ANNUAL REPORT 2014
We design, develop, manufacture, market and support software driven, three-dimensional (3-D) measurement, imaging and realization systems. We sell the majority of our products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building construction and law enforcement applications. Our FaroArm®, FARO Laser ScanArm®, FARO Gage, FARO Laser Tracker™, 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. Our FARO Focus3D and FARO Freestyle3D laser scanners, and their companion SCENE and FARO forensic software, are utilized for a wide variety of 3-D modeling, documentation and high- density surveying applications, including in two of our key vertical markets – architecture, engineering and construction (AEC) and law enforcement.
FARO’s sales are diversified across a broad number of over 15,000 customers worldwide in a range of end market applications. The FARO metrology product lines (e.g. Arm, Gage, Laser ScanArm, Laser Tracker, and Imager AMP) are purchased primarily by customers in the automotive and aerospace markets and a diverse array of manufacturing customers from small machine shops to large industrials. FARO’s Focus3Dand Freestyle3D product lines provide precise three-dimensional renderings primarily to architecture, engineering, construction, and law enforcement customers.
FARO is ISO-9001 certified and ISO-17025 laboratory registered.
FARO designs, develops,
manufactures, markets and
supports software driven,
three-dimensional (3-D)
measurement, imaging and
realization systems.
ABOUT
FARO
RESULTS
OPERATING
Sales
(in millions)
$341.8
$291.8
$273.4
Comparison 2012 - 2014
(In millions of dollars, except for percentages and Diluted EPS)
2012 2013 2014
Sales $ 273.4 $ 291.8 $ 341.8
Gross Profit $ 149.6 $ 161.9 $ 188.9
Gross Margin 54.7% 55.5% 55.3%
Operating Income $ 31.6 $ 30.2 $ 37.3
Operating Margin 11.5% 10.3% 10.9%
Net Income $ 23.0 $ 21.5 $ 33.6*
Diluted Earnings per Share $ 1.34 $ 1.25 $ 1.93*
Financial Highlights
12 13 14
Gross Profit
(in millions)
Diluted EPS
(in dollars)
$188.9
$161.9
$149.6
12 13
14
$1.93
$1.25
$1.34
12 13 14
* Excluding a discrete tax benefit of $4.5 million recorded in the third quarter of 2014, net income and diluted EPS for fiscal 2014 would have been $29.1 million and $1.67 per share, respectively.
To put it simply and succinctly, FARO delivered in 2014. We had solid growth across all product lines and all geographies. With the release of new market-leading products and outstanding execution by the global sales and marketing teams, FARO achieved record sales of $342 million in 2014, up 17% from 2013. Operating income increased by 24% to a record of $37 million with operating margin nearing 11%. We delivered a record net income of $34 million in 2014, up 56% from 2013 (or 35% excluding a $4.5 million discrete tax benefit recorded in the third quarter). In total, it was a terrific year for our Company.
DRIVING OUR VISION TO THE GOAL
All of FARO’s 1,200-plus employees are committed to a single strategic vision: To be the world’s most
trusted source for 3D measurement, imaging and realization technology. Delivering disruptive, cutting edge products defines our core approach to achieving this vision. Disruption starts with FARO’s strong commitment to research and development focused on products that solve the problems and challenges our customers face every day. In 2014, we demonstrated this commitment by increasing R&D investment by 23%. At the same time, we look beyond our own research labs to acquire adjacent or new technology through acquisitions that fit with the FARO culture and satisfy FARO’s financial model requirements. While results may vary in any given year, we are committed to executing this strategic vision toward a long-term goal of delivering mid-teens sales growth for our shareholders.
DISRUPTING WITH NEW PRODUCTS
The Company launched several innovative, market- leading products in 2014. In March, we expanded our laser scanner offering with the FARO Focus3DX130 Laser Scanner, providing a reduced entry price for our customers with lower range requirements. In September, our new Laser Line Probe HD disrupted the metrology market as the new standard for 3D laser scanning technology. The world class Laser Line Probe HD enables customers to deliver rapid point cloud collection with higher resolution and accuracy. We kicked-off 2015 by disrupting the 3D laser scanning market again, this time with an easy to use, affordably priced handheld Laser Scanner, the FARO Freestyle3D. This new product expands our 3D documentation portfolio to further penetrate two target vertical markets – Law Enforcement and Architecture, Engineering, and Construction (AEC). In 2014, we also upgraded FARO's software portfolio with several new releases: CAM2 Measure 10.3, SCENE 5.3, WebShare Cloud 1.5, and CAM2 SmartInspect 1.2. These software releases reinforce FARO’s commitment to providing easy to use, full-featured turnkey hardware and software bundled solutions for our customers.
GROWING THROUGH ACQUISITIONS
Since July, FARO has closed three strategic acquisitions to expand our software offerings within the AEC and Law Enforcement vertical markets. First, FARO acquired The CAD Zone, a leading software provider in the law enforcement accident and crime scene reconstruction market. In February 2015, we continued the execution of our Law Enforcement vertical market strategy by acquiring ARAS 360 Technologies Inc., a global leader in accident and crime reconstruction, simulation, and animation software. ARAS 360, combined with The CAD Zone, creates complementary software solutions that integrate with FARO laser scanning
LETTER TO
From the desk of Jay Freeland
SHAREHOLDERS
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.
technology to provide a complete turnkey solution to law enforcement. In March 2015, FARO strengthened its AEC offering by acquiring kubit GmbH, a leader in software development for surveying and as-built documentation.
INVESTING IN THE FUTURE
While delivering solid sales and profit growth in 2014, FARO also invested in the future by completing several long-term infrastructure and growth projects. In April, the Company opened a new Mexico Service Center near Monterrey to provide Latin America with reduced turnaround times and lower transportation costs for product service. At the end of the third quarter, the Americas region achieved a major milestone by going live with our new ERP system, and completing the first leg of the Company’s global ERP implementation. At the start of the fourth quarter, FARO Europe operations added a second production shift at its Stuttgart, Germany manufacturing facility to meet the rapid increase in Focus3DLaser Scanner demand and prepare for the new, hand-held FARO Freestyle3D. Finally, in the fourth quarter, we opened our new Exton, Pennsylvania technical center to modernize our Laser Tracker and Imager manufacturing and upgrade our optical metrology research capability.
PROVIDING SHAREHOLDER VALUE
The price appreciation of FARO shares on the NASDAQ exchange provided our shareholders with a compound annual return of 24% over the past five years (December 31,
2009 to December 31, 2014). During this same five-year time period, an investment in FARO solidly outperformed the compound annual return of two peer indices: NASDAQ Composite Total Returns of 17% and Morningstar Scientific
& Technical Instruments of 15%.
LOOKING FORWARD
The Company is off to a strong start in 2015 with the launch of the FARO Freestyle3Dand closing the acquisitions of ARAS 360 and kubit GmbH. Our sales and marketing teams are positioned to further penetrate our key vertical markets. Our business leadership teams are focused on our gross margin and operating expenses. Our research and product development teams are innovating next generation solutions. And our whole organization remains, as always, committed to our strategic vision to be the world’s most trusted source for 3D measurement, imaging and realization technology.
Jay W. Freeland President & CEO March 30, 2015
CAD Model
“Computer-Aided Design” that is created with software on a computer that defines the exact shape and dimensions of a part.
CAM2®
An acronym for computer-aided measurement, the large underserved market in which FARO 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.
FARO® Focus3DLaser Scanner
A portable, high density laser scanner that utilizes 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
FARO®Freestyle3D Laser Scanner
A top-quality, high-precision, handheld scanner that quickly and reliably documents rooms, structures and objects in 3-D and creates high-definition point clouds. The FARO Freestyle3Dcan be used independently or as a complement to the FARO Focus3D.
FARO®Gage
A smaller, higher-accuracy version of the FaroArm®that is sold as a combination of an articulated arm device with a computer and software.
FARO®Laser ScanArm®
A FaroArm®equipped with a combination of a hard probe (like that in the
FaroArm®) and a non-contact laser line probe (LLP). The ScanArm®is used for contact and non-contact measurement applications, including inspection, cloud- to-CAD comparison, rapid prototyping, reverse engineering and 3-D modeling.
FARO®Laser Tracker
A combination of a portable, large- volume laser measurement tool, a computer, and CAM2 software programs. The FARO Laser Tracker Vantage utilizes an ultra-precise laser beam to measure objects of up to 260 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. The FARO Laser Tracker ION is an interferometer (IFM)-based
high accuracy and range to complete measurement tasks, such as in-line measurements, high-speed dynamic measurements, or high-accuracy machine calibration.
FARO®SCENE
Software used with the FARO Focus3D and FARO Freestyle3Dlaser scanners that combines ease-of-use, networking, and an enhanced 3-D experience to deliver a complete scan processing solution. With SCENE, customers can display, analyze, administer and edit 3-D measurements in point clouds.
FaroArm®
A combination of a portable, six or seven-axis, articulated measurement arm, a computer, and CAM2 software programs.
Metrology
The study of measurements.
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.
QUICK GUIDE
Technical Terms
GLOSSARY
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, 2014
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
Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the 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 (§ 232.405 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
Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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. ‘
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.
Large accelerated filer Í Accelerated filer ‘
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 June 27, 2014 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $831,458,800.32 (based on the closing price of the Registrant’s common stock on such date on the NASDAQ Global Select Market, and assuming solely for the purposes of this calculation that all directors and executive officers of the Registrant are “affiliates.”
As of February 10, 2015, there were outstanding 17,317,430 shares of the Registrant’s common stock. DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Page
PART I . . . 1
Item 1. Business. . . 3
Item 1A. Risk Factors. . . 12
Item 1B. Unresolved Staff Comments. . . 22
Item 2. Properties. . . 22
Item 3. Legal Proceedings. . . 23
Item 4. Mine Safety Disclosures. . . 23
PART II . . . 24
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. . . 24
Item 6. Selected Financial Data. . . 26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . 39
Item 8. Financial Statements and Supplementary Data. . . 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 66
Item 9A. Controls and Procedures. . . 66
Item 9B. Other Information. . . 69
PART III . . . 70
Item10. Directors, Executive Officers, and Corporate Governance. . . 70
Item 11. Executive Compensation. . . 70
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. . . 70
Item 13. Certain Relationships and Related Transactions and Director Independence. . . . 70
Item 14. Principal Accounting Fees and Services. . . 70
PART IV . . . 71
Item 15. Exhibits, Financial Statement Schedules. . . 71
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, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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,” “might,” “would,” “will,” “will be,” “future,” “strategy,” “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 less competitive or obsolete;
• 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;
• change in the potential for the computer-aided measurement (“CAM2”) market and the potential adoption rate for the Company’s products, which are difficult to quantify and predict;
• the Company’s inability to protect its 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, shrinkage or other inventory losses due to product obsolescence, scrap or material price changes, (iv) raw material price fluctuations and other inflationary pressures, (v) expansion of the Company’s manufacturing capability, (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 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, and (xvii) compliance with government regulations including health, safety, and environmental matters;
• changes in gross margins due to changing mix of products sold and the different gross margins on different products and sales channels;
• the Company’s inability to successfully maintain the requirements of Restriction of use of Hazardous Substances (“RoHS2”) and Waste Electrical and Electronic Equipment (“WEEE”) compliance in 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 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;
• the impact of reductions or projected reductions in government spending, particularly in the defense sector;
• variations in the Company’s effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis;
• the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms;
• the impact of disruption, delays, or deficiencies in the design or implementation of the Company’s new global enterprise resource planning system;
• the Company’s ability to achieve and maintain profitability;
• the effect of estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements;
• the magnitude of increased warranty costs from new product introductions and enhancements to existing products;
• the continuation of the Company’s share repurchase program;
• the sufficiency of the Company’s working capital, cash flow from operations, and credit facility to fund its long-term liquidity requirements;
• the impact of geographic changes in the manufacturing or sales of the Company’s products on its tax rate; and
• the Company’s ability to comply with the requirements for favorable tax rates in foreign jurisdictions.
as well as other risks and uncertainties discussed in Part I, Item 1A 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, unless otherwise required by law.
ITEM1. BUSINESS.
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.
The Company designs, develops, manufactures, markets and supports software driven, three- dimensional (3-D) measurement, imaging and realization systems. The Company sells the majority of its products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building construction and law enforcement applications. The Company’s FaroArm®, FARO Laser ScanArm®, FARO Gage, FARO Laser Tracker™, 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’s FARO Focus3D and FARO Freestyle3Dlaser scanners, and their companion SCENE and FARO forensic software, are utilized for a wide variety of 3-D modeling, documentation and high-density surveying applications, including in two of the Company’s key vertical markets – architecture, engineering and construction (AEC) and law enforcement.
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-9001 (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 entails 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 CMM’s 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-measurement 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. Various factors contribute to increased market demand for FARO products and services. 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
FaroArm. The FaroArm is a combination of a portable, six or seven-axis, 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. Optical encoders 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 or Microsoft Windows™-based Touch PC or Touch Pad, 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.
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 laser line 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 contact and non-contact measurement applications, including inspection, cloud-to-CAD comparison, rapid prototyping, reverse engineering and 3-D modeling.
FARO Gage.The FARO Gage is a smaller, higher-accuracy version of the FaroArm that is sold as a combination of an articulated arm device with a computer and software. 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. The CAM2 FARO Gage software developed for this device, described below, features basic 2-D and 3-D measurements common to these applications.
FARO Laser Tracker. The FARO Laser Tracker combines a portable, large-volume laser measurement tool, a computer, and CAM2 software programs.
❑ Laser Tracker Vantage– The FARO Laser Tracker Vantage utilizes an ultra-precise laser beam to measure objects of up to 260 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 Vantage advances already-proven tracker technology. Among its many enhanced features is TruADM™, which improves upon existing Absolute Distance Measurement (“ADM”) 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.
❑ Laser Tracker ION – The FARO Laser Tracker ION is an interferometer (IFM)-based measurement system that provides the high accuracy and range to complete measurement tasks, such as in-line measurements, high-speed dynamic measurements, or high-accuracy machine calibration. The FARO Laser Tracker ION features Dual Distancing Systems, enabling the Tracker to catch the beam in the air and set the distance instantly with Agile ADM.
❑ Computer – The FARO Laser Tracker includes a notebook or desktop style computer or Microsoft Windows™-based Touch PC or Touch Pad, depending on the customer’s requirements, that includes the pre-installed CAM2 Software.
FARO 3D Imager AMP.The FARO 3D Imager AMP is a high-performance non-contact 3-D 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.
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 SCENE software.
FARO Freestyle3D. The FARO Freestyle3D, which was released in January 2015, is a top- quality, high-precision, handheld scanner that quickly and reliably documents rooms, structures and objects in 3-D and creates high-definition point clouds. The applications of the FARO Freestyle3D include architecture, construction, industrial production and forensics. The FARO Freestyle3D’s durable carbon fiber design equips the user with a versatile and ergonomic tool for performing accurate scanning in confined spaces. The FARO Freestyle3Dcan be used independently or as a complement to the FARO Focus3D. The FARO Freestyle3D comes with two software applications in addition to FARO’s proprietary SCENE software: SCENE Capture, which is installed on a tablet computer to record and visualize the capturing of 3-D data, and SCENE Process, which processes the captured 3-D data.
FARO Software.The Company provides a family of proprietary CAD-based measurement and laser scanner software used with the Company’s measurement and scanning devices.
❑ CAM2 Measure 10 allows customers to complete measurement jobs quickly and gives customers the freedom to measure as required by the application. State-of-the-art functionalities improve every process where measuring is needed.
❑ FARO CAM2 Smartinspect is the Company’s CAM2 solution for measuring geometry and building dimensions. The software allows customers to quickly measure geometric features and report dimensions for control.
❑ FARO SCENEsoftware combines ease-of-use, networking, and an enhanced 3-D experience to deliver a complete scan processing solution. With SCENE, customers can display, analyze, administer and edit 3-D measurements in point clouds.
❑ FARO Forensics software makes diagramming and pre-planning easier for law enforcement officers, firefighters and loss control engineers by allowing the users who need to draw site plans or crash or crime scene diagrams to be able to do so in a fast and efficient manner.
To support its product lines, the Company also offers extended warranties and comprehensive support, training and technology consulting services to its customers.
Customers
The Company’s sales are diversified across a broad number of over 15,000 customers worldwide in a range of end market applications. The FARO metrology product lines (e.g. Arm, Gage, Laser ScanArm, Laser Tracker, and Imager AMP) are purchased primarily by customers in the automotive and aerospace markets and a diverse array of manufacturing customers from small machine shops to large industrials. The Company’s Focus3D and Freestyle3D product lines provide precise three- dimensional renderings primarily to architecture, engineering, construction, and law enforcement customers. The Company’s ten largest customers by revenue represented an aggregate of approximately 3.3% of the Company’s total sales in 2014. No customer represented more than 1.0% of the Company’s sales in 2014.
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, 2014, the Company employed 167, 157, and 166 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, Brazil, Mexico, Germany, Switzerland, United Kingdom, France, Italy, Singapore, Japan, China and India. The Company also sells its products through distributors, although this channel has historically represented a small percentage of total sales, and in 2014 represented 9.9% of total sales. Note 16 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.
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, in part, 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. The field of 3- D measurement continues to expand, and new technologies and applications will be essential to competing in this market. 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 and documentation systems. The Company’s engineering development efforts will continue to focus on enhancing the mechanical hardware, electronics, and software in its existing products and developing new products for the CAM2 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, 2014, the Company employed 156 scientists and technicians in its research and development efforts. Research and development expenses were approximately $27.5 million in 2014, compared to $22.4 million in 2013 and $17.6 million in 2012.
Intellectual Property
The Company holds or has pending approximately 800 patents in the United States and related patents worldwide, which generally expire on a rolling basis between 2015 and 2033. The Company also has 21 registered or pending trademarks in the United States and worldwide, which generally expire on a rolling basis between 2015 and 2024.
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 relies on a combination of contractual provisions and trade secret laws to protect its proprietary information. However, 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 in foreign countries, and the Company may be unable to determine the extent, if any, to which unauthorized use of its 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 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, which could have a material adverse effect upon the Company’s business, operating results and financial condition. In addition, such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all.
Manufacturing and Assembly
The Company manufactures its FaroArm, FARO Gage, FARO Laser ScanArm, FARO 3D Imager AMP and FARO Laser Tracker products in the Company’s manufacturing facilities located in Florida and Pennsylvania for customer orders from the Americas, in its manufacturing facility located in Schaffhausen, 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 Focus3D and FARO Freestyle3Dproducts in its facilities located in Schaffhausen, Switzerland and Stuttgart, Germany. In the fourth quarter of 2014, the Company relocated its facility in Kennett Square, Pennsylvania to a leased facility consisting of approximately 90,400 square feet in Exton, Pennsylvania.
The Company expects all its existing plants to have the production capacity necessary to support its volume requirements through 2015.
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. Currently, the Company’s manufacturing sites in Lake Mary, Florida; Stuttgart, Germany; Schaffhausen, Switzerland; and Singapore are jointly registered to ISO-9001 and ISO-17025. As a result of the Company’s relocation of its Pennsylvania facility from Kennett Square to Exton, Pennsylvania, the ISO-9001 certification is being transitioned to the new facility. However, the Exton facility is registered to the ISO-17025 standard. In addition, the Company’s service sites in the United States, Germany, Switzerland, India, Japan, China, Singapore, Mexico and Brazil have joint certification and accreditation to ISO-17025. 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.
The Company’s efforts to register its manufacturing, engineering and design headquarters to the ISO-9001 standard in concert with the ISO9001:2008 Quality Management System Certification
verifies the Company’s commitment to quality through an internationally recognized standard. 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.
Competition
The Company’s 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, 3-D 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, FARO Focus3D and FARO 3D Imager AMP product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon AB, and with Steinbichler Optotechink GmbH and GOM Gmbh 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. However, 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 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 in the Middle East, Africa, and Asia-Pacific that are more prone to risk under these anti-corruption laws.
Manufacturers of electrical goods are subject to the European Union’s RoHS2 and WEEE directives, which took effect during 2006. RoHS2 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. Under the classification of “Industrial Monitoring and Control Instruments,” the
Company’s products have until July 22, 2017 to become compliant with the RoHS2 directive. Currently, only the FARO Laser Tracker ION does not meet the RoHS2 directive. However, if the Company is unable to bring the FARO Laser Tracker ION into compliance with the RoHS2 directive by July 22, 2017, it would be unable to sell the FARO Laser Tracker ION in European Union countries and China, and potentially in several states in the United States, which could have a material adverse effect on its sales and results of operations.
Backlog and Seasonality
At December 31, 2014, the Company had orders representing approximately $14.1 million in sales outstanding. The majority of these specific orders were shipped by February 19, 2015, and, as of February 19, 2015, the Company had orders representing approximately $13.1 million in sales outstanding. The Company believes that substantially all of the outstanding sales orders as of February 19, 2015 will be shipped during 2015. At December 31, 2013 and 2012, the Company had orders representing approximately $18.7 million and $18.0 million in sales outstanding, respectively.
The Company typically experiences greater order volume during the fourth quarter as customers spend the remaining balances of their capital expenditures budgets.
Employees
At December 31, 2014, the Company had 1,223 full-time employees, consisting of 490 sales and marketing professionals, 180 production staff, 156 research and development staff, 163 administrative staff, and 234 customer service/training/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 and three-dimensional documentation systems in each of these regions. These activities represent more than 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 16 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 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 by first clicking “Investor Relations” and then “SEC Filings”. 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 in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Annual Report on Form 10-K and in the Company’s Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.
Any of the following risks and uncertainties could materially and adversely affect our business, results of operations, liquidity, and financial condition. 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 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 various industries, including the automotive, aerospace, and heavy equipment industries, which have from time to time experienced, and may again experience, significant disruptions in the 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.
Reductions in defense spending could adversely affect the Company’s business.
Certain of the Company’s customers operate in the defense sector and depend significantly on U.S. government spending. In August 2011, Congress enacted the Budget Control Act of 2011 which imposes spending caps and certain reductions in defense spending over the next ten years. Automatic spending reductions, referred to as sequestration, were implemented in March 2013. Ongoing
budgetary discussions in the federal government may result in other cuts to defense spending. Reductions in defense spending that impact the aerospace and defense industries could have an adverse affect on the Company’s results of operations.
The buying process for most of the Company’s customers for the its measurement 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 the Company’s ability to generate additional revenue.
The Company’s success depends, in part, on its ability to further penetrate its customer base. During 2014, approximately 63% 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 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. Resolving 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. 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. Failures in the Company’s new or existing products could result in increased warranty costs, delays in new product introductions, and 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;
• geographic expansion in the Asia-Pacific region and other regions;
• training and ramp-up time for new sales people;
• investments in strategic sales, product or other initiatives;
• investments in technologies and new products and product enhancements, including costs associated with new development and product introductions and the timing and market acceptance of new products and product enhancements;
• shrinkage or other inventory losses due to product obsolescence, scrap or material price changes;
• expansion of the Company’s manufacturing capability;
• 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;
