesses. Moreover, the Company cannot be certain that its technology or its product development efforts will allow the Company to
successfully compete as the industry evolves. As the market for the Company’s portable measurement systems expands, additional competition may emerge and the Company’s existing and future competitors may commit more resources to the markets in which the Company participates.
Government Regulation
The Company’s operations are subject to numerous governmental laws and regulations, including those governing antitrust and competition, the environment, import and export of products, currency conversions and repatriation, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and suppliers. The Company’s foreign operations are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and similar foreign anti-corruption laws which makes illegal any payments to government officials or government employees that are intended to induce their influence to assist the Company or to gain any improper advantage for the Company. The Company operates in certain regions that are more highly prone to risk under these anti- corruption laws.
Manufacturers of electrical goods are subject to the European Union’s RoHS and WEEE directives, which took effect during 2006. RoHS prohibits the use of lead, mercury and certain other specified substances in electronics products, and WEEE makes producers of electrical goods financially responsible for specified collection, recycling, treatment, and disposal of covered electronic products and components. Parallel initiatives are being proposed in other jurisdictions, including several states in the United States and China.
The Company currently holds WEEE registration and is in compliance with the directives of the European Union. The Company’s products are currently exempt from the RoHS directive, although the Company expects to have all products in compliance in 2011. However, if the Company is unable to do so, and the RoHS exemption is removed, it would be unable to sell its products in European Union countries and China as well as several possible states in the United States, which would have a material adverse effect on its sales and results of operations.
Backlog
At December 31, 2010, the Company had orders representing approximately $23.0 million in sales outstanding. The majority of these specific orders were shipped by February 12, 2011, and, as of February 11, 2011, the Company had orders representing approximately $26.1 million in sales outstanding. At December 31, 2009 and 2008, the Company had orders representing approximately $17.6 million and $11.4 million in sales outstanding, respectively.
The Company’s increase in backlog at December 31, 2010 is primarily related to the increase in orders at the end of the fourth quarter of 2010. The Company believes that substantially all of the outstanding sales orders as of February 12, 2011 will be shipped during 2011.
Employees
At December 31, 2010, the Company had 781 full-time employees, consisting of 300 sales and marketing professionals, 127 production staff, 87 research and development staff, 104 administrative staff, and 163 customer service/application engineering specialists. The Company is not a party to any collective bargaining agreements and believes its employee relations are satisfactory. Management believes that its future growth and success will depend in part on its ability to retain and continue to attract highly skilled personnel. The Company anticipates that it will be able to obtain the additional personnel required to satisfy its staffing requirements over the foreseeable future.
Geographic Information
The Company has three reportable segments based upon geographic regions: Americas, Europe/Africa and Asia Pacific. The Company develops, manufactures, markets, supports and sells 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. Information regarding the Company’s net sales, operating income, and long-lived assets by geographic region is set forth in Note 17 to the Consolidated Financial Statements under Part II. Item 8 to this Annual Report on Form 10-K.
Available Information
The Company makes available, free of charge on its Internet website at http://www.faro.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. You can find these reports on the Company’s website at www.faro.com under the heading “Investor”. The information on the Company’s website is not a part of this Annual Report on Form 10-K.
These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at (800) SEC-0330. You may also access this information at the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
ITEM1A. RISKFACTORS.
The statements under this heading describe the most significant risks to the Company’s business identified by management and should be considered carefully in conjunction with the discussion under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s
“Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K. The following is a discussion of risks and uncertainties that the Company believes could, individually or in the aggregate, cause its actual results to differ materially from expected and past results. However, predicting or identifying all such risks and uncertainties is not possible. As a result, the following factors should not be considered to be a complete discussion of the Company’s risks and uncertainties.
Competitors may develop products that make the Company’s products obsolete or less competitive. The CAM2 market is characterized by rapid technological change. Competitors may develop new or improved products, processes or technologies that may make the Company’s products obsolete or less competitive.
As a result, the Company’s success depends, in part, on its ability to maintain its technological advantage by developing new products and applications and enhancing its existing products, which can be complex and time- consuming and require substantial investment by the Company. Significant delays in new product releases or difficulties in developing new products could adversely affect the Company’s business, revenues and results of operations. The Company can provide no assurance that it will be able to adapt to evolving markets and technologies or maintain its technological advantage.
The Company’s financial performance is dependent on the conditions of the automotive, aerospace, and heavy equipment industries, which have recently experienced and may again experience significant disruptions in the current economic environment.
A significant portion of the Company’s sales are to manufacturers in the automotive, aerospace and heavy equipment industries. The Company is dependent upon the continued viability and financial stability of its customers in these industries, which are highly cyclical and dependent upon the general health of the economy and consumer spending.
Customers’ buying process for the Company’s products is highly decentralized and typically requires
significant time and expense for the Company to further penetrate the potential market of a specific customer, which may delay its ability to generate additional revenue.
The Company’s success depends, in part, on its ability to further penetrate its customer base. During 2010, approximately 59% of the Company’s revenue was attributable to sales to its existing customers. If the Company is not able to continue to further penetrate its existing customer base, its sales growth may decline. However, most of the Company’s customers have a decentralized buying process for measurement devices, and the Company must spend significant time and resources to increase revenues from a specific customer. For example, the Company may provide products to only one of its customer’s manufacturing facilities or for a specific product line within a manufacturing facility. The Company cannot offer any assurance that it will be able to maintain or increase the amount of sales to its existing customers, which could adversely affect its financial condition and target financial results.
The Company’s ability to protect its patents and proprietary rights in the United States and foreign countries could adversely affect its revenues.
The Company’s success depends, in large part, on its ability to obtain and maintain patents and other proprietary right protection for its processes and products in the United States and other countries. The Company also relies upon trade secrets, technical know-how and continuing inventions to maintain its competitive position. The Company seeks to protect its technology and trade secrets, in part, by confidentiality agreements with its employees and contractors. However, the Company’s employees may breach these agreements or the Company’s trade secrets may otherwise become known or be independently discovered by inventors. If the Company is unable to obtain or maintain protection of its patents, trade secrets and other proprietary rights, it may not be able to prevent third parties from using its proprietary rights, which could have a material adverse effect on the Company’s results of operations.
The Company’s patent protection involves complex legal and technical questions. Its patents may be challenged, narrowed, invalidated or circumvented. Further, the Company may be able to protect its proprietary rights from infringement by third parties only to the extent that its proprietary processes and products are covered by valid and enforceable patents or are effectively maintained as trade secrets. Furthermore, others may
independently develop similar or alternative technologies or design around the Company’s patented technologies. Litigation or other proceedings to defend or enforce its intellectual property rights could require the Company to spend significant time and money, which could have an adverse impact on the Company’s financial condition. Claims from others that the Company infringes their intellectual property rights may adversely affect its business and financial condition.
From time to time, the Company receives notices from others claiming it infringes their intellectual property rights. Responding to these claims may require the Company to enter into royalty or licensing agreements on unfavorable terms, require it to stop selling or to redesign affected products, or require it to pay damages. In addition, from time to time, the Company is involved in intellectual property lawsuits. On July 11, 2008, Nikon Metrology, Inc. (formerly Metris USA, Inc.) filed a complaint for patent infringement against the Company concerning two U.S. patents. The Company believes that it does not infringe the asserted patents and that the
patents are invalid. Although it is not possible to predict with certainty the outcome of every claim and lawsuit, the Company believes that the complaint by Nikon will not have a material impact on the Company’s results. However, the Company could in the future incur judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on the Company’s financial condition. Any litigation or interference proceedings, regardless of their outcome, may be costly and may require significant time and attention of the Company’s management and technical personnel.
Product failures or product availability and performance issues could result in increased warranty costs, delays in new product introductions and enhancements and adversely affect the Company’s business.
The Company regularly introduces new products and enhances existing products. Product failures in new or existing products of the Company could result in increased warranty costs and delays in new product
introductions, which could lead to a loss of sales and customers and have an adverse effect on the Company’s business and financial condition.
The Company may not be able to achieve financial results within its target goals, and its operating results may fluctuate due to a number of factors, many of which are beyond its control.
The Company’s ability to achieve financial results that are within its goals is subject to a number of factors beyond its control. Moreover, the Company’s annual and quarterly operating results have varied significantly in the past and likely will vary significantly in the future. Factors that cause the Company’s financial results to fluctuate include, but are not limited to, the following:
• adverse changes in the manufacturing industry and general economic conditions,
• the effectiveness of sales promotions and sales of demonstration equipment;
• geographic expansion in the Asia/Pacific region and other regions;
• training and ramp-up time for new sales people;
• investments in potential acquisitions or strategic sales, product or other initiatives;
• investments in technologies and new products and product enhancements, including costs associated with new product introductions and the timing and market acceptance of new products and product enhancements;
• quality issues with the Company’s products;
• shrinkage or other inventory losses due to product obsolescence, scrap or material price changes;
• expansion of the Company’s manufacturing capability and other inflationary pressures;
• the size and timing of customer orders, many of which are received towards the end of the quarter;
• the amount of time that it takes to fulfill orders and ship the Company’s products;
• the length of the Company’s sales cycle to new customers;
• customer order deferrals in anticipation of new products and product enhancements;
• start-up costs and ramp-up time associated with opening new sales offices outside of the United States;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis; and
• litigation and regulatory action brought against the Company.
Any one or a combination of these factors could adversely affect the Company’s annual and quarterly operating results in the future and could cause it to fail to achieve its target financial results.
The Company’s growth depends on the ability of the Company’s products to attain broad market acceptance. The market for traditional fixed-base CMMs, check fixtures, handheld measurement tools, and surveying equipment is mature. Part of the Company’s strategy is to continue to displace these traditional measurement devices. Displacing traditional measurement devices and achieving broad market acceptance of the Company’s products requires significant effort to convince manufacturers to reevaluate their historical measurement procedures and methodologies.
The CAM2 market is emerging and the potential size and growth rate of this market is uncertain and difficult to quantify. If the CAM2 market does not continue to expand or does not expand as quickly as the Company anticipates, it may not be able to grow its sales, which may affect its financial results.
The Company markets six closely interdependent products (FaroArm, FARO Laser ScanArm, FARO Focus3D, FARO Laser Tracker ION, FARO Gage and FARO 3D Imager AMP) and related software for use in measurement, inspection, and high density surveying applications. Substantially all of the Company’s revenues are currently derived from sales of these products and software, and it plans to continue its business strategy of focusing on the portable software-driven, 3-D measurement and inspection market. Consequently, the
Company’s financial performance will depend in large part on portable, computer-based measurement,
inspection, and high density surveying products achieving broad market acceptance. If its products cannot attain broad market acceptance, the Company will not grow as anticipated and may be required to make increased expenditures on research and development for new applications or new products.
The Company competes with manufacturers of portable measurement systems and traditional measurement devices, many of which have more resources than the Company and may develop new products and
technologies.
The broad market for measurement devices is highly competitive. In the FARO Gage product line, the Company competes with manufacturers of handheld measurement tools and fixed-base CMMs, including some large, well-established companies. In the FaroArm, FARO Laser ScanArm, FARO Laser Tracker ION, FARO Focus3Dand FARO 3D Imager AMP product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon, and with Steinbichler Optotechink GmbH and GOM mbh in the 3D Imager product lines. The Company also competes in these product lines with a number of other smaller competitors. The Company competes on the basis of technical innovation, product performance, quality, and price with respect to all of its products.
The Company will be required to make continued investments in technology and product development to maintain the technological advantage that it believes it currently has over its competition. Some of its
competitors, including some manufacturers of fixed-base CMMs and Hexagon, possess substantially greater financial, technical, and marketing resources than it possesses. Moreover, the Company cannot be certain that its technology or its product development efforts will allow it to successfully compete as the industry evolves. As the market for its portable measurement systems expands, additional competition may emerge and the
Company’s existing and future competitors may commit more resources to the markets in which the Company participates. The Company’s results of operations could be adversely affected by pricing strategies pursued by competitors or technological or product developments by competitors.
The Company derives a substantial part of its revenues from its international operations, which are subject to greater volatility and often require more management time and expense to achieve profitability than its domestic operations.
The Company derives more than half of its revenues from international operations. The Company’s international operations are subject to various risks, including:
• difficulties in staffing and managing foreign operations;
• political and economic instability;
