2005 Annual Report
FARO is the leading provider of products for the large, underser ved Computer-Aided Manufacturing Measurement (CAM2) market. The Company’s prod- ucts include the FaroArm, the FARO Gage, the FARO Laser ScanArm, the FARO Laser Tracker, and the Digital Template. This line of portable products pro- vides for measurements of almost anything, any- where, by anyone in a manufacturing plant in the
Company’s market. FARO has a worldwide base of approximately 4,900 customers in the automotive, aerospace, heavy equipment and many other indus- tries, including some of the most widely recognized names in the world. Based in Lake Mary, Florida, FARO has a global reach with offices around the industrialized world. For more information, visit our eight-language website at www.faro.com.
CORPORATe PROFILe
Our newest product, the Laser Scanner LS is shown below capturing the interior of the Baptistero Church in Florence, Italy. The Laser Scanner LS is used in construction, forensic, insurance and cultural heritage applications.
FINANCIAL HIGHLIGHTS
In millions of dollars except EPS and Current Ratio 2005 2004 2003
Sales $125.6 $97.0 $71.8
Gross Profit $72.9 $60.0 $42.3
Gross Margin 58.1 % 61.8 % 58.9 %
Operating Income $10.2 $14.6 $7.4
Operating Margin 8.2% 15.0% 10.4 %
Diluted earnings Per Share $0.57 $1.06 $0.64
Current Ratio 3.8 5.3 5.0
FIVE-YEAR COMPOUNDED ANNUAL GROWTH RATE IN SALES: 25.4%
Sales (in millions) 2003
2004
2005
$71.8
$97.0
$125.6
Gross Profit (in millions) 2003
2004 2005
$42.3
$60.0
$72.9
Gross Margin (in percent) 2003
2004 2005
58.9% 61.8% 58.1%
Operating Margin (in percent) 2003
2004 2005
10.4%
15.0% 8.2%
Diluted ePS (in dollars) 2003
2004 2005
$0.64
$1.06
$0.57
Current Ratio 2003
2004 2005
5.0 5.3 3.8
TO OUR SHAREHOLDERS:
In 2005 we achieved our fourth consecutive year of greater than 25% sales growth. Gross margin, at 58.1%, was somewhat lower than our prior five-year average of 59.9% in part because of a change in product mix which included a 75% increase in unit sales of our FARO Gage product. Our operating margin declined to 8.2% in 2005 compared to 15.0% in 2004 primarily because of higher SG&A expenses as a percentage of sales which we will address in more detail below. This resulted in net income of $8.2 million or 6.6% of sales compared to $14.9 million or 15.4% of sales in 2004.
If we were to summarize the 2005 year in total, we would call it a year of “investment for growth.”
In April of 2005 we outlined a new five-year plan for remaining a leader in the large, underserved and rapidly growing CAM2 market. A new five-year target financial model was developed to address continuing changes in our industry and to establish new performance goals after achieving our original five-year target financial model in 2004.
To position the Company for achieving these new goals we invested aggressively in a number of growth- related initiatives in 2005:
• We acquired iQvolution, which provides another key component for our portable measurement product line and gives us the opportunity to expand well beyond our traditional manufacturing customer base.
• We established a new regional headquarters and manufacturing plant in Singapore to support our initiative of growing sales in Asia to a level similar to our volume in the Americas and europe. We also launched production in December of 2005, well ahead of our scheduled 2006 start-up.
• We strengthened our sales organization to drive continued penetration of the customers and industries we serve. Sales headcount increased nearly 70% including additions in our previously existing territories, in three new countries and across a brand new product line, the Laser Scanner LS.
• We established a new Software Diversity Program to take advantage of polarization we see occurring in the marketplace as a result of continued consolidation among competitors.
• We released several new products including:
1. the TargetCAM which enhances the field of view of our Laser Tracker product; 2. CAM2 Measure X1, a robust new platform for our market-leading software; and
3. the latest, most reliable and most accurate version of our line laser probe, which is sold as part of our ScanArm product.
In addition to these growth-related initiatives, we also had other new non-growth related Administrative expenses in 2005 including a full year of Sarbanes-Oxley 404 compliance and significantly higher legal expenses relating to a patent infringement case. The combination of all these expenses had what we believe was a short-term impact on profitability. However, with respect to our proactive investments we felt that the timing was necessary in order to provide the right platform for maximizing our top line and bottom line growth in 2006 and beyond.
To highlight some additional successes in 2005:
• Approximately 59% of our sales in 2005 were to new customers vs. 53% in 2004. This metric is impor- tant because it tracks acceptance of our technology as an industry standard. Although one might expect a high rate of sales to new customers in a relatively new region like Asia Pacific (at 71% vs. 82% in 2004), it is encouraging to see that our customer base in established markets like the Americas continues to increase its share of new customers, which was 61% in 2005 vs. 58% in 2004.
• We had several multi-unit orders for our products from companies such as Boeing, Airbus, Siemens, and Sauder Woodworking. We are looking carefully to see if these may be examples of certain of our prod- ucts reaching a level of acceptance that will ultimately lead to a change in our sales model which would not require a demonstration for every individual product purchase.
• As mentioned previously our FARO Gage product ramped-up nicely in its second full calendar year after release. We do not give revenues by product line but I can tell you that unit sales of the Gage increased 75%. We would like to see our newest product, the Laser Scanner LS, take off at this rate or better and have structured the sales force to enable our efforts with that product.
• We managed to keep our G&A costs as a percentage of sales flat with 2004, despite incurring $1.7MM in incremental legal costs associated with the abovementioned patent infringement suit. Our 2006 oper- ating plan assumes that patent defense costs on this and other cases will continue and remain a neces- sary component to our long-term strategy in the market.
OUTLOOK FOR 2006 AND BEYOND
earlier we described 2005 as a year of “investment for growth.” With those investments in place, 2006 is designed to be a year of “growth through leverage.”
• As mentioned in our Fiscal 2005 earnings release we are forecasting 20% –25% sales growth in 2006 compared to 2005, to approximately $150–$157 million.
• We expect gross margin in 2006 to be 57% –59%. Given the ongoing legal actions regarding the FCPA and patent cases it is difficult to accurately predict net income for the year and thus, are estimating only at the gross margin level.
• earnings in the first half of 2006 were impacted by the ongoing legal actions regarding the FCPA and patent cases as well as the continued ramp-up of new sales people hired in the second half of 2005. With a six to nine month learning curve, most of these people won’t become fully productive until the second half. As a result, we expect to see their positive impact on the top line and in reduced selling expenses as a percentage of sales in the third and fourth quarters of 2006.
• We believe that the infrastructure we developed in 2005 will be adequate to support our needs for the next two years. We will continue to hire selectively and only as absolutely necessary, but the heavy lifting is done. The entire leadership team is measured on leveraging the operation and has several pieces of their 2006 variable compensation tied to that strategy.
• We continue to build the Company for the long term, with our 2009 financial targets in mind. These five- year targets, which were established in April 2005, include annual sales growth of approximately 25% per year, gross margins of 60-65% and net income of 13–20%. We believe that our 2006 forecast of 20–25% sales growth and 56–59% gross margin positions us appropriately in our quest to achieve those long-term goals.
We would like to thank our employees and our investors for their continued interest in and dedication towards our success. Our performance in 2005 contained a broad mix of successes and challenges. Our focus for 2006 is leveraging the structure we created through the tough choices we made in 2005 and driv- ing towards the long-term financial model we designed for our Company.
Simon Raab Jay W. Freeland
Chairman and Co-CeO President and Co-CeO
QUICK GLANCE GLOSSARY:
CAD Model
Computer-aided design model that is created with software on a computer that defines the exact shape and dimensions of a part.
CAD-to-Part Inspection
Measuring a part and comparing the actual part to its “ideal” CAD model using a device like a FaroArm or FARO 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 the FaroArm and FARO Laser Tracker products to compare the measured part to its original design, CAD model and/or to log the data for statistical process control.
FaroArm
A portable six or seven 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 simplified user interface specifically aimed at immediate out of the box mea- surement suitable for small machine shops as well as large fac- tories.
FARO Laser Scanner LS
A portable high density data collection device used for cap- turing the “as-built” condition of a structure such as a factory or bridge, to allow the user to more efficiently design changes to or replacements for the measured structure. This device can also be used to capture accident, crime or insurance claim scenes, and capture 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 200 feet in size. Set on a tri- pod, it operates by tracking a bounced laser beam off a mov- able, reflective target that is placed on the point to be measured. Usually complemented by “draw as you measure” software that can even compare parts back to CAD models. FARO 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 line laser 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 measurement. Return on Investment (ROI)
The financial benefits of using a product (i.e. faster time to market, reduced scrap) less the financial costs of the product, divided by the financial costs of the product, multiplied by 100, expressed in percent. The time it takes a product to “pay for itself” is reached when ROI becomes a positive number. Re-work
The process of trying again when a part or assembly does not fit the first time. In the absence of new data this is often an expensive trial and error process. FARO’s customers often cal- culate their return on investment in our products by the reduced cost of re-work and scrap.
Statistical Process Control (SPC)
Using data gathering equipment like FARO products to peri- odically check a process for deviation and using the data to fix the process before it degrades beyond an acceptable limit.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
; ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005 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
(State or other jurisdiction of incorporation or organization)
59-3157093
(I.R.S. Employer Identification Number)
125 Technology Park, Lake Mary, FL (Address of principal executive offices)
32746 (Zip code)
(Registrant’s telephone number, including area code): (407) 333-9911 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ; No
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 ;
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 ; 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. Yes ; No
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer ; Non-accelerated filer As of June 19, 2006, there were outstanding 14,349,726 shares of common stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 19, 2006 was $168 million based on the last sale on such date on the NASDAQ National Market.
DOCUMENTS INCORPORATED BY REFERENCE None.
TABLE OF CONTENTS
Page
PART I 1
Item 1. Business. 2
Item 1A. Risk Factors. 10
Item 1B. Unresolved Staff Comments. 17
Item 2. Properties. 18
Item 3. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 21
PART II 22
Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters. 22
Item 6. Selected Financial Data. 23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations. 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 36
Item 8. Financial Statements and Supplementary Data. 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. 66
Item 9A. Controls and Procedures. 66
Item 9B. Other Information. 70
PART III 71
Item 10. Directors and Executive Officers of the Registrant. 71
Item 11. Executive Compensation. 76
Item 12. Security Ownership of Certain Beneficial Owners and Management. 80
Item 13. Certain Relationships and Related Transactions. 82
Item 14. Principal Accountant Fees and Services. 82
PART IV 84
Item 15. Exhibits and Financial Statement Schedules. 84
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION FARO Technologies, Inc. (“FARO”, the “Company”, “us”, “we”, or “our”) has made “forward- looking statements” in this report (within the meaning of the Private Securities Litigation Reform Act of 1995). 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, “ “goal” and similar words, or discussions of our strategy or other intentions identify forward-looking statements. Other written or oral statements that constitute forward-looking statements also may be made by the Company from time to time.
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. We do 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 a material difference in the actual results from those contemplated in such forward-looking statements include among others those under
“Cautionary Statements” and elsewhere in this report and the following:
• our inability to further penetrate our customer base;
• development by others of new or improved products, processes or technologies that make our products obsolete or less competitive;
• our inability to maintain our technological advantage by developing new products and enhancing our existing products;
• our ability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consumated;
• the cyclical nature of the industries of our customers and the financial condition of our customers;
• the fact that the market potential for the CAM2 market and the potential adoption rate for our products are difficult to quantify and predict;
• the inability to protect our patents and other proprietary rights in the United States and foreign countries and the assertion and ultimate outcome of infringement claims against us, including the pending suit by Hexagon’s Cimcore–Romer subsidiary against us;
• fluctuations in our annual and quarterly operating results and the inability to achieve our financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought against us, (ii) quality issues with our products, (iii) excess or obsolete inventory, (iv) raw material price fluctuations, (v) expansion of our 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 our products, (viii) the length of our sales cycle to new customers and the time and expense incurred in further penetrating our existing customer base, (ix) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (x) the timing and market acceptance of new products and product enhancements, (xi) customer order deferrals in anticipation of new products and product enhancements, (xii) our success in expanding our sales
and marketing programs, (xiii) costs associated with opening new sales offices outside of the United States, (xiv) fluctuations in revenue without proportionate adjustments in fixed costs, (xv) the efficiencies achieved in managing inventories and fixed assets, (xvi) investments in potential acquisitions or strategic sales, product or other initiatives, (xvii) shrinkage or other inventory losses due to product obsolescence, scrap or material price changes, (xviii) adverse changes in the manufacturing industry and general economic conditions, and (xiv) other factors including the cost of investigation and ongoing litigation expenses noted herein;
• the outcome of the purported class action lawsuit;
• our inability to successfully implement the requirements of Restriction of use of Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE) compliance into our products;
• the inability of our 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, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
• our inability to maintain our level of sales or grow sales in China as a result of, among other things, the impact of our investigation of potential violations of the Foreign Corrupt Practices Act and modifications to our business practices in China;
• higher than expected increases in expenses relating to our Asia Pacific expansion or our Swiss manufacturing facility;
• our inability to find less expensive alternatives to stock options to attract and retain employees;
• difficulties in recruiting research and development engineers, and application engineers;
• the failure to effectively manage our growth;
• variations in the 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; and
• the matters set forth under “Cautionary Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
ITEM 1. BUSINESS.
The Company designs, develops, manufactures, markets and supports portable, software driven, 3-D measurement systems that are used in a broad range of manufacturing, industrial, building
construction and forensic applications. The Company’s FaroArm, FARO Laser ScanArm and FARO Gage articulated measuring devices, the FARO Laser Tracker, and their companion CAM2 software, provide for Computer-Aided Design (CAD)-based inspection and/or factory-level statistical process control.
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 manufacturing measurement. The Company’s Digital Template articulated measuring device and its related software are used to measure the shape of existing counter tops and other structures in residential or commercial buildings to provide the data required to manufacture replacement
countertops or other structures. The Digital Template reduces the time required to measure these existing products and to provide the data to manufacturing machines to create the replacement structures,
compared to traditional techniques. In March 2005 the Company acquired iQvolution AG, a German designer, developer and manufacturer of a portable laser-based device for measuring the detailed
composition of factories, oil refineries and other structures. This device and its related software, which the Company sells under the product name Laser Scanner LS also has forensic applications such as capturing detailed 3-D crime scene information. As of June 2006, the Company’s products have been purchased by approximately 4,900 customers worldwide, ranging from small machine shops to such large
manufacturing and industrial companies as Audi, Bell Helicopter, Boeing, British Aerospace, Caterpillar, Daimler Chrysler, General Electric, General Motors, Honda, Johnson Controls, Komatsu Dresser,
Lockheed Martin, Nissan, Siemens and Volkswagen, among many others.
We were founded in 1982 and we re-incorporated in Florida in 1992. Our worldwide
headquarters are located at 125 Technology Park, Lake Mary, Florida 32746, and our telephone number is (407) 333-9911.
Industry Background
The Company believes that there are three 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, and 3) the inability of traditional measurement devices to address many manufacturing problems, especially those related to large components for products such as automobiles, aircraft, heavy duty construction equipment, factory retrofits and countertops.
CAD changes 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. 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. The use of CAD can shorten the time between design changes. 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 figuratively 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 that were developed by Chrysler, Ford, General Motors and major truck manufacturers and issued in late 1994. Companies that become 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 have never been measured before, in part because of the lack of suitable measurement equipment.
Traditional products don’t measure up. A significant aspect of the manufacturing process, which traditionally has not benefited from computer-aided technology, 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 coordinate measurement machines (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 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 compare the dimensions of an object with its CAD model. Traditional templates made of wood or Styrofoam for countertop design are prone to breakage and dimensional errors. The template making process is time consuming as well.
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. Some parts or assemblies are not easily accessible and cannot be measured at all using traditional devices.
Escalating global competition has created a demand for higher quality products with shorter life cycles. Manufacturers 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. Moreover, they increasingly require
measurement capabilities to be integrated into the manufacturing process 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 software programs under the acronym CAM2.
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 that are 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. 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 computers are not manufactured by the Company, but are purchased from various suppliers.
CAM2 Software – See separate section on CAM2 Software below.
The Digital Template. A lower accuracy articulated arm device targeted at the home remodeling market. This device is designed to replace traditional physical templates used in countertop, cabinet and other home remodeling applications.
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 our customers the ability to measure their products without touching them.
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 product. What
distinguishes the FARO Gage from the FaroArm are the special mounting features and the basic software which are 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 software developed for this device features basic 2-D and 3-D measurements common to these applications. (See also “FARO Gage Software” below.)
The FARO Laser Tracker. A combination of a portable, large-volume laser measurement tool, a computer, and CAM2 software programs.
Laser Tracker – The FARO Laser Tracker 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/or in-process. With its greater angular resolution, repeatability, and accuracy, the FARO Laser Tracker advances already- proven tracker technology. Among its many enhanced features is SuperADM, 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 – See description under FaroArm above.
CAM2 Software -– See separate section on CAM2 software below.
The FARO Laser Scanner LS. The FARO Laser Scanner LS 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 in general, 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 software for the applications listed above.
CAM2 Software. CAM2 is the Company’s family of proprietary CAD-based measurement and statistical process control software. The CAM2 product line includes the following software programs, many of which are translated into multiple languages:
CAM2 Measure X allows users 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.
CAM2 SPC Process allows for the collection, organization, and presentation of measurement data factory-wide. Not limited to measurements from the FaroArm or FARO Laser Tracker, CAM2 SPC Process accepts data from CMM and other computer-based measurement devices from many different measurement applications along the production line.
SoftCheck Tool is a custom software program designed to lead an operator through a measurement process on the FaroArm or FARO Laser Tracker with minimal training. These programs are created by the Company from specifications provided by the customer.
FARO Gage Software 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 SoftCheck tools.
Laser Scanner LS Software. The Company has a number of programs available for its Laser Scanner LS product, as follows:
FARO Scout is a powerful software tool for displaying 3-D measurements and navigation in huge pointclouds.
FARO Scene is software for displaying, analyzing, administration and editing of 3-D measurements in huge pointclouds including registration of multiple pointclouds.
FARO Cloud for AutoCAD supports the visualization and analysis of millions of 3-D points in the well known AutoCAD software environment. As-built documentation of industrial structures, historic buildings or many more applications are possible.
FARO Works is a web-based tool for the administration of complex projects and navigation from floorplan to scan with links to measurements.
Walkinside is a high performance 3-D viewer with full room measurement and other features. Customers
As of June 2006, the Company’s products have been purchased by approximately 4,900 customers worldwide, including small machine shops, large manufacturing and industrial companies, home improvement shops, universities and law enforcement agencies. The Company’s ten largest customers by revenue represented an aggregate of 8.9% of the Company’s total revenues in 2005. No customer represented more than 2.5% of the Company’s sales in 2005.
Sales and Marketing
The Company directs 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 in the Company’s headquarters in Lake Mary, Florida and the Europe/Africa regional headquarters is in Stuttgart, Germany. The Company opened a regional headquarters for the Asia/Pacific region in Singapore in 2005. At December 31, 2005 the Company employed 86, 113, and 83 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, Brazil, Germany, United Kingdom, France, Spain, Italy, Poland, Netherlands, India, South Korea, China, Singapore, Malaysia, Vietnam, and Japan. See Footnote 20 to the Notes to Consolidated Financial Statements, incorporated herein by reference to Item 8 hereof, for financial information about the Company’s foreign and domestic operations and export sales required by this Item.
The Company uses 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. With the exception of the digital template product which is sold by FaroArm sales people, each product has a separate sales force,
reporting to regional sales managers for all products. 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 our existing products and developing new products for the CAM2 market.
At December 31, 2005, the Company employed 55 scientists and technicians in its research and development efforts. Research and development expenses were approximately $6.4 million in 2005 as compared to $5.4 million in 2004 and $4.5 million in 2003. We believe that the continual development or acquisition of innovative new products is critical to our future success. 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 so completed, will be commercially accepted.
Intellectual Property
The Company holds or has pending 68 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 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 or at all, which could have a material adverse effect upon the Company’s business, operating results and financial condition. The Company has been defending itself in a patent infringement suit brought against the Company by Cimcore-Romer (a subsidiary of Hexagon) on November 25, 2003. (See Item 3 – Legal Proceedings)
Manufacturing and Assembly
The Company manufactures its products at its headquarters in Lake Mary, Florida, and at its plants in Kennett Square, Pennsylvania, Schaffhausen, Switzerland, Stuttgart, Germany, and Singapore. Manufacturing consists primarily of assembling finished products with 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. In limited circumstances, the Company performs in-house circuit board assembly and 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 the business evolves and has chosen English as the standard business language for its operations. This decision is expected to significantly influence the Company’s operations and documentation globally. This has been done in concert with the ISO Standard Registrar, and is expected to increase customer confidence in the Company’s products and services worldwide.
The Company takes a global approach to ISO registration, seeking to have all locations registered with identical scope of accreditation and capabilities for the products generated and serviced. In 2004 FARO took this to the highest level possible. Our manufacturing sites in Lake Mary, Kennett Square, Stuttgart, and Schaffhausen are now jointly registered to ISO-9001:2000. In addition, our service sites in the United States, Germany, Switzerland, Japan, China, and Brazil have been jointly accredited to ISO- 17025 for Calibration and Certification Laboratories by the Laboratory Accreditation Bureau.
Competition
Our portable measurement systems compete in the broad 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, and
handheld measurement tools. The broad market for measurement devices is highly competitive. In the FARO Gage product line, we compete 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 LS product lines, we compete primarily with Hexagon Metrology, a
division of Hexagon. We also compete in these product lines with a number of other smaller competitors. We will be required to make continued investments in technology and product development to maintain the technological advantage that we believe we currently have over our competition. Some of our competitors, including some manufacturers of fixed based CMMs and Hexagon, possess substantially greater financial, technical, and marketing resources than we possess. Moreover, we cannot be certain that our technology or our product development efforts will allow us to successfully compete as the industry evolves. As the market for our 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. For example, fixed-base CMM manufacturers are introducing CAD-based inspection software in response to the trend toward CAD-based factory floor metrology. In addition, some fixed-base CMM manufacturers are miniaturizing and increasing the mobility of their conventional CMMs.
Government Regulation
Our operations are subject to numerous governmental laws and regulations, including those governing antitrust and competition, the environment, securities transactions and disclosures, 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. Our foreign operations are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which makes illegal any payments to foreign officials or employees of foreign governments that are intended to induce them to use their influence to assist us or to gain any improper advantage for us. The Company operates in certain regions that are more highly prone to risk under the FCPA.
Manufacturers of electrical goods will become subject to the European Union’s Restrictions of Hazardous Substances, (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) directives, which take effect during 2006. Parallel initiatives are being proposed in other jurisdictions, including several states in the United States and China. 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.
We expect that we will have our products in compliance with the RoHS directive in time.
However, if we are unable to do so, we would be unable to sell our products in European Union countries, as well as possible several states in the United States and China, which would have a material adverse effect on our sales and results of operation.
Backlog
At December 31, 2005, the Company had orders representing approximately $3.5 million in product sales outstanding. The majority of these specific orders were shipped by June 16, 2006, and, as of June 16, 2006, the Company had orders representing approximately $7.3 million in product sales
outstanding. At December 31, 2004 and 2003, the Company had orders representing approximately $5.1 million and $7.5 million in product sales outstanding, respectively.
The Company’s decreased backlog at December 31, 2005 is the result of improved order-to- shipment turnaround times for its laser tracker and articulated arm product lines in 2005 to meet customer demand. The Company believes that substantially all of the outstanding sales orders as of June 16, 2006 will be shipped during 2006.
Employees
At December 31, 2005, the Company had 657 full-time employees, consisting of 282 sales and marketing professionals, 134 production staff, 55 research and development staff, 80 administrative staff, and 106 customer service/application engineering specialists. The Company is not a party to any
collective bargaining agreements and believes its employee relations are good. 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.
Available Information
We maintain a web site with the address www.faro.com. Information contained on our web site is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to these reports, as soon as reasonably practicable after we electronically file these reports with, or furnish these reports to, the Securities and Exchange Commission.
We were organized in 1982 and are incorporated in Florida. ITEM 1A. RISK FACTORS.
We discuss expectations regarding our future performance and make other forward-looking statements in our annual and quarterly reports, press releases and other written and oral statements. These forward-looking statements are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations. The following discussion of risks and uncertainties which is not exclusive, highlights some important factors to consider when evaluating our trends and future results.
Our customers’ buying process for our products is highly decentralized, and therefore, it typically requires significant time and expense for us to further penetrate the potential market of a specific customer, which may delay our ability to generate additional revenue.
Our success will depend, in part, on our ability to further penetrate our customer base. During 2005, 40.6% of our revenue was attributable to sales to our existing customers, compared to 52.7% in 2004. If we are not able to continue to penetrate our existing customer base, our sales growth will be impaired. Most of our customers have a decentralized buying process for measurement devices. Thus, we must spend significant time and resources to increase revenues from a specific customer. For example, we may provide products to only one of our customers manufacturing facilities or for a specific product line within a manufacturing facility. We cannot be certain that we will be able to maintain or increase the amount of sales to our existing customers.
Others may develop products that make our products obsolete or less competitive.
The CAM2 market is emerging and could be characterized by rapid technological change. Others may develop new or improved products, processes or technologies that may make our products obsolete or less competitive. We cannot assure you that we will be able to adapt to evolving markets and
technologies or maintain our technological advantage.
Our success will depend, in part, on our ability to maintain our technological advantage by developing new products and applications and enhancing our existing products. Developing new products and applications and enhancing our existing products can be complex and time-consuming and will require substantial investment by us. Significant delays in new product releases or difficulties in developing new products could adversely affect our revenues and results of operations. Because our customers are concentrated in a few industries, a reduction in sales to any one of these industries could cause a significant decline in our revenues.
An economic slowdown in manufacturing will affect our growth and profitability.
A significant portion of our sales are to manufacturers in the automotive, aerospace and heavy equipment industries. We are dependent upon the continued growth, viability and financial stability of our 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 our revenues and results of operations. In addition, the volume of orders from our customers and the prices of our products may be adversely impacted by decreases in capital spending by a significant portion of our customers during recessionary periods. In addition, we generate significant accounts receivable in connection with providing products and services to our customers. If one or more of our significant customers were to become insolvent or otherwise were unable to pay for the products provided by us, our operating results and financial condition would be adversely affected.
Our inability to protect our patents and proprietary rights in the United States and foreign countries could adversely affect our revenues.
Our success depends in large part on our ability to obtain and maintain patent and other proprietary right protection for our processes and products in the United States and other countries. We also rely upon trade secrets, technical know-how and continuing inventions to maintain our competitive position. We seek to protect our technology and trade secrets, in part, by confidentiality agreements with our employees and contractors. Our employees may breach these agreements or our trade secrets may otherwise become known or be independently discovered by inventors. If we are unable to obtain or maintain protection of our patents, trade secrets and other proprietary rights, we may not be able to prevent third parties from using our proprietary rights.
Our patent protection involves complex legal and technical questions. Our patents may be
challenged, narrowed, invalidated or circumvented. We may be able to protect our proprietary rights from infringement by third parties only to the extent that our 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 our patented technologies. Litigation or other proceedings to defend or enforce our intellectual property rights could require us to spend significant time and money and could otherwise adversely affect our business.
Claims from others that we infringe their intellectual property rights may adversely affect our operations.
From time to time we receive notices from others claiming we infringe their intellectual property rights. The number of these claims may grow. Responding to these claims may require us to enter into royalty or licensing agreements on unfavorable terms, require us to stop selling or to redesign affected products or require us to pay damages. Any litigation or interference proceedings, regardless of their outcome, may be costly and may require significant time and attention of our management and technical personnel.
On November 25, 2003, Cimcore-Romer (now a division of Hexagon) filed a patent infringement suit against us in the Federal District Court for the Southern District of California alleging that certain of our products sold in the United States, including the FaroArm, infringe U.S. Patent 5,829,148 (‘148 patent). A summary of this litigation is set forth in Item 3 (Legal Proceedings) of this report.
In the event of an adverse ruling in the Cimcore-Romer litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of any infringing products, discontinue the use of certain processes or obtain a license, if available, from Cimcore-Romer with royalty payment
obligations by us. At this time, however, the Company cannot estimate the potential impact, if any, that might result from this suit, and therefore, no provision has been made to cover such expense.
We may not be able to achieve financial results within our target goals, and our operating results may fluctuate due to a number of factors, many of which are beyond our control.
Our ability to achieve financial results that are within our goals is subject to a number of factors, some of which our beyond our control. Moreover, our annual and quarterly operating results have varied significantly in the past and likely will vary significantly in the future. Factors that cause our financial results to fluctuate include those set forth elsewhere in this report and the following:
• the size and timing of customer orders, many of which are received towards the end of the quarter;
• the effectiveness of sales promotions and sales of demonstration equipment;
• geographic expansion in the Asia/Pacific region and other regions and the effects of governmental or other actions relating to our operations in China;
• the loss of future business in China as a result of, among other things, the outcome of our investigation into potential violations of the Foreign Corrupt Practices Act including the expense, distraction and changes in personnel, as well as modifications to our business practices and compliance programs;
• training and ramp-up time for new sales people;
• investments in technologies and new products;
• our effective tax rate;
• the outcomes of the patent infringement lawsuit filed by Cimcore-Romer and the purported class action lawsuit;
• the amount of time that it takes to fulfill orders and ship our products;
• the length of our sales cycle to new customers and the time and expense incurred in further penetrating our 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;
• our success in expanding our 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;
• the efficiencies achieved in managing inventories and fixed assets;
• investments in potential acquisitions or strategic sales, product or other initiatives;
• shrinkage or other inventory losses due to product obsolescence, scrap or material price changes; and
• adverse changes in the manufacturing industry and general economic conditions. Any one or a combination of these factors could adversely affect our annual and quarterly operating results in the future and could cause us to fail to achieve our target financial results. The CAM2 market is an emerging market and our growth depends on the ability of our products to attain broad market acceptance.
The market for traditional fixed-base CMMs, check fixtures, and other handheld measurement tools is mature. Part of our strategy is to continue to displace these traditional measurement devices. Displacing traditional measurement devices and achieving broad market acceptance of our products requires significant effort to convince manufacturers to reevaluate their historical measurement procedures and methodologies.
Because the CAM2 market is emerging, the potential size and growth rate of the CAM2 market is uncertain and difficult to quantify. If the CAM2 market does not continue to expand or does not expand at least as quickly as we anticipate, we may not be able to continue our sales growth, which also may affect our profitability.
We market six closely interdependent products (FaroArm, Digital Template, ScanArm, FARO Laser Scanner LS, FARO Laser Tracker and FARO Gage) and related software for use in measurement and inspection applications. Substantially all our revenues are currently derived from sales of these products
and software and we plan to continue our business strategy of focusing on the portable software-driven, 3- D measurement and inspection market. Consequently, our financial performance will depend in large part on portable, computer-based measurement and inspection products achieving broad market acceptance. If our products cannot attain broad market acceptance, we will not grow as anticipated and may be required to make increased expenditures on research and development for new applications or new products. We compete with manufacturers of portable measurement systems and traditional measurement devices, many of which have more resources than us and may develop new products and technologies.
The broad market for measurement devices is highly competitive. In the FARO Gage product line, we compete 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 LS product lines, we compete primarily with Hexagon Metrology, a division of Hexagon. We
also compete in these product lines with a number of other smaller competitors.
We will be required to make continued investments in technology and product development to maintain the technological advantage that we believe we currently have over our competition. Some of our competitors, including some manufacturers of fixed based CMMs and Hexagon, possess substantially greater financial, technical, and marketing resources than we possess. Moreover, we cannot be certain that our technology or our product development efforts will allow us to successfully compete as the industry evolves. As the market for our 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. For example, fixed-base CMM manufacturers are introducing CAD-based inspection software in response to the trend toward CAD-based factory floor metrology. In addition, some fixed-base CMM manufacturers are miniaturizing and increasing the mobility of their conventional CMMs.
We derive a substantial part of our revenues from our international operations, which are subject to greater volatility and often require more management time and expense to achieve profitability than our domestic operations.
Since 2000, we have derived approximately half of our sales from international operations. In our experience, entry into new international markets requires considerable management time as well as start- up expenses for market development, hiring and establishing office facilities before any significant revenues are generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable.
Our international operations are subject to various risks, including:
• difficulties in staffing and managing foreign operations;
• political and economic instability;
• unexpected changes in regulatory requirements and laws;
• longer customer payment cycles and difficulty collecting accounts receivable;
• export duties, import controls and trade restrictions;
• governmental restrictions on the transfer of funds to us from our operations outside the United States;
• burdens of complying with a wide variety of foreign laws and labor practices; and
• fluctuations in currency exchange rates.
Because our foreign subsidiaries maintain their financial records and statements in their
respective local currencies, our consolidated financial results are affected by foreign currency translation adjustments. Moreover, several of the countries where we operate have emerging or developing
economies, which may be subject to greater currency volatility, negative growth, high inflation, limited availability of foreign exchange and other risks. These factors may harm our results of operations and any measures that we may implement to reduce the effect of volatile currencies and other risks of our
international operations may not be effective.
In addition, our foreign operations are subject to the Foreign Corrupt Practices Act, which makes illegal any payments to foreign officials or employees of foreign governments that are intended to induce them to use their influence to assist us or to gain any improper advantage for us. As previously reported on the Company’s Form 8-K dated March 15, 2006, the Company learned that its China subsidiary had made payments to certain customers in China that may have violated the Foreign Corrupt Practices Act and other applicable laws. We voluntarily notified the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) of this matter. If the SEC or the DOJ determines that violations of the FCPA have occurred, they could seek civil and criminal sanctions, including monetary penalties, against the Company and/or certain of its employees, as well as additional changes to the Company’s business practices and compliance programs, any of which could have a material adverse effect on the Company business and financial condition. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business. Further, detecting, investigating, and resolving such actions is expensive and could consume significant time and attention of our senior management.
We may not be able to identify, consummate or achieve expected benefits from acquisitions. We have completed three significant acquisitions since our initial public offering in 1997. We may pursue access to additional technologies, complementary product lines and sales channels through selective acquisitions and strategic investments. We may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms or otherwise complete acquisitions in the future. In the past we have used our stock as consideration for acquisitions. Our common stock may not remain at a price at which it can be used as consideration for acquisitions without diluting our existing shareholders, and potential acquisition candidates may not view our stock
attractively.
Realization of the benefits of acquisitions often requires integration of some or all of the acquired companies’ sales and marketing, distribution, manufacturing, engineering, finance and administrative organizations. The integration of acquisitions demands substantial attention from senior management and the management of the acquired companies. Any acquisition may be subject to a variety of risks and uncertainties including:
• the inability to assimilate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be located in diverse geographic regions);
• the inability to maintain uniform standards, controls, procedures and policies;
• the need or obligation to divest portions of the acquired companies; and
