2006 Annual Report
With approximately 13,000 installations and 6,100 customers globally, FARO Technologies, Inc. designs, develops, and markets portable, computerized measurement 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-specific software packages enable users to process and present their results quickly and more effectively.
Principal products include the world's best-selling portable measurement arm – the FaroArm; the world's best-selling laser trackers – the FARO Laser Tracker X and Xi; the FARO Laser ScanArm; FARO Laser Scanner LS; the FARO Gage, Gage-PLUS and PowerGAGE; and the CAM2 family of advanced CAD-based measurement and reporting software.
For more information, visit our eight-language website at www.FARO.com.
OUR MISSION
Enabling our customers’ products and processes to be the best in the world.
OUR VISION
To remain the world's leading three-dimensional
FIVE-YEAR COMPOUNDED ANNUAL GROWTH RATE IN SALES: 33.4%
In millions of dollars except EPS and Current Ratio
2006 2005 2004
Sales $ 152.4 $ 125.6 $ 97.0
Gross Profit $ 89.5 $ 72.9 $ 60.0
Gross Margin 58.7% 58.1% 61.8 %
Operating Income $ 8.3 $ 10.2 $ 14.6
Operating Margin 5.5% 8.2% 15.0 %
Diluted Earnings Per Share $ 0.56 $ 0.57 $ 1.06
Current Ratio 3.5 3.8 5.3
06 05 04
$97.0
$152.4
$125.6
Sales
(in millions)06 05 04
$60.0
$89.5
$72.9
Gross Profit
(in millions)06 05 04
$0.56 $0.57
Diluted EPS
(in dollars)$1.06
FINANCIAL HIGHLIGHTS
LIVE WITH PASSION
Many would describe 2006 as anything but a “normal” year at FARO Technologies. However, history demonstrates that “normal” for any company is a work in progress, a concept in constant motion that reshapes itself every day. Thus, a “normal” day at the office, with a customer, or in the factory is defined less by a sequence of predictable events but rather, by the way in which the participants in a series of unpredictable events adapt, execute and deliver a desired outcome. Achieving that desired outcome with consistency is a better measure of “normal” and by that standard, 2006 was very close to a “normal” year for our company:
• Sales were $152.4 million – an all-time high – and a 21.3% increase over 2005. It also marks our fifth consecutive year with greater than 20% top line growth.
• Gross margin was 58.7%, in-line with our five-year historical average.
• Net Income was $0.56 cents per share ($8.2 million) despite incurring more than $6 million in costs related to our recently resolved patent litigation and our internal investigation into possible Foreign Corrupt Practices Act violations in China.
• Share price increased 20.2% from January 1 – December 31. Executing successfully despite the unpredictable events we faced in 2006 (patent litigation, the China investigation, and a class-action lawsuit to name three) required a shared mission, a focused vision, and great people who have passion for their customers, passion for their products, and passion for doing the right thing every day. In short, it takes a team that lives with passion.
SHARED MISSION
In creating our mission, we wanted something broad enough to grow with the company, regardless of the paths we pursue, while maintaining clear visibility of who should ultimately benefit from the actions we take. The FARO team has a shared mission that defines our purpose and unifies every region, every office and every person: Enable our customers' products and processes to be the best in the world.
FOCUSED VISION
The vision for achieving our shared mission is to remain the world's leading three-dimensional measurement company. This vision leverages the original foundation on which we were built:
LETTER to SHAREHOLDERS
aggressively developing and delivering high-precision, mobile, three- dimensional manufacturing measurement equipment. We have expanded that foundation to include applications in non-manufacturing environments and applications with lower accuracy requirements. Three-dimensional technology represents the core of our competitive edge. We remain dedicated to maintaining that edge and further increasing our market share by providing innovative new product development and world-class support.
In 2006, the FARO Laser Tracker joined the FaroArm as the best-selling product in its category. The FARO Gage line added a new model: the PowerGAGE, which is key for helping us tap into the $1.5-billion On-Machine Inspection (OMI) market. We also introduced a lower- cost FARO Laser Scanner LS to help expand the available markets for that product line.
Admittedly, I overestimated the speed with which the LS adoption rate would proceed. This product is clearly in the early adopter stage, but it is working its way up the growth curve. The low-cost model, combined with our industry-specific software packages, will help speed the ascent as will our dedicated global salesforce and support team who are utilizing the same successful model we created for all of our other products. We will continue putting in the time and effort required to grow this new and relatively undefined market for large-volume, three-dimensional digitizing. I have no doubts about the long-term viability of the product and remain extremely excited by the opportunity that lies ahead for the Laser Scanner LS.
Overall, the trend we’re noticing across all our product lines is that in addition to adding hundreds of new customers to the FARO fold, we’re also selling additional units to existing customers. That speaks volumes of the unmatched “service after the sale” that FARO provides and demonstrates how we’re creating incremental value for our customers’ operations.
GREAT PEOPLE
Putting your best people on the biggest opportunities is one of the fundamental drivers of success in any organization. We’re always looking for ways to increase our bench strength around the world and in 2006 we made several changes, particularly to our senior leadership team.
• Keith Bair became our Chief Financial Officer in October, 2006. Keith joined FARO in March of 2006 as Director of Accounting, and served as Interim CFO from July, 2006 until his promotion to permanent CFO. Keith has a broad range of experiences from large companies to start-ups to the U.S. Securities and Exchange Commission and his financial leadership will be fundamental to our continued growth.
• Jim West was named our Senior Vice President of Integrated Engineering. Jim was one of the co-founders of Perceptron before he joined SMX, a company FARO acquired in 2002. Jim has served in VP-level technical leadership roles for over fifteen years and I plan to name him our Chief Technology Officer by the end of this year.
• David Morse, a 10-year FARO veteran became Senior Vice President and Managing Director for the Americas after serving as Vice President of Sales for the same region. Dave now has responsibility for all marketing, sales, service and manufacturing operations in the Americas.
• Siggi Buss now has sole control of all our Europe, Middle East and Africa operations as Senior Vice President and Managing Director for that region. Siggi has been with FARO since we acquired CATS GmbH in 1998 – a company which he co-founded – and he has been a key leader for us ever since. A strong team at every level of the organization is the ultimate differentiator against the competition. At FARO, our global team is second-to-none in the industry and possesses the right strength of character, the right knowledge and all the passion required to keep the Company in the lead.
THE NEXT CHAPTER
As mentioned in our Fiscal 2006 earnings release, we are forecasting 20-25% sales growth and gross margin between 57-59% for 2007. We also continue to work towards our 2009 target financial model of 20-25% sales growth with gross margins of 60-65% and net income of 13-20%. Our financial targets are based purely on organic growth, which puts us in the enviable position of being able to be highly selective when reviewing potential acquisitions. We look at the opportunities on a regular basis but will not compromise when it comes to finding the best fit for enhancing our core competencies or expanding our reach.
In closing, I’d like to thank three different parties who make all of this possible for FARO. The first two are our employees and our shareholders. The FARO team works tirelessly and with great passion towards fulfilling the mission, vision and strategy set forth for the Company. Our shareholders remain unwavering in their belief in our ability to execute.
Finally, a special thank you goes to Simon Raab and Greg Fraser, our two co-founders. As you know, both retired from FARO’s operations in 2006 after a wonderful 25-year run. Their innovation, dedication and perspiration form the foundation of this company – and that foundation will remain as their legacy at FARO. Simon and Greg built an entity in which we can all take great pride, and without question, they too did it all with passion.
Sincerely,
Jay W. Freeland President and Chief Executive Officer
CAD Model
“Computer-Aided Design” that is created with software on a computer that defines the exact shape and dimensions of a part.
CAD-to-Part Inspections
Measuring a part and comparing the actual part to an
“ideal” CAD Model using a device like 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, specifically aimed at immediate out-of-the-box measurement suitable for small machine shops as well as large factories.
FARO Laser Scanner LS
A portable, high-density data collection device used for capturing the "as-built" condition of structures, such as factories or bridges, to allow the user to more efficiently design changes to or replacements for the measured structures. This device can also be used to capture accident, crime or insurance claim scenes, and cultural heritage structures for restoration or cataloging.
FARO Laser Tracker
A portable three-axis laser-based device used for inspecting large parts or assemblies up to 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 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 financial benefits of using a product (i.e. faster time to market, reduced scrap) less the financial cost of the product, divided by the financial cost of the product, multiplied by 100, expressed in percent. The time it takes a product to ”pay for itself” is reached when ROI becomes a positive number.
Re-work
The process of trying again when a part or assembly does not fit the first time. In the absence of new data this is often an expensive trial and error process. FARO’s customers often calculate their return on investment in our products by the reduction price of re-work and scrap.
Statistical Process Control (SPC)
Using data gathering equipment like FARO products to periodically check a process for deviation and using the data to fix the process before it degrades beyond an acceptable limit.
QUICK GLANCE GLOSSARY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006 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)
125 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:Common Stock, par value $.001 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 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 Í 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 Í Non-accelerated filer ‘ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No Í
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on July 1, 2006, the last business day of the Registrant’s most recently completed second fiscal quarter, was $362 million (based on the last sale on such date on the NASDAQ Global Market).
As of March 1, 2007, there were outstanding 14,706,969 shares of the Registrant’s common stock. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the 2007 Annual Meeting of Shareholders are incorporated by
EXPLANATORY NOTE
This Form 10-K/A (the “Amended Report”) is being filed to include the conformed signatures of Grant Thornton LLP in the Audit Opinion, the Internal Control Audit Opinion, and the Consent of Independent Registered Public Accounting Firm.
Except for the change noted above, this Amended Report does not modify or update other disclosures in the original Form 10-K filed on March 15, 2007.
TABLE OF CONTENTS
Page
PART I . . . 1
Item 1. Business . . . 2
Item 1A. Risk Factors . . . 9
Item 1B. Unresolved Staff Comments . . . 15
Item 2. Properties . . . 15
Item 3. Legal Proceedings . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . 18
PART II . . . 19
Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters . . . 19
Item 6. Selected Financial Data . . . 21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 33
Item 8. Financial Statements and Supplementary Data . . . 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 62
Item 9A. Controls and Procedures . . . 62
PART III . . . 64
PART IV . . . 65
Item 15. Exhibits and Financial Statement Schedules . . . 65
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 inability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consummated;
• 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 existing suit by Hexagon’s Romer-Cimcore 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) 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) our success in expanding our sales and marketing programs, (xiii) costs associated with opening new sales offices outside of the United States, (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, (xiv) adverse changes in the manufacturing industry and general economic conditions, and (xx) 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 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;
• unforeseen developments in our Foreign Corrupt Practices Act matter or in complying with the FCPA in the future;
• higher than expected increases in expenses relating to our Asia Pacific expansion or our Singapore manufacturing facility;
• the loss of our Chief Executive Officer, our Chief Technology Officer, our Chief Financial Officer, or other key personnel;
• 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.
ITEM1. 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 Faro Arm, Faro Scan Arm and Faro Gage articulated measuring devices, the Faro Laser Scanner LS, the Faro Laser Tracker, and their companion CAM2 software, provide for Computer- Aided Design (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 manufacturing
measurement. As of February 2007, the Company’s products have been purchased by approximately 6,100 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 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, 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 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.
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.
Conventional surveying equipment is limited to single-point measurements and doesn’t 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 Faro Arm.The Faro Arm 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 Faro Scan Arm.The Faro Scan Arm is a Faro Arm equipped with a combination of a hard probe (like that in the Faro Arm) and a non-contact line laser probe. This product provides our customers the ability to measure their products without touching them and offers a seven-axis contact/non-contact measurement device with a fully integrated laser scanner. The Scan Arm 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 Faro Arm product. What distinguishes the Faro Gage from the Faro Arm 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 Faro Arm 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 Xallows 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 Faro Arm and the Faro Laser Tracker.
• CAM2 SPC Processallows for the collection, organization, and presentation of measurement data factory-wide. Not limited to measurements from the Faro Arm 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.
• Soft Check Toolis a custom software program designed to lead an operator through a measurement process on the Faro Arm or Faro Laser Tracker with minimal training. These programs are created by the Company from specifications provided by the customer.
• Faro Gage Softwareincludes 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 LS Software.The Company has a number of programs available for its Laser Scanner LS product, as follows:
• Faro Scoutis a powerful software tool for displaying 3-D measurements and navigation in huge pointclouds.
• Faro Sceneis software for displaying, analyzing, administration and editing of 3-D measurements in huge pointclouds including registration of multiple pointclouds.
• Farocloud for AutoCADsupports 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.
• Faroworksis a web-based tool for the administration of complex projects and navigation from floorplan to scan with links to measurements.
• Walkinsideis a high performance 3-D viewer with full room measurement and other features. Customers
As of February 2007, the Company’s products have been purchased by approximately 6,100 customers worldwide, including small machine shops, large manufacturing and industrial companies, universities and law enforcement agencies. The Company’s ten largest customers by revenue represented an aggregate of 7.2% of the Company’s total revenues in 2006. No customer represented more than 2.0% of the Company’s sales in 2006. 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, 2006 the Company employed 83, 118, and 64 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, China, Singapore, Malaysia, Vietnam, and Japan. See Footnote 19 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. Each product has a separate sales force who report 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, 2006, the Company employed 50 scientists and technicians in its research and
development efforts. Research and development expenses were approximately $7.2 million in 2006 as compared to $6.4 million in 2005 and $5.4 million in 2004. 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 65 patents in the United States and related patents worldwide. The Company also has 26 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 Romer-Cimcore (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 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, handheld
measurement tools and various categories of surveying equipment. 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 Faro Arm, Faro Scan Arm, 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.
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 have become subject to the European Union’s Restrictions of Hazardous Substances, (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) directives, which took 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, 2006, the Company had orders representing approximately $10.3 million in product sales outstanding. The majority of these specific orders were shipped by February 29, 2007, and, as of February 29, 2007, the Company had orders representing approximately $12.0 million in product sales outstanding. At December 31, 2005 and 2004, the Company had orders representing approximately $7.3 million and $5.1 million in product sales outstanding, respectively.
The Company’s increase in backlog at December 31, 2006 is consistent with the Company’s overall sales growth and includes planned customer delivery dates in early 2007. The Company believes that substantially all of the outstanding sales orders as of February 29, 2007 will be shipped during 2007.
Employees
At December 31, 2006, the Company had 641 full-time employees, consisting of 265 sales and marketing professionals, 128 production staff, 50 research and development staff, 82 administrative staff, and 116 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.
Geographic Information
The information regarding net sales, operating income, and long-lived assets set forth in Note 19 —
“Segment Reporting” to the Consolidated Financial Statements is hereby incorporated by reference into this Part I, Item 1.
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. ITEM1A. RISKFACTORS.
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 2006, 45.1% of our revenue was attributable to sales to our existing customers, compared to 40.6% in 2005. 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 customer’s 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. 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, Romer-Cimcore (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 FARO Arm, 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 Romer-Cimcore 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 Romer-Cimcore 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.
Potential product failures or product quality and performance issues could result in lost sales, loss of
customers and possible delays in new product introductions and enhancements and increased warranty costs. The Company has a history of new product introductions and enhancements to existing products. Potential product failures in new or existing products of the Company could result in delays in new product introductions, which could lead to a loss of sales, and increased warranty costs.
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;
• unforeseen developments in our Foreign Corrupt Practices Act matter or in complying with the FCPA in the future;
• 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 Romer-Cimcore 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, handheld measurement tools, and surveying equipment 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 (Faro Arm, Scan Arm, Faro Laser Scanner LS, Faro Laser Tracker and Faro Gage) and related software for use in measurement, inspection and high-density surveying 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, inspection and high-density surveying 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 Faro Arm, Faro Scan Arm, 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.
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 sales and marketing, distribution, manufacturing, engineering, finance and administrative organizations of the acquired companies. 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
• the potential impairment of relationships with customers.
We cannot assure you that we will be able to integrate successfully any acquisitions, that any acquired companies will operate profitably or that we will realize the expected benefits from any acquisition. We may face difficulties managing growth.
If our business continues to grow rapidly in the future, we expect it to result in:
• increased complexity
