2009 ANNUAL REPORT
With more than 20,000 installations and 10,000 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 3-D 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- speciic software packages enable users to process and present their results quickly and more efectively. 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
Principal products include the world‘s best- selling portable measurement arm – the FaroArm®; the world‘s best-selling laser tracker – the FARO Laser Tracker ION; the FARO Laser ScanArm®; FARO Laser Scanner Photon; the FARO Gage, GagePlus and PowerGage; and the CAM2 family of advanced CAD-based measurement and reporting software. FARO is ISO-9001 certiied and ISO-17025 laboratory registered.
About FARO
2007 2008 2009
Sales $ 191.6 $ 209.2 $ 147.7
Gross Proit $ 115.0 $ 125.2 $ 80.7
Gross Margin 60.0% 59.8% 54.6%
Operating Income (Loss) $ 19.1 $ 18.9 $ (11.0)
Operating Margin 9.9% 9.1% (7.4%)
Diluted Earnings (Loss) per Share $ 1.15 $ 0.83 $ (0.66)
Current Ratio 4.7 5.2 5.6
Comparison 2007 - 2009
(In millions of dollars except EPS and Current Ratio)Operating Results : Financial Highlights for 2009
2007 2008 2009
Sales
(in millions)
$ 1 9 1 .6 $ 2 0 9 .2 $ 1 4 7 .7
2007 2008 2009
Gross Profit
(in millions)
$ 1 1 5 .0 $ 1 2 5 .2 $ 8 0 .7
2007 2008
Diluted EPS
(in dollars)
$ 1 .1 5 $ 0 .8 3 $ (0 .6 6 )
2009
2009 was a tough year for many companies, and it certainly was for us. The brutal global economic environment impacted virtually every one of our markets. Our customers reduced spending across the board. We had our irst net loss after 26 consecutive proitable quarters, and our sales declined for the irst time since 2001. However, as a result of a history of conservative inancial
management, we entered this storm with a solid balance sheet and emerged in extremely good shape. Despite twelve punishing months, we took advantage of the crisis, made some tough decisions and learned a few valuable lessons. As a result, I believe that we are now favorably positioned to take advantage of improving market conditions in 2010 and deliver additional value to our customers and shareholders.
Stronger, Faster and “Asset Light”
Early in 2009, we recognized the signiicance of the economic deterioration. We moved quickly to identify every cost lever we could pull without sacriicing our hard-earned reputation, our ability to over-serve our customers and our dedication to remaining the technology leader in our markets. This was more than an exercise in cutting short-term costs. These actions had to be permanent and sustainable. I wanted to reposition FARO as a far more nimble entity, capable of returning to our 20-25% historical growth rates without losing the
$17 million in projected annual cost savings we were creating.
We made the diicult choice to cut costs by reducing our workforce nearly 30%. However, our cost saving measures went beyond these staff reductions. We also redesigned many of our processes, streamlined internal workflows and eliminated activities that were not core to our business. We strengthened our enterprise-wide systems for inancial and operational controls. We restructured our procurement processes, and we re-conigured the entire assembly layout by implementing standard work and single piece material flow practices in our manufacturing locations.
These actions left FARO stronger, faster and more flexible. We balanced cost reductions with process improvements and created an extremely “asset light” operation. We have always been asset light when it comes to investments in plant and equipment required to sustain our growth. Now we have a structure which is asset light across the board. We will always be looking at additional areas for improvement and we’ll continue making changes to bring about further productivity gains. Our structure today should support a signiicant return to growth and, under the strategy of running asset light, we should continue to achieve cost and operational leverage long after the pain of 2009 is behind us.
Consistent Technology Leadership
Despite all the cost reductions implemented in 2009, I was not willing to cut Research & Development. Since 2004, we have tripled our annual spending on R&D and despite the economic storm of 2009 we have maintained our spending there. To be clear, we reduced some of our headcount and reprioritized the team to focus on our projects we believe have the most potential. This allowed us to accelerate development on some of our programs and maintain our aggressive timelines on others. While I could have cut more from FARO’s cost structure by making short sighted choices in R&D, that’s exactly what they would have been: short sighted. The decision to continue driving forward with speed and creativity in R&D allowed us to release the Photon Laser Scanner, the Ion Laser Tracker, and two new versions of our CAM2Q software in 2009. That decision also positioned us for
Letter to Shareholders
From the desk of Jay Freeland
Stronger, Faster and “Asset Light”
a very active year of product releases in 2010. Historically, we have strived to obsolete previous generations of our technology approximately every four years. In 2010, we expect to introduce several new generations of our products, despite the fact that it has been far less than four years for many of them. We believe that the timing of these introductions could help accelerate FARO’s economic recovery, taking advantage of improvements already underway in our markets.
Substantial Market Opportunity
FARO serves a rapidly growing and highly underpenetrated market by providing portable and adaptable 3D solutions. From our roots in portable 3D measurement, we have expanded our vision to include 3D imaging. Going forward, we will continue to expand that vision, without straying from our core competencies in 3D technology and portability/adaptability. FARO is a pioneer in tearing down the walls of complexity surrounding 3D measurement and imaging, and we’re driving broad acceptance and utilization of our technology around the world. We’re also moving aggressively to further expand our offerings and capabilities. Our existing product portfolio today already gets us in the door with customers. I believe that our ongoing R&D and acquisition focus, particularly in non-contact technologies and application-speciic software, will create even more potential for the Company across a broader array of vertical markets and applications in the coming years.
Clear Signs of Recovery
I’ll be the irst to say that there may still be rough spots along the way, but there are clear
signs of recovery in the markets we serve. Last September, customers inally started asking the right questions again. Our lead and demo counts were growing at their historical rates throughout most of 2009, but customers weren’t buying. In September that started to change and the momentum continued throughout the fourth quarter of 2009. For most of last
year, I kept telling our investors and employees that recovery for us didn’t require a return to growth for our customers. Instead, it was my irm belief that we simply needed customers to stop thinking about how to keep water out of the boat and instead, focus on what direction the boat was sailing. We’re starting to see that positive behavior again, and we plan to drive our own recovery by helping our customers return to normal in their own operations. The FARO team continues to work tirelessly for our customers and our investors. They come to work every day, putting their hearts and souls into this company to make it better. That persistence is what has made us successful in the past, and it’s that persistence which will continue to make us successful as we move forward. Thanks to everyone for their support in 2009, and I look forward to a successful 2010.
Best regards,
Jay W. Freeland President & CEO March 30, 2010 Clear Signs of Recovery
Quick Glossary Guide
Technical Terms
CAD Model
“Computer-Aided Design” that is created with software on a computer that deines 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 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 of its original design, CAD model and/or to log the data for statistical process control.
FaroArm®
A portable six or seven-jointed 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-jointed 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, speciically 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 eiciently 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 230 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-jointed 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 inancial beneits of using a product (i.e. faster time to market, reduced scrap) less the inancial cost of the product, divided by the inancial 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 it the irst 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 ix 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, 2009 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 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, 2009, 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 Market).
As of February 23, 2010, there were outstanding 16,119,044 shares of the Registrant’s common stock. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the 2010 Annual Meeting of Shareholders are incorporated by
TABLE OF CONTENTS
Page
PART I . . . 1
Item 1. Business. . . 2
Item 1A. Risk Factors. . . 9
Item 1B. Unresolved Staff Comments. . . 16
Item 2. Properties. . . 17
Item 3. Legal Proceedings. . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . 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. . . 22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . 33
Item 8. Financial Statements and Supplementary Data. . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 55
Item 9A. Controls and Procedures. . . 55
Item 9B. Other Information . . . 57
PART III . . . 58
Item 10. Directors, Executive Officers, and Corporate Governance. . . 58
Item 11. Executive Compensation. . . 58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. . . 58
Item 13. Certain Relationships and Related Transactions and Director Independence. . . 58
Item 14. Principal Accountant Fees and Services. . . 58
PART IV . . . 59
Item 15. Exhibits and Financial Statement Schedules. . . 59
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, 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,” “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:
• the slowdown 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;
• 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 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 Scanner Photon, the FARO Laser Tracker ION™, 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 2009, the Company’s products have been purchased by approximately 10,000 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 that there are four principal forces driving 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 those related 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 be 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 embodies the principles of total quality management that focus 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 the object being measured be brought to the CMM and the object 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, in order to measure large or unconventionally shaped objects. In addition, some parts or assemblies are not easily accessible and cannot be measured using traditional devices.
Manufacturing 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 and 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.
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—Each 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 measuring device, 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 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 AgilrADM, 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 Laser Scanner Photon.The FARO Laser Scanner Photon 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. Laser scanning technology simplifies 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.
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. 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.
• Laser Scanner Photon Software.The Company has a number of programs available for use with its Laser Scanner Photon 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 or 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.
Customers
As of December 2009, the Company’s products have been purchased by approximately 10,000 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 5.2% of the Company’s total revenues in 2009. No customer represented more than 0.9% of the Company’s sales in 2009.
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, 2009, the Company employed 90, 112, and 104 sales and marketing specialists in the Americas, Europe/Africa, and Asia/Pacific regions, respectively. The Company has 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. Note 17 to the Company’s Notes to Consolidated Financial Statements included in Part II. Item 7 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, 2009, the Company employed 83 scientists and technicians in its research and
development efforts. Research and development expenses were approximately $12.6 million in each of 2009 and 2008, compared to $10.3 million in 2007.
Intellectual Property
The Company holds or has pending 83 patents in the United States and related patents worldwide. The Company also has 23 registered or pending trademarks in the United States and worldwide.
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, 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 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 Laser Scanner Photon product 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 2010.
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.
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 ISO9001:2000 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 identical 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 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 manufacturers of handheld measurement tools and fixed-base CMMs, including some large, well-established companies. In the FaroArm, FARO Laser ScanArm, FARO Laser Tracker, and FARO Laser Scanner product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon. The Company also competes in these product lines with a number of other smaller competitors.
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 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, which makes illegal any payments to foreign officials or employees of foreign governments 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 the FCPA.
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 2010. However, if the Company is unable to do so, it would be unable to sell its products in European Union countries, as well as several possible states in the United States and China, which would have a material adverse effect on its sales and results of operations.
Backlog
At December 31, 2009, the Company had orders representing approximately $17.6 million in sales outstanding. The majority of these specific orders were shipped by February 12, 2010, and, as of February 12, 2010, the Company had orders representing approximately $18.0 million in sales outstanding. At December 31, 2008 and 2007, the Company had orders representing approximately $11.4 million and $19.1 million in sales outstanding, respectively.
The Company’s increase in backlog at December 31, 2009 is primarily related to the increase in orders at the end of the fourth quarter of 2009. The Company believes that substantially all of the outstanding sales orders as of February 12, 2010 will be shipped during 2010.
Employees
At December 31, 2009, the Company had 734 full-time employees, consisting of 306 sales and marketing professionals, 114 production staff, 83 research and development staff, 96 administrative staff, and 135 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. 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, 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 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, D.C. 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 (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 in this section describe the most significant risks to the Company’s business and should be considered carefully in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” 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, make its actual results differ materially from expected and past results. 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 risks and uncertainties. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
The global economic crisis may continue to adversely impact the Company’s financial condition and results of operations.
The Company’s results of operations have been materially affected by the conditions in the global economy generally and in the global capital markets in 2009. As widely reported, financial markets in the United States, Europe, and Asia experienced extreme disruptions in 2009, including extreme volatility in security prices, severely diminished liquidity and credit availability, and rating downgrades of certain investments. Although these conditions have not materially adversely impacted the Company’s liquidity, these economic developments affect the Company in a number of other ways. Tightening of credit in financial markets adversely affects the ability of the Company’s customers to obtain financing, which may result in a decrease in and cancellation of orders for the Company’s products and may impact the ability of the Company’s customers to make payments. Similarly, tightening of credit may adversely affect the Company’s supplier base and may increase the potential for one or more of our suppliers to experience financial distress. In addition, as a result of decreases in business spending, combined with financial difficulties and uncertainties experienced by customers of the Company, the length of time for these customers to make purchase decisions may increase and the size of such customers’ orders may decreased. The Company cannot predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the United States, Europe, and Asia, and there can be no assurance that there will not be a further deterioration in financial markets and economic conditions. Should these economic conditions continue, they could have a material adverse affect on the Company’s financial condition and results of operations.
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. 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 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’s financial performance is dependent on the conditions of the automotive, aerospace, and heavy equipment industries, which have experienced 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. A reduction in sales in any one of these industries could cause a significant decline in the Company’s revenues. 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. The cyclical nature of these industries may exert significant influence on the Company’s revenues and results of operations. In addition, the volume of orders from customers may be adversely impacted by decreases in capital spending by customers. If one or more of its significant customers were to become insolvent or otherwise were unable to pay for the products provided by the Company, the Company’s results of operations could be materially adversely affected.
The Company expects the challenging operating and financial environment currently faced by
manufacturers in the automotive, aerospace, and heavy equipment industries to continue and cannot predict the duration or severity of this challenging operating and financial environment or whether it will further deteriorate.
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 2009, approximately 49% 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. Most of its customers have a decentralized buying process for measurement devices. Thus, 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 growth.
The Company’s inability 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 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, 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 Metris USA, Inc. and other such claims and lawsuits against it will not individually or in the aggregate 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 many of which may be 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 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;
• quality issues with the Company’s products;
• shrinkage or other inventory losses due to product obsolescence, scrap or material price changes;
• the efficiencies achieved in managing inventories and fixed assets;
• 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 and the time and expense incurred in further penetrating its existing customer base;
• increases in operating expenses for product development and new product marketing;
• costs associated with new product introductions, such as assembly line start-up costs and low introductory period production volumes;
• the timing and market acceptance of new products and product enhancements;
• customer order deferrals in anticipation of new products and product enhancements;
• the Company’s success in expanding its sales and marketing programs;
• start-up costs and ramp-up time associated with opening new sales offices outside of the United States;
• potential decreases in revenue without proportionate adjustments in fixed costs;
• changes in gross margins due to lower average selling prices, changing product mix of products sold and the different gross margins on different products;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis;
• compliance with government regulations including health, safety, and environmental matters; 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. 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 results of operations.
The Company markets five closely interdependent products (FaroArm, FARO Laser ScanArm, FARO Laser Scanner Photon, FARO Laser Tracker and FARO Gage) 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, and FARO Laser Scanner Photon product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon. The Company also competes in these product lines with a number of other smaller competitors. The Company competes on the basis of 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 based 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.
