2008 Annual Report
FARO Technologies, Inc.
About FARO
Enabling our customers’
products and processes
to be the best in the world.
To remain the world‘s
leading three-dimensional
measurement company.
Our Mission and Vision
Our Mission Our Vision
Consistent and Enduring Challenge
With more than 19,000 installations and 9,000 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-specifi c software packages enable users to process and present their results quickly and more effectively. FARO equipment is used by companies around the world in production and quality control. Airbus, Boeing, BMW, Johnson Controls, John Deere, Daimler, Volkswagen, Miele, Cargobull, Caterpillar, ABB, MAN, Goodyear, SKF and Siemens belong to FARO‘s extensive customer list.
Principal products include the world‘s best-selling portable measurement arm – the FaroArm®; the world‘s best- selling laser tracker – the FARO Laser Tracker X and Xi; the FARO Laser ScanArm®; FARO Laser Scanner LS; the FARO Gage, GagePlus and PowerGage; and the CAM2 family of advanced CAD-based measurement and reporting software. FARO is ISO-9001 certifi ed and ISO-17025 laboratory registered.
For further information, visit www.faro.com
Comparison 2006 - 2008
(In millions of dollars except EPS and Current Ratio)Five-Year Compounded Annual Growth Rate in Sales: 23.9%
Operating Results
Financial Highlights for 2008
2008 2007 2006
Sales $ 209.2 $ 191.6 $ 152.4
Gross Profi t $ 125.2 $ 115.0 $ 89.5
Gross Margin 59.8% 60.0% 58.7%
Operating Income $ 18.9 $ 19.1 $ 8.3
Operating Margin 9.1% 9.9% 5.5%
Diluted Earnings per Share $ 0.83 $ 1.15 $ 0.56
Current Ratio 5.2 4.7 3.5
Sales
(in millions)
200 250
150
100
50
0 2008 2007 2006
$209.2 $191.6 $152.4
Gross Profi t
(in millions)
125 150
100
75
50
25
0 2008 2007 2006
$125.2 $115.0 $89.5
Diluted EPS
(in dollars)
1.0 1.2
0.8
0.6
0.4
0.2
0 2008 2007 2006
$0.83 $1.15 $0.56
FARO is a company which has become accustomed to 20-25% growth, year after year. We believe that we have fantastic products, a compelling ROI and a world-class team. It would be easy to look at the rapid economic decline of last year and say “it could have been worse.” Instead, I’m sitting here looking at our 9% growth in 2008 and saying to myself, “it could have been better.”
Despite how ugly the economy turned last year, there were some great successes for FARO.
• We introduced the latest generation Laser Scanner, the Photon 80 and 20 with a 300% improvement in image clarity and simpler color overlay (and as of last week, we had already surpassed the 2008 generation). The Laser Scanner represents a major opportunity for our company over the long-term. We expect to continue to invest R&D funds on the scanner in 2009 and beyond. Ultimately, we believe the scanner will democratize 3D imaging, putting the power of 3D into the hands of the masses.
• We acquired the patent and technology rights for our new 3D Imager and established a new technology center in Boston to focus exclusively on its development. In its current form, the 3D Imager already has the ability to achieve FARO Gage-like accuracies in a non-contact device. Over time, we intend to substantially reduce the size and dramatically increase the speed and simplify the ease of use. The 3D Imager represents an opportunity for FARO to transform both the non- contact and contact segments of our markets.
• We upgraded all of our Arm product lines, adding additional lengths to the Quantum line and adding Bluetooth and sleep mode capabilities to the Platinum and Fusion lines.
• We resolved the class action and derivative matters with minimal cost impact to the company.
• We maintained gross margins near 60% and continued to balance our sales between new and existing customers at approximately 50-50.
Like many other companies, FARO has been hit by the rapid downturn in the global economy. Unlike other downturns I’ve experienced where you could point to disruptive technological changes, industry-specifi c anomalies or internal performance shortcomings, what we’re facing now is different. The global economy continues to be the principal impediment to our continued success. The economy is the enemy. It has placed signifi cant strain on our customers. That has caused them to pause and re-evaluate their own models and that pause (a very long pause) has slowed our growth dramatically. This storm will pass, but until it does we’re resetting the compass and sailing on a slightly different course.
Letter to Shareholders
From the desk of Jay Freeland
An Ugly Year but Still Plenty of Bright Spots
The Economy is the Enemy
The long-term mission, vision and strategy for our Company have not changed. We believe that the opportunity for FARO is as vast today as it was one, two, even ten years ago. The current environment presents uncharted waters, but our strategy for navigating through this crisis is actually quite simple:
• Keep the fi nancial house in order
• Focus on what we do best
• Grab more share of the market
Keep the fi nancial house in order. We are fortunate to be positioned well fi nancially. Our balance sheet is strong with $100 million in cash and no outstanding debt. In the fi rst quarter of 2009, we dramatically altered the size of the ship, reducing our global headcount by approximately 20%. Discretionary expenditures have been reduced while still maintaining maximum focus on sales and R&D. The decisions we made to reduce the size of our team were tough. FARO has the most talented employees in the industry and seeing many of them leave the family was diffi cult for everyone. However, given the
unpredictability of this environment it was a necessary choice to ensure the long-term health of the Company.
Focus on what we do best. Execution, execution, execution. FARO has always executed well and in this environment, the need for fl awless execution is even more critical. We’re also a team that prides itself on inspiring a culture of continuous improvement. New products, streamlining processes and better customer service are just a few of the areas that FARO has successfully improved on a regular basis. We use our Operational Dashboard to monitor progress and through internal programs like the Power of One, 5S and Standard Work, we’ll continue driving effi ciency across the Company.
Grab more share of the market. As unorthodox as it may seem, this is a great time for us to grab more share of the market. Despite the ongoing turmoil in the market, our lead and demo counts continue to grow. We’re receiving good orders, but the cycle time for deal closure has slowed signifi cantly. The crisis is pushing us to look hard at new industries and new applications. This drives new R&D activity and new sales approaches, which in turn, give us the opportunity to grab more share of the market.
Even with the prospect for continued sales declines throughout 2009, we believe that the need for 3D measurement and imaging is only going to grow. FARO remains the world leader and is poised to serve our customers for a long time to come. The overall market potential for FARO is real and nothing in the current economic climate has changed that.
As always, I’d like to thank the FARO team around the world for Living with Passion every day and our investors for putting their faith in us. What we’re facing today is a small blip on a very large radar. Let’s keep one eye on the compass and one eye on the horizon.
Best Regards,
Jay W. Freeland President & CEO
A Smaller Ship for Now
Our Future Remains Bright
CAD Model
“Computer-Aided Design” that is created with software on a computer that defi nes 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, specifi cally aimed at immediate out-of-the-box measurement suitable for small machine shops as well as large factories.
FARO
®Laser Scanner
A portable, high-density data collection device used for capturing the “as-built” condition of structures, such as factories or bridges, to allow the user to more effi ciently 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, refl ective target that is placed on the point being measured. Usually complemented by “draw as you measure” software that can even compare parts back to CAD models.
FARO Laser ScanArm
®A portable six or seven-jointed electronic/mechanical device used for inspecting parts between 2 inches and 12 feet in size, usually by scanning the part with a non- contact Laser Line Probe attached to the end of the device. Usually accompanied by point cloud software that can convert the point data into a CAD model.
Metrology
The study of measurements.
Return on Investment (ROI)
The fi nancial benefi ts of using a product (i.e. faster time to market, reduced scrap) less the fi nancial cost of the product, divided by the fi nancial 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 fi t the fi rst 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 fi x the process before it degrades beyond an acceptable limit.
Quick Guide Glossary
Technical Terms
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008 OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission File Number 0-23081
FARO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-3157093
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
250 Technology Park, Lake Mary, FL 32746
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code): (407) 333-9911 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $.001 NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No Í
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No Í
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes Í No ‘
Indicate by check mark 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 Í
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting Company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘ Accelerated filer Í Non-accelerated filer ‘ Smaller Reporting Company ‘
Do not check if a smaller reporting company.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘ No Í
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on June 30, 2008, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $386 million (based on the last sale on such date on the NASDAQ Global Market).
As of February 20, 2009, there were outstanding 16,741,428 shares of the Registrant’s common stock. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s proxy statement for the 2009 Annual Meeting of Shareholders are incorporated
TABLE OF CONTENTS
Page
PART I . . . 1
Item 1. Business . . . 2
Item 1A. Risk Factors . . . 9
Item 1B. Unresolved Staff Comments . . . 17
Item 2. Properties . . . 17
Item 3. Legal Proceedings . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . 19
PART II . . . 20
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . 20
Item 6. Selected Financial Data . . . 22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 31
Item 8. Financial Statements and Supplementary Data . . . 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 54
Item 9A. Controls and Procedures . . . 54
Item 9B. Other Information . . . 55
PART III . . . 56
Item 10. Directors, Executive Officers, and Corporate Governance . . . 56
Item 11. Executive Compensation . . . 56
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . 56
Item 13. Certain Relationships and Related Transactions and Director Independence . . . 56
Item 14. Principal Accountant Fees and Services . . . 56
PART IV . . . 57
Item 15. Exhibits and Financial Statement Schedules . . . 57
PART I
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION 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” 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. The Company does not intend to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Important factors that could cause a material difference in the actual results from those contemplated in such forward- looking statements include, among others, and those elsewhere in this report and the following:
• the slowdown in the manufacturing industry or the domestic and international economies in the regions of the world where the Company operates;
• the Company’s inability to further penetrate its customer base;
• development by others of new or improved products, processes or technologies that make the Company’s products obsolete or less competitive;
• the Company’s inability to maintain its technological advantage by developing new products and enhancing its existing products;
• the Company’s inability to successfully identify and acquire target companies or achieve expected benefits from acquisitions that are consummated;
• the cyclical nature of the industries of the Company’s customers and material adverse changes in its customers access to liquidity and capital;
• the market potential for the computer-aided measurement (“CAM2”) market and the potential adoption rate for the Company’s products are difficult to quantify and predict;
• the inability to protect the Company’s patents and other proprietary rights in the United States and foreign countries;
• fluctuations in the Company’s annual and quarterly operating results and the inability to achieve its financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought against the Company, (ii) quality issues with its products, (iii) excess or obsolete inventory, (iv) raw material price fluctuations, (v) expansion of the Company’s manufacturing capability and other inflationary pressures, (vi) the size and timing of customer orders, (vii) the amount of time that it takes to fulfill orders and ship the Company’s products, (viii) the length of the
Company’s sales cycle to new customers and the time and expense incurred in further penetrating its existing customer base, (ix) increases in operating expenses required for product development and new product, marketing, (x) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (xi) the timing and market acceptance of new products and product enhancements, (xii) customer order
deferrals in anticipation of new products and product enhancements, (xiii) the Company’s success in expanding its sales and marketing programs, (xiv) start-up costs associated with opening new sales offices outside of the United States, (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) the efficiencies achieved in managing inventories and fixed assets, (xvii) investments in potential acquisitions or strategic sales, product or other initiatives, (xviii) shrinkage or other inventory losses due to product obsolescence, scrap or material price changes, (xix) adverse changes in the manufacturing industry and general economic conditions, (xx) compliance with government regulations including health, safety, and environmental matters, (xxi) the ultimate costs of the Company’s monitoring obligations in respect of the Foreign Corrupt Practices Act (“FCPA”) matter; and (xxii) other factors noted herein;
• changes in gross margins due to changing product mix of products sold and the different gross margins on different products;
• the Company’s inability to successfully maintain the requirements of Restriction of use of Hazardous Substances (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) compliance into its products;
• the inability of the Company’s products to displace traditional measurement devices and attain broad market acceptance;
• the impact of competitive products and pricing in the CAM2 market and the broader market for measurement and inspection devices;
• the effects of increased competition as a result of recent consolidation in the CAM2 market;
• risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, political and economic instability, compliance with import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
• the loss of the Company’s Chief Executive Officer or other key personnel;
• difficulties in recruiting research and development engineers, and application engineers;
• the failure to effectively manage the Company’s growth;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis; and
• the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period or on commercially reasonable terms.
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 FaroArm, FARO Laser ScanArm 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 measurement. As of December 2008, the Company’s products have been purchased by approximately 9,000 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies such 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.
The Company was founded in 1982 and re-incorporated in Florida in 1992. The Company’s worldwide headquarters are located at 250 Technology Park, Lake Mary, Florida 32746, and its telephone number is (407) 333-9911.
Industry Background
The Company believes that there are four principal forces driving the need for its products and services: 1) the widespread use by manufacturers of CAD in product development which shortens product cycles; 2) the adoption by manufacturers of quality standards such as Six Sigma and ISO-9000 (and its offshoot QS-9000), which stress the measurement of every step in a manufacturing process to reduce or eliminate defects, 3) the inability of traditional measurement devices to address many manufacturing problems such as throughput, efficiency, and accuracy, especially those related to large components for products such as automobiles, aircraft, heavy duty construction equipment, and factory retrofits, and 4) the growing demand to capture large volumes of three-dimensional data for modeling and analysis.
CAD 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 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 never have been measured before, in part because of the lack of suitable measurement equipment.
Traditional products do not measure up.A significant aspect of the manufacturing process, 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 does not have the capacity to capture and analyze large volumes of three-dimensional data. As data requirements for construction, civil engineering and forensic inspection projects become more complex, single-point measurement devices will become increasingly more difficult to utilize in those applications.
Escalating global competition has created a demand for higher quality products with shorter life cycles. Customers require more rapid design, greater control of the manufacturing process, tools to compare components to their CAD specifications and the ability to precisely measure components that cannot be measured or
inspected by conventional devices, and the ability to capture and analyze large volumes of three-dimensional data. Moreover, they increasingly require measurement capabilities to be integrated into manufacturing processes and to be available on the factory floor.
FARO Products
The FaroArm.The FaroArm is a combination of a portable, six or seven-axis, instrumented articulated measurement arm, a computer, and 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 Laser ScanArm.The FARO Laser ScanArm is a FaroArm equipped with a combination of a hard probe (like that in the FaroArm) and a non-contact line laser probe. This product provides the Company’s customers the ability to measure their products without touching them and offers a seven-axis contact/non- contact measurement device with a fully integrated laser scanner. The ScanArm is used for non-contact measurement applications, including inspection, cloud-to-CAD comparison, rapid prototyping, reverse engineering and 3-D modeling.
The FARO Gage.Sold as a combination of an articulated arm device with a computer and software, the FARO Gage is a smaller, higher accuracy version of the FaroArm 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 Qallows the ScanArm to automatically recognize geometric features for non-contact
inspection. Users can now measure with multiple FaroArms and FARO Laser Trackers simultaneously to achieve geometry calculations that are accurate to one half-micron. CAM2 Q also contains an all new user interface that is fully customizable, allowing users to create and organize a work environment that best meets the user’s needs.
• 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 FaroArm 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 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.
• Soft Check Toolis 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 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.
• FARO Cloud 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.
• FARO Worksis a web-based tool for the administration of complex projects and navigation from floor plan to scan with links to measurements.
Customers
As of December 2008, the Company’s products have been purchased by approximately 9,000 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies such 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; as well as universities and law enforcement agencies. The Company’s ten largest customers by revenue represented an aggregate of 6.3% of the Company’s total revenues in 2008. No customer represented more than 2.0% of the Company’s sales in 2008.
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 located in the Company’s headquarters in Lake Mary, Florida; the Europe/Africa regional headquarters is located in Stuttgart, Germany; and the regional headquarters for the Asia/Pacific region is located in Singapore. At December 31, 2008 the Company employed 136, 139, and 121 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, Thailand, and Japan. See Footnote 17 to the Notes to Consolidated Financial Statements, incorporated herein by reference from Item 8 hereof into this Part I, Item 1, for financial information about the Company’s foreign and domestic operations and export sales.
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 its existing products and developing new products for the CAM2 market.
At December 31, 2008, the Company employed 89 scientists and technicians in its research and
development efforts. Research and development expenses were approximately $12.6 million in 2008 compared to
$10.3 million in 2007 and $7.2 million in 2006. The Company believes that the continual development or acquisition of innovative new products is critical to its 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 84 patents in the United States and related patents worldwide. The Company also has 25 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
Manufacturing and Assembly
The Company manufactures its FaroArm, FARO Gage, and FARO Laser Tracker products in the
Company’s manufacturing facilities located in Florida and Pennsylvania for customer orders from the Americas, in its manufacturing facility located in Switzerland for customer orders from the Europe/Africa region, and in its manufacturing facility located in Singapore for customer orders from the Asia/Pacific region. The Company manufactures its FARO Laser Scanner LS product in its facility located in Stuttgart, Germany. The Company expects all its existing plants to have the production capacity necessary to support its volume requirements through 2009.
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. The Company performs limited in-house circuit board assembly and component part machining.
The Company’s manufacturing, engineering, and design headquarters have been registered to the ISO-9001 standard since July 1998. Semi-annual surveillance audits have documented continuous improvement to this
multinational standard. The Company continues to examine its scope of registration as 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 ISO9001:2000 Quality Management System Certification, and is expected to increase customer confidence in the Company’s processes, products and services worldwide. Additionally, the Company takes a global approach to ISO17025:2005 Calibration Laboratory recognition, seeking to have all locations registered with identical scopes of accreditation and capabilities for the products generated and serviced
Currently the Company’s manufacturing sites in Lake Mary, Kennett Square, Stuttgart, Schaffhausen and Singapore are jointly registered to ISO-9001 and ISO17025. In addition, its service sites in the United States, Germany, India, Japan, China, Singapore and Brazil also have joint certification and accreditation to these key standards.
Competition
The Company’s 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, the Company competes with manufacturers of handheld measurement tools and fixed-base CMMs, including some large, well-established companies. In the FaroArm, FARO Laser ScanArm, FARO Laser Tracker, and FARO Laser Scanner LS product lines, the Company competes primarily with Hexagon Metrology, a division of Hexagon. The Company also competes in these product lines with a number of other smaller competitors.
The Company will be required to make continued investments in technology and product development to maintain the technological advantage that it believes it currently has over its competition. Some of the Company’s competitors, including some manufacturers of fixed based CMMs and Hexagon, possess substantially greater financial, technical, and marketing resources than it possesses. Moreover, the Company cannot be certain that its technology or its product development efforts will allow the Company to successfully compete as the industry evolves. As the market for the Company’s portable measurement systems expands, additional competition may emerge and the Company’s existing and future competitors may commit more resources to the markets in which the Company participates.
Government Regulation
The Company’s operations are subject to numerous governmental laws and regulations, including those governing antitrust and competition, the environment, 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. The Company’s foreign operations are subject to the U.S. 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 the Company or to gain any improper advantage for the Company. The Company operates in certain regions that are more highly prone to risk under the FCPA.
Manufacturers of electrical goods have become subject to the European Union’s RoHS and 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.
The Company currently holds WEEE registration and is in compliance with the directives of the European Union. The Company’s products are currently exempt from the RoHS directive, however the Company expects to have all products in compliance in 2010. However, if the Company is unable to do so, it would be unable to sell its products in European Union countries, as well as possible several states in the United States and China, which would have a material adverse effect on its sales and results of operation.
Backlog
At December 31, 2008, the Company had orders representing approximately $11.4 million in product sales outstanding. The majority of these specific orders were shipped by February 20, 2009, and, as of February 20, 2009, the Company had orders representing approximately $10.0 million in product sales outstanding. At December 31, 2007 and 2006, the Company had orders representing approximately $19.1 million and $10.3 million in product sales outstanding, respectively.
The Company’s decrease in backlog at December 31, 2008 is primarily related to the slowdown in orders at the end of the fourth quarter of 2008. The Company believes that substantially all of the outstanding sales orders as of February 20, 2009 will be shipped during 2009.
Employees
At December 31, 2008, the Company had 959 full-time employees, consisting of 396 sales and marketing professionals, 167 production staff, 89 research and development staff, 133 administrative staff, and 174 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 17 to the Consolidated Financial Statements is hereby incorporated by reference into this Part I, Item 1.
Available Information
The Company makes available, free of charge on its internet website, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the SEC). You can find these reports on the Company’s website at www.faro.com under the heading “Investor”. The information on the Company’s website is not incorporated by reference in this Annual Report on Form 10-K.
These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at (202) 942-8090. You may also access this information at the SEC’s website (http://www.sec.gov). This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
ITEM1A. RISKFACTORS.
The statements in this section describe the most significant risks to the Company’s business and should be considered carefully in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” of this Form 10-K. These statements
constitute the Company’s cautionary statements under the Private Securities Litigation Reform Act of 1995. This Form 10-K contains forward-looking statements, which involve risks and uncertainties that could significantly impact results. In addition, the Company discusses expectations regarding its future performance and makes other forward-looking statements in its quarterly reports, press releases and other materials and written and oral statements. Forward-looking statements give current expectations or forecasts of future events about the Company. Forward-looking statements can be identified by the fact they do not relate to historical or current facts and by the use of words such as “believe,” “expect,” “estimate,” “anticipate,” “will,” “should,” “plan,”
“project,” “intend,” “could,” and similar words or expressions. In particular, these forward-looking statements include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, tax rates, foreign exchange rates, the outcome of contingencies, economic conditions, and financial results.
These forward-looking statements are based on assumptions or on known or unknown risks and
uncertainties. Forward-looking statements are not guarantees of future performance or the realization of these statements and are subject to a number of known and unknown risks, uncertainties, and inaccurate assumptions that could cause actual results to differ materially from those anticipated, estimated, projected, or expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. These statements are inherently uncertain, and events could turn out to be significantly different from the Company’s expectations. Uncertainties include factors that affect domestic and international businesses, as well as matters specific to the Company and the markets that it serves.
The following is a discussion of risks and uncertainties that the Company believes could, individually or in the aggregate, make its actual results differ materially from expected and past results. Predicting or identifying all such risks and uncertainties is not possible. As a result, the following factors should not be considered to be a complete discussion of risks and uncertainties. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
The Company’s global growth is subject to a number of economic risks
The Company’s results of operations are materially affected by the conditions in the global economy generally and in the global capital markets. As widely reported, financial markets in the United States, Europe, and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, and rating downgrades of certain investments. Although these conditions have not adversely impacted the Company’s liquidity or financial condition, these economic developments affect the Company in a number of other ways. Tightening of credit in financial markets adversely affects the ability of the Company’s customers to obtain financing, which could result in a decrease in or cancellation of orders for the Company’s products as well as impact the ability of the Company’s customers to make payments. Similarly, tightening of credit may adversely affect the Company’s supplier base and increase the potential for one or more of our suppliers to experience financial distress. In addition, as a result of decreases in business spending as well as financial difficulties and uncertainties that may be experienced by customers of the Company, the length of time for these customers to make purchase decisions has increased, and may continue to increase, and the size of such customers’ order may decrease. The Company cannot predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S., Europe, and Asia, and there can be no assurance that there will not be a further deterioration in financial markets and economic conditions in the U.S., Europe, and Asia.
The Company’s customers’ buying process for its products is highly decentralized, and therefore, it typically requires significant time and expense for the Company to further penetrate the potential market of a specific customer, which may delay its ability to generate additional revenue.
The Company’s success will depend, in part, on its ability to further penetrate its customer base. During 2008, approximately 51% of the Company’s revenue was attributable to sales to its existing customers, compared to approximately 48% in 2007. If the Company is not able to continue to penetrate its existing customer base, its
sales growth will be impaired. Most of its customers have a decentralized buying process for measurement devices. Thus, the Company must spend significant time and resources to increase revenues from a specific customer. For example, the Company may provide products to only one of its customer’s manufacturing facilities or for a specific product line within a manufacturing facility. The Company cannot be certain that it will be able to maintain or increase the amount of sales to its existing customers.
Others may develop products that make the Company’s 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 the Company’s products obsolete or less competitive. The Company cannot provide assurance that the Company will be able to adapt to evolving markets and technologies or maintain its technological advantage.
The Company’s success will depend, in part, on its ability to maintain its technological advantage by developing new products and applications and enhancing its existing products. Developing new products and applications and enhancing its existing products can be complex and time-consuming and will require substantial investment by the Company. Significant delays in new product releases or difficulties in developing new
products could adversely affect the Company’s revenues and results of operations. The Company’s customers are concentrated in a few industries and a reduction in sales to any one of these industries could cause a significant decline in the Company’s revenues.
The Company’s financial performance is dependent on the conditions of the automotive, aerospace, and heavy equipment industries.
A significant portion of the Company’s sales are to manufacturers in the automotive, aerospace and heavy equipment industries. A reduction in sales in any one of these industries could cause a significant decline in the Company’s revenues. The Company is dependent upon the continued viability and financial stability of its customers in these industries, which are highly cyclical and dependent upon the general health of the economy and consumer spending. The cyclical nature of these industries may exert significant influence on the Company’s revenues and results of operations. In addition, the volume of orders from its customers and the prices of its products may be adversely impacted by decreases in capital spending by a significant portion of its customers. If one or more of its significant customers were to become insolvent or otherwise were unable to pay for the products provided by the Company, financial performance and results of operations could be adversely affected.
The Company expects the challenging operating and financial environment currently faced by
manufacturers in the automotive, aerospace, and heavy equipment industries to continue and cannot predict the duration or severity of this challenging operating and financial environment or whether it will further deteriorate. As a result, capital spending in the automotive, aerospace, and heavy equipment industries could be adversely affected. A reduction in capital spending by manufacturers in the automotive, aerospace, and heavy equipment industries could have a significant effect on the demand for the Company’s products, which would have an adverse effect on our results of operations.
The Company’s inability to protect its patents and proprietary rights in the United States and foreign countries could adversely affect its revenues.
The Company’s success depends in large part on its ability to obtain and maintain patents and other
proprietary right protection for its processes and products in the United States and other countries. The Company also relies upon trade secrets, technical know-how and continuing inventions to maintain its competitive position. The Company seeks to protect its technology and trade secrets, in part, by confidentiality agreements with its employees and contractors. The Company’s employees may breach these agreements or the Company’s trade secrets may otherwise become known or be independently discovered by inventors. If the Company is unable to obtain or maintain protection of its patents, trade secrets and other proprietary rights, it may not be able to prevent third parties from using its proprietary rights.
The Company’s patent protection involves complex legal and technical questions. Its patents may be challenged, narrowed, invalidated or circumvented. The Company may be able to protect its proprietary rights from infringement by third parties only to the extent that its proprietary processes and products are covered by valid and enforceable patents or are effectively maintained as trade secrets. Furthermore, others may
independently develop similar or alternative technologies or design around the Company’s patented technologies. Litigation or other proceedings to defend or enforce its intellectual property rights could require the Company to spend significant time and money and could otherwise adversely affect its business.
Claims from others that the Company infringes their intellectual property rights may adversely affect its operations.
From time to time the Company receives notices from others claiming it infringes their intellectual property rights. The number of these claims may grow. Responding to these claims may require the Company to enter into royalty or licensing agreements on unfavorable terms, require it to stop selling or to redesign affected products or require it to pay damages. In addition, from time to time, the Company is involved in intellectual property lawsuits. Although it is not possible to predict with certainty the outcome of every claim and lawsuit, the Company believes that the pending claims and lawsuits against it will not individually or in the aggregate have a material impact on the Company’s results. However, the Company could in the future incur judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on the Company’s results of operations or financial condition. Any litigation or interference proceedings, regardless of their outcome, may be costly and may require significant time and attention of the Company’s management and technical personnel. Potential product failures or product availability and performance issues could result in increased warranty costs, lost sales, loss of customers and possible delays in new product introductions and enhancements.
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 increased warranty costs and delays in new product introductions, which could lead to a loss of sales.
The Company may not be able to achieve financial results within its target goals, and its operating results may fluctuate due to a number of factors, many of which are beyond its control.
The Company’s ability to achieve financial results that are within its goals is subject to a number of factors, some of which are beyond its control. Moreover, the Company’s annual and quarterly operating results have varied significantly in the past and likely will vary significantly in the future. Factors that cause the Company’s financial results to fluctuate include those set forth elsewhere in this report and the following:
• adverse changes in the manufacturing industry and general economic conditions,
• the effectiveness of sales promotions and sales of demonstration equipment;
• geographic expansion in the Asia/Pacific region and other regions;
• training and ramp-up time for new sales people;
• investments in potential acquisitions or strategic sales, product or other initiatives;
• investments in technologies and new products;
• quality issues with the Company’s products;
• shrinkage or other inventory losses due to product obsolescence, scrap or material price changes;
• the efficiencies achieved in managing inventories and fixed assets;
• expansion of the Company’s manufacturing capability and other inflationary pressures;
• the size and timing of customer orders, many of which are received towards the end of the quarter;
• the amount of time that it takes to fulfill orders and ship the Company’s products;
• the length of the Company’s sales cycle to new customers and the time and expense incurred in further penetrating its existing customer base;
• increases in operating expenses for product development and new product marketing;
• costs associated with new product introductions, such as assembly line start-up costs and low introductory period production volumes;
• the timing and market acceptance of new products and product enhancements;
• customer order deferrals in anticipation of new products and product enhancements;
• the Company’s success in expanding its sales and marketing programs;
• start-up costs and ramp-up time associated with opening new sales offices outside of the United States;
• potential decreases in revenue without proportionate adjustments in fixed costs;
• changes in gross margins due to: lower average selling prices, changing product mix of products sold and the different gross margins on different products;
• variations in the effective income tax rate and the difficulty in predicting the tax rate on a quarterly and annual basis;
• compliance with government regulations including health, safety, and environmental matters;
• litigation and regulatory action brought against the Company; and
• the other risks identified herein
Any one or a combination of these factors could adversely affect the Company’s annual and quarterly operating results in the future and could cause it to fail to achieve its target financial results.
The CAM2 market is an emerging market and the Company’s growth depends on the ability of the Company’s products to attain broad market acceptance.
The market for traditional fixed-base CMMs, check fixtures, handheld measurement tools, and surveying equipment is mature. Part of the Company’s strategy is to continue to displace these traditional measurement devices. Displacing traditional measurement devices and achieving broad market acceptance of the Company’s products requires significant effort to convince manufacturers to reevaluate their historical measurement procedures and methodologies.
The CAM2 market is emerging. The potential size and growth rate of this market is uncertain and difficult to quantify. If the CAM2 market does not continue to expand or does not expand as quickly as the Company anticipates, it may not be able to continue its sales growth, which may affect its results of operations.
The Company markets five closely interdependent products (FaroArm, FARO Laser ScanArm, 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 of the Company’s revenues are currently derived from sales of these products and software and it plans to continue its business strategy of focusing on the portable software- driven, 3-D measurement and inspection market. Consequently, the Company’s financial performance will depend in large part on portable, computer-based measurement, inspection, and high density surveying products achieving broad market acceptance. If its products cannot attain broad market acceptance, the Company will not grow as anticipated and may be required to make increased expenditures on research and development for new applications or new products.
