FARO Technologies, Inc.

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FARO Technologies, Inc.

CANADIAN ROOTS: 1981

SWITCH TO NEW MARKETS: 1992

CANADIAN ROOTS: 1981

FARO was founded in 1981 as Res-Tech by a pair of biomedical engineering doctoral students at McGill University in Montreal, Canada: Simon Raab and Greg Fraser. Raab also held a degree in physics from the University of Waterloo, Canada, and a master’s of engineering physics from Cornell University. Prior to his doctorate Fraser earned an undergraduate degree in mechanical engineering and a master’s of theoretical and applied mechanics from Northwestern University. In 1983 the company assumed the FARO Technologies Inc. name, with Raab serving as chief executive officer. The firm was initially a research and development company, interested in developing software-aided devices to assist physicians in diagnostics and surgery. FARO’s first product was introduced in 1984, an articulated-arm device used to measure laxity in the knee. Subsequent models introduced in the 1980s offered greater capabilities. The Genucom Knee Analysis System generated a three-dimensional image of the knee, providing surgeons with far more information about the severity of an injury than they could achieve with mere touch. As a result, surgeons could make better informed decisions on how to correct the damaged knee. The device held obvious appeal for sports medicine, which dealt with a large number of severe knee injuries. Because so many high-salaried athletes were involved, sports medicine centers were willing to invest in the latest technology.

The partners had one failing, however. “As engineering egghead entrepreneurs, we didn’t understand marketing,” Raab told Investor’s Business Daily. “We got only 10% market penetration among 9,000 knee surgeons.” Ultimately the Genucom was discontinued. However, in the early years of the company, Raab and Fraser spent a great deal of their time on the road, either attending trade shows or demonstrating their devices at hospitals. Thus, they were able to interact with the users of their equipment and others, then use that feedback to further designs and develop new devices. In 1986 the company introduced Metrecom, a skeletal analysis system that detected abnormalities in the spine that caused neck and back problems. It was used by doctors as well as physical therapists and chiropractors to develop treatments. Two years later, FARO introduced a device called Surgicom to map the human brain by joining measurements with MRI and CAT scan information, allowing surgeons to locate difficult-to-find tumors and remove them with a minimum loss of bone and tissue.

In order to be closer to the bulk of their customers, Raab and Fraser decided to relocate to the United States. Because Raab had relatives living in central Florida the pair moved their operation to Lake Mary, Florida, in 1990. Around the same time, Raab and Fraser met a Martin-Marietta engineer who convinced them that there was a market for their technology in the field of industrial measurement, in particular the need for a portable device similar to the ones FARO had already produced, but to measure large parts and assemblies. While there were industrial measuring devices on the market, they were cumbersome and sensitive, and housed in metrology laboratories where they could provide only limited help. No three-dimensional measuring systems were available to provide information on the factory floor where they were needed. Moreover, the software component of the available systems was arcane and not easily used by the assemblers and machinists.

SWITCH TO NEW MARKETS: 1992

Raab and Fraser decided to fill this gap, and in 1992 FARO focused on the manufacturing and industrial markets, the same year that the company was reincorporated in Florida. The direct sale of medical products was phased out and FARO’s technology was licensed to two major neurosurgical companies, including Medtronic, Inc., which would incorporate the Surgicom advances into standard equipment used in neuro-surgery around the world. By 1994 FARO had essentially reinvented itself while pioneering a new field that combined metrology with the software used in computer-aided design and computer-aided manufacturing. FARO called this new market Computer-Aided Manufacturing Measurement, or CAM2 as it would become known.

COMPANY PERSPECTIVES

With more than 13,000 installations and 6,100 customers globally, FARO Technologies, Inc. (NASDAQ: FARO) and its international subsidiaries design, develop, and market portable, computerized measurement devices and software. The Company’s products allow manufacturers to perform 3-D inspections of parts and assemblies on the shop floor. This helps eliminate manufacturing errors, and thereby increases productivity and profitability for a variety of industries in FARO’s worldwide customer base.

FARO developed the FaroArm, which looked like a miniature space shuttle arm and was the cornerstone of a portable measuring system that was tough enough to withstand the production environment, highly accurate, yet easy to use. The companion software component took the name AnthroCAM. The new industrial measuring devices were quickly embraced by the aerospace industry, used to measure inside jet engines and refurbish airplanes. Very quickly, the number of different applications mushroomed. By 1995 the FaroArm was being used by a casket company to locate and drill handle holes, reducing an eight-hour process to just 15 minutes; prosthetic companies were using them to fashion artificial limbs; anthropologists brought the devices with them on digs; race-car builders were using them to transfer wind tunnel information to the shop to create aerodynamic cars; and race-car organizations began relying on the FaroArm to conduct prerace inspections that were quicker and more accurate. Automakers also embraced the FaroArm, used in a number of applications including the analysis of test crashes. Business was so strong that by 1995 FARO opened a Detroit office. In that year the company also introduced an even smaller measuring device, a $3,000 unit that was marketed to artists and animators.

Sales grew from $4.7 million in 1992 to $5.1 million in 1993, before dipping to $4.5 million a year later. The company lost nearly $1 million during this period. FARO turned profitable in 1995 after making a concerted effort to reach international customers. Revenues increased to $9.9 million in 1995, with international sales contributing $2.1 million, and the company posted earnings of $1.6 million. A year later FARO opened sales offices in France and Germany, followed by a United Kingdom office in 1997. Domestically, the company also opened sales offices in Chicago, Dallas, Los Angeles, and Seattle. As a result of growing sales home and abroad, FARO’s revenues increased to $14.7 million in 1996 and $23.5 million in 1997. During this period, the company recorded net income of $1.4 million in 1996 and $3.2 million in 1997.

In 1997 FARO went public. In an initial public offering of stock completed in September, the company sold 1.7 million shares, and individuals sold another 600,000 shares, netting $31.7 million for the company. The money was earmarked to pay down debt and provide funds for capital improvement, such as doubling the size of the Lake Mary facility to 35,000 square feet at a cost of $1 million, and general corporate purposes, including possible acquisitions.

FARO’s first acquisition was completed in May 1998 when the company bought CATS Computer Aided Technologies GmbH, a German manufacturer of portable, three-dimensional measuring systems used in manufacturing quality control, for approximately $16 million in cash and stock. Not only did FARO expand its reach to all areas of the factory floor, it hoped to take advantage of its international marketing organization to better promote the CATS system. Moreover, CATS’ strong software capabilities helped to refine FARO’s AnthroCAM system, resulting in the CAM2 Measure software program.

While FARO improved sales to $27.5 million in 1998, net income slipped to $500,000, primarily due to the CATS acquisition. The business continued to expand in 1999, when FARO also made progress with a branding initiative, introducing new logos and product names, as well as positioning statements. Furthermore, in 1999 the company established the MQC (Manufacturing Quality Group) to provide large and small manufacturers with quality assurance measurement services. In connection with this new unit, FARO opened a Detroit-based technology center to serve the automotive industry. When the year came to a close, FARO recorded an increase in sales to $33.1 million. Fourth quarter write-downs, however, resulted in a net loss of $400,000.

NEW CENTURY EXPANSION

Soon after the start of the 2000s, FARO opened a new European headquarters, located in a 14,000-square-foot facility in Stuttgart, Germany. The company also opened an office in Japan in 2000 to improve its position in the Asian market. FARO essentially broke even in 2000, netting almost $40,000 on revenues of $40.5 million. The strongest growth came from Germany, France, and the United Kingdom, where sales improved 33 percent. Sales in the United States also improved 13 percent over 1999.

FARO expanded its European presence in 2001 by opening sales offices in Turin, Italy, and Barcelona, Spain. Both countries had strong automotive and aerospace industries, making them logical customers for FARO’s CAM2 products and services. Nevertheless, 2001 was a difficult year for FARO because of a slumping economy that adversely impacted the manufacturing sector, which was dealt a further blow by the terrorist attacks in the United States on September 11 that served to worsen economic conditions. Sales declined to $36.1 million and the company posted a net loss of more than $2.8 million.

KEY DATES

1981:: Company is founded in Canada as Res-Tech by Simon Raab and Greg Fraser.
1983:: FARO name is assumed.
1984:: Knee measuring device is company’s first product.
1990:: Company relocates to Florida.
1992:: FARO becomes involved in Computer-Aided Manufacturing Measurement, CAM2.
1997:: Initial public offering is held.
1998:: CATS (Computer Aided Technologies) GmbH is acquired.
2002:: SpatialMetrix Corp. is acquired.
2005:: iQvolution AG is acquired.

Early in 2002, FARO diversified its product lineup through the acquisition of Kennett Square, Pennsylvania-based SpatialMetrix Corporation (SMX), a manufacturer of laser trackers and metrology software, and a provider of inspection services. That gave birth to the FARO Laser Tracker, which used an extremely precise laser beam to measure objects in a radius as large as 115 feet. The company also fortified its existing product by introducing new generation FaroArms, dubbed the Platinum FaroArm, FARO Gage, and Gage-PLUS, which were lighter, more durable, and provided even greater precision. FARO rebuilt sales and returned to profitability in the second half of 2002, although for the year it lost $2 million on sales of $46.2 million.

FARO’s international business showed strong growth, especially in China, which was just beginning to incorporate many aspects of modern technology. FARO also looked to expand its range of customers, targeting small manufacturers and machine shops, who wanted to perform advanced measurements, CAD-to-part comparisons, and reverse engineering, but do so within a tight budget without sacrificing quality. To tap into this market, FARO in 2003 introduced the Advantage Line of Measurement Products, ranging in price from $19,900 to $69,900. On the other end of the spectrum, FARO unveiled the first fully integrated 3-D Laser ScanArm in 2003, combining the capabilities of the Arm’s hand probe with a laser scanner. All of these positive developments combined to produce a banner year. Sales increased to $71.8 million and the company netted $8.3 million. Business continued to improve in 2004, when sales jumped to more than $97 million and net income approached $15 million.

In March 2005, FARO added more markets it could sell to, including mining, geology, architecture, petrochemical, and forensics, through the acquisition of iQvolution AG, a small German company that made three-dimensional laser scanning products used for factory planning, facility life-cycle management, quality control, and forensic analysis. Record results continued in 2005, as sales pushed past the $125 million mark, while the company netted $8.2 million.

Early in 2006 FARO made changes at the top management ranks when President and Chief Operating Officer Jay Freeland was named co-CEO with Raab. Freeland essentially took over day-to-day control of the company while Raab, who was also chairman of the board, focused on overall strategy as well as product and business development. Freeland was taking the helm at a time when FARO was clearly hitting its stride. New product launches continued in 2006, including a new low-cost version of the Laser Scanner product line, the FARO PowerGAGE that added CAD-to-part analysis capability for its Gage line, and an updated version of the company’s laser scanning software. As the year came to a close Freeland was named CEO, while Raab remained on the board of directors as nonexecutive chairman, all part of a succession plan. When the numbers were tallied, FARO posted sales of $152 million in 2006 and net income of $8.2 million.

Ed Dinger