item 14 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements following consolidated financial statements faro technologies inc report deloitte touche llp independent certified public accountants incorporated reference pages 15 24 registrants 1997 annual report stockholders consolidated balance sheets december 31 1996 1997 consolidated statements income years ended december 31 1995 1996 1997 consolidated statements shareholders equity years ended december 31 1995 1996 1997 consolidated statements cash flows years ended december 31 1995 1996 1997 notes consolidated financial statements independent auditors report 2 financial statement schedules listed herein omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date march 26 1998 gregory fraser gregory fraser phd executive vice president secretary treasurer chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 14 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report deloitte touche llp independent certified public accountants filed part form 10k 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc greg fraser gregory fraser phd executive vice president secretary treasurer chief financial officer dated april 2 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit index exhibit page 1013 faro oem purchase agreement dated march 12 1999 company brown sharpe manufacturing company filed herewith 211 list subsidiaries filed herewith 231 consent deloitte touche llp filed herewith 271 financial data schedule year ended december 31 1998 991 propertiesitem 14 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report deloitte touche llp independent certified public accountants filed part form 10k 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc stuart w jones stuart w jones vice president chief financial officer principal financial accounting officer dated march 29 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab phd gregory fraser phd stuart w jones individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 14 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report ernst young llp independent certified public accountants filed part form 10k additionally included exhibit 992 unaudited financial statements spatialmetrix corporation smx two years period ended december 31 2001 unaudited pro forma financial information pertaining acquisition smx 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc gregory fraser gregory fraser executive vice president secretary treasurer duly authorized officer principal financial officer date march 27 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 14 controls procedures company currently place systems relating internal controls procedures respect financial information management periodically reviews evaluates internal control systems internal auditors independent accountants company completed review evaluation connection preparation annual report company determined significant changes internal controls factors could significantly affect controls subsequent recent evaluation company believes internal controls effective company cannot provide assurance current internal controls change future reflect potentially new rules sec part iv item 15item 14 principal accountant fees services information required item incorporated reference proxy statement caption principal accountant fees services part iv item 15item 14 principal accountant fees services information required item incorporated herein reference information included caption entitled “our independent auditors” set forth proxy statement schedule ii valuation qualifying accounts valuation qualifying accounts follows three years ended december 31 2004 report independent registered public accounting firm board directors shareholders faro technologies inc audited accordance standards public company accounting oversight board united states consolidated financial statements faro technologies inc subsidiaries referred report dated march 14 2005 included annual report shareholders audit conducted purpose forming opinion basic financial statements taken whole schedule ii presented purposes additional analysis required part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects relation basic financial statements taken whole grant thornton llp orlando florida march 14 report independent registered public accounting firm board directors shareholders faro technologies inc audited consolidated financial statements faro technologies inc december 31 2003 two years period ended december 31 2003 issued report thereon dated february 20 2004 included elsewhere annual report audit also included information shown schedule ii annual report schedule responsibility companys management responsibility express opinion based audit opinion financial statement schedule referred considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp orlando florida february 20 2004 part iv item 15item 14 principal accountant fees services independent public accountants grant thornton llp independent public accountants audited company’s consolidated financial statements fiscal years ended december 31 2004 december 31 2005 grant thornton llp selected audit committee serve company’s independent auditors current fiscal year fees paid grant thornton llp audit committee concluded provision audit permitted nonaudit services described grant thornton llp compatible maintaining independence grant thornton llp pursuant audit committee charter audit committee preapproved services audit committee established preapproval policies procedures respect audit permitted nonaudit services provided independent auditors pursuant policies procedures audit committee may form delegate authority subcommittees consisting one members appropriate grant preapprovals provided decisions subcommittee grant preapprovals presented full audit committee next scheduled meeting audit committee’s preapproval policies permit delegation audit committee’s responsibilities management part iv item 15item 14 principal accountant fees services information required item incorporated herein reference information included caption entitled “our independent auditors” set forth proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated herein reference information included caption entitled “independent public accountants” set forth proxy statement part iv item 15item 14 principal accountant fees services information required item incorporated herein reference information included caption entitled “independent public accountants” set forth proxy statement part iv item 15item 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item principal accounting fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report ernst young llp independent certified public accountants filed part form 10k 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits b reports form 8k change registrants certifying accountants filed august 21 2000 sec signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc gregory fraser gregory fraser executive vice president secretary treasurer duly authorized officer principal financial officer date march 30 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item principal accounting fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information required item principal accountant fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information required item principal accounting fees services well related preapproval policies appears heading “independent public accountants” proxy statement incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations information required item incorporated reference pages 10 14 companys 1997 annual report stockholders item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops markets supports portable softwaredriven 3d measurement systems used broad range manufacturing industrial applications may 1998 company acquired cats computer aided technologies gmbh cats german company develops markets cadbased inspection statistical process control spc software companys principal products faroarmregistered trademark articulated measuring device multifaceted anthrocamregistered trademark software provides cadbased inspection portable fixedbase cmms factorylevel statistical process control together products integrate measurement quality inspection function cad cam computeraided engineering cae technology improve productivity enhance product quality decrease rework scrap manufacturing process companys products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor company pioneer development marketing 3d measurement technology manufacturing industrial applications currently holds pending 23 patents united states 13 also held pending jurisdictions companys products purchased 1100 customers worldwide ranging small machine shops large manufacturing industrial companies general motors daimlerchrysler ford boeing lockheed martin general electric westinghouse electric caterpillar komatsu dresser inception 1982 1992 company focused providing computerized 3d measurement devices orthopedic neurosurgical markets period company introduced knee laxity measurement device diagnostic tool measuring posture scoliosis back flexibility surgical guidance device utilizing sixaxis articulated arm 1992 effort capitalize demand 3d portable measurement tools factory floor company made strategic decision target core measurement technology manufacturing industrial markets order focus manufacturing industrial applications technology company phased direct sale medical products entered licensing agreements two major neurosurgical companies medical technology 1995 company made strategic decision target international markets company established sales offices france germany 1996 great britain 1997 international sales represented 261 sales 1996 350 sales 1997 57 sales 1998 company derives revenues primarily sale faroarmregistered trademark sixaxis articulated measuring device multifaceted anthrocamregistered trademark software revenue related products recognized upon shipment revenue growth resulted increased unit sales due expanded sales effort included addition sales personnel existing offices opening new sales offices expanded promotional efforts acquisition cats september 1998 company announced introduction new product line consisting two additional faroarm models addition 3 new software components anthrocam family cats acquisition addition providing oneyear basic warranty without additional charge company offers customers one two threeyear extended maintenance contracts include online help services software upgrades hardware warranties addition company sells training technology consulting services relating products company recognizes revenue extended maintenance contracts proportionately costs projected incurred cost sales consists primarily material production overhead labor selling expenses consist primarily salaries commissions sales marketing personnel promotion advertising travel telecommunications general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses research development expenses represent salaries equipment thirdparty services accounting whollyowned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected companys consolidated financial statements although company historically engaged hedging transactions limit risks currency fluctuations intends future results operations following table sets forth periods presented percentage sales represented certain items companys consolidated statements operations 1998 compared 1997 sales increased 40 million 170 235 million 1997 275 million 1998 increase result increases sales europe 54 million canada 634000 offset decreases sales asia 992000 united states 841000 gross profit gross profit increased 23 million 167 139 million 1997 162 million 1998 increase result proportional increase sales 1998 gross margin 590 virtually unchanged 591 1997 selling expenses selling expenses increased 43 million 755 57 million 1997 100 million 1998 increase primarily result 100 increase number sales marketing staff resulting sales activities number sales marketing employees grew 34 december 31 1997 68 december 31 1998 cost per sales employee higher 1998 part result greater proportion primarily result cats acquisition european employees higher cost payroll benefits travel costs europe general administrative expenses general administrative expenses increased 16 million 1080 15 million 1997 32 million 1998 increase resulted primarily increased number administrative personnel companys headquarters acquisition cats depreciation amortization expenses depreciation amortization expenses increased 25 million 8579 294000 1997 28 million 1998 increase primarily due 22 million amortization expenses related intangible assets associated companys acquisition cats research development expenses research development expenses increased 15 million 1406 11 million 1997 26 million 1998 increase result increase number research development employees 14 december 31 1997 43 december 31 1998 employee stock options employee stock option expenses decreased 236000 578 408000 1997 172000 1998 decrease result reduction amortized deferred compensation expense relating stock options issued 1995 1997 options issued 1998 compensation expense recorded exercise price options equal market price day grant inprocess research development resulting acquisition may 15 1998 company acquired cats 5 million 916668 companys common stock assumption certain liabilities 32 million portion purchase price attributed process research development expensed immediately interest income interest income increased 635000 1436 442000 1997 11 million 1998 increase result full year interest 1998 remaining portion proceeds companys initial public offering september 1997 compared approximately three months interest portion proceeds invested 1997 income tax expense income tax expense decreased 17 million 787 21 million 1997 451000 1998 income tax provision 1998 results primarily companys us operations taxable position deferred tax benefit companys foreign loss offset 3 million valuation allowance net income loss companys net income loss 1998 decreased 81 million net income 32 million 1997 net loss 49 million 1998 decrease result onetime inprocess research development charge 32 million amortization costs related cats acquisition 22 million higher sales general administrative research development expenses percentage sales 1997 compared 1996 sales increased 89 million 605 146 million 1996 235 million 1997 increase primarily result increased unit sales due expanded sales effort included addition sales personnel existing offices opening sales offices international sales increased 350 total sales 1997 261 1996 part increased sales european countries company sales offices increased sales several international distributors gross profit gross profit increased 57 million 702 82 million 1996 139 million 1997 gross margin increased 557 1996 591 1997 margin increase attributable reduction product costs result technological improvements purchasing economies production efficiencies selling expenses selling expenses increased 19 million 521 37 million 1996 57 million 1997 increase result companys expansion sales marketing staff united states europe expanded promotional efforts specifically hiring training salary expenses increased 965000 sales commissions bonuses increased 378000 promotional expenses increased 333000 selling expenses percentage sales decreased 255 1996 241 1997 general administrative expenses general administrative expenses increased 775000 1042 774000 1996 15 million 1997 increase resulted primarily hiring additional administrative personnel increases professional legal expenses part result companys periodic reporting requirements securities exchange commission resulting companys initial public offering september 1997 general administrative expenses percentage sales increased 51 1996 65 1997 research development expenses research development expenses increased 345000 473 730000 1996 11 million 1997 increase primarily result 246000 increase hiring training salary cost related new personnel research development expenses percentage sales decreased 50 1996 46 1997 growth expenses match percentage growth sales employee stock options expenses employee stock options expenses increased 385000 23000 1996 408000 1997 increase primarily attributable grant 52733 options may 1997 made exercise price fair market value common stock date grant income increased 475000 25000 1996 500000 1997 increase attributable interest income 30 million proceeds companys initial public offering 1997 interest expense interest expense decreased 102000 479 213000 1996 111000 1997 reduction attributable refinancing companys indebtedness lower interest rate also utilization proceeds companys initial public offering repay indebtedness income tax expense income tax expense increased 999000 895 11 million 1996 21 million 1997 provision income taxes percentage income taxes 442 twelve months 1996 397 twelve months 1997 lower effective tax rate 1997 higher research development tax credit creation foreign sales corporation net income net income increased 18 million 1280 14 million 1996 32 million 1997 increase result increased sales higher gross margin 442000 interest income 1997 zero 1996 lower tax rate liquidity capital resources september 1997 company completed initial public offering common stock provided net proceeds 317 million year ended december 31 1998 net cash used operating activities 31 million compared net cash used operating activities 705000 1997 net cash decreased due increases accounts receivable inventories accounts payable net cash used investing activities 252 million year ended december 31 1998 compared 792000 1997 net cash used investing activities increased 1998 primarily due 170 million increase short term investments 57 million acquisition business net cash acquired 10 million purchases property equipment related expansion companys headquarters net cash provided financing activities year ended december 311998 288000 compared net cash provided financing activities 302 million 1997 company invests excess cash balances shortterm investment grade securities money market investments obligations us government agencies obligations state local government agencies april 1997 company obtained oneyear secured 10 million line credit bears interest 30day commercial paper rate plus 265 per annum outstanding borrowings loan agreement december 31 1997 company available two financial institutions shortterm revolving lines credit aggregating 445000 lines subsidiary may borrow funds operations lines credit personally guaranteed certain shareholders amount outstanding lines december 31 1998 approximately 296000 average interest rates borrowings december 31 1998 9 companys principal commitments december 31 1998 leases headquarters regional offices material commitments capital expenditures date company believes cash investments cash flows operations funds available credit facilities sufficient satisfy working capital expenditure needs least 1999 foreign exchange exposure sales outside united states represent significant portion companys total revenues currently majority companys revenues expenses invoiced paid us dollars future company expects greater portion revenues denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect companys business results operations financial condition particularly operating margins could also result exchange losses impact future exchange rate fluctuations results companys operations cannot accurately predicted historically company managed risks associated fluctuations exchange rates intends undertake transactions manage risks future extent percentage companys nonus dollar revenues derived international sales increases future risks associated fluctuations foreign exchange rates increase company may use forward foreign exchange contracts foreign currency options hedge risks inflation company believes inflation material impact results operations recent years expect inflation material impact operations 1999 year 2000 company invested significant resources latest information technologies past five years therefore minimized effect year 2000 issues management initiated program evaluate internal computer systems applications products computer systems determined adjustments necessary become year 2000 compliant management confident existing internal resources sufficient correct internal systems deficiencies may determined company set target date september 30 1999 complete compliance internal computer systems applications products company also made inquiries major suppliers customers thirdparty entities business relations obtain assurances year 2000 compliance however assurance systems companies company relies timely corrected failure another company correct systems would material adverse effect company contingency plans currently developed implemented event information technology system noninformation technology system third party supplier year 2000 compliant timely manner total cost company year 2000 compliance activities anticipated material financial position results operations given year company provision 12500 per quarter 1999 cover cost unexpected corrections internal sysytems product deficiencies costs based managements best estimates derived utilizing numerous assumptions future events including continued availability certain resources third party modification plans factors however guarantee estimates achieved actual results could differ plans item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops markets supports portable softwaredriven 3d measurement systems used broad range manufacturing industrial applications may 1998 company acquired cats computer aided technologies gmbh cats german company develops markets cadbased inspection statistical process control spc software companys principal products faroarmr articulated measuring device multifaceted cam2 formerly anthrocamr software provides cadbased inspection portable fixedbase cmms factorylevel statistical process control together products integrate measurement quality inspection function cad cam computeraided engineering cae technology improve productivity enhance product quality decrease rework scrap manufacturing process companys products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor company pioneer development marketing 3d measurement technology manufacturing industrial applications currently holds pending 30 patents united states 19 also held pending jurisdictions companys products purchased 1500 customers worldwide ranging small machine shops large manufacturing industrial companies general motors daimlerchrysler ford boeing lockheed martin general electric westinghouse electric caterpillar komatsu dresser inception 1982 1992 company focused providing computerized 3d measurement devices orthopedic neurosurgical markets period company introduced knee laxity measurement device diagnostic tool measuring posture scoliosis back flexibility surgical guidance device utilizing sixaxis articulated arm 1992 effort capitalize demand 3d portable measurement tools factory floor company made strategic decision target core measurement technology manufacturing industrial markets order focus manufacturing industrial applications technology company phased direct sale medical products entered licensing agreements two major neurosurgical companies medical technology 1995 company made strategic decision target international markets company established sales offices france germany 1996 great britain 1997 international sales represented 343 sales 1997 464 sales 1998 466 sales 1999 company derives revenues primarily sale faroarmr sixaxis articulated measuring device multifaceted cam2 software revenue related products recognized upon shipment revenue growth resulted increased unit sales due expanded sales effort included addition sales personnel existing offices opening new sales offices expanded promotional efforts acquisition cats september 1998 company announced introduction new product line consisting two additional faroarm models addition 3 new software components cam2 family cats acquisition addition providing oneyear basic warranty without additional charge company offers customers one two threeyear extended maintenance contracts include online help services software upgrades hardware warranties addition company sells training technology consulting services relating products company recognizes revenue extended maintenance contracts proportionately costs projected incurred cost sales consists primarily material production overhead labor selling expenses consist primarily salaries commissions sales marketing personnel promotion advertising travel telecommunications general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses research development expenses represent salaries equipment thirdparty services accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected companys consolidated financial statements although company historically engaged hedging transactions limit risks currency fluctuations intends future results operations following table sets forth periods presented percentage sales represented certain items companys consolidated statements operations 1999 compared 1998 sales increased 56 million 204 275 million 1998 331 million 1999 increase resulted increases us 30 million 204 147 million 177 million three european countries direct company presence 21 million 247 85 million 106 million remainder world increase 05 million 116 43 million 48 million gross profit gross profit increased 27 million 167 162 million 1998 189 million 1999 increase resulted increase sales partially offset unusual charges 06 million related excess obsolete inventory 05 million warranties 01 million excluding unusual charges gross profit 195 million 589 gross margin percentage 1998 selling expenses selling expenses increased 21 million 210 100 million 1998 121 million 1999 increase primarily resulted selling expenses germany increased 14 million full year expenses 1999 german acquisition compared seven half months 1998 increase number sales marketing employees europe selling expenses also increased 04 million resulting unusual writedown demonstration inventory identified thorough worldwide physical inventory us salaries commissions advertising trade shows also increased partially offset lower spending promotions general administrative expenses general administrative expenses increased 18 million 563 32 million 1998 50 million 1999 increase primarily resulted general administrative expenses germany increased 11 million full year expenses 1999 compared seven half months 1998 general administrative expenses also increased due higher salaries outside services professional legal expenses unusual third quarter charges 02 million primarily writeoffs doubtful accounts residual costs related german acquisition partially offset lower bonuses 01 million unusual credit depreciation amortization expenses depreciation amortization expenses increased 17 million 607 28 million 1998 45 million 1999 increase primarily resulted 10 million unusual expenses 07 million amortization software development costs 02 million depreciation property equipment 01 million amortization patents remaining economic value unusual expenses resulted review companys assets determined certain patents capitalized research development costs written due changes technology additionally full year amortization intangible assets resulting german acquisition increased amortization expense 1999 03 million research development expenses research development expenses increased 12 million 462 26 million 1998 38 million 1999 increase primarily resulted increase number us research development employees 06 million full year research development expenses germany 1999 compared seven half months expenses 1998 04 million unusual charge 02 million writeoff capitalized research development costs products longer sold company employee stock option expenses employee stock option expenses decreased 3000 17 172000 1998 169000 1999 decrease result reduction amortized deferred compensation expense related stock options issued 1995 1997 options issued 1999 compensation expense recorded exercise price options equal market price day grant impairment loss acquired intangible assets unusual impairment loss 31 million recorded 1999 reflect impairment intangible assets resulting german acquisition may 15 1998 impairment resulted companys revised forecast cash flows expected developed core software technology acquired german acquisition amortization expenses 2000 drop approximately 850000 present exchange rates result impairment loss income increased 04 million 4000 01 million 1998 05 million 1999 increase resulted principally increase royalty income increase licensing fees companys medical technologies 1999 interest income interest income decreased 04 million 364 11 million 1998 07 million 1999 decrease primarily resulted reduction companys cash invested acquisition german company reduced companys cash invested twelve months 1999 seven half months 1998 addition cash invested loweryielding tax exempt municipal bonds 1999 income tax benefit expense income tax benefit increased 16 million 05 million expense 1998 11 million benefit 1999 benefit resulted companys us operations taxable loss deferred tax benefit companys foreign loss including impairment loss offset 31 million valuation allowance net loss companys net loss increased 25 million 510 49 million 1998 74 million 1999 increase resulted primarily unusual impairment loss acquired intangible assets 31 million offsetting tax benefit intangible assets resulting acquisition germany unusual operating charges 23 million higher recurring general administrative research development expenses percentage sales also contributed higher net loss partially offset 16 million increase income tax benefit net loss includes 25 million amortization intangibles related german acquisition increase 03 million 1998 compared 1997 sales increased 40 million 170 235 million 1997 275 million 1998 increase result increases sales europe 54 million canada 06 million offset decreases sales asia 10 million united states 08 million gross profit gross profit increased 23 million 167 139 million 1997 162 million 1998 increase result proportional increase sales 1998 gross margin 590 virtually unchanged 591 1997 selling expenses selling expenses increased 43 million 755 57 million 1997 100 million 1998 increase primarily result 100 increase number sales marketing staff resulting sales activities number sales marketing employees grew 34 december 31 1997 68 december 31 1998 cost per sales employee higher 1998 part result greater proportion primarily result cats acquisition european employees higher cost payroll benefits travel costs europe general administrative expenses general administrative expenses increased 17 million 1133 15 million 1997 32 million 1998 increase resulted primarily increased number administrative personnel companys headquarters acquisition cats depreciation amortization expenses depreciation amortization expenses increased 25 million 8333 03 million 1997 28 million 1998 increase primarily due 22 million amortization expenses related intangible assets associated companys acquisition cats research development expenses research development expenses increased 15 million 1364 11 million 1997 26 million 1998 increase result increase number research development employees 14 december 31 1997 43 december 31 1998 employee stock options employee stock option expenses decreased 02 million 500 04 million 1997 02 million 1998 decrease result reduction amortized deferred compensation expense relating stock options issued 1995 1997 options issued 1998 compensation expense recorded exercise price options equal market price day grant inprocess research development resulting acquisition may 15 1998 company acquired cats 5 million 916668 shares companys common stock assumption certain liabilities 32 million portion purchase price attributed inprocess research development expensed immediately interest income interest income increased 07 million 1750 04 million 1997 11 million 1998 increase result full year interest 1998 remaining portion proceeds companys initial public offering september 1997 compared approximately three months interest portion proceeds invested 1997 income tax expense income tax expense decreased 16 million 762 21 million 1997 05 million 1998 income tax provision 1998 results primarily companys us operations taxable position deferred tax benefit companys foreign loss offset 3 million valuation allowance net income loss companys net income loss 1998 decreased 81 million net income 32 million 1997 net loss 49 million 1998 decrease result onetime inprocess research development charge 32 million amortization costs related cats acquisition 22 million higher sales general administrative research development expenses percentage sales liquidity capital resources september 1997 company completed initial public offering common stock provided net proceeds 317 million total marketable securities cash equivalents shortterm investments december 31 1999 169 million compared 182 million december 31 1998 year ended december 31 1999 net cash provided operating activities 15 million compared net cash used operating activities 31 million 1998 net cash provided operating activities 1999 increased primarily due noncash depreciation amortization 45 million impairment loss 31 million increases accounts payable accrued liabilities 24 million partially offset net loss 74 million increases accounts receivable 10 million net cash excluding shortterm investments provided investing activities primarily conversions investments cash equivalents yielded equivalent interest rates year end year ended december 31 1999 53 million compared net cash used investing activities 252 million 1998 net cash provided investing activities increased 1999 primarily due decreases investments 68 million partially offset purchases property equipment 11 million payments intangible assets 03 million net cash used financing activities year ended december 31 1999 03 million compared net cash provided financing activities 03 million 1998 company invests excess cash balances shortterm investment grade securities money market investments obligations us government agencies obligations state local government agencies exchange rate changes resulted 11 million impact companys cash april 1997 company obtained oneyear secured 10 million line credit bears interest 30day commercial paper rate plus 265 per annum line credit extended twice additional oneyear terms outstanding borrowings loan agreement december 31 1999 companys principal commitments december 31 1999 leases headquarters regional offices material commitments capital expenditures date company believes cash investments cash flows operations funds available credit facilities sufficient satisfy working capital expenditure needs least 2000 foreign exchange exposure sales outside united states represent significant portion companys total revenues present majority companys revenues expenses invoiced paid us dollars future company expects greater portion revenues denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect companys business results operations financial condition particularly operating margins could also result exchange losses impact future exchange rate fluctuations results companys operations cannot accurately predicted historically company managed risks associated fluctuations exchange rates intends undertake transactions manage risks future extent percentage companys nonus dollar revenues derived international sales increases future risks associated fluctuations foreign exchange rates increase company present evaluating may use foreign exchange contracts foreign currency options hedge risks inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2000 year 2000 fiscal 1999 company completed companywide program prepare companys computer systems year 2000 compliance year 2000 issue relates computer systems use last two digits rather four define year whether systems would properly accurately process information year changed 2000 date report company experienced material problems related year 2000 company become aware significant year 2000 issues affecting companys major customers suppliers company anticipate material complaints regarding year 2000 issues related products year 2000 related costs december 31 1999 limited employees time expensed incurred remaining estimated cost address additional year 2000 problems deemed immaterial significant information system projects deferred accommodate year 2000 issues item 8item 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops markets supports portable software driven 3d measurement systems used broad range manufacturing industrial applications companys principal products control station control station pro formerly faroarmr articulated measuring devices companion soft check tool cam2 software respectively provide cadbased inspection factorylevel statistical process control together products integrate measurement quality inspection function cad software improve productivity enhance product quality decrease rework scrap manufacturing process companys products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor company pioneer development marketing 3d measurement technology manufacturing industrial applications currently holds pending 29 patents united states 19 also held pending jurisdictions companys products purchased approximately 2900 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimlerchrysler general electric general motors honda johnson controls komatsu dresser lockheed martin siemens volkswagen among many others inception 1982 1992 company focused providing computerized 3d measurement devices orthopedic neurosurgical markets period company introduced knee laxity measurement device diagnostic tool measuring posture scoliosis back flexibility surgical guidance device utilizing sixaxis articulated arm 1992 effort capitalize demand 3d portable measurement tools factory floor company made strategic decision target core measurement technology manufacturing industrial markets order focus manufacturing industrial applications technology company phased direct sale medical products entered licensing agreements two major neurosurgical companies medical technology since 1992 company entered additional licensing agreements use technology medical applications 1995 company made strategic decision target international markets company established sales offices france germany 1996 great britain 1997 japan spain 2000 italy 2001 international sales represented 608 506 466 sales 2001 2000 1999 respectively company derives revenues primarily sale 3d measurement equipment related multifaceted soft check tool cam2 software revenue related products recognized upon shipment going forward company also expects generate revenue sale laser tracker product revenue growth historically resulted increased unit sales due expanded sales effort included addition sales personnel existing offices opening new sales offices expanded promotional efforts include multilingual web site company demo cd 2000 company introduced control station softcheck tools new accessory items faro rail faro powerhouse new versions members cam2 software family january 2001 company acquired spatialmetrix corporation smx leading manufacturer supplier laser trackers targets metrology software contract inspection services smx new generation laser tracker highaccuracy portable 3dimensional measurement technology company expects begin shipments laser tracker second quarter 2002 addition providing oneyear basic warranty without additional charge company offers customers one two threeyear extended maintenance contracts include online help services software upgrades hardware warranties addition company sells training technology consulting services relating products company recognizes revenue extended maintenance contracts proportionately costs projected incurred cost sales consists primarily material production overhead labor selling expenses consist primarily salaries commissions sales marketing personnel promotion advertising travel telecommunications general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses research development expenses represent salaries equipment thirdparty services accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected companys consolidated financial statements normal course business company time employs offbalance sheet financial instruments hedge exposure foreign currency exchange rates including cross currency swaps forward contracts foreign currency options see foreign exchange exposure 2001 companys sales growth adversely affected economic slowdown currently affecting united states europe lesser extent expect current economic slowdown continue adversely affect u sales companys growth rate geographic markets first half 2002 accordingly company adopted cost reduction plan third quarter 2001 plan includes reducing discretionary spending canceling certain nonstrategic product development marketing projects reduction approximately 15 companys us workforce 30 people primarily administration research development manufacturing results operations following table sets forth periods presented percentage sales represented certain items companys consolidated statements operations 2001 compared 2000 sales decreased 53 million 132 405 million 2000 351 million 2001 decrease resulted lower sales us 62 million 312 200 million 138 million germany 16 million 189 86 million 69 million partially offset increased sales remainder world increase 25 million 212 119 million 144 million decrease us primarily resulted lower product unit sales resulting mainly slowing us economy throughout 2001 decrease germany reflects adverse translation effect approximately 700000 stronger us dollar 2001 gross profit gross profit decreased 49 million 190 257 million 2000 208 million 2001 gross margin decreased 593 2001 635 2000 decrease gross margin resulted primarily downward pressure unit prices us europe translation effect stronger us dollar international sales selling expenses selling expenses decreased 598000 43 140 million 2000 134 million 2001 decrease primarily result lower selling expenses united states 13 million resulting cost reduction efforts second half 2001 lower sales commissions lower us sales 2001 translation effect stronger us dollar 2001 european selling expenses approximately 275000 offset part higher selling expenses europe 670000 japan 282000 principally result higher compensation marketing expenses offset part general administrative expenses general administrative expenses increased 50000 10 5763000 2000 5813000 2001 increase due new operations japan 188000 offset part lower expenses us 53000 europe 15000 effect stronger us dollar 2001 approximately 70000 depreciation amortization expenses depreciation amortization expenses decreased 372000 127 29 million 2000 26 million 2001 primarily result assets becoming fully amortized 2001 research development expenses research development expenses decreased 178000 50 35 million 2000 34 million 2001 decrease due decline across many expense categories europe 286000 translation effect stronger us dollar 2001 50000 european rd expenses offset part increase across many expense categories united states 157000 interest income interest income increased 40000 860000 2000 900000 2001 primarily result higher average principal amounts invested 2001 including loans smx see liquidity capital resources income net income net increased 663000 302000 2000 965000 2001 increase resulted principally higher royalty income 2001 lower foreign exchange losses europe 2001 income tax expense income tax expense decreased 83000 425000 2000 342000 2001 net tax expense resulted increase valuation allowance companys us deferred income tax assets offset benefits realized utilization german net operating loss carryforwards previously reserved december 31 2001 company deferred income tax assets approximately 77 million including 14 million related us operations 63 million related foreign operations offset valuation allowance approximately 76 million deferred income tax assets primarily attributable net operating loss carryforwards intangible assets future income tax benefits may realized net income loss companys net income loss decreased 2888000 net income 40000 2000 loss 2848000 2001 due factors mentioned 2000 compared 1999 sales increased 73 million 222 331 million 1999 405 million 2000 increase resulted increases us 23 million 131 177 million 200 million europe 35 million 328 106 million 141 million remainder world increase 16 million 323 48 million 64 million increase primarily resulted higher product unit sales geographic regions partially offset effect stronger us dollar 2000 approximately 18 million gross profit gross profit increased 68 million 357 189 million 1999 257 million 2000 gross margin increased 635 2000 573 1999 increase gross margin primarily result cost reductions computer hardware software products 2000 partially offset effect stronger us dollar selling expenses selling expenses increased 19 million 156 121 million 1999 140 million 2000 increase primarily result higher selling expenses united states 11 million europe 12 million principally result higher compensation marketing expenses offset part effect stronger us dollar 2000 approximately 550000 general administrative expenses general administrative expenses increased 800000 159 50 million 1999 58 million 2000 increase due increases across many categories us 720000 europe 80000 offset part effect stronger us dollar 2000 approximately 150000 depreciation amortization expenses depreciation amortization expenses decreased 15 million 344 45 million 1999 29 million 2000 decrease primarily resulted 3073000 impairment loss acquired intangible assets end 1999 reduced amount acquired intangible assets amortized offset part depreciation assets acquired 2000 research development expenses research development expenses decreased 300000 73 38 million 1999 35 million 2000 decrease due decreases across many expense categories united states 234000 effect stronger us dollar 2000 130000 european expenses offset part increase local currency across many categories europe 85000 employee stock option expenses employee stock option expenses decreased 46000 269 169000 1999 123000 2000 decrease result reduction amortized deferred compensation expense related stock options issued 1995 1997 options issued 2000 1999 compensation expense recorded exercise price options equal market price day grant impairment loss acquired intangible assets unusual impairment loss 31 million recorded 1999 reflect impairment intangible assets resulting german acquisition may 15 1998 impairment resulted companys revised forecast cash flows expected developed core technology acquired german acquisition interest income interest income increased 144000 716000 1999 860000 2000 increase primarily attributable higher average yields interestearning cash equivalents investments held higher average principal amounts invested 2000 see liquidity capital resources income decreased 173000 475000 1999 302000 2000 decrease resulted principally foreign exchange losses 2000 income tax expense benefit income tax expense benefit increased 15 million benefit 11 million 1999 expense 425000 2000 tax expense resulted companys us operations taxable earnings 2000 company deferred income tax assets related german operations fully offset valuation allowance december 31 2000 companys foreign subsidiaries deferred income tax assets relating net operating loss carryforwards expire intangible assets 3360729 3131325 respectively net income loss companys net income loss increased 74 million loss 74 million 1999 net income 40000 2000 due factors mentioned recent developments january 16 2002 company acquired spatialmetrix corporation smx exchange 500000 shares faro common stock satisfaction company certain obligations smx connection therewith company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smxs obligations two lenders company also assumed andor satisfied obligations smx including approximately 29 million financing provided company smx april 1 2001 completion acquisition recorded utilizing purchase method accounting accordance sfas 142 goodwill intangible assets company estimates smx 35 installed laser tracker market company exercised contractual right acquire smx successful design smx new generation laser tracker company expects sell competitive prices compared previous generation smx tracker competitors current products smxs previous generation laser tracker introduced 1996 sold september 2001 smx halted production sale earlier generation laser tracker september 2001 part settlement patent infringement lawsuit operations smx expected contribute favorably companys revenue growth results operations new generation tracker begins ship company expects start shipping new generation tracker time first half 2002 operations smx expected result revenues least 10 million per quarter resulting sale parts comprehensive support technology consulting services additional operating expenses amount approximately 19 million per quarter liquidity capital resources since 1997 company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 317 million total marketable securities cash equivalents short term investments december 31 2001 141 million compared 190 million december 31 2000 year ended december 31 2001 net cash used operating activities 842000 compared net cash provided operating activities 47 million 2000 net cash used operating activities increased primarily due operational loss 2001 net cash excluding shortterm investments provided investing activities year ended december 31 2001 267000 compared cash used investing activities 31 million 2000 increase net cash provided investing activities 2001 primarily due net decreases shortterm investments 2001 41 million offset primarily loans smx 29 million see note 16 notes consolidated financial statements contained item 8 herein purchases property equipment 788000 net cash provided financing activities year ended december 31 2001 9000 compared 11000 2000 company invests excess cash balances shortterm investment grade securities money market investments obligations us government agencies obligations state local government agencies currency exchange rate changes resulted 224000 reduction companys reported cash december 31 2001 january 16 2002 connection acquisition smx company issued 500000 shares faro common stock satisfied certain obligations smx additionally company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smxs obligations two lenders company also assumed andor settled obligations smx operations smx expected contribute favorably companys liquidity new generation tracker introduced company expects start shipping new generation tracker time first half 2002 operations smx expected result revenues least 10 million per quarter resulting sale parts comprehensive support technology consulting services additional operating expenses amount approximately 19 million per quarter see recent developments companys principal commitments december 31 2001 consisted leases headquarters regional sales offices see contractual obligations commercial commitments material commitments capital expenditures date company believes cash investments cash flows operations sufficient satisfy working capital expenditure needs least 2002 contractual obligations commercial commitments company party term loan expires 2003 capital leases automotive equipment initial term 36 60 months noncancelable operating leases including leases related parties see note 8 notes consolidated financial statements expire 2006 commitments agreements follows december 31 2001 smxs principal commitments consist lease headquarters lease expires august 2003 minimum lease payments required lease 129372 86248 2002 2003 respectively critical accounting policies response secs financial reporting release fr60 cautionary advice regarding disclosure critical accounting policies selected subjective accounting estimation processes purposes explaining methodology used calculating estimate addition inherent uncertainties pertaining estimate possible effects companys financial condition two accounting estimation processes discussed companys process recognizing research development expenditures allowance obsolete slowmoving inventory estimation processes affect current assets operating results therefore critical assessing financial operating status company estimates involve certain assumptions incorrect could create adverse impact companys operations financial position research development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers company periodically assesses value capitalized product design costs records reserve obsolescence impairment certain circumstances including discontinuance probable discontinuance related products market deems asset obsolete impaired reserve obsolete slowmoving inventory 297500 417900 december 31 2001 2000 respectively reserve obsolete slow moving inventory used state companys inventories lower average cost net realizable value since amount inventoriable cost company truly recoup sales cannot known exact certainty company relies past sales experience future sales forecasts inventory considered obsolete company withdrawn market company sales product past 12 months sales forecasted next 12 months therefore reserve amount equal 100 average cost inventory recorded company classifies slowmoving inventory quantities hand greater amounts sold past 12 months forecasted sell next 12 months reserve amount adequate reduce carrying value net realizable value 2001 2000 1999 provision obsolete slowmoving inventory 856600 300955 1027200 respectively transactions related parties company leases headquarters xenon research inc xenon issued outstanding capital stock owned simon raab companys president chief executive officer diana raab spouse term lease expires february 28 2006 company two fiveyear renewal options base rent lease 391000 2001 base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers june 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans term three years interest rate approximately 47 grant borrowers option extend term additional three years collateral loans former cats shareholders pledged company 177074 shares companys common stock loans nonrecourse obligation former cats shareholders company engaged cole partners mergers acquisition corporate finance advisory service firm serve companys financial advisor connection companys acquisition january 2002 spatialmetrix inc smx stephen r cole one companys directors member audit committee founding partner president cole partners company paid cole partners total fees approximately 440000 early 2002 services smx acquisition foreign exchange exposure company conducts significant portion business outside united states present majority companys revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect companys business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results companys operations cannot accurately predicted extent percentage companys nonus dollar revenues derived international sales increases future companys exposure risks associated fluctuations foreign exchange rates increase see additional discussion impact recently issued accounting standards inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2002 conversion euro currency january 1 1999 certain member countries european union established fixed conversion rates existing currencies european unions common currency euro transition period introduction euro ends june 30 2002 connection therewith january 2002 certain member countries european union adopted euro national currency issues facing company result introduction euro include converting information technology systems reassessing currency risk amending lease agreements contracts processing tax accounting records company addressing issues expect adoption euro material effect companys financial condition results operations impact recently issued accounting standards october 2001 financial accounting standards board fasb issued statement 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 supersedes statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 retains many fundamental provisions sfas 121 sfas 144 also supersedes apb opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions sfas 144 retains requirement opinion 30 report separately discontinued operations extends reporting requirement component entity either disposed classified held sale sfas 144 effective fiscal years beginning december 15 2001 interim periods within fiscal years early application permitted company expect adoption sfas 144 material impact financial statements results operations july 2001 fasb issued statement financial accounting standards 142 goodwill intangible assets sfas 142 sfas 142 requires goodwill longer amortized earnings instead reviewed impairment company adopted new statement effective january 1 2002 upon adoption sfas 142 operating expenses reduced approximately 480000 annual basis amortization may increase assets determined impaired respective year january 2001 company adopted fasb statement 133 sfas 133 accounting derivative instruments hedging activities amended sfas 133 requires companies recognize derivative instruments either assets liabilities fair value statement position august 2001 company entered foreign exchange rate swap allowing company right purchase 13 million base rate 11049 euros per 100 agreement company bank compensate one another based exchange rate agreement differential specified measurement dates foreign exchange rate agreement qualify special hedge accounting treatment meet specified criteria sfas 133 therefore changes fair value included determination earnings june 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs standard applies legal obligations associated retirement longlived assets result acquisition construction development normal use asset company believes adoption sfas 143 material effect financial position results operations item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops markets supports portable softwaredriven measurement systems used broad range manufacturing industrial applications company’s principal products control station control station pro measuring devices companion soft check tool cam2 software respectively provide cadbased inspection factorylevel statistical process control together products integrate measurement quality inspection function cad software improve productivity enhance product quality decrease rework scrap manufacturing process company’s products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor company pioneer development marketing 3d measurement technology manufacturing industrial applications currently holds 29 patents company’s products purchased approximately 2900 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimlerchrysler general electric general motors honda johnson controls komatsu dresser lockheed martin siemens volkswagen among many others inception 1982 1992 company focused providing computerized 3d measurement devices orthopedic neurosurgical markets period company introduced knee laxity measurement device diagnostic tool measuring posture scoliosis back flexibility surgical guidance device utilizing sixaxis articulated arm 1992 effort capitalize demand 3d portable measurement tools factory floor company made strategic decision target core measurement technology manufacturing industrial markets order focus manufacturing industrial applications technology company phased direct sale medical products entered licensing agreements two major neurosurgical companies medical technology since 1992 company entered additional licensing agreements use technology medical applications prior 2002 company accounted royalty revenues licensing agreements “other income” 2002 company reclassified royalty revenues “other income” “sales” basis licensing technology consistent company’s main business 3d measurement 1995 company made strategic decision target international markets company established sales offices france germany 1996 great britain 1997 japan spain 2000 italy 2001 international sales represented 570 591 500 sales 2002 2001 2000 respectively company derives revenues primarily sale measurement equipment related multifaceted soft check tool cam2 software revenue related products recognized upon shipment going forward company expects generate increasing percentage revenue sale laser tracker product historically company’s sales growth resulted increased unit sales due expanded sales effort included addition sales personnel expanded promotional efforts 2000 company introduced control station softcheck tools new accessory items faro rail faro powerhouse new versions members cam2 software family january 2002 company acquired spatialmetrix corporation “smx” leading manufacturer supplier laser trackers metrology software new generation laser tracker highaccuracy portable 3dimensional measurement technology addition providing oneyear basic warranty without additional charge company offers customers one threeyear extended maintenance contracts include online help services software upgrades hardware warranties addition company sells training technology consulting services relating products company recognizes revenue extended maintenance contracts proportionately manner costs incurred revenues cost sales consists primarily material production overhead labor selling expenses consist primarily salaries commissions sales marketing personnel promotion advertising travel telecommunications general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses research development expenses represent salaries equipment thirdparty services accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected company’s consolidated financial statements normal course business company time employs offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure fiscal years 2002 2001 company’s sales growth adversely affected economic slowdown currently affecting united states europe effect however partially offset sales growth resulting acquisition smx january 2002 2001 company adopted cost reduction plan continued 2002 plan included reducing discretionary spending canceling certain nonstrategic product developments reduction company’s existing us workforce primarily administration research development manufacturing new products company commenced shipments new generation laser tracker product line late third quarter 2002 company also released new generation faroarm production names platinum titanium arms replace previous generation arms released 1998 company expects new generation arms allow company maintain market leadership segment portable measure market manufacture new generation laser trackers new generation portable measurement arms involve new distinct manufacturing designs well innovative production processes compared company’s previous product offering results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2002 compared 2001 sales increased 101 million 280 361 million year ended december 31 2001 462 million year ended december 31 2002 increase resulted primarily sales new laser product line 2002 geographically sales increased regions primarily due sales new laser product line united states increased 51 million 345 europe increased 22 million 154 japan increased 19 million 1118 foreign sales increased 900000 164 see note 15 financial statements “other foreign” includes approximately 800000 european sales royalty income included sales decreased 20000 1010000 year ended december 31 2001 990000 year ended december 31 2002 gross profit gross profit increased 33 million 151 218 million year ended december 31 2001 251 million year ended december 31 2002 gross margin decreased 604 year ended december 31 2001 544 year ended december 31 2002 decrease gross margin primarily result onetime inventory writedown 729000 recorded second quarter 2002 related new laser product line see acquisition smx impact new laser product line acquired january 2002 lesser extent new generation arm products introduced third quarter 2002 see new products gross margins sales expected ultimately meet exceed company’s historic levels production facilities full production levels plant capacity utilization expected increase additional manufacturing efficiencies expected 2003 selling expenses selling expenses increased 456000 34 134 million year ended december 31 2001 139 million year ended december 31 2002 increase result higher sales commissions higher sales us 10 million higher expenses japan 382000 offset largely cost reduction measures implemented united states 742000 europe 184000 increase total expenses experienced 2002 compared 2001 amount represents decrease percentage sales 372 2001 300 2002 general administrative expenses general administrative expenses increased 21 million 362 58 million year ended december 31 2001 79 million year ended december 31 2002 increase due administrative expenses resulting integration former smx 2002 915000 professional fees unrelated smx 352000 provision doubtful accounts receivable 245000 recorded second quarter 2002 related recently acquired laser product line shifting personnel research development administrative positions 549000 depreciation amortization expenses depreciation amortization expenses decreased 292000 112 26 million year ended december 31 2001 23 million 2002 depreciation amortization expenses 2002 reflect effect approximately 740000 adoption effective january 1 2002 financial accounting standards 142 “goodwill intangible assets” sfas 142 partly offset increase depreciation resulting newly acquired assets late 2002 see note 6 consolidated financial statement research development expenses research development expenses increased 663000 195 34 million year ended december 31 2001 40 million year ended december 31 2002 principally result research development expenses new laser tracker product line 16 million offset part lower expenses new generation arm development us 388000 shifting personnel administrative positions costs europe 549000see general administrative expenses interest income interest income decreased 339000 377 900000 year ended december 31 2001 561000 year ended december 31 2002 decrease primarily attributable lower interest bearing cash balances see liquidity capital resources lower interest rates prevailing 2002 incomeloss income increased 644000 43000 loss year ended december 31 2001 601000 income year ended december 31 2002 primarily due foreign currency gains current year income tax expense income tax expense decreased 131000 342000 year ended december 31 2001 211000 year ended december 31 2002 net loss net loss decreased 800000 28 million year ended december 31 2001 20 million year ended december 31 2002 primarily due higher gross profit increased sales cost savings measures implemented us europe partially offset integration expenses laser division reduced income tax expense 2001 compared 2000 sales decreased 48 million 117 409 million 2000 361 million 2001 decrease resulted lower sales us 57 million 279 205 million 148 million germany 17 million 198 86 million 69 million partially offset increased sales remainder world increase 25 million 210 119 million 144 million decrease us primarily resulted lower product unit sales resulting mainly slowing us economy throughout 2001 decrease germany reflects adverse translation effect approximately 700000 stronger us dollar 2001 royalty income included sales increased 550000 460000 year ended december 31 2000 1010000 year ended december 31 2001 gross profit gross profit decreased 44 million 168 262 million 2000 218 million 2001 gross margin decreased 604 2001 640 2000 decrease gross margin resulted primarily downward pressure unit prices us europe translation effect stronger us dollar international sales selling expenses selling expenses decreased 598000 43 140 million 2000 134 million 2001 decrease primarily result lower selling expenses united states 13 million resulting cost reduction efforts second half 2001 lower sales commissions lower us sales translation effect stronger us dollar 2001 approximately 250000 offset part higher expenses europe 670000 japan 282000 principally result higher compensation marketing expenses general administrative expenses general administrative expenses increased 50000 10 58 million 2000 58 million 2001 increase due new operations japan 188000 offset part lower expenses us 53000 europe 15000 effect stronger us dollar 2001 approximately 70000 depreciation amortization expenses depreciation amortization expenses decreased 372000 128 29 million 2000 25 million 2001 primarily result assets becoming fully amortized 2001 research development expenses research development expenses decreased 179000 50 35 million 2000 34 million 2001 decrease due decline across many expense categories europe 286000 translation effect stronger us dollar 2001 50000 european rd expenses offset part increase across many expense categories united states 157000 interest income interest income increased 40000 860000 2000 900000 2001 primarily result higher average principal amounts invested 2001 including loans smx see liquidity capital resources income net expenses decreased 114000 157000 2000 43000 2001 decrease resulted principally lower foreign exchange losses europe 2001 income tax expense income tax expense decreased 83000 425000 2000 342000 2001 net tax expense resulted increase valuation allowance company’s us deferred income tax assets offset benefits realized utilization german net operating loss carryforwards previously reserved december 31 2001 company deferred income tax assets approximately 77 million including 14 million related us operations 63 million related foreign operations offset valuation allowance approximately 76 million deferred income tax assets primarily attributable net operating loss carryforwards intangible assets future income tax benefits may realized net income loss company’s net income loss decreased 29 million net income 40000 2000 loss 28 million 2001 due factors mentioned acquisition smx january 16 2002 company acquired spatialmetrix corporation “smx” leading manufacturer supplier laser trackers targets metrology software contract inspection services exchange 500000 shares faro common stock 50000 shares held escrow satisfaction company certain obligations smx connection therewith company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smx’s obligations two lenders company also assumed andor satisfied obligations smx including approximately 29 million financing provided company smx prior january 16 2002 company estimates smx 35 installed laser tracker market company exercised contractual right acquire smx successful design smx new generation laser tracker company sells competitive prices compared previous generation smx tracker competitor’s current products smx’s previous generation laser tracker introduced 1996 sold september 2001 smx halted production sale earlier generation laser tracker september 2001 operations new laser product line contributing favorably company’s revenue growth beginning third quarter 2002 results operations company sold approximately 88 million laser products services 2002 expects continue ramp sales laser tracker 2003 operating expenses new laser product line beginning third quarter 2002 consistent company’s historic operating expense ratios liquidity capital resources since 1997 company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 317 million total marketable securities cash equivalents shortterm investments december 31 2002 59 million compared 141 million december 31 2001 significant 82 million reduction primarily due acquisition smx january 2002 related operating expenses year ending december 31 2002 believe working capital together anticipated cash flow operations sufficient fund longterm liquidity requirements liquidity dependant upon use offbalance sheet financing arrangements scrutinization receivables obtaining access assets special purpose entities year ended december 31 2002 net cash used operating activities 50 million compared 842000 2001 net cash used operating activities increases accounts receivable inventories 59 million decrease accounts payable 18 million offset net profit depreciation 252000 provisions expenses 12 million items 12 million net cash used investing activities year ended december 31 2002 118000 compared net cash provided 267000 2001 change investing activities due primarily acquisition smx net cash provided financing activities year ended december 31 2002 14 million compared 9000 2001 2002 line credit utilized amount 15 million company invests excess balances shortterm investmentgrade securities money market investments obligations us government agencies obligations state local governmental agencies january 16 2002 connection acquisition smx company issued 500000 shares faro common stock satisfied certain obligations smx additionally company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smx’s obligations two lenders see acquisition smx company also assumed andor settled obligations smx including approximately 29 million financing provided company smx prior january 16 2002 company recently commenced shipments new generation laser tracker product line released new generation platinum titanium advanced portable measure arm products see new products manufacture new generation laser trackers new generation portable measure arms involve new distinct manufacturing designs production processes compared company’s previous product offering plant capacity utilization expected increase additional manufacturing efficiencies expected fourth quarter company’s principal commitments december 31 2002 consisted leases headquarters regional offices see contractual obligations commercial commitments material commitments capital expenditures date company believes cash investments cash flows operations sufficient satisfy working capital expenditure needs least 2003 contractual obligations commercial commitments company party term loan expires 2003 capital leases automotive equipment initial term 36 60 months noncancelable operating leases including leases related parties see note 8 notes consolidated financial statements expire 2007 commitments agreements follows december 31 2002 critical accounting policies response sec’s financial reporting release fr60 cautionary advice regarding disclosure critical accounting policies selected subjective accounting estimation processes purposes explaining methodology used calculating estimate addition inherent uncertainties pertaining estimate possible effects company’s financial condition two accounting estimation processes discussed company’s process recognizing research development expenditures determining allowances obsolete slowmoving inventory doubtful accounts receivable estimation processes affect current assets operating results therefore critical assessing financial operating status company estimates involve certain assumptions incorrect could create adverse impact company’s operations financial position research development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers company periodically assesses value capitalized product design costs records writedown impairment circumstances including discontinuance probable discontinuance related products market deems asset obsolete impaired reserve obsolete slowmoving inventory 90000 298000 418000 december 31 2002 2001 2000 respectively reserve obsolete slowmoving inventory used state company’s inventories lower average cost net realizable value since amount inventorial cost company truly recoup sales cannot known exact certainty company relies past sales experience future sales forecasts inventory considered obsolete company withdrawn market company sales product past 12 months sales forecasted next 12 months therefore allowance amount equal 100 average cost inventory recorded company classifies slowmoving inventory quantities hand greater amounts sold past 12 months forecasted sell next 12 months reserve amount adequate reduce carrying value net realizable value company performs ongoing evaluations customers adjusts credit ratings accordingly company continuously monitors collections payments customers maintains provision uncollectable amounts based historical experience issues identified credit losses historically within expectations company cannot guarantee continue future allowances recorded 2002 2001 2000 approximately 582000 311000 30000 respectively transactions related parties company leases headquarters xenon research inc “xenon” issued outstanding capital stock owned simon raab company’s president chief executive officer diana raab spouse term lease expires february 28 2006 company two fiveyear renewal options base rent lease 397000 2002 base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers june 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former shareholders cats gmbh aggregate amount 11 million “the loans” loans made fund tax obligations incurred former cats shareholders connection company’s acquisition cats gmbh 1998 company agreed terms loans part acquisition agreement cats gmbh loans term three years interest rate approximately 47 grant borrowers option extend term additional three years collateral loans former cats shareholders pledged company 177074 shares company’s common stock loans nonrecourse obligation former cats shareholders company engaged cole partners mergers acquisition corporate finance advisory service firm serve company’s financial advisor connection company’s acquisition january 2002 spatialmetrix inc stephen r cole one company’s directors member audit committee founding partner president cole partners company paid cole partners total fees approximately 450000 services 302000 paid 2002 foreign exchange exposure company conducts significant portion business outside united states present majority company’s revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage company’s nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates increase see additional discussion impact recently issued accounting standards inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2003 conversion euro january 1 2002 certain member countries european union adopted euro national currency transition period introduction euro ended june 30 2002 adoption euro material effect company’s financial condition results operations impact recently issued accounting standards october 2001 financial accounting standards board “fasb” issued statement 144 “accounting impairment disposal longlived assets” sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 supersedes statement financial accounting standards 121 “accounting impairment longlived assets longlived assets disposed of” sfas 121 retains many fundamental provisions sfas 121 sfas 144 also supersedes apb opinion 30 “reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” sfas 144 retains requirement opinion 30 report separately discontinued operations extends reporting requirement component entity either disposed classified held sale sfas 144 effective fiscal years beginning december 15 2001 interim periods within fiscal years early application permitted company expect adoption sfas 144 material impact financial statements results operations july 2001 fasb issued statement financial accounting standards 142 “goodwill intangible assets” sfas 142 sfas 142 requires goodwill longer amortized earnings instead reviewed impairment company adopted new statement effective january 1 2002 january 2001 company adopted fasb statement 133 sfas 133 accounting derivative instruments hedging activities amended sfas 133 requires companies recognize derivative instruments either assets liabilities fair value statement position september 2002 company entered foreign exchange rate swap allowing company right purchase 18 million base rate 10444 euros per 100 agreement company bank compensate one another based exchange rate agreement differential specified measurement dates foreign exchange rate agreement qualify special hedge accounting treatment meet specified criteria sfas 133 therefore changes fair value included determination earnings june 2001 statement financial accounting standards 142 “goodwill intangible assets” “statement 142” issued stating indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impaired carrying amount reporting unit exceeds implied fair value reporting unit company adopted accounting standard january 2 2002 june 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs standard applies legal obligations associated retirement longlived assets result acquisition construction development normal use asset sfas 143 effective fiscal years beginning june 15 2002 company believes adoption sfas 143 material effect financial position results operations june 2002 fasb issued statement financial accounting standards 146 sfas 146 accounting costs associated exit disposal activities sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullified emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 requires liability cost associated exit disposal activity recognized liability incurred rather exit disposal plan approved required adopt provisions sfas 146 exit disposal activities initiated december 31 2002 effect adoption sfas 146 change prospective basis timing restructuring charges recorded commitment date approach liability recorded company expect adoption sfas 146 material impact financial statements results operations november 2002 fasb issued fasb interpretation 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation elaborates disclosures made guarantor interim annual financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee disclosure requirements interpretation effective interim annual periods december 15 2002 initial recognition initial measurement requirements interpretation effective prospectively guarantees issued modified december 31 2002 interpretation’s expanded disclosures material impact company’s financial position results operations november 2002 eitf reached consensus issue 0021 “multipledeliverable revenue arrangements” “eitf 0021” eitf 0021 addresses account arrangements may involve delivery performance multiple products services andor rights use assets consensus mandates identify whether goods services delivered separately bundled sales arrangement accounted separately “separate units accounting” guidance affect timing revenue recognition arrangements even though change rules governing timing pattern revenue recognition individual items accounted separately final consensus applicable agreements entered fiscal years beginning june 15 2003 early adoption permitted additionally companies permitted apply consensus guidance existing arrangements cumulative effect change accounting principle accordance apb opinion 20 accounting changes company assessing point believe adoption eitf 0021 material impact financial position cash flows results operations december 2002 fasb issued statement financial accounting standards 148 sfas 148 accounting stockbased compensationtransition disclosurean amendment fasb statement 123 sfas 148 amends sfas 123 provide alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results transition guidance annual disclosure provisions sfas 148 effective financial statements issued fiscal years ending december 15 2002 included note 1 consolidated financial statements interim disclosure provisions effective financial reports containing financial statements interim periods beginning december 15 2002 company believe adoption statement material impact financial position results operations item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops markets supports portable softwaredriven 3d measurement systems used broad range manufacturing industrial applications companys principal products faro arm faro gage articulated arm measuring devices faro laser tracker laserbased measuring device companion cam2 software provide cadbased inspection factorylevel statistical process control together products integrate measurement quality inspection function cad software improve productivity enhance product quality decrease rework scrap manufacturing process companys products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor company pioneer development marketing 3d measurement technology manufacturing industrial applications currently holds 33 patents companys products purchased approximately 3500 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimlerchrysler general electric general motors honda johnson controls komatsu dresser lockheed martin siemens volkswagen among many others 1995 company made strategic decision target international markets company established sales offices france germany 1996 great britain 1997 japan spain 2000 italy 2001 china 2003 international sales represented 473 570 591 sales 2003 2002 2001 respectively company expects higher percentage sales growth asia pacific region regions 2004 2005 result opening china sales office addition sales personnel opening service center japan organization company derives revenues primarily sale faro arm faro laser tracker 3d measurement equipment related multifaceted cam2 software going forward company also expects generate revenue sale new faro gage product revenue related products recognized upon shipment addition company sells one two threeyear maintenance contracts training technology consulting services relating products company recognizes revenue extended maintenance contracts proportionately manner costs incurred revenues company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees report use technology 2003 royalties licensing agreements 601000 08 total sales 2003 company began manufacture faro arm products switzerland customer orders europe asia begin manufacture faro laser tracker faro gage products swiss plant mid 2004 production products customer orders americas done companys headquarters florida manufacturing plant pennsylvania company expects existing plants provide necessary capacity growth least 2005 cost sales consists primarily material production overhead labor since companys ipo 1997 gross margin range 5464 company expects maintain gross margin near 60 going forward selling expenses consist primarily salaries commissions sales marketing personnel promotion advertising travel telecommunications selling expenses percentage sales dropped significantly 2003 compared 2002 256 300 holding selling expenses percentage sales 25 less longterm goal company although addition new sales personnel asia may temporarily cause rise selling expenses percentage sales 2004 new sales people fully trained productive general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses company expects general administrative expenses drop percentage sales higher sales require proportionate increase expenses research development expenses represent salaries equipment thirdparty services company commitment ongoing research development intends continue fund efforts level 57 sales going forward company received favorable income tax rate commitment swiss government incentive company establish manufacturing plant result company expects blended consolidated tax rate range 25 30 consolidated taxable income least 2004 2005 accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected companys consolidated financial statements company aware offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure however company regularly use instruments fiscal years 2002 2001 companys sales growth adversely affected economic slowdown began 2001 united states europe effect however offset sales growth resulting acquisition january 2002 spatialmetrix corporation smx manufactured predecessor faro laser tracker introduction september october 2002 latest generation companys traditional faro arm product 2003 sales growth resulted primarily strong customer response new faro arm laser tracker products increase worldwide sales marketing activities including increase headcount 106 2002 120 end 2003 company recorded approximately 11 million income result recovering approximately 100000 shares company stock related positive arbitration settlement company former smx shareholders results operations following table sets forth periods presented percentage sales represented certain items companys consolidated statements operations year ended december 31 2003 2002 2001 statement operations data sales 1000 cost sales 411 456 396 gross profit 589 544 604 operating expenses selling 255 300 372 general administrative 127 170 161 depreciation amortization 30 50 71 research development 63 87 93 employee stock options 10 total operating expenses 485 607 697 income loss operations 104 63 93 interest income 01 12 25 income net 27 13 01 interest expense 01 net income loss income taxes 131 39 69 income tax expense 16 05 09 net income loss 115 44 78 2003 compared 2002 sales increased 256 million 554 462 million year ended december 31 2002 718 million year ended december 31 2003 increase resulted higher unit sales faro arm laser tracker products increase headcount sales marketing 106 2002 120 2003 15 average price increase existing products january 1 2003 geographically sales increased 154 million 685 americas 92 million 498 europeafrica 09 million 178 asiapacific region gross profit gross profit increased 171 million 681 251 million year ended december 31 2002 422 million year ended december 31 2003 gross margin percentage increased 544 year ended december 31 2002 589 year ended december 31 2003 due higher selling prices efficiencies laser tracker manufacturing plant output selling expenses selling expenses increased 45 million 326 138 million year ended december 31 2002 183 million year ended december 31 2003 increase result increased sales head count higher commissions due higher sales percentage sales selling expenses dropped 256 sales 2003 300 2002 general administrative expenses general administrative expenses increased 12 million 152 79 million year ended december 31 2002 91 million year ended december 31 2003 increase primarily due increase professional legal fees service charges network costs general administrative expenses percentage sales fell 127 sales 2003 170 sales 2002 depreciation amortization expenses depreciation amortization expenses decreased 148000 66 23 million year ended december 31 2002 21 million 2003 due reduction amortization existing product technology 374000 offset increase 226000 depreciation new equipment research development expenses research development expenses increased 497000 123 40 million year ended december 31 2002 45 million year ended december 31 2003 due primarily increased subcontractor costs materials company plans spend least 5 sales research development employee stock option expenses employee stock option expenses increased 709000 9000 year ended december 31 2002 718000 year ended december 31 2003 due primarily increase price companys stock recording expense connection certain stock options accounted variable options see also note 12 stock compensation consolidated financial statements contained herein interest income expense interest income decreased 479000 854 561000 year ended december 31 2002 82000 year ended december 31 2003 primarily lower average investments lower interest rates 2003 interest expense increased 18000 28000 year ended december 31 2002 46000 year ended december 31 2003 due increased use credit line see liquidity capital resources income increased 13 million 601000 year ended december 31 2002 19 million year ended december 31 2003 due primarily settlement litigation former shareholders smx 11 million see also note 2acquisition income tax expense income tax expense increased 946000 211000 year ended december 31 2002 12 million year ended december 31 2003 effective tax rate 2003 128 net income tax primary reason relatively low tax rate reduction valuation allowance approximately 40 million reduction 28 million relates usage net operating losses foreign jurisdictions 12 million reduction valuation allowance relates domestic assets company believes likely realized company 17 million deferred tax assets remaining may recognized 2004 company remains consistently profitable see also note 10 income taxes financial statements contained herein separate income tax expenses company recorded addition shareholders equity 14 million income tax benefit received exercise unqualified stock options employees net income loss results operations increased 103 million loss 20 million year ended december 31 2002 83 million year ended december 31 2003 result factors described 2002 compared 2001 sales increased 101 million 280 361 million year ended december 31 2001 462 million year ended december 31 2002 increase resulted primarily sales new laser product line 2002 geographically sales increased regions primarily due sales new laser product line united states increased 51 million 345 europe increased 22 million 154 japan increased 19 million 1118 foreign sales increased 900000 164 see also note 15 consolidated financial statements royalty income included sales decreased 20000 1010000 year ended december 31 2001 990000 year ended december 31 2002 gross profit gross profit increased 33 million 151 218 million year ended december 31 2001 251 million year ended december 31 2002 gross margin decreased 604 year ended december 31 2001 544 year ended december 31 2002 decrease gross margin primarily result onetime inventory writedown 729000 recorded second quarter 2002 related new laser product line impact new laser product line acquired january 2002 lesser extent new generation arm products introduced third quarter 2002 see new products gross margins sales expected ultimately meet exceed companys historic levels production facilities full production levels plant capacity utilization expected increase additional manufacturing efficiencies expected 2003 selling expenses selling expenses increased 456000 34 134 million year ended december 31 2001 139 million year ended december 31 2002 increase result higher sales commissions higher sales us 10 million higher expenses japan 382000 offset largely cost reduction measures implemented united states 742000 europe 184000 increase total expenses experienced 2002 compared 2001 amount represents decrease percentage sales 372 2001 300 2002 general administrative expenses general administrative expenses increased 21 million 362 58 million year ended december 31 2001 79 million year ended december 31 2002 increase due administrative expenses resulting integration former smx 2002 915000 professional fees unrelated smx 352000 provision doubtful accounts receivable 245000 recorded second quarter 2002 related recently acquired laser product line shifting personnel research development administrative positions 549000 depreciation amortization expenses depreciation amortization expenses decreased 292000 112 26 million year ended december 31 2001 23 million 2002 depreciation amortization expenses 2002 reflect effect approximately 740000 adoption effective january 1 2002 financial accounting standards 142 goodwill intangible assets sfas 142 partly offset increase depreciation resulting newly acquired assets late 2002 see note 6 consolidated financial statements research development expenses research development expenses increased 663000 195 34 million year ended december 31 2001 40 million year ended december 31 2002 principally result research development expenses new laser tracker product line 16 million offset part lower expenses new generation arm development us 388000 shifting personnel administrative positions costs europe 549000see general administrative expenses interest income interest income decreased 339000 377 900000 year ended december 31 2001 561000 year ended december 31 2002 decrease primarily attributable lower interest bearing cash balances see liquidity capital resources lower interest rates prevailing 2002 incomeloss income increased 644000 43000 loss year ended december 31 2001 601000 income year ended december 31 2002 primarily due foreign currency gains current year income tax expense income tax expense decreased 131000 342000 year ended december 31 2001 211000 year ended december 31 2002 net loss net loss decreased 800000 28 million year ended december 31 2001 20 million year ended december 31 2002 primarily due higher gross profit increased sales cost savings measures implemented us europe partially offset integration expenses laser division reduced income tax expense liquidity capital resources since 1997 company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 317 million november 12 2003 company along companys two cofounders completed 415 million private placement common stock various institutional investors private placement company sold 1158000 shares approximately 8 total shares outstanding two cofounders company simon raab gregory fraser sold 772000 shares approximately 20 holdings aggregate shares sold 2150 per share resulting total proceeds placement agent fees offering expenses 249 million 166 million company cofounders respectively september 17 2003 company entered loan agreement suntrust bank line credit 5 million company drawn line credit total marketable securities cash equivalents investments december 31 2003 335 million compared 59 million december 31 2002 276 million increase primarily due 249 million private placement november 12 2003 described see note 1 consolidated financial statements year ended december 31 2003 net cash provided operating activities 47 million compared net cash used operating activities 50 million 2002 97 million increase reflects strong growth sales operating income partially offset increases accounts receivable taxes unearned revenue income realized company stock settlement smx litigation net cash used investing activities year ended december 31 2003 152 million compared 118000 2002 primarily due increased net investment purchases 141 million net cash provided financing activities year ended december 31 2003 230 million compared provision 14 million 2002 increase primarily proceeds 249 million private placement company common stock november 2003 believe working capital together anticipated cash flow operations sufficient fund longterm liquidity requirements liquidity dependant upon use offbalance sheet financing arrangements securitization receivables obtaining access capital special purpose entities january 16 2002 connection acquisition smx company issued 500000 shares faro common stock former shareholders september 16 2003 company settled dispute former smx shareholders resulted approximately 100000 shares returned 500000 initially issued acquisition contractual obligations commercial commitments company party capital lease 107234 party automotive equipment initial term 36 60 months noncancelable operating leases including leases related parties see note 8 notes consolidated financial statements expire 2007 commitments lease agreements follows december 31 2003 payments due capital operating year leases total 2004 42585 1145251 1187836 2005 31871 1403698 1435569 2006 30163 936589 966752 2007 2615 304292 306907 2008 159596 thereafter total future minimum lease payments 107234 3949426 4056660 critical accounting policies response secs financial reporting release fr60 cautionary advice regarding disclosure critical accounting policies selected subjective accounting estimation processes purposes explaining methodology used calculating estimate addition inherent uncertainties pertaining estimate possible effects companys financial condition two accounting estimation processes discussed companys process recognizing research development expenditures allowance obsolete slowmoving inventory estimation processes affect current assets operating results therefore critical assessing financial operating status company estimates involve certain assumptions incorrect could create adverse impact companys operations financial position research development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers company periodically assesses value capitalized product design costs records reserve obsolescence impairment circumstances including discontinuance probable discontinuance related products market deems asset obsolete impaired reserve obsolete slowmoving inventory 155000 90000 298000 december 31 2003 2002 2001 respectively reserve obsolete slowmoving inventory used determine companys inventories lower average cost net realizable value since amount inventorial cost company truly recoup sales cannot known exact certainty company relies past sales experience future sales forecasts inventory considered obsolete allowance amount equal 100 average cost inventory recorded company withdrawn market company sales product past 12 months sales forecasted next 12 months company classifies slowmoving inventory quantities hand greater amounts sold past 12 months forecasted sell next 12 months reserve amount adequate reduce carrying value estimated net realizable value company performs obsolete slowmoving inventory review twice year writes identified obsolete slowmoving inventory accordingly company performs ongoing evaluations customers adjusts credit ratings accordingly company continuously monitors collections payments customers maintains provision uncollectable amounts based historical experience issues identified credit losses historically within expectations company cannot guarantee continue future allowances recorded 2003 2002 2001 approximately 140000 582000 311000 respectively amount written net recoveries 2003 737000 related primarily old receivables acquired part smx acquisition company reserved doubtful receivables 2002 therefore income statement effect writeoff 2003 transactions related parties company leases headquarters xenon research inc xenon issued outstanding capital stock owned simon raab companys president chief executive officer diana raab spouse term lease expires february 28 2006 company two fiveyear renewal options base rent lease 398000 2003 base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers foreign exchange exposure company conducts significant portion business outside united states present slight majority companys revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect companys business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results companys operations cannot accurately predicted extent percentage companys nonus dollar revenues derived international sales increases future companys exposure risks associated fluctuations foreign exchange rates increase inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2004 impact recently issued accounting standards november 2002 emerging issues task force eitf reached consensus issue 0021 multipledeliverable revenue arrangements eitf 0021 eitf 0021 addresses account arrangements may involve delivery performance multiple products services andor rights use assets consensus mandates identify whether goods services delivered separately bundled sales arrangement accounted separately separate units accounting guidance affect timing revenue recognition arrangements even though change rules governing timing pattern revenue recognition individual items accounted separately final consensus applicable agreements entered fiscal years beginning june 15 2003 early adoption permitted additionally companies permitted apply consensus guidance existing arrangements cumulative effect change accounting principle accordance apb opinion 20 accounting changes company assessing point believe adoption eitf 0021 material impact financial position cash flows results operations january 2003 financial accounting standard board fasb issued fasb interpretation 46 fin 46 consolidation variable interest entities interpretation accounting research bulletin 51 consolidated financial statements addresses consolidation business enterprises variable interest entities current practice two enterprises generally included consolidated financial statements one enterprise controls voting interests interpretation defines concept variable interests requires existing unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks among parties involved interpretation applied immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applied first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 reasonably possible enterprise consolidate disclose information variable interest entity interpretation becomes effective enterprise shall disclose information entities financial statements issued january 31 2003 interpretation may applied prospectively cumulativeeffect adjustment date first applied restating previously issued financial statements one years cumulativeeffect adjustment beginning first year restated completed assessment interpretation determined party variable interest entities december 31 2003 december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure sfas 148 amendment sfas 123 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent frequent disclosures financial statements effects stockbased compensation statement effective financial statements fiscal years ending december 15 2002 adoption sfas 148 material impact companys financial position results operations april 2003 fasb issued statement financial accounting standards 149 sfas 149 amendment statement 133 derivative instruments hedging activities statement amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts collectively referred derivatives hedging activities statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities statement effective contracts entered modified june 30 2003 adoption standard material impact financial position results operations may 2003 fasb issued statement financial accounting standards 150 sfas 150 accounting certain financial instruments characteristics liabilities equity statement establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances standard effective beginning first interim period beginning june 15 2003 except mandatorily redeemable financial instruments nonpublic entities subject provisions statement first fiscal period beginning december 15 2003 adoption standard material impact financial position results operations cautionary statements discuss expectations regarding future performance make forwardlooking statements annual quarterly reports press releases written oral statements forwardlooking statements based currently available competitive financial economic data operating plans inherently uncertain investors must recognize events could turn significantly different expectations following discussion risks uncertainties exclusive highlights important factors consider evaluating trends future results customers buying process products highly decentralized therefore typically requires significant time expense us penetrate potential market specific customer may delay ability generate additional revenue success depend part ability penetrate customer base customers decentralized buying process measurement devices thus must spend significant time resources increase revenues specific customer example may provide products one customers manufacturing facilities specific product line within manufacturing facility cannot assure able maintain increase amount sales existing customers others may develop products make products obsolete less competitive computeraided manufacturing measurement cam2 market emerging could characterized rapid technological change others may develop new improved products processes technologies may make products obsolete less competitive cannot assure able adapt evolving markets technologies maintain technological advantage success depend part ability maintain technological advantage developing new products enhancing existing products developing new products enhancing existing products complex timeconsuming significant delays new product releases difficulties developing new products could adversely affect revenues results operations customers concentrated industries reduction sales one industries could cause significant decline revenues approximately 75 sales manufacturers automotive aerospace heavy equipment industries dependent upon continued growth viability financial stability customers industries highly cyclical dependent upon general health economy consumer spending cyclical nature industries may exert significant influence revenues results operations addition volume orders customers prices products may adversely impacted decreases capital spending significant portion customers recessionary periods addition generate significant accounts receivable connection providing products services customers one significant customers become insolvent otherwise unable pay products provided us operating results financial condition would adversely affected inability protect patents proprietary rights united states foreign countries could adversely affect revenues success depends large part ability obtain maintain patent proprietary right protection processes products united states countries also rely upon trade secrets technical knowhow continuing inventions maintain competitive position seek protect technology trade secrets part confidentiality agreements employees contractors employees may breach agreements trade secrets may otherwise become known independently discovered inventors unable obtain maintain protection patents trade secrets proprietary rights may able prevent third parties using proprietary rights patent protection involves complex legal technical questions patents may challenged narrowed invalidated circumvented may able protect proprietary rights infringement third parties extent proprietary processes products covered valid enforceable patents effectively maintained trade secrets furthermore others may independently develop similar alternative technologies design around patented technologies litigation proceedings defend enforce intellectual property rights could require us spend significant time money could otherwise adversely affect business claims others infringe intellectual property rights may adversely affect operations time receive notices others claiming infringe intellectual property rights number claims may grow responding claims may require us enter royalty licensing agreements unfavorable terms require us stop selling redesign affected products require us pay damages litigation interference proceedings regardless outcome may costly may require significant time attention management technical personnel operating results may fluctuate due number factors many beyond control annual quarterly operating results varied significantly past likely vary significantly future result size timing customer orders amount time takes fulfill orders ship products length sales cycle new customers time expense incurred penetrating existing customer base increases operating expenses required product development new product marketing costs associated new product introductions assembly line startup costs low introductory period production volumes timing market acceptance new products product enhancements customer order deferrals anticipation new products product enhancements success expanding sales marketing programs startup costs associated opening new sales offices outside united states fluctuations revenue without proportionate adjustments fixed costs efficiencies achieved managing inventories fixed assets adverse changes manufacturing industry general economic conditions one combination factors could adversely affect annual quarterly operating results future cam2 market emerging market growth depends ability products attain broad market acceptance cam2 market early stage adoption market traditional fixedbase coordinate measurement machines cmms check fixtures handheld measurement tools mature part strategy continue displace traditional measurement devices displacing traditional measurement devices achieving broad market acceptance products requires significant effort convince manufacturers reevaluate historical measurement procedures methodologies market three closely interdependent products faroarms faro laser tracker faro gage related software use measurement inspection applications substantially revenues currently derived sales products software plan continue business strategy focusing portable softwaredriven 3d measurement inspection market consequently financial performance depend large part portable computerbased measurement inspection products achieving broad market acceptance products cannot attain broad market acceptance grow anticipated may required make increased expenditures research development new applications new products compete manufacturers portable measurement systems traditional measurement devices many resources us may develop products technologies directly compete us portable measurement systems compete broad market measurement devices manufacturing industrial applications addition portable articulated arms laser tracker products consists fixedbase cmms check fixtures handheld measurement tools broad market measurement devices highly competitive manufacturers handheld measurement tools fixedbase cmms include significant number wellestablished companies substantially larger possess substantially greater financial technical marketing resources possess laser tracker product line compete primarily leica geosystems significantly larger us believe currently leader product line required make continued investments technology product development maintain technological advantage competition cannot assure sufficient resources make additional investments technology product development product development efforts allow us successfully compete industry evolves competitors may develop products technologies directly compete us example fixedbase cmms introducing computeraideddesign cadbased inspection software response trend toward cadbased factory floor metrology addition fixedbase cmm manufacturers miniaturizing increasing mobility conventional cmms companies may continue alter products devote resources development marketing additional products compete derive substantial part revenues international operations subject greater volatility often require management time expense achieve profitability domestic operations since 2000 derived 50 sales international operations recently opened manufacturing facility schaufhausen switzerland regional sales offices germany france spain italy japan united kingdom process opening first direct sales offices china trade relations united states china deteriorate ability transfer products china regions world including united states asia europe could significantly impaired results operations would suffer experience entry new international markets requires considerable management time well startup expenses market development hiring establishing office facilities significant revenues generated result initial operations new market may operate low margins may unprofitable international operations may subject number risks including difficulties staffing managing foreign operations political economic instability unexpected changes regulatory requirements laws longer customer payment cycles difficulty collecting accounts receivable export duties import controls trade barriers governmental restrictions transfer funds us operations outside united states burdens complying wide variety foreign laws labor practices fluctuations currency exchange rates could affect local payroll utility expenses inability use net operating losses incurred foreign operations reduce us income taxes several countries operate emerging developing economies may subject greater currency volatility negative growth high inflation limited availability foreign exchange risks factors may harm results operations measures may implement reduce effect volatile currencies risks international operations may effective addition 1997 1998 several asian countries including japan experienced severe currency fluctuation economic deflation situations reoccur occur regions operate may negatively impact sales ability collect payments customers regions rely large extent experience management ability senior executive officers success depend part services founders simon raab chief executive officer gregory fraser executive vice president chief financial officer loss interruption continued fulltime services executives could material adverse effect us employment agreements executives may able identify consummate achieve expected benefits acquisitions completed two significant acquisitions since initial public offering 1997 intend pursue access additional technologies complementary product lines sales channels selective acquisitions strategic investments may able identify successfully negotiate suitable acquisitions obtain financing future acquisitions satisfactory terms otherwise complete acquisitions future past used stock consideration acquisitions common stock may remain price used consideration acquisitions without diluting existing shareholders potential acquisition candidates may view stock attractively realization benefits acquisitions often requires integration acquired companies sales marketing distribution manufacturing engineering finance administrative organizations integration acquisitions demands substantial attention senior management acquired companies acquisition may subject variety risks uncertainties including inability assimilate effectively operations products technologies personnel acquired companies may located diverse geographic regions inability maintain uniform standards controls procedures policies need obligation divest portions acquired companies potential impairment relationships customers cannot assure able integrate successfully acquisitions acquired companies operate profitably realize expected benefits acquisition may face difficulties managing growth placed significant demands management operations financial resources business continues grow rapidly future expect result increased responsibility existing new management personnel incremental strain operations financial management systems success conditions depend significant extent ability executive officers members senior management operate effectively independently group able manage future growth business financial condition operating results may harmed dependence suppliers materials could impair ability manufacture products outside vendors provide key components used us manufacture products although believe alternative sources components available supply interruption limited source component would harm ability manufacture products new source supply identified addition uncorrected defect suppliers variation component either known unknown us incompatible manufacturing processes could harm ability manufacture products may able find sufficient alternative supplier reasonable period commercially reasonable terms fail obtain supplier manufacture components potential products may experience delays interruptions operations would adversely affect results operations financial condition may experience volatility stock price common stock may continue highly volatile response various factors many beyond control including developments industries operate actual anticipated variations quarterly annual operating results speculation press investment community announcements technological innovations new products us competitors common stocks market price may also affected inability meet analyst investor expectations failure achieve projected financial results including set forth prospectus failure meet expectations projected financial results even minor could cause market price common stock decline volatility stock price may result inability sell shares price purchased addition stock markets generally experienced high level price volume volatility market prices equity securities many companies experienced wide price fluctuations necessarily related operating performance companies broad market fluctuations may adversely affect common stocks market price past securities class action lawsuits frequently instituted companies following periods volatility market price companies securities litigation instigated us could result substantial costs diversion managements attention resources could material adverse effect business results operations financial condition executive officers directors control significant percentage common stock shareholders may take actions adverse interests executive officers directors entities affiliated aggregate beneficially approximately 240 common stock 210 beneficially owned two cofounders simon raab gregory fraser result shareholders acting together significantly influence matters requiring shareholder approval including election removal directors approval significant corporate transactions mergers consolidations sales assets also could dictate management business affairs concentration ownership could effect delaying deferring preventing change control impeding merger consolidation takeover business combination could cause market price common stock fall prevent receiving premium transaction antitakeover provisions articles incorporation bylaws provisions florida law could delay prevent change control may favor articles incorporation bylaws florida law could make difficult third party acquire us even would beneficial provisions could discourage potential takeover attempts could adversely affect market price shares provisions might able receive premium investment provisions include limitation shareholders ability call special meeting shareholders advance notice requirements nominate directors election board directors propose matters acted shareholders shareholder meetings authority board directors issue without shareholder approval preferred stock terms board directors may determine provisions described could delay make difficult transactions involving change control us management item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview design develop market support portable softwaredriven 3d measurement systems used broad range manufacturing industrial applications principal products faro arm faro gage articulated arm measuring devices faro laser tracker laserbased measuring device companion cam2 software provide cadbased inspection factorylevel statistical process control first half 2004 introduced new noncontact laser probe option faro arm sold together combination faro arm laser probe option called faro scan arm together products integrate measurement quality inspection function cad software improve productivity enhance product quality decrease rework scrap manufacturing process products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor pioneer development marketing 3d measurement technology manufacturing industrial applications currently hold 39 patents products purchased 3800 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimler chrysler general electric general motors honda johnson controls komatsu dresser lockheed martin siemens volkswagen among many others continue pursue international markets established sales offices france germany 1996 great britain 1997 japan spain 2000 italy 2001 china 2003 opened sales offices south korea india fourth quarter 2004 2003 began manage report global sales three regions americas europeafrica asiapacific 2004 430 sales americas compared 527 2003 444 europeafrica region compared 386 2003 126 asiapacific region compared 87 2003 see also note 20 geographic data financial statements although expect variations percentage sales asiapacific region quarter going forward generally expect higher percentage sales growth asiapacific region regions 2005 2006 result new sales offices china india south korea addition sales personnel opening service center japan office also expect open asiapacific regional headquarters singapore 2005 derive revenues primarily sale faro arm faro scan arm faro gage faro laser tracker 3d measurement equipment related multifaceted cam2 software revenue related products recognized upon shipment addition sell one threeyear extended warranties training technology consulting services relating products recognize revenue extended warranties proportionately manner costs incurred revenues also receive royalties licensing agreements historical medical technology generally recognize revenue royalties licensees use technology royalties licensing agreements 817000 601000 990000 2004 2003 2002 respectively 2003 began manufacture faro arm products switzerland customer orders europeafrica asiapacific regions began manufacture faro gage product parts faro laser tracker product swiss plant third quarter 2004 expect begin complete production faro laser tracker product swiss plant 2005 production products customer orders americas done manufacturing facilities located florida pennsylvania expect existing plants production capacity necessary support growth least 2006 cost sales consists primarily material production overhead labor since ipo 1997 annual gross margin range 5464 sales established goal maintaining target full year ranges 2005 gross margin 59 62 operating margin 145 185 gross margin fiscal 2004 within range 618 although gross margin fourth quarter 2004 range 580 partly result higher proportion sales coming demonstration equipment carry lower margins selling expenses percentage sales grew slightly 2004 267 compared 256 2003 higher percentage 2004 due addition new sales personnel asiapacific region resulting higher costs additional sales people become fully trained productive established goal maintaining selling expenses percentage sales 25 general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses general administrative expenses higher second half 2004 due part increase professional legal expenses approximately 670000 directly related compliance sarbanesoxley section 404 regarding internal controls procedures expect amount approximately 500000 2005 notwithstanding expected higher ongoing costs compliance new laws regulations governing public companies united states expect general administrative expenses gradually drop approximately 10 sales higher sales require proportionate increase expenses research development expenses represent salaries equipment thirdparty services commitment support ongoing research development intend continue fund efforts level 57 sales going forward expect incur expenses approximately 2 million 2005 calculated blackscholes method fas 123 related expected adoption fas 123r expensing stock options investigating valuation methods expenses prior adoption fas 123r expenses apportioned according employees received stock options cost sales selling general administrative research development costs 2003 2004 able use previously reserved net operating loss carryforwards reduced effective tax rate 123 2003 23 2004 also received favorable permanent income tax rate commitment swiss government incentive establish manufacturing plant switzerland providing deferred tax assets temporary differences scheduled reverse commitment period earnings included current tax provision second quarter 2005 expect approximately 60 total shipments come swiss plant shipments europeafrica asiapacific regions result expect blended consolidated tax rate 20 2005 could fluctuate depending upon among things ability use previously reserved net operating loss carryforwards amount sales europe shipments swiss plant see critical accounting policies income taxes accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure however regularly use instruments none utilized 2004 2003 ten consecutive profitable quarters december 31 2004 followed period losses 2001 first half 2002 resulted economic slowdown manufacturing 2001 expenses arising acquisition january 2002 spatialmetrix corporation smx sales growth return profitability since result number factors including acquisition smx manufactured predecessor faro laser tracker introduction october 2002 latest generation traditional faro arm product introduction faro gage september 2003 introduction faro scan arm product 2004 increase number sales people worldwide sales marketing headcount 2004 2003 2002 167 120 106 respectively third quarter 2003 company recorded approximately 11 million income result receiving approximately 100000 shares company stock related positive arbitration settlement company former smx shareholders november 12 2003 sold 1158000 shares common stock certain institutional investors private placement shares sold 2150 per share resulting total proceeds placement agent fees offering expenses 249 million transaction significantly increased cash available variety potential uses including working capital acquisitions capital expenditures ongoing international expansion see also “liquidity capital resources” results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations compared 2003 sales increased 252 million 351 718 million year ended december 31 2003 970 million year ended december 31 2004 increase resulted higher unit sales faro arm faro laser tracker faro gage products overall increase headcount sales marketing 47 392 120 2003 167 2004 geographically sales increased 38 million 100 americas 154 million 556 europeafrica 60 million 968 asiapacific region sales growth driven large extent growth number sales people expect new sales people learning curve 36 months fully functional 2004 sales marketing headcount increased 23 44 54 americas 13 67 76 europe africa 311 9 37 asiapacific region gross profit gross profit increased 177 million 418 423 million year ended december 31 2003 600 million year ended december 31 2004 gross margin increased 589 year ended december 31 2003 618 year ended december 31 2004 due reduced price discounts reduced service costs percentage sales 90 2003 85 2004 result improvements product quality efficiencies production selling expenses selling expenses increased 76 million 415 183 million year ended december 31 2003 259 million year ended december 31 2004 increase result higher commissions 30 million higher salaries bonuses 25 million higher product demonstration costs 12 million higher marketing costs 09 million percentage sales selling expenses increased 267 sales 2004 256 2003 general administrative expenses general administrative expenses increased 19 million 194 98 million year ended december 31 2003 117 million year ended december 31 2004 increase due higher salaries bonuses 14 million higher professional legal fees 787000 higher facilities rent 349000 partially offset reduced stock option expense 441000 general administrative expenses percentage sales fell 121 sales 2004 137 sales 2003 filings prior form 10q third quarter 2004 represented cost employee stock options separate line item consolidated statements operations accordance sec regulation sx eliminated separate line item periods presented included cost employee stock options appropriate expense category according employee’s function virtually employees stock options gave rise expense administration result 98 million general administration expenses 2003 reported higher 91 million previously reported form 10k 2003 07 million employee stock option expense 2003 depreciation amortization expenses depreciation amortization expenses increased 220000 105 21 million year ended december 31 2003 23 million 2004 due increase depreciation new equipment capital leases research development expenses research development expenses increased 910000 202 45 million year ended december 31 2003 54 million year ended december 31 2004 due increase salaries bonuses 660000 increase external services project expenses 250000 research development expenses percentage sales 56 2004 compared 63 2003 interest income expense interest income increased 274000 334 82000 year ended december 31 2003 356000 year ended december 31 2004 primarily increase investments 2004 related proceeds company’s sale stock november 2003 see also overview liquidity capital resources interest expense decreased 34000 46000 year ended december 31 2003 12000 year ended december 31 2004 see liquidity capital resources income net income net decreased 16 million 20 million year ended december 31 2003 04 million year ended december 31 2004 decrease primarily due settlement litigation former shareholders smx 11 million 2003 see also note 2 acquisition reduction foreign exchange gains 153000 2004 income tax expense income tax expense decreased 08 million 12 million year ended december 31 2003 358000 year ended december 31 2004 effective tax rate 2004 23 income tax compared 123 2003 primary reason lower expected tax rate tax benefit attributable reduction valuation allowance approximately 32 million reduction 15 million relates usage “net operating losses” foreign jurisdictions 17 million reduction valuation allowance relates partial release valuation allowance taken fourth quarter foreign deferred tax assets company believes likely realized company determined amount deferred tax assets relating net operating loss carryforwards foreign subsidiaries understated approximately 37 million december 31 2003 net operating loss carryforwards fully reserved december 31 2003 valuation allowance income statement balance sheet impact recognized 2003 company 50 million net deferred tax assets remaining likely realized 2005 thereafter company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 24 million income tax benefit received exercise unqualified stock options employees net income loss net income increased 66 million 795 83 million year ended december 31 2003 149 million year ended december 31 2004 result factors described compared 2002 sales increased 256 million 554 462 million year ended december 31 2002 718 million year ended december 31 2003 increase resulted higher unit sales faro arm laser tracker products increase headcount sales marketing 106 2002 120 2003 15 average price increase existing products january 1 2003 geographically sales increased 154 million 685 americas 92 million 498 europeafrica 09 million 178 asiapacific region gross profit gross profit increased 171 million 681 251 million year ended december 31 2002 422 million year ended december 31 2003 gross margin percentage increased 544 year ended december 31 2002 589 year ended december 31 2003 due higher selling prices efficiencies faro laser tracker manufacturing plant output selling expenses selling expenses increased 44 million 317 139 million year ended december 31 2002 183 million year ended december 31 2003 increase result increased sales head count higher commissions due higher sales percentage sales selling expenses dropped 256 sales 2003 300 2002 general administrative expenses general administrative expenses increased 19 million 241 79 million year ended december 31 2002 98 million year ended december 31 2003 increase primarily due increase professional legal fees stock option expense service charges network costs general administrative expenses percentage sales fell 137 sales 2003 170 sales 2002 depreciation amortization expenses depreciation amortization expenses decreased 149000 65 23 million year ended december 31 2002 21 million 2003 due reduction amortization existing product technology 374000 offset increase 225000 depreciation new equipment research development expenses research development expenses increased 497000 124 40 million year ended december 31 2002 45 million year ended december 31 2003 due primarily increased subcontractor costs materials company commitment spend least 5 sales research development interest income expense interest income decreased 479000 854 561000 year ended december 31 2002 82000 year ended december 31 2003 primarily lower average investments lower interest rates 2003 interest expense increased 18000 28000 year ended december 31 2002 46000 year ended december 31 2003 due increased use credit line see liquidity capital resources income net increased 14 million 601000 year ended december 31 2002 20 million year ended december 31 2003 due primarily settlement litigation former shareholders smx 11 million see also note 2acquisition income tax expense income tax expense increased 947000 211000 year ended december 31 2002 12 million year ended december 31 2003 effective tax rate 2003 123 income tax primary reason relatively low tax rate reduction valuation allowance approximately 40 million reduction 28 million relates usage net operating losses foreign jurisdictions 12 million reduction valuation allowance relates domestic assets company believes likely realized company 17 million deferred tax assets remaining may recognized 2004 company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 14 million income tax benefit received exercise unqualified stock options employees net income loss results operations increased 103 million loss 20 million year ended december 31 2002 83 million year ended december 31 2003 result factors described liquidity capital resources since 1997 company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 317 million november 12 2003 company along companys two cofounders completed 415 million private placement common stock various institutional investors terms agreement company agreed sell 1158000 shares approximately 8 total shares outstanding two cofounders company simon raab gregory fraser agreed sell 772000 shares approximately 20 holdings aggregate shares sold 2150 per share resulting total proceeds placement agent fees offering expenses 249 million 166 million company cofounders respectively september 17 2003 company entered loan agreement suntrust bank line credit 5 million agreement renewed due mature august 31 2005 facility bears interest rate libor plus 175 company drawn line credit january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes year ended december 31 2004 net cash provided operating activities 73 million compared 47 million 2003 26 million increase reflects growth net income 66 million increase income tax benefit exercise stock options 10 million absence 11 million income realized company stock settlement smx litigation 2003 partially offset increases accounts receivable 46 million deferred income tax benefit 16 million net cash used investing activities year ended december 31 2004 99 million compared 152 million 2003 primarily due reduction net investment purchases 78 million net cash provided financing activities year ended december 31 2004 11 million compared 230 million 2003 due reduction proceeds issuance stock 232 million believe working capital together anticipated cash flow operations sufficient fund longterm liquidity requirements contractual obligations commercial commitments company party capital leases automotive equipment initial term 36 60 months noncancelable operating leases including leases related parties expire 2009 obligations presented december 31 2004 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days longterm commitments purchases critical accounting policies response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing allowance obsolete slowmoving inventory allowance doubtful accounts income tax reserve warranties policies affect current assets operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could create adverse impact operations financial position reserve obsolescence since amount inventoriable cost truly recoup sales cannot known exact certainty rely upon past sales experience future sales forecasts inventory considered obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months accordingly reserve amount equal 100 average cost inventory recorded order reduce carrying value net realizable value allowance doubtful accounts perform ongoing evaluations customers adjust credit ratings accordingly continuously monitor collections payments customers maintain allowance uncollectible amounts based historical experience issues identified credit losses historically within expectations cannot guarantee continue future income taxes review deferred tax assets regular basis evaluate recoverability based projections turnaround timing deferred tax liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board fasb statement 109 “accounting income taxes” sfas 109 establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world 2003 company began manufacture products switzerland received permanent income tax rate commitment swiss government incentive establish manufacturing plant company provide deferred tax assets temporary differences scheduled reverse commitment period earnings included current tax provision approximately 60 finished goods shipments come swiss plant balance coming company’s manufacturing facilities located united states significant judgment required determine worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain appropriately reserved tax uncertainties based criteria established sfas 5 “accounting loss contingencies” uncertainties arise result intercompany arrangements share revenue costs arrangements uncertainties amount manner sharing could ultimately result changes arrangements reviewed taxing authorities reserve warranties company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month rate multiplied number machinemonths warranty product group sold period determine provision warranty expenses period company reevaluates exposure warranty costs end period using estimated expense per installation month major product group number machines remaining warranty remaining number months machine warranty expenses historically within expectations cannot guarantee continue future transactions related parties company leases headquarters lake mary florida xenon research inc issued outstanding capital stock owned simon raab companys chief executive officer diana raab spouse term lease expires february 28 2006 company fiveyear renewal option base rent lease 398000 2004 2003 2002 base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers may 1998 company acquired cats gmbh german company cats june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 47 granted borrowers option extend term additional three years loans repaid company 2003 company engaged cole partners mergers acquisition corporate finance advisory service firm serve company’s financial advisor connection company’s acquisition january 2002 smx stephen r cole one company’s directors member audit committee founding partner president cole partners company paid cole partners total fees 450000 services final payment 300000 paid 2002 fees paid cole partners 2004 2003 foreign exchange exposure conduct significant portion business outside united states present approximately 50 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future exposure risks associated fluctuations foreign exchange rates may increase decrease inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2005 impact recently issued accounting standards january 2003 fasb issued subsequently revised december 2003 fin 46 consolidation variable interest entities fin 46 interpretation arb 51 consolidated financial statements addresses consolidation business enterprises variable interest entities current practice two enterprises generally included consolidated financial statements one enterprise controls voting interests fin 46 defines concept variable interests requires existing unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks among parties involved fin 46 applied immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applied first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 fin 46r deferred effective date fin 46 first reporting period ending december 15 2003 reasonably possible enterprise consolidate disclose information variable interest entity interpretation becomes effective enterprise shall disclose information entities financial statements issued january 31 2003 fin 46 may applied prospectively cumulativeeffect adjustment date first applied restating previously issued financial statements one years cumulativeeffect adjustment beginning first year restated light current proposed changes fin 46 continuing assessment determine whether party variable interest entities may 2003 fasb issued statement financial accounting standards sfas 150“accounting certain financial instruments characteristics liabilities equity” sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity sfas 150 requires issuer classify financial instrument within scope liability asset circumstances sfas 150 effective beginning first interim period beginning june 15 2003 adoption sfas 150 material impact financial position results operations november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 retains general principle arb 43 chapter 4 “inventory pricing” inventories presumed stated cost however amends arb 43 clarify abnormal amounts idle facilities freight handling costs spoilage recognized current period expenses also sfas 151 requires fixed overhead costs allocated inventories based normal production capacity guidance safs 151 effective inventory costs incurred fiscal years beginning june 15 2005 company believes implementing sfas 151 material impact financial position results operations december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed apb opinion 25 allowed original provisions sfas 123 sfas 123r requires use option pricing model estimating fair value amortized expense service periods requirements sfas 123r effective fiscal periods beginning june 15 2005 company applied provisions sfas 123 financial statements period ending december 31 2004 net income would reduced approximately 12 million using blackscholes option pricing model expect incur expenses approximately 2 million 2005 calculated blackscholes method sfas 123 related expected adoption sfas 123r expensing stock options investigating valuation methods expenses prior adoption sfas 123r cautionary statements discuss expectations regarding future performance make forwardlooking statements annual quarterly reports press releases written oral statements forwardlooking statements based currently available competitive financial economic data operating plans inherently uncertain investors must recognize events could turn significantly different expectations following discussion risks uncertainties exclusive highlights important factors consider evaluating trends future results customers buying process products highly decentralized therefore typically requires significant time expense us penetrate potential market specific customer may delay ability generate additional revenue success depend part ability penetrate customer base 2004 527 revenue attributable sales existing customers compared 546 2003 able continue penetrate existing customer base sales growth impaired customers decentralized buying process measurement devices thus must spend significant time resources increase revenues specific customer example may provide products one customers manufacturing facilities specific product line within manufacturing facility cannot certain able maintain increase amount sales existing customers others may develop products make products obsolete less competitive cam2 market emerging could characterized rapid technological change others may develop new improved products processes technologies may make products obsolete less competitive cannot assure able adapt evolving markets technologies maintain technological advantage success depend part ability maintain technological advantage developing new products applications enhancing existing products developing new products applications enhancing existing products complex timeconsuming require substantial investment us significant delays new product releases difficulties developing new products could adversely affect revenues results operations customers concentrated industries reduction sales one industries could cause significant decline revenues economic slowdown manufacturing affect growth profitability approximately 75 sales manufacturers automotive aerospace heavy equipment industries dependent upon continued growth viability financial stability customers industries highly cyclical dependent upon general health economy consumer spending cyclical nature industries may exert significant influence revenues results operations addition volume orders customers prices products may adversely impacted decreases capital spending significant portion customers recessionary periods addition generate significant accounts receivable connection providing products services customers one significant customers become insolvent otherwise unable pay products provided us operating results financial condition would adversely affected potential size growth cam2 market could less anticipate cam2 market emerging potential size growth cam2 market uncertain difficult quantify cam2 market continue expand least quickly anticipate able continue sales growth affect profitability inability protect patents proprietary rights united states foreign countries could adversely affect revenues success depends large part ability obtain maintain patent proprietary right protection processes products united states countries also rely upon trade secrets technical knowhow continuing inventions maintain competitive position seek protect technology trade secrets part confidentiality agreements employees contractors employees may breach agreements trade secrets may otherwise become known independently discovered inventors unable obtain maintain protection patents trade secrets proprietary rights may able prevent third parties using proprietary rights patent protection involves complex legal technical questions patents may challenged narrowed invalidated circumvented may able protect proprietary rights infringement third parties extent proprietary processes products covered valid enforceable patents effectively maintained trade secrets furthermore others may independently develop similar alternative technologies design around patented technologies litigation proceedings defend enforce intellectual property rights could require us spend significant time money could otherwise adversely affect business claims others infringe intellectual property rights may adversely affect operations time receive notices others claiming infringe intellectual property rights number claims may grow responding claims may require us enter royalty licensing agreements unfavorable terms require us stop selling redesign affected products require us pay damages litigation interference proceedings regardless outcome may costly may require significant time attention management technical personnel operating results may fluctuate due number factors many beyond control annual quarterly operating results varied significantly past likely vary significantly future result · size timing customer orders many received towards end quarter · sales promotions sales demonstration equipment · geographic expansion asiapacific region regions · training rampup time new sales people · investments technologies new products · effective tax rate · amount time takes fulfill orders ship products · length sales cycle new customers time expense incurred penetrating existing customer base · increases operating expenses product development new product marketing · costs associated new product introductions assembly line startup costs low introductory period production volumes · timing market acceptance new products product enhancements · customer order deferrals anticipation new products product enhancements · success expanding sales marketing programs · startup costs rampup time associated opening new sales offices outside united states · fluctuations revenue without proportionate adjustments fixed costs · efficiencies achieved managing inventories fixed assets · adverse changes manufacturing industry general economic conditions one combination factors could adversely affect annual quarterly operating results future cam2 market emerging market growth depends ability products attain broad market acceptance cam2 market early stage adoption market traditional fixedbase cmms check fixtures handheld measurement tools mature part strategy continue displace traditional measurement devices displacing traditional measurement devices achieving broad market acceptance products requires significant effort convince manufacturers reevaluate historical measurement procedures methodologies market four closely interdependent products faro arm scan arm faro laser tracker faro gage related software use measurement inspection applications substantially revenues currently derived sales products software plan continue business strategy focusing portable softwaredriven 3d measurement inspection market consequently financial performance depend large part portable computerbased measurement inspection products achieving broad market acceptance products cannot attain broad market acceptance grow anticipated may required make increased expenditures research development new applications new products compete manufacturers portable measurement systems traditional measurement devices many resources us may develop products technologies directly compete us portable measurement systems compete broad market measurement devices manufacturing industrial applications addition portable articulated arms laser tracker products consists fixedbase cmms check fixtures handheld measurement tools broad market measurement devices highly competitive faro gage product line manufacturers handheld measurement tools fixedbase cmms include significant number wellestablished companies substantially larger possess substantially greater financial technical marketing resources possess faro arm product line compete hexagon metrology significantly larger us faro laser tracker product line compete primarily leica geosystems significantly larger us required make continued investments technology product development maintain technological advantage competition cannot assure sufficient resources make additional investments technology product development product development efforts allow us successfully compete industry evolves competitors may develop products technologies directly compete us example fixedbase cmm manufacturers introducing cadbased inspection software response trend toward cadbased factory floor metrology addition fixedbase cmm manufacturers miniaturizing increasing mobility conventional cmms companies may continue alter products devote resources development marketing additional products compete derive substantial part revenues international operations subject greater volatility often require management time expense achieve profitability domestic operations since 2000 derived approximately 50 sales international operations opened manufacturing facility schaffhausen switzerland 2003 regional sales offices germany france spain italy japan china india south korea united kingdom trade relations united states china deteriorate ability transfer products china regions world including united states asia europe could significantly impaired results operations would suffer experience entry new international markets requires considerable management time well startup expenses market development hiring establishing office facilities significant revenues generated result initial operations new market may operate low margins may unprofitable international operations may subject number risks including · difficulties staffing managing foreign operations · political economic instability · unexpected changes regulatory requirements laws · longer customer payment cycles difficulty collecting accounts receivable · export duties import controls trade barriers · governmental restrictions transfer funds us operations outside united states · burdens complying wide variety foreign laws labor practices · fluctuations currency exchange rates could affect local payroll utility expenses several countries operate emerging developing economies may subject greater currency volatility negative growth high inflation limited availability foreign exchange risks factors may harm results operations measures may implement reduce effect volatile currencies risks international operations may effective addition 1997 1998 several asian countries including japan experienced severe currency fluctuation economic deflation situations reoccur occur regions operate may negatively impact sales ability collect payments customers regions rely large extent experience management ability senior executive officers success depend part services founders simon raab chief executive officer gregory fraser executive vice president secretary treasurer jay freeland president chief operating officer hired november 2004 chief financial officer barbara smith hired february 2005 loss interruption continued fulltime services executives could material adverse effect us employment agreements executives may able identify consummate achieve expected benefits acquisitions completed two significant acquisitions since initial public offering 1997 intend pursue access additional technologies complementary product lines sales channels selective acquisitions strategic investments may able identify successfully negotiate suitable acquisitions obtain financing future acquisitions satisfactory terms otherwise complete acquisitions future past used stock consideration acquisitions common stock may remain price used consideration acquisitions without diluting existing shareholders potential acquisition candidates may view stock attractively realization benefits acquisitions often requires integration acquired companies sales marketing distribution manufacturing engineering finance administrative organizations integration acquisitions demands substantial attention senior management acquired companies acquisition may subject variety risks uncertainties including · inability assimilate effectively operations products technologies personnel acquired companies may located diverse geographic regions · inability maintain uniform standards controls procedures policies · need obligation divest portions acquired companies · potential impairment relationships customers cannot assure able integrate successfully acquisitions acquired companies operate profitably realize expected benefits acquisition may face difficulties managing growth placed significant demands management operations financial resources business continues grow rapidly future expect result · increased responsibility existing new management personnel · incremental strain operations financial management systems success conditions depend significant extent ability executive officers members senior management operate effectively independently group able manage future growth business financial condition operating results may harmed dependence suppliers materials could impair ability manufacture products outside vendors provide key components used us manufacture products although believe alternative sources components available supply interruption limited source component would harm ability manufacture products new source supply identified addition uncorrected defect suppliers variation component either known unknown us incompatible manufacturing processes could harm ability manufacture products may able find sufficient alternative supplier reasonable period commercially reasonable terms fail obtain supplier manufacture components potential products may experience delays interruptions operations would adversely affect results operations financial condition may experience volatility stock price common stock may continue highly volatile response various factors many beyond control including · developments industries operate · actual anticipated variations quarterly annual operating results · speculation press investment community · announcements technological innovations new products us competitors common stocks market price may also affected inability meet analyst investor expectations failure achieve projected financial results including set forth prospectus failure meet expectations projected financial results even minor could cause market price common stock decline volatility stock price may result inability sell shares price purchased addition stock markets generally experienced high level price volume volatility market prices equity securities many companies experienced wide price fluctuations necessarily related operating performance companies broad market fluctuations may adversely affect common stocks market price past securities class action lawsuits frequently instituted companies following periods volatility market price companies securities litigation instigated us could result substantial costs diversion managements attention resources could material adverse effect business results operations financial condition executive officers directors control significant percentage common stock shareholders may take actions adverse interests two cofounders simon raab gregory fraser beneficially approximately 1924 common stock result shareholders acting together significantly influence matters requiring shareholder approval including election removal directors approval significant corporate transactions mergers consolidations sales assets also could dictate management business affairs concentration ownership could effect delaying deferring preventing change control impeding merger consolidation takeover business combination could cause market price common stock fall prevent receiving premium transaction antitakeover provisions articles incorporation bylaws provisions florida law could delay prevent change control may favor articles incorporation bylaws provisions florida law could make difficult third party acquire us even would beneficial provisions could discourage potential takeover attempts could adversely affect market price shares provisions might able receive premium investment provisions include · limitation shareholders ability call special meeting shareholders · advance notice requirements nominate directors election board directors propose matters acted shareholders shareholder meetings · classified board directors means approximately onethird directors elected year · authority board directors issue without shareholder approval preferred stock terms board directors may determine provisions described could delay make difficult transactions involving change control us management item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview design develop manufacture market support portable software driven 3d measurement systems used broad range manufacturing industrial building construction forensic applications company’s faro arm faro scan arm faro gage articulated measuring devices faro laser tracker companion cam2 software provide computeraided design cadbased inspection andor factorylevel statistical process control together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company uses acronym “cam2” process stands computeraided manufacturing measurement company’s digital template articulated measuring device related software used measure shape existing counter tops structures residential commercial buildings provide data required manufacture replacement countertops structures digital template reduces time required measure existing products provide data manufacturing machines create replacement structures compared traditional techniques march 2005 company acquired iqvolution ag german designer developer manufacturer portable laserbased device measuring detailed composition factories oil refineries structures device related software company sells product name laser scanner ls also forensic applications capturing detailed 3d crime scene information june 2006 company’s products purchased approximately 4900 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimler chrysler general electric general motors honda johnson controls komatsu dresser lockheed martin nissan siemens volkswagen among many others continue pursue international markets established sales offices france germany 1996 great britain 1997 japan spain 2000 italy 2001 china 2003 opened sales offices south korea india 2004 established sales offices poland netherlands malaysia vietnam singapore 2005 added new regional headquarters singapore third quarter 2005 along new manufacturing service facility fourth quarter 2005 2003 began manage report global sales three regions americas europeafrica asiapacific 2005 445 sales americas compared 430 2004 357 europeafrica region compared 444 2004 197 asiapacific region compared 126 2004 see also note 20 geographic data financial statements derive revenues primarily sale faro arm faro scan arm faro gage faro laser tracker faro laser scanner ls 3d measurement equipment related multifaceted software revenue related products recognized upon shipment addition sell one threeyear extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis also receive royalties licensing agreements historical medical technology generally recognize revenue royalties licensees use technology 2003 began manufacture faro arm products switzerland customer orders europeafrica asiapacific regions began manufacture faro gage product parts faro laser tracker product swiss plant third quarter 2004 began complete production faro laser tracker product swiss plant 2005 began manufacture faro arm products singapore plant fourth quarter 2005 expect begin production faro gage faro laser tracker first half 2006 expect singapore plant take swiss plant supplying asiapacific region’s needs products manufacture products customer orders americas done manufacturing facilities located florida pennsylvania faro laser scanner ls product currently manufactured new german facility located stuttgart expect existing plants production capacity necessary support growth least 2006 previously reported company’s form 8k dated march 15 2006 company learned china subsidiary made payments certain customers china may violated fcpa applicable laws company’s audit committee instituted internal investigation matter february 2006 company voluntarily notified sec doj matter march 2006 internal investigation matter completed company provided sec doj information obtained course investigation cooperating agencies company’s internal investigation identified certain improper payments made china deficiencies controls respect operations china possible violation fcpa sec doj determines violations fcpa occurred could seek civil criminal sanctions including monetary penalties company andor certain employees well additional changes company’s business practices compliance programs based current information possible predict time sec doj investigations resolved outcome sanctions imposed effect matters may ultimately company consolidated financial statements results investigation revealed referral fee payments possible violation fcpa 165000 265000 2004 2005 respectively recorded selling expenses companys statement income related sales customers payment referral fees made totaled approximately 13 million 324 million 2004 2005 respecively additional improper referral fee payments 122000 made january february 2006 related sales contracts 2005 company anticipates incurring expenses least 35 million 2006 relating internal investigation fcpa matter company terminated certain personnel asiapacific region reassigned duties personnel asiapacific region us result internal investigation company instituting following remedial measures · contracted third party forensics accounting team conduct indepth audit operations china countries asiapacific region make recommendations improvement internal control systems · reviewing third party distributor arrangements effort assure contracts include adherence fcpa · performing due diligence third party distributors implementing process assess potential new distributors · established inhouse internal audit function including hiring director internal audit · consolidating human resources financial accounting reporting functions asia region singapore operations · implemented internal certification process ascertain whether similar issues may exist elsewhere company · implemented quarterly internal certification process confirm adherence company policy applicable laws regulations include regional leadership country management sales management · implementing additional training fcpa matters employees confidential compliance reporting system company sales china 90 million 2005 42 million 2004 approximately 7 4 total sales respectively depending matter resolved company’s sales china could significantly impacted termination certain personnel cessation improper payments china may significant adverse effect future operations china action could negatively influence decisions significant number customers chinese subsidiary business subsidiary potential magnitude loss sales china result potential violations foreign corrupt practices act cannot estimated time company’s internal investigation business practices china became aware income taxes related certain commissions bonus payments employees properly reported company promptly remit deficiencies completed investigation time company anticipate amount material effect financial condition results operations company may subject penalties chinese tax authorities able determine amount assessment respect financial performance 2005 cost sales consists primarily material production overhead labor since ipo 1997 annual gross margin range 5464 sales gross margin fiscal 2005 within range 581 selling expenses percentage sales grew significantly 2005 297 compared 267 2004 higher percentage 2005 due addition new sales personnel related costs additional sales people become fully trained productive general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses general administrative expenses higher 2005 due part increase professional legal expenses approximately 20 million directly related increased patent litigation costs compliance sarbanesoxley section regarding internal controls procedures professional legal fees resulting internal investigation china research development expenses represent salaries equipment thirdparty services commitment support ongoing research development intend continue fund efforts level 57 sales going forward expect incur minimal expenses 2006 calculated blackscholes method sfas 123 related adoption sfas 123r expensing stock options vested substantially unvested options fourth quarter 2005 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods options purchase approximately 704310 shares company’s stock 525 company’s outstanding options accelerated weighted average exercise price options subject acceleration 2130 aggregate pretax expense shares subject acceleration would reflected company’s consolidated financial statements beginning 2006 approximately 77 million including 43 million 2006 27 million 2007 07 million 2008 fair value future grants included expense vesting periods expenses apportioned according classification employees received stock options cost sales selling general administrative research development costs 2005 worldwide effective tax rate 174 2004 able use previously reserved net operating loss carryforwards combined release 17 million valuation allowance reduced effective tax rate 23 2004 received favorable income tax rate commitment swiss government incentive establish manufacturing plant switzerland 2005 entered agreement singapore economic development board favorable multiyear income tax rate commitment covering singapore headquarters manufacturing operations see critical accounting policies income taxes accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure however regularly use instruments none utilized 2005 2004 2003 fourteen consecutive profitable quarters december 31 2005 sales growth profitability result number factors including acquisition smx manufactured predecessor faro laser tracker introduction october 2002 latest generation traditional faro arm product introduction faro gage september 2003 introduction faro scan arm product 2004 increase number sales people worldwide sales marketing headcount 2005 2004 2003 289 167 120 respectively 2003 company recorded approximately 11 million income result receiving approximately 100000 shares company stock related positive arbitration settlement company former smx shareholders november 12 2003 sold 1158000 shares common stock certain institutional investors private placement shares sold 2150 per share resulting total proceeds placement agent fees offering expenses 249 million transaction significantly increased cash available variety potential uses including working capital acquisitions capital expenditures ongoing international expansion january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes date raised capital form s3 registration statement company must file timely manner reports securities exchange act 1934 certain exceptions sec period 12 months order able use s3 registration statement see also liquidity capital resources results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements income compared 2004 sales increased 286 million 295 970 million year ended december 31 2004 1256 million year ended december 31 2005 increase resulted higher unit sales faro arm faro laser tracker faro gage products introduction faro laser scanner ls effect overall increase headcount sales marketing 122 731 167 2004 289 2005 geographically sales increased 141 million 338 americas 18 million 42 europeafrica 126 million 1033 asiapacific region sales growth driven large extent growth number sales people expect new sales people learning curve 612 months 2005 sales marketing headcount increased 630 54 americas 539 76 117 europeafrica 1270 37 84 asiapacific region cannot quantify impact future sales china resulting actions taken ensure compliance applicable foreign us regulations gross profit gross profit increased 129 million 215 600 million year ended december 31 2004 729 million year ended december 31 2005 gross margin decreased 618 year ended december 31 581 year ended december 31 2005 due primarily product mix higher service costs price discounts selling expenses selling expenses increased 114 million 440 259 million year ended december 31 2004 373 million year ended december 31 2005 increase result higher commissions related increased volume 31 million higher salaries 46 million related increase sales marketing personnel higher product demonstration costs 06 million higher marketing costs 31 million percentage sales selling expenses increased 297 sales 2005 267 2004 general administrative expenses general administrative expenses increased 38 million 325 117 million year ended december 31 2004 155 million year ended december 31 2005 increase due higher salaries bonuses 11 million higher professional legal fees 27 million 13 million related patent litigation higher facilities rent 06 million partially offset reduced stock option expense 04 million general administrative expenses percentage sales rose slightly 124 sales 2005 121 sales 2004 depreciation amortization expenses depreciation amortization expenses increased 12 million 522 23 million year ended december 31 2004 35 million 2005 due increase depreciation new equipment asiapacific expansion additions leased space us increase amortization purchase iqvolution research development expenses research development expenses increased 10 million 185 54 million year ended december 31 2004 64 million year ended december 31 2005 due increase salaries bonuses 06 million stemming hiring personnel support new laser scanner ls increase external services project expenses 02 million research development expenses percentage sales 51 2005 compared 56 2004 interest income expense interest income increased 02 million 50 04 million year ended december 31 2004 06 million year ended december 31 2005 primarily increase interest rates 2005 partially offset reduced investment balances interest expense increased slightly due purchase iqvolution subsequent retirement debt obligations expense income net expense income net decreased 12 million income 04 million year ended december 31 2004 expense 08 million year ended december 31 2005 decrease primarily due foreign exchange losses 08 million 2005 income tax expense income tax expense increased 13 million 04 million year ended december 31 2004 17 million year ended december 31 2005 effective tax rate 2005 174 income tax compared 23 2004 primary reason higher tax rate prior year tax benefit attributable reduction valuation allowance approximately 32 million reduction 15 million related usage “net operating losses” foreign jurisdictions 17 million reduction valuation allowance related partial release valuation allowance taken fourth quarter 2004 foreign deferred tax assets company believed likely realized company 60 million net deferred tax assets remaining likely realized 2006 thereafter company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 04 million 2005 income tax benefit received exercise unqualified stock options employees net income net income decreased 67 million 450 149 million year ended december 31 2004 82 million year ended december 31 2005 result factors described compared 2003 sales increased 252 million 351 718 million year ended december 31 2003 970 million year ended december 31 2004 increase resulted higher unit sales faro arm faro laser tracker faro gage products overall increase headcount sales marketing 47 392 120 2003 167 2004 geographically sales increased 38 million 100 americas 154 million 556 europeafrica 60 million 968 asiapacific region sales growth driven large extent growth number sales people expect new sales people learning curve 36 months fully functional 2004 sales marketing headcount increased 23 44 54 americas 13 67 76 europe africa 311 9 37 asiapacific region gross profit gross profit increased 177 million 418 423 million year ended december 31 2003 600 million year ended december 31 2004 gross margin increased 589 year ended december 31 618 year ended december 31 2004 due reduced price discounts reduced service costs percentage sales 90 2003 85 2004 result improvements product quality efficiencies production selling expenses selling expenses increased 76 million 415 183 million year ended december 31 2003 259 million year ended december 31 2004 increase result higher commissions 30 million higher salaries bonuses 25 million related increase sales marketing personnel higher product demonstration costs 12 million higher marketing costs 09 million percentage sales selling expenses increased 267 sales 2004 256 2003 general administrative expenses general administrative expenses increased 19 million 194 98 million year ended december 31 2003 117 million year ended december 31 2004 increase due higher salaries bonuses 14 million higher professional legal fees 08 million higher facilities rent 03 million partially offset reduced stock option expense 04 million general administrative expenses percentage sales fell 121 sales 2004 137 sales 2003 filings prior form 10q third quarter 2004 represented cost employee stock options separate line item consolidated statements income accordance sec regulation sx eliminated separate line item periods presented included cost employee stock options appropriate expense category according employee’s function virtually employees stock options gave rise expense administration result 98 million general administration expenses 2003 reported higher 91 million previously reported form 10k 2003 07 million employee stock option expense 2003 depreciation amortization expenses depreciation amortization expenses increased 02 million 105 21 million year ended december 31 2003 23 million 2004 due increase depreciation new equipment capital leases research development expenses research development expenses increased 09 million 202 45 million year ended december 31 2003 54 million year ended december 31 2004 due increase salaries bonuses 07 million increase external services project expenses 02 million research development expenses percentage sales 56 2004 compared 63 2003 interest income expense interest income increased 03 million 334 01 million year ended december 31 2003 04 million year ended december 31 2004 primarily increase investments 2004 related proceeds company’s sale stock november 2003 see also overview liquidity capital resources interest expense decreased slightly year ended december 31 2004 see liquidity capital resources expense income net expense income net decreased 16 million 20 million year ended december 31 2003 04 million year ended december 31 2004 decrease primarily due settlement litigation former shareholders smx 11 million 2003 see also note 2 acquisition reduction foreign exchange gains 02 million 2004 income tax expense income tax expense decreased 08 million 12 million year ended december 31 2003 04 million year ended december 31 2004 effective tax rate 2004 23 income tax compared 123 2003 primary reason lower expected tax rate tax benefit attributable reduction valuation allowance approximately 32 million reduction 15 million relates usage “net operating losses” foreign jurisdictions 17 million reduction valuation allowance relates partial release valuation allowance taken fourth quarter foreign deferred tax assets company believes likely realized company determined amount deferred tax assets relating net operating loss carryforwards foreign subsidiaries understated approximately 37 million december 31 2003 net operating loss carryforwards fully reserved december 31 2003 valuation allowance income statement balance sheet impact recognized 2003 company 50 million net deferred tax assets remaining likely realized 2005 thereafter company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 24 million income tax benefit received exercise unqualified stock options employees net income net income increased 66 million 795 83 million year ended december 31 2003 149 million year ended december 31 2004 result factors described liquidity capital resources company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 317 million 2003 private placement common stock various institutional investors approximately 249 million september 17 2003 company entered loan agreement suntrust bank line credit 5 million agreement bears interest rate libor plus 175 renewed august 2005 due demand company drawn line credit company received term sheet currently negotiating new loan agreement expected increase term three years increase amount credit line 300 million january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes cash equivalents december 31 2005 93 million compared 164 million december 31 2004 decrease 71 million primarily attributable changes operating assets liabilities 146 million cash used purchase iqvolution 64 million cash used purchase property equipment payments intangible assets 49 million offset net income 82 million noncash charges 29 million net proceeds sales investments 60 million proceeds 04 million employee stock plan activity effect exchange rate changes cash 12 million believe working capital together anticipated cash flow operations credit facility previously announced shelf registration sufficient fund liquidity requirements 2006 balance sheet items company party offbalance sheet items already appropriately disclosed financial statements contractual obligations commercial commitments company party capital leases automotive equipment initial term 36 60 months noncancelable operating leases including leases related parties expire 2010 obligations presented december 31 2005 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days august 11 2005 faro entered agreement delcam plc company agreed purchase approximately 14 million products 12month term december 31 2005 company completed purchase 06 million products agreement effective november 1 2005 faro entered agreement metrologic group sa company agreed purchase approximately 04 million products 12month term december 31 2005 products purchased agreement agreements listed company longterm commitments purchases critical accounting policies response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve obsolescence income taxes reserve warranties policies affect current assets operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could create adverse impact operations financial position revenue recognition revenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year reserve excess obsolete inventory since amount inventoriable cost recoup sales cannot known exact certainty rely upon past sales experience future sales forecasts inventory considered obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds one year remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 average fifo cost inventory income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board fasb statement 109 “accounting income taxes” sfas 109 establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant 2005 company opened regional headquarters began manufacture products singapore received favorable multiyear income tax rate commitment singapore economic development board incentive establish manufacturing plant regional headquarters significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain appropriately reserved tax uncertainties based criteria established sfas 5 “accounting loss contingencies” reserve warranties company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month rate multiplied number machinemonths warranty product group sold period determine provision warranty expenses period company reevaluates exposure warranty costs end period using estimated expense per installation month major product group number machines remaining warranty remaining number months machine warranty expenses historically within expectations cannot guarantee continue future transactions related parties company leases headquarters lake mary florida xenon research inc issued outstanding capital stock owned simon raab company’s chairman cochief executive officer diana raab spouse term lease expired february 28 2006 continuing month basis company expects renew lease additional 3 5 years similar terms base rent lease 398000 per year foreign exchange exposure conduct significant portion business outside united states present approximately 50 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future exposure risks associated fluctuations foreign exchange rates may increase decrease inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2006 impact recently issued accounting standards january 2003 financial accounting standards board “fasb” issued subsequently revised december 2003 fin 46 “consolidation variable interest entities” fin 46 interpretation arb 51 “consolidated financial statements” addresses consolidation business enterprises variable interest entities current practice two enterprises generally included consolidated financial statements one enterprise controls voting interests fin 46 defines concept “variable interests” requires existing unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks among parties involved fin 46 applied immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applied first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 fin 46r deferred effective date fin 46 first reporting period ending december 15 2003 reasonably possible enterprise consolidate disclose information variable interest entity interpretation becomes effective enterprise shall disclose information entities financial statements issued january 31 2003 fin 46 may applied prospectively cumulativeeffect adjustment date first applied restating previously issued financial statements one years cumulativeeffect adjustment beginning first year restated company determined party variable interest entities november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 retains general principle arb 43 chapter 4 “inventory pricing” inventories presumed stated cost however amends arb 43 clarify abnormal amounts idle facilities freight handling costs spoilage recognized current period expenses also sfas 151 requires fixed overhead costs allocated inventories based normal production capacity guidance safs 151 effective inventory costs incurred fiscal years beginning june 15 2005 company believes implementing sfas 151 material impact financial position results operations december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed apb opinion 25 allowed original provisions sfas 123 sfas 123r requires use option pricing model estimating fair value amortized expense service periods sfas 123r allows two alternative transition methods first method modified prospective application whereby compensation cost portion awards requisite service yet rendered outstanding adoption date recognized remaining service period compensation cost portion awards based grant date fair value awards calculated pro forma disclosures sfas 123 originally issued new awards modified repurchased cancelled adoption date accounted provisions sfas 123r second method modified retrospective application requires company restates prior period financial statements modified retrospective application may applied either periods prior interim periods year adoption statement company adopt provisions sfas 123r effective january 1 2006 using modified prospective application transition method company accelerated vesting substantially outstanding options prior december 31 2005 expects record minimal expenses remaining unvested stock options 2006 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods fair value future grants included expense vesting periods item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops manufacturers markets supports portable software driven 3d measurement systems used broad range manufacturing industrial building construction forensic applications company’s faro arm faro scan arm faro gage articulated measuring devices faro laser scanner ls faro laser tracker companion cam2 software provide computeraided design cadbased inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company uses acronym “cam2” process stands computeraided measurement february 2007 company’s products purchased approximately 6100 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimler chrysler general electric general motors honda johnson controls komatsu dresser lockheed martin nissan siemens volkswagen among many others continue pursue international markets established sales offices france germany 1996 great britain 1997 japan spain 2000 italy 2001 china 2003 opened sales offices south korea india 2004 established sales offices poland netherlands malaysia vietnam singapore 2005 added new regional headquarters singapore third quarter 2005 along new manufacturing service facility fourth quarter 2005 2003 began manage report global sales three regions americas europeafrica asiapacific 2006 closed south korean office established third party distributor relationship serving market 2006 413 sales americas compared 445 2005 400 europeafrica region compared 357 2005 187 asiapacific region compared 197 2005 see also note 19 geographic data financial statements derive revenues primarily sale faro arm faro scan arm faro gage faro laser tracker faro laser scanner ls 3d measurement equipment related multifaceted software revenue related products generally recognized upon shipment addition sell one threeyear extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis also receive royalties licensing agreements historical medical technology recognize revenue royalties licensees use technology 2003 began manufacture faro arm products switzerland customer orders europeafrica asiapacific regions began manufacture faro gage product parts faro laser tracker product swiss plant third quarter 2004 began complete production faro laser tracker product swiss plant 2005 began manufacture faro arm products singapore plant fourth quarter 2005 faro laser tracker first half 2006 faro gage second half 2006 expect singapore plant take swiss plant supplying asiapacific region’s needs products manufacture products customer orders americas done manufacturing facilities located florida pennsylvania faro laser scanner ls product currently manufactured new facility located stuttgart germany expect existing plants production capacity necessary support growth 2007 previously reported company’s form 8k dated march 15 2006 company learned china subsidiary made payments certain customers china may violated fcpa applicable laws company’s audit committee instituted internal investigation matter february 2006 company voluntarily notified sec doj matter march 2006 internal investigation matter completed company provided sec doj information obtained course investigation cooperating agencies company’s internal investigation identified certain improper payments made china deficiencies controls respect operations china possible violation fcpa sec doj determines violations fcpa occurred could seek civil criminal sanctions including monetary penalties company andor certain employees well additional changes company’s business practices compliance programs based current information possible predict time sec doj investigations resolved outcome sanctions imposed effect matters may ultimately company consolidated financial statements results investigation revealed referral fee payments possible violation fcpa 165000 265000 2004 2005 respectively recorded selling expenses company’s statement income related sales customers payment referral fees made totaled 13 million 324 million 2004 2005 respectively additional improper referral fee payments 122000 made january february 2006 related sales contracts 2005 company sales china 90 million 2005 42 million 2004 approximately 7 4 total sales respectively company incurred expenses 38 million 2006 relating fcpa matter company terminated certain personnel asiapacific region reassigned duties personnel asiapacific region us result internal investigation company instituting following remedial measures • contracted third party forensics accounting team conduct indepth audit operations china countries asiapacific region make recommendations improvement internal control systems • reviewing third party distributor arrangements effort assure contracts include adherence fcpa • performing due diligence third party distributors implementing process assess potential new distributors • established inhouse internal audit function including hiring director internal audit • consolidating human resources financial accounting reporting functions asia region singapore operations • implemented internal certification process ascertain whether similar issues may exist elsewhere company • implemented quarterly internal certification process confirm adherence company policy applicable laws regulations include regional leadership country management sales management • implementing additional training fcpa matters employees confidential compliance reporting system company’s internal investigation business practices china became aware income taxes related certain commissions bonus payments employees properly reported company filed appropriate payroll tax returns remitted deficiency company currently involved patent infringement lawsuit class action securities fraud lawsuit see item 3 legal proceedings neither ultimate outcome actions potential impact company’s business financial condition reported results operations future period predicted respect financial performance 2006 cost sales consists primarily material labor production overhead since ipo 1997 annual gross margins range 5464 sales gross margin fiscal 2006 within range 587 selling expenses percentage sales remained 297 2006 2005 percentage decreased 284 second half 2006 312 first half 2006 new sales personnel hired end 2005 became productive general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses general administrative expenses higher 2006 primarily result increase professional legal expenses approximately 38 million related fcpa investigation 14 million related increased patent litigation costs research development expenses represent salaries equipment thirdparty services commitment support ongoing research development intend continue fund efforts level 57 sales going forward incurred minimal expenses 2006 calculated blackscholes method sfas 123 related adoption sfas 123r expensing stock options vested substantially unvested options fourth quarter 2005 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods options purchase approximately 704310 shares company’s stock 525 company’s outstanding options accelerated weighted average exercise price options subject acceleration 2130 aggregate pretax expense shares subject acceleration would reflected company’s consolidated financial statements beginning 2006 approximately 77 million including 43 million 2006 27 million 2007 07 million 2008 fair value future grants included expense vesting periods expenses apportioned according classification employees received stock options cost sales selling general administrative research development costs 2006 worldwide effective tax rate 162 received favorable income tax rate commitment swiss government incentive establish manufacturing plant switzerland 2006 received approval singapore economic development board favorable multiyear income tax holiday singapore headquarters manufacturing operations subject certain terms conditions including employment spending capital investment see critical accounting policiesincome taxes accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected consolidated financial statements aware availability balance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure however regularly use instruments none utilized 2006 2005 2004 eighteen consecutive profitable quarters december 31 2006 sales growth profitability result number factors including acquisition smx manufactured predecessor faro laser tracker introduction october 2002 latest generation traditional faro arm product introduction faro gage september 2003 introduction faro scan arm product 2004 continuing market demand acceptance products increase number sales people worldwide sales marketing headcount 2006 2005 2004 265 289 167 respectively january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes date raised capital form s3 registration statement company must file timely manner reports securities exchange act 1934 certain exceptions sec period 12 months order able use s3 registration statement see also liquidity capital resources results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements income 2006 compared 2005 sales increased 268 million 213 1524 million year ended december 31 2006 1256 million year ended december 31 2005 increase resulted primarily increase unit sales growth driven increased product sales resulting continuing market demand acceptance products sales americas region increased 70 million 125 629 million year ended december 31 2006 559 million year ended december 31 2005 sales europeafrica region increased 160 million 356 609 million year ended december 31 2006 449 million year ended december 31 2005 sales asiapacific region increased 38 million 153 286 million year ended december 31 2006 248 million year ended december 31 2005 2006 sales marketing headcount decreased 83 88 americas increased 118 117 europeafrica decreased 64 84 asiapacific region gross profit gross profit increased 166 million 228 895 million year ended december 31 2006 729 million year ended december 31 2005 gross margin increased 587 year ended december 31 2006 581 year ended december 31 2005 primarily due change sales mix resulting increase unit sales product lines lower average cost sales expect trend changes sales mix result gross margins range approximately 57 60 2007 selling expenses selling expenses increased 80 million 214 453 million year ended december 31 2006 373 million year ended december 31 2005 increase primarily due higher compensation commission expense 45 million related increase sales higher marketing costs 29 million higher product demonstration costs 06 million percentage sales selling expenses unchanged 297 2006 2005 general administrative expenses general administrative expenses increased 91 million 587 246 million year ended december 31 2006 155 million year ended december 31 2005 increase primarily due increased professional legal fees 54 million 38 million related company’s investigation possible violations foreign corrupt practices act chinese subsidiary 14 million ongoing patent litigation addition compensation costs increased 17 million expenses related singapore facility opened september 2005 increased 03 million general administrative expenses percentage sales increased 161 sales 2006 124 sales 2005 depreciation amortization expenses depreciation amortization expenses increased 06 million 171 41 million year ended december 31 2006 35 million 2005 primarily due increase depreciation new equipment asiapacific expansion additions leased space us research development expenses research development expenses increased 08 million 125 72 million year ended december 31 2006 64 million year ended december 31 2005 resulted primarily increase salaries subcontractors expense 07 million related addition laser scanner product line research development expenses percentage sales 47 2006 compared 51 2005 interest income expense interest income increased 01 million 167 07 million year ended december 31 2006 06 million year ended december 31 2005 primarily due increase interest rates short term investments interest expense decreased slightly due purchase iqvolution 2005 subsequent retirement debt obligations income expense net income expense net increased 16 million income 08 million year ended december 31 2006 expense 08 million year ended december 31 2005 income includes foreign exchange gains 08 million 2006 income tax expense income tax expense decreased 16 million year ended december 31 2006 17 million year ended december 31 2005 effective tax rate 2006 162 compared 174 2005 primary reason lower tax rate effect receipt approval tax holiday operations singapore effective january 1 2006 period four years additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment company 46 million net deferred tax assets remaining likely realized 2007 thereafter company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 001 million 2006 income tax benefit received exercise unqualified stock options employees net income net income 82 million year ended december 31 2006 year ended december 31 2005 result factors described 2005 compared 2004 sales increased 286 million 295 970 million year ended december 31 2004 1256 million year ended december 31 2005 increase resulted higher unit sales faro arm faro laser tracker faro gage products introduction faro laser scanner ls effect overall increase headcount sales marketing 122 731 167 2004 289 2005 geographically sales increased 141 million 338 americas 18 million 42 europeafrica 126 million 1033 asiapacific region 2005 sales marketing headcount increased 630 54 88 americas 539 76 117 europeafrica 1270 37 84 asiapacific region gross profit gross profit increased 129 million 215 600 million year ended december 31 2004 729 million year ended december 31 2005 gross margin decreased 618 year ended december 31 2004 581 year ended december 31 2005 due primarily product mix higher service costs price discounts selling expenses selling expenses increased 114 million 440 259 million year ended december 31 2004 373 million year ended december 31 2005 increase result higher commissions related increased volume 31 million higher salaries 46 million related increase sales marketing personnel higher product demonstration costs 06 million higher marketing costs 31 million percentage sales selling expenses increased 297 sales 2005 267 2004 general administrative expenses general administrative expenses increased 38 million 325 117 million year ended december 31 2004 155 million year ended december 31 2005 increase due higher salaries bonuses 11 million higher professional legal fees 27 million 13 million related patent litigation higher facilities rent 06 million partially offset reduced stock option expense 04 million general administrative expenses percentage sales rose slightly 124 sales 2005 121 sales 2004 depreciation amortization expenses depreciation amortization expenses increased 12 million 522 23 million year ended december 31 2004 35 million 2005 due increase depreciation new equipment asiapacific expansion additions leased space us increase amortization purchase iqvolution research development expenses research development expenses increased 10 million 185 54 million year ended december 31 2004 64 million year ended december 31 2005 due increase salaries bonuses 06 million stemming hiring personnel support new laser scanner ls increase external services project expenses 02 million research development expenses percentage sales 51 2005 compared 56 2004 interest income expense interest income increased 02 million 50 04 million year ended december 31 2004 06 million year ended december 31 2005 primarily increase interest rates 2005 partially offset reduced investment balances interest expense increased slightly due purchase iqvolution subsequent retirement debt obligations expense income net expense income net decreased 12 million income 04 million year ended december 31 2004 expense 08 million year ended december 31 2005 decrease primarily due foreign exchange losses 08 million 2005 income tax expense income tax expense increased 13 million 04 million year ended december 31 2004 17 million year ended december 31 2005 effective tax rate 2005 174 income tax compared 23 2004 primary reason higher tax rate prior year tax benefit attributable reduction valuation allowance approximately 32 million reduction 15 million related usage “net operating losses” foreign jurisdictions 17 million reduction valuation allowance related partial release valuation allowance taken fourth quarter 2004 foreign deferred tax assets company believed likely realized company 60 million net deferred tax assets remaining likely realized 2006 thereafter company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 04 million 2005 income tax benefit received exercise unqualified stock options employees net income net income decreased 67 million 450 149 million year ended december 31 2004 82 million year ended december 31 2005 result factors described liquidity capital resources company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 317 million 2003 private placement common stock various institutional investors approximately 249 million january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes date raised capital form s3 registration statement company must file timely manner reports securities exchange act 1934 certain exceptions sec period 12 months order able use s3 registration statement company’s form 10k year ended december 31 2005 form 10q first quarter ended april 1 2006 timely filed company eligible use form s3 registration statement result company would required use form s1 registration statement raise equity debt public markets july 11 2006 company entered loan agreement providing available line credit 300 million loans loan agreement bear interest rate libor plus 175 require company maintain certain ratios respect debt covenant agreement including current ratio consolidated ebitda senior funded debt ebitda december 31 2006 company compliance covenants amended loan agreement term amended loan agreement extends april 30 2009 company drawn line credit cash equivalents increased 64 million 157 million december 31 2006 93 million december 31 2005 increase primarily attributable net cash provided operating activities 102 million less cash used investing activities purchase equipment intangible assets 42 million offset proceeds sales investments 07 million cash used financing activities make payments capital leases 02 million decrease 01 million related exchange rate effects cash addition company short term investments 158 million 165 million december 31 2006 december 31 2005 respectively believe working capital together anticipated cash flow operations credit facility previously announced shelf registration sufficient fund liquidity requirements 2007 balance sheet items company party offbalance sheet items already appropriately disclosed financial statements contractual obligations commercial commitments company party capital leases automotive equipment initial term 36 60 months noncancelable operating leases including leases related parties expire 2011 obligations presented december 31 2006 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days august 11 2005 company entered agreement delcam plc company agreed purchase approximately 14 million products 12month term december 31 2006 company completed purchase 14 million products agreement effective november 1 2005 company entered agreement metrologic group sa company agreed purchase approximately 04 million products 12month term december 31 2006 03 million purchased agreement renewed agreements listed company longterm commitments purchases critical accounting policies response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties policies affect current assets operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could create adverse impact operations financial position preparation consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements revenue recognition revenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s technology medical applications recognized accrual basis based historical data reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income two year period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board statement 109 “accounting income taxes” establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world considers statutory rates within jurisdiction determine overall effective tax rate 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant aggregate dollar effect favorable tax rate approximately 17 million 012 per share year ended december 31 2006 30 million 021 per share year ended december 31 2005 company opened regional headquarters began manufacture products singapore recently received approval four year tax holiday singapore economic development board incentive establish manufacturing plant regional headquarters aggregate dollar effect favorable tax rate approximately 09 million 06 per share year ended december 31 2006 company subject certain terms conditions including employment spending capital investment countries order receive favorable tax rates subject statutory rates significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain appropriately reserved tax uncertainties based criteria established sfas 5 “accounting loss contingencies” reserve warranties company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues may increase warranty costs expenses historically within expectations cannot guarantee continue future transactions related parties company leases headquarters lake mary florida xenon research inc company owned simon raab company’s chairman diana raab spouse prior lease expired february 28 2006 company executed new lease agreement august 8 2006 xenon research initial term lease commenced july 1 2006 expires july 1 2011 lease automatically renewed one successive fiveyear term unless company provides xenon research written notice nonrenewal least 90 days prior end thenapplicable term company also onetime right terminate lease three years july 1 2006 upon written notice delivered landlord one year prior date upon company wishes terminate lease company’s independent directors negotiated approved lease behalf company process independent directors consulted real estate broker verify lease rate terms competitive market first year initial term fixed rent 302750 per annum payable monthly year thereafter july 1 fixed rent increased three percent fixed rent preceding year lease “net lease” meaning company also responsible real estate taxes insurance expenses covering leased premises real estate taxes insurance expenses paid xenon research company reimburses xenon research equal monthly payments real estate taxes insurance expenses reimbursement amount computed annually based real estate taxes insurance expenses actually paid xenon research payments fixed rent additional rent include applicable sales use taxes foreign exchange exposure conduct significant portion business outside united states present approximately 59 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future exposure risks associated fluctuations foreign exchange rates may increase decrease response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve obsolescence income taxes reserve warranties policies affect current assets operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could create adverse impact operations financial position inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2007 impact recently issued accounting standards november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 retains general principle arb 43 chapter 4 “inventory pricing” inventories presumed stated cost however amends arb 43 clarify abnormal amounts idle facilities freight handling costs spoilage recognized current period expenses also sfas 151 requires fixed overhead costs allocated inventories based normal production capacity guidance safs 151 effective inventory costs incurred fiscal years beginning june 15 2005 adoption sfas 151 material impact financial position results operations december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed apb opinion 25 allowed original provisions sfas 123 sfas 123r requires use option pricing model estimating fair value amortized expense service periods sfas 123r allows two alternative transition methods first method modified prospective application whereby compensation cost portion awards requisite service yet rendered outstanding adoption date recognized remaining service period compensation cost portion awards based grant date fair value awards calculated pro forma disclosures sfas 123 originally issued new awards modified repurchased cancelled adoption date accounted provisions sfas 123r second method modified retrospective application requires company restates prior period financial statements modified retrospective application may applied either periods prior interim periods year adoption statement company adopted provisions sfas 123r effective january 1 2006 using modified prospective application transition method company accelerated vesting substantially outstanding options prior december 31 2005 expects record minimal expenses remaining unvested stock options 2006 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods fair value future grants included expense vesting periods september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 issued provide consistency registrants quantify financial statement misstatements historically two widelyused methods quantifying effects financial statement misstatements methods referred “rollover” “iron curtain” method rollover method quantifies amount current year income statement misstated exclusive reliance income statement approach result accumulation errors balance sheet may material individual income statement may misstate one balance sheet accounts iron curtain method quantifies error cumulative amount current year balance sheet misstated exclusive reliance balance sheet approach result disregarding effects errors current year income statement results correction error existing previously issued financial statements previously used rollover method quantifying identified financial statement misstatements sab 108 established approach requires quantification financial statement misstatements based effects misstatement company’s financial statements related financial statement disclosures approach commonly referred “dual approach” requires quantification errors rollover iron curtain methods sab 108 allows registrants initially apply dual approach either 1 retroactively adjusting prior financial statements dual approach always used 2 recording cumulative effect initially applying dual approach adjustments carrying values assets liabilities january 1 2006 offsetting adjustment recorded opening balance retained earnings use “cumulative effect” transition method requires detailed disclosure nature amount individual error corrected cumulative adjustment arose company evaluated sab 108 material impact company’s financial condition results operations july 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation sfas 109” fin 48 intent fin 48 clarify accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 interpretation imposes recognition threshold measurement attribute financial statement disclosure tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 company currently evaluating requirements fin 48 yet determined impact adoption consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops manufactures markets supports portable software driven 3d measurement systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro scan arm faro gage articulated measuring devices faro laser scanner ls faro laser tracker companion cam2 software provide computeraided design “cad”based inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company uses acronym “cam2” process stands computeraided measurement december 2007 company’s products purchased approximately 7400 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimler chrysler general electric general motors honda johnson controls komatsu dresser lockheed martin nissan siemens volkswagen among many others company operates international markets throughout world maintains sales offices france germany great britain japan spain italy china india poland netherlands malaysia vietnam company added new regional headquarters singapore third quarter 2005 along new manufacturing service facility fourth quarter 2005 2006 company closed south korean office established third party distributor relationship serving market december 2006 company established sales office thailand company manages reports global sales three regions americas europeafrica asiapacific 2007 417 company’s sales americas compared 413 2006 409 europeafrica region compared 399 2006 174 asiapacific region compared 188 2006 see also note 19 consolidated financial statements company derives revenues primarily sale faroarm faro scan arm faro gage faro laser tracker faro laser scanner ls 3d measurement equipment related multifaceted software revenue related products generally recognized upon shipment addition company sells one threeyear extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company manufactures faroarm faro gage faro laser tracker products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region company manufactures faroarm faro gage faro laser tracker products company’s manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro laser scanner ls product facility located stuttgart germany company expects existing plants production capacity necessary support growth 2008 respect financial performance 2007 cost sales consists primarily material labor production overhead gross margin fiscal 2007 600 selling expenses percentage sales 293 2007 compared 297 2006 percentage decreased 287 second half 2007 300 first half 2007 new sales personnel became productive general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses general administrative expenses 133 sales 2007 included accrual 265 million estimated fines penalties related fcpa matter 11 million professional fees related fcpa matter resolution patent litigation settled 2007 general administrative expenses 161 sales 2006 included 68 million professional legal expenses related fcpa matter patent litigation costs research development expenses represent salaries equipment thirdparty services company expects support ongoing research development intends continue fund efforts level 57 sales going forward company incurred minimal expenses 2006 calculated blackscholes method sfas 123 “accounting stockbased compensation” “sfas 123” related adoption sfas 123r “sharebased payment” “sfas 123r” expensing stock options vested substantially unvested options fourth quarter 2005 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods options purchase approximately 704310 shares company’s stock 525 company’s outstanding options accelerated weighted average exercise price options subject acceleration 2130 aggregate pretax expense shares subject acceleration would reflected company’s consolidated financial statements beginning 2006 approximately 77 million including 43 million 2006 27 million 2007 07 million 2008 fair value future grants included expense vesting periods expenses apportioned according classification recipients received stock options cost sales selling general administrative research development costs 2007 company’s worldwide effective tax rate 215 company received favorable income tax rate commitment swiss government incentive establish manufacturing plant switzerland 2006 received approval singapore economic development board favorable multiyear income tax holiday singapore headquarters manufacturing operations subject certain terms conditions including employment spending capital investment see critical accounting policiesincome taxes accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected company’s consolidated financial statements company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure however company regularly use instruments none utilized 2007 2006 2005 company twentytwo consecutive profitable quarters december 31 2007 sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro gage laser scanner effect acquisitions company’s worldwide sales marketing headcount 2007 2006 2005 321 265 289 respectively january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes august 14 2007 company sold 1650000 shares common stock registered direct offering pursuant form s3 registration statement certain institutional investors 3400 per share net proceeds deducting placement fees offering expenses approximately 530 million see also liquidity capital resources fcpa update previously reported company learned china subsidiary made payments certain customers china may violated fcpa applicable laws company’s audit committee instituted internal investigation matter february 2006 company voluntarily notified sec doj matter march 2006 company’s internal investigation matter completed company’s internal investigation identified certain improper payments made china deficiencies controls respect operations china possible violation fcpa results investigation revealed referral fee payments possible violation fcpa 165000 265000 2004 2005 respectively recorded selling expenses statements income related sales customers payment referral fees made totaled approximately 13 million 324 million 2004 2005 respectively additional improper referral fee payments 122000 made january february 2006 related sales contracts 2005 company sales china 90 million 2005 42 million 2004 approximately 7 4 total sales respectively company incurred expenses 31 million 2007 including 265 million estimated fines penalties doj sec 38 million 2006 relating fcpa matter company provided sec doj information obtained course investigation cooperating agencies sec doj broad range civil criminal remedies may seek impose corporations individuals appropriate circumstances including without limitation disgorgement fines penalties injunctive equitable relief well additional changes company’s business practices compliance programs company engaged settlement discussions sec doj concerning fcpa matter although assurance discussions result resolution fcpa matter company determined settlement discussions likely result resolution include fine disgorgement associated profits company recorded third quarter 2007 reserve 265 million anticipation amount could necessary satisfy financial obligations sec doj resolving matter predicting time fcpa matter finally resolved sec doj possible monetary sanctions ultimately paid company sec doj resolving matter whether imposed company agreed settlement may exceed amount reserved company anticipates resolution matter result formal criminal charges filed doj company expects part final resolution fcpa matter sec doj addition monetary sanctions company continuing obligations sec doj respect monitoring compliance fcpa laws full cooperation government adoption compliance code containing specific provisions intended prevent violations fcpa company expects failure comply continuing obligations could result sec doj seeking impose penalties company future company terminated march 2006 certain personnel asiapacific region reassigned duties personnel asiapacific region us result internal investigation additionally company instituted following remedial measures • contracted third party forensics accounting team conduct indepth audit operations china countries asiapacific region make recommendations improvement internal control systems • reviewed third party distributor arrangements effort assure contracts include adherence fcpa • performed due diligence third party distributors implemented process assess potential new distributors • established inhouse internal audit function including hiring director internal audit • consolidated human resources financial accounting reporting functions asia region singapore operations • implemented internal certification process ascertain whether similar issues may exist elsewhere company • implemented quarterly internal certification process confirm adherence company policy applicable laws regulations include regional leadership country management sales management • implemented additional training fcpa matters employees confidential compliance reporting system results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements income 2007 compared 2006 sales increased 392 million 257 1916 million year ended december 31 2007 1524 million year ended december 31 2006 increase resulted primarily increase unit sales americas region increased 171 million 270 800 million year ended december 31 2007 629 million year ended december 31 2006 sales europeafrica region increased 174 million 286 783 million year ended december 31 2007 609 million year ended december 31 2006 sales asiapacific region increased 47 million 167 333 million year ended december 31 2007 286 million year ended december 31 2006 gross profit gross profit increased 255 million 286 1150 million year ended december 31 2007 895 million year ended december 31 2006 gross margin increased 600 year ended december 31 2007 587 year ended december 31 2006 increase gross margin primarily due change sales mix resulting increase unit sales product lines lower unit costs prior year period result continuing productivity improvements company expects trend changes sales mix result gross margins range approximately 58 60 2008 selling expenses selling expenses increased 108 million 240 561 million year ended december 31 2007 453 million year ended december 31 2006 increase primarily due increase commission compensation expense 68 million increase marketing advertising costs 14 million increase travel related expenses 14 million increase recruiting hiring expense 06 million percentage sales selling expenses decreased 293 sales year ended december 31 2007 297 year ended december 31 2006 general administrative expenses general administrative expenses increased 09 million 39 255 million year ended december 31 2007 246 million year ended december 31 2006 general administrative expenses fiscal 2007 include accrual 265 million estimated fines penalties related fcpa matter 11 million professional fees related fcpa matter resolution patent litigation settled 2007 general administrative expenses fiscal 2006 included 68 million professional legal expenses related fcpa matter patent litigation costs general administrative expenses decreased 133 sales 2007 161 2006 excluding effects penalty accrual professional fees related fcpa matter patent litigation general administrative expenses increased 40 million primarily result increases compensation costs 23 million including equity based compensation professional fees 09 million depreciation amortization expenses depreciation amortization expenses decreased 01 million 40 million year ended december 31 2007 41 million year ended december 31 2006 research development expenses research development expenses increased 31 million 103 million year ended december 31 2007 72 million year ended december 31 2006 primarily result increase compensation third party rd expense related new product releases research development expenses percentage sales increased 54 year ended december 31 2007 47 year ended december 31 2006 interest income expense interest income net increased 13 million 20 million year ended december 31 2007 07 million year ended december 31 2006 due increase short term investments income expense net income expense net increased 11 million 19 million income year ended december 31 2007 income 08 million year ended december 31 2006 primarily result increase foreign exchange transaction gains income tax expense income tax expense increased 33 million 49 million year ended december 31 2007 16 million year ended december 31 2006 increase primarily due increase pretax income company’s effective tax rate increased 215 year ended december 31 2007 162 primarily result increase expenses nondeductible us income tax purposes 265 million related accrual penalties connection resolution fcpa matter company’s effective income tax rate excluding effect would 170 year ended december 31 2007 company believes calculating effective tax rate without impact fcpa charge useful management investors provide greater clarity facilitate internal external comparisons company’s historical tax rate company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions company currently estimates effective tax rate excluding effects fcpa matter approximate 1822 fiscal 2008 however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction company 52 million net deferred tax assets remaining likely realized 2008 thereafter company remains consistently profitable see also note 14 consolidated financial statements separate income tax expenses company recorded addition shareholders’ equity 10 million 2007 income tax benefit received nonqualified disposition incentive stock options employees total deferred taxes company’s foreign subsidiaries relating net operating loss carryforwards 77 million 63 million december 31 2007 december 31 2006 respectively related valuation allowance 63 million 44 million december 31 2007 december 31 2006 respectively net income net income increased 99 million 181 million year ended december 31 2007 82 million year ended december 31 2006 result factors described compared 2005 sales increased 268 million 213 1524 million year ended december 31 2006 1256 million year ended december 31 2005 increase resulted primarily increase unit sales company’s sales growth driven increased product sales resulting continuing market demand acceptance products sales americas region increased 70 million 125 629 million year ended december 31 2006 559 million year ended december 31 2005 sales europeafrica region increased 160 million 356 609 million year ended december 31 2006 449 million year ended december 31 2005 sales asiapacific region increased 38 million 153 286 million year ended december 31 2006 248 million year ended december 31 2005 2006 company’s sales marketing headcount decreased 83 88 americas increased 118 117 europeafrica decreased 64 84 asiapacific region gross profit gross profit increased 166 million 228 895 million year ended december 31 2006 729 million year ended december 31 2005 gross margin increased 587 year ended december 31 2006 581 year ended december 31 2005 primarily due change sales mix resulting increase unit sales product lines lower average cost sales selling expenses selling expenses increased 80 million 214 453 million year ended december 31 2006 373 million year ended december 31 2005 increase primarily due higher compensation commission expense 45 million related increase sales higher marketing costs 29 million higher product demonstration costs 06 million percentage sales selling expenses unchanged 297 2006 2005 general administrative expenses general administrative expenses increased 91 million 587 246 million year ended december 31 2006 155 million year ended december 31 2005 increase primarily due increased professional legal fees 54 million 38 million related company’s investigation possible violations foreign corrupt practices act chinese subsidiary 14 million ongoing patent litigation addition compensation costs increased 17 million expenses related singapore facility opened september 2005 increased 03 million general administrative expenses percentage sales increased 161 sales 2006 124 sales 2005 depreciation amortization expenses depreciation amortization expenses increased 06 million 171 41 million year ended december 31 2006 35 million 2005 primarily due increase depreciation new equipment company’s asiapacific expansion additions leased space us research development expenses research development expenses increased 08 million 125 72 million year ended december 31 2006 64 million year ended december 31 2005 resulted primarily increase salaries subcontractors expense 07 million related addition laser scanner product line research development expenses percentage sales 47 2006 compared 51 2005 interest income expense interest income increased 01 million 167 07 million year ended december 31 2006 06 million year ended december 31 2005 primarily due increase interest rates short term investments interest expense decreased slightly due purchase iqvolution 2005 subsequent retirement debt obligations income expense net income expense net increased 16 million income 08 million year ended december 31 2006 expense 08 million year ended december 31 2005 income includes foreign exchange gains 08 million 2006 income tax expense income tax expense decreased 16 million year ended december 31 2006 17 million year ended december 31 2005 effective tax rate 2006 162 compared 174 2005 primary reason lower tax rate effect receipt approval tax holiday company’s operations singapore effective january 1 2006 period four years additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment company 46 million net deferred tax assets remaining likely realized 2007 thereafter company remains consistently profitable see also note 14income taxes separate income tax expenses company recorded addition shareholders’ equity 001 million 2006 income tax benefit received exercise unqualified stock options employees net income net income 82 million year ended december 31 2006 year ended december 31 2005 result factors described liquidity capital resources company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 315 million 2003 private placement common stock various institutional investors totaling approximately 249 million january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes august 14 2007 company sold 1650000 shares common stock registered direct offering pursuant form s3 registration statement certain institutional investors 3400 per share net proceeds deducting placement fees offering expenses approximately 530 million cash equivalents increased 101 million 258 million december 31 2007 157 million december 31 2006 increase resulted cash provided operating activities 216 million 53 million issuance common stock related exercise stock options 10 million related income tax benefit partially offset purchases short term investments 86 million purchases equipment intangible assets 33 million 59 million related effects foreign exchange rate changes cash addition company increased short term investments 616 million 774 million december 31 2007 158 million december 31 2006 increase primarily attributable cash provided net proceeds registered direct offering 530 million 86 million cash provided operations july 11 2006 company entered loan agreement providing available line credit 300 million loans agreement bear interest rate libor plus 175 require company maintain certain ratios respect debt covenant agreement including current ratio consolidated ebitda senior funded debt ebitda december 31 2007 company compliance covenants amended loan agreement term amended loan agreement extends april 30 2009 company drawn line credit company believes working capital anticipated cash flow operations credit facility sufficient fund longterm liquidity requirements foreseeable future balance sheet items company party offbalance sheet items already appropriately disclosed financial statements contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2007 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days december 31 2007 company longterm commitments purchases critical accounting policies response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties policies affect current assets operating results therefore critical assessing company’s financial operating status policies involve certain assumptions incorrect could create adverse impact company’s operations financial position preparation consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements revenue recognitionrevenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s technology medical applications recognized licensees use technology reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income two year period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board statement 109 “accounting income taxes” company establishes valuation allowance net deferred assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world considers statutory rates within jurisdiction determine overall effective tax rate 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant aggregate dollar effect favorable tax rate approximately 20 million 013 per share year ended december 31 2007 17 million 012 per share year ended december 31 2006 2005 company opened regional headquarters began manufacture products singapore received approval four year tax holiday singapore economic development board incentive establish manufacturing plant regional headquarters aggregate dollar effect favorable tax rate approximately 20 million 013 per share year ended december 31 2007 09 million 006 per share year ended december 31 2006 company subject certain terms conditions including employment spending capital investment countries order receive favorable tax rates subject statutory rates significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company appropriately reserved tax uncertainties based criteria established interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” reserve warrantiesthe company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues may increase warranty costs expenses historically within expectations company cannot guarantee continue future foreign exchange exposure company conducts significant portion business outside united states present 58 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future company’s exposure risks associated fluctuations foreign exchange rates may increase decrease inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2008 impact recently issued accounting standards february 2007 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 permits entities choose measure certain financial instruments eligible items fair value items otherwise currently required measured fair value sfas 159 decision measure items fair value made specified election dates irrevocable instrumentbyinstrument basis entities electing fair value option would required recognize changes fair value earnings expense upfront costs fees associated item fair value option elected entities electing fair value option required distinguish face statement financial position fair value assets liabilities fair value option elected similar assets liabilities measured using another measurement attribute elected sfas 159 effective beginning first fiscal year begins november 15 2007 earlier adoption permitted requirements sfas 159 adopted impact adoption sfas 159 dependent extent company chooses elect measure eligible items fair value september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements provisions statement applied prospectively beginning fiscal year statement initially applied transition adjustment recognized cumulativeeffect adjustment opening balance retained earnings provisions sfas 157 effective fiscal years beginning november 15 2007 except nonfinancial assets liabilities recognized disclosed fair value recurring basis effective date fiscal years beginning november 15 2008 company determined effect adoption statement financial condition results operations december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141 revised” sfas 141 revised requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisistion date measured fair values date statement also requires acquirer business combination achieved stages recognize identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values provisions sfas 141 revised effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company determined effect adoption statement financial condition results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” statement establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary statement effective prospectively except certain retrospective disclosure requirements fiscal years beginning december 15 2008 company determined effect adoption statement financial condition results operations item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops manufactures markets supports portable software driven 3d measurement systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro laser scanarm faro gage articulated measuring devices faro laser scanner ls faro laser tracker companion cam2 software provide computeraided design “cad”based inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company uses acronym “cam2” process stands computeraided measurement december 2008 company’s products purchased approximately 9000 customers worldwide ranging small machine shops large manufacturing industrial companies audi bell helicopter boeing british aerospace caterpillar daimler chrysler general electric general motors honda johnson controls komatsu dresser lockheed martin nissan siemens volkswagen among many others company derives revenues primarily sale faroarm faro laser scanarm faro gage faro laser tracker faro laser scanner ls 3d measurement equipment related multifaceted software revenue related products generally recognized upon shipment addition company sells one threeyear extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices france germany great britain japan spain italy china india poland netherlands malaysia vietnam company added new regional headquarters singapore third quarter 2005 along new manufacturing service facility fourth quarter 2005 2006 company closed south korean office established third party distributor relationship serving market december 2006 company established sales office thailand company manages reports global sales three regions americas europeafrica asiapacific sales increased 2092 million 2008 92 1916 million 2007 2008 375 company’s sales americas compared 417 2007 447 europeafrica region compared 409 2007 178 asiapacific region compared 174 2007 see also note 17 consolidated financial statements company manufactures faroarm faro gage faro laser tracker products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region company manufactures faroarm faro gage faro laser tracker products company’s manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro laser scanner ls product facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2009 cost sales consists primarily material labor production overhead gross margin decreased inr fiscal 2008 598 600 fiscal 2007 selling expenses percentage sales 301 2008 compared 293 2007 percentage decreased 299 second half 2008 303 first half 2008 new sales personnel became productive general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses percentage sales general administrative expenses 125 2008 compared 133 2007 primarily due decrease expenses related fcpa matter research development expenses represent salaries equipment thirdparty services company expects support ongoing research development intends continue fund efforts level 510 sales going forward 2008 company’s worldwide effective tax rate 240 company received favorable income tax rate commitment swiss government incentive establish manufacturing plant switzerland 2006 received approval singapore economic development board favorable multiyear income tax holiday company’s singapore headquarters manufacturing operations subject certain terms conditions including employment spending capital investment see critical accounting policiesincome taxes accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected company’s consolidated financial statements company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options see foreign exchange exposure however company regularly use instruments none utilized 2008 2007 2006 company twentysix consecutive profitable quarters december 31 2008 sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro gage laser scanner effect acquisitions company’s worldwide sales marketing headcount 2008 2007 2006 396 321 265 respectively january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes august 14 2007 company sold 1650000 shares common stock registered direct offering pursuant form s3 registration statement certain institutional investors 3400 per share net proceeds deducting placement fees offering expenses approximately 530 million see also liquidity capital resources fcpa update previously reported company conducted internal investigation 2006 certain payments made china subsidiary may violated fcpa applicable laws “fcpa matter” entered settlement agreements documents us securities exchange commission us department justice 2008 concerning fcpa matter company incurred expenses 38 million 2006 31 million 2007 03 million 2008 relating fcpa matter 295 million fines penalties interest doj sec 2008 pursuant settlement agreements documents sec doj concerning fcpa matter company twoyear monitoring obligation continuing obligations sec doj respect compliance fcpa laws full cooperation government adoption compliance code containing specific provisions intended prevent violations fcpa failure comply continuing obligations could result sec doj seeking impose penalties company future results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements income 2008 compared 2007 sales increased 176 million 92 2092 million year ended december 31 2008 1916 million year ended december 31 2007 increase resulted primarily increase unit sales increase average selling prices sales americas region decreased 17 million 21 783 million year ended december 31 2008 800 million year ended december 31 2007 sales europeafrica region increased 151 million 195 936 million year ended december 31 2008 783 million year ended december 31 2007 sales asiapacific region increased 40 million 120 373 million year ended december 31 2008 333 million year ended december 31 2007 gross profit gross profit increased 102 million 89 1252 million year ended december 31 2008 1150 million year ended december 31 2007 gross margin decreased 598 year ended december 31 2008 600 year ended december 31 2007 decrease gross margin primarily due increase service costs percentage sales company expects trend changes sales mix result gross margins range approximately 55 60 2009 continued economic downturn could negatively impact range selling expenses selling expenses increased 69 million 123 630 million year ended december 31 2008 561 million year ended december 31 2007 increase primarily due increase compensation expense 37 million increase marketing advertizing costs 05 million increase travel related expenses 21 million percentage sales selling expenses increased 301 sales year ended december 31 2008 293 year ended december 31 2007 general administrative expenses general administrative expenses increased 06 million 25 261 million year ended december 31 2008 255 million year ended december 31 2007 general administrative expenses increased primarily due increase compensation expense 21 million increased costs related additional leased space expand company’s corporate offices 14 million increase allowance doubtful accounts 07 million higher travel related costs 03 million offset reduction 37 million estimated fines penalties professional fees related settlement fcpa matter included year ended december 31 2007 general administrative expenses percentage sales decreased 125 year ended december 31 2008 133 year ended december 31 2007 depreciation amortization expenses depreciation amortization expenses increased 05 million 45 million year ended december 31 2008 40 million year ended december 31 2007 result increase property equipment intangible assets research development expenses research development expenses increased 23 million 126 million year ended december 31 2008 103 million year ended december 31 2007 primarily result increase compensation expense research development expenses percentage sales increased 60 year ended december 31 2008 54 year ended december 31 2007 interest income expense interest income net decreased 03 million 17 million year ended december 31 2008 20 million year ended december 31 2007 due interest expense related payment fines penalties fcpa matter expense income net expense income net decreased 42 million 23 million expense year ended december 31 2008 income 19 million year ended december 31 2007 due foreign currency transaction losses income tax expense income tax expense decreased 05 million 44 million year ended december 31 2008 49 million year ended december 31 2007 primarily due decrease pretax income company’s effective tax rate increased 240 year ended december 31 2008 215 year ended december 31 2007 due increase income higher tax jurisdictions total deferred taxes company’s foreign subsidiaries relating net operating loss carryforwards 102 million 77 million december 31 2008 2007 respectively related valuation allowance 87 million 63 million december 31 2008 2007 respectively company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 41 million 140 million year ended december 31 2008 181 million year ended december 31 2007 result factors described 2007 compared 2006 sales increased 392 million 257 1916 million year ended december 31 2007 1524 million year ended december 31 2006 increase resulted primarily increase unit sales americas region increased 171 million 270 800 million year ended december 31 2007 629 million year ended december 31 2006 sales europeafrica region increased 174 million 286 783 million year ended december 31 2007 609 million year ended december 31 2006 sales asiapacific region increased 47 million 167 333 million year ended december 31 2007 286 million year ended december 31 2006 gross profit gross profit increased 255 million 286 1150 million year ended december 31 2007 895 million year ended december 31 2006 gross margin increased 600 year ended december 31 2007 587 year ended december 31 2006 increase gross margin primarily due change sales mix resulting increase unit sales product lines lower unit costs prior year period result continuing productivity improvements selling expenses selling expenses increased 108 million 240 561 million year ended december 31 2007 453 million year ended december 31 2006 increase primarily due increase commission compensation expense 68 million increase marketing advertising costs 14 million increase travel related expenses 14 million increase recruiting hiring expense 06 million percentage sales selling expenses decreased 293 sales year ended december 31 2007 297 year ended december 31 2006 general administrative expenses general administrative expenses increased 09 million 39 255 million year ended december 31 2007 246 million year ended december 31 2006 general administrative expenses fiscal 2007 include accrual 265 million estimated fines penalties related fcpa matter 11 million professional fees related fcpa matter resolution patent litigation settled 2007 general administrative expenses fiscal 2006 included 68 million professional legal expenses related fcpa matter patent litigation costs general administrative expenses decreased 133 sales 2007 161 2006 excluding effects penalty accrual professional fees related fcpa matter patent litigation general administrative expenses increased 40 million primarily result increases compensation costs 23 million including equity based compensation professional fees 09 million depreciation amortization expenses depreciation amortization expenses decreased 01 million 40 million year ended december 31 2007 41 million year ended december 31 2006 research development expenses research development expenses increased 31 million 103 million year ended december 31 2007 72 million year ended december 31 2006 primarily result increase compensation third party rd expense related new product releases research development expenses percentage sales increased 54 year ended december 31 2007 47 year ended december 31 2006 interest income expense interest income net increased 13 million 20 million year ended december 31 2007 07 million year ended december 31 2006 due increase short term investments expense income net expense income net increased 11 million 19 million income year ended december 31 2007 income 08 million year ended december 31 2006 primarily result increase foreign exchange transaction gains income tax expense income tax expense increased 33 million 49 million year ended december 31 2007 16 million year ended december 31 2006 increase primarily due increase pretax income company’s effective tax rate increased 215 year ended december 31 2007 162 primarily result increase expenses nondeductible us income tax purposes 265 million related accrual penalties connection resolution fcpa matter company’s effective income tax rate excluding effect would 170 year ended december 31 2007 company believes calculating effective tax rate without impact fcpa charge useful management investors provide greater clarity facilitate internal external comparisons company’s historical tax rate company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction separate income tax expenses company recorded addition shareholders’ equity 10 million 2007 income tax benefit received nonqualified disposition incentive stock options employees total deferred taxes company’s foreign subsidiaries relating net operating loss carryforwards 77 million 63 million december 31 2007 december 31 2006 respectively related valuation allowance 63 million 44 million december 31 2007 december 31 2006 respectively net income net income increased 99 million 181 million year ended december 31 2007 82 million year ended december 31 2006 result factors described liquidity capital resources company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 315 million 2003 private placement common stock various institutional investors totaling approximately 249 million january 10 2005 company filed registration statement form s3 securities exchange commission allowing raise proceeds 125 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes august 14 2007 company sold 1650000 shares common stock registered direct offering pursuant form s3 registration statement certain institutional investors 3400 per share net proceeds deducting placement fees offering expenses approximately 530 million cash equivalents decreased 23 million 235 million december 31 2008 258 million december 31 2007 decrease primarily attributable purchases equipment intangible assets 135 million short term investments 46 million offset decrease net income increase noncash expenses 134 million effect exchange rate changes cash 25 million company’s short term investments increased 820 million december 31 2008 774 million december 31 2007 july 11 2006 company entered loan agreement providing available line credit 300 million loans agreement bear interest rate libor plus 175 require company maintain certain ratios respect debt covenant agreement including current ratio consolidated ebitda senior funded debt ebitda december 31 2008 company compliance covenants amended loan agreement term amended loan agreement extends april 30 2009 company drawn line credit company believes able renew line credit upon expiration current amended loan agreement although terms conditions may change company believes working capital anticipated cash flow operations credit facility sufficient fund longterm liquidity requirements foreseeable future balance sheet items company party offbalance sheet items already appropriately disclosed financial statements contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2008 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days december 31 2008 company longterm commitments purchases critical accounting policies response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties policies affect current assets operating results therefore critical assessing company’s financial operating status policies involve certain assumptions incorrect could create adverse impact company’s operations financial position preparation consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements revenue recognitionrevenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s technology medical applications recognized technology sold licensees reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income two year period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board statement 109 “accounting income taxes” company establishes valuation allowance net deferred assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world considers statutory rates within jurisdiction determine overall effective tax rate 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant aggregate dollar effect favorable tax rate approximately 21 million 013 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 2005 company opened regional headquarters began manufacture products singapore received approval four year tax holiday singapore economic development board incentive establish manufacturing plant regional headquarters aggregate dollar effect favorable tax rate approximately 16 million 010 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 company subject certain terms conditions including employment spending capital investment countries order receive favorable tax rates subject statutory rates significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company appropriately reserved tax uncertainties based criteria established interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” reserve warrantiesthe company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues may increase warranty costs expenses historically within expectations company cannot guarantee continue future foreign exchange exposure company conducts significant portion business outside united states present 626 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future company’s exposure risks associated fluctuations foreign exchange rates may increase decrease inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2009 impact recently issued accounting standards january 1 2008 company adopted statement financial accounting standards “sfas” 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 permits entities choose measure certain financial instruments eligible items fair value items otherwise currently required measured fair value sfas 159 decision measure items fair value made specified election dates irrevocable instrumentbyinstrument basis entities electing fair value option would required recognize changes fair value earnings expense upfront costs fees associated item fair value option elected entities electing fair value option required distinguish face statement financial position fair value assets liabilities fair value option elected similar assets liabilities measured using another measurement attribute adoption sfas 159 impact company’s consolidated financial statements january 1 2008 company adopted sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements company believe assets liabilities subject recurring measurement provisions sfas 157 disclosure requirements nonfinancial assets nonfinancial liabilities assessed nonrecurring basis deferred fasb staff position 1572 “effective date fasb statement 157” fiscal years beginning november 15 2008 december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141 revised” sfas 141 revised requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date statement also requires acquirer business combination achieved stages recognize identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values provisions sfas 141 revised effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company believe adoption statement 141 material impact company’s financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” statement establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary statement effective prospectively except certain retrospective disclosure requirements fiscal years beginning december 15 2008 company believe adoption statement 160 material impact company’s financial position results operations march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” “sfas 161” statement requires enhanced disclosures entity’s derivative hedging activities sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 company expect sfas 161 material impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included part ii item 8 annual report form 10k overview company designs develops manufactures markets supports portable software driven 3d measurement imaging systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro laser scanarm faro gage articulated measuring devices faro laser scanner photon faro laser tracker companion cam2 software systems provide cadbased inspection highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company derives revenues primarily sale faroarm faro laser scanarm faro gage faro laser tracker faro laser scanner photon 3d measurement equipment related multifaceted cam2 software programs revenue related products generally recognized upon shipment addition company sells one threeyear extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices france germany great britain japan spain italy turkey china india poland netherlands malaysia thailand singapore vietnam company manages reports global sales three regions americas europeafrica asiapacific company manufactures faroarm faro gage faro laser tracker products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region company manufactures faroarm faro gage faro laser tracker products company’s manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro laser scanner photon product facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2010 company accounts wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected company’s consolidated financial statements company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2009 2008 2007 company implemented three reductionsinforce year ended december 31 2009 lower costs view effects deteriorating global economic conditions first reductioninforce announced february 20 2009 affected approximately 7 company’s workforce result first reductioninforce company expected save approximately 45 million compensation costs annualized basis severance costs related first reductioninforce equaled 07 million second reductioninforce effective april 3 2009 announced april 6 2009 affected approximately 14 company’s workforce result second reductioninforce company expected save 74 million compensation costs annualized basis severance costs second reductioninforce 10 million third reductioninforce effective august 24 2009 affected approximately 8 company’s workforce result third reductioninforce company expected save approximately 41 million compensation costs annualized basis severance costs third reductioninforce 06 million company incurred net loss year ended december 31 2009 primarily result decrease product sales company attributes decrease product sales principally deterioration global economy prior 2009 company history sales earnings growth 26 consecutive profitable quarters december 31 2008 sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro gage faro laser scanner photon effect acquisitions however company’s historical financial performance indicative future financial performance december 22 2009 company filed registration statement form s3 sec registering 145 million shares common stock preferred stock warrants purchase common preferred stock either individually units proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes fcpa update previously reported company conducted internal investigation 2006 certain payments made china subsidiary may violated fcpa applicable laws company refers fcpa matter entered settlement agreements documents sec us department justice doj 2008 related fcpa matter company incurred expenses 38 million 2006 31 million 2007 03 million 2008 relating fcpa matter paid 295 million fines penalties interest doj sec 2008 related fcpa matter company twoyear monitoring obligation continuing obligations sec doj respect compliance fcpa laws including full cooperation government adoption compliance code containing specific provisions intended prevent violations fcpa selection process monitor company pursuing conjunction sec doj yet complete failure comply continuing obligations could result sec doj seeking impose penalties company future results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2009 compared 2008 sales total sales decreased 615 million 294 1477 million year ended december 31 2009 2092 million year ended december 31 2008 decrease resulted primarily decrease unit sales regions related weakness global economy product sales decreased 615 million 343 1177 million year ended december 31 2009 1792 million year ended december 31 2008 service revenue remained flat 300 million 2009 2008 sales americas region decreased 233 million 298 550 million year ended december 31 2009 783 million prior year period product sales americas region decreased 239 million 361 423 million year ended december 31 2009 662 million prior year service revenue americas region increased 07 million 58 128 million year ended december 31 2009 121 million prior year sales europeafrica region decreased 306 million 327 630 million year ended december 31 2009 936 million year ended december 31 2008 product sales europeafrica region decreased 294 million 367 508 million year ended december 31 2009 802 million prior year service revenue europeafrica region decreased 13 million 97 121 million year ended december 31 2009 134 million prior year primarily due decrease customer service training revenue sales asiapacific region decreased 76 million 204 297 million year ended december 31 2009 373 million year ended december 31 2008 product sales asiapacific region decreased 82 million 252 246 million year ended december 31 2009 328 million prior year service revenue asiapacific region increased 06 million 133 51 million year ended december 31 2009 45 million period prior year primarily due increase warranty revenue gross profit decreased 445 million 356 807 million year ended december 31 2009 1252 million year ended december 31 2008 gross margin decreased 546 year ended december 31 2009 598 year ended december 31 2008 primarily due change sales mix product sales service revenue resulting decrease product sales gross margin product sales decreased 607 year ended december 31 2009 661 prior year primarily due change product sales mix resulting decrease average unit selling prices gross margin service revenues increased 310 year ended december 31 2009 225 prior year primarily due decrease customer service costs company expects trend changes sales mix result gross margins range approximately 55 60 2010 continued economic downturn could negatively impact range selling expenses selling expenses decreased 144 million 229 486 million year ended december 31 2009 630 million year ended december 31 2008 decrease primarily due decrease compensation expense 89 million decrease travelrelated expenses 25 million decrease marketing advertising costs 20 million decrease recruiting training expenses 10 million result reductionsinforce implemented company 2009 company incurred 10 million severance costs expects save 62 million compensation costs annualized basis worldwide sales marketing headcount decreased 90 227 306 december 31 2009 396 december 31 2008 regionally company’s sales marketing headcount decreased 46 338 90 december 31 2009 136 december 31 2008 americas decreased 27 194 112 december 31 2009 139 december 31 2008 europeafrica decreased 17 140 asiapacific 104 december 31 2009 121 december 31 2008 percentage sales selling expenses increased 329 sales year ended december 31 2009 301 year ended december 31 2008 regionally selling expenses 307 sales americas year ended december 31 2009 compared 296 sales year ended december 31 2008 342 sales europeafrica year ended december 31 2009 compared 305 sales prior year 343 sales asiapacific year ended december 31 2009 compared 302 sales prior year general administrative expenses general administrative expenses decreased 12 million 45 249 million year ended december 31 2009 261 million year ended december 31 2008 general administrative expenses decreased primarily due decrease compensation expense 18 million decrease travel related costs 09 million reduction recruiting training costs 07 million offset increase allowance doubtful accounts 05 million increase 20 million legal professional fees primarily related patent litigation settlement irs audit general administrative expenses percentage sales increased 169 year ended december 31 2009 125 year ended december 31 2008 result reductionsinforce implemented company 2009 company incurred 07 million severance costs expects save 34 million compensation costs annualized basis depreciation amortization expenses depreciation amortization expenses increased 10 million 55 million year ended december 31 2009 45 million year ended december 31 2008 result increase property equipment intangible assets research development expenses research development expenses remained flat 126 million years ended december 31 2009 2008 research development expenses percentage sales increased 85 year ended december 31 2009 60 year ended december 31 2008 result reductionsinforce implemented company 2009 company incurred 01 million severance costs expects save 18 million compensation costs annualized basis interest income expense interest income net decreased 15 million 02 million year ended december 31 2009 17 million year ended december 31 2008 due decrease interest rates related cash short term investments income expense net income expense net increased 29 million 06 million income year ended december 31 2009 expense 23 million year ended december 31 2008 due foreign currency transaction gains income tax expense income tax expense decreased 40 million 04 million year ended december 31 2009 44 million year ended december 31 2008 primarily due decrease pretax income tax expense year ended december 31 2009 included 26 million 016 per share related settlement internal revenue service fourth quarter 2009 audit company’s federal corporate income tax returns period 2005 2007 related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 excluding effects 26 million tax settlement company’s effective tax benefit rate would 217 2009 company believes calculating effective tax rate without impact irs settlement useful management investors provide greater clarity facilitate internal external comparisons company’s historical tax rate company’s effective tax rate 42 year ended december 31 2009 compared 240 year ended december 31 2008 total deferred tax assets company’s foreign subsidiaries relating net operating loss carryforwards 122 million 102 million december 31 2009 2008 respectively related valuation allowance 106 million 87 million december 31 2009 2008 respectively company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 246 million net loss 106 million year ended december 31 2009 net income 140 million year ended december 31 2008 result factors described 2008 compared 2007 sales increased 176 million 92 2092 million year ended december 31 2008 1916 million year ended december 31 2007 increase resulted primarily increase unit sales increase average selling prices product sales increased 91 million 53 1792 million year ended december 31 2008 1701 million year ended december 31 2007 service revenue increased 85 million 395 300 million year ended december 31 2008 215 million year ended december 31 2007 sales americas region decreased 17 million 21 783 million year ended december 31 2008 800 million prior year period product sales americas region decreased 40 million 57 662 million year ended december 31 2008 702 million prior year service revenue americas region increased 24 million 245 121 million year ended december 31 2008 98 million prior year sales europeafrica region increased 153 million 195 936 million year ended december 31 2008 783 million year ended december 31 2007 product sales europeafrica region increased 110 million 159 802 million year ended december 31 2008 692 million prior year service revenue europeafrica region increased 44 million 484 134 million year ended december 31 2008 91 million prior year primarily due increase customer service training revenue sales asiapacific region increased 40 million 120 373 million year ended december 31 2008 333 million year ended december 31 2007 product sales asiapacific region increased 21 million 68 328 million year ended december 31 2008 307 million prior year service revenue asiapacific region increased 19 million 731 45 million year ended december 31 2008 26 million period prior year primarily due increase warranty revenue gross profit gross profit increased 102 million 89 1252 million year ended december 31 2008 1150 million year ended december 31 2007 gross margin decreased 598 year ended december 31 2008 600 year ended december 31 2007 decrease gross margin primarily due increase service costs percentage sales selling expenses selling expenses increased 69 million 123 630 million year ended december 31 2008 561 million year ended december 31 2007 increase primarily due increase compensation expense 37 million increase marketing advertizing costs 05 million increase travelrelated expenses 21 million percentage sales selling expenses increased 301 sales year ended december 31 2008 293 year ended december 31 2007 general administrative expenses general administrative expenses increased 06 million 25 261 million year ended december 31 2008 255 million year ended december 31 2007 general administrative expenses increased primarily due increase compensation expense 21 million increased costs 14 million related additional leased space expand company’s corporate offices increase allowance doubtful accounts 07 million higher travelrelated costs 03 million offset reduction 37 million estimated fines penalties professional fees related settlement fcpa matter included year ended december 31 2007 general administrative expenses percentage sales decreased 125 year ended december 31 2008 133 year ended december 31 2007 depreciation amortization expenses depreciation amortization expenses increased 05 million 45 million year ended december 31 2008 40 million year ended december 31 2007 result increase property equipment intangible assets research development expenses research development expenses increased 23 million 126 million year ended december 31 2008 103 million year ended december 31 2007 primarily result increase compensation expense research development expenses percentage sales increased 60 year ended december 31 2008 54 year ended december 31 2007 interest income expense interest income net decreased 03 million 17 million year ended december 31 2008 20 million year ended december 31 2007 due interest expense related payment fines penalties fcpa matter income expense net income expense net decreased 42 million 23 million expense year ended december 31 2008 income 19 million year ended december 31 2007 due foreign currency transaction losses income tax expense income tax expense decreased 05 million 44 million year ended december 31 2008 49 million year ended december 31 2007 primarily due decrease pretax income company’s effective tax rate increased 240 year ended december 31 2008 215 year ended december 31 2007 due increase income higher tax jurisdictions total deferred taxes company’s foreign subsidiaries relating net operating loss carryforwards 102 million 77 million december 31 2008 2007 respectively related valuation allowance 87 million 63 million december 31 2008 2007 respectively net income net income decreased 41 million 140 million year ended december 31 2008 181million year ended december 31 2007 result factors described liquidity capital resources company financed operations primarily cash provided operating activities proceeds 1997 initial public offering common stock approximately 315 million 2003 private placement common stock totaling approximately 249 million 2007 registered direct offering form s3 proceeds approximately 530 million december 22 2009 company filed registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units value 145 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes cash equivalents increased 116 million 351 million december 31 2009 235 million december 31 2008 increase primarily attributable net proceeds 170 million sale 820 million company’s variable rate demand bonds net purchases 650 million us treasury bills increase working capital 77 million 12 million net loss noncash expenses offset purchases 88 million company’s common stock part company’s share repurchase program 41 million purchases equipment intangible assets negative effect exchange rate changes cash 15 million july 11 2006 company entered loan agreement providing line credit 300 million recently amended june 18 2009 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 225 250 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2009 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended extends march 31 2012 company drawn line credit company believes anticipated cash flow operations cash equivalents short term investments credit facility sufficient finance presently anticipated working capital expenditure requirements foreseeable future balance sheet items none contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2009 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days december 31 2009 company longterm commitments purchases company 06 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2010 critical accounting policies response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment policies affect current assets operating results therefore critical assessing company’s financial operating status policies involve certain assumptions incorrect could adverse impact company’s operations financial position preparation company’s consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements revenue recognition revenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s historical technology medical applications recognized technology sold licensees reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world considers statutory rates within jurisdiction determine overall effective tax rate 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant aggregate dollar effect favorable tax rate approximately 12 million 007 per share year ended december 31 2009 21 million 013 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 11 million 007 per share year ended december 31 2009 16 million 010 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 company subject certain terms conditions including employment spending capital investment countries order receive favorable tax rates subject statutory rates significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company establishes provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described asc 740 tax position likely sustained upon examination applicable taxing authority ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes company assesses likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair market value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2009 2008 2007 impact recently issued accounting standards january 1 2008 company adopted financial accounting standards board fasb accounting standards codification asc 82010 formerly statement financial accounting standards sfas 157 “fair value measurements disclosures” statement defines fair value establishes framework measuring fair value accordance us gaap expands disclosures fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements company previously adopted provisions pronouncement financial assets liabilities january 1 2008 effective january 1 2009 company adopted asc 82010 nonfinancial assets liabilities measured fair value nonrecurring basis adoption asc 82010 material impact company’s consolidated financial position results operations cash flows january 1 2009 company adopted fasb asc 80520 formerly sfas 141 revised “business combinationsidentifiable assets liabilities noncontrolling interest” asc 80520 asc 80520 requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date statement also requires acquirer business combination consummated stages recognize identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values provisions asc 80520 effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adoption asc 80520 material impact company’s financial position results operations january 1 2009 company adopted fasb asc 81010 formerly sfas 160 “consolidation” asc 81010 asc 81010 establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary asc 81010 effective prospectively except certain retrospective disclosure requirements fiscal years beginning december 15 2008 adoption asc 81010 material impact company’s financial position results operations january 1 2009 company adopted fasb asc 81510 formerly sfas 161 “derivatives hedging” asc 81510 statement requires enhanced disclosures entity’s derivative hedging activities asc 81510 effective financial statements issued fiscal years interim periods beginning november 15 2008 adoption asc 81510 material impact company’s consolidated financial statements may 2009 fasb issued sfas 165 codified asc 85510 “subsequent events” addresses types timing events reported financial statements events occurring balance sheet date financial statements issued available issued asc 85510 effective company july 4 2009 adoption asc 85510 material impact company’s consolidated financial statements june 2009 fasb issued sfas 168 codified asc 10510 “the fasb accounting standards codification hierarchy generally accepted accounting principles” asc 10510 establishes fasb accounting standards codification source authoritative accounting principles recognized fasb applied nongovernmental entities preparation financial statements conformity us gaap asc 10510 effective financial statements issued interim annual periods ending september 15 2009 adoption asc 10510 supersedes references precodification standards material impact company’s consolidated financial statements october 2009 fasb issued accounting standards update asu 200913 amends asc topic 605 “revenue recognition” guidance relates determination individual deliverables included multipleelement arrangement may treated separate units accounting modifies manner transaction consideration allocated across individual deliverables also guidance expands disclosure requirements revenue arrangements multiple deliverables asu 200913 effective beginning january 1 2011 may applied retrospectively periods presented prospectively arrangements entered materially modified adoption date company expect asu 200913 material impact company’s consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included part ii item 8 annual report form 10k overview company designs develops manufactures markets supports portable software driven 3d measurement imaging systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro laser scanarm faro gage articulated measuring devices faro laser tracker ion faro focus3d faro 3d imager amp companion cam2 software systems provide cadbased inspection highdensity surveying applications together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company derives revenues primarily sale measurement equipment related multifaceted cam2 software programs revenue related products generally recognized upon shipment addition company sells one threeyear extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices france germany great britain japan spain italy turkey china india poland netherlands malaysia thailand singapore vietnam company manages reports global sales three regions americas europeafrica asiapacific company manufactures faroarm faro gage faro 3d imager amp faro laser tracker ion products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro focus3d product facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2012 company accounts wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected company’s consolidated financial statements company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2011 2010 2009 company profitable quarter years ended december 31 2011 december 31 2010 company incurred net loss year ended december 31 2009 primarily result decrease product sales company attributes decrease product sales principally decline global economy prior 2009 company history sales earnings growth 26 consecutive profitable quarters december 31 2008 historical sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro edge arm faro focus3d effect acquisitions however company’s historical financial performance indicative future financial performance december 22 2009 company filed registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units proposed maximum aggregate offering price 145 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes fcpa update previously reported company conducted internal investigation 2006 certain payments made china subsidiary may violated foreign corrupt practices act fcpa applicable laws refer “fcpa matter” entered settlement agreements related documents sec us department justice doj 2008 related fcpa matter terms agreements sec doj company assumed twoyear monitoring obligation continuing obligations respect compliance fcpa laws including full cooperation us government adoption compliance code containing specific provisions intended prevent violations fcpa second quarter 2010 company conjunction sec doj completed selection fcpa monitor result delays secdoj approval monitor company currently still monitoring period otherwise would already expired company cooperating monitor completes work plan assess company’s compliance requirements settlement agreements failure comply continuing obligations respect fcpa matter could result sec doj seeking impose penalties company future results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2011 compared 2010 sales total sales increased 624 million 326 2542 million year ended december 31 2011 1918 million year ended december 31 2010 increase resulted primarily increase worldwide demand products recovery global economy product sales increased 553 million 352 2126 million year ended december 31 2011 1573 million year ended december 31 2010 service revenue increased 71 million 206 416 million year ended december 31 2011 345 million year ended december 31 2010 sales americas region increased 251 million 347 975 million year ended december 31 2011 724 million prior year period product sales americas region increased 231 million 407 800 million year ended december 31 2011 569 million prior year service revenue americas region increased 20 million 126 175 million year ended december 31 2011 155 million prior year primarily due increase customer service revenue sales europeafrica region increased 249 million 332 996 million year ended december 31 2011 747 million year ended december 31 2010 product sales europeafrica region increased 214 million 345 833 million year ended december 31 2011 619 million prior year service revenue europeafrica region increased 35 million 272 163 million year ended december 31 2011 128 million prior year primarily due increase customer service revenue sales asiapacific region increased 124 million 279 571 million year ended december 31 2011 447 million year ended december 31 2010 product sales asiapacific region increased 108 million 280 493 million year ended december 31 2011 385 million prior year service revenue asiapacific region increased 16 million 268 78 million year ended december 31 2011 62 million period prior year primarily due increase warranty revenue gross profit increased 303 million 267 1437 million year ended december 31 2011 1134 million year ended december 31 2010 gross margin decreased 565 year ended december 31 2011 591 year ended december 31 2010 decrease gross margin primarily due decrease gross margin product sales 612 year ended december 31 2011 653 prior year primarily result change historical product sales mix caused increase sales new laser scanner product currently lower gross margin gross margin service revenues increased 324 year ended december 31 2011 compared 309 prior year selling expenses selling expenses increased 114 million 226 621 million year ended december 31 2011 507 million year ended december 31 2010 increase primarily due increase commissions compensation expense 88 million increase marketing advertising expenses 17 million increase travel expenses 15 million worldwide sales marketing headcount increased 27 90 327 december 31 2011 300 december 31 2010 regionally company’s sales marketing headcount increased 9 111 90 december 31 2011 81 december 31 2010 americas increased 2 18 113 december 31 2011 111 december 31 2010 europeafrica increased 16 148 asiapacific 124 december 31 2011 108 december 31 2010 percentage sales selling expenses decreased 244 sales year ended december 31 2011 264 sales year ended december 31 2010 regionally selling expenses 205 sales americas year ended december 31 2011 compared 219 sales year ended december 31 2010 281 sales europeafrica year ended december 31 2011 compared 301 sales prior year 249 sales asiapacific year ended december 31 2011 compared 275 sales prior year general administrative expenses general administrative expenses remained flat 268 million years ended december 31 2011 december 31 2010 increases compensation costs 17 million increases recruiting relocation costs 03 million offset decreases 10 million bad debt expenses decreases 04 million related fcpa monitor decrease legal professional fees related patent litigation 06 million general administrative expenses percentage sales decreased 105 year ended december 31 2011 140 year ended december 31 2010 depreciation amortization expenses depreciation amortization expenses increased 04 million 67 million year ended december 31 2011 63 million year ended december 31 2010 result increase property equipment intangible assets research development expenses research development expenses increased 25 million 197 152 million year ended december 31 2011 127 million year ended december 31 2010 primarily due increase compensation 19 million subcontractor expenses 06 million expenses 04 million related closing relocation rd facility andover existing facility kennett square pa research development expenses percentage sales decreased 60 year ended december 31 2011 66 year ended december 31 2010 income expense net income expense net decreased 16 million 12 million expense year ended december 31 2011 expense 28 million year ended december 31 2010 primarily result decrease foreign exchange transaction losses due effects changes foreign exchange rates value intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense increased 52 million 83 million year ended december 31 2011 31 million year ended december 31 2010 primarily due increase pretax income company’s effective tax rate increased 263 year ended december 31 2011 compared 221 year ended december 31 2010 primarily due release valuation allowance approximately 12 million year ended december 31 2010 related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction total deferred tax assets company’s foreign subsidiaries relating net operating loss carryforwards 149 million 141 million december 31 2011 2010 respectively related valuation allowance 118 million 111 million december 31 2011 2010 respectively net income net income increased 123 million 234 million year ended december 31 2011 111 million year ended december 31 2010 result factors described 2010 compared 2009 sales total sales increased 441 million 299 1918 million year ended december 31 2010 1477 million year ended december 31 2009 increase resulted primarily increase worldwide demand products related part recovery global economy product sales increased 396 million 336 1573 million year ended december 31 2010 1177 million year ended december 31 2009 service revenue increased 45 million 15 345 million year ended december 31 2010 300 million year ended december 31 2009 sales americas region increased 174 million 314 724 million year ended december 31 2010 550 million prior year period product sales americas region increased 147 million 345 569 million year ended december 31 2010 422 million prior year service revenue americas region increased 27 million 211 155 million year ended december 31 2010 128 million prior year primarily due increase customer service revenue sales europeafrica region increased 117 million 187 747 million year ended december 31 2010 630 million year ended december 31 2009 product sales europeafrica region increased 110 million 219 619 million year ended december 31 2010 509 million prior year service revenue europeafrica region increased 07 million 56 128 million year ended december 31 2010 121 million prior year primarily due increase customer service revenue sales asiapacific region increased 150 million 505 447 million year ended december 31 2010 297 million year ended december 31 2009 product sales asiapacific region increased 139 million 565 385 million year ended december 31 2010 246 million prior year service revenue asiapacific region increased 11 million 208 62 million year ended december 31 2010 51 million period prior year primarily due increase warranty revenue gross profit increased 327 million 405 1134 million year ended december 31 2010 807 million year ended december 31 2009 gross margin increased 591 year ended december 31 2010 546 year ended december 31 2009 primarily due change sales mix highermargin product sales lowermargin service revenue resulting increase product sales gross margin product sales increased 653 year ended december 31 2010 607 prior year primarily due increase product sales mix higher margin product lines gross margin service revenues remained relatively flat 309 year ended december 31 2010 compared 310 prior year selling expenses selling expenses increased 21 million 43 507 million year ended december 31 2010 486 million year ended december 31 2009 increase primarily due increase commissions expense 47 million increase product demonstration costs 13 million increase performancebased bonuses 04 million offset decrease compensation costs 36 million due reduced headcount decrease travel expenses 07 million worldwide sales marketing headcount decreased 6 20 300 december 31 2010 306 december 31 2009 regionally company’s sales marketing headcount decreased 9 100 81 december 31 2010 90 december 31 2009 americas decreased 1 10 111 december 31 2010 112 december 31 2009 europeafrica increased 4 40 asiapacific 108 december 31 2010 104 december 31 2009 percentage sales selling expenses decreased 264 sales year ended december 31 2010 329 year ended december 31 2009 regionally selling expenses 219 sales americas year ended december 31 2010 compared 307 sales year ended december 31 2009 301 sales europeafrica year ended december 31 2010 compared 342 sales prior year 275 sales asiapacific year ended december 31 2010 compared 343 sales prior year general administrative expenses general administrative expenses increased 19 million 73 268 million year ended december 31 2010 249 million year ended december 31 2009 general administrative expenses increased primarily due 11 million cost fcpa monitor increase legal professional fees related patent litigation 08 million increase performance based bonuses 11 million offset decrease compensation costs 09 million due reduced headcount general administrative expenses percentage sales decreased 140 year ended december 31 2010 169 year ended december 31 2009 depreciation amortization expenses depreciation amortization expenses increased 08 million 63 million year ended december 31 2010 55 million year ended december 31 2009 result increase property equipment intangible assets research development expenses research development expenses increased 01 million 06 127 million year ended december 31 2010 126 million year ended december 31 2009 primarily due increase performancebased bonuses 08 million offset decreases materials 01 million subcontractor expenses 06 million research development expenses percentage sales decreased 66 year ended december 31 2010 85 year ended december 31 2009 interest income expense interest income net decreased 01 million 01 million year ended december 31 2010 02 million year ended december 31 2009 due decrease interest rates related cash short term investments income expense net income expense net increased 34 million 28 million expense year ended december 31 2010 income 06 million year ended december 31 2009 primarily result increase foreign currency losses related effects decline euro value intercompany account balances denominated different currencies company’s european subsidiaries income tax expense income tax expense increased 27 million 31 million year ended december 31 2010 04 million year ended december 31 2009 primarily due increase pretax income tax expense year ended december 31 2009 included 26 million related settlement internal revenue service fourth quarter 2009 audit company’s federal corporate income tax returns period 2005 2007 related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 excluding effects 26 million tax settlement company’s effective tax benefit rate would 217 2009 company believes calculating effective tax rate without impact irs settlement useful management investors provide greater clarity facilitate internal external comparisons company’s historical tax rate company’s effective tax rate 221 year ended december 31 2010 compared tax benefit rate 217 excluding effects 26 million tax settlement year ended december 31 2009 total deferred tax assets company’s foreign subsidiaries relating net operating loss carryforwards 141 million 122 million december 31 2010 2009 respectively related valuation allowance 111 million 106 million december 31 2010 2009 respectively company released valuation allowance approximately 12 million related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income increased 217 million 111 million year ended december 31 2010 net loss 106 million year ended december 31 2009 result factors described liquidity capital resources cash equivalents increased 138 million 645 million december 31 2011 507 million december 31 2010 increase primarily attributable increase net income noncash expenses 343 million proceeds tax benefits stock option exercises 107 million offset increase working capital 256 million primarily related increase raw material inventories meet higher level sales laser scanner product 54 million purchases equipment intangible assets july 11 2006 company entered loan agreement providing line credit 300 million recently amended june 18 2009 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 225 250 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2011 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended extends march 31 2012 company drawn line credit company believes able renew line credit upon expiration current amended loan agreement although terms conditions may change company believes working capital anticipated cash flow operations cash credit facility sufficient fund longterm liquidity requirements foreseeable future balance sheet items none contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2011 thousands faro consolidated contractual obligations year ended december 31 2011 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days company 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation material impact company’s results operations recent years company expect inflation material impact operations 2012 critical accounting policies preparation company’s consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment policies affect current assets operating results therefore critical assessing company’s financial operating condition policies involve certain assumptions incorrect could adverse impact company’s operations financial position revenue recognition revenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s historical technology medical applications recognized technology used licensees reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred tax assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company establishes provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described asc 740 tax position likely sustained upon examination applicable taxing authority ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes company assesses likelihood amount potential adjustments adjusts income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties company establishes time sale liability oneyear warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test company believes result qualitative assessment likely fair value reporting unit less carrying amount first second steps goodwill impairment test unnecessary company elected early adopt accounting guidance beginning fourth quarter 2011 prospective basis goodwill impairment tests necessary goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair market value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2011 2010 2009 impact recently issued accounting standards january 2010 financial accounting standards board “fasb” issued asu 20106 improving disclosures fair value measurements “asu 20106” requires reporting entities make new disclosures recurring nonrecurring fairvalue measurements including significant transfers level 1 level 2 fairvalue measurements information purchases sales issuances settlements gross basis reconciliation level 3 fairvalue measurements asu 20106 effective annual reporting periods beginning december 15 2009 except level 3 reconciliation disclosures effective annual periods beginning december 15 2010 adoption asu 20106 material impact company’s consolidated financial statements disclosures expected material impact future periods july 2010 fasb issued guidance enhance disclosures credit quality creditor’s financing receivables adequacy allowance credit losses amended guidance effective periodend balances beginning first interim annual reporting period ending december 15 2010 amended guidance effective activity reporting period beginning first interim annual reporting period beginning december 15 2010 adoption amended guidance impact company’s disclosure consolidated financial statements may 2011 financial accounting standards board fasb issued accounting standards update 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss asu 201104 asu 201104 clarifies application fair value measurement disclosure requirements effective annual periods beginning december 15 2011 currently evaluating provisions asu 201104 assessing impact may financial position results operations december 2010 fasb issued accounting standard asu 201028 intangiblesgoodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts consensus fasb emerging issues task force “asu 201028” asu 201028 provides amendments topic 350 modifies step 1 goodwill impairment test reporting units zero negative carrying amounts result goodwill impairments may reported sooner current practice public entities asu 201028 effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted adoption asu 201028 material impact company’s consolidated results operations financial condition june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 require companies present components net income comprehensive income either one continuous statement two consecutive statements eliminates option present components comprehensive income part changes stockholders’ equity standard change items must reported comprehensive income items measured must reclassified net income asu 201105 effective interim annual periods beginning december 15 2011 early adoption permitted adoption asu 201105 impact presentation effect company’s condensed consolidated financial statements financial condition december 2011 fasb issued accounting standards update 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 asu 201112 update defers specific requirement present items reclassified accumulated comprehensive income net income separately respective components net income comprehensive income part update fasb defer requirement report comprehensive income either single continuous statement two separate consecutive financial statements asu 201112 effective annual periods beginning december 15 2011 september 2011 fasb issued asu 201108 intangiblesgoodwill topic 350 “asu 201108” asu 201108 allows entities first assess qualitatively whether necessary perform twostep goodwill impairment test entity believes result qualitative assessment likely fair value reporting unit less carrying amount first second steps goodwill impairment test unnecessary company elected early adopt accounting guidance beginning fourth quarter 2011 prospective basis goodwill impairment tests adoption standard material impact consolidated financial statements footnote disclosures october 2009 fasb issued asu 200913 “revenue recognition multipledeliverable revenue arrangements” new standard changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 effective revenue arrangements entered fiscal years beginning june 15 2010 company adopted asu 200913 effective january 1 2011 adoption asu 200913 impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included part ii item 8 annual report form 10k overview company designs develops manufactures markets supports portable software driven 3d measurement imaging systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro laser scanarm faro gage articulated measuring devices faro laser tracker vantage faro focus3d faro 3d imager amp companion cam2 software systems provide cadbased inspection highdensity surveying applications products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company derives revenues primarily sale measurement equipment related multifaceted cam2 software programs revenue related products generally recognized upon shipment addition company sells extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis revenue training technology consulting services provided company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices france germany great britain japan spain italy turkey china india poland netherlands malaysia thailand singapore vietnam company manages reports global sales three regions americas europeafrica asiapacific company manufactures faroarm faro gage faro 3d imager amp faro laser tracker vantage products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro focus3d product facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2014 company accounts wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however use instruments none utilized 2013 2012 2011 company profitable 16 consecutive quarters company incurred net loss year ended december 31 2009 primarily result decrease product sales company attributes decrease product sales principally decline global economy prior 2009 company history sales earnings growth 26 consecutive profitable quarters december 31 2008 historical sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro edge arm faro focus3d effect acquisitions however company’s historical financial performance indicative future financial performance results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2013 compared 2012 sales total sales increased 184 million 67 2918 million year ended december 31 2013 2734 million year ended december 31 2012 increase resulted primarily increase worldwide demand company’s products services product sales increased 109 million 48 2388 million year ended december 31 2013 2279 million year ended december 31 2012 service revenue increased 75 million 164 530 million year ended december 31 2013 455 million year ended december 31 2012 primarily due increase warranty revenue sales americas region increased 118 million 109 1204 million year ended december 31 2013 1086 million prior year period product sales americas region increased 86 million 96 976 million year ended december 31 2013 890 million prior year service revenue americas region increased 32 million 165 228 million year ended december 31 2013 196 million prior year primarily due increase warranty revenue sales europeafrica region increased 33 million 33 1034 million year ended december 31 2013 1001 million year ended december 31 2012 product sales europeafrica region decreased 03 million 04 827 million year ended december 31 2013 831 million prior year service revenue europeafrica region increased 37 million 214 207 million year ended december 31 2013 170 million prior year primarily due increase warranty revenue sales asiapacific region increased 33 million 50 680 million year ended december 31 2013 647 million year ended december 31 2012 product sales asiapacific region increased 27 million 48 585 million year ended december 31 2013 558 million prior year service revenue asiapacific region increased 06 million 66 95 million year ended december 31 2013 89 million prior year primarily due increase customer service revenue gross profit gross profit increased 123 million 82 1619 million year ended december 31 2013 1496 million year ended december 31 2012 gross margin increased 555 year ended december 31 2013 547 year ended december 31 2012 increase gross margin primarily due increase gross margin service revenues 391 year ended december 31 2013 compared 348 prior year result increase higher margin warranty sales increase gross margin product sales 591 year ended december 31 2013 587 prior year primarily result lower manufacturing costs offset lower average selling prices selling expenses selling expenses increased 73 million 112 717 million year ended december 31 2013 644 million year ended december 31 2012 increase primarily due increase commissions compensation expense 49 million increase travel expenses 14 million increase marketing advertising expenses 03 million worldwide sales marketing headcount increased 68 186 433 december 31 2013 365 december 31 2012 regionally company’s sales marketing headcount increased 28 259 136 december 31 2013 108 december 31 2012 americas increased 18 146 141 december 31 2013 123 december 31 2012 europeafrica increased 22 164 asiapacific 156 december 31 2013 134 december 31 2012 percentage sales selling expenses increased 246 sales year ended december 31 2013 236 sales year ended december 31 2012 regionally selling expenses 214 sales americas year ended december 31 2013 compared 200 sales year ended december 31 2012 288 sales europeafrica year ended december 31 2013 compared 264 sales prior year 236 sales asiapacific year ended december 31 2013 compared 251 sales prior year general administrative expenses general administrative expenses increased 15 million 306 million 53 year ended december 31 2013 291 million year ended december 31 2012 primarily due increase compensation 18 million bad debt expense 12 million recruiting costs 10 million travel costs 02 million partially offset decrease 29 million professional fees related patent litigation fcpa matter general administrative expenses percentage sales decreased 105 year ended december 31 2013 106 year ended december 31 2012 depreciation amortization expenses depreciation amortization expenses remained flat 70 million years ended december 31 2013 december 31 2012 research development expenses research development expenses increased 48 million 275 224 million year ended december 31 2013 176 million year ended december 31 2012 primarily due increase compensation 25 million subcontractor expenses 16 million material expenses 06 million research development expenses percentage sales increased 77 year ended december 31 2013 64 year ended december 31 2012 income expense income expense increased 07 million 13 million expense year ended december 31 2013 expense 06 million year ended december 31 2012 primarily result increase foreign exchange transaction losses resulting changes foreign exchange rates value current intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense decreased 05 million 74 million year ended december 31 2013 79 million year ended december 31 2012 primarily due decrease pretax income company’s effective tax rate decreased 255 year ended december 31 2013 compared 257 year ended december 31 2012 included reduction income tax rates 08 15 related tax benefit exercise employee stock options years ended december 31 2013 2012 respectively effective tax rate year ended december 31 2013 also included discrete tax benefit 15 related retroactive legislative reinstatement january 2 2013 research development tax credit year ended december 31 2012 required included period reinstatement enacted law company’s tax rate continued lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 15 million 215 million year ended december 31 2013 230 million year ended december 31 2012 result factors described 2012 compared 2011 sales total sales increased 192 million 76 2734 million year ended december 31 2012 2542 million year ended december 31 2011 increase resulted primarily increase worldwide demand products weaker euro relative us dollar average resulted lower sales approximately 74 million year ended december 31 2012 compared year ended december 31 2011 sales denominated euros translated us dollars product sales increased 153 million 72 2279 million year ended december 31 2012 2126 million year ended december 31 2011 service revenue increased 39 million 95 455 million year ended december 31 2012 416 million year ended december 31 2011 sales americas region increased 111 million 114 1086 million year ended december 31 2012 975 million prior year period product sales americas region increased 90 million 113 890 million year ended december 31 2012 800 million prior year service revenue americas region increased 21 million 121 196 million year ended december 31 2012 175 million prior year primarily due increase warranty revenue sales europeafrica region increased 05 million 05 1001 million year ended december 31 2012 996 million year ended december 31 2011 product sales europeafrica region decreased 02 million 02 831 million year ended december 31 2012 833 million prior year service revenue europeafrica region increased 07 million 45 170 million year ended december 31 2012 163 million prior year primarily due increase warranty revenue sales asiapacific region increased 76 million 133 647 million year ended december 31 2012 571 million year ended december 31 2011 product sales asiapacific region increased 65 million 130 558 million year ended december 31 2012 493 million prior year service revenue asiapacific region increased 11 million 144 89 million year ended december 31 2012 78 million period prior year primarily due increase warranty revenue gross profit gross profit increased 59 million 41 1496 million year ended december 31 2012 1437 million year ended december 31 2011 gross margin decreased 547 year ended december 31 2012 565 year ended december 31 2011 decrease gross margin primarily due decrease gross margin product sales 587 year ended december 31 2012 612 prior year primarily result lower average selling prices change sales mix caused increase sales laser scanner product lower gross margin increase sales mix laser scanner product sold distributors gross margin service revenues increased 348 year ended december 31 2012 compared 324 prior year selling expenses selling expenses increased 23 million 37 644 million year ended december 31 2012 621 million year ended december 31 2011 increase primarily due increase commissions compensation expense 08 million increase marketing advertising expenses 06 million increase travel expenses 07 million worldwide sales marketing headcount increased 38 116 365 december 31 2012 327 december 31 2011 regionally company’s sales marketing headcount increased 18 200 108 december 31 2012 90 december 31 2011 americas increased 10 88 123 december 31 2012 113 december 31 2011 europeafrica increased 10 81 asiapacific 134 december 31 2012 124 december 31 2011 percentage sales selling expenses decreased 236 sales year ended december 31 2012 244 sales year ended december 31 2011 regionally selling expenses 200 sales americas year ended december 31 2012 compared 205 sales year ended december 31 2011 264 sales europeafrica year ended december 31 2012 compared 281 sales prior year 251 sales asiapacific year ended december 31 2012 compared 249 sales prior year general administrative expenses general administrative expenses increased 23 million 291 million 84 year ended december 31 2012 268 million year ended december 31 2011 primarily due increase 10 million related fcpa monitor increase legal professional fees related patent litigation 14 million general administrative expenses percentage sales increased 106 year ended december 31 2012 105 year ended december 31 2011 depreciation amortization expenses depreciation amortization expenses increased 03 million 70 million year ended december 31 2012 67 million year ended december 31 2011 result increase property equipment intangible assets research development expenses research development expenses increased 24 million 157 176 million year ended december 31 2012 152 million year ended december 31 2011 primarily due increase compensation 17 million subcontractor expenses 09 million offset expenses 03 million incurred prior year period related closing relocation rd facility andover facility kennett square pa research development expenses percentage sales increased 64 year ended december 31 2012 60 year ended december 31 2011 income expense income expense decreased 06 million 06 million expense year ended december 31 2012 expense 12 million year ended december 31 2011 primarily result decrease foreign exchange transaction losses due effects changes foreign exchange rates value intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense decreased 04 million 79 million year ended december 31 2012 83 million year ended december 31 2011 primarily due decrease pretax income company’s effective tax rate decreased 257 year ended december 31 2012 compared 263 year ended december 31 2011 included reduction income tax rates 15 16 related tax benefit exercise employee stock options years ended december 31 2012 2011 respectively company’s tax rate continued lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 04 million 230 million year ended december 31 2012 234 million year ended december 31 2011 result factors described liquidity capital resources cash equivalents increased 314 million 1246 million december 31 2013 932 million december 31 2012 increase primarily attributable net income noncash expenses 346 million proceeds stock option exercises 54 million well decrease working capital 06 million partially offset 66 million purchases equipment intangible assets effects exchange rate changes cash 26 million july 11 2006 company entered loan agreement providing available line credit 300 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2013 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended expires march 31 2015 company drawn line credit december 21 2012 company filed registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units proposed maximum aggregate offering price 250 million registration statement declared effective january 7 2013 proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes company believes working capital anticipated cash flow operations credit facility sufficient fund longterm liquidity requirements foreseeable future company balance sheet arrangements contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2013 thousands company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days company 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation material impact company’s results operations recent years company expect inflation material impact operations 2014 critical accounting policies preparation company’s consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment policies affect current assets operating results therefore critical assessing company’s financial operating status policies involve certain assumptions incorrect could adverse impact company’s operations financial position revenue recognition revenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process complete shipping date revenue sales software recognized significant production modification customization software required persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended warranty revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended warranties recognized incurred revenue licensing agreements use company’s historical technology medical applications recognized technology used licensees reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining company’s worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain company establishes provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described asc 740 tax position likely sustained upon examination applicable taxing authority ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes company assesses likelihood amount potential adjustments adjusts income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units company elect initially perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test company believes result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount fust second steps quantitative goodwill impairment test unnecessary company elects bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill less carrying amount company perform twostep quantitative goodwill impairment test company performs first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method comparing fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value company performs second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2013 2012 2011 impact recently issued accounting standards june 2011 financial accounting standards board fasb issued accounting standards update asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 requires companies present components net income comprehensive income either one continuous statement two consecutive statements eliminates option present components comprehensive income part changes shareholders’ equity standard change items must reported comprehensive income items measured must reclassified net income company elected present components net income comprehensive income two consecutive statements asu 201105 effective interim annual periods beginning december 15 2011 adoption asu 201105 quarter ended march 31 2012 subsequent periods impacted presentation effect company’s consolidated financial statements financial condition december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 “asu 201112” asu 201112 defers specific requirement present items reclassified accumulated comprehensive income net income separately respective components net income comprehensive income part update fasb defer requirement report comprehensive income either single continuous statement two separate consecutive financial statements february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income “asu 201203” effective reporting periods beginning december 15 2012 specific requirements asu 201302 impact company’s consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included part ii item 8 annual report form 10k overview company designs develops manufactures markets supports software driven threedimensional 3d measurement imaging realization systems company sells majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building construction law enforcement applications company’s faroarm® faro laser scanarm® faro gage faro laser tracker™ faro 3d imager amp companion cam2® software provide computeraided design cad based inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company’s faro focus3d faro freestyle3d laser scanners companion scene faro forensic software utilized wide variety 3d modeling documentation highdensity surveying applications including two company’s key vertical markets architecture engineering construction aec law enforcement company derives revenues primarily sale measurement equipment related multifaceted software programs revenue related products generally recognized upon shipment addition company sells extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis term warranty revenue training technology consulting services provided company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices united states brazil mexico france germany united kingdom japan spain italy turkey china south korea india poland netherlands malaysia thailand singapore vietnam company manages reports global sales three regions americas europeafrica asiapacific company manufactures faroarm faro laser scanarm faro gage faro laser tracker faro 3d imager amp products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro focus3d faro freestyle3d products facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2015 company accounts wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however use instruments none utilized 2014 2013 2012 company achieved continued sales earnings growth last several years exception loss 2009 resulted primarily decline global economy year company’s historical sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro edge arm faro laser scanarm faro focus3d faro freestyle effect acquisitions however company’s historical financial performance indicative future financial performance results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2014 compared 2013 sales total sales increased 500 million 172 3418 million year ended december 31 2014 2918 million year ended december 31 2013 company’s sales growth primarily driven strong yearoveryear unit sales growth across product lines including arm comprising faroarm faro laser scanarm faro gage laser tracker comprising faro laser tracker vantage ion products laser scanner faro focus3d product line across geographic regions arm sales growth 18 driven 11 increase units sold higher average selling price due release company’s new laser line probe hd faro laser scanarm number laser tracker units sold increased 16 however dollar amount laser tracker sales grew 1 due pricing pressures negative impact foreign exchange rates sales laser scanner grew 38 driven primarily continued adoption technology architecture engineering construction aec law enforcement markets foreign exchange rates negative impact sales 65 million year end december 31 2014 primarily driven decline euro yen product sales increased 453 million 190 2841 million year ended december 31 2014 2388 million year ended december 31 2013 primarily reflecting higher laser scanner arm sales described service revenue increased 47 million 89 577 million year ended december 31 2014 530 million year ended december 31 2013 primarily due increase warranty revenue 30 million customer service revenue 15 million reflecting higher unit sales yearover year sales americas region increased 186 million 154 1390 million year ended december 31 2014 1204 million prior year period foreign exchange rates negative impact sales 11 million decreasing sales growth 09 percentage points product sales americas region increased 172 million 176 1148 million year ended december 31 2014 976 million prior year primarily driven 50 increase laser scanner sales 14 growth arm sales service revenue americas region increased 14 million 60 242 million year ended december 31 2014 228 million prior year primarily due increase customer service revenue 09 million warranty revenue 08 million sales europeafrica region increased 167 million 162 1201 million year ended december 31 2014 1034 million year ended december 31 2013 foreign exchange rates negative impact sales 18 million decreasing sales growth 17 percentage points product sales europeafrica region increased 137 million 166 964 million year ended december 31 2014 827 million prior year primarily driven 29 increase laser scanner sales 20 growth arm sales service revenue europeafrica region increased 30 million 148 237 million year ended december 31 2014 207 million prior year primarily due increase warranty revenue 20 million customer service revenue 06 million sales asiapacific region increased 147 million 217 827 million year ended december 31 2014 680 million year ended december 31 2013 foreign exchange rates negative impact sales 36 million decreasing sales growth 54 percentage points product sales asiapacific region increased 144 million 247 729 million year ended december 31 2014 585 million prior year primarily driven 38 increase laser scanner sales 25 growth laser tracker sales 20 growth arm sales service revenue asiapacific region increased 03 million 33 98 million year ended december 31 2014 95 million prior year primarily due modest increase warranty training revenue gross profit gross profit increased 270 million 167 1889 million year ended december 31 2014 1619 million year ended december 31 2013 driven increase sales revenue foreign exchange rates negative impact gross profit 22 million year ended december 31 2014 gross margin 553 year ended december 31 2014 marginally lower 555 year ended december 31 2013 gross margin product revenue increased 04 percentage points 595 year ended december 31 2014 591 year ended december 31 2013 primarily result lower manufacturing costs company’s arm laser tracker products improved average selling prices arm products due release company’s new laser line probe hd partially offset less favorable overall sales mix strong yearoveryear increase units laser scanners sold partially offset impact writeoff primarily demonstration service loaner inventory became obsolete release new products totaling 33 million 1 impact gross margin gross margin service revenue decreased 48 percentage points 343 year ended december 31 2014 391 year ended december 31 2013 primarily due increase headcount customer service support growth product sales selling marketing expenses selling marketing expenses increased 85 million 118 802 million year ended december 31 2014 717 million year ended december 31 2013 increase selling marketing expenses primarily due higher compensation costs 68 million travel costs 06 million advertising trade show costs 07 million facility costs 04 million increase compensation costs driven higher commissions primarily reflecting increase sales volume 2014 well increase headcount support contribute increased demand sales company’s products worldwide sales marketing headcount increased 57 132 490 december 31 2014 433 december 31 2013 regionally company’s sales marketing headcount increased 31 228 167 december 31 2014 136 december 31 2013 americas increased 16 113 157 december 31 2014 141 december 31 2013 europeafrica increased 10 64 asiapacific 166 december 31 2014 156 december 31 2013 2014 company leveraged sales marketing organization selling marketing expenses decreased 234 sales year ended december 31 2014 246 sales year ended december 31 2013 regionally selling marketing expenses 208 sales americas year ended december 31 2014 compared 214 sales year ended december 31 2013 273 sales europeafrica year ended december 31 2014 compared 288 sales prior year 223 sales asiapacific year ended december 31 2014 compared 236 sales prior year general administrative expenses general administrative expenses increased 59 million 192 365 million year ended december 31 2014 306 million year ended december 31 2013 primarily due higher compensation costs 40 million reflecting higher headcount increase company’s consulting advisory services 19 million relating primarily new erp system implementation strategic planning initiatives general administrative expenses percentage sales increased 107 year ended december 31 2014 105 year ended december 31 2013 depreciation amortization expenses depreciation amortization expenses increased 04 million 55 74 million year ended december 31 2014 70 million year ended december 31 2013 primarily due start depreciation erp system research development expenses 2014 company increased investment research development accelerate new product development increasing engineering headcount 17 result research development expenses increased 51 million 227 275 million year ended december 31 2014 224 million year ended december 31 2013 research development expenses percentage sales increased 80 year ended december 31 2014 77 year ended december 31 2013 income expense income expense decreased 15 million 02 million income year ended december 31 2014 expense 13 million year ended december 31 2013 primarily result foreign exchange transaction gains resulting changes foreign exchange rates value current intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense decreased 35 million 39 million year ended december 31 2014 74 million year ended december 31 2013 primarily due discrete tax benefit 45 million recorded third quarter 2014 due reduction valuation allowance partially offset higher pretax income valuation allowance originally established net operating losses certain foreign subsidiaries 2014 foreign subsidiaries demonstrated pattern profitability resulted company concluding valuation allowance reversed company’s effective tax rate decreased 103 year ended december 31 2014 compared 255 year ended december 31 2013 primarily due discrete tax benefit company’s effective tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s effective tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income increased 121 million 336 million year ended december 31 2014 215 million year ended december 31 2013 result factors described foreign exchange rates negative impact net income 09 million year ended december 31 2014 ebitda nongaap earnings interest income taxes depreciation amortization ebitda increased 91 million 449 million year ended december 31 2014 358 million year ended december 31 2013 primarily result strong yearoveryear sales growth partially offset headcount growth increased investment research development foreign exchange rates negative impact ebitda 10 million year ended december 31 2014 ebitda intended alternative measure calculated accordance gaap rather ebitda used management provided aid company’s investors understanding evaluating company’s core operating performance detailed description rationales utilizing ebitda reconciliation net income ebitda included part ii item 6 annual report form 10k 2013 compared 2012 sales total sales increased 184 million 67 2918 million year ended december 31 2013 2734 million year ended december 31 2012 increase resulted primarily increase worldwide demand company’s products services product sales increased 109 million 48 2388 million year ended december 31 2013 2279 million year ended december 31 2012 service revenue increased 75 million 164 530 million year ended december 31 2013 455 million year ended december 31 2012 primarily due increase warranty revenue sales americas region increased 118 million 109 1204 million year ended december 31 2013 1086 million prior year period product sales americas region increased 86 million 96 976 million year ended december 31 2013 890 million prior year service revenue americas region increased 32 million 165 228 million year ended december 31 2013 196 million prior year primarily due increase warranty revenue sales europeafrica region increased 33 million 33 1034 million year ended december 31 2013 1001 million year ended december 31 2012 product sales europeafrica region decreased 03 million 04 827 million year ended december 31 2013 831 million prior year service revenue europeafrica region increased 37 million 214 207 million year ended december 31 2013 170 million prior year primarily due increase warranty revenue sales asiapacific region increased 33 million 50 680 million year ended december 31 2013 647 million year ended december 31 2012 product sales asiapacific region increased 27 million 48 585 million year ended december 31 2013 558 million prior year service revenue asiapacific region increased 06 million 66 95 million year ended december 31 2013 89 million prior year primarily due increase customer service revenue gross profit gross profit increased 123 million 82 1619 million year ended december 31 2013 1496 million year ended december 31 2012 gross margin increased 555 year ended december 31 2013 547 year ended december 31 2012 increase gross margin primarily due increase gross margin service revenues 391 year ended december 31 2013 compared 348 prior year result increase higher margin warranty sales increase gross margin product sales 591 year ended december 31 2013 587 prior year primarily result lower manufacturing costs offset lower average selling prices selling marketing expenses selling marketing expenses increased 73 million 112 717 million year ended december 31 2013 644 million year ended december 31 2012 increase primarily due increase commissions compensation expense 49 million increase travel expenses 14 million increase marketing advertising expenses 03 million worldwide sales marketing headcount increased 68 186 433 december 31 2013 365 december 31 2012 regionally company’s sales marketing headcount increased 28 259 136 december 31 2013 108 december 31 2012 americas increased 18 146 141 december 31 2013 123 december 31 2012 europeafrica increased 22 164 asiapacific 156 december 31 2013 134 december 31 2012 percentage sales selling expenses increased 246 sales year ended december 31 2013 236 sales year ended december 31 2012 regionally selling expenses 214 sales americas year ended december 31 2013 compared 200 sales year ended december 31 2012 288 sales europeafrica year ended december 31 2013 compared 264 sales prior year 236 sales asiapacific year ended december 31 2013 compared 251 sales prior year general administrative expenses general administrative expenses increased 15 million 306 million 53 year ended december 31 2013 291 million year ended december 31 2012 primarily due increase compensation 18 million bad debt expense 12 million recruiting costs 10 million travel costs 02 million partially offset decrease 29 million professional fees related patent litigation fcpa matter general administrative expenses percentage sales decreased 105 year ended december 31 2013 106 year ended december 31 2012 depreciation amortization expenses depreciation amortization expenses remained flat 70 million years ended december 31 2013 december 31 2012 research development expenses research development expenses increased 48 million 275 224 million year ended december 31 2013 176 million year ended december 31 2012 primarily due increase compensation 25 million subcontractor expenses 16 million material expenses 06 million research development expenses percentage sales increased 77 year ended december 31 2013 64 year ended december 31 2012 income expense income expense increased 07 million 13 million expense year ended december 31 2013 expense 06 million year ended december 31 2012 primarily result increase foreign exchange transaction losses resulting changes foreign exchange rates value current intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense decreased 05 million 74 million year ended december 31 2013 79 million year ended december 31 2012 primarily due decrease pretax income company’s effective tax rate decreased 255 year ended december 31 2013 compared 257 year ended december 31 2012 included reduction income tax rates 08 15 related tax benefit exercise employee stock options years ended december 31 2013 2012 respectively effective tax rate year ended december 31 2013 also included discrete tax benefit 15 related retroactive legislative reinstatement january 2 2013 research development tax credit year ended december 31 2012 required included period reinstatement enacted law company’s tax rate continued lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 15 million 215 million year ended december 31 2013 230 million year ended december 31 2012 result factors described ebitda nongaap ebitda decreased 20 million 358 million year ended december 31 2013 378 million year ended december 31 2012 primarily due unfavorable impact 17 million change foreign exchange rates higher investment research development spending partially offset modest sales growth ebitda intended alternative measure calculated accordance gaap rather ebitda used management provided aid company’s investors understanding evaluating company’s core operating performance detailed description rationales utilizing ebitda reconciliation net income ebitda included part ii item 6 annual report form 10k liquidity capital resources cash equivalents decreased 153 million 1093 million december 31 2014 1246 million december 31 2013 decrease cash equivalents primarily due increase accounts receivable inventory result company’s sales growth partially offset higher net income 2014 also impacting comparison 187 million capital expenditures mainly reflecting company’s investment new facility exton pennsylvania erp implementation company’s cash equivalents 589 million held foreign subsidiaries company’s current intent indefinitely reinvest funds foreign operations cash needed fund ongoing operations event circumstances change leading conclusion funds indefinitely reinvested company would need provide time income taxes would triggered upon repatriation company undrawn 30 million credit facility entered july 11 2006 terms loan arrangement recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 require company maintain minimum cash balance 25 million tangible net worth measured end company’s fiscal quarters december 31 2014 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended expires march 31 2015 company expect renew agreement december 21 2012 company filed “shelf” registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units proposed maximum aggregate offering price 250 million registration statement declared effective january 7 2013 proceeds offerings respect shelf registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes company believes working capital anticipated cash flow operations credit facility sufficient fund longterm liquidity requirements foreseeable future company balance sheet arrangements contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2014 dollars thousands company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days company 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation material impact company’s results operations recent years company expect inflation material impact operations 2015 critical accounting policies preparation company’s consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment policies affect current assets operating results therefore critical assessing company’s financial operating status policies involve certain assumptions incorrect could adverse impact company’s operations financial position revenue recognition revenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related company’s measurement imaging realization equipment related software generally recognized upon shipment company considers earnings process complete shipping date fees billed customers associated distribution products classified revenue company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year revenues presented net salesrelated taxes reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income least twoyear period significant judgment required determining company’s worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain company establishes provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described accounting standards codification topic 740 income taxes tax position likely sustained upon examination applicable taxing authority ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes company assesses likelihood amount potential adjustments adjusts income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired goodwill amortized tested impairment least annually company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units company elect initially perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test company believes result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary company elects bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill less carrying amount company perform twostep quantitative goodwill impairment test company performs first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method comparing fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value company performs second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2014 2013 2012 stockbased compensation company measures compensation cost stockbased awards fair value recognizes compensation service period awards expected vest company uses blackscholes optionpricing model value stock options requires input assumptions including dividend yield riskfree interest rate estimated length time employees retain vested stock options exercising expected term estimated volatility company’s common stock price expected term furthermore calculating compensation expense awards company also required estimate extent options forfeited prior vesting forfeitures many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates differ current estimates amounts recorded cumulative adjustment previously recorded amounts impact recently issued accounting standards may 2014 financial accounting standards board “fasb” issued amendment accounting guidance related revenue recognition amendment result joint project fasb international accounting standards board “iasb” clarify principles recognizing revenue develop common revenue standards us gaap international financial reporting standards meet objectives fasb issued accounting standards update 201409 revenue contracts customers topic 606 “asu 201409” asu 201409 based principle revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 also requires additional disclosure nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract company adopt asu 201409 reporting periods beginning december 15 2016 early adoption permitted company currently evaluating impact adopting pronouncement consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements including notes thereto included part ii item 8 annual report form 10k overview highlights global technology company designs develops manufactures markets supports software driven threedimensional “3d” measurement imaging realization systems technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage applications faroarm® faro scanarm® faro gage® faro laser trackertm faro cobalt array imager faro laser projector companion cam2® buildit raytracertm software solutions provide computeraided design “cad” based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications factory metrology vertical faro focus faro scanner freestyle3dx laser scanners companion faro scene faro pointsense faro zone public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications construction building information modeling construction information management “construction bimcim” public safety forensics verticals faro scanarm® faro cobalt array imager faro scanner freestyle3dx laser scanners companion scene software also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle supporting product design vertical faro visual inspect enables large complex 3d cad data transferred tablet device used mobile visualization comparison real world conditions facilitating inprocess inspection assembly guidance positioning applications factory metrology construction bimcim verticals line galvanometerbased scan heads laser scan controllers used variety laser applications integrated larger components systems derive revenues primarily sale measurement equipment related multifaceted software programs revenue related products generally recognized upon shipment addition sell extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis term warranty revenue training technology consulting services provided operate international markets throughout world maintain sales offices australia brazil canada china france germany india italy japan malaysia mexico netherlands poland portugal singapore south korea spain switzerland thailand turkey united kingdom united states manufacture faroarm® faro scanarm® faro gage products manufacturing facility located switzerland customer orders europe middle east africa “emea” manufacturing facility located singapore customer orders asiapacific region manufacturing facility located florida customer orders americas manufacture faro focus manufacturing facilities located germany switzerland customer orders emea asiapacific region manufacturing facility located pennsylvania customer orders americas manufacture faro freestyle3dx products facility located germany manufacture faro laser trackertm faro cobalt array imager faro laser projection products facility located pennsylvania expect existing manufacturing facilities production capacity necessary support volume requirements 2018 account whollyowned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies reflected consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2017 2016 2015 executive summary total sales increased 353 million 109 3609 million year ended december 31 2017 3256 million year ended december 31 2016 increase reflected improved growth product service revenue continued grow global sales force consistent strategy began undertaking several important strategic initiatives 2016 believe drive longterm growth profitability including reorganizing business align sales marketing product management research development around specific vertical markets better define end market applications modernizing sales process improve efficiency sales organization supplementing current direct sales approach conducting onsite demonstrations multimedia webbased demonstrations cloudbased customer relations development accelerating maintaining consistent schedule new product introductions reorganizing functions processes people harmonized global mindset improve operational efficiencies vertical approach coupled continued investment global sales force release new products cost optimization represent important steps towards longterm financial objectives successfully completed strategic initiatives 2017 achieved numerous milestones 2017 involving significant product launches sales force growth acquisitions product innovation 2017 launched several new products including ◦ faro quantums faroarm® introduction certified iso 10360 122016 quantums tests international electrical commission iec 600682 standards shock vibration temperature stress relief electromechanical electronic equipment devices ◦ faro focuss 70 addition faro focus laser scanner portfolio provides industrial grade performance includes ingress protection rating use high particulate wet weather conditions high dynamic range imaging extended temperature range ◦ faro focusm 70 addition faro focus laser scanner portfolio provides entry point professional users considering laser scanning construction bimcim public safety forensics markets ◦ faro vantages vantagee laser trackers vantages intended shorttolong range measurement applications 80 meters vantagee supports shorttomedium range applications 25 meters ◦ faro pointsense 180 software suite software platform delivers seamless integration latest 2018 autocad® revit® registered trademarks autodesk design tools ◦ faro cam2 measure 105 software platform provides users streamlined analysis visual reporting workflow efficiencies enhanced programming data analysis reduce required training time minimize operator errors ◦ faro zone platform enables investigators move fluidly 2d 3d environments public safety professionals application used presentations courtroom exhibits enhances ability public safety professionals plan respond emergencies creating accurate representations realworld locations within local communities ◦ faro scene 70 software platform includes quality functionality scene 62 automatic object recognition scan registration position adds additional functionality enabling 3d scan data whether single scan multiple scans process simultaneously wirelessly transmitted directly onsite computer workstation real time global sales force 2017 consistent strategic initiative drive sales growth worldwide periodending selling headcount increased 95 177 631 december 31 2017 536 december 31 2016 acquisition 2017 acquired instrument associates llc dba nutfield technology “nutfield” located hudson new hampshire nutfield specializes design manufacture advanced galvanometerbased optical scanners scan heads laser kits acquisition completed april 2017 total purchase price approximately 55 million supports longterm strategy expand presence key markets improve existing product lines innovative technology results operations 2017 compared 2016 consolidated results sales total sales increased 353 million 109 3609 million year ended december 31 2017 3256 million year ended december 31 2016 sales increase primarily driven strong increase construction bimcim segment growth warranty revenue modest increase average selling prices total product sales increased 219 million 86 2779 million year ended december 31 2017 2560 million year ended december 31 2016 product sales increase reflected increase unit sales within construction bimcim segment well higher average selling prices attributable technological advances service revenue increased 134 million 193 830 million year ended december 31 2017 696 million year ended december 31 2016 primarily due increase warranty customer service revenue driven growth installed serviceable base focused sales initiatives foreign exchange rates slightly positive impact sales 19 million increasing overall sales growth 06 percentage points primarily due strengthening euro relative us dollar offset partly weakening japanese yen relative us dollar gross profit gross profit increased 266 million 150 2046 million year ended december 31 2017 1780 million year ended december 31 2016 gross margin increased 567 year ended december 31 2017 547 prior year period gross margin product revenue increased 26 percentage points 604 year ended december 31 2017 578 prior year period increase primarily due higher average selling prices products attributable new product introductions improved manufacturing efficiencies gross margin service revenue increased 14 percentage points 444 year ended december 31 2017 430 prior year period primarily due higher warranty customer service revenue selling marketing expenses selling marketing expenses increased 236 million 296 1035 million year ended december 31 2017 799 million year ended december 31 2016 increase driven primarily higher compensation expense reflecting investment selling headcount part global strategic initiatives drive sales growth selling marketing expenses percentage sales 287 year ended december 31 2017 compared 245 year ended december 31 2016 worldwide periodending selling headcount increased 95 177 631 december 31 2017 536 december 31 2016 general administrative expenses general administrative expenses increased 30 million 73 438 million year ended december 31 2017 408 million year ended december 31 2016 increase general administrative expenses primarily driven higher compensation global system expenses higher global system expenses resulted strategic initiative harmonize global verticals implementation entitywide systems human resource information system general administrative expenses 121 sales year ended december 31 2017 compared 125 sales prior year depreciation amortization expenses depreciation amortization expenses increased 27 million 196 166 million year ended december 31 2017 139 million year ended december 31 2016 increase depreciation amortization expenses primarily due higher amortization intangible assets related acquisitions new production tooling manufacture new products research development expenses research development expenses increased 53 million 174 354 million year ended december 31 2017 301 million year ended december 31 2016 increase research development expenses mainly due higher compensation expense resulting increased headcount connection acquisitions research development expenses percentage sales increased 98 year ended december 31 2017 93 year ended december 31 2016 income expense income 05 million year ended december 31 2017 compared expense 07 million year ended december 31 2016 change primarily driven foreign exchange transaction gains resulting positive impact changes foreign exchange rates value current intercompany account balances subsidiaries denominated currencies year ended december 31 2017 compared losses resulting negative impact changes foreign exchange rates year ended december 31 2016 income tax expense income tax expense year ended december 31 2017 203 million compared income tax expense 15 million year ended december 31 2016 increase primarily related tax expense 194 million recorded fourth quarter 2017 pursuant tax cuts act 174 million expense related provisional transition tax expense mandatory deemed repatriation foreign earnings 20 million expense related remeasurement deferred tax assets liabilities expect utilize future result tax cuts act decreasing united states statutory corporate tax rate 35 21 tax years beginning january 1 2018 net loss income net loss 145 million year ended december 31 2017 compared net income 111 million year ended december 31 2016 reflecting impact factors described segment results use segment profit evaluate performance reportable segments factory metrology construction bimcim segment profit calculated gross profit net selling marketing expenses reporting segment discussion segment results years ended december 31 2017 2016 presented based segment profit described segment profit percent sales calculated segment profit divided net sales reporting segment definition segment profit may comparable similarly titled measures reported companies additional information including reconciliation total segment profit income operations see note 16 “notes consolidated financial statements” included part ii item 8 annual report form 10k sales factory metrology segment increased 88 million 37 2451 million year ended december 31 2017 2363 million prior year primarily reflecting higher average selling prices higher service revenue segment profit segment profit factory metrology segment increased 52 million 71 789 million year ended december 31 2017 737 million prior year increase primarily due increase average selling prices service revenue partially offset increase selling marketing expenses reflecting higher headcount sales construction bimcim segment increased 212 million 327 863 million year ended december 31 2017 651 million prior year primarily reflecting increase units sold higher service revenue segment profit segment profit construction bimcim segment increased 63 million 424 211 million year ended december 31 2017 148 million prior year increase primarily due increase units sold higher service revenue partially offset increase selling marketing expenses reflecting higher headcount sales segment increased 52 million 216 295 million year ended december 31 2017 242 million prior year primarily reflecting increase unit sales higher service revenue segment profit segment profit segment decreased 85 million 880 12 million year ended december 31 2017 96 million prior year decrease primarily due increase selling marketing expenses reflecting higher headcount part longterm initiatives grow emerging verticals partially offset increase unit sales higher service revenue 2016 compared 2015 consolidated results sales total sales increased 81 million 25 3256 million year ended december 31 2016 3175 million year ended december 31 2015 sales increase primarily driven higher service revenue modest increase average selling prices partially offset decrease product sales total product sales decreased 38 million 15 2560 million year ended december 31 2016 2598 million year ended december 31 2015 product sales decrease reflected decline unit sales partially offset increase average selling prices products service revenue increased 119 million 206 696 million year ended december 31 2016 577 million year ended december 31 2015 primarily due increase warranty customer service revenue driven growth installed serviceable base focused sales initiatives foreign exchange rates slightly negative impact sales 18 million decreasing overall sales growth 06 percentage points primarily due decline british pound sterling chinese yuan renminbi relative us dollar gross profit gross profit increased 108 million 64 1780 million year ended december 31 2016 1672 million year ended december 31 2015 gross margin increased 547 year ended december 31 2016 527 prior year period gross margin product revenue increased 18 percentage points 578 year ended december 31 2016 560 prior year period increase primarily due higher average selling prices products lower writedown inventory partially offset increased sales service demonstration inventory results lower gross margins gross margin service revenue increased 55 percentage points 430 year ended december 31 2016 375 prior year period primarily due higher warranty customer service revenue selling marketing expenses selling marketing expenses virtually flat yearoveryear result increased compensation expenses reflecting higher headcount higher incentive compensation higher base salaries change commission structure well higher recruitingrelated expense almost entirely offset lower costs resulting holding annual sales meeting 2016 decrease commissions due lower product sales change commission structure selling marketing expenses percentage sales 245 year ended december 31 2016 compared 251 year ended december 31 2015 worldwide selling periodending headcount increased 85 188 536 december 31 2016 451 december 31 2015 general administrative expenses general administrative expenses increased 44 million 122 408 million year ended december 31 2016 364 million year ended december 31 2015 increase general administrative expenses primarily driven higher compensation expense due higher headcount higher incentive compensation increased recruiting costs higher costs related businesses acquired partially offset lower yearoveryear consulting fees general administrative expenses 125 sales year ended december 31 2016 compared 115 sales prior year depreciation amortization expenses depreciation amortization expenses increased 27 million 236 139 million year ended december 31 2016 112 million year ended december 31 2015 primarily due increased depreciation new enterprise resource planning erp system service inventory transferred fixed assets well increased amortization intangibles related prior current year acquisitions research development expenses research development expenses increased 34 million 129 301 million year ended december 31 2016 267 million year ended december 31 2015 increase mainly due higher project material costs higher compensation expense resulting increased engineering headcount connection initiative accelerate new product development introductions overall increase incentive compensation research development expenses percentage sales increased 92 year ended december 31 2016 84 year ended december 31 2015 expense income expense increased 04 million 07 million year ended december 31 2016 compared 03 million year ended december 31 2015 increase primarily driven foreign exchange transaction losses resulting negative impact changes foreign exchange rates value current intercompany account balances subsidiaries denominated currencies income tax benefit expense income tax expense year ended december 31 2016 15 million compared income tax benefit less 01 million year ended december 31 2015 change primarily result shift distribution profits losses among tax jurisdictions effective tax rate 120 year ended december 31 2016 compared 01 prior year effective tax rate continues lower statutory tax rate united states primarily global footprint foreign jurisdictions lower tax rates effective tax rate could impacted positively negatively geographic changes manufacturing sales products change statutory tax rates jurisdiction well resulting effect taxable income jurisdiction net income net income 111 million year ended december 31 2016 compared 128 million year ended december 31 2015 reflecting impact factors described segment results sales factory metrology segment increased 136 million 61 2363 million year ended december 31 2016 2227 million prior year primarily reflecting higher average selling prices higher service revenue across regions partially offset decline units sold mainly emea region foreign exchange rates negative impact sales 15 million decreasing sales growth 07 percentage points segment profit segment profit factory metrology segment increased 102 million 161 737 million year ended december 31 2016 635 million prior year increase primarily due increase segment sales addition higher writedown inventory recorded 2015 compared 2016 partially offset increase selling marketing expenses reflecting higher headcount allocated segment partially offset cost savings due holding annual sales meeting 2016 sales construction bimcim segment decreased 58 million 82 651 million year ended december 31 2016 708 million prior year primarily reflecting decline units sold mostly americas emea regions partially offset increase average selling prices higher service revenue across regions foreign exchange rates slightly negative impact sales 01 million decreasing sales growth 02 percentage points segment profit segment profit construction bimcim segment decreased 15 million 92 148 million year ended december 31 2016 163 million prior year decrease primarily due decrease product sales segment increased 02 million 11 242 million year ended december 31 2016 240 million prior year primarily reflecting higher average selling prices mostly americas region higher service revenue across regions partially offset decline unit sales particularly emea region foreign exchange rates slightly negative impact sales 02 million decreasing sales growth 06 percentage points segment profit segment profit segment increased 20 million 262 96 million year ended december 31 2016 76 million prior year increase primarily due shift product services sales mix resulting higher gross margins partially offset increase selling marketing expenses reflecting higher headcount cost savings due holding annual sales meeting 2016 liquidity capital resources cash equivalents increased 348 million 1410 million december 31 2017 1062 million december 31 2016 increase primarily driven maturity us treasury bills reinvested cash flow operations proceeds issuance stock partially offset purchase property equipment cash used nutfield acquisition cash flows operating activities provide primary source liquidity generated positive cash flows operations 104 million year ended december 31 2017 compared cash provided operations 376 million year ended december 31 2016 decrease mainly due strategic growth initiatives increasing service sales demonstration inventory higher accounts receivable cash flows provided investing activities year ended december 31 2017 151 million compared cash flows used investing activities 371 million year ended december 31 2016 change primarily due maturity us treasury bills reinvested year ended december 31 2017 221 million decrease cash used acquisitions year ended december 31 2017 compared year ended december 31 2016 cash flows provided financing activities years ended december 31 2017 december 31 2016 30 million 02 million respectively increase primarily driven proceeds issuance stock relating exercise stock options year ended december 31 2017 cash equivalents 988 million held foreign subsidiaries december 31 2017 december 22 2017 united states enacted tax cuts act resulting significant modifications existing law continue gather analyze information including whether repatriate cash united states foreign subsidiaries fourth quarter 2017 recorded provisional amount 174 million related increase taxes payable pursuant tax cuts act associated earnings foreign subsidiaries pay liability 8 years 8 liability paid year first 5 years followed 15 sixth year 20 seventh year concluding 25 eighth year november 24 2008 board directors approved 30 million share repurchase program acquisitions share repurchase program may made time prevailing prices permitted securities laws legal requirements subject market conditions factors share repurchase program may discontinued time expiration date restriction governing period repurchase shares program october 2015 board directors authorized increase existing share repurchase program 30 million 50 million made stock repurchases years ended december 31 2017 2016 december 31 2017 authorization repurchase 183 million remaining repurchase program believe working capital anticipated cash flow operations sufficient fund longterm liquidity operating requirements 2018 balance sheet arrangements contractual obligations commercial commitments party capital leases equipment initial term 36 60 months noncancellable operating leases obligations presented december 31 2017 dollars thousands enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2017 approximately 533 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions also 07 million longterm commitments purchases delivered 12 months fourth quarter 2017 recorded provisional amount 174 million related increase taxes payable pursuant tax cuts act associated mandatory deemed repatriation earnings foreign subsidiaries pay liability eight years 8 liability paid year first five years followed 15 sixth year 20 seventh year concluding 25 eighth year obligations included table primarily represent estimated payments due acquisition related earnouts inflation material impact results operations recent years expect inflation material impact operations 2018 critical accounting policies preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities base estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made management may estimates assumptions reasonable believe given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment business combinations stockbased compensation policies affect current assets current liabilities operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could adverse impact operating results financial position revenue recognition revenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related measurement imaging realization equipment related software generally recognized upon shipment consider earnings process complete shipping date fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support “pcs” generally establish vendorspecific objective evidence “vsoe” fair value pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenues presented net salesrelated taxes reserve excess obsolete inventory value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 firstin firstout “fifo” cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income least twoyear period significant judgment required determining worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain establish provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described financial accounting standards board “fasb” accounting standards codification “asc” topic 740 income taxes tax position likely sustained upon examination applicable taxing authority ordinary course business examined various federal state foreign tax authorities regularly assess potential outcome examinations future examinations current prior years determining adequacy provision income taxes assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties establish time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired historically evaluated goodwill impairment annually december 31 indicator impairment exists 2017 changed date annual impairment assessment reporting units october 1 voluntary change annual goodwill testing date change accounting policy concluded preferable better aligns timing assessment annual budgeting process change date annual impairment assessment applied prospectively accelerate delay avoid potential impairment charge asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2017 2016 2015 business combinations allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available stockbased compensation measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition determined using blackscholes option valuation model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant additionally calculating compensation expense awards also required estimate extent awards forfeited prior vesting many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates forfeiture differ current estimates amounts recorded cumulative adjustment previously recorded amounts expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation adjusted estimated forfeitures using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation adjusted estimated forfeitures straightline basis requisite service period separately vesting portion award taking account probability satisfy performance condition furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive impact recently adopted accounting standards january 2017 fasb issued accounting standards update asu 201701 business combinations topic 805 clarifying definition business “asu 201701” order clarify definition business provide additional guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses currently asc topic 805 recognizes three elements business inputs processes outputs integrated set assets activities collectively referred “set” business usually outputs required present additionally inputs processes seller uses operating set required market participants acquire set continue produce outputs asu 201701 provides screen determine set business screen requires substantially fair value gross assets acquired disposed concentrated single identifiable asset group similar identifiable assets set business screen met new guidance 1 requires considered business set must include minimum input substantive process together significantly contribute ability create output 2 removes evaluation whether market participant could replace missing elements new guidance provides framework assist entities evaluating whether input substantive process present framework includes two sets criteria consider depend whether set outputs although outputs required set business outputs generally key element business asu 201701 provides stringent criteria sets without outputs narrowly defines term output asu 201701 became effective us january 1 2018 applied prospectively adoption new guidance material impact consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory “asu 201616” removes prohibition asc 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory asu requires tax effects intercompany transactions sales inventory recognized transfer occurs instead deferred transferred asset sold third party otherwise recovered use asset new guidance must applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption effective annual periods beginning december 15 2017 interim period therein asu 201616 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments “asu 201615” clarifies companies present classify certain cash receipts cash payments statement cash flows asu 201615 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” amending accounting guidance related revenue recognition asu subsequently issued amendments revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services additional disclosures required provide nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract evaluated effect guidance consolidated financial statements analyzing transactional analytical data revenue streams following status evaluation impacts significant revenue stream • measurement equipment related software prior accounting guidance sales measurement imaging realization equipment related software sales generally recognized upon shipment considered earnings process complete shipping date related software sold measurement imaging realization equipment functions together equipment deliver tangible product’s essential functionality adoption new guidance result material changes accounting revenue related measurement imaging realization equipment related software • extended warranties prior accounting guidance extended warranty sales recognized straightline basis term warranty adoption new guidance result material changes accounting revenue related extended warranties • software prior accounting guidance software sales recognized significant production modification customization software required following criteria met persuasive evidence sales agreement existed delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support maintenance renewals sold recognized straightline basis term maintenance agreement adoption new guidance result material changes accounting revenue related software sales maintenance renewals prior accounting guidance recognized sales commission expense incurred new guidance capitalize commission expense sales arrangements extend beyond one year amortize costs ratably term contract result recognize deferred cost asset consolidated balance sheet upon adoption new guidance however impact change consolidated balance sheet material adoption new guidance material change results operations cash flows adopted guidance utilizing modified retrospective method applying contracts completed date initial adoption option available asc topic 606 march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting “asu 201609” intended simplify several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statement cash flows asu 201609 became effective annual periods beginning december 15 2016 interim periods therein fiscal year 2017 adopted asu 201609 effective january 1 2017 new guidance excess tax benefits previously recognized related tax deduction reduced current taxes payable recorded modified retrospective basis achieved cumulativeeffect adjustment retained earnings beginning period new guidance adopted historically recognized excess tax benefits option exercised share vested since us net operating loss carryforward therefore tax benefit allowed current guidance adjustment retained earnings required new guidance taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows effective january 1 2017 adopted portion guidance prospective basis approach incorporates net inflow outflow taxrelated cash flows resulting sharebased payments deferred income tax benefit expense line item presents along income tax cash flows operating activities statement cash flows also elected account forfeitures related service conditionbased awards occur effective january 1 2017 change treatment estimating forfeitures previous years however continue assess performance conditionbased awards quarterly required adopting new policy using modified retrospective approach assessed cumulative effect adjustment recorded retaining earnings difference amount compensation cost previously recorded amount would recorded without assuming forfeitures cumulative effect adjustment recorded retained earnings material continue assess impact adopted guidance quarterly basis expect adoption guidance material impact consolidated financial statements july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory “asu 201511” changes measurement principle inventory lower cost market lower cost net realizable value asu 201511 defines net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation new guidance must applied prospective basis adopted asu 201511 effective january 1 2017 adoption guidance material impact consolidated financial statements november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes “asu 201517” requires deferred tax liabilities assets classified noncurrent classified balance sheet asu 201517 became effective us january 1 2017 adopted guidance retrospective basis resulted reclassification current deferred tax assets totaling approximately 76 million december 31 2016 current noncurrent consolidated financial statements impact recently issued accounting standards january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test current guidance performance step 2 requires us calculate implied fair value goodwill following procedures would required determine fair value assets acquired liabilities assumed business combination new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment result reporting units subject impairment assessment still option perform qualitative assessment reporting unit determine quantitative impairment test necessary asu 201704 becomes effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted annual interim goodwill impairment tests january 1 2017 amendments asu applied prospective basis disclosure nature reason change accounting principle required upon transition disclosure required first annual period interim period within first annual period initially adopt amendments asu plan adopt guidance fiscal year ending december 31 2020 expect adoption guidance material impact consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 must applied modified retrospective basis effective fiscal years beginning december 15 2018 interim periods within years early adoption permitted plan adopt asu 201602 first quarter 2019 although process evaluating impact adoption asu consolidated financial statements currently believe significant changes related recognition new rightofuse assets lease liabilities balance sheet real estate operating leases item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements including notes thereto included part ii item 8 annual report form 10k overview highlights global technology company designs develops manufactures markets supports software driven threedimensional “3d” measurement imaging solutions technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage dental applications faroarm® faro scanarm® faro laser trackertm faro cobalt array imager faro laser projector companion cam2® buildit projector software solutions provide computeraided design “cad” based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications 3d manufacturing formerly known “factory metrology” “3d factory” vertical faro focus faro scanplan faro scanner freestyle3d x laser scanners companion faro scene buildit faro asbuilttm faro zone public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications construction building information modeling “construction bim” formerly known “construction bimcim” public safety forensics verticals faro scanarm® faro cobalt array imager faro scanner freestyle3d x laser scanners companion scene software 3d structured light scanning solutions specific dental industry also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle supporting 3d design formerly known “product design” vertical line galvanometerbased scan heads laser scan controllers used variety laser applications integrated larger components systems supporting photonics vertical derive revenues primarily sale measurement equipment related multifaceted software programs revenue related products generally recognized upon shipment addition sell extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis term warranty revenue training technology consulting services provided operate international markets throughout world maintain sales offices australia brazil canada china france germany india italy japan malaysia mexico netherlands poland portugal singapore south korea spain switzerland thailand turkey united kingdom united states manufacture faroarm® faro scanarm® products manufacturing facility located switzerland customer orders europe middle east africa “emea” manufacturing facility located singapore customer orders asiapacific region manufacturing facility located florida customer orders americas manufacture faro focus manufacturing facilities located germany switzerland customer orders emea asiapacific region manufacturing facility located pennsylvania customer orders americas manufacture faro freestyle3d x products facility located germany manufacture faro laser trackertm faro laser projector products facility located pennsylvania manufacture 3d structured light scanning solutions specific dental industry engineering manufacturing facility italy expect existing manufacturing facilities production capacity necessary support volume requirements 2019 account whollyowned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies reflected consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2018 2017 2016 executive summary total sales increased 427 million 118 4036 million year ended december 31 2018 3609 million year ended december 31 2017 increase reflected improved growth product service revenue continued introduce new products grow global sales force consistent strategy achieved numerous milestones 2018 involving significant product launches sales force growth acquisitions product innovation 2018 launched several new products including ◦ faro scanplan faro scanplan handheld mapper captures 2d floor plans faro scanplan performs realtime capturing diagramming asbuilt floor plans buildings threat assessment preincident planning fire protection engineering faro scanplan comes faro zone 2d software turn floor plan map completed diagram adding doors stairs hazardous materials notes dimensions among others ◦ faro tracersi faro tracersi accurately projects laser line onto surface object providing virtual template operators assemblers use quickly accurately position components confidence laser template created using 3d cad model enables system visually project laser outline parts reference points areas interest result virtual collaborative 3d template streamline wide range assembly production applications ◦ faro design scanarm®25c faro prizmtm faro design scanarm®25c colorcapable portable lightweight 3d scanarm using new faro prizmtm fullcolor laser line probe 3d design modeling software faro design scanarm®25c delivers highresolution color pointcloud data enabling insight object design creation ◦ faro 8axis faroarm® comprehensive solution combines either portable quantum faroarm® quantum scanarm design scanarm® portfolio products functionally integrated yet physically separate 8th axis ◦ 6dof faro vantage laser tracker together handheld 6probe fullyintegrated handheld probe 6dof faro vantage laser tracker expands capabilities large volume measurement allowing users access hidden hardtoreach locations probing scanning ◦ faro digicube® faro digicube® highprecision high scan rate digital autocontrolled scan head easily integrated variety laser scanning products product used exacting applications high accuracy laser marking scribing engraving laser 3d printing photovoltaic production welding global sales force 2018 consistent strategic initiative drive sales growth worldwide periodending selling headcount increased 102 162 733 december 31 2018 631 december 31 2017 acquisitions equity investment july 2018 acquired issued outstanding corporate capital optotech srl subsidiary open technologies srl collectively “open technologies” 3d structured light scanning solution company located brescia italy acquisition supports 3d design vertical longterm strategy establish presence 3d measurement technology used industries applications especially dental medical july 2018 acquired outstanding shares lanmark controls inc “lanmark” highspeed laser marking control boards laser marking software provider located acton massachusetts acquisition supports development components used new 3d laser inspection product development order expand product portfolio photonics vertical april 2018 invested present4d gmbh “present4d” software solutions provider professional virtual reality presentations training environments form equity capital contribution represents minority investment present4d supports public safety forensics vertical march 2018 acquired outstanding shares laser control systems limited “laser control systems” laser component technology business located bedfordshire united kingdom specializes design manufacture advanced digital scan heads laser software similar acquisition lanmark acquisition supports photonics vertical longterm strategy expand presence product portfolio photonics applications march 2018 acquired outstanding shares photocore ag visionbased 3d measurement application software developer located zürich switzerland acquisition supports construction bim vertical longterm strategy improve existing software offerings innovative technology photogrammetry sold products related services us government “government” general services administration “gsa” federal supply schedule contracts “gsa contracts” since 2002 currently selling products related services government two gsa contracts gsa contract subject extensive legal regulatory requirements includes among provisions price reduction clause “price reduction clause” generally requires us reduce prices billed government gsa contracts correspond lowest prices billed certain benchmark customers late fourth quarter 2018 internal review preliminarily determined certain pricing practices may resulted government overcharged price reduction clauses gsa contracts “the gsa matter” february 14 2019 reported gsa matter gsa office inspector general sixyear period ended december 31 2018 sales government gsa contracts approximately 535 million aggregate sales government gsa contracts represented approximately 35 total sales year ended december 31 2018 result gsa matter fourth quarter 2018 reduced total sales 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts addition fourth quarter 2018 recorded 05 million imputed interest related estimated cumulative sales adjustment increased expense resulted estimated total liability 53 million gsa matter estimate based preliminary review date annual report form 10k subject change based results review pricing practices gsa contracts conducted outside legal counsel discussions government amounts reported millions within annual report form 10k computed based amounts thousands result sum components reported millions may equal total amount reported millions due rounding certain columns rows within tables follow may add due use rounded numbers percentages presented calculated based respective amounts thousands amounts related reporting segment information year ended december 31 2017 restated throughout annual report form 10k reflect changes reporting segments discussed “segment reporting” amounts related reporting segment information year ended december 31 2016 restated impacted changes reporting segments discussed “segment reporting” results operations 2018 compared 2017 consolidated results sales total sales increased 427 million 118 4036 million year ended december 31 2018 3609 million year ended december 31 2017 result gsa matter fourth quarter 2018 reduced total sales 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts “gsa cumulative sales adjustment” total product sales increased 332 million 119 3111 million year ended december 31 2018 2779 million year ended december 31 2017 product sales increase reflected higher unit sales within construction bim emerging verticals segments well higher average selling prices within 3d manufacturing segment partially offset gsa cumulative sales adjustment service revenue increased 95 million 115 925 million year ended december 31 2018 830 million year ended december 31 2017 primarily due increase warranty customer service revenue driven growth installed serviceable base focused sales initiatives segments partially offset gsa cumulative sales adjustment foreign exchange rates positive impact sales 25 million increasing overall sales growth approximately 07 percentage points primarily due strengthening euro japanese yen chinese yuan relative us dollar gross profit gross profit increased 237 million 116 2283 million year ended december 31 2018 2046 million year ended december 31 2017 gross margin decreased 566 year ended december 31 2018 567 prior year period gross margin product revenue decreased 05 percentage points 599 year ended december 31 2018 604 prior year period decrease gross margin product revenue primarily due gsa cumulative sales adjustment recorded fourth quarter 2018 47 million inventory reserve charge recorded third quarter 2018 resulting analysis inventory reserves connection new product introductions acquisitions increasing reserve excess obsolete inventory partially offset higher average selling prices 3d manufacturing segment improved manufacturing efficiencies gross margin service revenue increased 10 percentage points 454 year ended december 31 2018 444 prior year period primarily due higher warranty customer service revenue partially offset increase cost sales service revenue effects gsa cumulative sales adjustment selling marketing expenses selling marketing expenses increased 134 million 129 1169 million year ended december 31 2018 1035 million year ended december 31 2017 increase driven primarily investment increased selling headcount part global initiatives drive sales growth related compensation cost well increase commission expense driven increased sales selling marketing expenses percentage sales 290 year ended december 31 2018 compared 287 year ended december 31 2017 worldwide periodending selling headcount increased 102 162 733 december 31 2018 631 december 31 2017 general administrative expenses general administrative expenses increased 39 million 88 477 million year ended december 31 2018 438 million year ended december 31 2017 increase general administrative expenses primarily driven higher compensation professional services spending related business acquisitions well costs associated implementing european union’s general data protection regulation general administrative expenses decreased 118 sales year ended december 31 2018 compared 121 sales prior year primarily due leveraging effect increased sales depreciation amortization expenses depreciation amortization expenses increased 17 million 104 183 million year ended december 31 2018 166 million year ended december 31 2017 increase depreciation amortization expenses primarily due higher amortization intangible assets related acquisitions new production tooling manufacture new products research development expenses research development expenses increased 43 million 122 397 million year ended december 31 2018 354 million year ended december 31 2017 increase research development expenses mainly due increased engineering headcount related compensation expense increased engineering headcount partly due recent acquisitions also connection activities accelerate new product development hardware software platforms segments research development expenses percentage sales remained flat 98 years ended december 31 2018 december 31 2017 expense income expense 12 million year ended december 31 2018 compared income 05 million year ended december 31 2017 change primarily driven 05 million imputed interest expense recorded fourth quarter 2018 related gsa cumulative sales adjustment effect foreign exchange rates value current intercompany account balances subsidiaries denominated currencies income tax benefit expense income tax benefit year ended december 31 2018 04 million compared income tax expense 203 million year ended december 31 2017 change primarily due higher income tax expense year ended december 31 2017 related us tax cuts jobs act 2017 “us tax reform” december 22 2017 united states enacted us tax reform resulting significant modifications existing law followed guidance securities exchange commission staff accounting bulletin 118 “sab 118” provided additional clarification regarding application financial accounting standards board “fasb” accounting standards codification “asc” topic 740 income taxes “fasb asc topic 740” company necessary information available prepared analyzed reasonable detail complete accounting certain income tax effects us tax reform reporting period us tax reform enacted result accordance us tax reform recorded provisional amount 194 million additional income tax expense fourth quarter 2017 period legislation enacted portion 194 million provisional amount related transition tax mandatory deemed repatriation foreign earnings 174 million based best estimate guidance available time additional guidance released sab 118 remeasurement period completed transition tax analysis resulted income tax benefit 10 million 18 million decrease deferred tax assets recorded fourth quarter 2018 related adjustments transition tax mandatory deemed repatriation foreign earnings net income loss net income 49 million year ended december 31 2018 compared net loss 145 million year ended december 31 2017 reflecting impact factors described segment results use segment profit evaluate performance reporting segments 3d manufacturing construction bim emerging verticals segment profit calculated gross profit less selling marketing expenses reporting segment discussion segment results years ended december 31 2018 2017 presented based segment profit described segment profit percent sales calculated segment profit divided total sales reporting segment believe aid investors understanding analyzing operating results definition segment profit may comparable similarlytitled measures reported companies additional information including reconciliation total segment profit income operations see note 18 “notes consolidated financial statements” included part ii item 8 annual report form 10k 2018 following changes made verticals reporting segments • first quarter 2018 combined historical factory metrology 3d machine vision verticals single reporting segment 3d factory replaced factory metrology reporting segment due linkage two historical verticals related type class customers served nature products services provided nature production processes 3d machine vision vertical previously reported reporting segment • first quarter 2018 renamed construction bimcim vertical reporting segment “construction bim” • first quarter 2018 renamed reporting segment “emerging verticals” • third quarter 2018 merged historical factory metrology 3d machine vision verticals one vertical named “3d factory” greater consistency realigned reporting segments • third quarter 2018 segregated operations acquisitions laser control systems lanmark along operations resulting acquisition substantially assets instrument associates llc dba nutfield technology “nutfield” vertical named “photonics” creation vertical enables us better focus product range directed laser steering operations historically reported 3d factory reporting segment first six months 2018 historical factory metrology reporting segment 2017 included emerging verticals formerly known “other” reporting segment due change performed qualitative goodwill impairment analysis third quarter 2018 management concluded goodwill impairment time vertical reporting change • third quarter 2018 renamed product design vertical “3d design” • fourth quarter 2018 renamed 3d factory vertical reporting segment “3d manufacturing” changes total consolidated financial condition results operations previously reported result changes verticals reporting segments amounts related reporting segment information year ended december 31 2017 restated throughout annual report form 10k reflect changes reporting segments amounts related reporting segment information year ended december 31 2016 restated impacted changes reporting segments reporting segments continue employ consistent accounting policies sales 3d manufacturing segment increased 209 million 86 2644 million year ended december 31 2018 2435 million prior year primarily driven higher average selling prices continued growth service revenue increases partially offset 30 million sales reduction fourth quarter 2018 related gsa cumulative sales adjustment segment profit segment profit 3d manufacturing segment increased 33 million 42 808 million year ended december 31 2018 775 million prior year increase primarily due higher sales partially offset investment increased selling headcount part global initiatives drive sales growth related compensation cost well increase commission expense driven increased sales increase inventory reserve third quarter 2018 performed analysis inventory reserves connection new product introductions acquisitions recorded charge 39 million increasing reserve excess obsolete inventory primarily based determination quantities onhand certain legacy products exceeded revised sales projections sales construction bim segment increased 99 million 114 962 million year ended december 31 2018 863 million prior year primarily reflecting increase product unit sales service revenue increases partially offset 02 million sales reduction fourth quarter 2018 related gsa cumulative sales adjustment segment profit segment profit construction bim segment increased 64 million 305 275 million year ended december 31 2018 211 million prior year increase primarily due increase product unit sales higher service revenue partially offset investment increased selling headcount part global initiatives drive sales growth related compensation cost well increase commission expense driven increased sales increase inventory reserve third quarter 2018 performed analysis inventory reserves connection new product introductions acquisitions recorded charge 08 million increasing reserve excess obsolete inventory primarily based determination quantities onhand certain legacy products exceeded revised sales projections sales emerging verticals segment increased 119 million 383 430 million year ended december 31 2018 311 million prior year primarily due higher product unit sales public safety forensics photonics 3d design verticals continue strategically invest new markets organically acquisitions increases partially offset 16 million sales reduction fourth quarter 2018 related gsa cumulative sales adjustment segment profit segment profit emerging verticals segment increased 06 million 265 31 million year ended december 31 2018 25 million prior year increase primarily due higher sales verticals partially offset investment increased selling headcount part global initiatives drive sales growth related compensation cost well increase commission expense driven increased sales 2017 compared 2016 consolidated results sales total sales increased 353 million 109 3609 million year ended december 31 2017 3256 million year ended december 31 2016 sales increase primarily driven strong increase construction bim segment growth warranty revenue modest increase average selling prices total product sales increased 219 million 86 2779 million year ended december 31 2017 2560 million year ended december 31 2016 product sales increase reflected increase unit sales within construction bim segment well higher average selling prices attributable technological advances service revenue increased 134 million 193 830 million year ended december 31 2017 696 million year ended december 31 2016 primarily due increase warranty customer service revenue driven growth installed serviceable base focused sales initiatives foreign exchange rates slightly positive impact sales 19 million increasing overall sales growth 06 percentage points primarily due strengthening euro relative us dollar offset partly weakening japanese yen relative us dollar gross profit gross profit increased 266 million 150 2046 million year ended december 31 2017 1780 million year ended december 31 2016 gross margin increased 567 year ended december 31 2017 547 prior year period gross margin product revenue increased 26 percentage points 604 year ended december 31 2017 578 prior year period increase primarily due higher average selling prices products attributable new product introductions improved manufacturing efficiencies gross margin service revenue increased 14 percentage points 444 year ended december 31 2017 430 prior year period primarily due higher warranty customer service revenue selling marketing expenses selling marketing expenses increased 236 million 296 1035 million year ended december 31 2017 799 million year ended december 31 2016 increase driven primarily higher compensation expense reflecting investment selling headcount part global strategic initiatives drive sales growth selling marketing expenses percentage sales 287 year ended december 31 2017 compared 245 year ended december 31 2016 worldwide periodending selling headcount increased 95 177 631 december 31 2017 536 december 31 2016 general administrative expenses general administrative expenses increased 30 million 73 438 million year ended december 31 2017 408 million year ended december 31 2016 increase general administrative expenses primarily driven higher compensation global system expenses higher global system expenses resulted strategic initiative harmonize global verticals implementation entitywide systems human resource information system general administrative expenses 121 sales year ended december 31 2017 compared 125 sales prior year depreciation amortization expenses depreciation amortization expenses increased 27 million 196 166 million year ended december 31 2017 139 million year ended december 31 2016 increase depreciation amortization expenses primarily due higher amortization intangible assets related acquisitions new production tooling manufacture new products research development expenses research development expenses increased 53 million 174 354 million year ended december 31 2017 301 million year ended december 31 2016 increase research development expenses mainly due higher compensation expense resulting increased headcount connection acquisitions research development expenses percentage sales increased 98 year ended december 31 2017 93 year ended december 31 2016 income expense income 05 million year ended december 31 2017 compared expense 07 million year ended december 31 2016 change primarily driven foreign exchange transaction gains resulting positive impact changes foreign exchange rates value current intercompany account balances subsidiaries denominated currencies year ended december 31 2017 compared losses resulting negative impact changes foreign exchange rates year ended december 31 2016 income tax expense income tax expense year ended december 31 2017 203 million compared income tax expense 15 million year ended december 31 2016 increase primarily related tax expense 194 million recorded fourth quarter 2017 pursuant us tax reform 174 million expense related provisional transition tax expense mandatory deemed repatriation foreign earnings 20 million expense related remeasurement deferred tax assets liabilities expect utilize future result us tax reform decreasing united states statutory corporate tax rate 35 21 tax years beginning january 1 2018 net loss income net loss 145 million year ended december 31 2017 compared net income 111 million year ended december 31 2016 reflecting impact factors described segment results sales 3d manufacturing segment increased 72 million 30 2435 million year ended december 31 2017 2363 million prior year primarily reflecting higher average selling prices higher service revenue segment profit segment profit 3d manufacturing segment increased 38 million 52 775 million year ended december 31 2017 737 million prior year increase primarily due increase average selling prices service revenue partially offset increase selling marketing expenses reflecting higher headcount sales construction bim segment increased 212 million 326 863 million year ended december 31 2017 651 million prior year primarily reflecting increase units sold higher service revenue segment profit segment profit construction bim segment increased 63 million 424 211 million year ended december 31 2017 148 million prior year increase primarily due increase units sold higher service revenue partially offset increase selling marketing expenses reflecting higher headcount sales emerging verticals segment increased 69 million 285 311 million year ended december 31 2017 242 million prior year primarily reflecting increase unit sales higher service revenue segment profit segment profit emerging verticals segment decreased 71 million 737 25 million year ended december 31 2017 96 million prior year decrease primarily due increase selling marketing expenses reflecting higher headcount part longterm initiatives grow emerging verticals partially offset increase unit sales higher service revenue liquidity capital resources cash equivalents decreased 322 million 1088 million december 31 2018 1410 million december 31 2017 decrease primarily driven cash paid acquisitions 271 million 18 million equity investment present4d investment 140 million us treasury bills property equipment purchases 110 million decreases partially offset 209 million proceeds received exercise stock options 63 million net cash provided operations twelve months ended december 31 2018 cash flows operating activities provide primary source liquidity generated positive cash flows operations 63 million year ended december 31 2018 compared 104 million year ended december 31 2017 decrease mainly due changes working capital primarily driven increases accounts receivable net inventories prepaid expenses assets cash flows used investing activities year ended december 31 2018 558 million compared cash flows provided investing activities 151 million year ended december 31 2017 change primarily due cash paid acquisitions 271 million 18 million equity investment present4d investment 140 million us treasury bills year ended december 31 2018 compared maturity 320 million us treasury bills 2017 reinvested cash paid acquisitions 56 million year ended december 31 2017 cash flows provided financing activities years ended december 31 2018 december 31 2017 198 million 30 million respectively increase primarily driven increased proceeds issuance stock relating exercise stock options year ended december 31 2018 cash equivalents 775 million held foreign subsidiaries december 31 2018 december 22 2017 united states enacted us tax reform resulting significant modifications existing law included transition tax mandatory deemed repatriation foreign earnings despite changes us tax law current intent indefinitely reinvest funds foreign operations cash needed fund ongoing operations november 24 2008 board directors approved 300 million share repurchase program subsequently october 2015 board directors authorized increase existing share repurchase program 300 million 500 million december 2018 board directors authorized management utilize share repurchase program beginning january 1 2019 maintain number issued outstanding shares address dilutive impact stock options exercises settlement restricted stock units acquisitions share repurchase program may made time prevailing prices permitted securities laws legal requirements subject market conditions factors program share repurchase program may discontinued time expiration date restriction governing period repurchase shares program made stock repurchases years ended december 31 2018 2017 program december 31 2018 authorization repurchase 183 million 500 million authorized board directors existing share repurchase program believe working capital anticipated cash flow operations sufficient fund longterm liquidity operating requirements least next 12 months balance sheet arrangements contractual obligations commercial commitments party capital leases equipment initial term 36 60 months noncancellable operating leases obligations presented december 31 2018 dollars thousands enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2018 approximately 569 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions also 23 million longterm commitments purchases delivered 12 months fourth quarter 2017 recorded provisional amount 174 million related increase taxes payable pursuant us tax reform associated mandatory deemed repatriation earnings foreign subsidiaries transition tax fourth quarter 2018 decreased provisional estimate onetime transition tax 28 million upon completing analysis earnings profits foreign subsidiaries utilization foreign tax credits 18 million decrease related change deferred tax assets 10 million income tax benefit recorded fourth quarter 2018 made first transition tax payment 2018 pay remaining liability next seven years obligations included table primarily represent estimated payments due acquisition related earnouts inflation material impact results operations recent years expect inflation material impact operations 2019 critical accounting policies preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities base estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made management may estimates assumptions reasonable believe given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response securities exchange commissions financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment business combinations stockbased compensation policies affect current assets current liabilities operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could adverse impact operating results financial position revenue recognition arrangements multiple performance obligations represent promises within arrangement capable distinct allocate revenue distinct performance obligations based relative standalone selling prices “ssp” available use observable prices determine ssp observable prices available ssps established reflect best estimates selling prices performance obligations would sold regularly standalone basis revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customer location determined agreed upon shipping terms time entitled payment title control passed customer fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required risks rewards ownership passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services payment products services collected within short period time following transfer control commencement delivery services applicable revenues presented net salesrelated taxes reserve excess obsolete inventory value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 firstin firstout cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain establish provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described fasb asc topic 740 tax position likely sustained upon examination applicable taxing authority ordinary course business examined various federal state foreign tax authorities regularly assess potential outcome examinations future examinations current prior years determining adequacy provision income taxes assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties establish time sale liability oneyear warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired evaluate goodwill impairment annually october 1 indicator impairment exists asset impaired difference carrying value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2018 2017 2016 business combinations allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available stockbased compensation measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition determined using blackscholes option valuation model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant extent forfeitures occur amounts recorded cumulative adjustment previously recorded amounts expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance condition furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive also beginning october 2018 nonemployee directors may elect annual cash retainers annual equity retainers paid form deferred stock units pursuant 2014 equity incentive plan 2018 nonemployee director deferred compensation plan deferred stock unit represents right receive one share common stock upon nonemployee directors separation service company record compensation cost associated deferred stock units period service impact recently adopted accounting standards january 2017 fasb issued accounting standards update “asu” 201701 business combinations topic 805 clarifying definition business “asu 201701” order clarify definition business provide additional guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses fasb asc topic 805 recognized three elements business inputs processes outputs integrated set assets activities collectively referred “set” business usually outputs required present additionally inputs processes seller used operating set required market participants could acquire set continue produce outputs asu 201701 provides screen determine set business screen requires substantially fair value gross assets acquired disposed concentrated single identifiable asset group similar identifiable assets set business screen met new guidance 1 requires considered business set must include minimum input substantive process together significantly contribute ability create output 2 removes evaluation whether market participant could replace missing elements new guidance provides framework assist entities evaluating whether input substantive process present framework includes two sets criteria consider depend whether set outputs although outputs required set business outputs generally key element business asu 201701 provides stringent criteria sets without outputs narrowly defines term output asu 201701 became effective us january 1 2018 applied prospectively adoption new guidance material impact consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory “asu 201616” removes prohibition fasb asc topic 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory asu requires tax effects intercompany transactions sales inventory recognized transfer occurs instead deferred transferred asset sold third party otherwise recovered use asset new guidance must applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption asu 201616 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments “asu 201615” clarifies companies present classify certain cash receipts cash payments statement cash flows asu 201615 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” amending accounting guidance related revenue recognition asu subsequently issued amendments revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services additional disclosures required provide nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract following summary impacts significant revenue stream • measurement equipment related software prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 sales measurement imaging equipment related software sales generally recognized upon shipment considered earnings process complete shipping date related software sold measurement imaging equipment functions together equipment deliver tangible product’s essential functionality customers frequently purchase extended warranties purchase measurement equipment related software new adopted guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 allocate contract price performance obligations based best estimate standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances exception software licenses respect software licenses use residual method allocating contract price performance obligations relating software licenses revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customer location determined agreed upon shipping terms time entitled payment title control passed customer adoption new guidance result material changes accounting revenue related measurement imaging equipment related software • extended warranties prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 extended warranty sales recognized straightline basis term warranty extended warranty sales include contract periods extend one month three years unearned service revenues reported current noncurrent liabilities consolidated balance sheets appropriately reflect remaining performance obligations related contracts adoption new guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 result material changes accounting revenue related extended warranties • software prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 softwareonly sales recognized significant production modification customization software required following criteria met persuasive evidence sales agreement existed delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support maintenance renewals sold recognized straightline basis term maintenance agreement adoption new guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 result material changes accounting revenue related softwareonly sales maintenance renewals unearned service revenue liabilities reported consolidated balance sheets reflect contract liabilities satisfy remaining performance obligations extended warranties software maintenance current portion unearned service revenues consolidated balance sheets expect recognize revenue within twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities unearned service revenues less current portion consolidated balance sheets expect recognize revenue extending beyond twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities customer deposits consolidated balance sheets represent customer prepayments contracts performance obligations must satisfy future recognize related contract revenue amounts generally related performance obligations delivered less 12 months year ended december 31 2018 recognized 250 million service revenue deferred consolidated balance sheet december 31 2017 prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 recognized sales commission expense incurred new guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 must capitalize commission expense amortize costs ratably term contract accordance practical expedient modified retrospective method adoption recorded net increase opening retained earnings january 1 2018 18 million recognized associated 24 million deferred cost asset due cumulative impact adopting new guidance december 31 2018 deferred cost asset related deferred commissions approximately 27 million classification purposes 18 million 09 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2018 elected practical expedient account shipping handling activities fulfill promise transfer good shipping handling fees billed customers sales transaction recorded product sales shipping handling costs incurred recorded cost sales additionally elected practical expedient exclude sales value added sales taxes collect concurrently revenueproducing activities accounting policy elections consistent manner historically recorded shipping handling fees taxes nature certain contracts gives rise variable consideration may constrained primarily related allowance sales returns accordance adoption new guidance required estimate contract asset related sales returns record corresponding adjustment cost sales historically allowance sales returns material approximately 01 million december 31 2018 adoption new guidance result material changes accounting variable consideration related sales returns corresponding contract asset related returns see note 3 “notes consolidated financial statements” included part ii item 8 annual report form 10k information impact recently issued accounting standards january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test current guidance performance step 2 requires us calculate implied fair value goodwill following procedures would required determine fair value assets acquired liabilities assumed business combination new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment result reporting units subject impairment assessment still option perform qualitative assessment reporting unit determine quantitative impairment test necessary asu 201704 becomes effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted annual interim goodwill impairment tests january 1 2017 amendments asu applied prospective basis disclosure nature reason change accounting principle required upon transition disclosure required first annual period interim period within first annual period initially adopt amendments asu plan adopt guidance fiscal year ending december 31 2020 expect adoption guidance material impact consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201811 lease topic 842 targeted improvements issued fasb july 2018 allows cumulativeeffect adjustment transition method adoption new guidance effective fiscal years beginning december 15 2018 interim periods within years plan adopt asu 201602 first quarter 2019 cumulativeeffect adjustment made january 1 2019 process calculating impact adoption asu consolidated financial statements currently finalizing implementation lease management software assist task believe significant changes related recognition new rightofuse assets lease liabilities balance sheet operating leases function lessee estimate impact adoption asu 201602 14 million 17 million increase rightof use assets lease liabilities plan elect certain practical expedients available transition provisions allow aggregation nonlease components related lease components evaluating accounting treatment ii apply modified retrospective adoption method utilizing simplified transition option allows entities continue apply legacy guidance fasb asc topic 840 including disclosure requirements comparative periods presented year adoption iii use hindsight determining lease term considering lessee options extend terminate lease purchase underlying asset assessing impairment entity’s rightofuse assets adoption asu 201602 also require initial direct costs incremental costs would incurred lease obtained included rightofuse assets expect recognition costs upon adoption material impact rightofuse assets consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements including notes thereto included part ii item 8 annual report form 10k overview global technology company designs develops manufactures markets supports software driven threedimensional “3d” measurement imaging solutions technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage applications faroarm® faro scanarm® faro laser trackertm faro laser projector companion cam2® buildit projector software solutions provide computeraided design “cad” based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications automotive aerospace metal machine fabrication industrial manufacturing markets faro focus faro scanplan laser scanners companion faro scene buildit faro asbuilttm faro zone public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications primarily architecture engineering construction public safety markets faro scanarm® companion scene software also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle derive revenues primarily sale measurement equipment related multifaceted software programs revenue related products generally recognized upon shipment addition sell extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis term warranty revenue training technology consulting services provided operate international markets throughout world maintain sales offices australia brazil canada china france germany india italy japan malaysia mexico netherlands poland portugal singapore south korea spain switzerland thailand turkey united kingdom united states manufacture faroarm® faro scanarm® products manufacturing facility located switzerland customer orders europe middle east africa “emea” manufacturing facility located singapore customer orders asiapacific region manufacturing facility located florida customer orders americas manufacture faro focus manufacturing facilities located germany switzerland customer orders emea asiapacific region manufacturing facility located pennsylvania customer orders americas manufacture faro laser trackertm faro laser projector products facility located pennsylvania expect existing manufacturing facilities production capacity necessary support volume requirements 2020 account whollyowned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies reflected consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2019 2018 2017 executive summary total sales decreased 219 million 54 3818 million year ended december 31 2019 4036 million year ended december 31 2018 product sales decreased 309 million 96 primarily driven softening many served markets particular softness automotive broader asian markets service revenue increased 90 million 109 continued capitalize growth global installed serviceable base focused sales initiatives maintain customer relationships purchase measurement devices also foreign exchange rates negative impact sales 130 million decreasing overall sales approximately 32 primarily due weakening euro chinese yuan relative us dollar change organizational structure segment reporting since fourth quarter 2016 operated five verticals3d manufacturing construction building information modeling “construction bim” public safety forensics 3d design photonicsand three reporting segments3d manufacturing construction bim emerging verticals discussed quarterly report form 10q third quarter 2019 new management team led new chief executive officer “ceo” formulated began implement new comprehensive strategic plan business part strategic planning process identified areas business needed enhanced focus change order improve efficiency cost structure fourth quarter 2019 reassessed redefined gotomarket strategy refocused marketing engagement customers reevaluated hardware product portfolio also begun focus organizational optimization efforts including simplification overly complex management structure part new strategic plan based recommendation ceo also chief operating decision maker “codm” fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety new strategic plan restructuring plan addition reorganization company’s structure part strategic planning process also evaluated hardware product portfolio operations certain recent acquisitions result evaluation simplifying hardware product portfolio ceasing sell certain products evaluating whether divest shut related operations performed annual goodwill intangible asset impairment test december 2019 connection preparation financial statements fourth quarter year ended december 31 2019 result test recorded impairment charge 352 million fourth quarter 2019 included 212 million goodwill 105 million intangible assets associated recent acquisitions 14 million intangible assets related capitalized patents 21 million asset writedowns see note 7 “goodwill” note 8 “intangible assets” notes consolidated financial statements included part ii item 8 annual report form 10k information also recorded charge 128 million fourth quarter 2019 increasing reserve excess obsolete inventory based analysis inventory reserves connection strategy simplify hardware product portfolio cease selling certain products addition implementation new strategic plan february 14 2020 board directors approved global restructuring plan “restructuring plan” intended support strategic plan effort improve operating performance ensure appropriately structured resourced deliver sustainable value shareholders customers key activities restructuring plan include continued focus efficiency costsaving efforts includes decreasing total headcount approximately 500 employees upon completion restructuring plan activities expected substantially completed end 2021 estimate restructuring plan reduce gross annual pretax expenses approximately 40 million realized fourth quarter 2020 annualized basis estimate implementation restructuring plan result pretax charges approximately 26 million 36 million addition pretax charges approximately 49 million recorded fourth quarter 2019 connection implementation new strategic plan expect 18 million 22 million additional charges form cash charges actual results including costs restructuring plan may differ materially expectations resulting inability realize expected benefits restructuring plan new strategic plan negatively impacting ability execute future plans strategies could material adverse effect business financial condition results operations gsa matter sold products related services us government “government” general services administration “gsa” federal supply schedule contracts “gsa contracts” since 2002 currently selling products related services government two gsa contracts sales government gsa contracts represented approximately 40 total sales year ended december 31 2019 gsa contract subject extensive legal regulatory requirements includes among provisions price reduction clause “price reduction clause” generally requires us reduce prices billed government gsa contracts correspond lowest prices billed certain benchmark customers late fourth quarter 2018 internal review determined certain pricing practices may resulted government overcharged price reduction clauses gsa contracts “the gsa matter” result performed remediation efforts including limited identification additional controls procedures ensure future compliance pricing requirements gsa contracts also retained outside legal counsel forensic accountants assist efforts conduct comprehensive review pricing practices gsa contracts “review” february 14 2019 reported gsa matter gsa office inspector general result gsa matter fourth quarter 2018 reduced total sales 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts addition fourth quarter 2018 recorded 05 million imputed interest related estimated cumulative sales adjustment increased interest expense net resulted estimated total liability 53 million gsa matter based preliminary review february 20 2019 date annual report form 10k year ended december 31 2018 july 15 2019 submitted report gsa office inspector general setting forth findings review conducted outside legal counsel forensic accountants based results review reduced total sales second quarter 2019 incremental 58 million sales adjustment reflecting estimated aggregate overcharge 106 million gsa contracts period july 2011 march 2019 addition recorded incremental 08 million imputed interest related estimated cumulative sales adjustment 2019 increased interest expense net resulted 66 million total incremental increase estimated total liability gsa matter date filing annual report form 10k recorded aggregate estimated total liability gsa matter 119 million estimate based information date annual report form 10k subject change based discussions outside legal counsel government presentation information reclassifications amounts reported millions within annual report form 10k computed based amounts thousands result sum components reported millions may equal total amount reported millions due rounding certain columns rows within tables follow may add due use rounded numbers percentages presented calculated based respective amounts thousands depreciation amortization expenses reported statements operations reflect departmental costs previously expenses reported separate line item operating expenses amounts related depreciation amortization expenses years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification depreciation amortization expenses conform current period presentation selling marketing expenses general administrative expenses reported accompanying statements operations together one line selling general administrative previously expenses reported two separate line items operating expenses amounts related selling general administrative expenses years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification selling general administrative expenses conform current period presentation software maintenance revenue reported accompanying statements operations component product sales previously revenues reported service sales amounts related software maintenance revenue years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification software maintenance revenue conform current period presentation software maintenance cost sales reported accompanying statements operations component product cost sales previously cost sales reported service cost sales amounts related software maintenance cost sales years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification software maintenance cost sales conform current period presentation results operations 2019 compared 2018 consolidated results sales total sales decreased 219 million 54 3818 million year ended december 31 2019 4036 million year ended december 31 2018 total product sales decreased 309 million 96 2897 million year ended december 31 2019 3206 million year ended december 31 2018 product sales decrease reflected lower unit sales primarily driven continuing softness many served markets particular softness automotive broader asian markets service sales increased 90 million 109 921 million year ended december 31 2019 830 million year ended december 31 2018 primarily due increase warranty customer service revenue driven growth global installed serviceable base focused sales initiatives maintain customer relationships purchase measurement devices foreign exchange rates negative impact sales 130 million decreasing overall sales approximately 32 primarily due weakening euro chinese yuan relative us dollar gross profit gross profit decreased 234 million 106 1981 million year ended december 31 2019 2216 million year ended december 31 2018 gross margin decreased 519 year ended december 31 2019 549 prior year period gross margin product revenue decreased 52 percentage points 540 year ended december 31 2019 592 prior year period decrease gross margin product revenue primarily due 128 million increase reserve excess obsolete inventory recorded fourth quarter 2019 connection strategic decisions simplify hardware product portfolio cease selling certain products compared 47 million increase reserve excess obsolete inventory recorded 2018 gross margin service revenue increased 70 percentage points 453 year ended december 31 2019 383 prior year period primarily due leveraging effect higher warranty customer service revenue well improved efficiencies customer service repair process selling general administrative expenses selling general administrative “sga” expenses increased 77 million 45 1774 million year ended december 31 2019 1697 million year ended december 31 2018 increase driven primarily executive team transition costs including acceleration stockbased compensation expense related accelerated vesting stock options restricted stock units granted prior executive officers severance costs professional fees incurred related gsa matter increase compensation expenses related increased selling headcount partially offset lower commission expense due decrease product sales sga expenses percentage sales increased 465 year ended december 31 2019 420 year ended december 31 2018 research development expenses research development expenses decreased 19 million 41 442 million year ended december 31 2019 461 million year ended december 31 2018 decrease research development expenses mainly due decrease materials consulting costs well favorable changes foreign currencies us dollar strengthened euro decreased compensation cost foreign research development employees research development expenses percentage sales increased 116 year ended december 31 2019 114 year ended december 31 2018 impairment loss result annual goodwill intangible asset impairment test performed december 2019 recorded impairment loss 352 million fourth quarter 2019 included 212 million goodwill 105 million intangible assets associated recent acquisitions 14 million intangible assets related capitalized patents 21 million asset writedowns similar impairments 2018 expense 24 million year ended december 31 2019 compared 12 million year ended december 31 2018 increase primarily driven impairment charge related equity investment present4d gmbh “present4d” recorded second quarter 2019 impairment charge related note receivable due present4d recorded fourth quarter 2019 partially offset favorable adjustment contingent consideration liability prior year acquisition income tax expense benefit income tax expense year ended december 31 2019 11 million compared income tax benefit 04 million year ended december 31 2018 effective tax rate 19 year ended december 31 2019 compared 82 year ended december 31 2018 change income tax expense benefit primarily due 85 million income tax expense recorded year ended december 31 2019 resulting determination likely certain foreign deferred tax assets fully realized establishment valuation due history cumulative losses related jurisdictions additionally yearoveryear change income tax expense benefit effective tax rate partially due pretax book loss year ended december 31 2019 compared pretax book income year ended december 31 2018 well provisiontoreturn adjustments recorded 2019 2018 net loss income net loss 621 million year ended december 31 2019 compared net income 49 million year ended december 31 2018 reflecting impact factors described 2018 compared 2017 consolidated results sales total sales increased 427 million 118 4036 million year ended december 31 2018 3609 million year ended december 31 2017 sales increase primarily driven increases unit sales average selling prices growth hardware warranty revenue partially offset 48 million reduction total sales recorded fourth quarter 2018 result gsa matter “gsa cumulative sales adjustment” total product sales increased 334 million 116 3206 million year ended december 31 2018 2872 million year ended december 31 2017 product sales increase primarily driven increases unit sales average selling prices partially offset gsa cumulative sales adjustment service revenue increased 94 million 127 830 million year ended december 31 2018 737 million year ended december 31 2017 primarily due increase warranty customer service revenue driven growth installed serviceable base focused sales initiatives partially offset gsa cumulative sales adjustment foreign exchange rates slightly positive impact sales 25 million increasing overall sales growth 07 percentage points primarily due strengthening euro japanese yen chinese yuan relative us dollar gross profit gross profit increased 229 million 115 2216 million year ended december 31 2018 1987 million year ended december 31 2017 gross margin decreased 549 year ended december 31 2018 550 year ended december 31 2017 decrease primarily due gsa cumulative sales adjustment recorded fourth quarter 2018 47 million inventory charge recorded third quarter 2018 resulting analysis inventory reserves connection new product introductions acquisitions increasing reserve excess obsolete inventory partially offset higher average selling prices measurement solutions due new product introductions improved manufacturing efficiencies higher gross margin service revenue selling general administrative expenses selling general administrative expenses increased 174 million 114 1697 million year ended december 31 2018 1523 million year ended december 31 2017 increase due higher compensation expense headcount increases primarily driven global sales force headcount increase commission expense driven increased sales increase global system expenses associated implementing european union’s general data protection regulation sga expenses percentage sales 420 year ended december 31 2018 compared 422 year ended december 31 2017 research development expenses research development expenses increased 50 million 122 461 million year ended december 31 2018 411 million year ended december 31 2017 increase research development expenses mainly due higher compensation expense resulting increased engineering headcount higher amortization intangible assets related acquisitions new production tooling manufacture products expense income expense 12 million year ended december 31 2018 compared income 05 million year ended december 31 2017 change primarily driven 05 million imputed interest expense recorded fourth quarter 2018 related gsa cumulative sales adjustment effect foreign exchange rates value current intercompany account balances subsidiaries denominated currencies income tax benefit expense income tax benefit year ended december 31 2018 04 million compared income tax expense 203 million year ended december 31 2017 change primarily due higher income tax expense year ended december 31 2017 related us tax cuts jobs act 2017 “us tax cuts jobs act” december 22 2017 united states enacted us tax cuts jobs act resulting significant modifications existing law followed guidance securities exchange commission “sec” staff accounting bulletin 118 “sab 118” provided additional clarification regarding application financial accounting standards board “fasb” accounting standards codification “asc” topic 740 income taxes “fasb asc topic 740” company necessary information available prepared analyzed reasonable detail complete accounting certain income tax effects us tax cuts jobs act reporting period us tax cuts jobs act enacted result accordance us tax cuts jobs act recorded provisional amount 194 million additional income tax expense fourth quarter 2017 period legislation enacted portion 194 million provisional amount related transition tax mandatory deemed repatriation foreign earnings 174 million based best estimate guidance available time additional guidance released sab 118 remeasurement period completed transition tax analysis resulted income tax benefit 10 million 18 million decrease deferred tax assets recorded fourth quarter 2018 related adjustments transition tax mandatory deemed repatriation foreign earnings net income loss net income 49 million year ended december 31 2018 compared net loss 145 million year ended december 31 2017 reflecting impact factors described liquidity capital resources cash equivalents increased 249 million 1336 million december 31 2019 1088 million december 31 2018 increase primarily driven net cash provided operating activities financing activities partially offset net cash used investing activities cash flows operating activities provide primary source liquidity generated positive cash flows operations 325 million year ended december 31 2019 compared 63 million year ended december 31 2018 increase mainly due noncash impairment charges recorded fourth quarter 2019 well changes working capital primarily comprised decrease accounts receivable increase gsa liability unearned service revenue partially offset increase inventory cash flows used investing activities year ended december 31 2019 93 million compared 558 million year ended december 31 2018 change primarily due cash paid acquisitions 271 million 18 million equity investment present4d net purchase 140 million us treasury bills year ended december 31 2018 compared activity year ended december 31 2019 cash flows provided financing activities years ended december 31 2019 december 31 2018 22 million 198 million respectively decrease primarily driven reduction proceeds issuance stock relating exercise stock options year ended december 31 2019 compared prior year increased contingent consideration paid connection recent acquisitions year ended december 31 2019 increased payments taxes related net share settlement equity awards year ended december 31 2019 cash equivalents 893 million held foreign subsidiaries december 31 2019 december 22 2017 united states enacted us tax cuts jobs act resulting significant modifications existing law included transition tax mandatory deemed repatriation foreign earnings despite changes us tax law current intent indefinitely reinvest funds foreign operations cash needed fund ongoing operations november 24 2008 board directors approved 300 million share repurchase program subsequently october 2015 board directors authorized increase existing share repurchase program 300 million 500 million december 2018 board directors authorized management utilize share repurchase program beginning january 1 2019 maintain number issued outstanding shares address dilutive impact stock options exercises settlement restricted stock units acquisitions share repurchase program may made time prevailing prices permitted securities laws legal requirements subject market conditions factors program share repurchase program may discontinued time expiration date restriction governing period repurchase shares program made stock repurchases years ended december 31 2019 2018 2017 program december 31 2019 authorization repurchase 183 million 500 million authorized board directors existing share repurchase program believe working capital anticipated cash flow operations sufficient fund longterm liquidity operating requirements least next 12 months offbalance sheet arrangements contractual obligations commercial commitments party capital leases equipment initial term 36 60 months noncancellable operating leases obligations presented december 31 2019 dollars thousands enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2019 approximately 526 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions also 15 million longterm commitments purchases delivered 12 months fourth quarter 2017 recorded provisional amount 174 million related increase taxes payable pursuant us tax cuts jobs act associated mandatory deemed repatriation earnings foreign subsidiaries transition tax fourth quarter 2018 decreased provisional estimate onetime transition tax 28 million upon completing analysis earnings profits foreign subsidiaries utilization foreign tax credits 18 million decrease related change deferred tax assets 10 million income tax benefit recorded fourth quarter 2018 made first two transition tax payments 2018 2019 pay remaining liability next six years obligations included table primarily represent estimated payments due acquisition related earnouts 07 million inflation material impact results operations recent years expect inflation material impact operations 2020 critical accounting policies preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities base estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made management may estimates assumptions reasonable believe given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response secs financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment business combinations stockbased compensation policies affect current assets current liabilities operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could adverse impact operating results financial position revenue recognition arrangements multiple performance obligations represent promises within arrangement capable distinct allocate revenue distinct performance obligations based relative standalone selling prices “ssp” available use observable prices determine ssp observable prices available ssps established reflect best estimates selling prices performance obligations would sold regularly standalone basis revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customers location determined agreed upon shipping terms time entitled payment title control passed customer fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required risks rewards ownership passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services payment products services collected within short period time following transfer control commencement delivery services applicable revenues presented net salesrelated taxes reserve excess obsolete inventory value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 firstin firstout cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain establish provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described fasb asc topic 740 tax position likely sustained upon examination applicable taxing authority ordinary course business examined various federal state foreign tax authorities regularly assess potential outcome examinations future examinations current prior years determining adequacy provision income taxes assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties establish time sale liability oneyear warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist ie likely fair value reporting unit less carrying value determine carrying value recorded goodwill indefinite lived intangible assets impaired changed timing annual test goodwill 2019 align updated strategic plan annual budgetary process accordingly performed annual quantitative test impairment recorded goodwill december 10 2019 result test estimated fair value photonics reporting unit included goodwill recognized instrument associates llc dba nutfield technology “nutfield” laser control systems limited “laser control systems” lanmark controls inc “lanmark” acquisitions 3d design reporting unit included goodwill recognized acquisition optotech srl subsidiary open technologies srl collectively “open technologies” determined significantly less carrying value reporting unit indicating full impairment driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform quantitative goodwill impairment test perform quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value impair goodwill excess amount reporting unit compared fair value reduced zero management concluded goodwill impairment years ended december 31 2018 2017 business combinations allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates critical estimates also made valuing earnouts represent arrangements pay former owners based satisfaction performance criteria fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available stockbased compensation measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock restricted stock units performancebased awards granted directors employees fair value stock options including performance awards without market condition determined using blackscholes option valuation model fair value restricted stock units stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant elect account forfeitures related service conditionbased awards occur expense stockbased compensation stock options restricted stock awards restricted stock units performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance condition furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive also beginning october 2018 nonemployee directors may elect annual cash retainers annual equity retainers paid form deferred stock units pursuant 2014 equity incentive plan 2018 nonemployee director deferred compensation plan deferred stock unit represents right receive one share common stock upon nonemployee directors separation service company record compensation cost associated deferred stock units period service impact recently adopted accounting standards february 2016 fasb issued accounting standards update “asu” 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201811 leases topic 842 targeted improvements issued fasb july 2018 allows cumulativeeffect adjustment transition method adoption adopted asu 201602 effective january 1 2019 utilizing cumulativeeffect adjustment transition method adoption resulted recognition consolidated balance sheet december 31 2019 184 million rightofuse assets operating leases 196 million lease liability operating leases 08 million property equipment net finance leases 08 million lease liability finance leases function lessee elected certain practical expedients available transition provisions allow aggregation nonlease components related lease components evaluating accounting treatment ii apply modified retrospective adoption method utilizing simplified transition option allows us continue apply legacy guidance fasb asc topic 840 including disclosure requirements comparative periods presented year adoption iii use hindsight determining lease term considering options extend terminate lease purchase underlying asset assessing impairment rightofuse assets adoption asu 201602 also required us include initial direct costs incremental costs would incurred lease obtained rightofuse assets recognition costs connection adoption guidance material impact consolidated financial statements january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment adopted guidance connection annual impairment test fiscal year ended december 31 2019 adoption guidance material impact consolidated financial statements impact recently issued accounting standards june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments “asu 201613” requires measurement recognition expected credit losses financial assets held amortized cost asu 201613 subsequent related amendments asu 201613 replace existing incurred loss impairment model expected loss model requires use forwardlooking information calculate credit loss estimates also eliminates concept otherthantemporary impairment requires credit losses related availableforsale debt securities recorded allowance credit losses rather reduction amortized cost basis securities changes result earlier recognition credit losses adopted asu 201613 effective january 1 2020 adoption new guidance material impact consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements including notes thereto included part ii item 8 annual report form 10k overview global technology company designs develops manufactures markets supports software driven threedimensional “3d” measurement imaging realization solutions 3d metrology architecture engineering construction “aec” public safety analytics markets enable customers capture measure manipulate interact share data physical world virtual environment translate information back physical domain technology enables highly accurate 3d measurement imaging comparison projection parts complex structures within production assembly quality assurance processes faro suite 3d products software solutions used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction assembly layout machine guidance well investigation reconstructions crash crime scenes sell majority solutions direct sales force across range industries including automotive aerospace metal machine fabrication surveying architecture engineering construction public safety forensics industries derive revenues primarily sale measurement equipment related multifaceted software programs revenue related products generally recognized upon shipment addition sell extended warranties training technology consulting services relating products recognize revenue hardware service contracts software maintenance contracts straightline basis contractual term revenue training technology consulting services provided operate international markets throughout world maintain sales offices australia brazil canada china france germany india italy japan malaysia mexico netherlands poland portugal singapore south korea spain switzerland thailand turkey united kingdom united states manufacture faro quantum arm products manufacturing facility located switzerland customer orders europe middle east africa “emea” manufacturing facility located singapore customer orders asiapacific region manufacturing facility located florida customer orders americas manufacture faro focus laser scanner manufacturing facilities located germany switzerland customer orders emea asiapacific region manufacturing facility located pennsylvania customer orders americas manufacture faro laser tracker faro laser projector products facility located pennsylvania expect existing manufacturing facilities production capacity necessary support volume requirements 2021 account whollyowned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies reflected consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2020 2019 2018 executive summary covid19 impact business significantly vulnerable economic effects pandemics public health crises including ongoing covid19 pandemic surfaced virtually every country global operating footprint second third quarter 2020 experienced significant decline demand products services across served markets result impact spread covid19 although covid19 negatively impacted demand products services overall global pandemic also provided us opportunity adapt virtual environment capitalize existing virtual sales demonstration infrastructure place several years launched updated webbased learning system faro academy resulted increase attendance virtual training product information seminars customers take advantage opportunity remotely participate better understand capabilities products software offerings continue assess ongoing impact covid19 business results remain committed taking actions address health safety employees customers well negative effects demand disruption production impacts including limited following •operating business focus employee health safety includes minimizing travel remote work policies maintaining employee distancing enhanced sanitation facilities •monitoring liquidity reduction supply flows manufacturing facilities disciplined inventory management scrutinization capital expenditures •continuously reviewing financial strategy strengthen financial flexibility volatile financial markets continue maintain strong capital structure cash balance 1856 million debt december 31 2020 believe liquidity position adequate meet projected needs reasonably foreseeable future developments potential resurgence covid19 countries begun recover early impact pandemic actions taken governments response future resurgence highly uncertain able predicted determine extent covid19 outbreak continues impact company’s results operations financial conditions see item 1a risk factors included part annual report form 10k additional discussion risks related covid19 total sales decreased 780 million 204 3038 million year ended december 31 2020 3818 million year ended december 31 2019 product sales decreased 711 million 245 primarily due unfavorable impact end market demand softness related covid19 pandemic fluctuations market conditions service revenue decreased 69 million 75 primarily due unfavorable impact end market demand softness related covid19 pandemic also foreign exchange rates positive impact total sales 07 million decreasing percent overall sales declined approximately 02 percentage points primarily due strengthening euro relative us dollar change organizational structure segment reporting historically operated five verticals3d manufacturing construction building information modeling “construction bim” public safety forensics 3d design photonicsand three reporting segments3d manufacturing construction bim emerging verticals second half 2019 chief executive officer “ceo” faros management team formulated began implement new comprehensive strategic plan business strategic planning process included extensive conversations employees customers investors suppliers identify company provide sustained differentiated customer value opportunities existed improve operating efficiencies identified areas business needed enhanced focus change order improve efficiency cost structure part strategic plan reassessed redefined gotomarket strategy refocused marketing engagement customers reevaluated hardware software product portfolio examined key decisions made throughout global organization additionally focused organizational optimization efforts including simplification overly complex management structure part new strategic plan based recommendation ceo also chief operating decision maker “codm” fourth quarter 2019 eliminated vertical structure favor functional structure new executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 report one reporting segment develops manufactures markets supports sells suite 3d imaging software solutions addition reorganization company’s structure evaluated hardware software product portfolio operations certain recent acquisitions result evaluation simplified hardware software product portfolio divested photonics business 3d design related assets obtained acquisition optotech srl subsidiary open technologies srl collectively “open technologies” second quarter 2020 february 14 2020 board directors approved global restructuring plan “restructuring plan” supports strategic plan effort improve operating performance ensure appropriately structured resourced deliver sustainable value shareholders customers key activities restructuring plan targeted 40 million annualized savings realized fourth quarter 2020 include decreasing total headcount approximately 500 employees upon completion restructuring plan elimination vertical structure allowed us successfully complete redefined gotomarket strategy placed increased focus customers enabled sales employees supported talented pool field application engineers sell product lines globally new marketing leadership team focused efforts gaining increased understanding customer applications workflows enables valuebased product positioning optimizing customers total cost ownership strengthening understanding customer applications workflows continue develop highvalue solutions across product software platforms also marketing leadership team transformed lead generation process implemented technology provide sales organization higher quality leads optimizes time effort spent newly organized sales team continue focus organizational optimization improved decision making throughout company prior execution restructuring plan company strong geographic organizations decentralized decision making additionally previous vertical structure layered top geographic organization led overly complex costly management structure newly formed global functional organization enabled centralized management clear process ownership eliminating redundant resources increasing companys agility ability execute new strategic plan covid19 global pandemic made significant progress executing restructuring plan 2020 recorded pretax charge approximately 158 million year ended december 31 2020 primarily consisting severance related benefits professional fees related charges costs including noncash expense 04 million related disposal photonics business 3d design related assets reduction global workforce new cost structure allowed company maintain strong capital structure despite depressed sales levels primarily result covid19 pandemic time continuing evaluate future key activities additional charges originate estimate additional pretax charges 5 million 15 million fiscal year 2021 activities expected substantially completed end 2021 acquisition ats august 21 2020 acquired outstanding shares advanced technical solutions scandinavia ab “ats” swedish company focused 3d digital twin solution technology purchase price €51 million 60 million paid net cash acquired subject certain additional postclosing adjustments €10 million 12 million contingent consideration may earned former owners certain product development milestones met threeyear period us dollar amounts converted euros based foreign exchange rate effect closing date acquisition believe acquisition enables company provide high accuracy 3d digital twin simulations industries automotive aerospace results ats’s operations date acquisition included consolidated financial statements december 31 2020 presentation information reclassifications amounts reported millions within annual report form 10k computed based amounts thousands result sum components reported millions may equal total amount reported millions due rounding certain columns rows within tables follow may add due use rounded numbers percentages presented calculated based respective amounts thousands depreciation amortization expenses reported statements operations reflect departmental costs previously expenses reported separate line item operating expenses amounts related depreciation amortization expenses year ended december 31 2018 restated throughout annual report form 10k reflect reclassification depreciation amortization expenses conform current period presentation selling marketing expenses general administrative expenses reported accompanying statements operations together one line selling general administrative previously expenses reported two separate line items operating expenses amounts related selling general administrative expenses year ended december 31 2018 restated throughout annual report form 10k reflect reclassification selling general administrative expenses conform current period presentation software maintenance revenue reported accompanying statements operations component product sales previously revenues reported service sales amounts related software maintenance revenue year ended december 31 2018 restated throughout annual report form 10k reflect reclassification software maintenance revenue conform current period presentation software maintenance cost sales reported accompanying statements operations component product cost sales previously cost sales reported service cost sales amounts related software maintenance cost sales year ended december 31 2018 restated throughout annual report form 10k reflect reclassification software maintenance cost sales conform current period presentation results operations 2020 compared 2019 consolidated results sales total sales decreased 780 million 204 3038 million year ended december 31 2020 3818 million year ended december 31 2019 total product sales decreased 711 million 245 2186 million year ended december 31 2020 2897 million year ended december 31 2019 product sales decreased due unfavorable impact end market demand softness related covid19 pandemic fluctuations market conditions service sales decreased 69 million 75 852 million year ended december 31 2020 921 million year ended december 31 2019 primarily due unfavorable impact end market demand softness related covid19 pandemic fluctuations market conditions foreign exchange rates positive impact sales 07 million reducing overall sales decline approximately 02 percentage points primarily due strengthening euro relative us dollar gross profit gross profit decreased 383 million 193 1598 million year ended december 31 2020 1981 million year ended december 31 2019 gross margin increased 526 year ended december 31 2019 519 prior year period gross margin product revenue increased 08 percentage points 548 year ended december 31 2020 540 prior year period increase gross margin product revenue primarily due 2019 burdened 128 million increase reserve excess obsolete inventory recorded connection strategic decisions simplify hardware software product portfolio cease selling certain products gross margin service revenue increased 18 percentage points 471 year ended december 31 2020 453 prior year period primarily due reduction departmental costs result restructuring plan selling general administrative expenses selling general administrative “sga” expenses decreased 456 million 257 1318 million year ended december 31 2020 1774 million year ended december 31 2019 decrease driven primarily decreased salaries wages cost savings initiatives reduce nonpersonnel costs resulted restructuring plan additionally decrease selling commission expense travel expense driven reduced global sales pandemic stayathome orders respectively sga expenses percentage sales decreased 434 year ended december 31 2020 465 year ended december 31 2019 research development expenses research development expenses decreased 13 million 29 429 million year ended december 31 2020 442 million year ended december 31 2019 decrease mainly driven decrease purchased technology intangible amortization expense result impairment certain intangible assets connection restructuring plan research development expenses percentage sales increased 141 year ended december 31 2020 116 year ended december 31 2019 restructuring costs february 2020 initiated restructuring plan improve business effectiveness streamline operations achieve stated target cost level company whole restructuring costs included operating expenses year ended december 31 2020 158 million primarily consisting severance related benefits charges impairment loss result annual goodwill intangible asset impairment test performed prior year recorded impairment loss 352 million fourth quarter 2019 included 212 million goodwill 105 million intangible assets associated recent acquisitions 14 million intangible assets related capitalized patents 21 million asset writedowns similar impairments 2020 expense 01 million year ended december 31 2020 compared 24 million year ended december 31 2019 decrease primarily driven impairment charge related equity investment present4d gmbh “present4d” recorded second quarter 2019 impairment charge related note receivable due present4d recorded fourth quarter 2019 income tax benefit expense income tax benefit year ended december 31 2020 314 million compared income tax expense 11 million year ended december 31 2019 effective tax rate 1020 year ended december 31 2020 compared 19 year ended december 31 2019 change income tax benefit expense primarily due company completing intraentity transfer certain intellectual property rights “ip rights” resulted company establishing deferred tax asset benefit 192 million based fair value ip rights transferred december 2020 net income loss net income 06 million year ended december 31 2020 compared net loss 621 million year ended december 31 2019 reflecting impact factors described 2019 compared 2018 consolidated results sales total sales decreased 219 million 54 3818 million year ended december 31 2019 4036 million year ended december 31 2018 total product sales decreased 309 million 96 2897 million year ended december 31 2019 3206 million year ended december 31 2018 product sales decrease reflected lower unit sales primarily driven continuing softness many served markets particular softness automotive broader asian markets service sales increased 90 million 109 921 million year ended december 31 2019 830 million year ended december 31 2018 primarily due increase warranty customer service revenue driven growth global installed serviceable base focused sales initiatives maintain customer relationships purchase measurement devices foreign exchange rates negative impact sales 130 million decreasing overall sales approximately 32 primarily due weakening euro chinese yuan relative us dollar gross profit gross profit decreased 234 million 106 1981 million year ended december 31 2019 2216 million year ended december 31 2018 gross margin decreased 519 year ended december 31 2019 549 prior year period gross margin product revenue decreased 52 percentage points 540 year ended december 31 2019 592 prior year period decrease gross margin product revenue primarily due 128 million increase reserve excess obsolete inventory recorded fourth quarter 2019 connection strategic decisions simplify hardware software product portfolio cease selling certain products compared 47 million increase reserve excess obsolete inventory recorded 2018 gross margin service revenue increased 70 percentage points 453 year ended december 31 2019 383 prior year period primarily due leveraging effect higher warranty customer service revenue well improved efficiencies customer service repair process selling general administrative expenses selling general administrative “sga” expenses increased 77 million 45 1774 million year ended december 31 2019 1697 million year ended december 31 2018 increase driven primarily executive team transition costs including acceleration stockbased compensation expense related accelerated vesting stock options restricted stock units granted prior executive officers severance costs professional fees incurred related gsa matter increase compensation expenses related increased selling headcount partially offset lower commission expense due decrease product sales sga expenses percentage sales increased 465 year ended december 31 2019 420 year ended december 31 2018 research development expenses research development expenses decreased 19 million 41 442 million year ended december 31 2019 461 million year ended december 31 2018 decrease research development expenses mainly due decrease materials consulting costs well favorable changes foreign currencies us dollar strengthened euro decreased compensation cost foreign research development employees research development expenses percentage sales increased 116 year ended december 31 2019 114 year ended december 31 2018 impairment loss result annual goodwill intangible asset impairment test performed december 2019 recorded impairment loss 352 million fourth quarter 2019 included 212 million goodwill 105 million intangible assets associated recent acquisitions 14 million intangible assets related capitalized patents 21 million asset writedowns similar impairments 2018 expense 24 million year ended december 31 2019 compared 12 million year ended december 31 2018 increase primarily driven impairment charge related equity investment present4d gmbh “present4d” recorded second quarter 2019 impairment charge related note receivable due present4d recorded fourth quarter 2019 partially offset favorable adjustment contingent consideration liability prior year acquisition income tax expense benefit income tax expense year ended december 31 2019 11 million compared income tax benefit 04 million year ended december 31 2018 effective tax rate 19 year ended december 31 2019 compared 82 year ended december 31 2018 change income tax expense benefit primarily due 85 million income tax expense recorded year ended december 31 2019 resulting determination likely certain foreign deferred tax assets fully realized establishment valuation due history cumulative losses related jurisdictions additionally yearoveryear change income tax expense benefit effective tax rate partially due pretax book loss year ended december 31 2019 compared pretax book income year ended december 31 2018 well provisiontoreturn adjustments recorded 2019 2018 net loss income net loss 621 million year ended december 31 2019 compared net income 49 million year ended december 31 2018 reflecting impact factors described liquidity capital resources cash equivalents increased 520 million 1856 million december 31 2020 1336 million december 31 2019 cash flows operating activities provide primary source liquidity generated positive cash flows operations 214 million year ended december 31 2020 compared 325 million year ended december 31 2019 change mainly due decrease noncash adjustments reconcile net income offsetting increase due certain working capital reductions cash flows provided investing activities year ended december 31 2020 139 million compared cash flows used investing activities 93 million year ended december 31 2019 change primarily due proceeds sales investments 250 million year ended december 31 2020 compared activity year ended december 31 2019 cash flows provided financing activities years ended december 31 2020 december 31 2019 111 million 22 million respectively increase primarily driven higher proceeds issuance stock relating exercise stock options year ended december 31 2020 compared prior year decreased contingent consideration paid connection recent acquisitions year ended december 31 2020 cash equivalents 1192 million held foreign subsidiaries december 31 2020 december 22 2017 united states enacted us tax cuts jobs act resulting significant modifications existing law included transition tax mandatory deemed repatriation foreign earnings result us tax cuts jobs act company repatriate foreign earnings profits us minimal us income tax consequences transition tax global intangible lowtaxed income “gilti” tax company reinvested large portion undistributed foreign earnings profits acquisitions investments intends bring back portion foreign cash certain jurisdictions company subject local withholding taxes subject already transition tax gilti tax november 24 2008 board directors approved 300 million share repurchase program subsequently october 2015 board directors authorized increase existing share repurchase program 300 million 500 million december 2018 board directors authorized management utilize share repurchase program beginning january 1 2019 maintain number issued outstanding shares address dilutive impact stock options exercises settlement restricted stock units acquisitions share repurchase program may made time prevailing prices permitted securities laws legal requirements subject market conditions factors program share repurchase program may discontinued time expiration date restriction governing period repurchase shares program made stock repurchases years ended december 31 2020 2019 2018 program december 31 2020 authorization repurchase 183 million 500 million authorized board directors existing share repurchase program believe working capital anticipated cash flow operations sufficient fund longterm liquidity operating requirements least next 12 months offbalance sheet arrangements contractual obligations commercial commitments party capital leases equipment initial term 36 60 months noncancellable operating leases obligations presented december 31 2020 dollars thousands enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2020 approximately 442 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions also 09 million longterm commitments purchases delivered 12 months fourth quarter 2017 recorded provisional amount 174 million related increase taxes payable pursuant us tax cuts jobs act associated mandatory deemed repatriation earnings foreign subsidiaries transition tax fourth quarter 2018 decreased provisional estimate onetime transition tax 28 million upon completing analysis earnings profits foreign subsidiaries utilization foreign tax credits 18 million decrease related change deferred tax assets 10 million income tax benefit recorded fourth quarter 2018 made first three transition tax payments 2018 2019 2020 pay remaining liability next five years obligations included table primarily represent estimated payments due acquisition related earnouts 11 million inflation material impact results operations recent years expect inflation material impact operations 2021 critical accounting policies preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities base estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made management may estimates assumptions reasonable believe given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response secs financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment business combinations stockbased compensation policies affect current assets current liabilities operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could adverse impact operating results financial position revenue recognition arrangements multiple performance obligations represent promises within arrangement capable distinct allocate revenue distinct performance obligations based relative standalone selling prices “ssp” available use observable prices determine ssp observable prices available ssps established reflect best estimates selling prices performance obligations would sold regularly standalone basis revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customers location determined agreed upon shipping terms time entitled payment title control passed customer fees billed customers associated distribution products classified revenue generally warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped support product lines also sell hardware service contracts typically range one year three years hardware service contract revenues recognized straightline basis term contract costs relating hardware service contracts recognized incurred revenue sales software recognized significant production modification customization software required risks rewards ownership passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based software maintenance contract renewals software maintenance contracts sold recognized straightline basis term contract revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services payment products services collected within short period time following transfer control commencement delivery services applicable revenues presented net salesrelated taxes reserve excess obsolete inventory value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 firstin firstout cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain establish provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described fasb asc topic 740 tax position likely sustained upon examination applicable taxing authority ordinary course business examined various federal state foreign tax authorities regularly assess potential outcome examinations future examinations current prior years determining adequacy provision income taxes assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties establish time sale liability oneyear warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist ie likely fair value reporting unit less carrying value determine carrying value recorded goodwill indefinite lived intangible assets impaired period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform quantitative goodwill impairment test perform quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value impair goodwill excess amount reporting unit compared fair value reduced zero management concluded goodwill impairment years ended december 31 2020 2018 however 2019 result test historical reporting unit structure estimated fair value photonics reporting unit included goodwill recognized instrument associates llc dba nutfield technology “nutfield” laser control systems limited “laser control systems” lanmark controls inc “lanmark” acquisitions 3d design reporting unit included goodwill recognized acquisition optotech srl subsidiary open technologies srl collectively “open technologies” determined significantly less carrying value reporting unit indicating full impairment driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan business combinations allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates critical estimates also made valuing earnouts represent arrangements pay former owners based satisfaction performance criteria fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available stockbased compensation measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock restricted stock units performancebased awards granted directors employees fair value stock options including performance awards without market condition determined using blackscholes option valuation model fair value restricted stock units stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant elect account forfeitures related service conditionbased awards occur expense stockbased compensation stock options restricted stock awards restricted stock units performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance condition furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive also beginning october 2018 nonemployee directors may elect annual cash retainers annual equity retainers paid form deferred stock units pursuant 2014 equity incentive plan 2018 nonemployee director deferred compensation plan deferred stock unit represents right receive one share common stock upon nonemployee directors separation service company record compensation cost associated deferred stock units period service impact recently adopted accounting standards february 2016 fasb issued accounting standards update “asu” 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201811 leases topic 842 targeted improvements issued fasb july 2018 allows cumulativeeffect adjustment transition method adoption adopted asu 201602 effective january 1 2019 utilizing cumulativeeffect adjustment transition method adoption resulted recognition consolidated balance sheet december 31 2019 184 million rightofuse assets operating leases 196 million lease liability operating leases 08 million property equipment net finance leases 08 million lease liability finance leases function lessee elected certain practical expedients available transition provisions allow aggregation nonlease components related lease components evaluating accounting treatment ii apply modified retrospective adoption method utilizing simplified transition option allows us continue apply legacy guidance fasb asc topic 840 including disclosure requirements comparative periods presented year adoption iii use hindsight determining lease term considering options extend terminate lease purchase underlying asset assessing impairment rightofuse assets adoption asu 201602 also required us include initial direct costs incremental costs would incurred lease obtained rightofuse assets recognition costs connection adoption guidance material impact consolidated financial statements january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment adopted guidance connection annual impairment test fiscal year ended december 31 2019 adoption guidance material impact consolidated financial statements june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments “asu 201613” requires measurement recognition expected credit losses financial assets held amortized cost asu 201613 subsequent related amendments asu 201613 replace existing incurred loss impairment model expected loss model requires use forwardlooking information calculate credit loss estimates also eliminates concept otherthantemporary impairment requires credit losses related availableforsale debt securities recorded allowance credit losses rather reduction amortized cost basis securities changes result earlier recognition credit losses adopted asu 201613 effective january 1 2020 adoption new guidance material impact consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included elsewhere document overview company designs develops markets supports portable software driven 3d measurement systems used broad range manufacturing industrial applications companys principal products faroarmr articulated measuring device control station multi faceted cam2 software provides cadbased inspection portable fixedbase cmms factorylevel statistical process control together products integrate measurement quality inspection function cad cam computeraided engineering cae technology improve productivity enhance product quality decrease rework scrap manufacturing process companys products bring precision measurement quality inspection specification conformance capabilities integrated leading cad software factory floor company pioneer development marketing 3d measurement technology manufacturing industrial applications currently holds pending 29 patents united states 17 also held pending jurisdictions companys products purchased 2300 customers worldwide ranging small machine shops large manufacturing industrial companies audi boeing british aerospace caterpillar daimlerchrysler general electric general motors honda johnson controls komatsu dresser lockheed martin siemens volkswagen inception 1982 1992 company focused providing computerized 3d measurement devices orthopedic neurosurgical markets period company introduced knee laxity measurement device diagnostic tool measuring posture scoliosis back flexibility surgical guidance device utilizing sixaxis articulated arm 1992 effort capitalize demand 3d portable measurement tools factory floor company made strategic decision target core measurement technology manufacturing industrial markets order focus manufacturing industrial applications technology company phased direct sale medical products entered licensing agreements two major neurosurgical companies medical technology 1995 company made strategic decision target international markets company established sales offices france germany 1996 great britain 1997 japan spain 2000 international sales represented 506 466 464 sales 2000 1999 1998 respectively company derives revenues primarily sale faroarmr sixaxis articulated measuring device multifaceted cam2 software revenue related companys 3d measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportion maintenance costs projected incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred december 1999 securities exchange commission issued staff accounting bulletin 101 summarizing views applying generally accepted accounting principles revenue recognition financial statements companys policy revenue recognition consistent bulletin revenue growth resulted increased unit sales due expanded sales effort included addition sales personnel existing offices opening new sales offices expanded promotional efforts include multilingual web site company demo cd 2000 company introduced control station softcheck tools new accessory items faro rail faro powerhouse new versions members cam2 software family addition providing oneyear basic warranty without additional charge company offers customers one two threeyear extended maintenance contracts include online help services software upgrades hardware warranties addition company sells training technology consulting services relating products cost sales consists primarily material production overhead labor selling expenses consist primarily salaries commissions sales marketing personnel promotion advertising travel telecommunications general administrative expenses consist primarily salaries administrative personnel rent utilities professional legal expenses research development expenses represent salaries equipment thirdparty services accounting wholly owned foreign subsidiaries maintained currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected companys consolidated financial statements although company historically engaged hedging transactions limit risks currency fluctuations intends future results operations following table sets forth periods presented percentage sales represented certain items companys consolidated statements operations 2000 compared 1999 sales increased 73 million 222 331 million 1999 405 million 2000 increase resulted increases us 23 million 131 177 million 200 million europe 35 million 328 106 million 141 million remainder world increase 16 million 323 48 million 64 million increase primarily resulted higher product unit sales geographic regions partially offset effect stronger us dollar 2000 approximately 18 million gross profit gross profit increased 68 million 357 189 million 1999 257 million 2000 gross margin increased 635 2000 572 1999 increase gross margin primarily result cost reductions computer hardware software products 2000 partially offset effect stronger us dollar selling expenses selling expenses increased 19 million 156 121 million 1999 140 million 2000 increase primarily result higher selling expenses united states 11 million europe 12 million principally result higher compensation marketing expenses offset part effect stronger us dollar 2000 approximately 550000 general administrative expenses general administrative expenses increased 8 million 159 50 million 1999 58 million 2000 increase due increases across many categories us 07 million europe 01 million offset part effect stronger us dollar 2000 approximately 150000 depreciation amortization expenses depreciation amortization expenses decreased 15 million 344 45 million 1999 29 million 2000 decrease primarily resulted 31 million impairment loss acquired intangible assets end 1999 reduced amount acquired intangible assets amortized offset part depreciation assets acquired 2000 research development expenses research development expenses decreased 300000 73 38 million 1999 35 million 2000 decrease due decreases across many expense categories united states 02 million effect stronger us dollar 2000 01 million european expenses offset part increase local currency across many categories europe 01 million employee stock option expenses employee stock option expenses decreased 46000 269 169000 1999 123000 2000 decrease result reduction amortized deferred compensation expense related stock options issued 1995 1997 options issued 2000 1999 compensation expense recorded exercise price options equal market price day grant impairment loss acquired intangible assets unusual impairment loss 31 million recorded 1999 reflect impairment intangible assets resulting german acquisition may 15 1998 impairment resulted companys revised forecast cash flows expected developed core technology acquired german acquisition interest income interest income increased 144000 716000 1999 860000 2000 increase primarily attributable higher average yields interestearning cash equivalents investments held higher average principal amounts invested 2000 see liquidity capital resources income decreased 173000 475000 1999 302000 2000 decrease resulted principally foreign exchange losses 2000 income tax expense benefit income tax expense benefit increased 15 million benefit 11 million 1999 expense 04 million 2000 tax expense resulted companys us operations taxable earnings 2000 german federal tax benefit 65 million offset 2000 valuation allowance related german acquisition 1998 december 31 2000 companys foreign subsidiaries deferred tax assets relating net operating loss carryforwards expire intangible assets 34 million 31 million respectively net income loss companys net income loss increased 74 million loss 74 million 1999 net income 40000 2000 due factors mentioned 1999 compared 1998 sales increased 56 million 204 275 million 1998 331 million 1999 increase resulted increases us 30 million 204 147 million 177 million europe 21 million 247 85 million 106 million remainder world increase 05 million 116 43 million 48 million gross profit gross profit increased 27 million 167 162 million 1998 189 million 1999 increase resulted increase sales partially offset unusual charges 06 million related excess obsolete inventory 05 million warranties 01 million excluding unusual charges gross profit 195 million 589 gross margin percentage 1998 selling expenses selling expenses increased 21 million 210 100 million 1998 121 million 1999 increase primarily resulted selling expenses germany increased 14 million full year expenses 1999 german acquisition compared seven half months 1998 increase number sales marketing employees europe selling expenses also increased 04 million resulting unusual writedown demonstration inventory identified thorough worldwide physical inventory us salaries commissions advertising trade shows also increased partially offset lower spending promotions general administrative expenses general administrative expenses increased 18 million 563 32 million 1998 50 million 1999 increase primarily resulted general administrative expenses germany increased 11 million full year expenses 1999 compared seven half months 1998 general administrative expenses also increased due higher salaries outside services professional legal expenses unusual third quarter charges 02 million primarily writeoffs doubtful accounts residual costs related german acquisition partially offset lower bonuses 01 million unusual adjustments depreciation amortization expenses depreciation amortization expenses increased 17 million 607 28 million 1998 45 million 1999 increase primarily resulted 10 million unusual expenses 07 million amortization software development costs 02 million depreciation property equipment 01 million amortization patents remaining economic value unusual expenses resulted review companys assets determined certain patents capitalized research development costs written due changes technology additionally full year amortization intangible assets resulting german acquisition increased amortization expense 1999 03 million research development expenses research development expenses increased 12 million 462 26 million 1998 38 million 1999 increase primarily resulted increase number us research development employees 06 million full year research development expenses germany 1999 compared seven half months expenses 1998 04 million unusual charge 02 million write capitalized research development costs products longer sold company employee stock option expenses employee stock option expenses decreased 3000 17 172000 1998 169000 1999 decrease result reduction amortized deferred compensation expense related stock options issued 1995 1997 options issued 1999 compensation expense recorded exercise price options equal market price day grant impairment loss acquired intangible assets unusual impairment loss 31 million recorded 1999 reflect impairment intangible assets resulting german acquisition may 15 1998 impairment resulted companys revised forecast cash flows expected developed core technology acquired german acquisition income increased 04 million 4000 01 million 1998 05 million 1999 increase resulted principally increase royalty income increase licensing fees companys medical technologies 1999 interest income interest income decreased 04 million 364 11 million 1998 07 million 1999 decrease primarily resulted reduction companys cash invested acquisition german company reduced companys cash invested twelve months 1999 seven half months 1998 addition cash invested loweryielding tax exempt municipal bonds 1999 income tax benefit expense income tax benefit increased 16 million 05 million expense 1998 11 million benefit 1999 benefit resulted companys us operations taxable loss deferred tax benefit companys foreign loss including impairment loss offset 31 million valuation allowance net loss companys net loss increased 25 million 510 49 million 1998 74 million 1999 increase resulted primarily unusual impairment loss acquired intangible assets 31 million offsetting tax benefit intangible assets resulting acquisition germany unusual operating charges 23 million higher recurring general administrative research development expenses percentage sales also contributed higher net loss partially offset 16 million increase income tax benefit net loss includes 25 million amortization intangibles related german acquisition increase 03 million 1998 liquidity capital resources september 1997 company completed initial public offering common stock provided net proceeds 317 million total marketable securities cash equivalents shortterm investments december 31 2000 190 million compared 167 million december 31 1999 year ended december 31 2000 net cash provided operating activities 47 million compared 14 million 1999 net cash provided operating activities net foreign exchange effects increased primarily due improved operational results 2000 net cash excluding shortterm investments used investing activities year ended december 31 2000 31 million compared net cash provided investing activities 53 million 1999 net cash used investing activities 2000 primarily due net increase shortterm investments 2000 732000 increases notes receivable 10 million see note 2 notes consolidated financial statements contained item 8 herein purchases property equipment 12 million net cash provided financing activities year ended december 31 2000 11000 compared net cash used 282000 1999 company invests excess cash balances shortterm investment grade securities money market investments obligations us government agencies obligations state local government agencies currency exchange rate changes resulted 161000 reduction companys reported cash december 31 2000 companys principal commitments december 31 2000 consisted leases headquarters regional sales offices material commitments capital expenditures date company believes cash investments cash flows operations sufficient satisfy working capital expenditure needs least 2001 foreign exchange exposure sales outside united states represent significant portion companys total revenues present majority companys revenues expenses invoiced paid us dollars future company expects greater portion revenues denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect companys business results operations financial condition could specifically result foreign exchange losses impact future exchange rate fluctuations results companys operations cannot accurately predicted extent percentage companys nonus dollar revenues derived international sales increases future companys exposure risks associated fluctuations foreign exchange rates increase historically company hedged risks associated fluctuations exchange rates company present evaluating exposure may use foreign exchange contracts andor foreign currency options hedge risks future inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2001 conversion euro currency january 1 1999 certain member countries european union established fixed conversion rates existing currencies european unions common currency euro transition period introduction euro ends june 30 2002 transition period certain member countries european union expected adopt euro national currency issues facing company result introduction euro include converting information technology systems reassessing currency risk amending lease agreements contracts processing tax accounting records company addressing issues expect euro material effect companys financial condition results operations implementation sab 101 securities exchange commission sec issued staff accounting bulletin sab 101 revenue recognition financial statements december 1999 sab summarizes certain sec staffs views applying generally accepted accounting principles revenue recognition financial statements fourth quarter 2000 company performed comprehensive review revenue recognition policies determined compliance sab 101 item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included part ii item 8 annual report form 10k overview company designs develops manufactures markets supports portable software driven 3d measurement imaging systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro laser scanarm faro gage articulated measuring devices faro laser tracker vantage faro focus3d faro 3d imager amp companion cam2 software systems provide cadbased inspection highdensity surveying applications together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company derives revenues primarily sale measurement equipment related multifaceted cam2 software programs revenue related products generally recognized upon shipment addition company sells one threeyear extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis revenue training technology consulting services provided company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices france germany great britain japan spain italy turkey china india poland netherlands malaysia thailand singapore vietnam company manages reports global sales three regions americas europeafrica asiapacific company manufactures faroarm faro gage faro 3d imager amp faro laser tracker vantage products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro focus3d product facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2013 company accounts wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2012 2011 2010 company profitable quarter years ended december 31 2012 december 31 2011 december 31 2010 company incurred net loss year ended december 31 2009 primarily result decrease product sales company attributes decrease product sales principally decline global economy prior 2009 company history sales earnings growth 26 consecutive profitable quarters december 31 2008 historical sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro edge arm faro focus3d effect acquisitions however company’s historical financial performance indicative future financial performance results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2012 compared 2011 sales total sales increased 192 million 76 2734 million year ended december 31 2012 2542 million year ended december 31 2011 increase resulted primarily increase worldwide demand products weaker euro relative us dollar average resulted lower sales approximately 74 million year ended december 31 2012 sales denominated euros translated us dollars product sales increased 153 million 72 2279 million year ended december 31 2012 2126 million year ended december 31 2011 service revenue increased 39 million 95 455 million year ended december 31 2012 416 million year ended december 31 2011 sales americas region increased 111 million 114 1086 million year ended december 31 2012 975 million prior year period product sales americas region increased 90 million 113 890 million year ended december 31 2012 800 million prior year service revenue americas region increased 21 million 121 196 million year ended december 31 2012 175 million prior year primarily due increase warranty revenue sales europeafrica region increased 05 million 05 1001 million year ended december 31 2012 996 million year ended december 31 2011 product sales europeafrica region decreased 02 million 02 831 million year ended december 31 2012 833 million prior year service revenue europeafrica region increased 07 million 45 170 million year ended december 31 2012 163 million prior year primarily due increase warranty revenue sales asiapacific region increased 76 million 133 647 million year ended december 31 2012 571 million year ended december 31 2011 product sales asiapacific region increased 65 million 130 558 million year ended december 31 2012 493 million prior year service revenue asiapacific region increased 11 million 144 89 million year ended december 31 2012 78 million period prior year primarily due increase warranty revenue gross profit gross profit increased 59 million 41 1496 million year ended december 31 2012 1437 million year ended december 31 2011 gross margin decreased 547 year ended december 31 2011 565 year ended december 31 2011 decrease gross margin primarily due decrease gross margin product sales 587 year ended december 31 2012 612 prior year primarily result lower average selling prices change sales mix caused increase sales laser scanner product lower gross margin increase sales mix laser scanner product sold distributors gross margin service revenues increased 348 year ended december 31 2012 compared 324 prior year selling expenses selling expenses increased 23 million 37 644 million year ended december 31 2012 621 million year ended december 31 2011 increase primarily due increase commissions compensation expense 08 million increase marketing advertising expenses 06 million increase travel expenses 07 million worldwide sales marketing headcount increased 38 116 365 december 31 2012 327 december 31 2011 regionally company’s sales marketing headcount increased 18 200 108 december 31 2012 90 december 31 2011 americas increased 10 88 123 december 31 2012 113 december 31 2011 europeafrica increased 10 81 asiapacific 134 december 31 2012 124 december 31 2011 percentage sales selling expenses decreased 236 sales year ended december 31 2012 244 sales year ended december 31 2011 regionally selling expenses 200 sales americas year ended december 31 2012 compared 205 sales year ended december 31 2011 264 sales europeafrica year ended december 31 2012 compared 281 sales prior year 251 sales asiapacific year ended december 31 2012 compared 249 sales prior year general administrative expenses general administrative expenses increased 23 million 291 million 84 year ended december 31 2012 268 million year ended december 31 2011 primarily due increase 10 million related fcpa monitor increase legal professional fees related patent litigation 14 million general administrative expenses percentage sales increased 106 year ended december 31 2012 105 year ended december 31 2011 depreciation amortization expenses depreciation amortization expenses increased 03 million 70 million year ended december 31 2012 67 million year ended december 31 2011 result increase property equipment intangible assets research development expenses research development expenses increased 24 million 157 176 million year ended december 31 2012 152 million year ended december 31 2011 primarily due increase compensation 17 million subcontractor expenses 09 million offset expenses 03 million incurred prior year period related closing relocation rd facility andover existing facility kennett square pa research development expenses percentage sales increased 64 year ended december 31 2012 60 year ended december 31 2011 income expense net income expense net decreased 06 million 06 million expense year ended december 31 2012 expense 12 million year ended december 31 2011 primarily result decrease foreign exchange transaction losses due effects changes foreign exchange rates value intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense decreased 04 million 79 million year ended december 31 2012 83 million year ended december 31 2011 primarily due decrease pretax income company’s effective tax rate decreased 257 year ended december 31 2012 compared 263 year ended december 31 2011 included reduction income tax rates 15 16 related tax benefit exercise employee stock options years ended december 31 2012 2011 respectively company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 04 million 230 million year ended december 31 2012 234 million year ended december 31 2011 result factors described 2011 compared 2010 sales total sales increased 624 million 326 2542 million year ended december 31 2011 1918 million year ended december 31 2010 increase resulted primarily increase worldwide demand products recovery global economy product sales increased 553 million 352 2126 million year ended december 31 2011 1573 million year ended december 31 2010 service revenue increased 71 million 206 416 million year ended december 31 2011 345 million year ended december 31 2010 sales americas region increased 251 million 347 975 million year ended december 31 2011 724 million prior year period product sales americas region increased 231 million 407 800 million year ended december 31 2011 569 million prior year service revenue americas region increased 20 million 126 175 million year ended december 31 2011 155 million prior year primarily due increase customer service revenue sales europeafrica region increased 249 million 332 996 million year ended december 31 2011 747 million year ended december 31 2010 product sales europeafrica region increased 214 million 345 833 million year ended december 31 2011 619 million prior year service revenue europeafrica region increased 35 million 272 163 million year ended december 31 2011 128 million prior year primarily due increase customer service revenue sales asiapacific region increased 124 million 279 571 million year ended december 31 2011 447 million year ended december 31 2010 product sales asiapacific region increased 108 million 280 493 million year ended december 31 2011 385 million prior year service revenue asiapacific region increased 16 million 268 78 million year ended december 31 2011 62 million period prior year primarily due increase warranty revenue gross profit gross profit increased 303 million 267 1437 million year ended december 31 2011 1134 million year ended december 31 2010 gross margin decreased 565 year ended december 31 2011 591 year ended december 31 2010 decrease gross margin primarily due decrease gross margin product sales 612 year ended december 31 2011 653 prior year primarily result change historical product sales mix caused increase sales new laser scanner product currently lower gross margin gross margin service revenues increased 324 year ended december 31 2011 compared 309 prior year selling expenses selling expenses increased 114 million 226 621 million year ended december 31 2011 507 million year ended december 31 2010 increase primarily due increase commissions compensation expense 88 million increase marketing advertising expenses 17 million increase travel expenses 15 million worldwide sales marketing headcount increased 27 90 327 december 31 2011 300 december 31 2010 regionally company’s sales marketing headcount increased 9 111 90 december 31 2011 81 december 31 2010 americas increased 2 18 113 december 31 2011 111 december 31 2010 europeafrica increased 16 148 asiapacific 124 december 31 2011 108 december 31 2010 percentage sales selling expenses decreased 244 sales year ended december 31 2011 264 sales year ended december 31 2010 regionally selling expenses 205 sales americas year ended december 31 2011 compared 219 sales year ended december 31 2010 281 sales europeafrica year ended december 31 2011 compared 301 sales prior year 249 sales asiapacific year ended december 31 2011 compared 275 sales prior year general administrative expenses general administrative expenses remained flat 268 million years ended december 31 2011 december 31 2010 increases compensation costs 17 million increases recruiting relocation costs 03 million offset decreases 10 million bad debt expenses decreases 04 million related fcpa monitor decrease legal professional fees related patent litigation 06 million general administrative expenses percentage sales decreased 105 year ended december 31 2011 140 year ended december 31 2010 depreciation amortization expenses depreciation amortization expenses increased 04 million 67 million year ended december 31 2011 63 million year ended december 31 2010 result increase property equipment intangible assets research development expenses research development expenses increased 25 million 197 152 million year ended december 31 2011 127 million year ended december 31 2010 primarily due increase compensation 19 million subcontractor expenses 06 million expenses 04 million related closing relocation rd facility andover existing facility kennett square pa research development expenses percentage sales decreased 60 year ended december 31 2011 66 year ended december 31 2010 income expense net income expense net decreased 16 million 12 million expense year ended december 31 2011 expense 28 million year ended december 31 2010 primarily result decrease foreign exchange transaction losses due effects changes foreign exchange rates value intercompany account balances company’s subsidiaries denominated different currencies income tax expense income tax expense increased 52 million 83 million year ended december 31 2011 31 million year ended december 31 2010 primarily due increase pretax income company’s effective tax rate increased 263 year ended december 31 2011 compared 221 year ended december 31 2010 primarily due release valuation allowance approximately 12 million year ended december 31 2010 related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction total deferred tax assets company’s foreign subsidiaries relating net operating loss carryforwards 149 million 141 million december 31 2011 2010 respectively related valuation allowance 118 million 111 million december 31 2011 2010 respectively net income net income increased 123 million 234 million year ended december 31 2011 111 million year ended december 31 2010 result factors described liquidity capital resources cash equivalents increased 287 million 932 million december 31 2012 645 million december 31 2011 increase primarily attributable net income noncash expenses 320 million proceeds stock option exercises 62 million partially offset increase working capital 29 million 52 million purchases equipment intangible assets july 11 2006 company entered loan agreement providing available line credit 300 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2012 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended expires march 31 2015 company drawn line credit december 21 2012 company filed registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units proposed maximum aggregate offering price 250 million registration statement declared effective january 7 2013 proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes company believes working capital anticipated cash flow operations credit facility sufficient fund longterm liquidity requirements foreseeable future company balance sheet arrangements contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2012 thousands faro consolidated contractual obligations year ended december 31 2012 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days company 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation material impact company’s results operations recent years company expect inflation material impact operations 2013 critical accounting policies preparation company’s consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment policies affect current assets operating results therefore critical assessing company’s financial operating condition policies involve certain assumptions incorrect could adverse impact company’s operations financial position revenue recognition revenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process complete shipping date revenue sales software recognized significant production modification customization software required persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s historical technology medical applications recognized technology used licensees reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred tax assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company establishes provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described asc 740 tax position likely sustained upon examination applicable taxing authority ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes company assesses likelihood amount potential adjustments adjusts income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties company establishes time sale liability oneyear warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test company believes result qualitative assessment likely fair value reporting unit less carrying amount first second steps goodwill impairment test unnecessary company elected early adopt accounting guidance beginning fourth quarter 2011 prospective basis goodwill impairment tests necessary result qualitative assessment goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2012 2011 2010 impact recently issued accounting standards june 2011 financial accounting standards board “fasb” issued accounting standards update “asu” 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 requires companies present components net income comprehensive income either one continuous statement two consecutive statements eliminates option present components comprehensive income part changes shareholders’ equity standard change items must reported comprehensive income items measured must reclassified net income company elected present components net income comprehensive income two consecutive statements asu 201105 effective interim annual periods beginning december 15 2011 adoption asu 201105 quarter ended march 31 2012 subsequent periods impacted presentation effect company’s consolidated financial statements financial condition december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 “asu 201112” asu 201112 defers specific requirement present items reclassified accumulated comprehensive income net income separately respective components net income comprehensive income part update fasb defer requirement report comprehensive income either single continuous statement two separate consecutive financial statements february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income “asu 201203” effective reporting periods beginning december 15 2012 specific requirements asu 201302 expected impact company’s consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations following information read conjunction consolidated financial statements including notes thereto included part ii item 8 annual report form 10k overview design develop manufacture market support software driven threedimensional 3d measurement imaging realization systems technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage applications faroarm® faro laser scanarm® faro gage® faro laser trackertm faro laser projector faro cobalt array imager companion cam2® buildit software solutions provide computeraided design cad based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications factory metrology vertical faro focus faro scanner freestyle3dx laser scanners companion scene faro pointsense faro public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications construction building information modeling construction information management “construction bimcim” public safety forensics verticals faro laser scanarm® faro cobalt array imager faro scanner freestyle3dx laser scanners companion scene software also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle supporting product design vertical faro visual inspecttm enables large complex 3d cad data transferred tablet device used mobile visualization comparison real world conditions facilitating inprocess inspection assembly guidance positioning applications factory metrology construction bimcim verticals derive revenues primarily sale measurement equipment related multifaceted software programs revenue related products generally recognized upon shipment addition sell extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis term warranty revenue training technology consulting services provided operate international markets throughout world maintain sales offices australia brazil canada china france germany india italy japan malaysia mexico netherlands poland portugal singapore south korea spain switzerland thailand turkey united kingdom united states vietnam manufacture faroarm® faro laser scanarm® faro gage® faro laser trackertm products manufacturing facility located switzerland customer orders emea region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas manufacture faro focus faro scanner freestyle3dx products facilities located germany switzerland manufacture faro laser projection products facility located pennsylvania expect existing plants production capacity necessary support volume requirements 2017 account wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies reflected condensed consolidated financial statements aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2016 2015 2014 executive summary total sales 2016 increased 81 million 25 3256 million year ended december 31 2016 3175 million year ended december 31 2015 increase reflected improved service revenue compared prior year offset decrease product sales 2016 initiated broadreaching renewal faro drive sales growth increase operating efficiencies several key initiatives include global reorganization 2016 reorganized business align sales marketing product management rd specific vertical markets better define end market applications believe realignment enable us focus product offerings selling approach meet specific needs customers result reorganization realigned business following three reporting segments incorporate specific vertical markets ◦ factory metrology provides solutions manual automated measurement inspection industrial manufacturing environment applications include alignment part inspection dimensional analysis first article inspection incoming inprocess inspection machine calibration noncontact inspection robot calibration tool building set assembly guidance ◦ construction bimcim provides solutions asbuilt data capturing 3d visualization building information modeling construction information management applications allowing customers architecture engineering construction markets quickly accurately extract desired 2d 3d measurement points applications include asbuild documentation construction monitoring surveying asset facility management heritage preservation ◦ segment includes product design public safety forensics 3d solutions vertical organizations ▪ product design provides advanced 3d solutions assist engineering design movable object enabling fully digital workflow applications include reverse engineering virtual simulation ▪ public safety forensics provides solutions public safety officials professionals capture environmental situational scenes 2d 3d crime crash fire scene investigations environmental safety evaluations ▪ 3d solutions provides solutions customers require customized 3d measurement realization solutions otherwise addressed offtheshelf product offerings prior period presentations throughout annual report form 10k restated reflect change reporting segments product innovation 2016 launched several new products including ◦ faro focuss laser scanner new laser scanner includes increased measurement range accessory bay customer addon devices features safeguards intrusions dirt dust outdoor elements ◦ faro cobalt array imager faro cobalt array imager next generation faro imager product offering replacing faro 3d imager amp faro cobalt array imager metrologygrade noncontact scanner utilizes blue light technology capture millions high resolution 3d coordinate measurements seconds faro cobalt’s versatility supports variety deployment options including rotary table robot industrial inspection cells multiple imager arrays technology used quality control improve product quality reduce scrap well reverse engineering rapid manufacturing ◦ faro vantagee addition vantage laser tracker product line includes wellproven features capabilities highspeed dynamic measurement affordable price customers demand high performance working shorttomedium range applications acquisitions 2016 acquired ◦ buildit software solutions ltd “buildit” located montreal canada buildit specializes processconfigurable 3d metrology software solutions hardware agnostic interfaces acquisition enhances factory metrology portfolio providing customers greater software options use variety applications reduce inspection assembly times increase productivity ◦ laser projection technologies inc “lpt” located londonderry new hampshire lpt specializes laser projection measurement systems used throughout manufacturing environments around globe maximize productivity efficiency acquisition enhances portfolio 3d measurement solutions supports longterm strategy expand presence key markets ◦ mwftechnology gmbh “mwf” located near frankfurt germany mwf innovator mobile augmented reality solutions breakthrough technology enables large complex 3d cad data transferred tablet device used mobile visualization comparison real world conditions enables real time actionable manufacturing insight inprocess inspection assembly guidance positioning sales modernization support future growth modernized sales process leveraging current direct sales approach onsite demonstrations multimedia webbased demonstrations cloudbased customer relations development global harmonization reorganized functions processes people harmonized global mindset historically regional business structure reorganization expected increase operating efficiency harmonizing global manufacturing business support functions including among items implementation uniform sales terms conditions global demonstration service loaner inventory management global human resources information system hris continue drive initiatives though 2017 fiscal year achieve longterm growth profitability ability fully implement initiatives reorganize business around certain vertical markets modernize sales processes improve efficiency sales organization accelerate maintain consistent schedule new product introductions harmonize global functions improve operational effectiveness dependent upon number factors including continued improvements new erp system continued development products maintain technological advantage retention key employees results operations 2016 compared 2015 consolidated results sales total sales increased 81 million 25 3256 million year ended december 31 2016 3175 million year ended december 31 2015 sales increase primarily driven higher service revenue modest increase average selling prices partially offset decrease product sales total product sales decreased 38 million 15 2560 million year ended december 31 2016 2598 million year ended december 31 2015 product sales decrease reflected decline unit sales partially offset increase average selling prices products service revenue increased 119 million 206 696 million year ended december 31 2016 577 million year ended december 31 2015 primarily due increase warranty customer service revenue driven growth installed serviceable base focused sales initiatives foreign exchange rates slightly negative impact sales 18 million decreasing overall sales growth 06 percentage points primarily due decline british pound sterling chinese yuan renminbi relative us dollar gross profit gross profit increased 108 million 64 1780 million year ended december 31 2016 1672 million year ended december 31 2015 gross margin increased 547 year ended december 31 2016 527 prior year period gross margin product revenue increased 18 percentage points 578 year ended december 31 2016 560 prior year period increase primarily due higher average selling prices products lower writedown inventory partially offset increased sales service demonstration inventory results lower gross margins gross margin service revenue increased 55 percentage points 430 year ended december 31 2016 375 prior year period primarily due higher warranty customer service revenue selling marketing expenses selling marketing expenses virtually flat yearoveryear result increased compensation expenses reflecting higher headcount higher incentive compensation higher base salaries change commission structure well higher recruitingrelated expense almost entirely offset lower costs resulting holding annual sales meeting 2016 decrease commissions due lower product sales change commission structure selling marketing expenses percentage sales 245 year ended december 31 2016 compared 251 year ended december 31 2015 selling headcount key driver sales growth look selling headcount two perspectives actual periodending headcount timeweighted average experienced headcount refer full time experienced “fte” headcount trailing four quarters determine selling fte headcount discount first year new employee experience factor better correlate sales effectiveness headcount weight number months employed fulltime parttime basis worldwide selling actual periodending headcount increased 85 188 536 december 31 2016 451 december 31 2015 selling fte headcount increased 29 63 486 december 31 2016 457 december 31 2015 general administrative expenses general administrative expenses increased 44 million 122 408 million year ended december 31 2016 364 million year ended december 31 2015 increase general administrative expenses primarily driven higher compensation expense due higher headcount higher incentive compensation increased recruiting costs higher costs related businesses acquired partially offset lower yearoveryear consulting fees general administrative expenses 125 sales year ended december 31 2016 compared 115 sales prior year depreciation amortization expenses depreciation amortization expenses increased 27 million 236 139 million year ended december 31 2016 112 million year ended december 31 2015 primarily due increased depreciation new erp system service inventory transferred fixed assets well increased amortization intangibles related prior current year acquisitions research development expenses research development expenses increased 34 million 129 301 million year ended december 31 2016 267 million year ended december 31 2015 increase mainly due higher project material costs higher compensation expense resulting increased engineering headcount connection initiative accelerate new product development introductions overall increase incentive compensation research development expenses percentage sales increased 92 year ended december 31 2016 84 year ended december 31 2015 expense income expense increased 04 million 07 million year ended december 31 2016 compared 03 million year ended december 31 2015 increase primarily driven foreign exchange transaction losses resulting negative impact changes foreign exchange rates value current intercompany account balances subsidiaries denominated currencies income tax benefit expense income tax expense year ended december 31 2016 15 million compared income tax benefit 7000 year ended december 31 2015 change primarily result shift distribution profits losses among tax jurisdictions effective tax rate 120 year ended december 31 2016 compared 01 prior year effective tax rate continues lower statutory tax rate united states reflecting primarily global footprint foreign jurisdictions lower tax rates effective tax rate could impacted positively negatively geographic changes manufacturing sales products change statutory tax rates jurisdiction well resulting effect taxable income jurisdiction net income net income 111 million year ended december 31 2016 compared 128 million year ended december 31 2015 reflecting impact factors described segment results use segment profit evaluate performance reportable segments factory metrology construction bimcim segment profit calculated gross profit net selling marketing expenses reporting segment discussion segment results years ended december 31 2016 2015 presented based segment profit described segment profit percent sales calculated segment profit divided net sales reporting segment definition segment profit may comparable similarly titled measures reported companies additional information including reconciliation total segment profit income operations see note 17 “notes consolidated financial statements” included part ii item 8 annual report form 10k sales factory metrology segment increased 136 million 61 2363 million year ended december 31 2016 2227 million prior year primarily reflecting higher average selling prices higher service revenue across regions partially offset decline units sold mainly emea region foreign exchange rates negative impact sales 15 million decreasing sales growth 07 percentage points segment profit segment profit factory metrology segment increased 63 million 99 698 million year ended december 31 2016 635 million prior year increase primarily due increase segment sales addition higher writedown inventory recorded 2015 compared 2016 partially offset increase selling marketing expenses reflecting higher headcount allocated segment partially offset cost savings due holding annual sales meeting 2016 sales construction bimcim segment decreased 57 million 81 651 million year ended december 31 2016 708 million prior year primarily reflecting decline units sold mostly americas emea regions partially offset increase average selling prices higher service revenue across regions foreign exchange rates slightly negative impact sales 01 million decreasing sales growth 02 percentage points segment profit segment profit construction bimcim segment increased 20 million 123 183 million year ended december 31 2016 163 million prior year increase primarily due increase service revenue slight decline selling marketing expenses reflecting cost savings due holding annual sales meeting 2016 higher writedown inventory recorded 2015 compared 2016 partially offset decrease product sales segment increased 02 million 08 242 million year ended december 31 2016 240 million prior year primarily reflecting higher average selling prices mostly americas region higher service revenue across regions partially offset decline unit sales particularly emea region foreign exchange rates slightly negative impact sales 02 million decreasing sales growth 06 percentage points segment profit segment profit segment increased 24 million 316 100 million year ended december 31 2016 76 million prior year increase primarily due shift product service sales mix resulting higher gross margins partially offset increase selling marketing expenses reflecting higher headcount cost savings due holding annual sales meeting 2016 2015 compared 2014 consolidated results sales total sales decreased 243 million 71 3175 million year ended december 31 2015 3418 million year ended december 31 2014 lower sales reflected 243 million unfavorable impact foreign exchange rates primarily due weakening euro japanese yen brazilian real relative us dollar excluding foreign exchange rate impact sales year ended december 31 2015 would even compared year ended december 31 2014 sales results primarily driven decline product sales offset increased service revenue total product sales decreased 243 million 86 2598 million year ended december 31 2015 2841 million year ended december 31 2014 product sales decrease primarily driven decline unit sales partially offset increase average selling prices well favorable sales impact resulting new product launches 2015 service revenue totaled 577 million years ended december 31 2015 2014 reflecting increase warranty revenue offset unfavorable impact foreign exchange rates gross profit gross profit 1672 million year ended december 31 2015 compared 1885 million year ended december 31 2014 decrease 213 million 113 reflected primarily unfavorable foreign exchange rates lower product sales increase inventory reserve recorded third quarter 2015 gross margin 527 year ended december 31 2015 compared 551 prior year gross margin product sales 560 year ended december 31 2015 compared 594 prior year decrease primarily result increase inventory reserve higher manufacturing costs percent sales consistent lower sales volume partially offset higher average selling prices gross margin service revenue increased 35 percentage points 375 year ended december 31 2015 340 year ended december 31 2014 primarily reflecting higher warranty revenue lower service costs selling marketing expenses selling marketing expenses 798 million year ended december 31 2015 compared 808 million year ended december 31 2014 lower selling marketing expenses 10 million 12 primarily reflected lower sales commissions partially offset increase headcount driven two acquisitions completed 2015 selling marketing expenses percentage sales increased 251 year ended december 31 2015 compared 236 year ended december 31 2014 primarily due lower net sales worldwide selling actual periodending headcount increased 17 39 451 december 31 2015 434 december 31 2014 selling fte headcount increased 44 106 457 december 31 2015 413 december 31 2014 general administrative expenses general administrative expenses 364 million year ended december 31 2015 compared 354 million year ended december 31 2014 increase general administrative expenses reflected primarily severance costs relating cost reduction initiatives well higher advisory consulting fees support erp implementation acquisition expenses professional fees general administrative expenses percentage sales increased 115 year ended december 31 2015 104 year ended december 31 2014 depreciation amortization expenses depreciation amortization expenses 112 million year ended december 31 2015 compared 74 million year ended december 31 2014 increase 38 million reflected primarily exton facility implementation erp system amortization expense related recent acquisitions research development expenses research development expenses 267 million year ended december 31 2015 compared 276 million year ended december 31 2014 lower expenses primarily reflected reduction highcost contractor expenses timing product development activities impact favorable foreign exchange rates partially offset impairment charge related discontinuation licensing agreement research development expenses percentage sales increased 84 year ended december 31 2015 81 year ended december 31 2014 expense income expense income changed 05 million 03 million expense year ended december 31 2015 compared 02 million income year ended december 31 2014 change primarily driven foreign exchange transaction losses resulting changes foreign exchange rates value current intercompany account balances subsidiaries denominated currencies income tax expense benefit income tax benefit year ended december 31 2015 7000 compared income tax expense 39 million year ended december 31 2014 change primarily due lower pretax income offset partially discrete tax benefit 45 million related reversal valuation allowance 2014 effective tax rate 01 year ended december 31 2015 compared 103 prior year effective tax rate continues lower statutory tax rate united states primarily due global footprint foreign jurisdictions lower tax rates particular low tax rate recognized 2015 primarily reflected higher operating income jurisdictions like switzerland operating losses jurisdictions higher statutory tax rate united states germany effective tax rate could impacted positively negatively geographic changes manufacturing sales products change statutory tax rates jurisdiction well resulting effect taxable income jurisdiction net income net income 128 million year ended december 31 2015 compared 336 million year ended december 31 2014 reflecting impact factors described segment results sales factory metrology segment decreased 235 million 95 2227 million year ended december 31 2015 2462 million prior year foreign exchange rates negative impact sales 174 million decreasing sales growth 71 percentage points decrease factory metrology sales primarily reflected decline unit sales across regions lower average selling prices emea asiapacific regions segment profit segment profit factory metrology segment decreased 126 million 166 635 million year ended december 31 2015 761 million prior year decrease primarily due unfavorable foreign exchange rates lower product sales increase inventory reserve recorded third quarter 2015 partially offset slight decrease selling marketing expenses due lower sales commissions sales construction bimcim segment decreased 46 million 61 708 million year ended december 31 2015 754 million prior year period foreign exchange rates negative impact sales 59 million decreasing sales growth 78 percentage points decrease construction bimcim sales primarily reflected decline units sold mostly americas emea regions partially offset increased average selling prices americas region well favorable sales impact resulting new product launches first quarter 2015 segment profit segment profit construction bimcim segment decreased 82 million 335 163 million year ended december 31 2015 245 million prior year decrease primarily due unfavorable foreign exchange rates lower product sales increase inventory reserve recorded third quarter 2015 slight increase selling marketing expenses driven increased headcount partially offset lower sales commissions sales segment increased 38 million 188 240 million year ended december 31 2015 202 million prior year foreign exchange rates negative impact sales 10 million decreasing sales growth 51 percentage points increase sales segment primarily reflected increased unit sales strong service revenue particularly americas region segment profit segment profit segment increased 05 million 70 76 million year ended december 31 2015 71 million prior year increase primarily due increase sales partially offset unfavorable foreign exchange rates slight increase selling marketing expenses driven increased headcount higher sales commissions liquidity capital resources cash equivalents decreased 12 million 1062 million december 31 2016 1074 million december 31 2015 decrease primarily driven cash paid acquisitions year ended december 31 2016 mostly offset improved cash flow operations cash flows operating activities provide primary source liquidity generated positive cash flows operations 376 million year ended december 31 2016 compared cash provided operations 280 million year ended december 31 2015 increase mainly due lower inventory levels well impact prepaid expenses assets accounts payable accrued liabilities year ended december 31 2016 compared year ended december 31 2015 cash flows used investing activities year ended december 31 2016 december 31 2015 371 million 64 million respectively increase cash used investing activities primarily due change proceeds sale investments increase cash paid consideration three acquisitions completed year ended december 31 2016 compared two acquisitions completed year ended december 31 2015 cash flows provided financing activities year ended december 31 2016 02 million compared cash flows used financing activities 202 million year ended december 31 2015 change primarily due repurchase common stock year ended december 31 2015 cash equivalents 873 million held foreign subsidiaries december 31 2016 current intent indefinitely reinvest funds foreign operations cash needed fund ongoing operations event circumstances change leading conclusion funds indefinitely reinvested would need accrue time determination income taxes would triggered upon repatriation november 24 2008 board directors approved 30 million share repurchase program acquisitions share repurchase program may made time prevailing prices permitted securities laws legal requirements subject market conditions factors share repurchase program may discontinued time expiration date restriction governing period repurchase shares program october 2015 board directors authorized increase existing share repurchase program 30 million 50 million made stock repurchases year ended december 31 2016 228 million year ended december 31 2015 program december 31 2016 authorization repurchase 183 million remaining repurchase program believe working capital anticipated cash flow operations sufficient fund longterm liquidity operating requirements foreseeable future balance sheet arrangements contractual obligations commercial commitments party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2016 dollars thousands enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2016 approximately 294 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions also 303 million longterm commitments purchases delivered 12 months obligations included table primarily represent estimated payments due acquisition related earnouts 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation material impact results operations recent years expect inflation material impact operations 2017 critical accounting policies preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities base estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made management may estimates assumptions reasonable believe given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment business combinations stockbased compensation policies affect current assets current liabilities operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could adverse impact operations financial position revenue recognition revenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related measurement imaging realization equipment related software generally recognized upon shipment consider earnings process complete shipping date fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support “pcs” generally establish vendorspecific objective evidence “vsoe” fair value pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenues presented net salesrelated taxes reserve excess obsolete inventory value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 firstin firstout “fifo” cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income least twoyear period significant judgment required determining worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain establish provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described financial accounting standards board “fasb” accounting standards codification “asc” topic 740 income taxes tax position likely sustained upon examination applicable taxing authority ordinary course business examined various federal state foreign tax authorities regularly assess potential outcome examinations future examinations current prior years determining adequacy provision income taxes assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties establish time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2016 2015 2014 business combinations allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available stockbased compensation measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition determined using blackscholes option valuation model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant additionally calculating compensation expense awards also required estimate extent awards forfeited prior vesting many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates forfeiture differ current estimates amounts recorded cumulative adjustment previously recorded amounts expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation adjusted estimated forfeitures using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation adjusted estimated forfeitures straightline basis requisite service period separately vesting portion award taking account probability satisfy performance condition furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive excess tax benefits credited additional paidin capital deduction reduces cash taxes payable tax deductions excess compensation cost classified financing cash inflows condensed consolidated statements cash flows impact recently issued accounting standards october 2016 fasb issued accounting standards update “asu” 201616 income taxes topic 740 intraentity transfers assets inventory “asu 201616” removes prohibition asc 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory asu requires tax effects intercompany transactions sales inventory recognized transfer occurs instead deferred transferred asset sold third party otherwise recovered use asset new guidance must applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption effective annual periods beginning december 15 2017 interim period therein early adoption permitted expect adoption guidance material impact consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments “asu 201615” clarifies companies present classify certain cash receipts cash payments statement cash flows asu 201615 effective annual periods beginning december 15 2017 interim periods therein early adoption permitted expect adoption guidance material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” amending accounting guidance related revenue recognition asu subsequently issued amendments revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services additional disclosures required provide nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract asu subsequently issued amendments revenue recognition accounting guidance effective us january 1 2018 permit use either retrospective cumulative effective transition method yet selected transition method determined effect revenue recognition accounting guidance ongoing financial reporting march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting “asu 201609” intended simplify several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statement cash flows asu 201609 became effective annual periods beginning december 15 2016 interim periods therein fiscal year 2017 adopted asu 201609 effective january 1 2017 new guidance excess tax benefits previously recognized related tax deduction reduced current taxes payable recorded modified retrospective basis achieved cumulativeeffect adjustment retained earnings beginning period new guidance adopted historically recognized excess tax benefits option exercised share vested since us net operating loss carryforward therefore tax benefit allowed current guidance adjustment retained earnings required new guidance taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows effective january 1 2017 adopted portion guidance prospective basis approach incorporates net inflow outflow taxrelated cash flows resulting sharebased payments deferred income tax benefit expense line item presents along income tax cash flows operating activities statement cash flows also elected account forfeitures related service conditionbased awards occur effective january 1 2017 change treatment estimating forfeitures previous years however continue assess performance conditionbased awards quarterly required adopting new policy using modified retrospective approach assessed cumulative effect adjustment recorded retaining earnings difference amount compensation cost previously recorded amount would recorded without assuming forfeitures cumulative effect adjustment recorded retained earnings material continue assess impact adopted guidance quarterly basis expect adoption guidance material impact consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 must applied modified retrospective basis effective fiscal years beginning december 15 2018 interim periods within years early adoption permitted evaluating impact adopting standard consolidated financial statements related disclosures july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory “asu 201511” changes measurement principle inventory lower cost market lower cost net realizable value asu 201511 defines net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation new guidance must applied prospective basis became effective fiscal years beginning december 15 2016 fiscal year 2017 interim periods within years early adoption permitted adopted asu 201511 effective january 1 2017 adoption standard material impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements company including notes thereto included part ii item 8 annual report form 10k overview company designs develops manufactures markets supports portable software driven 3d measurement imaging systems used broad range manufacturing industrial building construction forensic applications company’s faroarm faro laser scanarm faro gage articulated measuring devices faro laser tracker ion faro focus3d faro 3d imager amp companion cam2 software systems provide cadbased inspection highdensity surveying applications together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company derives revenues primarily sale measurement equipment related multifaceted cam2 software programs revenue related products generally recognized upon shipment addition company sells one threeyear extended warranties training technology consulting services relating products company recognizes revenue extended warranties straightline basis company also receives royalties licensing agreements historical medical technology recognizes revenue royalties licensees use technology company operates international markets throughout world maintains sales offices france germany great britain japan spain italy turkey china india poland netherlands malaysia thailand singapore vietnam company manages reports global sales three regions americas europeafrica asiapacific company manufactures faroarm faro gage faro 3d imager amp faro laser tracker ion products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas company manufactures faro focus3d product facility located stuttgart germany company expects existing plants production capacity necessary support volume requirements 2011 company accounts wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact intercompany accounts reflected company’s consolidated financial statements company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2010 2009 2008 company profitable quarter year ended december 31 2010 company incurred net loss year ended december 31 2009 primarily result decrease product sales company attributes decrease product sales principally decline global economy prior 2009 company history sales earnings growth 26 consecutive profitable quarters december 31 2008 historical sales earnings growth result number factors including continuing market demand acceptance company’s products increased sales activity part additional sales staff worldwide new products product enhancements faro focus3d faro 3d imager amp effect acquisitions however company’s historical financial performance indicative future financial performance december 22 2009 company filed registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units proposed maximum aggregate offering price 145 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes fcpa update previously reported company conducted internal investigation 2006 certain payments made china subsidiary may violated foreign corrupt practices act fcpa applicable laws refer “fcpa matter” entered settlement agreements documents sec us department justice “doj” 2008 related fcpa matter terms agreements sec doj company assumed twoyear monitoring obligation continuing obligations respect compliance fcpa laws including full cooperation us government adoption compliance code containing specific provisions intended prevent violations fcpa second quarter 2010 company conjunction sec doj completed selection fcpa monitor result delays secdoj approval monitor company currently still monitoring period otherwise would already expired company cooperating monitor implements work plan assess company’s compliance requirements settlement agreements failure comply continuing obligations respect fcpa matter could result sec doj seeking impose penalties company future results operations following table sets forth periods presented percentage sales represented certain items company’s consolidated statements operations 2010 compared 2009 sales total sales increased 441 million 299 1918 million year ended december 31 2010 1477 million year ended december 31 2009 increase resulted primarily increase worldwide demand products related part recovery global economy product sales increased 396 million 336 1573 million year ended december 31 2010 1177 million year ended december 31 2009 service revenue increased 45 million 15 345 million year ended december 31 2010 300 million year ended december 31 2009 sales americas region increased 174 million 314 724 million year ended december 31 2010 550 million prior year period product sales americas region increased 147 million 345 569 million year ended december 31 2010 422 million prior year service revenue americas region increased 27 million 211 155 million year ended december 31 2010 128 million prior year primarily due increase customer service revenue sales europeafrica region increased 117 million 187 747 million year ended december 31 2010 630 million year ended december 31 2009 product sales europeafrica region increased 110 million 219 619 million year ended december 31 2010 509 million prior year service revenue europeafrica region increased 07 million 56 128 million year ended december 31 2010 121 million prior year primarily due increase customer service revenue sales asiapacific region increased 150 million 505 447 million year ended december 31 2010 297 million year ended december 31 2009 product sales asiapacific region increased 139 million 565 385 million year ended december 31 2010 246 million prior year service revenue asiapacific region increased 11 million 208 62 million year ended december 31 2010 51 million period prior year primarily due increase warranty revenue gross profit increased 327 million 405 1134 million year ended december 31 2010 807 million year ended december 31 2009 gross margin increased 591 year ended december 31 2010 546 year ended december 31 2009 primarily due change sales mix highermargin product sales lowermargin service revenue resulting increase product sales gross margin product sales increased 653 year ended december 31 2010 607 prior year primarily due increase product sales mix higher margin product lines gross margin service revenues remained relatively flat 309 year ended december 31 2010 compared 310 prior year company expects trend changes sales mix result gross margins range approximately 55 60 2011 selling expenses selling expenses increased 21 million 43 507 million year ended december 31 2010 486 million year ended december 31 2009 increase primarily due increase commissions expense 47 million increase product demonstration costs 13 million increase performancebased bonuses 04 million offset decrease compensation costs 36 million due reduced headcount decrease travel expenses 07 million worldwide sales marketing headcount decreased 6 20 300 december 31 2010 306 december 31 2009 regionally company’s sales marketing headcount decreased 9 100 81 december 31 2010 90 december 31 2009 americas decreased 1 10 111 december 31 2010 112 december 31 2009 europeafrica increased 4 40 asiapacific 108 december 31 2010 104 december 31 2009 percentage sales selling expenses decreased 264 sales year ended december 31 2010 329 year ended december 31 2009 regionally selling expenses 219 sales americas year ended december 31 2010 compared 307 sales year ended december 31 2009 301 sales europeafrica year ended december 31 2010 compared 342 sales prior year 275 sales asiapacific year ended december 31 2010 compared 343 sales prior year general administrative expenses general administrative expenses increased 19 million 73 268 million year ended december 31 2010 249 million year ended december 31 2009 general administrative expenses increased primarily due 11 million cost fcpa monitor connection doj sec settlement increase legal professional fees related patent litigation 08 million increase performance based bonuses 11 million offset decrease compensation costs 09 million due reduced headcount general administrative expenses percentage sales decreased 140 year ended december 31 2010 169 year ended december 31 2009 depreciation amortization expenses depreciation amortization expenses increased 08 million 63 million year ended december 31 2010 55 million year ended december 31 2009 result increase property equipment intangible assets research development expenses research development expenses increased 01 million 06 127 million year ended december 31 2010 126 million year ended december 31 2009 primarily due increase performancebased bonuses 08 million offset decreases materials 01 million subcontractor expenses 06 million research development expenses percentage sales decreased 66 year ended december 31 2010 85 year ended december 31 2009 interest income expense interest income net decreased 01 million 01 million year ended december 31 2010 02 million year ended december 31 2009 due decrease interest rates related cash short term investments income expense net income expense net increased 34 million 28 million expense year ended december 31 2010 income 06 million year ended december 31 2009 primarily result increase foreign currency losses related effects decline euro value intercompany account balances denominated different currencies company’s european subsidiaries income tax expense income tax expense increased 27 million 31 million year ended december 31 2010 04 million year ended december 31 2009 primarily due increase pretax income tax expense year ended december 31 2009 included 26 million related settlement internal revenue service fourth quarter 2009 audit company’s federal corporate income tax returns period 2005 2007 related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 excluding effects 26 million tax settlement company’s effective tax benefit rate would 217 2009 company believes calculating effective tax rate without impact irs settlement useful management investors provide greater clarity facilitate internal external comparisons company’s historical tax rate company’s effective tax rate 221 year ended december 31 2010 compared tax benefit rate 217 excluding effects 26 million tax settlement year ended december 31 2009 total deferred tax assets company’s foreign subsidiaries relating net operating loss carryforwards 141 million 122 million december 31 2010 2009 respectively related valuation allowance 111 million 106 million december 31 2010 2009 respectively company released valuation allowance approximately 12 million related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income increased 217 million 111 million year ended december 31 2010 net loss 106 million year ended december 31 2009 result factors described compared 2008 sales total sales decreased 615 million 294 1477 million year ended december 31 2009 2092 million year ended december 31 2008 decrease resulted primarily decrease unit sales regions related weakness global economy product sales decreased 615 million 343 1177 million year ended december 31 2009 1792 million year ended december 31 2008 service revenue remained flat 300 million 2009 2008 sales americas region decreased 233 million 298 550 million year ended december 31 2009 783 million prior year period product sales americas region decreased 239 million 361 423 million year ended december 31 2009 662 million prior year service revenue americas region increased 07 million 58 128 million year ended december 31 2009 121 million prior year sales europeafrica region decreased 306 million 327 630 million year ended december 31 2009 936 million year ended december 31 2008 product sales europeafrica region decreased 294 million 367 508 million year ended december 31 2009 802 million prior year service revenue europeafrica region decreased 13 million 97 121 million year ended december 31 2009 134 million prior year primarily due decrease customer service training revenue sales asiapacific region decreased 76 million 204 297 million year ended december 31 2009 373 million year ended december 31 2008 product sales asiapacific region decreased 82 million 252 246 million year ended december 31 2009 328 million prior year service revenue asiapacific region increased 06 million 133 51 million year ended december 31 2009 45 million period prior year primarily due increase warranty revenue gross profit decreased 445 million 356 807 million year ended december 31 2009 1252 million year ended december 31 2008 gross margin decreased 546 year ended december 31 2009 598 year ended december 31 2008 primarily due change sales mix highermargin product sales lowermargin service revenue resulting decrease product sales gross margin product sales decreased 607 year ended december 31 2009 661 prior year primarily due change product sales mix resulting decrease average unit selling prices gross margin service revenues increased 310 year ended december 31 2009 225 prior year primarily due decrease customer service costs selling expenses selling expenses decreased 144 million 229 486 million year ended december 31 2009 630 million year ended december 31 2008 decrease primarily due decrease compensation expense 89 million decrease travelrelated expenses 25 million decrease marketing advertising costs 20 million decrease recruiting training expenses 10 million result reductionsinforce implemented company 2009 company incurred 10 million severance costs expects save 62 million compensation costs annualized basis worldwide sales marketing headcount decreased 90 227 306 december 31 2009 396 december 31 2008 regionally company’s sales marketing headcount decreased 46 338 90 december 31 2009 136 december 31 2008 americas decreased 27 194 112 december 31 2009 139 december 31 2008 europeafrica decreased 17 140 asiapacific 104 december 31 2009 121 december 31 2008 percentage sales selling expenses increased 329 sales year ended december 31 2009 301 year ended december 31 2008 regionally selling expenses 307 sales americas year ended december 31 2009 compared 296 sales year ended december 31 2008 342 sales europeafrica year ended december 31 2009 compared 305 sales prior year 343 sales asiapacific year ended december 31 2009 compared 302 sales prior year general administrative expenses general administrative expenses decreased 12 million 45 249 million year ended december 31 2009 261 million year ended december 31 2008 general administrative expenses decreased primarily due decrease compensation expense 18 million decrease travelrelated costs 09 million reduction recruiting training costs 07 million offset increase allowance doubtful accounts 05 million increase 20 million legal professional fees primarily related patent litigation settlement irs audit general administrative expenses percentage sales increased 169 year ended december 31 2009 125 year ended december 31 2008 result reductionsinforce implemented company 2009 company incurred 07 million severance costs expects save 34 million compensation costs annualized basis depreciation amortization expenses depreciation amortization expenses increased 10 million 55 million year ended december 31 2009 45 million year ended december 31 2008 result increase property equipment intangible assets research development expenses research development expenses remained flat 126 million years ended december 31 2009 2008 research development expenses percentage sales increased 85 year ended december 31 2009 60 year ended december 31 2008 result reductionsinforce implemented company 2009 company incurred 01 million severance costs expects save 18 million compensation costs annualized basis interest income expense interest income net decreased 15 million 02 million year ended december 31 2009 17 million year ended december 31 2008 due decrease interest rates related cash short term investments income expense net income expense net increased 29 million 06 million income year ended december 31 2009 expense 23 million year ended december 31 2008 due foreign currency transaction gains income tax expense income tax expense decreased 40 million 04 million year ended december 31 2009 44 million year ended december 31 2008 primarily due decrease pretax income tax expense year ended december 31 2009 included 26 million related settlement internal revenue service fourth quarter 2009 audit company’s federal corporate income tax returns period 2005 2007 related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 excluding effects 26 million tax settlement company’s effective tax benefit rate would 217 2009 company believes calculating effective tax rate without impact irs settlement useful management investors provide greater clarity facilitate internal external comparisons company’s historical tax rate company’s effective tax rate 240 year ended december 31 2008 total deferred tax assets company’s foreign subsidiaries relating net operating loss carryforwards 122 million 102 million december 31 2009 2008 respectively related valuation allowance 106 million 87 million december 31 2009 2008 respectively company’s tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however company’s tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income decreased 246 million net loss 106 million year ended december 31 2009 net income 140 million year ended december 31 2008 result factors described liquidity capital resources cash equivalents increased 156 million 507 million december 31 2010 351 million december 31 2009 increase primarily attributable increase net income noncash expenses 215 million effect exchange rate changes cash 42 million proceeds stock option exercises 14 million offset increase working capital 65 million 50 million purchases equipment intangible assets july 11 2006 company entered loan agreement providing line credit 300 million recently amended june 18 2009 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 225 250 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2010 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended extends march 31 2012 company drawn line credit january 2010 company’s subsidiary china opened short term line credit expiring july 6 2010 bank china approximately 25 million bore interest 486 subsidiary drew approximately 25 million temporary loan process approving additional capital investment approved chinese government approval received loan repaid april 19 2010 december 22 2009 company filed registration statement form s3 sec registering shares common stock preferred stock warrants purchase common preferred stock either individually units value 145 million proceeds offerings respect registration statement would used either repayment refinancing debt acquisition additional businesses technologies working capital general corporate purposes company believes working capital anticipated cash flow operations cash credit facility sufficient fund longterm liquidity requirements foreseeable future balance sheet items none contractual obligations commercial commitments company party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2010 company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days company 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2011 critical accounting policies preparation company’s consolidated financial statements requires company’s management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities company bases estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made company’s management may estimates assumptions reasonable company believes given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” company selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed company’s processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment policies affect current assets operating results therefore critical assessing company’s financial operating condition policies involve certain assumptions incorrect could adverse impact company’s operations financial position revenue recognition revenue related company’s measurement equipment related software generally recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized straightline basis life plan company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use company’s historical technology medical applications recognized technology used licensees reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred assets taxing jurisdiction operates unless “more likely not” recover assets means future company’s evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company establishes provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described asc 740 tax position likely sustained upon examination applicable taxing authority ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes company assesses likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties company establishes time sale liability oneyear warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting unit using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair market value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2010 2009 2008 impact recently issued accounting standards june 2009 financial accounting standards board “fasb” issued guidance codified within accounting standards codification “asc” topic 810 consolidation “asc 810” asc 810 requires entities perform analysis determine whether enterprise’s variable interest interests give controlling financial interest variable interest entity analysis identifies primary beneficiary variable interest entity one power direct activities variable interest entity significantly impact entity’s economic performance obligation absorb losses entity could potentially significant variable interest guidance effective beginning annual reporting period commencing november 15 2009 early adoption prohibited adoption asc 810 january 1 2010 material effect company’s financial position results operations october 2009 fasb issued accounting standards update “asu” 200913 multipledelivery revenue arrangements “asu 200913” asu 200913 establishes accounting reporting guidance arrangements including multiple revenuegenerating activities provides amendments criteria separating deliverables measuring allocating arrangement consideration one units accounting amendments asu 200913 also establish selling price hierarchy determining selling price deliverable significantly enhanced disclosures also required asu 200913 provide information vendor’s multipledeliverable revenue arrangements including information nature terms significant deliverables performance within arrangements amendments also require reporting company provide information significant judgments made changes judgments application relative sellingprice method affects timing amount revenue recognition amendments asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early application permitted company implemented new standard january 1 2011 expect adoption asu 200913 material impact consolidated financial statements january 2010 fasb issued asu 20106 improving disclosures fair value measurements “asu 20106” requires reporting entities make new disclosures recurring nonrecurring fairvalue measurements including significant transfers level 1 level 2 fairvalue measurements information purchases sales issuances settlements gross basis reconciliation level 3 fairvalue measurements asu 20106 effective annual reporting periods beginning december 15 2009 except level 3 reconciliation disclosures effective annual periods beginning december 15 2010 adoption asu 20106 material impact company’s consolidated financial statements expected material impact portion effective 2010 year end july 2010 fasb issued guidance enhance disclosures credit quality creditor’s financing receivables adequacy allowance credit losses amended guidance effective periodend balances beginning first interim annual reporting period ending december 15 2010 amended guidance effective activity reporting period beginning first interim annual reporting period beginning december 15 2010 company expects amended guidance impact disclosures future periods otherwise significant effect consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements including notes thereto included part ii item 8 annual report form 10k overview design develop manufacture market support software driven threedimensional 3d measurement imaging realization systems sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety cultural heritage applications faroarm® faro laser scanarm® faro gage faro laser tracker™ faro cobalt array 3d imager companion cam2® software provide computeraided design cad based inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process faro focus3d faro freestyle3d laser scanners companion scene faro public safety software faro 3d software utilized wide variety 3d modeling documentation highdensity surveying applications including two key vertical markets building information modeling bimconstruction information management cim public safety derive revenues primarily sale measurement equipment related multifaceted cam2 software programs revenue related products generally recognized upon shipment addition sell extended warranties training technology consulting services relating products recognize revenue extended warranties straightline basis term warranty revenue training technology consulting services provided also receive royalties licensing agreements historical medical technology recognize revenue royalties licensees use technology operate international markets throughout world maintain sales offices brazil canada china france germany india italy japan malaysia mexico netherlands poland singapore south korea spain switzerland thailand turkey united kingdom united states vietnam manage report global sales three regions americas europeafrica asiapacific manufacture faroarm faro laser scanarm faro gage faro laser tracker faro cobalt array 3d imager products manufacturing facility located switzerland customer orders europeafrica region manufacturing facility located singapore customer orders asiapacific region manufacturing facilities located florida pennsylvania customer orders americas manufacture faro focus3d faro freestyle3d products facilities located stuttgart germany schaffhausen switzerland expect existing plants production capacity necessary support volume requirements 2016 account wholly owned foreign subsidiaries currency respective foreign jurisdiction therefore fluctuations exchange rates may impact value intercompany account balances denominated different currencies aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however none utilized 2015 2014 2013 executive summary past decade continued achieve profitability exception loss 2009 resulted primarily decline global economy year historically sales earnings grown result continuing market demand acceptance products increased sales activity part additional sales staff worldwide new product launches enhancements acquisitions historical financial performance indicative future financial performance fiscal 2015 results reflected effect significant strengthening us dollar throughout 2015 macroeconomic conditions negatively impacted capital budgets many customers although financial results meet internal targets number highlights 2015 • product innovation first quarter 2015 launched faro freestyle3d laser scanner handheld laser scanner quickly document rooms structures objects 3d create highdefinition point clouds also launched faro freestyle3dx third quarter 2015 delivers enhanced scanning accuracy 1 millimeter 1 meter range • strategic acquisitions first quarter 2015 completed acquisition kubit gmbh aras 360 technologies inc software businesses provide us opportunity offer customers complementary suite integrated 3d documentation products within public safety building information modeling bim construction information management cim markets • infrastructure investment support future growth enhance business information transactions systems financial reporting implemented sap enterprise resource planning “erp” system sap implemented phases beginning americas region implementation commenced start fourth quarter 2014 implementation continued 2015 europeafrica region completed asiapacific region fourth quarter 2015 • share repurchases october 2015 board directors authorized increase existing share repurchase program 30 million 50 million fourth quarter 2015 repurchased 809241 shares program total cash payment 228 million december 31 2015 authorization repurchase 183 million remaining repurchase program fiscal 2015 results also impacted writedown inventory mainly third quarter 2015 based upon planned timing new product introductions sudden significant decline demand products three months ended september 26 2015 onhand inventory levels exceeded estimated requirements resulting excess inventory use several contract manufacturers suppliers provide manufacturing services products normal course business reduce manufacturing lead times ensure adequate component availability enter agreements manufacturers suppliers purchase sufficient inventory based forecast demand september 26 2015 purchase commitments suppliers inventory longer expected utilize product lifecycle warranty commitments consequently recorded 59 million writedown excess inventory 20 million loss purchase commitments third quarter 2015 resulting aggregate writedown 79 million undertaking several important initiatives 2016 drive longterm growth profitability including reorganizing business around specific vertical markets modernizing sales process improve efficiency sales organization accelerating maintaining consistent schedule new product introductions harmonizing global functions improve effectiveness timing implementation reorganization sales marketing organizations around vertical markets 2016 dependent upon number factors including making necessary adjustments new erp system results operations following table sets forth periods presented percentage sales represented certain items consolidated statements operations 2015 compared 2014 sales totaled 3175 million year ended december 31 2015 compared 3418 million year ended december 31 2014 decrease 243 million 71 lower sales reflected 243 million unfavorable impact foreign exchange rates primarily due weakening euro japanese yen brazilian real relative us dollar excluding foreign exchange rate impact sales year ended december 31 2015 would even compared year ended december 31 2014 sales favorably impacted introduction faro freestyle3d product launched first quarter 2015 higher average selling price products offset decline unit sales across regions arm comprising faroarm faro laser scanarm faro gage sales lower 5 reflecting 11 decrease units sold partially offset higher average selling price mostly due increased sales arm accessories laser line probe hd laser tracker comprising faro laser tracker vantage ion products sales lower 22 reflecting 18 decrease units sold laser scanner comprising faro focus3d faro freestyle3d sales lower 6 primarily reflecting 8 decline units sold faro focus3d laser scanner partially offset sales new faro freestyle3d launched 2015 total product sales 2598 million year ended december 31 2015 compared 2841 million 2014 service revenue totaled 577 million years ended december 31 2015 2014 reflecting increase warranty revenue offset unfavorable impact foreign exchange rates sales americas region increased 44 million 32 1434 million year ended december 31 2015 compared 1390 million year ended december 31 2014 foreign exchange rates unfavorable impact sales 34 million excluding impact foreign exchange rates sales americas region increased 78 million 56 product sales americas region increased 10 million 09 1158 million year ended december 31 2015 compared 1148 million prior year reflecting primarily higher average arm selling price partially offset lower unit sales due weaker macroeconomic conditions brazil service revenue americas region increased 34 million 140 276 million year ended december 31 2015 compared 242 million prior year primarily reflecting increase warranty revenue due specific promotions targeting warranty renewals year sales europeafrica region totaled 1031 million year ended december 31 2015 compared 1201 million year ended december 31 2014 yearoveryear decrease 170 million 141 excluding unfavorable impact foreign exchange rates 164 million sales europeafrica region even year ended december 31 2015 compared prior year product sales europeafrica region totaled 829 million year ended december 31 2015 compared 964 million year ended december 31 2014 decrease 135 million 140 reflecting unfavorable impact foreign exchange rates service revenue europeafrica region totaled 202 million year ended december 31 2015 compared 237 million 2014 decline 35 million 147 reflecting unfavorable impact foreign exchange rates sales asiapacific region totaled 710 million year ended december 31 2015 compared 827 million year ended december 31 2014 excluding unfavorable foreign exchange rate impact 46 million sales region lower 86 total product sales asiapacific region 611 million year ended december 31 2015 compared 729 million prior year decrease reflected lower faro focus3d laser scanner sales delayed canceled customer spending aggressive price competition service revenue asiapacific region increased 01 million 14 99 million year ended december 31 2015 98 million prior year primarily due higher warranty revenue gross profit gross profit 1677 million year ended december 31 2015 compared 1889 million year ended december 31 2014 decrease 212 million 112 reflected primarily unfavorable foreign exchange rates lower asiapacific product sales increase inventory reserve recorded third quarter 2015 partially offset sales growth americas region gross margin 528 year ended december 31 2015 compared 553 prior year gross margin product sales 561 year ended december 31 2015 compared 595 prior year decrease reflected primarily increase inventory reserve higher manufacturing costs percent sales consistent lower sales volume partially offset higher average arm selling price gross margin service revenue increased 35 percentage points 378 year ended december 31 2015 343 year ended december 31 2014 reflecting primarily higher warranty revenue lower service costs selling marketing expenses selling marketing expenses 793 million year ended december 31 2015 compared 802 million year ended december 31 2014 lower selling marketing expenses 09 million 11 primarily reflected lower sales commissions partially offset increase marketing headcount driven two completed acquisitions 2015 worldwide sales marketing headcount increased 22 45 512 december 31 2015 490 december 31 2014 regionally sales marketing headcount increased 4 24 171 december 31 2015 167 december 31 2014 americas increased 15 96 172 december 31 2015 157 december 31 2014 europeafrica increased 3 18 asiapacific 169 december 31 2015 166 december 31 2014 2015 selling marketing expenses percentage sales 250 year ended december 31 2015 compared 234 year ended december 31 2014 regionally selling marketing expenses 226 sales americas year ended december 31 2015 compared 208 sales year ended december 31 2014 291 sales europeafrica year ended december 31 2015 compared 273 sales prior year 237 sales asiapacific year ended december 31 2015 compared 223 sales prior year general administrative expenses general administrative expenses 375 million year ended december 31 2015 compared 365 million year ended december 31 2014 increase general administrative expenses reflected primarily severance costs relating cost reduction initiatives well higher advisory consulting fees support erp implementation acquisition expenses professional fees general administrative expenses percentage sales increased 118 year ended december 31 2015 107 year ended december 31 2014 depreciation amortization expenses depreciation amortization expenses 112 million year ended december 31 2015 compared 74 million year ended december 31 2014 increase 38 million reflected primarily new exton facility implementation new erp system amortization expense related recent acquisitions research development expenses research development expenses 266 million year ended december 31 2015 compared 275 million year ended december 31 2014 lower expenses reflected primarily reduction highcost contractor expenses timing product development activities impact favorable foreign exchange rates partially offset impairment charge related discontinuation licensing agreement research development expenses percentage sales increased 84 year ended december 31 2015 80 year ended december 31 2014 income expense income expense changed 05 million 03 million expense year ended december 31 2015 compared 02 million income year ended december 31 2014 change primarily driven foreign exchange transaction losses resulting changes foreign exchange rates value current intercompany account balances subsidiaries denominated currencies income tax benefit expense income tax benefit year ended december 31 2015 7000 compared income tax expense 39 million year ended december 31 2014 change reflected primarily lower pretax income offset partially discrete tax benefit 45 million related reversal valuation allowance 2014 effective tax rate 01 year ended december 31 2015 compared 103 prior year effective tax rate continues lower statutory tax rate united states reflecting primarily global footprint foreign jurisdictions lower tax rates particular low tax rate recognized 2015 primarily reflected higher operating income jurisdictions like switzerland favorable tax ruling operating losses jurisdictions higher statutory tax rate united states germany effective tax rate could impacted positively negatively geographic changes manufacturing sales products change statutory tax rates jurisdiction well resulting effect taxable income jurisdiction net income net income 128 million year ended december 31 2015 compared 336 million year ended december 31 2014 reflecting impact factors described 2014 compared 2013 sales total sales increased 500 million 172 3418 million year ended december 31 2014 2918 million year ended december 31 2013 sales growth reflected primarily favorable sales growth across product lines including arm comprising faroarm faro laser scanarm faro gage laser tracker comprising faro laser tracker vantage ion products laser scanner faro focus3d product line across geographic regions arm sales growth 18 reflected primarily 11 increase units sold higher average selling price release new laser line probe hd faro laser scanarm laser tracker units sold increased 16 laser tracker sales grew 1 despite pricing pressures unfavorable impact foreign exchange rates sales laser scanner increased 38 reflecting primarily continued adoption technology bimcim public safety markets foreign exchange rates unfavorable impact sales 65 million year ended december 31 2014 reflecting primarily weaker euro yen relative us dollar product sales increased 453 million 190 2841 million year ended december 31 2014 2388 million year ended december 31 2013 primarily reflecting higher laser scanner arm sales discussed service revenue increased 47 million 89 577 million year ended december 31 2014 530 million year ended december 31 2013 primarily reflecting increase warranty revenue 30 million increase customer service revenue 15 million due higher unit sales americas region increased 186 million 154 1390 million year ended december 31 2014 1204 million prior year foreign exchange rates unfavorable impact sales 11 million product sales americas region increased 172 million 176 1148 million year ended december 31 2014 976 million prior year reflecting primarily 50 increase laser scanner sales 14 increase arm sales service revenue americas region increased 14 million 60 242 million year ended december 31 2014 228 million prior year reflecting primarily increase customer service revenue 09 million warranty revenue 08 million sales europeafrica region increased 167 million 162 1201 million year ended december 31 2014 1034 million year ended december 31 2013 foreign exchange rates unfavorable impact sales 18 million 17 percentage points product sales europeafrica region increased 137 million 166 964 million year ended december 31 2014 827 million prior year reflecting primarily 29 increase laser scanner sales 20 increase arm sales service revenue europeafrica region increased 30 million 148 237 million year ended december 31 2014 207 million prior year reflecting primarily increase warranty revenue 20 million customer service revenue 06 million sales asiapacific region increased 147 million 217 827 million year ended december 31 2014 680 million year ended december 31 2013 foreign exchange rates unfavorable impact sales 36 million 54 percentage points product sales asiapacific region increased 144 million 247 729 million year ended december 31 2014 585 million prior year reflecting primarily 38 increase laser scanner sales 25 increase laser tracker sales 20 increase arm sales service revenue asiapacific region increased 03 million 33 98 million year ended december 31 2014 95 million prior year reflecting primarily modest increase warranty training revenue gross profit gross profit increased 270 million 167 1889 million year ended december 31 2014 1619 million year ended december 31 2013 reflecting increase sales revenue foreign exchange rates unfavorable impact gross profit 22 million year ended december 31 2014 gross margin 553 year ended december 31 2014 slightly lower 555 year ended december 31 2013 gross margin product revenue increased 04 percentage points 595 year ended december 31 2014 591 year ended december 31 2013 reflecting primarily lower manufacturing costs related achieved efficiencies arm laser tracker products improved average selling prices arm products included new laser line probe hd partially offset less favorable overall sales mix yearoveryear increase units laser scanners sold results included 33 million writeoff sales demonstration service loaner inventory became obsolete release new products gross margin service revenue decreased 48 percentage points 343 year ended december 31 2014 391 year ended december 31 2013 reflecting primarily increase customer service employees support growth product sales selling marketing expenses selling marketing expenses increased 85 million 118 802 million year ended december 31 2014 717 million year ended december 31 2013 increase selling marketing expenses reflected primarily higher compensation costs 68 million including additional headcount higher commissions advertising trade show costs 07 million travel costs 06 million facility costs 04 million worldwide sales marketing headcount increased 57 132 490 december 31 2014 433 december 31 2013 regionally sales marketing headcount increased 31 228 167 december 31 2014 136 december 31 2013 americas increased 16 113 157 december 31 2014 141 december 31 2013 europeafrica increased 10 64 asiapacific 166 december 31 2014 156 december 31 2013 2014 selling marketing expenses decreased 234 sales year ended december 31 2014 246 sales year ended december 31 2013 regionally selling marketing expenses 208 sales americas year ended december 31 2014 compared 214 sales year ended december 31 2013 273 sales europeafrica year ended december 31 2014 compared 288 sales prior year 223 sales asiapacific year ended december 31 2014 compared 236 sales prior year general administrative expenses general administrative expenses increased 59 million 192 365 million year ended december 31 2014 306 million year ended december 31 2013 reflecting primarily higher compensation costs 40 million higher headcount increase consulting advisory services 19 million relating primarily erp system implementation strategic planning initiatives general administrative expenses percentage sales increased 107 year ended december 31 2014 105 year ended december 31 2013 depreciation amortization expenses depreciation amortization expenses increased 04 million 55 74 million year ended december 31 2014 70 million year ended december 31 2013 reflecting primarily depreciation erp system research development expenses 2014 increased investment research development accelerate new product development increasing engineering headcount 17 result research development expenses increased 51 million 227 275 million year ended december 31 2014 224 million year ended december 31 2013 research development expenses percentage sales increased 80 year ended december 31 2014 77 year ended december 31 2013 income expense income expense decreased 15 million 02 million income year ended december 31 2014 expense 13 million year ended december 31 2013 primarily result foreign exchange transaction gains resulting changes foreign exchange rates value current intercompany account balances subsidiaries denominated different currencies income tax expense income tax expense decreased 35 million 39 million year ended december 31 2014 74 million year ended december 31 2013 primarily due discrete tax benefit 45 million recorded third quarter 2014 reflecting reduction valuation allowance partially offset higher pretax income valuation allowance originally established net operating losses certain foreign subsidiaries 2014 foreign subsidiaries demonstrated pattern profitability resulted concluding valuation allowance reversed effective tax rate decreased 103 year ended december 31 2014 compared 255 year ended december 31 2013 primarily due discrete tax benefit effective tax rate continues lower statutory tax rate united states primarily result favorable tax rates foreign jurisdictions however effective tax rate could impacted positively negatively geographic changes manufacturing sales products resulting effect taxable income jurisdiction net income net income increased 121 million 336 million year ended december 31 2014 215 million year ended december 31 2013 result factors discussed foreign exchange rates unfavorable impact net income 09 million year ended december 31 2014 liquidity capital resources cash equivalents decreased 19 million 1074 million december 31 2015 1093 million december 31 2014 decrease cash equivalents primarily due 228 million common stock repurchases 2015 121 million cash payments made two acquisitions completed 2015 142 million capital expenditures related erp implementation production equipment support new products partially offset proceeds sale 220 million treasury bills 280 million higher cash flow operations reflecting lower receivables inventory balances compared prior year cash equivalents 712 million held foreign subsidiaries intent indefinitely reinvest funds foreign operations cash needed fund ongoing operations event circumstances change leading conclusion funds indefinitely reinvested would need accrue time determination income taxes would triggered upon repatriation july 11 2006 entered loan agreement providing available line credit 300 million recently amended effective march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 amended restated loan agreement required us maintain minimum cash balance 25 million tangible net worth measured end fiscal quarters term amended restated loan agreement amended expired march 31 2015 draw line credit extend term loan agreement november 24 2008 board directors approved 30 million share repurchase program acquisitions share repurchase program may made time prevailing prices permitted securities laws legal requirements subject market conditions factors share repurchase program may discontinued time expiration date restriction governing period repurchase shares program october 2015 board directors authorized increase existing share repurchase program 30 million 50 million 2015 purchased total 809241 shares total cash payment 228 million december 31 2015 authorization repurchase 183 million remaining repurchase program believe working capital anticipated cash flow operations sufficient fund longterm liquidity requirements foreseeable future balance sheet arrangements contractual obligations commercial commitments party capital leases equipment initial term 36 60 months noncancelable operating leases obligations presented december 31 2015 dollars thousands enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments ensure adequate component availability preparation new product introductions also 45 million longterm commitments purchases delivered 2017 obligations included table primarily represent estimated payments due acquisition related earnouts 03 million liability unrecognized tax benefits excluded contractual obligations table due uncertainty period settlement respective taxing authorities inflation material impact results operations recent years expect inflation material impact operations 2016 critical accounting policies preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosure contingent assets liabilities base estimates historical experience along various factors believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources judgments subjective complex consequently actual results may differ estimates different assumptions conditions given estimate assumption made management may estimates assumptions reasonable believe given current facts circumstances unlikely applying reasonable estimate assumption would materially impact financial statements response sec’s financial reporting release fr60 “cautionary advice regarding disclosure critical accounting policies” selected critical accounting policies purposes explaining methodology used calculation addition inherent uncertainties pertaining possible effects financial condition critical policies discussed processes recognizing revenue reserve excess obsolete inventory income taxes reserve warranties goodwill impairment business combinations stockbased compensation policies affect current assets operating results therefore critical assessing financial operating status policies involve certain assumptions incorrect could adverse impact operations financial position revenue recognition revenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related measurement imaging realization equipment related software generally recognized upon shipment consider earnings process complete shipping date fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year revenues presented net salesrelated taxes reserve excess obsolete inventory value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income twoyear period tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income least twoyear period significant judgment required determining worldwide provision income taxes ordinary course operating global business many transactions ultimate tax outcome uncertain establish provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold described accounting standards codification topic 740 income taxes tax position likely sustained upon examination applicable taxing authority ordinary course business examined various federal state foreign tax authorities regularly assess potential outcome examinations future examinations current prior years determining adequacy provision income taxes assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts gave rise revision become known reserve warranties establish time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future goodwill impairment goodwill represents excess cost business acquisition fair value net assets acquired goodwill amortized tested impairment least annually perform annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units elect initially perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted unable conclude likely fair value reporting unit containing goodwill less carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method comparing fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2015 2014 2013 business combinations allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available stockbased compensation measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition determined using blackscholes optionpricing model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant additionally calculating compensation expense awards also required estimate extent awards forfeited prior vesting many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates forfeiture differ current estimates amounts recorded cumulative adjustment previously recorded amounts expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation adjusted estimated forfeitures using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation adjusted estimated forfeitures straightline basis requisite service period separately vesting portion award taking account probability satisfy performance condition furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive excess tax benefits credited common stock deduction reduces cash taxes payable tax deductions excess compensation cost classified financing cash inflows consolidated statements cash flows impact recently issued accounting standards september 2015 financial accounting standards board “fasb” issued accounting standards update “asu” 201516 business combinations topic 805 simplifying accounting measurementperiod adjustments eliminates requirement acquirer business combination account measurementperiod adjustments retrospectively instead acquirers must recognize measurementperiod adjustments period amounts determined new guidance effective fiscal years beginning december 15 2015 interim periods within fiscal years early adoption permitted believe implementation standard material impact consolidated financial statements july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory changes measurement principle inventory lower cost market lower cost net realizable value asu 201511 defines net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation new guidance must applied prospective basis effective fiscal years beginning december 15 2015 interim periods within years early adoption permitted believe implementation standard material impact consolidated financial statements may 2014 fasb issued amendment accounting guidance related revenue recognition amendment result joint project fasb international accounting standards board “iasb” clarify principles recognizing revenue develop common revenue standards us gaap international financial reporting standards meet objectives fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” asu 201409 based principle revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 also requires additional disclosure nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract august 2015 fasb issued asu 201514 revenue contracts customers topic 606 deferral effective date deferring effective date asu 201409 one year deferral new standard effective us january 1 2018 standard permits use either retrospective cumulative effective transition method evaluating impact adopting standard consolidated financial statements related disclosures yet selected transition method determined effect standard ongoing financial reporting item 7a item 7a quantitative qualitative disclosures market risk applicable item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference herein section report part ii item 7 caption foreign exchange exposure item 8nanitem 7a quantitative qualitative disclosures market risk information required item incorporated reference herein section report part ii item 7 captions foreign exchange exposure inflation conversion euro currency item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference herein section report part ii item 7 captions “foreign exchange exposure” “inflation” “conversion euro currency” item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present slight majority companys revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect companys business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results companys operations cannot accurately predicted extent percentage companys nonus dollar revenues derived international sales increases future companys exposure risks associated fluctuations foreign exchange rates increase inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2004 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present slight majority company’s revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage company’s nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates increase inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2004 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present slight majority company’s revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage company’s nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates increase inflation company believes inflation material impact results operations recent years expect inflation material impact operations 2006 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present slight majority company’s revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage company’s nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates increase item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 58 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future company’s exposure risks associated fluctuations foreign exchange rates may increase decrease item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 626 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases decreases future company’s exposure risks associated fluctuations foreign exchange rates may increase decrease item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 627 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect business results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates may increase item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 616 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates may increase company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2011 2010 2009 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 587 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates may increase company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2013 2012 2011 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 64 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted due company’s constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although company’s significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates may increase company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2014 2013 2012 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure conduct significant portion business outside united states 2017 61 revenue invoiced significant portion operating expenses paid foreign currencies december 31 2017 58 assets denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted due constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future exposure risks associated fluctuations foreign exchange rates may increase aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2017 2016 2015 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure conduct significant portion business outside united states 2018 61 revenue invoiced significant portion operating expenses paid foreign currencies december 31 2018 52 assets denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted due constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future exposure risks associated fluctuations foreign exchange rates may increase aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2018 2017 2016 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure conduct significant portion business outside united states 2019 60 revenue invoiced significant portion operating expenses paid foreign currencies december 31 2019 41 assets denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted due constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future exposure risks associated fluctuations foreign exchange rates may increase aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2019 2018 2017 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure conduct significant portion business outside united states 2020 61 revenue invoiced significant portion operating expenses paid foreign currencies december 31 2020 42 assets denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted due constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future exposure risks associated fluctuations foreign exchange rates may increase aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2020 2019 2018 item 8item 7a quantitative qualitative disclosures market risk information required item incorporated reference herein section report part ii item 7 captions foreign exchange exposure inflation item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 603 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates may increase company aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however regularly use instruments none utilized 2012 2011 2010 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure conduct significant portion business outside united states 2016 59 revenue invoiced significant portion operating expenses paid foreign currencies december 31 2016 56 assets denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted due constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future exposure risks associated fluctuations foreign exchange rates may increase aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2016 2015 2014 item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure company conducts significant portion business outside united states present 623 revenues invoiced significant portion operating expenses paid foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect company’s results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results company’s operations cannot accurately predicted extent percentage nonus dollar revenues derived international sales increases future company’s exposure risks associated fluctuations foreign exchange rates may increase item 8item 7a quantitative qualitative disclosures market risk foreign exchange exposure conduct significant portion business outside united states present 58 revenue invoiced significant portion operating expense paid foreign currencies well 56 assets denominated foreign currencies fluctuations exchange rates us dollar foreign currencies may material adverse effect results operations financial condition could specifically result foreign exchange gains losses impact future exchange rate fluctuations results operations cannot accurately predicted due constantly changing exposure various currencies fact foreign currencies react manner relation us dollar number currencies involved although significant exposures euro swiss franc japanese yen brazilian real extent percentage nonus dollar revenues derived international sales increases future exposure risks associated fluctuations foreign exchange rates may increase aware availability offbalance sheet financial instruments hedge exposure foreign currency exchange rates including crosscurrency swaps forward contracts foreign currency options however used instruments past none utilized 2015 2014 2013 item 8 item 8 financial statements supplementary data information required item incorporated reference pages 15 24 companys 1997 annual report stockholders item 9item 8 financial statements supplementary data independent auditors report board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc subsidiaries december 31 1998 1997 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position faro technologies inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles deloitte touche llp jacksonville florida february 19 1999 faro technologies inc subsidiaries consolidated balance sheets see notes consolidated financial statements faro technologies inc subsidiaries consolidated statements operations see notes consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders equity see notes consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows see notes consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 1998 1997 1996 1 summary significant accounting policies description business faro technologies inc subsidiaries company develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software company three whollyowned subsidiaries faro worldwide inc cats gmbh german company antares lda portugese company principles consolidation consolidated financial statements include accounts faro whollyowned subsidiaries collectively company significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect period end assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component comprehensive income revenue recognition product warranty extended maintenance contracts revenue related companys 3d measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportionately maintenance costs projected incurred prior november 1 1997 revenues recognized ratable contract term change estimate respect recognition revenues accurately matches revenues costs incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred cash equivalents company considers cash hand amounts deposit financial institutions original maturities three months less cash equivalents shortterm investments shortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations amounts maturities less one year faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued inventories stated lower average cost net realizable value order achieve better matching production costs revenues generated production certain fixed overhead costs certain general administrative costs related production capitalized inventory incurred charged cost sales product costs time sale amounts material consolidated financial statements sales demonstration inventory comprised measuring devices utilized sales representatives present companys products customers products remain sales demonstration inventory six months subsequently sold prices produce slightly reduced gross margins property equipment property equipment recorded cost depreciation computed using straightline decliningbalance methods estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease intangibles goodwill represents excess purchase price fair value businesses acquired amortized straightline basis 5 years acquired intangibles principally include core technology existing product technology workforce place customer relationships arose connection acquisition cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers patents recorded cost amortization computed using straightline method lives patents 17 years faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued intangibles amortized periods ranging 2 5 years research development research development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred income taxes company utilizes asset liability method measure record deferred income tax assets liabilities deferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases measured using enacted tax rates apply taxable income years temporary differences expected recovered settled deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instruments companys financial instruments include cash equivalents shortterm investments accounts receivable accounts payable liabilities banks shareholders carrying amount longterm debt banks approximates fair value based interest rates currently available company issuance debt similar terms remaining maturities carrying amounts financial instruments approximate fair value shortterm maturities earnings per share basic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings reconciliation number common shares used calculation basic diluted eps presented note 11 concentration credit risk financial instruments potentially expose company concentrations credit risk consist principally operating demand deposit accounts companys policy place operating demand deposit accounts high credit quality financial institutions june 1996 company entered original equipment manufacturer agreement mitutoyo corporation mitutoyo japanese company manufactures markets metrology tools agreement mitutoyo sells companys products name spinarm agreement grants mitutoyo nonexclusive right sales japan expires june 1999 renewable successive one year terms faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued customer represented 10 companys total sales years ended december 31 1998 1997 one customer accounted approximately 10 total sales year ended december 31 1996 stockbased compensation accordance sfas 123 accounting stockbased compensation sfas 123 company elected continue account employee stock compensation plans apb opinion 25 proforma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock fair value based method compensation cost measured grant date based value award recognized service period usually vesting period longlived assets longlived assets including property equipment intangible assets reviewed impairment whenever events changes business circumstances indicate carrying value assets may recoverable impairment losses recognized expected future cash flows related assets less carrying values estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently adopted accounting standards june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income sfas 130 effective fiscal years beginning december 15 1997 sfas 130 requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements sfas 130 require specific format financial statement requires entity display amount representing total comprehensive income period statement sfas 130 requires entity classify items comprehensive income nature financial statement example comprehensive income may include foreign currency unrealized gains losses certain investments debt equity securities addition accumulated balance comprehensive income must displayed faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued separately retained earnings additional paid capital equity section statement financial position company adopted accounting standard january 1 1998 required prior year financial statements restated comparative purposes june 1997 fasb issued sfas 131 disclosure segments enterprise related information sfas 131 effective fiscal years beginning december 15 1997 sfas 131 establishes standards reporting information operating segments annual financial statements requires selected information operating segments interim financial reports shareholders also establishes standards related disclosures products services geographic areas major customers operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance sfas 131 requires reporting segment profit loss certain specific revenue expense items segment assets also requires reconciliations total segment revenues total segments profit loss total segment assets amounts disclosed segments corresponding amounts reported financial statements october 1997 american institute certified public accountants issued statement position 972 software revenue recognition sop 972 sop 972 provides guidance applying generally accepted accounting principles recognizing revenue software transactions effective transactions entered fiscal years beginning december 15 1997 company adopted sop 972 january 1 1998 required adoption sop 972 material effect financial statements february 1998 fasb issued sfas 132 employers disclosures pensions postretirement benefits sfas 132 effective fiscal years beginning december 15 1997 sfas 132 revises employer disclosures pension postretirement benefit plans change measurement recognition plans statement standardizes disclosure requirements pensions postretirement benefits extent practicable requires additional information changes benefit obligations fair values plan assets facilitate financial analysis eliminates certain disclosures restatement disclosures earlier periods required adoption sfas 132 material impact financial statements new accounting standards june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities effective fiscal years faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued beginning june 15 1999 sfas 133 requires companies record derivatives balance sheet assets liabilities measured fair value gains losses resulting changes values derivatives would accounted depending use derivative whether qualifies hedge accounting company completed evaluation impact standard financial statements reclassifications certain prior year amounts reclassified conform current year presentation 2 acquisition cats may 15 1998 company acquired cats total consideration 16069000 consisting 5 million cash 916668 shares common stock assumption certain outstanding liabilities cats addition 333332 shares common stock issued provided cats meets certain sales performance goals purchase price includes direct costs acquisition amount 674000 acquisition recorded purchase method accounting final allocation among tangible intangible assets liabilities follows valuation cats based managements estimates tax net cash flows gives explicit consideration security exchange commissions sec recent views inprocess research development purchase transactions making allocation purchase price company considered present value cash flows income status projects completion costs project risk specifically company considered 1 value core technology ensured relative allocations core technology process technology consistent relative faro technologies inc subsidiaries notes consolidated financial statementscontinued 2 acquisition catscontinued contributions final products 2 stage completion individual projects ensured value considered efforts completed transaction date amount allocated process research development 32 million expensed upon acquisition determined underlying projects reached technological feasibility alternative future use successful future development uncertain operating results cats included consolidated statements since date acquisition following unaudited pro forma results operations presented informational purposes assuming company acquired cats january 1 1997 32 million charge process research development excluded pro forma results represents material nonrecurring charge pro forma results operations prepared comparative purposes purport indicative results operations actually would resulted acquisition occurred date indicated may result future faro technologies inc subsidiaries notes consolidated financial statementscontinued 3 supplemental cash flow information selected cash payments noncash activities follows 4 inventories consist following 5 intangible assets intangible assets consist following faro technologies inc subsidiaries notes consolidated financial statementscontinued 6 lines credit debt longterm debt consists following december 31 1998 secured note collateralized telephone system carrying value approximately 13700 unsecured note shareholders noninterest bearing due december 31 1999 april 1997 company obtained oneyear unsecured 10 million line credit bears interest 30day commercial paper rate plus 265 per annum line credit extended 1998 expires march 31 1999 borrowings outstanding line credit december 31 1998 1997 company available two financial institutions shortterm revolving lines credit aggregating 445000 lines subsidiary may borrow funds operations lines credit personally guaranteed certain shareholders total amount outstanding lines december 31 1998 approximately 296000 average interest rates borrowings december 31 1998 9 7 related party transactions leases company leases plant office building xenon research inc xenon 24 shareholder lease amended 1997 provide additional premises increase base rent approximately 150000 expires february 28 2001 company two fiveyear renewal options base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 300000 1998 150000 1997 1996 faro technologies inc subsidiaries notes consolidated financial statementscontinued 8 income taxes loss income taxes consisted following components expense benefit income taxes follows income taxes years ended december 31 1998 1997 1996 differ amount computed applying federal statutory corporate rate income taxes differences reconciled follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 8 income taxescontinued components companys net deferred tax asset december 31 1998 1997 follows december 31 1998 companys foreign subsidiaries deferred tax assets relating net operating loss carryforwards expire intangible assets 944000 2089000 respectively financial reporting purposes valuation allowance 3033000 recognized offset deferred tax assets relating net operating losses intangible assets faro technologies inc subsidiaries notes consolidated financial statementscontinued 9 commitments contingencies leases following schedule future minimum lease payments required noncancelable operating leases including leases related parties see note 7 effect december 31 1998 rent expense 1998 1997 1996 approximately 641000 236000 173000 respectively litigation normal course business company subject various proceedings lawsuits claims matters subject many uncertainties outcomes predictable assurance uncertainties could affect future operations company believes final disposition monetary liability financial impact would expected materially adverse effect companys consolidated financial statements 10 stock option plans company three stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors company authorized grant options 1000000 shares common stock 1993 plan 295997 133218 options granted exercise prices 36 360 respectively options vest primarily 3 4 year periods company authorized grant options 750000 shares common stock 1997 plan 328000 options granted exercise prices 12 1320 meant qualify treatment incentive stock options vest three year period faro technologies inc subsidiaries notes consolidated financial statementscontinued 10 stock option planscontinued company authorized grant 250000 shares common stock nonemployee director plan nonemployee director granted 3000 options upon election reelection board directors formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest three year period additionally 1997 certain nonemployee directors granted options purchase 160000 common stock consideration prior service board directors options vested upon grant exercise price 12 additionally companys 1997 nonemployee directors fee plan permits nonemployee directors elect receive directors fees form common stock rather cash common stock issued lieu cash directors fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter compensation cost charged operations associated companys stock option plans 172164 408000 23100 1998 1997 1996 respectively compensation cost based difference value stock date grant exercise price multiplied number shares vested year summary stock option activity weighted average exercise prices follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 10 stock option planscontinued summary stock options outstanding exercisable december 31 1998 follows remaining nonexercisable options december 31 1998 become exercisable follows compensation cost companys stockbased compensation plans determined consistent sfas 123 companys net earnings per share would follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 10 stock option planscontinued company used blackscholes optionpricing model determine fair value grants made options granted 1996 following assumptions applied determining pro forma compensation cost effects applying sfas 123 pro forma disclosures representative effects expected reported net income per share future years since disclosures reflect compensation expense options granted prior 1996 11 earnings per share reconciliation number common shares used calculation basic diluted eps presented 12 benefit plan 1996 company established defined contribution retirement plan 401k employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participants account cannot exceed 4 compensation company made contributions plan three years ending december 31 1998 faro technologies inc subsidiaries notes consolidated financial statementscontinued 13 segment geographic data company develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software one line business represents 99 consolidated sales company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area company aggregated sales teams single operating segment result similarities nature products sold type customers methods used distribute companys products following table presents information company geographic area 14 quarterly results operations unaudited item 9item 8 financial statements supplementary data page independent auditors report 25 consolidated balance sheets december 31 1999 1998 26 consolidated statements operations years ended december 31 1999 1998 1997 27 consolidated statements shareholders equity years ended december 31 1999 1998 1997 28 consolidated statements cash flows years ended december 31 1999 1998 1997 29 notes consolidated financial statements 30 independent auditors report board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc subsidiaries december 31 1999 1998 related consolidated statements operations shareholders equity cash flows three years period ended december 31 1999 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position faro technologies inc subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states america deloitte touche llp certified public accountants tampa florida march 17 2000 faro technologies inc subsidiaries consolidated balance sheets see notes consolidated financial statements faro technologies inc subsidiaries consolidated statements operations see notes consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders equity see notes consolidated financial statements faro technologies inc subsidiaries consolidated statement cash flows see notes consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 1999 1998 1997 1 summary significant accounting policies description business faro technologies inc subsidiaries develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software company three whollyowned subsidiaries faro worldwide inc faro europe gmbh co kg german company antares lda portuguese company principles consolidation consolidated financial statements include accounts faro technologies inc whollyowned subsidiaries collectively company significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect period end assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component comprehensive loss income revenue recognition product warranty extended maintenance contracts revenue related companys 3d measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportionately maintenance costs projected incurred prior november 1 1997 revenues recognized ratably contract term change estimate respect recognition revenues accurately matches revenues costs incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred cash equivalents company considers cash hand amounts deposit financial institutions original maturities three months less cash equivalents faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued shortterm investments debt securities maturities three months less included cash equivalents classified trading securities carried fair value based upon quoted market prices investments december 31 1999 1998 accordingly net realized unrealized gains losses trading securities included income consolidated statements operations total trading securities included cash equivalents 4694451 145437 december 31 1999 1998 respectively gross unrealized gain loss trading securities unrealized loss approximately 18000 december 31 1999 unrealized gain approximately 3000 december 31 1998 investments shortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations amounts maturities less one year investments ordinarily consist debt securities acquired cash immediately needed operations amounts maturities least one year none maturities exceeding eighteen months management determines appropriate classification short term investments debt securities time purchase reevaluates determinations balance sheet date investments debt securities classified held maturity company positive intent ability hold securities maturity held maturity securities stated amortized cost amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization interest included income consolidated statements operations companys investments debt securities diversified among high credit quality securities accordance companys investment policy gross unrealized gain loss held maturity debt securities unrealized loss approximately 83000 december 31 1999 unrealized loss approximately 40000 december 31 1998 inventories stated lower average cost net realizable value order achieve better matching production costs revenues generated production certain fixed overhead costs certain general administrative costs related production capitalized inventory incurred charged cost sales product costs time sale amounts material consolidated financial statements sales demonstration inventory comprised measuring devices utilized sales representatives present companys products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued property equipment property equipment recorded cost depreciation computed using straightline decliningbalance methods estimated useful lives various classes assets follows machinery equipment 2 10 years furniture fixtures 5 10 years leasehold improvements amortized straightline basis lesser life asset term lease intangibles goodwill represents excess purchase price fair value businesses acquired amortized straightline basis 5 years acquired intangibles principally include core technology existing product technology workforce place customer relationships arose connection acquisition cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers patents recorded cost amortization computed using straightline method lives patents 17 years intangibles amortized periods ranging 3 5 years research development research development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred income taxes company utilizes asset liability method measure record deferred income tax assets liabilities deferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued measured using enacted tax rates apply taxable income years temporary differences expected recovered settled deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instruments companys financial instruments include cash equivalents shortterm investments accounts receivable investments accounts payable liabilities banks carrying amount longterm debt banks approximates fair value based interest rates currently available company issuance debt similar terms remaining maturities carrying amounts financial instruments approximate fair value shortterm maturities earnings per share basic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings reconciliation number common shares used calculation basic diluted eps presented note 12 concentration credit risk financial instruments potentially expose company concentrations credit risk consist principally operating demand deposit accounts companys policy place operating demand deposit accounts high credit quality financial institutions june 1996 company entered original equipment manufacturer oem agreement mitutoyo corporation mitutoyo japanese company manufactures markets metrology tools agreement mitutoyo sells companys products name spinarm agreement grants mitutoyo nonexclusive right sales japan originally expired june 1999 renewed successive oneyear term 1999 march 1999 company entered oem agreement brown sharpe manufacturing company brown sharpe north kingstown rhode island company world leader manufacture traditional cmms metrology products brown sharpe market faroarmregistered trademark worldwide name gage 2000 agreement grants brown sharpe nonexclusive distribution right worldwide expires march 2001 renewable successive oneyear terms customer represented 6 companys total sales years ended december 31 1999 1998 faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued stockbased compensation accordance statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 company elected continue account employee stock compensation plans accounting principle board apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock fair value based method compensation cost measured grant date based value award recognized service period usually vesting period longlived assets longlived assets including property equipment certain intangible assets held used company reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable impairment losses recognized expected future cash flows related assets less carrying values measurement impairment loss based fair value asset longlived assets certain identifiable intangibles disposed reported lower carrying amount fair value less cost sell see note 2 regarding impairment certain developed core technology estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently adopted accounting standards june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income sfas 130 effective fiscal years beginning december 15 1997 sfas 130 requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements sfas 130 require specific format financial statement requires entity display amount representing total comprehensive income period statement sfas 130 requires entity classify items comprehensive income nature financial statement example comprehensive loss income may include foreign currency unrealized gains losses certain investments debt equity securities addition accumulated balance comprehensive income must faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued displayed separately retained earnings additional paid capital equity section statement financial position company adopted accounting standard january 1 1998 required prior year financial statements restated comparative purposes june 1997 fasb issued sfas 131 disclosure segments enterprise related information sfas 131 effective fiscal years beginning december 15 1997 sfas 131 establishes standards reporting information operating segments annual financial statements requires selected information operating segments interim financial reports shareholders also establishes standards related disclosures products services geographic areas major customers operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance sfas 131 requires reporting segment profit loss certain specific revenue expense items segment assets also requires reconciliations total segment revenues total segments profit loss total segment assets amounts disclosed segments corresponding amounts reported financial statements october 1997 american institute certified public accountants issued statement position 972 software revenue recognition sop 972 sop 972 provides guidance applying generally accepted accounting principles recognizing revenue software transactions effective transactions entered fiscal years beginning december 15 1997 company adopted sop 972 january 1 1998 required adoption sop 972 material effect financial statements new accounting standards fasb recently issued sfas 137 accounting derivative instruments hedging activitiesdeferral effective date fasb statement 133 sfas 137 sfas 137 defers one year effective date sfas 133 accounting derivative instruments hedging activities sfas 133 rule apply fiscal quarters fiscal years beginning june 15 2000 sfas 137 permits early adoption beginning fiscal quarter issuance sfas 133 require company recognize derivatives balance sheet fair value derivatives hedges must adjusted fair value income derivative hedge depending nature hedge changes fair value derivatives either offset change fair value hedged assets liabilities firm commitments earnings recognized comprehensive income hedged item recognized earnings faro technologies inc subsidiaries notes consolidated financial statementscontinued 1 summary significant accounting policiescontinued ineffective portion derivatives change fair value immediately recognized earnings company completed evaluation impact sfas 133 financial statements reclassifications certain prior year amounts reclassified conform current year presentation 2 acquisition cats may 15 1998 company acquired cats gmbh cats total consideration 16069000 consisting 5 million cash 916668 shares common stock assumption certain outstanding liabilities cats purchase price includes direct costs acquisition amount 674000 addition 333332 shares common stock placed escrow issued provided cats met certain sales performance goals within eighteenmonth period following acquisition sales goals met november 15 1999 90day period registering disputes expired february 13 2000 claims 333332 shares held escrow agent returned company acquisition agreement provided company would provide loan two former shareholders cats fund tax liability connection shares faro common stock received acquisition former cats shareholders remain key employees company pursuant loan agreement dated august 2 1999 former cats shareholders company agreed loan former cats shareholders amount equal tax obligation german tax authorities connection acquisition cats aggregate amount loans estimated approximately 2 million company obligated provide loans german tax authorities request payment tax former cats shareholders yet occurred moreover loan commitment cease companys share price rises 1134 per share price establishing tax liability several consecutive days loans made term three years interest rate approximately 43 option borrower extend term additional three years collateral loans former cats shareholders pledge company number shares company common stock equal amount loan divided 6375 amount loans 2 million loans secured 313725 shares loans nonrecourse obligation former cats shareholders faro technologies inc subsidiaries notes consolidated financial statementscontinued 2 acquisition catscontinued acquisition recorded purchase method accounting final allocation among tangible intangible assets liabilities follows tangible assets including cash 5618 1522000 intangible assets developed core technology 8940000 workforce place 550000 customer relations 590000 goodwill 2871000 inprocess technology 3210000 liabilities assumed 1614000 16069000 valuation cats based managements estimates tax net cash flows gives explicit consideration security exchange commissions sec recent views inprocess research development purchase transactions making allocation purchase price company considered present value cash flows income status projects completion costs project risk specifically company considered 1 value core technology ensured relative allocations core technology inprocess technology consistent relative contributions final products 2 stage completion individual projects ensured value considered efforts completed transaction date amount allocated inprocess research development 32 million expensed upon acquisition determined underlying projects reached technological feasibility alternative future use successful future development uncertain fourth quarter 1999 company recorded writedown developed core technology approximately 3073000 consolidated statement operations writedown accordance sfas 121 accounting impairment longlived assets sfas 121 developed core technology determined impaired anticipated future cash flows resulting software products acquired cats gmbh indicate recoverability portion developed core technology reasonably assured estimated fair value developed core technology determined calculating present value estimated future cash flows faro technologies inc subsidiaries notes consolidated financial statementscontinued 2 acquisition catscontinued operating results cats included consolidated statements operations since date acquisition following unaudited pro forma results operations presented informational purposes assuming company acquired cats january 1 1997 32 million charge inprocess research development excluded pro forma results represents material unusual charge pro forma results operations prepared comparative purposes purport indicative results operations actually would resulted acquisition occurred date indicated may result future 3 supplemental cash flow information selected cash payments non cash activities follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 4 inventories consist following december 31 1999 1998 raw materials 1914543 2778081 finished goods 1191977 1486572 sales demonstration 3092894 2178965 6199414 6443618 5 intangible assets intangible assets consist following december 31 1999 1998 goodwill 2695632 3033767 existing product technology 5320924 9446839 work force place 516405 581181 customer relationships 553961 623449 product design costs 886897 744229 patents 1102821 956439 283067 130639 11359707 15516543 accumulated amortization 5380635 2695352 intangible assets net 5979072 12821191 6 accrued liabilities accrued liabilities consist following december 31 1999 1998 accrued compensation benefits 1334675 221105 accrued royalties warranties 227486 accrued liabilities 1276169 610988 2838330 832093 faro technologies inc subsidiaries notes consolidated financial statementscontinued 7 notes payable debt longterm debt consists following december 31 1999 1998 58 secured note 5424 10092 4year 59 automobile loan 20812 unsecured note shareholders 31388 26236 41480 less current portion 8746 4156 17490 37324 longterm debt 17490 37324 included longterm liabilities accompanying consolidated balance sheets december 31 1999 1998 respectively secured note collateralized telephone system repaid full january 2000 november 1999 subsidiary acquired company vehicle financing medium payable 4 years expire 2003 loan originally financed approximately 22000 april 1997 company obtained oneyear unsecured 10 million line credit bears interest 30day commercial paper rate plus 265 per annum line credit extended 1998 1999 expires march 31 2000 borrowings outstanding line credit december 31 1999 1998 subsidiary standby line credit 20000 german bank secure remaining lease obligation former german headquarters 3 fee charged annually amount line credit december 1998 company available two financial institutions shortterm revolving lines credit aggregating 445000 lines subsidiary could borrow funds operations lines credit personally guaranteed certain shareholders total amount outstanding lines december 31 1998 approximately 296000 average interest rates borrowings december 31 1998 9 entire balance repaid 1999 line credit renewed faro technologies inc subsidiaries notes consolidated financial statementscontinued 8 related party transactions leases company leases plant office building xenon research inc xenon 26 shareholder lease amended 1997 provide additional premises increase base rent approximately 150000 expires february 28 2001 company two fiveyear renewal options base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 358000 1999 300000 1998 150000 1997 9 income taxes loss income taxes consisted following components income tax benefit expense income taxes follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 9 income taxescontinued income tax benefit expense years ended december 31 1999 1998 1997 differ amount computed applying federal statutory corporate rate income taxes differences reconciled follows components companys net deferred tax asset december 31 1999 1998 follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 9 income taxescontinued december 31 1999 companys foreign subsidiaries deferred tax assets relating net operating loss carryforwards expire intangible assets 2299211 3762451 respectively financial reporting purposes valuation allowance 6061662 recognized offset deferred tax assets relating net operating losses intangible assets 10 commitments contingencies leases following schedule future minimum lease payments required noncancelable operating leases including leases related parties see note 8 effect december 31 1999 year ending december 31 amount 2000 964000 2001 536000 2002 334000 2003 292000 2004 283000 total future minimum lease payments 2409000 rent expense 1999 1998 1997 approximately 973000 641000 236000 respectively litigation normal course business company subject various proceedings lawsuits claims matters subject many uncertainties outcomes predictable assurance uncertainties could affect future operations company believes final disposition monetary liability financial impact would expected materially adverse effect companys consolidated financial statements 11 stock option plans company three stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan amended restated 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors faro technologies inc subsidiaries notes consolidated financial statementscontinued 11 stock option planscontinued company authorized grant options 1000000 shares common stock 1993 plan 295997 133218 options granted exercise prices 036 360 respectively options vest primarily 3 4 year periods company authorized grant options 1400000 shares common stock 1997 plan 857594 options granted exercise prices 331 1430 meant qualify treatment incentive stock options vest threeyear period subsequent december 31 1999 additional 218550 options granted company authorized grant 250000 shares common stock nonemployee director plan nonemployee director granted 3000 options upon election reelection board directors formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest threeyear period additionally 1997 certain nonemployee directors granted options purchase 160000 common stock consideration prior service board directors options vested upon grant exercise price 12 additionally companys 1997 nonemployee directors fee plan permits nonemployee directors elect receive directors fees form common stock rather cash common stock issued lieu cash directors fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter compensation cost charged operations associated companys stock option plans 168912 172164 408000 1999 1998 1997 respectively compensation cost based difference value stock date grant exercise price multiplied number shares vested year faro technologies inc subsidiaries notes consolidated financial statementscontinued 11 stock option planscontinued summary stock option activity weighted average exercise prices follows summary stock options outstanding exercisable december 31 1999 follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 11 stock option planscontinued remaining nonexercisable options december 31 1999 become exercisable follows year ending december 31 amount 2000 283918 2001 175825 2002 21668 481411 compensation cost companys stockbased compensation plans determined consistent sfas 123 companys net earnings per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost effects applying sfas 123 pro forma disclosures representative effects expected reported net loss income loss income per share future years since disclosures reflect compensation expense options granted prior 1996 faro technologies inc subsidiaries notes consolidated financial statementscontinued 12 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented 13 benefit plan 1996 company established defined contribution retirement 401k plan employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participants account cannot exceed 4 compensation company made contributions plan three years ending december 31 1999 14 segment geographic data company develops manufactures markets supports computeraided design cadbased quality assurance products cadbased inspection statistical process control software one line business represents 99 consolidated sales company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area company aggregated sales teams single operating segment result similarities nature products sold type customers faro technologies inc subsidiaries notes consolidated financial statementscontinued 14 segment geographic datacontinued methods used distribute companys products following table presents information company geographic area 15 quarterly results operations unaudited faro technologies inc subsidiaries notes consolidated financial statementscontinued 15 quarterly results operations unauditedcontinued fourth quarter 1999 includes unusual charges approximately 3073000 related impairment existing developed core software technology acquired cats gmbh unusual charges approximately 900000 related obsolete inventory writedown demonstration inventory identified worldwide physical inventory unusual charges approximately 1200000 primarily related writeoff certain patents capitalized research development costs due changes technology second quarter 1998 includes unusual charges 3210000 related portion cats purchase price attributed inprocess research development expensed immediately item 9item 8 financial statements supplementary data independent auditors report board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc subsidiaries december 31 2001 2000 related consolidated statements operations shareholders equity cash flows two years period ended december 31 2001 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position faro technologies inc subsidiaries december 31 2001 2000 consolidated results operations cash flows two years period ended december 31 2001 conformity accounting principles generally accepted united states ernst young llp orlando florida march 1 2002 independent auditors report board directors shareholders faro technologies inc audited accompanying consolidated statements operations shareholders equity cash flows faro technologies inc subsidiaries year ended december 31 1999 financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements present fairly material respects results operations cash flows faro technologies inc subsidiaries year ended december 31 1999 conformity accounting principles generally accepted united states america deloitte touche llp certified public accountants tampa florida march 17 2000 faro technologies inc subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements operations see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders equity see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2001 2000 1999 1 summary significant accounting policies description businessfaro technologies inc subsidiaries develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software principles consolidationthe consolidated financial statements include accounts faro technologies inc majorityowned subsidiaries collectively company significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component comprehensive loss income revenue recognition product warranty extended maintenance contracts revenue related companys 3d measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportion maintenance costs projected incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred cash equivalentsthe company considers cash hand amounts deposit financial institutions original maturities three months less cash equivalents shortterm investments debt securities maturities three months less classified cash equivalents carried market value based upon quoted market prices investments respective balance sheet date investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations amounts maturities exceeding one year investments ordinarily consist debt securities acquired cash immediately needed operations amounts maturities least one year none maturities exceeding two years investments consisted following faro technologies inc subsidiaries notes consolidated financial statementscontinued management determines appropriate classification short term investments debt securities time purchase reevaluates determinations balance sheet date investments debt securities classified held maturity company positive intent ability hold securities maturity held maturity securities stated amortized cost amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization interest included income consolidated statements operations companys investments debt securities diversified among high credit quality securities accordance companys investment policy gross unrealized gain held maturity debt securities approximately 123000 65000 december 31 2001 2000 respectively inventoriesinventories stated lower average cost net realizable value order achieve better matching production costs revenues generated production certain fixed overhead costs certain general administrative costs related production capitalized inventory incurred charged cost sales product costs time sale shipping handling costs classified component cost sales consolidated statement operations sales demonstration inventory comprised measuring devices utilized sales representatives present companys products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins property equipmentproperty equipment recorded cost depreciation computed using straightline decliningbalance methods estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease intangiblesgoodwill represents excess purchase price fair value businesses acquired amortized straightline basis 5 years december 31 2001 effective january 1 2002 company ceased amortize goodwill accordance provisions sfas 142 see recently adopted accounting standards acquired intangibles principally include core technology existing product technology workforce place customer relationships arose connection acquisition cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features faro technologies inc subsidiaries notes consolidated financial statementscontinued technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers patents recorded cost amortization computed using straight line method lives patents 17 years intangibles amortized periods ranging 3 5 years research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred income taxesdeferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases measured using enacted tax rates apply taxable income years temporary differences expected recovered settled deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instrumentsthe companys financial instruments include cash equivalents shortterm investments accounts receivable investments foreign exchange rate agreements accounts payable carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings reconciliation number common shares used calculation basic diluted eps presented note 13 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally operating demand deposit accounts companys policy place operating demand deposit accounts high credit quality financial institutions 1999 company entered oem agreement brown sharpe manufacturing company brown sharpe unit hexagon b stockholm sweden world leader manufacture traditional coordinate measurement machines cmms metrology products brown sharpe market faroarmr worldwide name gage 2000 agreement grants brown sharpe nonexclusive distribution right worldwide expires march 2002 renewable successive oneyear terms company anticipates agreement renewed customer represented 6 companys total sales years ended december 31 2001 2000 1999 faro technologies inc subsidiaries notes consolidated financial statementscontinued stockbased compensationin accordance statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 company elected continue account employee stock compensation plans accounting principle board apb opinion 25 proforma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock fair value based method compensation cost measured grant date based value award recognized service period usually vesting period april 2000 financial accounting standards board fasb issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 clarifies modifies apb opinion 25 accounting stock issued employees 2001 certain options purchase common stock effectively priced accounted variable plan options accounting could result future charges earnings see note 12 longlived assetslonglived assets including property equipment certain intangible assets held used company reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable impairment losses recognized expected future discounted undiscounted cash flows related assets less carrying values measurement impairment loss based fair value asset longlived assets certain identifiable intangibles disposed reported lower carrying amount fair value less cost sell see note 2 regarding impairment certain developed core technology estimatesthe preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standardsin july 2001 fasb issued statement financial accounting standards 142 goodwill intangible assets sfas 142 sfas 142 establishes accounting reporting standards acquired goodwill intangible assets supersedes apb opinion no17 intangible assets sfas 142 requires goodwill longer amortized earnings instead reviewed impairment company adopted new statement effective january 1 2002 upon adoption sfas 142 operating expenses reduced approximately 480000 annual basis amortization may increase assets determined impaired respective year january 2001 company adopted statement financial accounting standards statement 133 sfas 133 accounting derivative instruments hedging activities amended sfas 133 requires companies recognize derivative instruments either assets liabilities fair value statement financial position accounting changes fair faro technologies inc subsidiaries notes consolidated financial statementscontinued value ie gains losses derivative depends whether designated qualifies part hedging relationship type hedging relationship derivative instruments designated qualify hedging instruments company must designate hedging instrument based exposure hedged derivative instruments designated qualify cash flow hedges effective portion gain loss reported component comprehensive income accounting instruments referred special hedge accounting however sfas 133 eliminates special hedge accounting derivative instrument meet certain criteria august 2001 company entered foreign exchange rate swap allowing company right purchase 13 million base rate 11049 euros per 100 agreement company bank compensate one another based exchange rate agreement differential specified measurement dates foreign exchange rate agreement expires september 2002 qualify special hedge accounting mentioned meet specified criteria sfas 133 therefore changes fair value recorded income year ended december 31 2001 company recognized gain 37000 related change fair value foreign exchange rate agreement statement operations asset 37000 recorded assets balance sheet 2 acquisition cats 1998 company acquired cats gmbh total consideration 16 million including direct costs acquisition consisting 5 million cash 916668 shares companys common stock assumption certain outstanding liabilities cats acquisition recorded purchase method accounting acquisition agreement provided company would provide loan two former shareholders cats remain key employees company fund tax liability connection companys acquisition cats connection therewith june 2000 company former cats shareholders entered amended restated loan agreement company granted loans former cats shareholders aggregate amount 11 million loans term three years interest rate approximately 47 grant borrowers option extend term additional three years collateral loans former cats shareholders pledged company 177074 shares companys common stock loans nonrecourse obligation former cats shareholders valuation cats based managements estimates tax net cash flows certain intangible assets actual tax net cash flows may vary managements original estimates fourth quarter 1999 company recorded writedown developed core technology approximately 31 million consolidated statement operations writedown accordance sfas 121 accounting impairment longlived assets sfas 121 developed core technology determined impaired anticipated future cash flows resulting software products acquired cats gmbh faro technologies inc subsidiaries notes consolidated financial statementscontinued indicate recoverability portion developed core technology reasonably assured estimated fair value developed core technology determined calculating present value estimated future cash flows 3 supplemental cash flow information selected cash payments non cash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows 5 inventories net consist following allowance obsolete slowmoving inventory follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 6 intangible assets intangible assets consist following amortization expense 1557819 2062293 3625045 2001 2000 1999 respectively 7 accrued liabilities accrued liabilities consist following 8 notes payable debt company available line credit 1500000 drawings line credit bear interest rate equivalent 30day commercial paper plus 275 amounts outstanding line credit december 31 2001 2000 longterm debt consists following longterm debt 55506 49260 included longterm liabilities accompanying consolidated balance sheet december 31 2001 2000 respectively long faro technologies inc subsidiaries notes consolidated financial statementscontinued term debt december 31 2001 due follows 200225120 200336867 200415045 20052601 thereafter993 1999 subsidiary financed purchase motor vehicle term loan expires 2003 additionally 2000 companys japanese subsidiary entered capital leases automotive equipment initial term 36 60 months present value minimum lease payments due lease agreements included longterm debt 9 related party transactions related party leasethe company leases plant office building xenon research inc xenon 297 shareholder pursuant terms lease agreement expires 2006 company fiveyear renewal option base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 391000 2001 355000 2000 358000 1999 related party loanson june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 47 grant borrowers option extend term additional three years see note 2 notes consolidated financial statements related party consulting servicesthe company engaged cole partners mergers acquisition corporate finance advisory service firm serve companys financial advisor connection companys acquisition january 2002 spatialmetrix inc smx stephen r cole one companys directors member audit committee founding partner president cole partners company paid cole partners total fees approximately 440000 early 2002 services smx acquisition 10 income taxes loss income taxes consisted following faro technologies inc subsidiaries notes consolidated financial statementscontinued components income tax expense benefit income taxes follows income tax expense benefit years ended december 31 2001 2000 1999 differ amount computed applying federal statutory corporate rate loss income taxes differences reconciled follows faro technologies inc subsidiaries notes consolidated financial statementscontinued components companys net deferred income tax asset follows december 31 2001 companys domestic entities deferred income tax assets amount 1345356 financial reporting purposes valuation allowance 1268938 set year appropriately reflect portion deferred tax asset likely realized december 31 2001 companys foreign subsidiaries deferred income tax assets relating net operating loss carryforwards expire intangible assets 3087378 3227871 respectively financial reporting purposes valuation allowance 6315249 recognized offset deferred tax assets relating net operating losses intangible assets 11 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases including leases related parties see note 8 effect december 31 2001 rent expense 2001 2000 1999 approximately 1101000 1120000 973000 respectively faro technologies inc subsidiaries notes consolidated financial statementscontinued litigationthe company involved pending legal proceedings routine litigation arising normal course business company believe results litigation even outcome unfavorable company would material adverse effect companys business financial condition results operations 12 stock option plans company three stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors additionally connection initial public offering 1997 company issued warrants purchase 100000 shares common stock 1320 per share warrants expire 2002 company authorized grant options 1000000 shares common stock 1993 plan 295997 123372 options granted exercise prices 36 360 respectively options vest primarily 3 4year periods company authorized grant options 1400000 shares common stock 1997 plan 916219 options granted exercise prices 150 1200 meant qualify treatment incentive stock options vest threeyear period company authorized grant 250000 shares common stock 1997 nonemployee director plan nonemployee director granted 3000 options upon election board directors annually upon attending annual meeting shareholders formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest threeyear period additionally 1997 certain nonemployee directors granted options purchase 160000 common stock consideration prior service board directors options vested upon grant exercise price 12 companys 1997 nonemployee directors fee plan company authorized issue 250000 shares common stock permits non employee directors elect receive directors fees form common stock rather cash common stock issued lieu cash directors fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter fourth quarter 2001 company cancelled approximately 548000 money options including approximately 440000 options issued 1997 plan approximately 108000 options issued 1997 nonemployee director plan result 91000 options granted 2001 1997 plan subjected variable accounting treatment fin 44 stock options issued within six months cancellation must accounted variable certain circumstances variable accounting requires companies remeasure compensation costs variable options exercised cancelled forfeited without replacement compensation dependent fluctuations quoted stock prices faro technologies inc subsidiaries notes consolidated financial statementscontinued companys common stock compensation costs recognized threeyear vesting schedule options fully vested exercised cancelled forfeited time compensation recognized immediately reporting period compensation costs charged operations associated companys stock option plans 123404 168912 2000 1999 respectively charge operations 2001 connection plans compensation cost based difference value stock date grant exercise price multiplied number shares vested year summary stock option activity weighted average exercise prices follows summary stock options outstanding exercisable december 31 2001 follows faro technologies inc subsidiaries notes consolidated financial statementscontinued remaining nonexercisable options december 31 2001 become exercisable follows compensation cost companys stockbased compensation plans determined consistent sfas 123 companys net earnings per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost effects applying sfas 123 pro forma disclosures representative effects expected reported net loss income per share future years since disclosures reflect compensation expense options granted prior 1996 faro technologies inc subsidiaries notes consolidated financial statementscontinued 13 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented 14 employee retirement benefits plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participants account cannot exceed 6 compensation costs charged operations connection plan 2001 2000 aggregated 83400 35000 respectively company made contributions plan prior 2000 15 segment geographic data company develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software one line business represents 99 consolidated sales company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area company aggregated sales teams single operating segment result similarities nature products sold type customers methods used distribute companys products following table presents information company geographic area geographical sales information presented represents sales customers located respective country whereas longlived assets information represents assets held respective countries 16 subsequent event january 16 2002 company acquired spatialmetrix corporation smx exchange 500000 shares faro common stock satisfaction company certain obligations smx connection therewith company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smxs obligations two lenders company also assumed andor satisfied obligations smx transaction recorded utilizing purchase method accounting accordance sfas 142 goodwill intangible assets smx corp leading manufacturer supplier laser trackers targets metrology software contract inspection services april 2001 company provided 15 million financing smx entering participation agreement smxs bank pursuant company funded simultaneously acquired 15 million interest smxs outstanding 38 million bank line credit october 2001 company smx entered additional agreement pursuant company would provide smx additional 15 million financing company smxs bank amended participation agreement additional financing smx also would made participation smxs bank line credit consequently smxs bank line credit could increase maximum 53 million faro would 30 million prior closing company provided 29 million aggregate financing smx pursuant participation agreement 17 quarterly results operations unaudited item 9item 8 financial statements supplementary data page independent certified public accountant’s reports consolidated balance sheets december 31 2002 2001 consolidated statements operations years ended december 31 2002 2001 consolidated statements shareholders’ equity years ended december 31 2002 2001 2000 consolidated statements cash flows years ended december 31 2002 2001 notes consolidated financial statements 32 48 independent certified public accountant’s report board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc subsidiaries december 31 2002 2001 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2002 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position faro technologies inc subsidiaries december 31 2002 2001 consolidated results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states described note 6 financial statements company adopted statement financial accounting standards 142 “goodwill intangible assets” effective january 1 2002 ernst young llp orlando florida march 19 2003 faro technologies inc subsidiaries condensed consolidated balance sheets see accompanying notes condensed consolidated financial statements faro technologies inc subsidiaries condensed consolidated statements operations see accompanying notes condensed consolidated financial statements faro technologies inc subsidiaries condensed consolidated statements shareholders’ equity see accompanying notes condensed consolidated financial statements faro technologies inc subsidiaries condensed consolidated statements cash flows see accompanying notes condensed consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2002 2001 2000 1 summary significant accounting policies description businessfaro technologies inc subsidiaries develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software principles consolidationthe consolidated financial statements include accounts faro technologies inc majorityowned subsidiaries collectively “company” significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component comprehensive loss income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportion maintenance costs projected incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use technology medical applications generally recognized received amounts representing royalties current year received year end estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions original maturities three months less cash equivalents shortterm investments debt securities maturities three months less classified cash equivalents carried market value based upon quoted market prices investments respective balance sheet date investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations amounts maturities exceeding one year investments ordinarily consist debt securities acquired cash immediately needed operations amounts maturities least one year none maturities exceeding two years investments consisted following faro technologies inc subsidiaries notes consolidated financial statementscontinued management determines appropriate classification short term investments debt securities time purchase reevaluates determinations balance sheet date investments debt securities classified held maturity company positive intent ability hold securities maturity held maturity securities stated amortized cost amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization interest included income consolidated statements operations company’s investments debt securities diversified among high credit quality securities accordance company’s investment policy gross unrealized gain held maturity debt securities approximately 13000 123000 december 31 2002 2001 respectively inventoriesinventories stated lower average cost net realizable value order achieve better matching production costs revenues generated production certain fixed overhead costs certain general administrative costs related production capitalized inventory incurred charged cost sales product costs time sale shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins property equipmentproperty equipment recorded cost depreciation computed using straightline decliningbalance methods estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease intangiblesgoodwill represents excess purchase price fair value businesses acquired amortized straightline basis 5 years december 31 2001 effective january 1 2002 company ceased amortize goodwill accordance provisions sfas 142 see recently adopted accounting standards acquired intangibles principally include core technology existing product technology customer relationships arose connection acquisition cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers faro technologies inc subsidiaries notes consolidated financial statementscontinued patents recorded cost amortization computed using straightline method lives patents 17 years intangibles amortized periods ranging 3 5 years goodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards 142 “goodwill intangible assets” “statement 142” indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impaired carrying amount reporting unit exceeds implied fair value reporting unit company adopted accounting standard january 2 2002 table sets forth reported net income earnings per share would periods presented exclusive amortization expense recognized periods related goodwill intangible assets longer amortized june 2001 financial accounting standards board “fasb” issued statement financial accounting standards 141 “business combinations” “statement 141” statement 142 statement 141 eliminates pooling method accounting business combinations initiated june 30 2001 addresses initial recognition measurement goodwill intangible assets acquired business combination company adopted accounting standard business combinations initiated june 30 2001 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred faro technologies inc subsidiaries notes consolidated financial statementscontinued income taxesdeferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases measured using enacted tax rates apply taxable income years temporary differences expected recovered settled deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable investments foreign exchange rate agreements accounts payable carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings reconciliation number common shares used calculation basic diluted eps presented note 13 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions customer represented 60 company’s total sales years ended december 31 2002 2001 2000 stockbased compensationin accordance statement financial accounting standards “sfas” 123 “accounting stockbased compensation” “sfas 123” company elected continue account employee stock compensation plans accounting principle board apb opinion 25 proforma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock fair value based method compensation cost measured grant date based value award recognized service period usually vesting period april 2000 financial accounting standards board “fasb” issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 clarifies modifies apb opinion 25 accounting stock issued employees 2001 certain options purchase common stock effectively repriced accounted variable plan options accounting could result future charges earnings see note 12 faro technologies inc subsidiaries notes consolidated financial statementscontinued longlived assetslonglived assets including property equipment certain intangible assets held used company reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable impairment losses recognized expected future discounted undiscounted cash flows related assets less carrying values measurement impairment loss based fair value asset longlived assets certain identifiable intangibles disposed reported lower carrying amount fair value less cost sell see note 2 regarding impairment certain developed core technology estimatesthe preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standardsin january 2001 company adopted fasb statement 133 sfas 133 accounting derivative instruments hedging activities amended sfas 133 requires companies recognize derivative instruments either assets liabilities fair value statement position september 2002 company entered foreign exchange rate swap allowing company right purchase 18 million base rate 10444 euros per 100 agreement company bank compensate one another based exchange rate agreement differential specified measurement dates foreign exchange rate agreement qualify special hedge accounting treatment meet specified criteria sfas 133 therefore changes fair value included determination earnings foreign exchange rate agreement set expire september 2003 terminated december 2002 year ended december 31 2002 company recognized loss 105000 related change fair value subsequent termination foreign exchange rate agreement loss included “other income” june 2001 financial accounting standards board “fasb” issued statement financial accounting standards 141 “business combinations” “statement 141” statement 142 statement 141 eliminates pooling method accounting business combinations initiated june 30 2001 addresses initial recognition measurement goodwill intangible assets acquired business combination company adopted accounting standard business combinations initiated june 30 2001 june 2001 statement financial accounting standards 142 goodwill intangible assets “statement 142” issued stating indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impaired carrying amount reporting unit exceeds implied fair value reporting unit company adopted accounting standard january 1 2002 effect adoption faro technologies inc subsidiaries notes consolidated financial statementscontinued resulted decrease depreciation amortization approximately 740000 year ended december 31 2002 june 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs standard applies legal obligations associated retirement longlived assets result acquisition construction development normal use asset sfas 143 effective fiscal years beginning june 15 2002 company believes adoption sfas 143 material effect financial position results operations october 2001 financial accounting standards board “fasb” issued statement 144 accounting impairment disposal longlived assets sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 supersedes statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 retains many fundamental provisions sfas 121 sfas 144 also supersedes apb opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions sfas 144 retains requirement opinion 30 report separately discontinued operations extends reporting requirement component entity either disposed classified held sale sfas 144 effective fiscal years beginning december 15 2001 interim periods within fiscal years adoption standard material impact financial position results operation june 2002 fasb issued statement financial accounting standards 146 sfas 146 accounting costs associated exit disposal activities sfas 146 addresses financial accounting reporting costs associated exit disposal activities nullified emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 requires liability cost associated exit disposal activity recognized liability incurred rather exit disposal plan approved required adopt provisions sfas 146 exit disposal activities initiated december 31 2002 effect adoption sfas 146 charge prospective basis timing restructuring charges recorded commitment date approach liability recorded company expect adoption sfas 146 material impact financial position results operations november 2002 fasb issued fasb interpretation 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation elaborates disclosures made guarantor interim annual financial statements obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee disclosure requirements interpretation effective interim annual periods december 15 2002 initial recognition initial measurement requirements interpretation effective prospectively guarantees issued faro technologies inc subsidiaries notes consolidated financial statementscontinued modified december 31 2002 interpretations’s expanded disclosures material impact company’s financial position results operations november 2002 eitf reached consensus issue 0021 multipledeliverable revenue arrangements “eitf 0021” eitf 0021 addresses account arrangements may involve delivery performance multiple products services andor rights use assets consensus mandates identify whether goods services delivered separately bundled sales arrangement accounted separately “separate units accounting” guidance affect timing revenue recognition arrangements even though change rules governing timing pattern revenue recognition individual items accounted separately final consensus applicable agreements entered fiscal years beginning june 15 2003 early adoption permitted additionally companies permitted apply consensus guidance existing arrangements cumulative effect change accounting principle accordance apb opinion 20 accounting changes company assessing point believe adoption eitf 0021 material impact financial position cash flows results operations reclassificationcertain 2001 2000 amounts reclassified conform 2002 classifications 2 acquisition january 16 2002 company acquired spatialmetrix corporation “smx” exchange 500000 shares faro common stock 50000 shares held escrow satisfaction company certain obligations smx connection therewith company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smx’s obligations two lenders company also assumed andor satisfied obligations smx transaction recorded utilizing purchase method accounting accordance statement financial accounting standard 142 “goodwill intangible assets” smx manufacturer supplier laser trackers metrology software smx’s previous generation laser tracker introduced 1996 sold september 2001 smx halted production sale earlier generation laser tracker september 2001 company exercised contractual right acquire smx successful design smx new generation laser tracker company sells competitive prices compared previous generation smx tracker competitor’s current products acquisition recorded purchase method accounting final allocation among tangible intangible assets liabilities follows faro technologies inc subsidiaries notes consolidated financial statementscontinued operating results smx included consolidated statements operations since date acquisition following unaudited pro forma results operations year ended december 30 2002 2001 presented informational purposes assuming company acquired smx january 1 2001 pro forma results operations prepared comparative purposes purport indicative results operations actually would resulted acquisition occurred date indicated results operations may result future 3 supplemental cash flow information selected cash payments noncash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows faro technologies inc subsidiaries notes consolidated financial statementscontinued 5 inventories net consist following allowance obsolete slowmoving inventory follows 6 intangible assets intangible assets consist following amortization expense 1156668 1557819 2062293 2002 2001 2000 respectively effective january 1 2002 company stopped amortizing certain indefinitelived intangibles resulted decrease amortization expense approximately 740000 estimated amortization expense five succeeding fiscal years follows 2003746000 2004496000 2005495000 2006488000 2007486000 faro technologies inc subsidiaries notes consolidated financial statementscontinued 7 accrued liabilities accrued liabilities consist following 8 notes payable debt company available lines credit aggregating 1500000 drawings lines credit bear interest rate equivalent 30day commercial paper plus 275 december 31 2002 borrowings lines credit aggregated 1459647 amounts outstanding line credit december 31 2001 debt consists following longterm debt 47028 55506 included longterm liabilities accompanying consolidated balance sheet december 31 2002 2001 respectively longterm debt december 31 2002 due follows 200424783 200514684 20065197 thereafter 2364 1999 subsidiary financed purchase motor vehicle term loan expires 2003 additionally 2000 company’s japanese subsidiary entered capital leases automotive equipment initial term 36 60 months present value minimum lease payments due lease agreements included longterm debt 9 related party transactions related party leasethe company leases plant office building xenon research inc “xenon” 253 shareholder pursuant terms lease agreement expires 2006 company fiveyear renewal option base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 398000 2002 391000 2001 355000 2000 faro technologies inc subsidiaries notes consolidated financial statementscontinued related party loanson june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million “the loans” loans outstanding term three years interest rate approximately 47 grant borrowers option extend term additional three years related party consulting servicesthe company engaged cole partners mergers acquisition corporate finance advisory service firm serve company’s financial advisor connection company’s acquisition january 2002 spatialmetrix inc stephen r cole one company’s directors member audit committee founding partner president cole partners company paid cole partners total fees approximately 450000 services 302000 paid 2002 10 income taxes loss income taxes consisted following components income tax expense benefit income taxes follows faro technologies inc subsidiaries notes consolidated financial statementscontinued income tax expense benefit years ended december 31 2002 2001 2000 differ amount computed applying federal statutory corporate rate loss income taxes differences reconciled follows components company’s net deferred income tax asset follows december 31 2002 company’s domestic entities deferred income tax assets amount 1806863 financial reporting purposes valuation allowance 1806863 set year appropriately reflect portion deferred tax asset likely realized december 31 2002 company’s foreign subsidiaries deferred income tax assets relating net operating loss carryforwards expire intangible assets 3080466 2941665 respectively financial reporting purposes valuation allowance 6022131 recognized offset deferred tax assets relating net operating losses intangible assets faro technologies inc subsidiaries notes consolidated financial statementscontinued 11 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases including leases related parties see note 9 effect december 31 2002 rent expense 2002 2001 2000 approximately 1004000 1101000 1120000 respectively litigationthe company involved pending legal proceedings routine litigation arising normal course business company believe results litigation even outcome unfavorable company would material adverse effect company’s business financial condition results operations 12 stock option plans company three stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan “1993 plan” 1997 employee stock option plan “1997 plan” provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors company authorized grant options 703100 shares common stock 1993 plan 70011 options currently outstanding exercise prices 36 360 options vest primarily 3 4year periods company also authorized grant options 1400000 shares common stock 1997 plan 1331502 options currently outstanding exercise prices 150 1034 meant qualify treatment incentive stock options vest threeyear period company also authorized grant 250000 shares common stock 1997 nonemployee director plan 153000 options currently outstanding exercise prices 221 448 nonemployee director granted 3000 options upon election board directors annually upon attending annual meeting shareholders formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest threeyear period faro technologies inc subsidiaries notes consolidated financial statementscontinued company’s 1997 nonemployee directors’ fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter fourth quarter 2001 company cancelled approximately 548000 “out money” options including approximately 440000 options issued 1997 plan approximately 108000 options issued 1997 nonemployee director plan result 91000 options granted 2001 1997 plan holders options cancelled subjected variable accounting treatment fin 44 stock options issued within six months cancellation must accounted variable certain circumstances variable accounting requires companies remeasure compensation costs variable options exercised cancelled forfeited without replacement compensation dependent fluctuations quoted stock prices company’s common stock compensation costs recognized threeyear vesting schedule options fully vested exercised cancelled forfeited time compensation recognized immediately reporting period compensation costs charged operations associated company’s stock option plans 9526 0 123404 2002 2001 2000 respectively compensation cost based difference value stock date grant exercise price multiplied number shares vested year summary stock option activity weighted average exercise prices follows faro technologies inc subsidiaries notes consolidated financial statementscontinued summary stock options outstanding exercisable december 31 2002 follows remaining nonexercisable options december 31 2002 become exercisable follows compensation cost company’s stockbased compensation plans determined consistent sfas 123 company’s net earnings per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost effects applying sfas 123 pro forma disclosures representative effects expected reported net loss income per share future years since disclosures reflect compensation expense options granted prior 1996 faro technologies inc subsidiaries notes consolidated financial statementscontinued 13 loss per share reconciliation number common shares used calculation basic diluted loss per share “lps” presented effect 92532 123454 dilutive securities included computations years 2002 2001 respectively would antidilutive 14 employee retirement benefits plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participant’s account cannot exceed 6 compensation costs charged operations connection plan 2002 2001 2000 aggregated 102900 83400 35000 respectively 15 segment geographic data company develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software one line business represents approximately 98 consolidated sales company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area company aggregated sales teams single operating segment result similarities nature products sold type customers methods used distribute company’s products following table presents information company geographic area faro technologies inc subsidiaries notes consolidated financial statementscontinued geographical sales information presented represents sales customers located respective country whereas longlived assets information represents assets held respective countries 16 quarterly results operations unaudited royalty income reclassified “other income” “sales” amount reclassified quarter follows 2002q1 132000 q2 193000 q3 288000 q4 379941 2001q1 99000 q2 203500 q3 324000 q4 381600 item 9item 8 financial statements supplementary data page independent certified public accountants report 31 consolidated balance sheets december 31 2003 2002 32 consolidated statements operations years ended december 31 2003 2002 2001 33 consolidated statements shareholders equity years ended december 31 2003 2002 2001 34 consolidated statements cash flows years ended december 31 2003 2002 2001 35 notes consolidated financial statements 37 52 independent certified public accountants report board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc subsidiaries december 31 2003 2002 related consolidated statements operations shareholders equity cash flows three years period ended december 31 2003 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position faro technologies inc subsidiaries december 31 2003 2002 consolidated results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states described note 6 financial statements company adopted statement financial accounting standards 142 goodwill intangible assets effective january 1 2002 ernst young llp orlando florida february 20 2004 faro technologies inc subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements operations see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders equity see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2003 2002 2001 1 summary significant accounting policies description businessfaro technologies inc subsidiaries develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software principles consolidationthe consolidated financial statements include accounts faro technologies inc majorityowned subsidiaries collectively company significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component comprehensive loss income revenue recognition product warranty extended maintenance contractsrevenue related companys measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportion maintenance costs projected incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred revenue licensing agreements use technology medical applications generally recognized received amounts representing royalties current year received year end estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions original maturities three months less cash equivalents shortterm investments debt securities maturities three months less classified cash equivalents carried market value based upon quoted market prices investments respective balance sheet date investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations amounts maturities exceeding one year investments ordinarily consist debt securities acquired cash immediately needed operations amounts maturities least one year none maturities exceeding two years investments consisted following december 31 2003 2002 corporate bonds 432153 427478 commercial paper 15605055 16037208 427478 faro technologies inc subsidiaries notes consolidated financial statementscontinued management determines appropriate classification short term investments debt securities time purchase reevaluates determinations balance sheet date investments debt securities classified held maturity company positive intent ability hold securities maturity held maturity securities stated amortized cost amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization interest included income consolidated statements operations companys investments debt securities diversified among high credit quality securities accordance companys investment policy gross unrealized gain held maturity debt securities approximately 0 13000 december 31 2003 2002 respectively inventoriesinventories stated lower average cost net realizable value shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present companys products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins property equipmentproperty equipment recorded cost depreciation computed using straightline decliningbalance methods estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset term lease intangiblesgoodwill represents excess purchase price fair value businesses acquired amortized straightline basis 5 years december 31 2001 effective january 1 2002 company ceased amortize goodwill accordance provisions sfas 142 goodwill intangible assets acquired intangibles principally include core technology existing product technology customer relationships arose connection acquisition cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers patents recorded cost amortization computed using straightline method lives patents 17 years intangibles amortized periods ranging 3 5 years goodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards 142 goodwill intangible assets statement 142 indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value faro technologies inc subsidiaries notes consolidated financial statementscontinued assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs table sets forth reported net income earnings per share would periods presented exclusive amortization expense recognized periods related goodwill intangible assets longer amortized research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred income taxesdeferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases measured using enacted tax rates apply taxable income years temporary differences expected recovered settled deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instrumentsthe companys financial instruments include cash equivalents shortterm investments accounts receivable investments foreign exchange rate agreements accounts payable carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings reconciliation number common shares used calculation basic diluted eps presented note 13 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally corporate bonds commercial paper operating demand deposit accounts companys policy place operating demand deposit accounts high credit quality financial institutions faro technologies inc subsidiaries notes consolidated financial statementscontinued customer represented 6 companys total sales years ended december 31 2003 2002 2001 stockbased compensationin accordance statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 company elected continue account employee stock compensation plans accounting principle board apb opinion 25 proforma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock fair value based method compensation cost measured grant date based value award recognized service period usually vesting period compensation cost companys stockbased compensation plans determined consistent sfas 123 companys net earnings per share would follows years ended 2003 2002 assume tax effect 376 0 respectively company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost years ended december 31 2003 2002 2001 riskfree interest rate 248 343 251 513 360 672 expected dividend yield 0 expected option life 3 10 years 3 10 years 1 10 years stock price volatility 7420 6230 6250 faro technologies inc subsidiaries notes consolidated financial statementscontinued effects applying sfas 123 pro forma disclosures representative effects expected reported net loss income per share future years since disclosures reflect compensation expense options granted prior 1996 april 2000 financial accounting standards board fasb issued interpretation 44 fin 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 fin 44 clarifies modifies apb opinion 25 accounting stock issued employees 2001 certain options purchase common stock effectively repriced accounted variable plan options see also note 12 longlived assetslonglived assets including property equipment certain intangible assets held used company reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable impairment losses recognized expected future undiscounted cash flows related assets less carrying values estimatesthe preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates foreign exchange rate swap agreementin january 2001 company adopted fasb statement 133 sfas 133 accounting derivative instruments hedging activities amended sfas 133 requires companies recognize derivative instruments either assets liabilities fair value statement position september 2002 company entered foreign exchange rate swap allowing company right purchase 18 million base rate 10444 euros per 100 agreement company bank compensate one another based exchange rate agreement differential specified measurement dates foreign exchange rate agreement qualify special hedge accounting treatment meet specified criteria sfas 133 therefore changes fair value included determination earnings foreign exchange rate agreement set expire september 2003 terminated december 2002 year ended december 31 2002 company recognized loss 105000 related change fair value subsequent termination foreign exchange rate agreement loss included income impact recently issued accounting standards november 2002 eitf reached consensus issue 0021 multipledeliverable revenue arrangements eitf 0021 eitf 0021 addresses account arrangements may involve delivery performance multiple products services andor rights use assets consensus mandates identify whether goods services delivered separately bundled sales arrangement accounted separately separate units accounting guidance affect timing revenue recognition arrangements even though change rules governing timing pattern revenue recognition individual items accounted separately final consensus applicable agreements entered fiscal years beginning june 15 2003 early adoption permitted additionally companies permitted apply consensus guidance faro technologies inc subsidiaries notes consolidated financial statementscontinued existing arrangements cumulative effect change accounting principle accordance apb opinion 20 accounting changes company assessing point believe adoption eitf 0021 material impact financial position cash flows results operations january 2003 fasb issued fasb interpretation 46 fin 46 consolidation variable interest entities interpretation accounting research bulletin 51 consolidated financial statements addresses consolidation business enterprises variable interest entities current practice two enterprises generally included consolidated financial statements one enterprise controls voting interests interpretation defines concept variable interests requires existing unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks among parties involved interpretation applied immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applied first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 reasonably possible enterprise consolidate disclose information variable interest entity interpretation becomes effective enterprise shall disclose information entities financial statements issued january 31 2003 interpretation may applied prospectively cumulativeeffect adjustment date first applied restating previously issued financial statements one years cumulativeeffect adjustment beginning first year restated completed assessment interpretation determined party variable interest entities december 31 2003 december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure sfas 148 amendment sfas 123 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent frequent disclosures financial statements effects stockbased compensation statement effective financial statements fiscal years ending december 15 2002 adoption sfas 148 material impact companys financial position results operations april 2003 fasb issued statement financial accounting standards 149 sfas 149 amendment statement 133 derivative instruments hedging activities statement amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts collectively referred derivatives hedging activities statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities statement effective contracts entered modified june 30 2003 adoption standard material impact financial position results operations may 2003 fasb issued statement financial accounting standards 150 sfas 150 accounting certain financial instruments characteristics liabilities equity statement establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity requires issuer classify financial instrument within scope liability asset circumstances standard effective beginning first interim period beginning june 15 2003 except mandatorily redeemable financial instruments nonpublic entities subject provisions statement first faro technologies inc subsidiaries notes consolidated financial statements continued fiscal period beginning december 15 2003 adoption standard material impact financial position results operations reclassificationcertain 2002 2001 amounts reclassified conform 2003 classifications 2 acquisition january 16 2002 company acquired spatialmetrix corporation smx exchange 500000 shares faro common stock 50000 shares held escrow satisfaction company certain obligations smx connection therewith company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smxs obligations two lenders company also assumed andor satisfied obligations smx transaction recorded utilizing purchase method accounting accordance statement financial accounting standard 141 business combinations acquisition recorded purchase method accounting final allocation among tangible intangible assets liabilities follows tangible assets 3723000 intangible assets purchased technology 1500000 patents licenses 500000 goodwill 7243000 liabilities assumed 5778000 7188000 operating results smx included consolidated statements operations since date acquisition following unaudited pro forma results operations year ended december 30 2002 2001 presented informational purposes assuming company acquired smx january 1 2001 pro forma results operations prepared comparative purposes purport indicative results operations actually would resulted acquisition occurred date indicated results operations may result future year ended december 31 2002 2001 unaudited revenues 46374076 47408591 net loss 2520984 8757839 loss per share basic 021 074 diluted 021 074 2003 company recorded approximately 11 million income result receiving approximately 100000 shares company stock related positive arbitration settlement company former smx shareholders faro technologies inc subsidiaries notes consolidated financial statementscontinued 3 supplemental cash flow information selected cash payments noncash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows years ended december 31 2003 2002 2001 balance beginning year 851852 339715 353514 provision 140249 582463 310981 amounts written net recoveries 737186 70326 324780 balance end year 254915 851852 339715 5 inventories net consist following december 31 2003 2002 raw materials 5624061 3214119 workinprocess 352104 1580667 finished goods 1435112 793094 sales demonstration 7360515 3538977 14771792 9126857 faro technologies inc subsidiaries notes consolidated financial statementscontinued allowance obsolete slowmoving inventory follows years ended december 31 2003 2002 2001 balance beginning year 89969 297508 417930 charges cost sales 904513 663269 856551 amounts written 839835 870808 976973 balance end year 154647 89969 297508 6 intangible assets intangible assets consist following december 31 2003 2002 goodwill 10239788 9559888 existing product technology 5527108 3777842 customer relationships 1572937 1055451 product design costs 4548653 3704377 patents 2206750 2041979 1035448 884472 total 25130684 21024009 accumulated amortization 13691309 9481520 intangible assets net 11439375 11542489 2003 approximately 32 million 41 million increase total intangible assets result foreign currency translation amortization expense 986805 1156668 1557819 2003 2002 2001 respectively effective january 1 2002 company stopped amortizing certain indefinitelived intangibles resulted decrease amortization expense approximately 740000 estimated amortization expense five succeeding fiscal years follows 2004830553 2005780174 2006619274 2007359949 2008349409 7 accrued liabilities accrued liabilities consist following december 31 2003 2002 accrued compensation benefits 2418110 1173438 accrued royalties warranties 613829 114328 accrued liabilities 1744839 1914465 4776778 3202231 faro technologies inc subsidiaries notes consolidated financial statementscontinued 8 notes payable debt company available lines credit aggregating 5000000 drawings lines credit bear interest rate equivalent libor plus 175 amounts outstanding line credit december 31 2003 borrowings lines credit aggregated 1459647 december 31 2002 december 31 2003 2002 loan obligations capital leases 107234 96478 less current portion 42584 49450 64650 47028 debt consists following longterm debt december 31 2003 due follows 200531871 200630163 20072615 9 related party transactions related party leasethe company leases plant office building xenon research inc xenon owned 175 shareholder pursuant terms lease agreement expires 2006 company fiveyear renewal option base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 398000 2003 398000 2002 391000 2001 related party loansin may 1998 company acquired cats gmbh german company cats june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 47 granted borrowers option extend term additional three years loans repaid company 2003 related party consulting servicesthe company engaged cole partners mergers acquisition corporate finance advisory service firm serve companys financial advisor connection companys acquisition january 2002 spatialmetrix inc stephen r cole one companys directors member audit committee founding partner president cole partners company paid cole partners total fees approximately 450000 services 300000 150000 paid 2002 2001 respectively 10 income taxes income loss taxes consisted following years ended december 31 2003 2002 2001 domestic 6455000 1349335 2229368 foreign 2980270 455496 276868 income loss income taxes 9435270 1804831 2506226 faro technologies inc subsidiaries notes consolidated financial statementscontinued components income tax expense benefit income taxes follows years ended december 31 2003 2002 2001 current federal 1535214 119076 460984 state 100886 15244 foreign 571561 2207661 134320 460984 deferred federal 985378 71708 731704 state 64753 4712 71018 foreign 1050131 76420 802722 1157530 210740 341738 income tax expense benefit years ended december 31 2003 2002 2001 differ amount computed applying federal statutory corporate rate loss income taxes differences reconciled follows faro technologies inc subsidiaries notes consolidated financial statementscontinued components companys net deferred income tax asset follows december 31 2003 december 31 2002 companys domestic entities deferred income tax assets amount 1708587 0 respectively december 31 2003 companys foreign subsidiaries deferred income tax assets relating net operating loss carryforwards expire 913517 financial reporting purposes valuation allowance 913517 recognized offset deferred tax assets relating net operating losses intangible assets company continues maintain valuation allowance net operating losses jurisdictions history income company reduced overall valuation allowance assets amount 3973812 reduction valuation allowance relates use deferred tax assets foreign jurisdictions well companys position certain domestic deferred tax liabilities likely utilized significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain uncertainties arise result intercompany arrangements share revenue costs arrangements uncertainties amount manner sharing could ultimately result changes arrangements reviewed taxing authorities company utilized domestic net operating loss carry forward 2003 company recorded accrual tax uncertainties exposures faro technologies inc subsidiaries notes consolidated financial statementscontinued 11 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases including leases related parties see note 9 effect december 31 2003 year ending december 31 amount 2004 1145251 2005 1403698 2006 936589 2007 304292 2008 159596 thereafter total future minimum lease payments 3949426 rent expense 2003 2002 2001 approximately 1148000 1004000 1101000 respectively litigationthe company involved pending legal proceedings routine litigation arising normal course business company believe results litigation even outcome unfavorable company would material adverse effect companys business financial condition results operations 12 stock compensation plans company three stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors company authorized grant options 703100 shares common stock 1993 plan 7032 options currently outstanding exercise prices 36 360 options vest primarily 3 4year periods company also authorized grant options 1400000 shares common stock 1997 plan 897920 options currently outstanding exercise prices 150 1034 options vest threeyear period company also authorized grant 250000 shares common stock 1997 nonemployee director plan 74000 options currently outstanding exercise prices 221 448 nonemployee director granted 3000 options upon election board directors annually upon attending annual meeting shareholders formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest threeyear period faro technologies inc subsidiaries notes consolidated financial statementscontinued companys 1997 nonemployee directors fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors fees form common stock rather cash common stock issued lieu cash directors fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter fourth quarter 2001 company cancelled approximately 548000 money options including approximately 440000 options issued 1997 plan approximately 108000 options issued 1997 nonemployee director plan result 91000 options granted 2001 1997 plan holders options cancelled subjected variable accounting treatment fin 44 stock options issued within six months cancellation must accounted variable certain circumstances variable accounting requires companies remeasure compensation costs variable options exercised cancelled forfeited without replacement compensation dependent fluctuations quoted stock prices companys common stock compensation costs recognized threeyear vesting schedule options fully vested exercised cancelled forfeited time compensation recognized immediately reporting period compensation costs charged operations associated companys stock option plans 718000 9526 0 2003 2002 2001 respectively compensation cost based difference value stock end accounting period exercise price multiplied number shares vested year increases stock option associated compensation cost due market price increase companys common stocks summary stock option activity weighted average exercise prices follows faro technologies inc subsidiaries notes consolidated financial statementscontinued summary stock options outstanding exercisable december 31 2003 follows weightedaverage exercise options remaining options price outstanding contractual life years exercisable 150 131296 784 62882 151 220 234712 844 96742 221 240 317502 687 104667 241 300 168634 691 129700 300 126808 332 107640 978952 501631 remaining nonexercisable options december 31 2003 become exercisable follows years ending december 31 amount 2004 282920 2005 186895 2006 7506 477321 13 earning loss per share reconciliation number common shares used calculation basic diluted earning per share eps loss per share lps presented effect 92532 123454 dilutive securities included computations years 2002 2001 respectively would antidilutive faro technologies inc subsidiaries notes consolidated financial statementscontinued 14 employee retirement benefits plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participants account cannot exceed 6 compensation costs charged operations connection plan 2003 2002 2001 aggregated 113316 102900 83400 respectively 15 geographic data company develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software one line business represents approximately 98 consolidated sales companys segment company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area following table presents information company geographic area geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions faro technologies inc subsidiaries notes consolidated financial statementscontinued 16 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc audited accompanying consolidated balance sheet faro technologies inc florida corporation subsidiaries collectively “company” december 31 2004 related consolidated statements operations shareholders’ equity cash flows year ended financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2004 results operations cash flows year ended conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness faro technologies incs internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated mach 14 2005 expressed unqualified opinion grant thornton llp orlando florida march 14 2005 report independent registered public accounting firm board directors shareholders faro technologies inc audited accompanying consolidated balance sheet faro technologies inc subsidiaries december 31 2003 related consolidated statements operations shareholders equity cash flows two years period ended december 31 2003 financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position faro technologies inc subsidiaries december 31 2003 consolidated results operations cash flows two years period ended december 31 2003 conformity us generally accepted accounting principles described note 7 financial statements company adopted statement financial accounting standards 142 “goodwill intangible assets” effective january 1 2002 ernst young llp orlando florida february 20 2004 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2004 2003 2002 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” develop manufacture market support computer aided design cadbased quality assurance products cadbased inspection statistical process control software principal products include faro arm faro gage articulated electromechanical measuring devices faro laser tracker multiaxis laser based measuring device markets company’s products include automobile aerospace heavy equipment manufacturers company sells vast majority products though direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component accumulated comprehensive income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped also included one year warranty right software upgrades company believes appropriately recognized revenue related upgrade right provisions sop 972 beginning 2005 software upgrade rights longer included one year warranty must purchased separately company separately sells one three year extended warranties extended warranty revenues recognized proportion maintenance costs projected incurred costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 14043782 7632836 december 31 2004 2003 respectively shortterm investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations held fair value management determines appropriate classification short term investments time purchase reevaluates determinations balance sheet date company’s shortterm investments diversified among high credit quality securities accordance company’s investment policy accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectibility accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value determine allowance sales returns management uses historical trends estimate future period product returns allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writesoff accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower average cost net realizable value shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding 1000 capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 1453103 1132225 1111095 2004 2003 2002 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangibles goodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards sfas 142 “goodwill intangible assets” indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs acquired intangibles principally include core technology existing product technology customer relationships arose connection acquisition cats gmbh german company cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years patents recorded cost amortization computed using straightline method lives patents 17 years research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred income taxesdeferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases measured using enacted tax rates apply taxable income years temporary differences expected recovered settled temporary items result primarily loss carryforwards tax credits depreciation amortization deferred revenue items deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable carrying amounts financial instruments approximate fair value due shortterm nature instruments earnings per sharebasic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 18 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions stockbased compensationin december 2002 financial accounting standards board “fasb” issued sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased compensation addition sfas 148 amends disclosure requirements sfas 123 “accounting stockbased compensation” require prominent disclosures annual interim financial statements method accounting stockbased compensation effect method used reported results sfas 148 effective financial statements fiscal years ending december 15 2002 interim periods beginning december 15 2002 annual disclosure requirements sfas 148 adopted company january 1 2003 accordance sfas 123 company elected continue account employee stock compensation plans using intrinsic value based method proforma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost measured excess quoted market price stock grant date amount employee must pay acquire stock fair value based method compensation cost measured grant date based fair value award recognized service period usually vesting period compensation cost company’s stockbased compensation plans determined consistent sfas 123 company’s net income loss earnings loss per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost april 2000 fasb issued fin 44 “accounting certain transactions involving stock compensation interpretation apb opinion 25” fin 44 clarifies modifies apb opinion 25 “accounting stock issued employees” longlived assetseffective january 1 2002 company adopted sfas 144 “accounting impairment disposal longlived assets” sfas 144 supersedes sfas 121 requires one accounting impairment model used longlived assets held used disposed sale whether previously held used newly acquired broadens presentation discontinued operations include disposal transactions adoption sfas 144 financial impact results operations financial position company estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates foreign exchange rate swap agreementin september 2002 company entered foreign exchange rate swap allowing company right purchase 18 million base rate 10444 euros per 100 agreement company bank compensate one another based exchange rate agreement differential specified measurement dates foreign exchange rate agreement qualify special hedge accounting treatment therefore changes fair value included determination earnings foreign exchange rate agreement set expire september 2003 terminated december 2002 year ended december 31 2002 company recognized loss 105000 related change fair value subsequent termination foreign exchange rate agreement loss included income net accompanying consolidated statements operations activity 2004 2003 relating foreign exchange rate swap agreements impact recently issued accounting standards january 2003 fasb issued subsequently revised december 2003 fin 46 consolidation variable interest entities interpretation arb 51 consolidated financial statements addresses consolidation business enterprises variable interest entities current practice two enterprises generally included consolidated financial statements one enterprise controls voting interests fin 46 defines concept variable interests requires existing unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks among parties involved fin 46 applied immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applied first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 fin 46r deferred effective date fin 46 first reporting period ending december 15 2003 reasonably possible enterprise consolidate disclose information variable interest entity interpretation becomes effective enterprise shall disclose information entities financial statements issued january 31 2003 fin 46 may applied prospectively cumulativeeffect adjustment date first applied restating previously issued financial statements one years cumulativeeffect adjustment beginning first year restated light current proposed changes fin 46 continuing assessment determine whether party variable interest entities may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity sfas 150 requires issuer classify financial instrument within scope liability asset circumstances sfas 150 effective beginning first interim period beginning june 15 2003 adoption sfas 150 material impact financial position results operations november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 retains general principle arb 43 chapter 4 “inventory pricing” inventories presumed stated cost however amends arb 43 clarify abnormal amounts idle facilities freight handling costs spoilage recognized current period expenses also sfas 151 requires fixed overhead costs allocated inventories based normal production capacity guidance sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company believes implementing sfas 151 material impact financial position results operations december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed apb opinion 25 allowed original provisions sfas 123 sfas 123r requires use option pricing model estimating fair value amortized expense service periods requirements sfas 123r effective fiscal periods beginning june 15 2005 net income financial statements period ending december 31 2004 would reduced approximately 12 million using blackscholes option pricing model applied sfas 123 amount may change management process assessing various option pricing models allowed sfas 123r reclassificationcertain 2003 2002 amounts reclassified conform 2004 presentation 2 acquisition january 16 2002 company acquired spatialmetrix corporation smx exchange 500000 shares faro common stock satisfaction company certain obligations smx connection therewith company issued additional 350000 shares faro common stock paid 20 million cash fully satisfy smx’s obligations two lenders value attributed 500000 350000 shares faro common stock 1125000 787500 respectively based market value stock january 16 2002 represented 225 closing price stock nasdaq stock exchange company also assumed andor satisfied obligations smx transaction recorded utilizing purchase method accounting accordance sfas 141 “business combinations” final allocation purchase price among tangible intangible assets liabilities follows operating results smx included consolidated statements operations since date acquisition following unaudited proforma results operations year ended december 31 2002 presented informational purposes assuming company owned smx entire year unaudited proforma results operations prepared comparative purposes purport indicative results operations actually would resulted results operations may result future 2003 company recorded approximately 11 million income net accompanying consolidated statements operations result receiving approximately 100000 shares company stock related positive arbitration settlement company former smx shareholders 3 supplemental cash flow information selected cash payments noncash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows 5 shortterm investments shortterm investments consist following underlying investments companys variable rate municipal bonds long term taxexempt municipal bonds variable rate municipal bonds mature every seven days time interest rate adjusts current market conditions available sale securities company classified shortterm investments accompanying consolidated balance sheets 6 inventories consist following 7 goodwill company’s goodwill december 31 2004 2003 related acquisition two previous businesses company tests goodwill impairment accordance sfas 142 “goodwill intangible assets” company evaluates reporting unit’s fair value versus carrying value fourth quarter year frequently events changes circumstances indicate carrying value may exceed fair value estimating reporting unit’s fair value company utilizes gross profit reporting unit multiple based industry averages reporting unit compares carrying value impairments goodwill charged earnings period impairment identified company two reporting units goodwill tested december 31 2004 december 31 2004 2003 company goodwill identified impaired increase decrease goodwill 75250 168590 2004 2003 respectively relates entirely translation foreign currency balances 8 intangible assets intangible assets consist following amortization expense 886393 986805 1156668 2004 2003 2002 respectively estimated amortization expense five succeeding fiscal years follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 line credit company available line credit 5000000 terms line credit require company maintain certain ratios balances respect debt covenant agreement including current ratio consolidated ebitda indebtedness consolidated net worth fixed charge coverage ratio consolidated tangible net worth december 31 2004 2003 company compliance required ratios drawings line credit bear interest rate equivalent libor plus 175 line credit matures august 31 2005 amounts outstanding line credit december 31 2004 2003 11 capital leases required future payments obligations capital leases follows assets capital leases 406340 360662 december 31 2004 2003 respectively accumulated depreciation capital leases 177630 117571 december 31 2004 2003 respectively 12 related party transactions related party leasethe company leases plant office building xenon research inc issued outstanding capital stock owned simon raab chief executive officer diana raab spouse term lease expires february 28 2006 fiveyear renewal option base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 398000 2004 2003 2002 company evaluating potential impact fin 46r accounting assets subject lease related party loansin may 1998 company acquired cats june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 47 granted borrowers option extend term additional three years loans repaid company 2003 related party consulting servicesthe company engaged cole partners mergers acquisition corporate finance advisory service firm serve company’s financial advisor connection company’s acquisition january 2002 smx stephen r cole one company’s directors member audit committee founding partner president cole partners company paid cole partners total fees approximately 450000 services final payment 300000 paid 2002 fees paid cole partners 2004 2003 13 income net income net consists following 14 income taxes income loss income taxes consists following components income tax expense benefit income taxes follows income tax expense benefit years ended december 31 2004 2003 2002 differ amount computed applying federal statutory corporate rate income loss income taxes differences reconciled follows components company’s net deferred income tax asset follows december 31 2004 2003 company’s domestic entities deferred income tax assets amount 3306378 1708587 respectively company determined amounts fully realizable established valuation allowance based assessment morelikelythannot utilized december 31 2004 2003 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 3358630 4838235 respectively financial reporting purposes valuation allowance 1647188 4838235 respectively recognized offset deferred tax assets relating net operating losses company determined amount deferred tax assets relating net operating loss carryforwards foreign subsidiaries understated december 31 2003 understatement due tax treatment intercompany debt waivers determined 2004 exempt tax resulted adjustment beginning balances approximately 37 million deferred tax assets relating net operating loss carryforwards reflected schedule deferred income tax assets december 31 2003 net operating loss carryforwards would fully reserved december 31 2003 valuation allowance income statement balance sheet impact recognized 2003 company continues maintain valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized company reduced overall valuation allowance 2004 2003 deferred tax assets amount 3191047 3973812 respectively reduction valuation allowance 2004 relates net use deferred tax assets foreign jurisdictions release 1713347 valuation allowance foreign jurisdiction fourth quarter release valuation allowance based one foreign units demonstrated history earnings past three years management’s assessment unit morelikelythannot utilize deferred tax assets management calculated amount release valuation allowance using projections future taxable earnings next two years december 31 2004 2003 company 1018854 675132 tax credits respectively credits related company’s research development activities expire 17 20 years company fully expects realize credits expiration company operates number different countries around world 2003 company began manufacture products switzerland received permanent income tax rate commitment swiss government incentive establish manufacturing plant company provide deferred tax assets temporary differences scheduled reverse commitment period earnings included current tax provision approximately 60 finished goods shipments come swiss plant balance coming company’s manufacturing facilities located united states recognized us tax expense undistributed international earnings since intend reinvest earnings outside us foreseeable future undistributed international earnings approximately 54 million 28 million december 31 2004 2003 respectively significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary 15 share issuance november 12 2003 company sold 1158000 shares common stock two company’s founders sold 772000 shares company’s common stock institutional investors private placement registered securities act 1933 shares sold 2150 per share resulting total proceeds placement agent fees offering expenses 249 million 166 million company cofounders respectively purchasers shares sold transaction 31 institutional investors robert w baird co served placement agent transaction received fee equal 2489700 6 aggregate sales proceeds company also reimbursed robert w baird co 50000 expenses incurred connection transaction 16 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year including leases related parties see note 12 effect december 31 2004 rent expense 2004 2003 2002 approximately 1651000 1148000 1004000 respectively litigationthe company involved pending legal proceedings routine litigation arising normal course business company believe results litigation even outcome unfavorable company would material adverse effect company’s business financial condition results operations 17 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan 2004 plan provides granting options stock appreciation rights employees nonemployee directors company authorized grant options 703100 shares common stock 1993 plan 5032 options currently outstanding exercise price 360 options primarily vest 3 4year periods company also authorized grant options 1400000 shares common stock 1997 plan 526836 options currently outstanding exercise prices 150 2740 options vest 3year period company also authorized grant 250000 shares common stock 1997 nonemployee director plan 84000 options currently outstanding exercise prices 161 2156 nonemployee director granted 3000 options upon election board directors annually upon attending annual meeting shareholders formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest 3year period company also authorized grant options 1750000 shares common stock 2004 plan 599372 options currently outstanding exercise prices 1934 2435 options vest 3year period addition four stock option plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable december 31 2004 2003 35941 shares accrued yet issued connection director’s elections fourth quarter 2001 company cancelled approximately 548000 “out money” options including approximately 440000 options issued 1997 plan approximately 108000 options issued 1997 nonemployee director plan result 62806 options granted 2001 1997 plan holders options cancelled subjected variable accounting treatment fin 44 stock options issued within six months cancellation must accounted variable certain circumstances variable accounting requires companies remeasure compensation costs variable options based company’s share price options exercised cancelled forfeited without replacement compensation dependent fluctuations quoted market prices company’s common stock compensation costs recognized threeyear vesting schedule options fully vested exercised cancelled forfeited time compensation recognized immediately reporting period compensation costs charged operations associated company’s stock option plans 277028 718524 9526 2004 2003 2002 respectively changes stock option associated compensation cost due market price fluctuation company’s common stock summary stock option activity weighted average exercise prices follows summary stock options outstanding exercisable december 31 2004 follows remaining nonexercisable options december 31 2004 become exercisable follows 18 earnings loss per share reconciliation number common shares used calculation basic diluted earnings per share eps loss per share lps presented effect 92532 dilutive securities included computations 2002 antidilutive 19 employee retirement benefit plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participant’s account cannot exceed 6 compensation costs charged operations connection plan 2004 2003 2002 aggregated 172403 113316 102900 respectively 20 geographic data company develops manufactures markets supports cadbased quality assurance products integrated cadbased inspection statistical process control software one line business represents approximately 99 consolidated sales company’s segment company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area following table presents information company geographic area geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions 21 quarterly results operations unaudited 22 subsequent event january 10 2005 company filed registration statement form s3 securities exchange commission debt securities common stock par value 0001 per share warrants units consisting two foregoing total amount 125000000 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries collectively “company” december 31 2005 2004 related consolidated statements income shareholders’ equity cash flows years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2005 2004 results operations cash flows years ended conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness faro technologies inc subsidiaries internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated june 21 2006 expressed unqualified opinion managements assessment internal controls financial reporting adverse opinion companys internal controls financial reporting audits conducted purpose forming opinion basic financial statements taken whole schedule ii valuation qualifying accounts presented purposes addtional analysis required part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects basic financial statements taken whole grant thornton llp orlando florida june 21 report ernst young llp independent registered public accounting firm board directors shareholders faro technologies inc audited accompanying consolidated statement income shareholders’ equity cash flows faro technologies inc subsidiaries company year ended december 31 2003 financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement engaged perform audit company’s internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects consolidated results company’s operations cash flows year ended december 31 2003 conformity us generally accepted accounting principles ernst young llp orlando florida february 20 2004 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2005 2004 2003 thousands except share per share data otherwise noted 1 summary significant accounting policies description business faro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement devices manufacturing industrial building construction forensic applications company’s principal products include faro arm faro scan arm digital template faro gage articulated electromechanical measuring devices faro laser tracker faro laser scanner ls laserbased measuring devices markets company’s products include automobile aerospace heavy equipment countertop manufacturers law enforcement agencies company sells vast majority products though direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive loss income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 7336 14044 december 31 2005 2004 respectively shortterm investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations held fair value management determines appropriate classification shortterm investments time purchase reevaluates determinations balance sheet date company’s shortterm investments diversified among high credit quality securities accordance company’s investment policy accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectibility accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements income sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment second quarter 2005 company changed method computing pricing inventory average cost fifo change made result inventory system conversion allow improved system efficiencies underlying calculation average cost fifo cost materially different change material impact results operations fiscal 2005 total year property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 5 years furniture fixtures 10 years leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 2154 1453 1132 2005 2004 2003 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangibles goodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards sfas 142 “goodwill intangible assets” indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs acquired intangibles principally include core technology existing product technology customer relationships arose connection acquisition cats gmbh iqvolution ag see note 2 acquired intangibles recorded fair value date acquisition amortized estimated useful lives 3 15 years patents recorded cost amortization computed using straightline method lives patents research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warranties company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month rate multiplied number machinemonths warranty product group sold period determine provision warranty expenses period company reevaluates exposure warranty costs end period using estimated expense per installation month major product group number machines remaining warranty remaining number months machine warranty expenses historically within expectations cannot guarantee continue future income taxes review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board fasb statement 109 “accounting income taxes” sfas 109 establish valuation allowance net deferred assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability achieve profitability ability predict achieve future projections taxable income company operates number different countries around world 2003 company began manufacture products switzerland received permanent income tax rate commitment swiss government incentive establish manufacturing plant 2005 company opened regional headquarters began manufacture products singapore received favorable multiyear income tax rate commitment singapore economic development board incentive establish manufacturing plant regional headquarters significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain appropriately reserved tax uncertainties based criteria established sfas 5 “accounting loss contingencies” fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accruals carrying amounts financial instruments approximate fair value due shortterm nature instruments earnings per sharebasic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 18 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions stockbased compensation december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased compensation addition sfas 148 amends disclosure requirements sfas 123 “accounting stockbased compensation” require prominent disclosures annual interim financial statements method accounting stockbased compensation effect method used reported results sfas effective financial statements fiscal years ending december 15 2002 interim periods beginning december 15 2002 annual disclosure requirements sfas 148 adopted company january 1 2003 accordance sfas 123 company elected continue account employee stock compensation plans using intrinsic value based method proforma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost measured excess quoted market price stock grant date amount employee must pay acquire stock fair value based method compensation cost measured grant date based fair value award recognized service period usually vesting period included net income certain compensation expenses subject variable accounting treatment compensation cost company’s stockbased compensation plans determined consistent sfas 123 company’s net income earnings per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost longlived assetseffective january 1 2002 company adopted sfas 144 “accounting impairment disposal longlived assets” sfas 144 supersedes sfas 121 requires one accounting impairment model used longlived assets held used disposed sale whether previously held used newly acquired broadens presentation discontinued operations include disposal transactions adoption sfas 144 financial impact results operations financial position company fourth quarter 2005 management reviewed company’s longlived assets concluded impairment assets year ended december 31 2005 estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards january 2003 financial accounting standards board “fasb” issued subsequently revised december 2003 fin 46 “consolidation variable interest entities” interpretation arb 51 “consolidated financial statements” addresses consolidation business enterprises variable interest entities current practice two enterprises generally included consolidated financial statements one enterprise controls voting interests fin 46 defines concept “variable interests” requires existing unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks among parties involved fin 46 applied immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date applied first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 fin 46r deferred effective date fin 46 first reporting period ending december 15 2003 reasonably possible enterprise consolidate disclose information variable interest entity interpretation becomes effective enterprise shall disclose information entities financial statements issued january 31 2003 fin 46 may applied prospectively cumulativeeffect adjustment date first applied restating previously issued financial statements one years cumulativeeffect adjustment beginning first year restated company determined party variable interest entities november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 retains general principle arb 43 chapter 4 “inventory pricing” inventories presumed stated cost however amends arb 43 clarify abnormal amounts idle facilities freight handling costs spoilage recognized current period expenses also sfas 151 requires fixed overhead costs allocated inventories based normal production capacity guidance sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company believes implementing sfas 151 material impact financial position results operations december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed apb opinion 25 allowed original provisions sfas 123 sfas 123r requires use option pricing model estimating fair value amortized expense service periods sfas 123r allows two alternative transition methods first method modified prospective application whereby compensation cost portion awards requisite service yet rendered outstanding adoption date recognized remaining service period compensation cost portion awards based grant date fair value awards calculated pro forma disclosures sfas 123 originally issued new awards modified repurchased cancelled adoption date accounted provisions sfas 123r second method modified retrospective application requires company restates prior period financial statements modified retrospective application may applied either periods prior interim periods year adoption statement company adopt provisions sfas 123r effective january 1 2006 using modified prospective application transition method company accelerated vesting substantially outstanding options prior december 31 2005 expects record minimal expenses remaining unvested stock options 2006 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods options purchase approximately 704310 shares company’s stock 525 company’s outstanding options accelerated weighted average exercise price options subject acceleration 2130 aggregate pretax expense shares subject acceleration would reflected company’s consolidated financial statements beginning 2006 approximately 77 million including 43 million 2006 27 million 2007 07 million 2008 fair value future grants included expense vesting periods expenses apportioned according classification employees received stock options cost sales selling general administrative research development costs fair value future grants included expense vesting periods reclassification certain 2004 2003 amounts reclassified conform 2005 presentation 2 acquisition iqvolution march 29 2005 company acquired 100 outstanding stock privately held iqvolution ag “iqvolution” iqvolution german company designs manufactures supplies threedimensional laser scanning products services purchase strategic acquisition enable company enter broader threedimensional measurement markets purchase price transaction approximately 136 million including initial cash payment approximately 38 million 314736 shares common stock valued approximately 72 million based average closing price three days immediately preceding closing 152292 shares payable immediately remaining 162444 shares common stock valued approximately 37 million placed escrow may paid following five years subject achieving predetermined milestones respect purchased assets subsequent purchase approximately 18 million cash paid repayment loans approximately 04 million paid fees associated purchase additionally purchase price adjusted downward 01 million funds repaid company third quarter relating settlement purchase price adjustment clause within purchase agreement fourth quarter 2005 12183 shares issued result successful qualification milestones corresponding addition goodwill 252 december 31 2005 150261 shares held escrow february 2006 43871 shares issued result milestones met 675 accrued goodwill additional paidin capital december 31 2005 additional 1288 shares returned company february 2006 cancellation result milestone disqualification third quarter approximately 38 million purchase price allocated intangible assets reflecting company’s preliminary estimate fair value technology software assets acquired hardware assets acquired valued approximately 23 million estimated life years software assets valued approximately 16 million estimated life 10 years december 31 2005 estimates process reviewed validated third party current purchase price allocation goodwill intangible assets subject adjustment march 29 2006 deadline based company’s completion purchase accounting transaction company completed first quarter 2006 third party valuation assets acquired allocation goodwill intangible assets recorded first quarter 2006 materially different preliminary estimates preliminary beginning balance sheet iqvolution follows adjusted purchase accounting items december 31 2005 operating results iqvolution included consolidated statements income since date acquisition following unaudited proforma results operations years ended december 31 2005 december 31 2004 presented informational purposes purport indicative results operations actually would resulted acquisition occurred date indicated results operations may result future spatialmetrix january 16 2002 company acquired spatialmetrix corporation smx company recorded approximately 11 million expense income net accompanying consolidated statements operations result receiving approximately 100000 shares company stock related positive arbitration settlement company former smx shareholders 3 supplemental cash flow information selected cash payments noncash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows 5 shortterm investments underlying investments company’s variable rate municipal bonds long term taxexempt municipal bonds variable rate municipal bonds mature every seven days time interest rate adjusts current market conditions considered availableforsale securities company classified shortterm investments accompanying consolidated balance sheets 6 inventories consist following 7 goodwill company’s goodwill december 31 2005 2004 related acquisition three previous businesses company tests goodwill impairment accordance sfas 142 “goodwill intangible assets” company evaluates reporting unit’s fair value versus carrying value fourth quarter year frequently events changes circumstances indicate carrying value may exceed fair value estimating reporting unit’s fair value company utilizes gross profit reporting unit multiple based industry averages reporting unit compares carrying value impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2005 december 31 2005 2004 company goodwill identified impaired increase goodwill 66 million 2005 relates primarily purchase iqvolution 01 million increase 2004 relates entirely translation foreign currency balances 8 intangible assets intangible assets consist following 2005 company wrote patents original cost 503 net book value 334 abandoned amortization expense 1299 886 987 2005 2004 2003 respectively estimated amortization expense five succeeding fiscal years follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 line credit company available line credit 5 million terms line credit require company maintain certain ratios balances respect debt covenant agreement including current ratio consolidated ebitda indebtedness consolidated net worth fixed charge coverage ratio consolidated tangible net worth december 31 2005 2004 company compliance required ratios drawings line credit bear interest rate equivalent libor plus 175 line credit due demand amounts outstanding line credit december 31 2005 2004 company received term sheet currently negotiating new loan agreement expected increase term three years increase amount credit line 300 million 11 capital leases longterm debt required future payments obligations capital leases follows assets capital leases 384 406 december 31 2005 2004 respectively accumulated depreciation capital leases 235 178 december 31 2005 2004 respectively longterm debt 112 included capital leases longterm debt accompanying consolidated balance sheets december 31 2005 44 longterm debt due 2006 balance 68 due 2007 12 related party transactions related party leasethe company leases plant office building xenon research inc issued outstanding capital stock owned simon raab chairman cochief executive officer diana raab spouse term lease expired february 28 2006 continuing month basis company expects renew lease additional 3 5 years similar terms rent expense lease approximately 398 2005 2004 2003 company determined assets subject lease subject requirements fin 46r related party loansin may 1998 company acquired cats june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 47 granted borrowers option extend term additional three years loans repaid company 2003 13 expense income net expense income net consists following 14 income taxes income taxes consists following components income tax expense follows income tax expense years ended december 31 2005 2004 2003 differ amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows december 31 2005 2004 company’s domestic entities deferred income tax assets amount 4074 3306 respectively company determined amounts fully realizable established valuation allowance based assessment morelikelythannot utilized december 31 2005 2004 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 5422 3359 respectively financial reporting purposes valuation allowance 3486 1647 respectively recognized offset deferred tax assets relating net operating losses company continues maintain valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized company increased overall valuation allowance 2005 deferred tax assets amount 1839 increase valuation allowance 2005 relates net generation deferred tax assets foreign jurisdictions combined 809 purchase iqvolution release 44 valuation allowance foreign jurisdiction second quarter release valuation allowance based one foreign units demonstrated history earnings past three years management’s assessment unit morelikelythannot utilize deferred tax assets management calculated amount release valuation allowance using projections future taxable earnings next two years december 31 2005 2004 company 716 1019 tax credits respectively credits related company’s research development activities expire 16 20 years company fully expects realize credits expiration company operates number different countries around world 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant 2005 company opened regional headquarters began manufacture products singapore received temporary reduced income tax rate commitment singapore economic development board incentive establish manufacturing plant regional headquarters recognized us tax expense undistributed international earnings since intend reinvest earnings outside us foreseeable future net undistributed international earnings approximately 206 million 54 million december 31 2005 2004 respectively significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary 15 share issuance november 12 2003 company sold 1158000 shares common stock two company’s founders sold 772000 shares company’s common stock institutional investors private placement registered securities act 1933 shares sold 2150 per share resulting total proceeds placement agent fees offering expenses 249 million 166 million company cofounders respectively purchasers shares sold transaction 31 institutional investors robert w baird co served placement agent transaction received fee equal 2489700 6 aggregate sales proceeds company also reimbursed robert w baird co 50000 expenses incurred connection transaction 16 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year including leases related parties see note 12 effect december 31 2005 rent expense 2005 2004 2003 approximately 2306 1651 1148 respectively patent litigation november 25 2003 cimcoreromer division hexagon filed patent infringement suit us federal district court southern district california alleging certain products sold united states including faro arm infringe us patent 5829148 ‘148 patent company believes contended litigation company infringe ‘148 patent ‘148 patent invalid july 12 2005 court issued order granting cimcoreromer’s motion summary judgment infringement three claims ‘148 patent july 22 2005 company announced decision limit capability usbased faro arm products faro arm faro gage digital template removing call “infinite rotation feature” reducing capability 50 rotations fewer faro believes limiting range joint rotation 50 rotations removed us products ability sweep unlimited arc feature ‘148 patent claims addressed court’s ruling required infringe ‘148 patent revised products however considered courts accordingly cannot give assurance revised products deemed infringe ‘148 patent september 20 2005 court vacated order summary judgment infringement agreed reconsider conclusions patent claim construction “markman” ruling pretrial hearing often used patent infringement cases new markman hearing occurred october 3 2005 hearingonsummary judgments infringement occurred november 14 2005 october 18 2005 court issued revised claim construction company believes materially alters court’s previous markman ruling substantially narrowing faro believes key aspects claim construction company believes narrower claim construction ultimately lead finding infringe claim ‘148 patent november 14 2005 court denied plaintiffs’ renewed motion summary judgment infringement defendant’s faro’s renewed motion summary judgment noninfringement determined existed genuine issue material fact respect whether faro infringed assert patent case originally set trial january 31 2006 january 18 2006 court vacated trial date remanded case magistrate resumption discovery regarding plaintiffs’ alleged compliance patent marking provisions 35 usc § 287 related issues hearing faro’s motion partial summary judgment regarding plaintiffs’ failure comply patent marking provisions 35 usc § 287 held may 11 2006 new trial date set july 17 2006 addition company filed two separate requests reexamination us patent trademark office “pto” ‘148 patent requests granted pto ruled first reexamination september 2005 company believes pto ruling bolsters company’s previous position infringe ‘148 patent specifically first reexamination pto construed critical claim terms relatively narrow manner company believes consistent stated positions patent litigation narrow claim construction led pto differentiate claims references issue first reexamination company believes narrow construction allowing ‘148 claims confirmed valid aforementioned references first reexamination prevent california district court ruling faro’s products infringe ‘148 patent company’s second reexamination request granted pto november 2005 based new “prior art” earlier issued patent publications submitted pto faro believes ultimately invalidate ‘148 patent prior art reference issue first reexamination proceeding pto ruled second reexamination request event adverse ruling cimcoreromer litigation however could required pay substantial damages cease manufacturing use sale infringing products discontinue use certain processes obtain license available cimcoreromer royalty payment obligations us adverse decision cimcoreromer case could materially adversely affect financial condition results operations time however company cannot estimate potential impact might result suit therefore provision made cover expense securities litigation december 6 2005 first four essentially identical class action securities fraud lawsuits filed company certain officers company april 19 2006 four lawsuits consolidated kornitzer capital management inc appointed lead plaintiff may 16 2006 kornitzer filed consolidated amended class action complaint company individual defendents amended complaint also names grant thornton llp company’s independent registered public accounting firm additional defendant amended complaint kornitzer seeks represent class consisting persons purchased otherwise acquired company’s publicly traded securities april 15 2004 march 15 2006 behalf alleged class kornitzer seeks unspecified amount damages premised allegations defendant made misrepresentations omissions material fact class period violation securities exchange act 1934 among things kornitzer alleges company’s reported gross margins net income knowingly overstated result manipulation company’s inventory levels company failed disclose deficiencies associated company’s implementation use enterprise resource planning system material requirements planning system made false misleading statements regarding company’s internal controls failed disclose fact company accruing commissions bonuses would material adverse effect upon company’s profitability improperly reported sales net income based part sales new orders obtained violation foreign corrupt practices act company’s deadline filing response amended complaint july 31 2006 company intends file motion dismiss company timely notified issuer executive liability entity securities liability insurance policy securities litigation reserved full amount 250000 retention policy although company believes material allegations made amended complaint without merit intends vigorously defend securities litigation assurances given respect outcome securities litigation purchase commitmentsthe company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days august 11 2005 faro entered agreement delcam plc company agreed purchase approximately 14 million products 12month term december 31 2005 company completed purchase 06 million products agreement effective november 1 2005 faro entered agreement metrologic group sa company agreed purchase approximately 04 million products 12month term december 31 2005 products purchased agreement agreements listed company longterm commitments purchases voluntary disclosure foreign corrupt practices act matter securities exchange commission department justice previously reported company’s form 8k dated march 15 2006 company learned china subsidiary made payments certain customers china may violated fcpa applicable laws company’s audit committee instituted internal investigation matter february 2006 company voluntarily notified sec doj matter march 2006 internal investigation matter completed company provided sec doj information obtained course investigation cooperating agencies company’s internal investigation identified certain improper payments made china deficiencies controls respect operations china possible violation fcpa sec doj determines violations fcpa occurred could seek civil criminal sanctions including monetary penalties company andor certain employees well additional changes company’s business practices compliance programs based current information possible predict time sec doj investigations resolved outcome sanctions imposed effect matters may ultimately company consolidated financial statements results investigation revealed referral fee payments possible violation fcpa 165000 265000 2004 2005 respectively recorded selling expenses companys statement income related sales customers payment referral fees made totaled approximately 13 million 324 million 2004 2005 respecively additional improper referral fee payments 122000 made january february 2006 related sales contracts 2005 company anticipates incurring expenses least 35 million 2006 relating internal investigation fcpa matter company terminated certain personnel asiapacific region reassigned duties personnel asiapacific region us result internal investigation company instituting following remedial measures · contracted third party forensics accounting team conduct indepth audit operations china countries asiapacific region make recommendations improvement internal control systems · reviewing third party distributor arrangements effort assure contracts include adherence fcpa · performing due diligence third party distributors implementing process assess potential new distributors · established inhouse internal audit function including hiring director internal audit · consolidating human resources financial accounting reporting functions asia region singapore operations · implemented internal certification process ascertain whether similar issues may exist elsewhere company · implemented quarterly internal certification process confirm adherence company policy applicable laws regulations include regional leadership country management sales management · implementing additional training fcpa matters employees confidential compliance reporting system company reported sales china 90 million 2005 42 million 2004 approximately 7 4 total sales respectively depending matter resolved company’s sales china could significantly impacted termination certain personnel cessation improper payments china may significant adverse effect future operations china action could negatively influence decisions significant number customers chinese subsidiary business subsidiary potential magnitude loss sales china result potential violations fcpa cannot estimated time company’s internal investigation business practices china became aware income taxes related certain commissions bonus payments employees properly reported company promptly remit deficiencies completed investigation time company anticipate amount material effect financial condition results operations company may subject penalties chinese tax authorities able determine amount assessment litigation mentioned company involved legal proceedings routine litigation arising normal course business company believe results litigation even outcome unfavorable company would material adverse effect company’s business financial condition results operations 17 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan 2004 plan provides granting options stock appreciation rights employees nonemployee directors company authorized grant options 703100 shares common stock 1993 plan 1 option currently outstanding exercise price 360 option vests 3year period company also authorized grant options 1400000 shares common stock 1997 plan 382047 options currently outstanding exercise prices 150 2740 options vest 3year period company also authorized grant 250000 shares common stock nonemployee director plan 80000 options currently outstanding exercise prices 161 2156 nonemployee director granted 3000 options upon election board directors annually upon attending annual meeting shareholders formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest 3year period company also authorized grant options 1750000 shares common stock 2004 plan 877986 options currently outstanding exercise prices 1934 3145 57259 restricted stock units outstanding stock price 1949 options restricted stock units vest 3year period restricted stock unit grants performancebased annual vesting anniversary date respective terms company records compensation cost associated restricted stock unit grants straightline basis vesting term addition four stock option plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable december 31 2005 2004 11090 35941 shares respectively accrued yet issued connection director’s elections fourth quarter 2001 company cancelled approximately 548000 “out money” options including approximately 440000 options issued 1997 plan approximately 108000 options issued 1997 nonemployee director plan result 62806 options granted 2001 1997 plan holders options cancelled subjected variable accounting treatment fin 44 stock options issued within six months cancellation must accounted variable certain circumstances variable accounting requires companies remeasure compensation costs variable options based company’s share price options exercised cancelled forfeited without replacement compensation dependent fluctuations quoted market prices company’s common stock compensation costs recognized threeyear vesting schedule options fully vested exercised cancelled forfeited time compensation recognized immediately reporting period adoption fas 123r january 2006 fin 44 superseded company longer required account options variable accounting fourth quarter 2005 company accelerated vesting substantially outstanding options expects record minimal expenses remaining unvested stock options 2006 pretax charge estimated company avoided result acceleration amounts approximately 77 million course original vesting periods fair value future grants included expense vesting periods compensation income costs charged operations associated company’s stock option plans 150 277 719 2005 2004 2003 respectively changes stock option associated compensation cost due vesting options combined market price fluctuations company’s common stock variable accounting accrual expenses relating issuance restricted stock summary stock option activity weighted average exercise prices follows summary stock options outstanding exercisable december 31 2005 follows remaining nonexercisable options december 31 2005 become exercisable follows 18 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 237419 dilutive securities included 2005 antidilutive 19 employee retirement benefit plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participant’s account cannot exceed 100 compensation costs charged operations connection plan 2005 2004 2003 aggregated 201 172 113 respectively 20 geographic data company develops manufactures markets supports cadbased quality assurance products integrated cadbased inspection statistical process control software one line business represents approximately 99 consolidated sales company’s segment company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area following table presents information company geographic area geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions 21 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries collectively “company” december 31 2006 2005 related consolidated statements income shareholders’ equity cash flows years three year period ended december 31 2006 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2006 2005 results operations cash flows years three year period ended december 31 2006 conformity accounting principles generally accepted united states america audits conducted purpose forming opinion basic financial statements taken whole schedule ii valuation qualifying accounts presented purposes additional analysis required part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects basic financial statements taken whole discussed note 1 consolidated financial statements company adopted statement 123 revised 2004 sharebased payment effective interim annual reporting periods beginning december 15 2005 also audited accordance standards public company accounting oversight board united states effectiveness faro technologies inc subsidiaries’ internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 14 2007 expressed unqualified opinion management’s assessment internal controls financial reporting adverse opinion company’s internal controls financial reporting orlando florida march 14 2007 report independent registered public accounting firm board directors shareholders faro technologies inc audited management’s assessment included accompanying management’s report internal control financial reporting faro technologies inc florida corporation subsidiaries maintain effective internal control financial reporting december 31 2006 effect lack controls place prevent premature revenue recognition sales certain shipping terms based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso faro technologies inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weakness identified included management’s assessment controls place provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles resulted premature revenue recognition sales certain shipping terms material weakness considered determining nature timing extent audit tests applied audit 2006 financial statements report affect report dated march 14 2007 expressed unqualified opinion contained explanatory paragraph company’s adoption statement 123 revised 2004 financial statements opinion management’s assessment faro technologies inc subsidiaries maintain effective internal control financial reporting december 31 2006 fairly stated material respects based criteria established internal controlintegrated framework issued coso also opinion effect material weakness described achievement objectives control criteria faro technologies inc subsidiaries maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued coso orlando florida march 14 2007 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2006 2005 2004 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2006 2005 2004 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement devices manufacturing industrial building construction forensic applications company’s principal products include faro arm faro scan arm faro gage articulated electromechanical measuring devices faro laser tracker faro laser scanner ls laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products though direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive loss income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 9861 7336 december 31 2006 2005 respectively shortterm investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations held fair value management determines appropriate classification shortterm investments time purchase reevaluates determinations balance sheet date company’s shortterm investments diversified among high credit quality securities accordance company’s investment policy accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectibility accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements income sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 2842 2154 1453 2006 2005 2004 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards sfas 142 “goodwill intangible assets” indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs acquired intangibles principally include patents existing product technology customer relationships arose connection acquisition iqvolution ag see note 2 acquired intangibles recorded fair value date acquisition amortized estimated useful lives 3 15 years patents recorded cost amortization computed using straightline method lives patents research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month rate multiplied number machinemonths warranty product group sold period determine provision warranty expenses period company reevaluates exposure warranty costs end period using estimated expense per installation month major product group number machines remaining warranty remaining number months machine warranty expenses historically within expectations cannot guarantee continue future income taxes company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence described financial accounting standards board fasb statement 109 “accounting income taxes” sfas 109 company establishes valuation allowance net deferred assets taxing jurisdiction company operates unless “more likely not” company recover assets means future evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income two year period company operates number different countries around world 2003 company began manufacture products switzerland received permanent income tax rate commitment swiss government incentive establish manufacturing plant 2005 company opened regional headquarters began manufacture products singapore received 2006 favorable multiyear income tax rate commitment singapore economic development board incentive establish manufacturing plant regional headquarters significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company appropriately reserved tax uncertainties based criteria established sfas 5 “accounting loss contingencies” fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accruals carrying amounts financial instruments approximate fair value due shortterm nature instruments earnings per sharebasic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 17 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions stockbased compensation december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased compensation addition sfas 148 amends disclosure requirements sfas 123 “accounting stockbased compensation” require prominent disclosures annual interim financial statements method accounting stockbased compensation effect method used reported results sfas 148 effective financial statements fiscal years ending december 15 2002 interim periods beginning december 15 2002 annual disclosure requirements sfas 148 adopted company january 1 2003 december 2004 fasb issued sfas 123r “sharebased payment” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed apb opinion 25 allowed original provisions sfas 123 intrinsic value based method compensation cost measured excess quoted market price stock grant date amount employee must pay acquire stock fair value based method compensation cost measured grant date based fair value award recognized service period usually vesting period sfas 123r provides two alternative transition methods period adoption modified prospective application method modified retrospective application method company adopted provisions sfas 123r effective january 1 2006 using modified prospective application transition method modified prospective application requires compensation cost portion awards requisite service yet rendered outstanding adoption date recognized remaining service period compensation cost portion awards based grant date fair value awards calculated pro forma disclosures sfas 123 originally issued new awards modified repurchased cancelled adoption date accounted provisions sfas 123r company uses blackscholes option pricing model determine fair value stock option grants impact statement material company’s financial position results operations compensation costs 29 related company’s stock option plan 181 related compensation costs restricted stock unit grants included operations year ended december 31 2006 compensation expense company’s stock based compensation plans determined consistent sfas 123 company’s net income earnings per share would follows years ended 2005 2004 assume us tax rate 376 incurred minimal expenses 2006 calculated blackscholes method sfas 123 related adoption sfas 123r expensing stock options vested substantially unvested options fourth quarter 2005 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods options purchase approximately 704310 shares company’s stock 525 company’s outstanding options accelerated weighted average exercise price options subject acceleration 2130 aggregate pretax expense shares subject acceleration would reflected company’s consolidated financial statements beginning 2006 approximately 77 million including 43 million 2006 27 million 2007 07 million 2008 fair value future grants included expense vesting periods expenses apportioned according classification employees received stock options cost sales selling general administrative research development costs company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost longlived assetseffective january 1 2002 company adopted sfas 144 “accounting impairment disposal longlived assets” sfas 144 supersedes sfas 121 requires one accounting impairment model used longlived assets held used disposed sale whether previously held used newly acquired broadens presentation discontinued operations include disposal transactions adoption sfas 144 financial impact results operations financial position company fourth quarter 2006 management reviewed company’s longlived assets concluded impairment assets year ended december 31 2006 estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 retains general principle arb 43 chapter 4 “inventory pricing” inventories presumed stated cost however amends arb 43 clarify abnormal amounts idle facilities freight handling costs spoilage recognized current period expenses also sfas 151 requires fixed overhead costs allocated inventories based normal production capacity guidance sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 implementation sfas 151 material impact financial position results operations september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 issued provide consistency registrants quantify financial statement misstatements historically two widelyused methods quantifying effects financial statement misstatements methods referred “rollover” “iron curtain” method rollover method quantifies amount current year income statement misstated exclusive reliance income statement approach result accumulation errors balance sheet may material individual income statement may misstate one balance sheet accounts iron curtain method quantifies error cumulative amount current year balance sheet misstated exclusive reliance balance sheet approach result disregarding effects errors current year income statement results correction error existing previously issued financial statements company previously used rollover method quantifying identified financial statement misstatements sab 108 established approach requires quantification financial statement misstatements based effects misstatement company’s financial statements related financial statement disclosures approach commonly referred “dual approach” requires quantification errors rollover iron curtain methods sab 108 allows registrants initially apply dual approach either 1 retroactively adjusting prior financial statements dual approach always used 2 recording cumulative effect initially applying dual approach adjustments carrying values assets liabilities january 1 2006 offsetting adjustment recorded opening balance retained earnings use “cumulative effect” transition method requires detailed disclosure nature amount individual error corrected cumulative adjustment arose company evaluated sab 108 material impact company’s financial condition results operations july 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation sfas 109” fin 48 intent fin 48 clarify accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 interpretation imposes recognition threshold measurement attribute financial statement disclosure tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 company currently evaluating requirements fin 48 yet determined impact adoption consolidated financial statements 2 acquisition iqvolutionon march 29 2005 company acquired 100 outstanding stock privately held iqvolution ag “iqvolution” iqvolution german company designs manufactures supplies threedimensional laser scanning products services purchase strategic acquisition enable company enter broader threedimensional measurement markets purchase price transaction approximately 136 million including initial cash payment approximately 38 million 314736 shares common stock valued approximately 72 million based average closing price three days immediately preceding closing 152292 shares payable immediately remaining 162444 shares common stock valued approximately 37 million placed escrow may paid following five years subject achieving predetermined milestones respect purchased assets subsequent purchase approximately 18 million cash paid repayment loans approximately 04 million paid fees associated purchase additionally purchase price adjusted downward 01 million funds repaid company third quarter relating settlement purchase price adjustment clause within purchase agreement fourth quarter 2005 12183 shares issued result successful qualification milestones corresponding addition goodwill 252 2006 25991 shares released escrow corresponding addition goodwill 408 december 31 2006 81267 shares held escrow third quarter 2005 approximately 38 million purchase price allocated intangible assets reflecting company’s preliminary estimate fair value technology software assets acquired hardware assets acquired valued approximately 23 million estimated life 17 years software assets valued approximately 16 million estimated life 10 years december 31 2005 estimates process reviewed validated third party company completed first quarter 2006 third party valuation assets acquired company made adjustment purchase price reflect deferred tax liability approximately 15 million following table represents fair value assets acquired liabilities assumed includes final determination estimated fair values deferred tax assets noncompete intangible assets preliminary december 31 2005 operating results iqvolution included consolidated statements income since date acquisition following unaudited proforma results operations years ended december 31 2005 december 31 2004 presented informational purposes purport indicative results operations actually would resulted acquisition occurred date indicated results operations may result future 3 supplemental cash flow information selected cash payments noncash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows 5 shortterm investments underlying investments company’s variable rate municipal bonds long term taxexempt municipal bonds variable rate municipal bonds mature every seven days time interest rate adjusts current market conditions considered availableforsale securities company classified shortterm investments accompanying consolidated balance sheets 6 inventories consist following 7 goodwill company’s goodwill december 31 2006 2005 related acquisition three previous businesses company tests goodwill impairment accordance sfas 142 “goodwill intangible assets” company evaluates reporting unit’s fair value versus carrying value fourth quarter year frequently events changes circumstances indicate carrying value may exceed fair value company prepares discounted cash flow model estimate fair value reporting unit compares amount carrying value impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2006 americas region europeasia region asia pacific region shown table december 31 2006 2005 company goodwill identified impaired increase goodwill 27 million 2006 65 million 2005 relates primarily purchase iqvolution 8 intangible assets intangible assets consist following 2005 company wrote patents original cost 503 net book value 334 abandoned amortization expense 1293 1299 886 2006 2005 2004 respectively estimated amortization expense five succeeding fiscal years follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 line credit july 11 2006 company entered loan agreement providing available line credit 300 million loans loan agreement bear interest rate libor plus 175 require company maintain certain ratios respect debt covenant agreement including current ratio consolidated ebitda senior funded debt ebitda december 31 2006 company compliance covenants amended loan agreement term amended loan agreement extends april 30 2009 company drawn line credit 11 capital leases longterm debt required future payments obligations capital leases follows assets capital leases 559 384 december 31 2006 2005 respectively accumulated depreciation capital leases 366 235 december 31 2006 2005 respectively current portion longterm debt 38 included capital leases longterm debt accompanying consolidated balance sheets december 31 2006 12 related party transactions related party leasethe company leases headquarters lake mary florida xenon research inc company owned simon raab company’s chairman diana raab spouse prior lease expired february 28 2006 company executed new lease agreement august 8 2006 xenon research term lease commenced july 1 2006 expires july 1 2011 lease automatically renewed one successive fiveyear term unless company provides xenon research written notice nonrenewal least 90 days prior end term company also onetime right terminate lease three years july 1 2006 upon written notice delivered landlord one year prior date upon company wishes terminate lease company’s independent directors negotiated approved lease behalf company process independent directors consulted real estate broker verify lease rate terms competitive market first year initial term fixed rent 302750 per annum payable monthly year thereafter july 1 fixed rent increased three percent fixed rent preceding year lease “net lease” meaning company also responsible real estate taxes insurance expenses covering leased premises real estate taxes insurance expenses paid xenon research company reimburses xenon research equal monthly payments real estate taxes insurance expenses reimbursement amount computed annually based real estate taxes insurance expenses actually paid xenon research payments fixed rent additional rent include applicable sales use taxes rent expense lease prior lease 398 2006 2005 2004 13 income expense net income expense net consists following 14 income taxes income taxes consists following components income tax expense follows income tax expense years ended december 31 2006 2005 2004 differ amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows december 31 2006 2005 company’s domestic entities deferred income tax assets amount 3996 4074 respectively company determined amounts fully realizable established valuation allowance based assessment morelikelythannot utilized december 31 2006 2005 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 6251 5422 respectively financial reporting purposes valuation allowance 4417 3486 respectively recognized offset deferred tax assets relating net operating losses company continues maintain valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company increased overall valuation allowance 2006 deferred tax assets amount 931 increase valuation allowance 2006 relates net generation deferred tax assets foreign jurisdictions including 451 related purchase iqvolution december 31 2006 2005 company 279 716 tax credits respectively credits related company’s research development activities expire 16 20 years company fully expects realize credits expiration company operates number different countries around world 2003 company began manufacture products switzerland received favorable income tax rate commitment swiss government incentive establish manufacturing plant aggregate dollar effect favorable tax rate approximately 17 million 012 per share year ended december 31 2006 30 million 021 per share year ended december 31 2005 company opened regional headquarters began manufacture products singapore received reduced income tax rate commitment singapore economic development board incentive establish manufacturing plant regional headquarters aggregate dollar effect favorable tax rate approximately 09 million 06 per share year ended december 31 2006 recognized us tax expense undistributed international earnings since intend reinvest earnings outside us foreseeable future net undistributed international earnings approximately 108 million 63 million december 31 2006 2005 respectively significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary 15 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year including leases related parties see note 12 effect december 31 2006 rent expense 2006 2005 2004 approximately 3291 2306 1651 respectively patent litigationpatent litigationon november 25 2003 cimcoreromer division hexagon filed patent infringement suit us federal district court southern district california alleging certain products sold united states including faro arm infringe us patent 5829148 ‘148 patent company believes contended litigation company infringe ‘148 patent ‘148 patent invalid july 12 2005 court issued order granting cimcoreromer’s motion summary judgment infringement three claims ‘148 patent july 22 2005 company announced decision limit capability usbased faro arm products faro arm faro gage digital template removing call “infinite rotation feature” reducing capability 50 rotations fewer faro believes limiting range joint rotation 50 rotations removed us products ability sweep unlimited arc feature ‘148 patent claims addressed court’s ruling required infringe ‘148 patent revised products however considered courts accordingly cannot give assurance revised products deemed infringe ‘148 patent september 20 2005 court vacated order summary judgment infringement agreed reconsider conclusions patent claim construction “markman” ruling pretrial hearing often used patent infringement cases new markman hearing occurred october 3 2005 hearingonsummary judgments infringement occurred november 14 2005 october 18 2005 court issued revised claim construction company believes materially alters court’s previous markman ruling substantially narrowing faro believes key aspects claim construction company believes narrower claim construction ultimately lead finding infringe claim ‘148 patent trial began november 2006 december 6 2006 judge presiding case declared mistrial trial new trial date set april 3 2007 addition company filed two separate requests reexamination us patent trademark office “pto” ‘148 patent requests granted pto ruled first reexamination september 2005 company believes pto ruling bolsters company’s previous position infringe ‘148 patent specifically first reexamination pto construed critical claim terms relatively narrow manner company believes consistent stated positions patent litigation company’s second reexamination request granted pto november 2005 based new “prior art” earlier issued patent publications submitted pto faro believes ultimately invalidate ‘148 patent prior art reference issue first reexamination proceeding december 7 2006 pto rejected key claims hexagon’s ‘148 patent hexagon appealed pto’s rejection claims rejected claims include claims involved ongoing ‘148 patent infringement pto rejection ultimately made final patent claims asserted company hexagon litigation invalidated faro prevail litigation hexagon ‘148 patent claims cover fourjointed arm construction mechanically unlimited rotation certain joints pto rejection determined feature already found number prior patents determined ‘148 claims “obvious” view prior patents hexagon right respond eventually appeal rejection claims event adverse ruling romercimcore litigation could required pay substantial damages cease manufacturing use sale infringing products discontinue use certain processes obtain license available romercimcore royalty payment obligations us adverse decision romercimcore case could materially adversely affect financial condition results operations time however company cannot estimate potential impact might result suit therefore provision made cover expense securities litigationon december 6 2005 first four essentially identical class action securities fraud lawsuits filed company certain officers company april 19 2006 four lawsuits consolidated kornitzer capital management inc appointed lead plaintiff may 16 2006 kornitzer filed consolidated amended class action complaint company individual defendants amended complaint also named grant thornton llp company’s independent registered public accounting firm additional defendant july 31 2006 company filed motion dismiss amended complaint february 3 2007 court dismissed amended complaint defendants leave replead february 22 2007 kornitzer filed consolidated second amended class action complaint second amended complaint principally asserts claims set forth amended complaint adds various allegations attempt comply certain standards stated court’s order amended complaint kornitzer seeks represent class consisting persons purchased otherwise acquired company’s publicly traded securities april 15 2004 march 15 2006 behalf alleged class kornitzer seeks unspecified amount damages premised allegations defendant made misrepresentations omissions material fact class period violation securities exchange act 1934 among things kornitzer alleges defendants misrepresented matters class period related value company’s inventory amount company’s gross margins profits result inventory valuation ii amount 2005 selling expenses company accrued expected iii effectiveness company’s systems internals controls including connection company’s determination inventory valuation selling expenses fact certain reported sales asia obtained violation foreign corrupt practices act company’s deadline responding second amended complaint april 26 2007 company intends file motion dismiss second amended complaint company timely notified issuer executive liability entity securities liability insurance policy securities litigation although company believes material allegations made second amended complaint without merit intends vigorously defend securities litigation assurances given respect outcome securities litigation purchase commitmentsthe company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days august 11 2005 faro entered agreement delcam plc company agreed purchase approximately 14 million products 12month term december 31 2006 company completed purchase 14 million products agreement effective november 1 2005 faro entered agreement metrologic group sa company agreed purchase approximately 04 million products 12month term december 31 2006 03 million purchased agreement renewed agreements listed company longterm commitments purchases voluntary disclosure foreign corrupt practices act matter securities exchange commission department justiceas previously reported company learned china subsidiary made payments certain customers china may violated fcpa applicable laws company’s audit committee instituted internal investigation matter february 2006 company voluntarily notified sec doj matter march 2006 internal investigation matter completed company provided sec doj information obtained course investigation cooperating agencies company’s internal investigation identified certain improper payments made china deficiencies controls respect operations china possible violation fcpa sec doj determines violations fcpa occurred could seek civil criminal sanctions including monetary penalties company andor certain employees well additional changes company’s business practices compliance programs based current information possible predict time sec doj investigations resolved outcome sanctions imposed effect matters may ultimately company consolidated financial statements results investigation revealed referral fee payments possible violation fcpa 165000 265000 2004 2005 respectively recorded selling expenses company’s statement income related sales customers payment referral fees made totaled 13 million 324 million 2004 2005 respectively additional improper referral fee payments 122000 made january february 2006 related sales contracts 2005 company sales china 90 million 2005 42 million 2004 approximately 7 4 total sales respectively company incurred expenses 38 million 2006 relating internal investigation fcpa matter company terminated certain personnel asiapacific region reassigned duties personnel asiapacific region us result internal investigation company instituting following remedial measures • contracted third party forensics accounting team conduct indepth audit operations china countries asiapacific region make recommendations improvement internal control systems • reviewing third party distributor arrangements effort assure contracts include adherence fcpa • performing due diligence third party distributors implementing process assess potential new distributors • established inhouse internal audit function including hiring director internal audit • consolidating human resources financial accounting reporting functions asia region singapore operations • implemented internal certification process ascertain whether similar issues may exist elsewhere company • implemented quarterly internal certification process confirm adherence company policy applicable laws regulations include regional leadership country management sales management • implementing additional training fcpa matters employees confidential compliance reporting system company’s internal investigation business practices china became aware income taxes related certain commissions bonus payments employees properly reported company filed appropriate payroll tax returns remitted deficiency litigation mentioned company involved legal proceedings routine litigation arising normal course business company believe results litigation even outcome unfavorable company would material adverse effect company’s business financial condition results operations 16 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan 2004 plan provides granting options stock appreciation rights employees nonemployee directors company authorized grant options 703100 shares common stock 1993 plan none outstanding company also authorized grant options 1400000 shares common stock 1997 plan 308257 options currently outstanding exercise prices 150 2740 options vest 3year period company also authorized grant 250000 shares common stock 1997 nonemployee director plan 80000 options currently outstanding exercise prices 161 2156 nonemployee director granted 3400 options upon election board directors annually upon attending annual meeting shareholders formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest 3year period company also authorized grant options 1750000 shares common stock 2004 plan 670183 options currently outstanding exercise prices 1406 3145 26163 restricted stock units outstanding stock price 1949 options restricted stock units vest 3year period restricted stock unit grants performancebased annual vesting anniversary date respective terms company records compensation cost associated restricted stock unit grants straightline basis vesting term addition four stock option plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable december 31 2005 2004 11090 35941 shares respectively accrued yet issued connection director’s elections shares issued december 31 2006 fourth quarter 2001 company cancelled approximately 548000 “out money” options including approximately 440000 options issued 1997 plan approximately 108000 options issued 1997 nonemployee director plan result 62806 options granted 2001 1997 plan holders options cancelled subjected variable accounting treatment fin 44 stock options issued within six months cancellation must accounted variable certain circumstances variable accounting requires companies remeasure compensation costs variable options based company’s share price options exercised cancelled forfeited without replacement compensation dependent fluctuations quoted market prices company’s common stock compensation costs recognized threeyear vesting schedule options fully vested exercised cancelled forfeited time compensation recognized immediately reporting period adoption fas 123r january 2006 fin 44 superseded company longer required account options variable accounting fourth quarter 2005 company accelerated vesting substantially outstanding options recorded minimal expenses remaining unvested stock options 2006 pretax charge estimated company avoided result acceleration amounts approximately 77 million course original vesting periods fair value future grants included expense vesting periods compensation income costs charged operations associated company’s stock option plans 210 150 277 2006 2005 2004 respectively changes stock option associated compensation cost due vesting options combined market price fluctuations company’s common stock variable accounting accrual expenses relating issuance restricted stock summary stock option activity weighted average exercise prices follows summary stock options outstanding exercisable december 31 2006 follows remaining nonexercisable options december 31 2006 become exercisable follows table illustrating effect net income net income per share fair value method prescribed fas 123 r applied presented note 1 summary significant accounting policies company used blackscholes optionpricing model determine fair value grants made using following assumptions 17 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 745841 237419 0 dilutive securities included 2006 2005 2004 antidilutive 18 employee retirement benefit plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participant’s account cannot exceed 100 compensation costs charged operations connection plan 2006 2005 2004 aggregated 247 201 172 respectively 19 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers accounted 10 total revenue 20 quarterly results operations unaudited fourth quarter 2006 company identified certain shipments customers containing freight term fob destination exceptions standard terms conditions sale included sales shipped delivered also fourth quarter company noted freight duty included cost inventory certain international locations improperly expensed incurred company recorded adjustment decrease sales cost sales 14 million 07 million respectively resulting decrease pretax income 07 million fourth quarter fiscal 2006 pretax effect items material previous quarters item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries december 31 2007 2006 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2007 audits basic consolidated financial statements included financial statement schedule listed index appearing item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements company adopted statement 123 revised 2004 sharebased payment january 1 2006 interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 january 1 2007 also audited accordance standards public company accounting oversight board united states faro technologies inc subsidiaries’ internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 10 2008 expressed unqualified opinion orlando florida grant thornton llp march 10 2008 report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited faro technologies inc florida corporation subsidiaries’ internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso faro technologies inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion faro technologies inc subsidiaries’ internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion faro technologies inc subsidiaries maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets faro technologies inc subsidiaries december 31 2007 2006 related consolidated statements income shareholders’ equity cash flows three years period ended december 31 2007 report dated march 10 2008 expressed unqualified opinion orlando florida grant thornton llp march 10 2008 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2007 2006 2005 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2007 2006 2005 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement devices manufacturing industrial building construction forensic applications company’s principal products include faro arm faro scan arm faro gage articulated electromechanical measuring devices faro laser tracker faro laser scanner ls laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products though direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income loss revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 15376 9861 december 31 2007 2006 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectibility accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements income sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 3319 2842 2154 2007 2006 2005 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs acquired intangibles principally include patents existing product technology customer relationships arose connection acquisition iqvolution ag see note 2 acquired intangibles recorded fair value date acquisition amortized estimated useful lives 3 15 years patents recorded cost amortization computed using straightline method lives patents research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month rate multiplied number machinemonths warranty product group sold period determine provision warranty expenses period company reevaluates exposure warranty costs end period using estimated expense per installation month major product group number machines remaining warranty remaining number months machine warranty expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence described sfas 109 “accounting income taxes” “sfas 109” company establishes valuation allowance net deferred assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income two year period company operates number different countries around world 2003 company began manufacture products switzerland received permanent income tax rate commitment swiss government incentive establish manufacturing plant 2005 company opened regional headquarters began manufacture products singapore received 2006 favorable multiyear income tax rate commitment singapore economic development board incentive establish manufacturing plant regional headquarters july 13 2006 financial accounting standards board “fasb” issued interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48 clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 prescribes recognition threshold measurement attributes financial statement disclosure tax positions taken expected taken tax return fin 48 impact uncertain tax position income tax return must recognized largest amount morelikelythannot sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 company adopted provisions fin 48 january 1 2007 significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company appropriately reserved tax uncertainties based criteria established fin 48 fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accruals carrying amounts financial instruments approximate fair value due shortterm nature instruments earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 17 earnings per share concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions stockbased compensationin december 2004 fasb issued sfas 123r “sharebased payment” “sfas 123r” sfas 123r requires employee stock options rights purchase shares stock participation plans accounted fair value method eliminates ability account instruments intrinsic value method prescribed accounting principles board opinion 25 “accounting stock issued employers” allowed original provisions sfas 123 “accounting stockbased compensation” “sfas 123” intrinsic value based method compensation cost measured excess quoted market price stock grant date amount employee must pay acquire stock fair value based method compensation cost measured grant date based fair value award recognized service period usually vesting period generally three years company adopted provisions sfas 123r january 1 2006 using modified prospective application transition method company uses blackscholes option pricing model determine fair value stock option grants order determine fair value restricted stock awards company uses closing market price common stock date grant compensation expense company’s stock based compensation plans determined consistent sfas 123 company’s net income earnings per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost company incurred minimal expenses 2006 calculated blackscholes method sfas 123 related adoption sfas 123r expensing stock options vested substantially unvested options fourth quarter 2005 reduction pretax charges estimated company result acceleration amounts approximately 77 million course original vesting periods options purchase approximately 704310 shares company’s stock 525 company’s outstanding options accelerated weighted average exercise price options subject acceleration 2130 aggregate pretax expense shares subject acceleration would reflected company’s consolidated financial statements beginning 2006 approximately 77 million including 43 million 2006 27 million 2007 07 million 2008 fair value future grants included expense vesting periods expenses apportioned according classification employees received stock options cost sales selling general administrative research development costs longlived assetseffective january 1 2002 company adopted sfas 144 “accounting impairment disposal longlived assets” “sfas 144” sfas 144 supersedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” requires one accounting impairment model used longlived assets held used disposed sale whether previously held used newly acquired broadens presentation discontinued operations include disposal transactions adoption sfas 144 financial impact results operations financial position company fourth quarter 2007 2006 2005 management reviewed company’s longlived assets concluded impairment assets years ended december 31 2007 2006 2005 estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 permits entities choose measure certain financial instruments eligible items fair value items otherwise currently required measured fair value sfas 159 decision measure items fair value made specified election dates irrevocable instrumentbyinstrument basis entities electing fair value option would required recognize changes fair value earnings expense upfront costs fees associated item fair value option elected entities electing fair value option required distinguish face statement financial position fair value assets liabilities fair value option elected similar assets liabilities measured using another measurement attribute elected sfas 159 effective beginning first fiscal year begins november 15 2007 earlier adoption permitted requirements sfas 159 adopted impact adoption sfas 159 dependent extent company chooses elect measure eligible items fair value september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements provisions statement applied prospectively beginning fiscal year statement initially applied transition adjustment recognized cumulativeeffect adjustment opening balance retained earnings provisions sfas 157 effective fiscal years beginning november 15 2007 except nonfinancial assets liabilities recognized disclosed fair value recurring basis effective date fiscal years beginning november 15 2008 company determined effect adoption statement financial condition results operations december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141 revised” sfas 141 revised requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date statement also requires acquirer business combination achieved stages recognize identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values provisions sfas 141 revised effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company determined effect adoption statement financial condition results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” statement establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary statement effective prospectively except certain retrospective disclosure requirements fiscal years beginning december 15 2008 company determined effect adoption statement financial condition results operations reclassificationcertain 2006 2005 amounts reclassified conform 2007 presentation 2 acquisition iqvolutionon march 29 2005 company acquired 100 outstanding stock privately held iqvolution ag “iqvolution” iqvolution german company designs manufactures supplies threedimensional laser scanning products services purchase strategic acquisition enable company enter broader threedimensional measurement markets purchase price transaction approximately 136 million including initial cash payment approximately 38 million 314736 shares common stock valued approximately 72 million based average closing price three days immediately preceding closing 152292 shares payable immediately remaining 162444 shares common stock valued approximately 37 million placed escrow may paid following five years subject achieving predetermined milestones respect purchased assets subsequent purchase approximately 18 million cash paid repayment loans approximately 04 million paid fees associated purchase additionally purchase price adjusted downward 01 million funds repaid company third quarter relating settlement purchase price adjustment clause within purchase agreement fourth quarter 2005 12183 shares issued result successful qualification milestones corresponding addition goodwill 252 february 2006 43871 shares issued result milestones met 675 accrued goodwill additional paidin capital december 31 2005 additional 1288 shares returned company february 2006 cancellation result milestone disqualification 2006 25991 shares released escrow corresponding addition goodwill 408 2007 24773 shares released escrow corresponding addition goodwill 730 december 31 2007 56914 shares held escrow third quarter 2005 approximately 38 million purchase price allocated intangible assets reflecting company’s preliminary estimate fair value technology software assets acquired hardware assets acquired valued approximately 23 million estimated life 17 years software assets valued approximately 16 million estimated life 10 years december 31 2005 estimates process reviewed validated third party company completed first quarter 2006 third party valuation assets acquired company made adjustment purchase price reflect deferred tax liability approximately 15 million following table represents fair value assets acquired liabilities assumed includes final determination estimated fair values deferred tax assets noncompete intangible assets preliminary december 31 2005 operating results iqvolution included consolidated statements income since date acquisition following unaudited proforma results operations year ended december 31 2005 presented informational purposes purport indicative results operations actually would resulted acquisition occurred date indicated results operations may result future 3 supplemental cash flow information selected cash payments noncash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows 5 shortterm investments underlying investments company variable rate longterm taxexempt municipal bonds interest rate variable rate municipal bonds resets every seven days adjust current market conditions company redeem investments cost time five business days notice therefore investments held cost classified shortterm investments accompanying consolidated balance sheets company holds investments available sale 6 inventories consist following 7 goodwill company’s goodwill december 31 2007 2006 related acquisition three previous businesses company tests goodwill impairment accordance sfas 142 “goodwill intangible assets” company evaluates reporting unit’s fair value versus carrying value fourth quarter year frequently events changes circumstances indicate carrying value may exceed fair value company prepares discounted cash flow model estimate fair value reporting unit compares amount carrying value impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2007 americas region europeasia region asia pacific region shown table december 31 2007 2006 company goodwill identified impaired increase goodwill 19 million 2007 27 million 2006 relates primarily purchase iqvolution 8 intangible assets intangible assets consist following 2005 company wrote patents original cost 503 net book value 334 abandoned amortization expense 715 1293 1299 2007 2006 2005 respectively estimated amortization expense five succeeding fiscal years follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 line credit july 11 2006 company entered loan agreement providing available line credit 300 million loans loan agreement bear interest rate libor plus 175 require company maintain certain ratios respect debt covenant agreement including current ratio consolidated ebitda senior funded debt ebitda december 31 2007 company compliance covenants loan agreement term loan agreement extends april 30 2009 company drawn line credit 11 capital leases longterm debt required future payments obligations capital leases follows assets capital leases 409 559 december 31 2007 2006 respectively accumulated depreciation assets capital leases 150 366 december 31 2007 2006 respectively 12 related party transactions related party leasethe company leased headquarters lake mary florida xenon research inc company owned simon raab companys chairman diana raab spouse may 22 2007 xenon research inc sold property assigned lease agreement emma investments llc unrelated third party rent expense lease 166 398 2007 2006 2005 respectively 13 income expense net income expense net consists following 14 income taxes company adopted provisions fin 48 january 1 2007 result implementation company recognize adjustment liability unrecognized tax benefits company 05 million liability recorded unrecognized tax benefits january 1 2007 december 31 2007 includes interest penalties 005 million reconciliation beginning ending amount unrecognized tax benefits follows company one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2007 company recognizes interest penalties accrued related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 05 million company currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2004 forward state level subject three five year statute limitations united states internal revenue service “irs” commenced examination company’s 2005 income tax return late 2007 anticipated exam completed end 2008 company also received notice state early 2008 commencement examination tax returns period 2004 2007 addition company’s tax returns currently examination taxing authorities germany years 1999 2003 audit began 2005 anticipated close end 2008 company currently anticipate total amount unrecognized tax benefits significantly increase decrease within next 12 months effective income tax rate 2007 2006 2005 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 20 million 013 per share year ended december 31 2007 17 million 012 per share year ended december 31 2006 30 million 021 per share year ended december 31 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 20 million 013 per share year ended december 31 2007 09 million 06 per share year ended december 31 2006 december 31 2007 2006 company’s domestic entities deferred income tax assets amount 4928 3996 respectively company determined amounts fully realizable established valuation allowance based assessment morelikelythannot utilized december 31 2007 2006 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 7677 6251 respectively financial reporting purposes valuation allowance 6304 4417 respectively recognized offset deferred tax assets relating net operating losses company continues maintain valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company increased overall valuation allowance 2007 deferred tax assets amount 1887 december 31 2006 company 279 tax credit carryforwards credits related company’s research development activities fully utilized 2007 company recognized us tax expense undistributed international earnings since intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 256 million 108 million december 31 2007 2006 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary income taxes consists following components income tax expense follows income tax expense years ended december 31 2007 2006 2005 differ amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows 15 commitments contingencies leasesthe company leases buildings equipment operating leases following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2007 rent expense 2007 2006 2005 approximately 3662 3291 2306 respectively purchase commitmentsthe company enters purchase commitments products services ordinary course business purchases generally cover production requirements 60 90 days december 31 2007 company longterm commitments purchases securities litigationon december 6 2005 first four essentially identical class action securities fraud lawsuits filed company certain officers company “securities litigation” us district court middle district florida april 19 2006 four lawsuits consolidated kornitzer capital management inc “lead plaintiff” appointed lead plaintiff may 16 2006 lead plaintiff filed consolidated amended class action complaint company individual defendants “amended complaint” february 3 2007 court dismissed amended complaint without prejudice february 22 2007 lead plaintiff filed consolidated second amended class action complaint “second amended complaint” company individual defendants second amended complaint amended complaint lead plaintiff seeks include class persons purchased otherwise acquired company’s common stock april 15 2004 march 15 2006 “class” seeks unspecified amount damages premised allegations defendant made misrepresentations omissions material fact class period violation securities exchange act 1934 among things lead plaintiff alleges company’s reported inventory gross margins profits false misleading portion class period company consciously overstated value inventory company misstated 2005 certain selling expenses accrued expected incur certain asian sales company reported class period product unlawful payments made violation foreign corrupt practices act company failed disclose utilizing unlawful means achieve sales certain company’s statements regarding company’s systems internal controls false misleading light circumstances february 26 2008 parties securities litigation entered memorandum understanding stating principal terms agreement settle securities litigation pursuant memorandum understanding subject certain conditions parties securities litigation prepare file detailed stipulation agreement settlement court seeking court’s preliminary final approval terms proposed settlement pursuant terms issuer company’s executive liability entity securities liability insurance policy applicable securities litigation pay 6875 million settlement fund securities litigation sum within coverage limit policy proceeds settlement fund distributed members class lead plaintiff’s counsel balance settlement fund used pay various costs associated providing notice terms proposed settlement class administering settlement court approves settlement judgment entered dismissing securities litigation prejudice defendant derivative actionon january 10 2008 verified shareholder derivative complaint “derivative complaint” filed alleged shareholder company us district court middle district florida six company’s current former directors defendants company nominal defendant derivative complaint alleges breach fiduciary duty claims individual defendants principally connection alleged acts omissions asserted securities litigation plaintiff alleges individual defendants caused company’s stock price falsely inflated subjected company costs fines damages well loss good plaintiff purports seek unspecified amount damages together relief behalf company individual defendants prior filing derivative complaint plaintiff requested company assert certain claims individual defendants february 2008 company received another demand another alleged shareholder company assert substantially claims set forth derivative complaint seven company’s current former directors company formed committee independent directors review investigate shareholder’s demand allegations made derivative complaint shareholder demand committee yet made recommendation respect matters company’s knowledge defendant served derivative complaint voluntary disclosure foreign corrupt practices act matter securities exchange commission department justiceas previously reported company learned china subsidiary made payments certain customers china may violated foreign corrupt practices act “fcpa” applicable laws company’s audit committee instituted internal investigation matter february 2006 company voluntarily notified securities exchange commission “sec” department justice “doj” matter march 2006 companys internal investigation matter completed company’s internal investigation identified certain improper payments made china deficiencies controls respect operations china possible violation fcpa results investigation revealed referral fee payments possible violation fcpa 165000 265000 2004 2005 respectively recorded selling expenses statements income related sales customers payment referral fees made totaled approximately 13 million 324 million 2004 2005 respectively additional improper referral fee payments 122000 made january february 2006 related sales contracts 2005 company sales china 90 million 2005 42 million 2004 approximately 7 4 total sales respectively company incurred expenses 38 million 2006 31 million 2007 relating fcpa matter including 265 million estimated fines penalties doj sec company provided sec doj information obtained course investigation cooperating agencies sec doj broad range civil criminal remedies may seek impose corporations individuals appropriate circumstances including without limitation disgorgement fines penalties injunctive equitable relief well additional changes company’s business practices compliance programs company engaged settlement discussions sec doj concerning fcpa matter although assurance discussions result resolution fcpa matter company determined settlement discussions likely result resolution include fine disgorgement associated profits company recorded reserve 265 million anticipation amount could necessary satisfy financial obligations sec doj resolving matter predicting time fcpa matter finally resolved sec doj possible monetary sanctions ultimately paid company sec doj resolving matter whether imposed company agreed settlement may exceed amount reserved company anticipates resolution matter result formal criminal charges filed doj company expects part final resolution fcpa matter sec doj addition monetary sanctions company continuing obligations sec doj respect monitoring compliance fcpa laws full cooperation government adoption compliance code containing specific provisions intended prevent violations fcpa company expects failure comply continuing obligations could result sec doj seeking impose penalties company future company terminated march 2006 certain personnel asiapacific region reassigned duties personnel asiapacific region us result internal investigation additionally company instituted following remedial measures • contracted third party forensics accounting team conduct indepth audit operations china countries asiapacific region make recommendations improvement internal control systems • reviewed third party distributor arrangements effort assure contracts include adherence fcpa • performed due diligence third party distributors implemented process assess potential new distributors • established inhouse internal audit function including hiring director internal audit • consolidated human resources financial accounting reporting functions asia region singapore operations • implemented internal certification process ascertain whether similar issues may exist elsewhere company • implemented quarterly internal certification process confirm adherence company policy applicable laws regulations include regional leadership country management sales management • implemented additional training fcpa matters employees confidential compliance reporting system litigation mentioned company involved legal proceedings routine litigation arising normal course business company believe results litigation would material adverse effect company’s business financial condition results operations 16 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan “1993 plan” 1997 employee stock option plan “1997 plan” provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” provides granting options stock appreciation rights employees nonemployee directors company authorized grant options 703100 shares common stock 1993 plan none outstanding company also authorized grant options 1400000 shares common stock 1997 plan 97659 options currently outstanding exercise prices 150 2740 options 10 year term vest 3year period company also authorized grant 250000 shares common stock 1997 nonemployee director plan 63000 options currently outstanding exercise prices 161 2156 nonemployee director granted 3400 restricted shares common stock vest ratably three years annually day following annual meeting shareholders nonemployee director granted 2200 restricted shares common stock vest ratably three years company also authorized grant options 1750000 shares common stock 2004 plan 625205 options currently outstanding exercise prices 1406 3321 23834 restricted stock units outstanding stock price 1949 2436 options restricted stock units 10 year term vest 3year period restricted stock unit grants performancebased annual vesting anniversary date respective terms company records compensation cost associated restricted stock unit grants straightline basis vesting term addition four stock option plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable december 31 2005 11090 shares accrued yet issued connection director’s elections shares issued december 31 2006 shares issued plan 2007 fourth quarter 2005 company accelerated vesting substantially outstanding options recorded minimal expenses remaining unvested stock options 2006 pretax charge estimated company avoided result acceleration amounts approximately 77 million course original vesting periods fair value future grants included expense vesting periods compensation income costs charged operations associated company’s stock option plans 1217 210 150 2007 2006 2005 respectively changes stock option associated compensation cost due vesting options combined market price fluctuations company’s common stock variable accounting accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2007 2006 1280 732 respectively aggregate intrinsic value stock options exercised years ended december 31 2007 2006 80 million 07 million respectively total fair value stock options vested years ended december 31 2007 2006 005 million 003 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2007 december 31 2007 27 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 21 years 17 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 10000 745841 237419 dilutive securities included 2007 2006 2005 antidilutive 18 employee retirement benefit plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board directors discretionary contributions employer matches made participant’s account cannot exceed 100 compensation costs charged operations connection plan 2007 2006 2005 aggregated 569 247 201 respectively 19 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total revenue 20 quarterly results operations unaudited fourth quarter 2006 company identified certain shipments customers containing freight term fob destination exceptions standard terms conditions sale included sales shipped delivered also fourth quarter company noted freight duty included cost inventory certain international locations improperly expensed incurred company recorded adjustment decrease sales cost sales 14 million 07 million respectively resulting decrease pretax income 07 million fourth quarter fiscal 2006 pretax effect items material previous quarters item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries december 31 2008 2007 related statements income stockholders’ equity comprehensive income cash flows three years period ended december 31 2008 audits basic consolidated financial statements included financial statement schedule listed index appearing item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements company adopted interpretation 48 accounting uncertainty income taxes interpretation fasb statements 109 january 1 2007 also audited accordance standards public company accounting oversight board united states faro technologies inc subsidiaries’ internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2009 expressed unqualified opinion grant thornton llp orlando florida february 26 2009 report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited faro technologies inc florida corporation subsidiaries’ internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso faro technologies inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion faro technologies inc subsidiaries’ internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion faro technologies inc subsidiaries maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets faro technologies inc subsidiaries december 31 2008 2007 related consolidated statements income shareholders’ equity comprehensive income cash flows three years period ended december 31 2008 report dated february 26 2009 expressed unqualified opinion grant thornton llp orlando florida february 26 2009 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2008 2007 2006 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2008 2007 2006 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement devices manufacturing industrial building construction forensic applications company’s principal products include faroarm faro laser scanarm faro gage articulated electromechanical measuring devices faro laser tracker faro laser scanner ls laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products though direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 17907 15376 december 31 2008 2007 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements income sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 3485 3319 2842 2008 2007 2006 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards sfas 142 “goodwill intangible assets” “sfas 142” indefinitelife identifiable intangible assets goodwill amortized company periodically reviews identifiable intangible assets goodwill considering factors projected cash flows revenue earnings multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs acquired intangibles principally include patents existing product technology customer relationships arose connection acquisition iqvolution ag dimensional photonics international acquired intangibles recorded fair value date acquisition amortized estimated useful lives 3 15 years patents recorded cost amortization computed using straightline method lives patents research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month rate multiplied number machinemonths warranty product group sold period determine provision warranty expenses period company reevaluates exposure warranty costs end period using estimated expense per installation month major product group number machines remaining warranty remaining number months machine warranty expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence described sfas 109 “accounting income taxes” “sfas 109” company establishes valuation allowance net deferred assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income two year period july 13 2006 financial accounting standards board “fasb” issued interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 prescribes recognition threshold measurement attributes financial statement disclosure tax positions taken expected taken tax return fin 48 impact uncertain tax position income tax return must recognized largest amount morelikelythannot sustained upon audit relevant taxing authority uncertain income tax position recognized less 50 likelihood sustained additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 company adopted provisions fin 48 january 1 2007 significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company appropriately reserved tax uncertainties based criteria established fin 48 fair value financial instrumentsthe company’s financial instruments include cash equivalents accounts receivable accounts payable accruals carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions longlived assetsthe company follows sfas 144 “accounting impairment disposal longlived assets” “sfas 144” requires one accounting impairment model used longlived assets held used disposed sale whether previously held used newly acquired broadens presentation discontinued operations include disposal transactions fourth quarter 2008 2007 2006 management reviewed company’s longlived assets concluded impairment assets years ended december 31 2008 2007 2006 estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards january 1 2008 company adopted statement financial accounting standards “sfas” 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 permits entities choose measure certain financial instruments eligible items fair value items otherwise currently required measured fair value sfas 159 decision measure items fair value made specified election dates irrevocable instrumentbyinstrument basis entities electing fair value option would required recognize changes fair value earnings expense upfront costs fees associated item fair value option elected entities electing fair value option required distinguish face statement financial position fair value assets liabilities fair value option elected similar assets liabilities measured using another measurement attribute adoption sfas 159 impact company’s consolidated financial statements january 1 2008 company adopted sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value accordance generally accepted accounting principles expands disclosures fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements company adopted provisions pronouncement financial assets liabilities january 1 2008 disclosure requirements nonfinancial assets nonfinancial liabilities assessed nonrecurring basis deferred fasb staff position 1572 “effective date fasb statement 157” fiscal years beginning november 15 2008 december 2007 fasb issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141 revised” sfas 141 revised requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date statement also requires acquirer business combination achieved stages recognize identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values provisions sfas 141 revised effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company believe adoption statement 141 material impact company’s financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” statement establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary statement effective prospectively except certain retrospective disclosure requirements fiscal years beginning december 15 2008 company believe adoption statement 160 material impact company’s financial position results operations march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” “sfas 161” statement requires enhanced disclosures entity’s derivative hedging activities sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 company expect sfas 161 material impact consolidated financial statements reclassificationcertain 2007 2006 amounts reclassified conform 2008 presentation 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts allowance doubtful accounts follows 4 shortterm investments underlying investments company variable rate longterm taxexempt municipal bonds interest rate variable rate municipal bonds resets every seven days adjust current market conditions company redeem investments cost time five business days notice investments held market based level 1 inputs defined sfas 157 approximates cost classified shortterm investments accompanying consolidated balance sheets company accounts investments available sale securities 5 inventories consist following 6 goodwill company’s goodwill december 31 2008 2007 related acquisition three previous businesses company tests goodwill impairment accordance sfas 142 “goodwill intangible assets” company evaluates reporting unit’s fair value versus carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value company prepares discounted cash flow model estimate fair value reporting unit compares amount carrying value impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2008 americas region europeasia region asia pacific region shown table december 31 2008 2007 company goodwill identified impaired decrease goodwill 02 million 2008 increase 19 million 2007 relates adjustments purchase acquisition made 2005 7 intangible assets intangible assets consist following amortization expense 1021 715 1293 2008 2007 2006 respectively estimated amortization expense five succeeding fiscal years follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million loans loan agreement bear interest rate libor plus 175 require company maintain certain ratios respect debt covenant agreement including current ratio consolidated ebitda senior funded debt ebitda december 31 2008 company compliance covenants loan agreement term loan agreement extends april 30 2009 company drawn line credit company believes able renew line credit upon expiration current amended loan agreement although terms conditions may change 10 capital leases longterm debt required future payments obligations capital leases follows assets capital leases 417 409 december 31 2008 2007 respectively accumulated depreciation assets capital leases 85 150 december 31 2008 2007 respectively 11 expense income net expense income net consists following 12 income taxes fiscal 2008 company decreased unrecognized tax benefit 02 million decrease due tax developments primarily related us operations impacted company’s valuation uncertain tax positions december 31 2008 company’s gross unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2008 company recognizes interest penalties accrued related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2004 forward state level subject three five year statute limitations united states internal revenue service “irs” commenced examination company’s 2005 income tax return late 2007 examination process company believes provided appropriately uncertain tax positions may arise company currently examination tax jurisdiction effective income tax rate 2008 2007 2006 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 21 million 013 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 17 million 012 per share year ended december 31 2006 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 16 million 010 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 09 million 06 per share year ended december 31 2006 december 31 2008 2007 company’s domestic entities deferred income tax assets amount 6775 4928 respectively december 31 2008 2007 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 10224 7677 respectively financial reporting purposes valuation allowance 8690 6304 respectively recognized offset deferred tax assets relating net operating losses company maintains valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company released valuation allowance approximately 08 million germany based demonstrated history earnings past three years management’s assessment morelikelythannot utilize deferred tax assets management calculated amount release valuation allowance using projections future taxable earnings next two years company recognized us tax expense undistributed international earnings since intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 341 million 256 million december 31 2008 2007 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary income taxes consists following components income tax expense follows income tax expense years ended december 31 2008 2007 2006 differ amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows 13 commitments contingencies leasesthe company leases buildings equipment operating leases following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2008 rent expense 2008 2007 2006 approximately 4644 3662 3291 respectively securities litigationon december 6 2005 first four essentially identical class action securities fraud lawsuits filed company certain officers company “securities litigation” us district court middle district florida april 19 2006 four lawsuits consolidated kornitzer capital management inc “lead plaintiff” appointed lead plaintiff lead plaintiff sought include class persons purchased otherwise acquired company’s common stock april 15 2004 march 15 2006 “class” sought unspecified amount damages premised allegations defendant made misrepresentations omissions material fact class period violation securities exchange act 1934 february 26 2008 parties securities litigation entered memorandum understanding stating principal terms agreement settle securities litigation april 9 2008 parties filed detailed stipulation settlement court seeking court’s preliminary final approval terms proposed settlement pursuant terms issuer company’s executive liability entity securities liability insurance policy applicable securities litigation pay 6875 million settlement fund securities litigation sum within coverage limit policy accordingly effect company’s financial results october 3 2008 court entered final judgment order dismissal prejudice whereby court certified class purposes settlement approved settlement dismissed securities litigation prejudice defendant derivative actionon january 10 2008 verified shareholder derivative complaint filed alleged shareholder company us district court middle district florida six company’s current former directors defendants company nominal defendant “derivative action” derivative complaint alleges breach fiduciary duty claims individual defendants principally connection alleged acts omissions asserted securities litigation february 2008 april 2008 company received two demands alleged shareholders company assert substantially claims set forth derivative complaint seven company’s current former directors demands subsequently withdrawn november 12 2008 parties derivative action executed memorandum understanding material terms proposed settlement derivative action january 21 2009 parties filed court stipulation settlement “stipulation” seeking court’s preliminary final approval terms proposed settlement pursuant terms company shall adopt certain corporate governance policies period three years effective date policies issuer company’s executive liability entity securities liability insurance policy applicable derivative action pay 400000 plaintiff’s counsel fees expenses sum within coverage limit policy accordingly effect company’s financial results february 13 2009 court granted preliminary approval settlement hearing held april 23 2009 determine whether terms conditions settlement proposed stipulation approved fair reasonable adequate court approves settlement judgment entered dismissing derivative action prejudice defendant patent matterson july 11 2008 complaint patent infringement filed company us district court district massachusetts metris usa inc certain affiliates collectively “metris” concerning us patent nos 6611617 7313264 patents generally directed laser scanning devices complaint served november 5 2008 discovery case commenced trial date set company believes infringe asserted patents andor patents invalid company currently anticipate lawsuit material impact company’s business financial condition results operations litigation mentioned company involved legal proceedings routine litigation arising normal course business none company believes material adverse effect company’s business financial condition results operations 14 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan “1993 plan” 1997 employee stock option plan “1997 plan” provide granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” provides granting options stock appreciation rights employees nonemployee directors company authorized grant options 703100 shares common stock 1993 plan none outstanding company also authorized grant options 1400000 shares common stock 1997 plan 89092 options currently outstanding exercise prices 150 2740 options 10 year term vest 3year period company also authorized grant 250000 shares common stock 1997 nonemployee director plan 63000 options currently outstanding exercise prices 161 2156 nonemployee director granted 3400 restricted shares common stock vest ratably three years annually day following annual meeting shareholders nonemployee director granted 2200 restricted shares common stock vest ratably three years company also authorized grant options 1750000 shares common stock 2004 plan 797480 options currently outstanding exercise prices 1250 3321 23433 restricted stock units outstanding stock price 1949 3106 options restricted stock units 10 year term vest 3year period restricted stock unit grants performancebased annual vesting anniversary date respective terms company records compensation cost associated restricted stock unit grants straightline basis vesting term addition four stock option plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable december 31 2005 11090 shares accrued yet issued connection directors’ elections shares issued december 31 2006 shares issued plan 2008 compensation costs charged operations associated company’s stock option plans 2098 1217 210 2008 2007 2006 respectively changes stock option associated compensation cost due vesting options combined market price fluctuations company’s common stock variable accounting accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2008 2007 2006 1399 1280 732 respectively aggregate intrinsic value stock options exercised years ended december 31 2008 2007 2006 02 million 80 million 07 million respectively total fair value stock options vested years ended december 31 2008 2007 2006 081 million 005 million 003 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2008 december 31 2008 40 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 19 years 15 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 509290 10000 745841 potentially dilutive securities included 2008 2007 2006 respectively antidilutive 16 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees costs charged operations connection plan 2008 2007 2006 aggregated 909 569 247 respectively 17 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total revenue 18 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries december 31 2009 2008 related statements operations shareholders’ equity cash flows three years period ended december 31 2009 audits basic consolidated financial statements included financial statement schedule listed index appearing item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states faro technologies inc subsidiaries’ internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2010 expressed unqualified opinion grant thornton llp orlando florida february 26 2010 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2009 2008 2007 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2009 2008 2007 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement imaging systems manufacturing industrial building construction forensic applications company’s principal products include faroarm faro laser scanarm faro gage articulated electromechanical measuring devices faro laser tracker faro laser scanner photon laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products though direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 23181 17907 december 31 2009 2008 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 4143 3485 3319 2009 2008 2007 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair market value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2009 2008 2007 acquired intangibles principally include patents existing product technology customer relationships arose connection acquisition iqvolution ag dimensional photonics international acquired intangibles recorded fair value date acquisition amortized estimated useful lives 3 15 years patents recorded cost amortization computed using straightline method lives patents longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded impairment assets years ended december 31 2009 2008 2007 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group sold period determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installation month major product group number units remaining warranty remaining number months unit warranty expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income two year period company recognizes tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions less 50 likelihood tax benefit sustained tax benefit recognized financial statements ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accruals due shortterm nature carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share concentration credit riskfinancial instruments expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards december 2007 financial accounting standards board “fasb” issued statements financial accounting standards “sfas” 141 r business combinations codified accounting standards codification “asc” 805 business combinations asc 805 requires acquirer measure identifiable assets acquired liabilities assumed noncontrolling interest acquired entity fair values acquisition date goodwill excess value net identifiable assets acquired impacted acquisitions closed january 1 2009 adoption material effect company’s financial position results operations march 2008 fasb issued guidance codified within asc 815 expands disclosure requirements derivative instruments hedging activities requiring enhanced disclosure derivative instruments impact company’s financial statements companies engage transactions tabular disclosure effects instruments related hedged items company’s financial position results operations cash flows company adopted amendments january 1 2009 prospective basis adoption material effect company’s financial position results operations april 2008 fasb issued guidance codified within asc 350 outlines factors considered developing renewal extension assumptions used determine useful life recognized intangible assets intent guidance improve consistency useful life recognized intangible asset period expected cash flows used measure fair value asset accordance asc 350 us gaap authoritative literature amendments must applied prospectively intangible assets acquired effective date company adopted amendments effective january 1 2009 adoption material effect company’s financial position results operations june 2009 fasb issued guidance codified within asc topic 105 generally accepted accounting principles “asc 105” asc 105 establishes fasb accounting standards codification “codification” single source authoritative nongovernmental us gaap asc 105 change current us gaap intended simplify user access authoritative us gaap providing authoritative literature related particular topic one place rules interpretative releases securities exchange commission “sec” authority federal securities laws also sources authoritative us gaap sec registrants guidance contained codification carries equal level authority codification superseded existing nonsec accounting reporting standards nongrandfathered nonsec accounting literature included codification became nonauthoritative provisions asc 105 effective interim annual reporting periods ending september 15 2009 company adopted asc 105 interim reporting period ended september 30 2009 adoption asc 105 disclosure purposes material effect company’s financial position results operations june 2009 fasb issued guidance codified within asc topic 810 consolidation “asc 810” asc 810 requires entities perform analysis determine whether enterprise’s variable interest interests give controlling financial interest variable interest entity analysis identifies primary beneficiary variable interest entity one power direct activities variable interest entity significantly impact entity’s economic performance obligation absorb losses entity could potentially significant variable interest guidance effective beginning annual reporting period commencing november 15 2009 early adoption prohibited company expect adoption asc 810 material effect financial position results operations october 2009 fasb issued accounting standards update “asu” 200913 multipledelivery revenue arrangements “asu 200913” asu 200913 establishes accounting reporting guidance arrangements including multiple revenuegenerating activities provides amendments criteria separating deliverables measuring allocating arrangement consideration one units accounting amendments asu 200913 also establish selling price hierarchy determining selling price deliverable significantly enhanced disclosures also required provide information vendor’s multipledeliverable revenue arrangements including information nature terms significant deliverables performance within arrangements amendments also require providing information significant judgments made changes judgments application relative sellingprice method affects timing amount revenue recognition amendments asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early application permitted company expect adoption asu 200913 material impact consolidated financial statements january 2010 fasb issued asu 20106 improving disclosures fair value measurements “asu 20106” requires reporting entities make new disclosures recurring nonrecurring fairvalue measurements including significant transfers level 1 level 2 fairvalue measurements information purchases sales issuances settlements gross basis reconciliation level 3 fairvalue measurements asu 20106 effective annual reporting periods beginning december 15 2009 except level 3 reconciliation disclosures effective annual periods beginning december 15 2010 company expect adoption asu 20106 material impact consolidated financial statements reclassificationcertain 2008 2007 amounts reclassified conform 2009 presentation 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts allowance doubtful accounts follows 4 shortterm investments shortterm investments 820 million december 31 2008 variable rate longterm taxexempt municipal bonds sold 2009 short term investments 650 million december 31 2009 comprised us treasury bills mature june 17 2010 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost fair value us treasury bills december 31 2009 approximated cost 5 inventories consist following 6 goodwill company’s goodwill december 31 2009 2008 related acquisition three previous businesses company evaluates reporting unit’s fair value versus carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value recoverability goodwill measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2009 americas region europeasia region asia pacific region shown table december 31 2009 2008 company goodwill identified impaired increase goodwill 10 million 2009 decrease 02 million 2008 relates adjustments purchase acquisition made 2005 7 intangible assets intangible assets consist following amortization expense 1387 1021 715 2009 2008 2007 respectively estimated amortization expense years 2010 2014 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million recently amended june 18 2009 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 225 250 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2009 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended extends march 31 2012 company drawn line credit 10 capital leases assets capital leases 366 417 december 31 2009 2008 respectively accumulated depreciation assets capital leases 134 85 december 31 2009 2008 respectively 11 income expense net income expense net consists following 12 income taxes fiscal 2009 company increased unrecognized tax benefit 03 million increase due tax developments primarily related us operations impacted company’s valuation uncertain tax positions december 31 2009 company’s gross unrecognized tax benefits totaled 06 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2009 company recognizes accrued interest penalties related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 06 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2005 forward state level subject three five year statute limitations united states internal revenue service “irs” commenced examination company’s 2005 2007 income tax returns late 2007 examination resulted assessment approximately 26 million related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 assessment paid january 2010 included income tax expense year ended december 31 2009 company expect assessment prospective impact global effective tax rate company believes provided appropriately uncertain tax positions may arise company currently examination tax jurisdiction effective income tax rate 2009 2008 2007 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 12 million 007 per share year ended december 31 2009 21 million 013 per share year ended december 31 2008 20 million 013 per share year ended december 31 2007 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 11 million 007 per share year ended december 31 2009 16 million 010 per share year ended december 31 2008 20 million 13 per share year ended december 31 2007 december 31 2009 2008 company’s domestic entities deferred income tax assets amount 4789 6775 respectively december 31 2009 2008 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 12181 10224 respectively financial reporting purposes valuation allowance 10603 8690 respectively recognized offset deferred tax assets relating net operating losses company maintains valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company released valuation allowance approximately 08 million germany 2008 based demonstrated history earnings past three years management’s assessment morelikelythannot utilize deferred tax assets management calculated amount release valuation allowance using projections future taxable earnings next two years company refundable income taxes related domestic net operating losses approximately 59 million december 31 2009 carried back 2005 2006 recorded prepaid expenses current assets accompanying consolidated balance sheets company recognized us tax expense undistributed international earnings intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 390 million 341 million december 31 2009 2008 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary income loss income taxes consists following components income tax benefit expense follows income tax expense benefit years ended december 31 2009 2008 2007 differs amount computed applying federal statutory corporate rate loss income taxes differences reconciled follows components company’s net deferred income tax asset follows 13 commitments contingencies leasesthe company leases buildings equipment operating leases following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2009 rent expense 2009 2008 2007 approximately 4680 4644 3662 respectively securities litigationon december 6 2005 first four essentially identical class action securities fraud lawsuits filed company certain officers company “securities litigation” us district court middle district florida april 19 2006 four lawsuits consolidated kornitzer capital management inc “lead plaintiff” appointed lead plaintiff lead plaintiff sought include class persons purchased otherwise acquired company’s common stock april 15 2004 march 15 2006 “class” sought unspecified amount damages premised allegations defendant made misrepresentations omissions material fact class period violation securities exchange act 1934 february 26 2008 parties securities litigation entered memorandum understanding stating principal terms agreement settle securities litigation april 9 2008 parties filed detailed stipulation settlement court seeking court’s preliminary final approval terms proposed settlement pursuant terms issuer company’s executive liability entity securities liability insurance policy applicable securities litigation paid 6875 million settlement fund securities litigation sum within coverage limit policy accordingly effect company’s financial results october 3 2008 court entered final judgment order dismissal prejudice whereby court certified class purposes settlement approved settlement dismissed securities litigation prejudice defendant derivative actionon january 10 2008 verified shareholder derivative complaint filed alleged shareholder company us district court middle district florida six company’s current former directors defendants company nominal defendant “derivative action” derivative complaint alleges breach fiduciary duty claims individual defendants principally connection alleged acts omissions asserted securities litigation february 2008 april 2008 company received two demands alleged shareholders company assert substantially claims set forth derivative complaint seven company’s current former directors demands subsequently withdrawn november 12 2008 parties derivative action executed memorandum understanding material terms proposed settlement derivative action january 21 2009 parties filed court stipulation settlement seeking court’s preliminary final approval terms proposed settlement february 13 2009 court granted preliminary approval settlement april 23 2009 court granted final approval settlement entered order final judgment directing consummation settlement dismissing derivative action prejudice defendant pursuant terms settlement company adopted certain corporate governance policies period three years issuer company’s executive liability entity securities liability insurance policy applicable derivative action paid 04 million plaintiff’s counsel fees expenses sum within coverage limit policy accordingly effect company’s financial results patent matterson july 11 2008 complaint patent infringement filed company us district court district massachusetts metris usa inc certain affiliates company refers collectively “metris” concerning us patent nos 6611617 7313264 company responded counterclaims alleging asserted patents generally directed laser scanning devices invalid noninfringed unenforceable due fraud prosecution patents us patent trademark office august 31 2009 court granted company’s motion add counterclaims defenses violation federal state antitrust unfair competition laws based alleged knowing assertion invalid fraudulent patents october 22 2009 court issued order purpose construing certain claim language asserted patents pursuant october 22 2009 order parties submitted stipulation construing claim language november 9 2009 discovery case ongoing trial date set company believes infringe asserted patents andor patents invalid company anticipate lawsuit material impact company’s business financial condition results operations however outcome difficult predict adverse determination could material impact company’s business financial condition results operations litigation mentioned company involved legal proceedings routine litigation arising normal course business none company believes material adverse effect company’s business financial condition results operations 14 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1997 employee stock option plan “1997 plan” provides granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors company authorized grant awards 1400000 shares common stock 1997 plan 74782 options currently outstanding exercise prices 150 2740 options 10 year term vest 3year period company also authorized grant awards 250000 shares common stock 1997 nonemployee director plan 60000 options currently outstanding exercise prices 161 2156 company also authorized grant awards 1750000 shares common stock 2004 plan 895796 options currently outstanding exercise prices 1250 3145 12867 restricted stock units outstanding stock price 1304 3106 options restricted stock units 10 year term 7 years new grants vest 3year period company make grants 1997 plan 1997 nonemployee director 2004 plan company authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminate expire unexercised canceled forfeited lapse reason grants currently outstanding 2009 plan prior 2009 upon election board nonemployee director granted 3400 restricted shares common stock vested ratably three years day following annual meeting shareholders nonemployee director nonemployee director received initial equity grant year granted 2200 restricted shares common stock vested ratably three years beginning 2009 nonemployee director granted restricted shares common stock value equal 70000 calculated closing share price day following annual meeting shareholders shares restricted stock vest first anniversary grant date subject director’s continued membership board company records compensation cost associated restricted stock unit grants straightline basis vesting term addition four stock incentive plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable compensation costs charged operations associated company’s stock incentive plans 2449 2098 1217 2009 2008 2007 respectively changes stock option associated compensation cost due vesting options accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2009 2008 2007 508 1399 1280 respectively aggregate intrinsic value stock options exercised years ended december 31 2009 2008 2007 005 million 02 million 80 million respectively total fair value stock options vested years ended december 31 2009 2008 2007 17 million 081 million 005 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2009 december 31 2009 23 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 15 years 15 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 1030578 509290 10000 potentially dilutive securities included 2009 2008 2007 respectively antidilutive 16 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees company terminated matching contributions april 18 2009 costs charged operations connection 401k plan 2009 2008 2007 aggregated 291 909 569 respectively 17 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company includes costs related corporate americas region company incur rd expenses asia region company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total revenue 18 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries december 31 2011 2010 related statements operations shareholders equity comprehensive income loss cash flows three years period ended december 31 2011 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states faro technologies inc subsidiaries’ internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 28 2012 expressed unqualified opinion grant thornton llp orlando florida february 28 2012 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity comprehensive income loss years ended december 31 2011 2010 2009 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2011 2010 2009 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement imaging systems manufacturing industrial building construction forensic applications company’s principal products include faroarm faro laser scanarm faro gage articulated electromechanical measuring devices faro laser tracker ion faro focus3d faro 3d imager amp laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 37531 34763 december 31 2011 2010 respectively company intend repatriate funds accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately 6 12 months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset remaining term lease exceed 7 years depreciation expense 5394 4842 4143 2011 2010 2009 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test company believes result qualitative assessment likely fair value reporting unit less carrying amount first second steps goodwill impairment test unnecessary company elected early adopt accounting guidance beginning fourth quarter 2011 prospective basis goodwill impairment tests necessary goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair market value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2011 2010 2009 intangible assets principally include patents existing product technology customer relationships arose connection company’s acquisition iqvolution ag dimensional photonics international intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years product technology patents recorded cost amortization computed using straightline method lives patents longlived assetslonglived assets goodwill indefinite lived intangible assets evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded impairment assets years ended december 31 2011 2010 2009 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability twelvemonth warranties included products creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month included cost salesservice accompanying consolidated statements operations repair rate multiplied number installationmonths warranty product group sold period determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installation month major product group number units remaining warranty remaining number months unit warranty expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred tax assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income twoyear period company recognizes tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions less 50 likelihood tax benefit sustained tax benefit recognized financial statements ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accruals due shortterm nature carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share concentration credit riskfinancial instruments expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards january 2010 financial accounting standards board “fasb” issued asu 20106 improving disclosures fair value measurements “asu 20106” requires reporting entities make new disclosures recurring nonrecurring fairvalue measurements including significant transfers level 1 level 2 fairvalue measurements information purchases sales issuances settlements gross basis reconciliation level 3 fairvalue measurements asu 20106 effective annual reporting periods beginning december 15 2009 except level 3 reconciliation disclosures effective annual periods beginning december 15 2010 adoption asu 20106 material impact company’s consolidated financial statements disclosures expected material impact future periods july 2010 fasb issued guidance enhance disclosures credit quality creditor’s financing receivables adequacy allowance credit losses amended guidance effective periodend balances beginning first interim annual reporting period ending december 15 2010 amended guidance effective activity reporting period beginning first interim annual reporting period beginning december 15 2010 adoption amended guidance impact company’s disclosure consolidated financial statements may 2011 financial accounting standards board fasb issued accounting standards update 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss asu 201104 asu 201104 clarifies application fair value measurement disclosure requirements effective annual periods beginning december 15 2011 currently evaluating provisions asu 201104 assessing impact may financial position results operations december 2010 fasb issued accounting standard asu 201028 intangiblesgoodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts consensus fasb emerging issues task force “asu 201028” asu 201028 provides amendments topic 350 modifies step 1 goodwill impairment test reporting units zero negative carrying amounts result goodwill impairments may reported sooner current practice public entities asu 201028 effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted adoption asu 201028 material impact company’s consolidated results operations financial condition june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 require companies present components net income comprehensive income either one continuous statement two consecutive statements eliminates option present components comprehensive income part changes shareholders’ equity standard change items must reported comprehensive income items measured must reclassified net income asu 201105 effective interim annual periods beginning december 15 2011 early adoption permitted adoption asu 201105 impact presentation effect company’s condensed consolidated financial statements financial condition december 2011 fasb issued accounting standards update 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 asu 201112 update defers specific requirement present items reclassified accumulated comprehensive income net income separately respective components net income comprehensive income part update fasb defer requirement report comprehensive income either single continuous statement two separate consecutive financial statements asu 201112 effective annual periods beginning december 15 2011 september 2011 fasb issued asu 201108 intangiblesgoodwill topic 350 “asu 201108” asu 201108 allows entities first assess qualitatively whether necessary perform twostep goodwill impairment test entity believes result qualitative assessment likely fair value reporting unit less carrying amount first second steps goodwill impairment test unnecessary company elected early adopt accounting guidance beginning fourth quarter 2011 prospective basis goodwill impairment tests adoption standard material impact consolidated financial statements footnote disclosures october 2009 fasb issued asu 200913 “revenue recognition multipledeliverable revenue arrangements” new standard changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 effective revenue arrangements entered fiscal years beginning june 15 2010 company adopted asu 200913 effective january 1 2011 adoption asu 200913 impact consolidated financial statements 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts 4 shortterm investments shortterm investments 650 million december 31 2011 2010 comprised us treasury bills mature june 15 2012 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost fair value us treasury bills december 31 2011 2010 approximated cost 5 inventories consist following 6 goodwill company’s goodwill december 31 2011 2010 related acquisition three previous businesses company evaluates reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test recoverability goodwill measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2011 americas region europeafrica region asia pacific region shown table december 31 2011 2010 company goodwill identified impaired changes goodwill 04 million 2011 09 million 2010 adjustments changes foreign exchange rates related acquisition made 2005 7 intangible assets intangible assets consist following amortization expense 1318 1484 1387 2011 2010 2009 respectively estimated amortization expense years 2012 2016 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million recently amended june 18 2009 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 225 250 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2011 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended extends march 31 2012 company drawn line credit company believes able renew line credit upon expiration current amended loan agreement although terms conditions may change 10 capital leases assets capital leases 401 381 december 31 2011 2010 respectively accumulated depreciation assets capital leases 294 202 december 31 2011 2010 respectively 11 income expense net income expense net consists following 12 income taxes december 31 2011 2010 company’s gross unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company subsidiaries file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2011 company recognizes accrued interest penalties related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2005 forward state level subject three five year statute limitations united states internal revenue service “irs” commenced examination company’s 2009 income tax returns june 2011 currently process irs completed examination company’s 2005 2007 income tax returns late 2009 examination resulted assessment approximately 26 million related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 assessment paid january 2010 included income tax expense year ended december 31 2009 company expect assessment prospective impact global effective tax rate company believes provided appropriately uncertain tax positions may arise effective income tax rate 2011 2010 2009 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 09 million 005 per share year ended december 31 2011 02 million 001 per share year ended december 31 2010 12 million 007 per share year ended december 31 2009 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional sixyear extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 03 million 002 per share year ended december 31 2011 07 million 004 per share year ended december 31 2010 11 million 007 per share year ended december 31 2009 december 31 2011 2010 company’s domestic entities deferred income tax assets amount 4957 4564 respectively december 31 2011 2010 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 5 15 years others carried forward indefinitely 14939 14084 respectively financial reporting purposes valuation allowance 11760 11148 respectively recognized offset deferred tax assets relating net operating losses company maintains valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company released valuation allowance approximately 12 million year ended december 31 2010 related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company recognized us tax expense undistributed international earnings intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 508 million 384 million december 31 2011 2010 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary income loss income taxes consists following components income tax expense follows income tax expense years ended december 31 2011 2010 2009 differs amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows 13 commitments contingencies leases company leases buildings equipment operating leases 2019 following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2011 rent expense 2011 2010 2009 approximately 5176 4044 4680 respectively patent matters july 11 2008 metris usa inc affiliates metris nv metris ipr nv 3d scanners ltd filed complaint company patent infringement us district court district massachusetts “massachusetts court” concerning us patent nos 6611617 7313264 hereinafter “patentsinsuit” following acquisition nikon corporation late 2009 metris usa inc subsequently changed name nikon metrology inc metris nv changed name nikon metrology nv metris ipr nv dissolved merged nikon metrology nv refer nikon metrology inc nikon metrology nv 3d scanners ltd “plaintiffs” “nikon” company responded complaint counterclaims alleging patentsinsuit generally directed laser scanning devices invalid noninfringed unenforceable due fraud prosecution patents us patent trademark office august 31 2009 massachusetts court granted company’s motion add counterclaims defenses violation federal state antitrust unfair competition laws based alleged knowing assertion invalid fraudulent patents company also filed amended counterclaim add plaintiff’s parent company nikon corporation counterclaim defendant january 29 2010 company filed motion summary judgment patentsinsuit unenforceable due inequitable conduct patent prosecution evidentiary hearings issue inequitable conduct commenced july 19 2010 concluded october 22 2010 posttrial briefing concluded december 10 2010 july 14 2010 company filed motion summary judgment noninfringement patentsinsuit addition first quarter 2010 nikon served supplemental interrogatory answer revising alleged date conception patentsinsuit earlier date company filed motion strike supplemental interrogatory answer august 31 2010 nikon filed motion summary judgment company’s counterclaims antitrust violations unfair trade practices company filed opposition october 12 2010 mediation hearing held february 18 2011 settle matter unsuccessful february 22 2011 massachusetts court denied nikon’s motion summary judgment company’s counterclaims antitrust violations unfair trade practices without prejudice february 24 2011 massachusetts court denied company’s motion summary judgment noninfringement without prejudice may 4 2011 massachusetts court found respect us patent 6611617 nikon’s patent unenforceable due inequitable conduct may 26 2011 company renewed motion summary judgment noninfringement june 28 2011 massachusetts court heard oral arguments company’s motion well nikon’s renewed motion summary judgment company’s counterclaims antitrust violations unfair trade practices massachusetts court also heard oral arguments regarding intervening change law inequitable conduct whether changes massachusetts court’s may 4 2011 finding nikon’s us patent 6611617 unenforceable due inequitable conduct september 19 2011 result changes law inequitable conduct massachusetts court vacated may 4 2011 decision us patent 6611617 unenforceable however order massachusetts court ruled company infringe us patent 6611617 massachusetts court also granted nikon’s motion summary judgment company’s counterclaims antitrust violations unfair trade practices massachusetts court denied company’s motion summary judgment noninfringement us patent 7313264 effect ruling reduce eliminate company’s exposure respect claims associated us patent 6611617 patent dispute respect us patent 7313264 remains ongoing company believes infringe us patent 7313264 patent invalid unenforceable company continue vigorously defend claims company anticipate lawsuit material impact company however outcome difficult predict adverse determination could material impact company’s business financial condition results operations litigation mentioned company involved legal proceedings routine litigation arising normal course business none company believes material adverse effect company’s business financial condition results operations 14 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1997 employee stock option plan “1997 plan” provides granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director stock option plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors company authorized grant awards 1400000 shares common stock 1997 plan 28583 options currently outstanding exercise prices 168 2740 options 10year term vest 3year period company also authorized grant awards 250000 shares common stock 1997 nonemployee stock option director plan 3000 options currently outstanding exercise price 2156 company also authorized grant awards 1750000 shares common stock 2004 plan 397170 options currently outstanding exercise prices 1250 3106 5251 restricted stock units outstanding stock price 1304 2430 options restricted stock units 10year term 7 years grants beginning 2010 vest 3year period company make grants 1997 plan 1997 nonemployee stock option director plan 2004 plan company authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminate expire unexercised canceled forfeited lapse reason 436692 options currently outstanding 2009 plan exercise prices 1704 3933 prior 2009 upon election board nonemployee director granted 3400 restricted shares common stock vested ratably three years day following annual meeting shareholders nonemployee director nonemployee director received initial equity grant year granted 2200 restricted shares common stock vested ratably three years beginning 2009 upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually first business day following annual meeting stockholders nonemployee director granted restricted shares common stock value equal 70000 calculated closing share price day shares restricted stock vest day prior following year’s annual meeting date subject director’s continued membership board company records compensation cost associated restricted stock unit grants straightline basis vesting term compensation costs charged operations associated company’s stock incentive plans 2756 2416 2449 2011 2010 2009 respectively changes stock option associated compensation cost due vesting options accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2011 2010 2009 1415 930 508 respectively aggregate intrinsic value stock options exercised years ended december 31 2011 2010 2009 104 million 07 million 005 million respectively total fair value stock options using blackscholes option pricing model vested years ended december 31 2011 2010 2009 16 million 17 million 17 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2011 december 31 2011 44 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 20 years 15 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 0 605506 1030578 potentially dilutive securities included 2011 2010 2009 respectively antidilutive 16 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees company terminated matching contributions april 18 2009 reinstated march 1 2011 costs charged operations connection 401k plan 2011 2010 aggregated 640 0 respectively 17 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company includes costs related corporate americas region company incur rd expenses asia region company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total revenue 18 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2013 2012 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2013 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2013 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2013 based criteria established 1992 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2014 expressed unqualified opinion grant thornton llp orlando florida february 26 2014 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity comprehensive income years ended december 31 2013 2012 2011 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2013 2012 2011 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement imaging systems manufacturing industrial building construction forensic applications company’s principal products include faroarm faro laser scanarm faro gage articulated electromechanical measuring devices faro laser tracker ion faro focus3d faro 3d imager amp laserbased measuring devices markets company’s products include automobile aerospace heavy equipment universities law enforcement agencies company sells vast majority products direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income revenue recognition product warranty extended warranty contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 669 million 532 million december 31 2013 2012 respectively company presently intend repatriate funds see note 12 accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately 6 12 months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment reserve excess obsolete inventory since value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset remaining term lease exceed 7 years depreciation expense 5825 5769 5394 2013 2012 2011 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment least annually company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units company elect initially perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test company believes result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary company elects bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill less carrying amount company perform twostep quantitative goodwill impairment test company performs first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method comparing fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value company performs second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2013 2012 2011 intangible assets principally include patents existing product technology customer relationships arose connection company’s acquisitions iqvolution ag dimensional photonics international intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years product technology patents recorded cost amortization computed using straightline method lives patents longlived assetslonglived assets goodwill indefinite lived intangible assets evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded indications impairment assets years ended december 31 2013 2012 2011 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warranties company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred tax assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income twoyear period company recognizes tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions morelikely tax benefit sustained tax benefit recognized financial statements ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities due shortterm nature carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect potentially dilutive common shares reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share concentration credit riskfinancial instruments expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards june 2011 financial accounting standards board “fasb” issued accounting standards update “asu” 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 requires companies present components net income comprehensive income either one continuous statement two consecutive statements eliminates option present components comprehensive income part changes shareholders’ equity standard change items must reported comprehensive income items measured must reclassified net income company elected present components net income comprehensive income two consecutive statements asu 201105 effective interim annual periods beginning december 15 2011 adoption asu 201105 quarter ended march 31 2012 subsequent periods impacted presentation effect company’s consolidated financial statements financial condition december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 “asu 201112” asu 201112 defers specific requirement present items reclassified accumulated comprehensive income net income separately respective components net income comprehensive income part update fasb defer requirement report comprehensive income either single continuous statement two separate consecutive financial statements february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income “asu 201203” effective reporting periods beginning december 15 2012 specific requirements asu 201302 impact company’s consolidated financial statements 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts activity allowance doubtful accounts follows 4 shortterm investments shortterm investments 650 million december 31 2013 2012 comprised us treasury bills mature june 12 2014 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost fair value us treasury bills december 31 2013 2012 approximated cost 5 inventories consist following 6 goodwill company’s goodwill december 31 2013 2012 related previous acquisitions three businesses company evaluates reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test step 1 quantitative goodwill impairment test performed fair value reporting unit measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment impairments goodwill charged earnings period impairment identified company two reporting units goodwill tested december 31 2013 americas region europeafrica region shown table december 31 2013 2012 company goodwill identified impaired changes goodwill 05 million 2013 02 million 2012 due adjustments changes foreign exchange rates related acquisition made 2005 7 intangible assets intangible assets consist following amortization expense 1213 1207 1318 2013 2012 2011 respectively estimated amortization expense years 2014 2018 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2013 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended expires march 31 2015 company drawn line credit 2013 2012 10 capital leases assets capital leases 23 230 december 31 2013 2012 respectively accumulated depreciation assets capital leases 23 195 december 31 2013 2012 respectively 11 expense net expense net consists following 12 income taxes income tax expense consists following components income tax expense benefit income taxes follows income tax expense benefit years ended december 31 2013 2012 2011 differ amount computed applying federal statutory corporate rate income taxes differences recorded follows components company’s net deferred income tax assets liabilities follows effective income tax rate 2013 2012 2011 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 02 million 001 per share year ended december 31 2013 09 million 005 per share year ended december 31 2012 09 million 005 per share year ended december 31 2011 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional sixyear extension favorable tax rate subject certain terms conditions including employment spending capital investment company singapore economic development board mutually agreed end program december 31 2011 company expanded operations locations within asia meet market demand aggregate dollar effect favorable tax rate approximately 03 million 002 per share year ended december 31 2011 december 31 2013 2012 company’s domestic entities deferred income tax assets amount 5476 4264 respectively december 31 2013 2012 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 5 15 years others carried forward indefinitely 14983 14825 respectively financial reporting purposes valuation allowance 11576 11763 respectively recognized offset deferred tax assets relating net operating losses company maintains valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company released valuation allowance approximately 12 million year ended december 31 2010 related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company recognized us tax expense undistributed international earnings intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 782 million 671 million december 31 2013 2012 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary december 31 2013 2012 company’s gross unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company subsidiaries file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2013 company recognizes accrued interest penalties related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2009 forward state level subject three four year statute limitations september 2013 us internal revenue service issued new regulations capitalizing deducting costs incurred acquire produce improve tangible property new regulations effective taxable years beginning january 1 2014 however considered enacted date issuance result new regulations company process reviewing existing income tax accounting methods related tangible property company believes new regulations material effect company’s consolidated financial statements 13 commitments contingencies leases company leases buildings equipment operating leases 2024 following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2013 rent expense 2013 2012 2011 5227 4917 5176 respectively patent matters july 11 2008 metris usa inc affiliates metris nv metris ipr nv 3d scanners ltd filed complaint company patent infringement us district court district massachusetts “massachusetts court” concerning us patent nos 6611617 7313264 hereinafter “patentsinsuit” following acquisition nikon corporation late 2009 metris usa inc subsequently changed name nikon metrology inc metris nv changed name nikon metrology nv metris ipr nv dissolved merged nikon metrology nv refer nikon metrology inc nikon metrology nv 3d scanners ltd “plaintiffs” “nikon” company responded complaint counterclaims alleging patentsinsuit generally directed laser scanning devices invalid noninfringed unenforceable due fraud prosecution patents us patent trademark office august 31 2009 massachusetts court granted company’s motion add counterclaims defenses violation federal state antitrust unfair competition laws based alleged knowing assertion invalid fraudulent patents company also filed amended counterclaim add plaintiff’s parent company nikon corporation counterclaim defendant july 14 2010 company filed motion summary judgment noninfringement patentsinsuit august 31 2010 nikon filed motion summary judgment company’s counterclaims antitrust violations unfair trade practices september 19 2011 massachusetts court ruled company infringe us patent 6611617 massachusetts court also granted nikon’s motion summary judgment company’s counterclaims antitrust violations unfair trade practices massachusetts court denied company’s motion summary judgment noninfringement us patent 7313264 effect ruling reduce eliminate company’s exposure respect claims associated us patent 6611617 patent dispute respect us patent 7313264 continued august 10 2012 following twoweek jury trial remaining claims related us patent 7313264 jury determined asserted patent claims invalid august 13 2012 massachusetts court entered judgment company massachusetts court sustained verdict january 23 2013 denying posttrial motions except company’s motion attorneys’ fees february 21 2013 massachusetts court stayed company’s motion attorneys’ fees pending resolution appeals us federal circuit march 20 2013 massachusetts court entered final judgment company’s favor awarding company costs april 10 2013 company filed notice appeal us federal circuit respect massachusetts court’s failure address inequitable conduct inventor related patent misuse antitrust issues july 10 2013 matter settled impact company’s financial statements 14 stock compensation plans company four compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 1997 employee stock option plan “1997 plan” provides granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director stock option plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors company authorized grant awards 1400000 shares common stock 1997 plan options remain outstanding company also authorized grant awards 250000 shares common stock 1997 nonemployee director stock option plan options exercised company also authorized grant awards 1750000 shares common stock 2004 plan 144606 options currently outstanding exercise prices 1304 3106 options 10year term 7 years grants beginning 2010 vest 3year period company make grants 1997 plan 1997 nonemployee director stock option plan 2004 plan company authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminate expire unexercised canceled forfeited lapse reason 669685 options currently outstanding 2009 plan exercise prices 2430 5701 prior 2009 upon election board nonemployee director granted 3400 restricted shares common stock vested ratably three years day following annual meeting shareholders nonemployee director nonemployee director received initial equity grant year granted 2200 restricted shares common stock vested ratably three years prior 2013 upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually first business day following annual meeting shareholders nonemployee director granted restricted shares common stock value equal 70000 calculated closing share price day shares restricted stock vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board beginning 2013 upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually first business day following annual meeting shareholders nonemployee director granted restricted shares common stock value equal 80000 calculated closing share price day shares restricted stock vest day prior following year’s annual meeting date subject director’s continued membership board company records compensation cost associated restricted stock unit grants straightline basis vesting term compensation costs charged operations associated company’s stock incentive plans 4409 4080 2756 2013 2012 2011 respectively changes stock option associated compensation cost due vesting options accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2013 2012 2011 1441 2228 1415 respectively aggregate intrinsic value stock options exercised years ended december 31 2013 2012 2011 37 million 71 million 104 million respectively total fair value stock options using blackscholes option pricing model vested years ended december 31 2013 2012 2011 33 million 17 million 16 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2013 december 31 2013 60 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 25 years 15 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 403649 238266 0 potentially dilutive securities included 2013 2012 2011 respectively antidilutive 16 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees company terminated matching contributions april 18 2009 reinstated march 1 2011 costs charged operations connection 401k plan 2013 2012 2011 aggregated 934 876 640 respectively 17 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company includes costs related corporate americas region company incur rd expenses asia region company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total consolidated revenue net sales external customers based upon geographic location customer long lived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated 18 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2014 2013 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2014 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2014 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2014 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 25 2015 expressed unqualified opinion grant thornton llp orlando florida february 25 2015 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements consolidated statements shareholders’ equity years ended december 31 2014 2013 2012 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2014 2013 2012 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” designs develops manufactures markets supports software driven threedimensional 3d measurement imaging realization systems company sells majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building construction law enforcement applications company’s faroarm® faro laser scanarm® faro gage faro laser tracker™ faro 3d imager amp companion cam2® software provide computeraided design cad based inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process company’s faro focus3d faro freestyle3d laser scanners companion scene faro forensic software utilized wide variety 3d modeling documentation highdensity surveying applications including two company’s key vertical markets architecture engineering construction aec law enforcement principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income foreign currency transaction gains losses included income revenue recognition product warranty extended warranty contractsrevenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related company’s measurement imaging realization equipment related software generally recognized upon shipment company considers earnings process complete shipping date fees billed customers associated distribution products classified revenue company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year revenues presented net salesrelated taxes cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 589 million 669 million december 31 2014 2013 respectively company presently intend repatriate funds see note 11 income taxes accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout fifo method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging realization devices utilized sales representatives present company’s products customers management expects products remain sales demonstration inventory approximately 12 months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 6171 5825 5769 2014 2013 2012 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired company amortize goodwill however performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units company elect initially perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test company believes result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary company elects bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount company perform twostep quantitative goodwill impairment test company performs first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method comparing fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value company performs second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2014 2013 2012 intangible assets principally include patents existing product technology customer relationships arose connection company’s acquisitions cad zone iqvolution ag dimensional photonics international intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2014 indefinitelived intangible assets product technology patents recorded cost amortization computed using straightline method lives patents 17 20 years weightedaverage amortization period company’s intangible assets nine years longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded indications impairment assets years ended december 31 2014 2013 2012 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes time sale liability one year warranty included initial purchase price equipment based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty company history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred tax assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income least twoyear period company recognizes tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities accordance requirements fair value measurements disclosures topic financial accounting standards board fasb accounting standards codification asc company groups financial assets liabilities measured fair value recurring basis three levels based markets assets liabilities traded reliability assumptions used determine fair value levels level 1 valuation based upon quoted market price identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques accordance requirements fair value measurements disclosures topic fasb asc company’s policy use observable inputs whenever reasonably practicable order minimize use unobservable inputs developing fair value measurements available company uses quoted market prices measure fair value market prices available fair value measurement based models use primarily market based parameters including interest rate yield curves option volatilities currency rates certain cases market rate assumptions available company required make judgments assumptions market participants would use estimate fair value financial instrument changes underlying assumptions used including discount rates estimates future cash flows could significantly affect results current future values cash equivalents shortterm investments included cash equivalents shortterm investments accompanying consolidated balance sheets deposits financial institutions sixmonth us treasury bills fair values assets based level 1 inputs fair value hierarchy due shortterm nature carrying amounts financial instruments approximate fair values accounts receivable accounts payable accrued liabilities recorded amounts financial instruments approximate fair value shortmaturities instruments earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect potentially dilutive common shares applying treasury stock method reconciliation number common shares used calculation basic diluted eps presented note 14 earnings per share accounting stockbased compensationthe company several stockbased employee director compensation plans described fully note 13 stock compensation plans company records compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performance share awards granted directors employees compensation cost sharebased awards recorded straight line basis required service period fair value stock option grants estimated using blackscholes optionpricing model requires input assumptions including dividend yield riskfree interest rate estimated length time employees retain stock options exercising expected term estimated volatility company’s common stock price expected term assumptions generally based historical averages company furthermore calculating compensation expense awards company also required estimate extent options forfeited prior vesting many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates forfeiture differ current estimates amounts recorded cumulative adjustment previously recorded amounts compensation expense associated restricted stock performance share awards equal market value company’s common stock determined closing price date grant recorded pro rata required service period awards performance criteria expense recorded based assessment achieving criteria concentration credit riskfinancial instruments expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits company continually monitors banking relationships believes exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standardsin may 2014 fasb issued amendment accounting guidance related revenue recognition amendment result joint project fasb international accounting standards board “iasb” clarify principles recognizing revenue develop common revenue standards us gaap international financial reporting standards meet objectives fasb issued accounting standards update 201409 revenue contracts customers topic 606 “asu 201409” asu 201409 based principle revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 also requires additional disclosure nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract company adopt asu 201409 reporting periods beginning december 15 2016 early adoption permitted company currently evaluating impact adopting pronouncement consolidated financial statements reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current year presentation 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts activity allowance doubtful accounts follows 4 shortterm investments shortterm investments 650 million december 31 2014 2013 comprised us treasury bills mature june 11 2015 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost plus accrued interest fair value us treasury bills december 31 2014 2013 approximated cost discussion fair value refer fair value financial instruments section note 1 summary significant accounting policies 5 inventories consist following 6 goodwill company’s goodwill december 31 2014 2013 related previous acquisitions four businesses company evaluates reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test step 1 quantitative goodwill impairment test performed fair value reporting unit measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment impairments goodwill charged earnings period impairment identified company two reporting units goodwill tested december 31 2014 americas region europeafrica region shown table december 31 2014 2013 company goodwill identified impaired decrease goodwill 2014 related changes foreign exchange rates partially offset goodwill resulting acquisition completed 2014 changes goodwill 05 million 2013 due adjustments changes foreign exchange rates 7 intangible assets intangible assets consist following amortization expense 1257 1213 1207 2014 2013 2012 respectively estimated amortization expense years 2015 2019 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 require company maintain minimum cash balance 25 million tangible net worth measured end company’s fiscal quarters december 31 2014 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended expires march 31 2015 company drawn line credit 2014 2013 2012 10 income expense net income expense net consists following 11 income taxes income tax expense consists following components income tax expense benefit income taxes follows income tax expense benefit years ended december 31 2014 2013 2012 differ amount computed applying federal statutory corporate rate income taxes differences recorded follows components company’s net deferred income tax asset liabilities follows effective income tax rate 2014 2013 2012 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 19 million 011 per share year ended december 31 2014 15 million 009 per share year ended december 31 2013 09 million 005 per share year ended december 31 2012 december 31 2014 2013 company’s domestic entities deferred income tax assets amount 52 million 55 million respectively december 31 2014 2013 company’s foreign subsidiaries deferred tax assets primarily relating net operating losses expire next 5 15 years others carried forward indefinitely 92 million 103 million respectively valuation allowance deferred tax assets december 31 2014 2013 18 million 68 million respectively net change total valuation allowance years ended december 31 2014 2013 2012 decrease 50 million decrease 02 million increase 30 thousand respectively year ended december 31 2014 company identified certain immaterial errors related deferred tax assets related valuation allowance result company decreased deferred tax assets related valuation allowance 47 million correct grossup error table adjusted reflect adjustment company believes error material consolidated financial statements prior interim annual periods correction error material company’s 2014 consolidated financial statements valuation allowance december 31 2014 2013 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment 2014 certain foreign subsidiaries previously generated losses established pattern profitability resulted company concluding valuation allowance reversed based assessment previously described result company recorded 45 million discrete tax adjustment third quarter 2014 remaining changes impacting valuation allowance year ended december 31 2014 related changes foreign currency company recognized us tax expense undistributed international earnings intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 1062 million 782 million december 31 2014 2013 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary december 31 2014 2013 company’s gross unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company subsidiaries file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2014 company recognizes accrued interest penalties related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2010 forward state level subject three four year statute limitations september 2013 us internal revenue service issued new regulations capitalizing deducting costs incurred acquire produce improve tangible property company adopted new regulations january 1 2014 material effect consolidated financial statements 12 commitments contingencies leasesthe company leases buildings equipment noncancellable operating leases 2024 following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2014 rent expense 2014 2013 2012 6119 5227 4917 respectively patent matterson july 11 2008 metris usa inc affiliates metris nv metris ipr nv 3d scanners ltd filed complaint company patent infringement us district court district massachusetts “massachusetts court” concerning us patent nos 6611617 7313264 hereinafter “patentsinsuit” following acquisition nikon corporation late 2009 metris usa inc subsequently changed name nikon metrology inc metris nv changed name nikon metrology nv metris ipr nv dissolved merged nikon metrology nv refer nikon metrology inc nikon metrology nv 3d scanners ltd “plaintiffs” “nikon” company responded complaint counterclaims alleging patentsinsuit generally directed laser scanning devices invalid noninfringed unenforceable due fraud prosecution patents us patent trademark office august 31 2009 massachusetts court granted company’s motion add counterclaims defenses violation federal state antitrust unfair competition laws based alleged knowing assertion invalid fraudulent patents company also filed amended counterclaim add plaintiff’s parent company nikon corporation counterclaim defendant july 14 2010 company filed motion summary judgment noninfringement patentsinsuit august 31 2010 nikon filed motion summary judgment company’s counterclaims antitrust violations unfair trade practices september 19 2011 massachusetts court ruled company infringe us patent 6611617 massachusetts court also granted nikon’s motion summary judgment company’s counterclaims antitrust violations unfair trade practices massachusetts court denied company’s motion summary judgment noninfringement us patent 7313264 effect ruling reduce eliminate company’s exposure respect claims associated us patent 6611617 patent dispute respect us patent 7313264 continued august 10 2012 following twoweek jury trial remaining claims related us patent 7313264 jury determined asserted patent claims invalid august 13 2012 massachusetts court entered judgment company massachusetts court sustained verdict january 23 2013 denying posttrial motions except company’s motion attorneys’ fees february 21 2013 massachusetts court stayed company’s motion attorneys’ fees pending resolution appeals us federal circuit march 20 2013 massachusetts court entered final judgment company’s favor awarding company costs april 10 2013 company filed notice appeal us federal circuit respect massachusetts court’s failure address inequitable conduct inventor related patent misuse antitrust issues july 10 2013 matter settled impact company’s financial statements 13 stock compensation plans company five compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 1997 employee stock option plan 1997 plan provided granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director stock option plan provided granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan 2004 plan 2009 equity incentive plan 2009 plan 2014 equity incentive plan 2014 plan provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors company authorized grant awards 1400000 shares common stock 1997 plan options remain outstanding company also authorized grant awards 250000 shares common stock 1997 nonemployee director stock option plan options remain outstanding company authorized grant awards 1750000 shares common stock 2004 plan 120988 options currently outstanding exercise prices 1304 3106 company also authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 768941 options currently outstanding 2009 plan exercise prices 2430 5754 options outstanding 2004 plan 2009 plan 10year term 7 years grants beginning 2010 vest 3year period may 2014 company’s shareholders approved 2014 plan authorizing company grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason 8500 options currently outstanding 2014 plan exercise prices 4640 5175 options outstanding 2014 plan 7year term vest 3year period company make grants 1997 plan 1997 nonemployee director stock option plan 2004 plan 2009 plan prior 2009 upon election board nonemployee director granted 3400 restricted shares common stock vested ratably three years day following annual meeting shareholders nonemployee director nonemployee director received initial equity grant year granted 2200 restricted shares common stock vested ratably three years prior 2013 upon election board nonemployee director received initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually first business day following annual meeting shareholders nonemployee director granted restricted shares common stock value equal 70000 calculated closing share price day shares restricted stock vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board beginning 2013 upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually first business day following annual meeting shareholders nonemployee director granted restricted shares common stock value equal 80000 calculated closing share price day shares restricted stock vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board company records compensation cost associated restricted stock unit grants straightline basis vesting term compensation costs charged operations associated company’s stock incentive plans 4678 4409 4080 2014 2013 2012 respectively company used blackscholes optionpricing model determine fair value stock option grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2014 2013 2012 1938 1441 2228 respectively aggregate intrinsic value stock options exercised years ended december 31 2014 2013 2012 22 million 37 million 71 million respectively total fair value stock options using blackscholes option pricing model vested years ended december 31 2014 2013 2012 37 million 33 million 17 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2014 december 31 2014 52 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 18 years 14 earnings per share basic earnings per share information calculated dividing net income weighted average number shares outstanding diluted earnings per share information calculated also considering impact potential common stock net income weighted average number shares outstanding company’s potential common stock consists employee director stock options restricted stock performance share awards performance share awards included diluted earnings per share calculation performance criteria achieved company’s potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive years ended december 31 2014 2013 2012 company outstanding performance share awards reconciliation number common shares used calculation basic diluted earnings per share eps presented 15 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees company terminated matching contributions april 18 2009 reinstated march 1 2011 costs charged operations connection 401k plan 2014 2013 2012 aggregated 1127 934 876 respectively 16 segment reporting company three reportable segments based upon geographic regions americas europeafrica asiapacific company includes costs related corporate americas region company incur research development expenses asiapacific region company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software threedimensional documentation systems regions activities represent 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total consolidated revenue net sales external customers based upon geographic location customer long lived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated 17 quarterly results operations unaudited 18 subsequent events february 5 2015 company announced acquisition aras 360 technologies inc aras privately held company 77 million cash additional 40 million contingent consideration may earned twoyear period aras global leader development accident crime reconstruction simulation animation software headquartered kamloops british columbia acquisition expected complement company’s portfolio within law enforcement market company process allocating purchase price acquired assets liabilities based upon estimated fair values date closing results aras’ operations included company’s consolidated financial statements year ended december 31 2014 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries opinion financial statements audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2017 2016 related consolidated statements operations comprehensive income loss changes shareholders’ equity cash flows three years period ended december 31 2017 related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2017 based criteria established 2013 internal control integrated framework issued committee sponsoring organizations treadway commission “coso” report dated february 21 2018 expressed unqualified opinion basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion grant thornton llp served company’s auditor since 2004 orlando florida february 21 2018 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive income loss accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2017 2016 2015 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2017 2016 2015 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “faro” “company” “us” “we” “our” design develop manufacture market support software driven threedimensional “3d” measurement imaging realization systems technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage applications faroarm® faro scanarm® faro gage® faro laser trackertm faro cobalt array imager faro laser projector companion cam2® buildit raytracertm software solutions provide computeraided design “cad” based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications factory metrology vertical faro focus faro scanner freestyle3dx laser scanners companion faro scene faro pointsense faro zone public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications construction building information modelingconstruction information management “construction bimcim” public safety forensics verticals faro scanarm® faro cobalt array imager faro scanner freestyle3dx laser scanners companion scene software also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle supporting product design vertical faro visual inspecttm enables large complex 3d cad data transferred tablet device used mobile visualization comparison real world conditions facilitating inprocess inspection assembly guidance positioning applications factory metrology construction bimcim verticals line galvanometerbased scan heads laser scan controllers used variety laser applications integrated larger components systems reportable segmentsduring fiscal 2016 evaluated reportable segment structure based new management organization changes implemented connection initiatives reorganize business around certain vertical markets result assessment report activities following three reportable segments • factory metrology segment provides solutions manual automated measurement inspection industrial manufacturing environment applications include alignment part inspection dimensional analysis first article inspection incoming inprocess inspection machine calibration noncontact inspection robot calibration tool building setup assembly guidance • construction bimcim segment provides solutions asbuilt data capturing 3d visualization building information modeling construction information management applications allowing customers architecture engineering construction markets quickly accurately extract 2d 3d measurement points applications include asbuilt documentation construction monitoring surveying asset facility management heritage preservation • segment includes product design public safety forensics 3d machine vision operating segments product design operating segment provides advanced 3d solutions assist engineering design movable object enabling full digital workflow applications include reverse engineering virtual simulation public safety forensics operating segment provides solutions public safety officials professionals capture environmental situational scenes 2d 3d crime crash fire scene investigations environmental safety evaluations 3d machine vision operating segment provides solutions customers require customized 3d measurement realization solutions otherwise addressed offtheshelf product offerings operating segments meet criteria reportable segments aggregated category combined based aggregation criteria quantitative thresholds accordance provisions financial accounting standards board “fasb” accounting standards codification “asc” topic 280 “segment reporting” “fasb asc topic 280” reportable segments determined accordance internal management structure based operating activities evaluate business performance based upon several metrics using profitable revenue growth segment profit primary financial measure report segment information accordance provisions fasb asc topic 280 see note 16 “segment reporting” information principles consolidationour consolidated financial statements include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive loss foreign currency transaction gains losses included net loss income revenue recognition product warranty extended warranty contractsrevenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related measurement imaging realization equipment related software generally recognized upon shipment consider earnings process complete shipping date related software sold equipment function together deliver tangible product’s essential functionality fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support “pcs” generally establish vendorspecific objective evidence vsoe fair value pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenues presented net salesrelated taxes cash equivalentswe consider cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents deposits foreign banks totaling 988 million 873 million december 31 2017 2016 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due make judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages write accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout “fifo” method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging realization devices utilized sales representatives present products customers management expects sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins sales demonstration inventory remains classified inventory available sale required refurbishment prior sale minimal service inventory typically used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining useful life typically three years see note 5 inventories information regarding inventories reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed beginning date asset placed service using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 123 million 109 million 92 million 2017 2016 2015 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes business combinationswe allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill intangible assetsgoodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired historically evaluated goodwill impairment annually december 31 indicator impairment exists 2017 changed date annual impairment assessment reporting units october 1 voluntary change annual goodwill testing date change accounting policy concluded preferable better aligns timing assessment annual budgeting process change date annual impairment assessment applied prospectively accelerate delay avoid potential impairment charge asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs see note 6 goodwill note 7 intangible assets information regarding goodwill intangible assets respectively period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2017 2016 2015 intangible assets principally include patents existing product technology customer relationships arose connection acquisitions intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2017 2016 indefinitelived intangible assets product technology patents recorded cost amortization computed using straightline method lives product technology patents 7 20 years remaining weightedaverage amortization period intangible assets eight years longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount asset group may fully recoverable comparing projected undiscounted future cash flows carrying value asset group management concluded indicators impairment assets years ended december 31 2017 2016 2015 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred date time incurred attainment related products technological feasibility general release customers short reserve warrantieswe establish time sale liability one year warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future income taxeswe review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred tax assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income least twoyear period recognize tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes see note 11 income taxes information regarding income taxes loss earnings per share epsbasic loss earnings per share computed dividing net loss income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted eps presented note 14 “loss earnings per share” accounting stockbased compensationwe two stockbased employee director compensation plans described fully note 13 “stock compensation plans” measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition estimated date grant using blackscholes optionpricing model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance conditions furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive effective january 1 2017 adopted accounting standards update “asu” 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting “asu 201609” simplifying several aspects accounting sharebased payment transactions including income tax consequences classifications awards either equity liabilities classification statement cash flows impacts adopting asu 201609 described fully within impact recently adopted accounting standards section concentration credit riskfinancial instruments expose us concentrations credit risk consist principally shortterm investments operating demand deposit accounts policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits continually monitor banking relationships believe exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently adopted accounting standards january 2017 fasb issued accounting standards update asu 201701 business combinations topic 805 clarifying definition business “asu 201701” order clarify definition business provide additional guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses currently asc topic 805 recognizes three elements business inputs processes outputs integrated set assets activities collectively referred “set” business usually outputs required present additionally inputs processes seller uses operating set required market participants acquire set continue produce outputs asu 201701 provides screen determine set business screen requires substantially fair value gross assets acquired disposed concentrated single identifiable asset group similar identifiable assets set business screen met new guidance 1 requires considered business set must include minimum input substantive process together significantly contribute ability create output 2 removes evaluation whether market participant could replace missing elements new guidance provides framework assist entities evaluating whether input substantive process present framework includes two sets criteria consider depend whether set outputs although outputs required set business outputs generally key element business asu 201701 provides stringent criteria sets without outputs narrowly defines term output asu 201701 became effective us january 1 2018 applied prospectively adoption new guidance material impact consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory “asu 201616” removes prohibition asc 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory asu requires tax effects intercompany transactions sales inventory recognized transfer occurs instead deferred transferred asset sold third party otherwise recovered use asset new guidance must applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption effective annual periods beginning december 15 2017 interim period therein asu 201616 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments “asu 201615” clarifies companies present classify certain cash receipts cash payments statement cash flows asu 201615 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” amending accounting guidance related revenue recognition asu subsequently issued amendments revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services additional disclosures required provide nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract evaluated effect guidance consolidated financial statements analyzing transactional analytical data revenue streams following status evaluation impacts significant revenue stream • measurement equipment related software prior accounting guidance sales measurement imaging realization equipment related software sales generally recognized upon shipment considered earnings process complete shipping date related software sold measurement imaging realization equipment functions together equipment deliver tangible product’s essential functionality adoption new guidance result material changes accounting revenue related measurement imaging realization equipment related software • extended warranties prior accounting guidance extended warranty sales recognized straightline basis term warranty adoption new guidance result material changes accounting revenue related extended warranties • software prior accounting guidance software sales recognized significant production modification customization software required following criteria met persuasive evidence sales agreement existed delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support maintenance renewals sold recognized straightline basis term maintenance agreement adoption new guidance result material changes accounting revenue related software sales maintenance renewals prior accounting guidance recognized sales commission expense incurred new guidance capitalize commission expense sales arrangements extend beyond one year amortize costs ratably term contract result recognize deferred cost asset consolidated balance sheet upon adoption new guidance however impact change consolidated balance sheet material adoption new guidance material change results operations cash flows adopted guidance utilizing modified retrospective method applying contracts completed date initial adoption option available asc topic 606 march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting “asu 201609” intended simplify several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statement cash flows asu 201609 became effective annual periods beginning december 15 2016 interim periods therein fiscal year 2017 adopted asu 201609 effective january 1 2017 new guidance excess tax benefits previously recognized related tax deduction reduced current taxes payable recorded modified retrospective basis achieved cumulativeeffect adjustment retained earnings beginning period new guidance adopted historically recognized excess tax benefits option exercised share vested since us net operating loss carryforward therefore tax benefit allowed current guidance adjustment retained earnings required new guidance taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows effective january 1 2017 adopted portion guidance prospective basis approach incorporates net inflow outflow taxrelated cash flows resulting sharebased payments deferred income tax benefit expense line item presents along income tax cash flows operating activities statement cash flows also elected account forfeitures related service conditionbased awards occur effective january 1 2017 change treatment estimating forfeitures previous years however continue assess performance conditionbased awards quarterly required adopting new policy using modified retrospective approach assessed cumulative effect adjustment recorded retaining earnings difference amount compensation cost previously recorded amount would recorded without assuming forfeitures cumulative effect adjustment recorded retained earnings material continue assess impact adopted guidance quarterly basis expect adoption guidance material impact consolidated financial statements july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory “asu 201511” changes measurement principle inventory lower cost market lower cost net realizable value asu 201511 defines net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation new guidance must applied prospective basis adopted asu 201511 effective january 1 2017 adoption guidance material impact consolidated financial statements november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes “asu 201517” requires deferred tax liabilities assets classified noncurrent classified balance sheet asu 201517 became effective us january 1 2017 adopted guidance retrospective basis resulted reclassification current deferred tax assets totaling approximately 76 million december 31 2016 current noncurrent consolidated financial statements impact recently issued accounting standards january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test current guidance performance step 2 requires us calculate implied fair value goodwill following procedures would required determine fair value assets acquired liabilities assumed business combination new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment result reporting units subject impairment assessment still option perform qualitative assessment reporting unit determine quantitative impairment test necessary asu 201704 becomes effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted annual interim goodwill impairment tests january 1 2017 amendments asu applied prospective basis disclosure nature reason change accounting principle required upon transition disclosure required first annual period interim period within first annual period initially adopt amendments asu plan adopt guidance fiscal year ending december 31 2020 expect adoption guidance material impact consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 must applied modified retrospective basis effective fiscal years beginning december 15 2018 interim periods within years early adoption permitted plan adopt asu 201602 first quarter 2019 although process evaluating impact adoption asu consolidated financial statements currently believe significant changes related recognition new rightofuse assets lease liabilities balance sheet real estate operating leases reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current period presentation example • deferred income tax assets net reclassified current noncurrent consolidated balance sheet december 31 2016 result adopting asu 201517 • certain reclassifications made reporting segments segment profit year ended december 31 2016 note 16 “segment reporting” result changes methodology allocating manufacturing variances segments reclassifications impacted segment reporting footnote disclosure 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts activity allowance doubtful accounts follows 4 shortterm investments shortterm investments december 31 2017 consisted us treasury bills totaling 110 million matured january 11 2018 shortterm investments december 31 2016 consisted us treasury bills totaling 429 million matured june 15 2017 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost plus accrued interest approximates fair value intend sell shortterm investments likely required sell investments recovery amortized cost bases may maturity fair value us treasury bills december 31 2017 december 31 2016 classed level 1 traded sufficient frequency volume enable us obtain pricing information ongoing basis discussion fair value refer note 9 “fair value measurements” 5 inventories stated lower cost net realizable value using firstin firstout fifo method three principal categories inventory 1 manufactured product sold 2 sales demonstration inventory completed product used support sales force demonstrations 3 service inventory completed product parts used support service department shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins service inventory used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining life typically three years inventories consist following 6 goodwill december 31 2017 2016 related acquisitions evaluate reporting unit’s fair value compared carrying value october 1st year frequently events changes circumstances indicate carrying value may exceed fair value prior 2017 evaluated reporting units fair value compared carrying value december 31 2017 step 1 quantitative goodwill impairment test fair value reporting units measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit market approach key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment market approach relies analysis publiclytraded companies similar us derives range revenue profit multiples publiclytraded companies used market approach selected based defined peer group resulting multiples applied reporting unit determine fair value impairments goodwill charged earnings period impairment identified 2016 realigned organizational structure focus five operating segments factory metrology construction bimcim product design public safety forensics 3d machine vision result change operating segments 2016 realigned reporting units goodwill tested december 31 2016 factory metrology construction bimcim public safety forensics shown table december 31 2017 2016 goodwill identified impaired increase goodwill 2017 2016 reflected acquisitions completed periods changes foreign exchange rates 7 intangible assets intangible assets consist following amortization expense 45 million 29 million 20 million 2017 2016 2015 respectively estimated amortization expense years 2018 2022 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 fair value measurements guidance fair value measurements disclosures defines fair value establishes framework measuring fair value requires enhanced disclosures assets liabilities measured fair value fair value defined price asset could exchanged current transaction knowledgeable willing parties liability’s fair value defined amount would paid transfer liability new obligor amount would paid settle liability creditor available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models used determine fair value models employ valuation techniques involve level management estimation judgment degree dependent price transparency instruments market instruments’ complexity assets liabilities recorded fair value recurring basis consolidated balance sheets categorized based upon level judgment associated inputs used measure fair value hierarchical levels defined guidance fair value measurements directly related amount subjectivity associated inputs fair valuation assets liabilities follows level 1 valuation based upon quoted market price identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques fair value recurring basis assets liabilities measured fair value recurring basis categorized tables based upon lowest level significant input valuations 1 shortterm investments accompanying consolidated balance sheets sixmonth us treasury bills fair values assets based level 1 inputs fair value hierarchy 2 contingent consideration liability represents arrangements pay former owners certain companies acquired year ended december 31 2017 paid 05 million part arrangements year ended december 31 2016 paid 08 million part arrangements remaining change fair value contingent consideration december 31 2016 december 31 2017 related 13 million decrease due expiration contingent consideration period one acquisitions changes foreign currency exchange rates 10 income expense net income expense net consists following 11 income taxes income loss income tax expense benefit consists following components income tax expense benefit income taxes follows reconciliations income tax expense us federal statutory income tax rate compared actual income tax expense benefit summarized components net deferred income tax asset liabilities follows december 22 2017 united states enacted tax cuts act resulting significant modifications existing law follow guidance sec staff accounting bulletin 118 “sab 118” provides additional clarification regarding application asc topic 740 situations company necessary information available prepared analyzed reasonable detail complete accounting certain income tax effects tax cuts act reporting period tax cuts act enacted sab 118 provides measurement period beginning reporting period includes tax cuts acts december 2017 enactment date ending obtained prepared analyzed information needed order complete accounting income tax effects circumstances measurement period extend beyond one year enactment date tax cuts act changes include lowering statutory corporate tax rate 35 21 eliminating certain deductions imposing mandatory tax accumulated earnings foreign subsidiaries introducing new tax regimes changing foreign earnings subject united states taxation statutory corporate tax rate reduction effective tax years beginning january 1 2018 based best estimate calculated impact tax cuts act current yearend provision accordance understanding tax cuts act available guidance result recorded amount 194 million additional income tax expense fourth quarter 2017 period legislation enacted portion provisional amount related transition tax mandatory deemed repatriation foreign earnings 174 million based best estimate guidance available date filing additional work necessary perform detailed analysis historical foreign earnings upon gathering necessary data interpreting additional guidance tax authorities completing analysis provisional amount adjusted measurement period allowable accordance sab 118 provisional amount relating transition tax may materially differ upon completing analysis compared amount accrued december 31 2017 portion amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 20 million domestic entities deferred income tax assets amount 77 million 78 million december 31 2017 december 31 2016 respectively december 31 2017 2016 foreign subsidiaries deferred tax assets primarily relating net operating losses 79 million 64 million respectively expire next 1 9 years others carried forward indefinitely valuation allowance deferred tax assets december 31 2017 2016 16 million 09 million respectively net change total valuation allowance years ended december 31 2017 2016 2015 07 million 01 million increase 10 million decrease respectively valuation allowance december 31 2017 2016 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain review tax contingencies regular basis make appropriate accruals necessary file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2017 recognize accrued interest penalties related unrecognized tax benefits income tax expense total amount unrecognized tax benefits recognized would affect effective tax rate material currently anticipate total amount unrecognized tax benefits result material changes financial position subject income taxes federal state foreign country level tax returns subject examination us federal level 2014 forward state level subject three four year statute limitations depending state 12 commitments contingencies leases lease buildings equipment noncancellable operating leases 2026 leases include costescalation clauses costescalation clauses recognized straightline basis lease term following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2017 rent expense 2017 2016 2015 75 million 77 million 69 million respectively purchase commitments enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2017 approximately 533 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions december 31 2017 also 07 million longterm commitments purchases delivered 12 months legal proceedings involved legal proceedings routine litigation arising normal course business none believe material adverse effect business financial condition results operations 13 stock compensation plans two compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 2009 equity incentive plan “2009 plan” 2014 equity incentive plan “2014 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 equity incentive plan 2004 plan effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 390351 options outstanding december 31 2017 2009 plan exercise prices 3590 5754 options outstanding 2009 plan 10year term 7 years grants beginning 2010 vest 3year period may 2014 shareholders approved 2014 plan authorizing us grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason 766912 options outstanding december 31 2017 2014 plan exercise prices 2998 5997 options outstanding 2014 plan 7year term generally vest 3year period awards outstanding 2004 plan december 31 2017 make grants 2004 plan 2009 plan upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually nonemployee directors granted restricted shares equal 50 compensation first business day following annual meeting shareholders calculated using closing price common stock day shares restricted stock vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board record compensation cost associated restricted stock grants straightline basis vesting term annually upon approval compensation committee grant stock options restricted stock units certain employees also grant stock options restricted stock units certain new employees throughout year prior 2016 awards vested three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options 2015 granted performancebased stock options restricted stock units certain executives awards vest three annual installments beginning one year grant date applicable performance measures strategic objectives achieved related stockbased compensation expense recognized requisite service period taking account probability satisfy performance measures strategic objectives addition certain strategic objectives performancebased stock options restricted stock units granted 2015 earned vest based 1 achievement specified revenue eps targets 2 total shareholder return tsr relative tsr attained companies within defined peer group due tsr presence certain performancebased grants fair value awards determined using monte carlo simulation valuation model expense market condition awards threeyear vesting period regardless value award recipients ultimately receive february 2017 compensation committee determined number performancebased stock options restricted stock units earned 2016 performance period based performance strategic objectives achieved 2016 8590 stock options 300 restricted stock units earned vested 20388 stock options 604 restricted stock units determined unearned required metrics achieved grant performancebased stock options restricted stock units employees 2017 instead annual grant march 2017 consisted stock options restricted stock units subject timebased vesting number stock options restricted stock units granted based employee’s individual objectives performance operational metrics assigned employee overall contribution last year restricted stock unit awards vest full threeyear anniversary grant date stock options vest three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options blackscholes option valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weightedaverage grantdate fair value stock options granted years ended december 31 2017 2016 2015 valued using blackscholes option valuation model 1451 1290 1508 per option respectively stock options granted years ended december 31 2017 2016 2015 valued using blackscholes option valuation model used following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued market condition awards granted years ended december 31 2017 2016 monte carlo simulation valuation model used determine fair value stock options restricted stock units granted 2017 2015 granted performancebased stock options restricted stock units included presence market condition valued using monte carlo simulation model valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield assumptions used estimate fair value performancebased stock options restricted stock units granted 2015 valued monte carlo simulation model follows summary stock option activity weighted average exercise prices follows aggregate intrinsic value stock options exercised years ended december 31 2017 2016 2015 12 million 17 million 17 million respectively total fair value stock options vested years ended december 31 2017 2016 2015 41 million 38 million 39 million respectively following table summarizes restricted stock restricted stock unit activity weighted average grantdate fair values year ended december 31 2017 recorded total stockbased compensation expense associated stock incentive plans 65 million 54 million 43 million 2017 2016 2015 respectively december 31 2017 94 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 19 years 14 loss earnings per share basic loss earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted loss earnings per share presented 15 employee retirement benefit plan maintain 401k defined contribution retirement plan eligible us employees costs charged operations connection 401k plan 2017 2016 2015 aggregated 17 million 14 million 13 million respectively 16 segment reporting three reportable segments factory metrology construction bimcim segments based upon vertical markets currently serve business activities meet criteria reportable segments aggregated category develop manufacture market support sell cadbased quality assurance products integrated cadbased inspection statistical process control software threedimensional documentation systems reportable segments activities represent 99 consolidated sales chief operating decision maker codm chief executive officer evaluates segment performance allocates resources based upon profitable growth use segment profit evaluate performance reportable segments segment profit calculated gross profit net selling marketing expenses reporting segment definition segment profit may comparable similarly titled measures reported companies following tables present information reportable segments years ended december 31 2017 2016 2015 net sales external customers based upon geographic location customer longlived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated applicable 17 business combinations april 2017 completed acquisition substantially assets instrument associates llc dba nutfield technology “nutfield” component technology business located hudson new hampshire specializes design manufacture advanced galvanometerbased optical scanners scan heads laser kits total purchase price approximately 55 million acquisition supports longterm strategy expand presence key markets improve existing product lines innovative technology results acquired business’ operations date acquisition included consolidated financial statements year ended december 31 2017 december 2016 acquired mwftechnology gmbh “mwf” purchase price net cash acquired approximately 66 million paid cash hand mwf innovator mobile augmented reality solutions located near frankfurt germany provides technology enables large complex 3d cad data transferred tablet device use mobile visualization comparison real world conditions enables real time actionable manufacturing insight inprocess inspection assembly guidance positioning august 2016 acquired laser projection technologies inc “lpt” purchase price net cash acquired approximately 172 million paid cash hand lpt located londonderry new hampshire specializes laser projection measurement systems used throughout manufacturing environments around globe maximize productivity efficiency acquisition enhances portfolio 3d measurement solutions supports longterm strategy expand presence key markets july 2016 acquired buildit software solutions ltd “buildit” purchase price net cash acquired approximately 39 million paid cash hand buildit software solutions business located montreal canada specializes processconfigurable 3d metrology software solutions hardware agnostic interfaces addition buildit enhances metrology portfolio providing customers greater software options use variety applications reduce inspection assembly times increase productivity acquisitions nutfield mwf lpt buildit constitute business combinations defined fasb asc topic 805 business combinations accordingly assets acquired liabilities assumed recorded fair values date acquisition following summary allocations purchase price fair values assets acquired liabilities assumed date acquisition 1 goodwill arising acquisitions consists largely expected synergies combining operations well value workforce portion goodwill expected tax deductible lpt nutfield acquisitions following details purchase price allocated intangible assets acquired acquisitions noted goodwill nutfield acquisition allocated factory metrology reporting segment goodwill buildit lpt mwf acquisitions allocated appropriate operating segments using relative fair value approach 2016 acquisition integration costs included components consideration transferred recorded expense period costs incurred date incurred approximately 09 million acquisition integration costs buildit lpt mwf nutfield acquisitions pro forma financial results buildit lpt mwf nutfield presented effects transactions individually aggregate material consolidated results operations 18 quarterly result operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc opinion financial statements audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2018 2017 related consolidated statements operations comprehensive income loss shareholders’ equity cash flows three years period ended december 31 2018 related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2018 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” report dated february 20 2019 expressed unqualified opinion basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion grant thornton llp served company’s auditor since 2004 orlando florida february 20 2019 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive loss income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2018 2017 2016 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2018 2017 2016 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “faro” “company” “us” “we” “our” design develop manufacture market support software driven threedimensional “3d” measurement imaging solutions technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage dental applications faroarm® faro scanarm® faro laser trackertm faro cobalt array imager faro laser projector companion cam2® buildit projector software solutions provide computeraided design “cad” based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications 3d manufacturing formerly known “factory metrology” “3d factory” vertical faro focus faro scanplan faro scanner freestyle3d x laser scanners companion faro scene buildit faro asbuilttm faro zone public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications construction building information modeling “construction bim” formerly known “construction bimcim” public safety forensics verticals faro scanarm® faro cobalt array imager faro scanner freestyle3d x laser scanners companion scene software 3d structured light scanning solutions specific dental industry also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle supporting 3d design formerly known “product design” vertical line galvanometerbased scan heads laser scan controllers used variety laser applications integrated larger components systems supporting photonics vertical reporting segmentsin 2016 evaluated reporting segment structure based new management organization changes implemented connection initiatives reorganize business around certain vertical markets report segment information accordance provisions financial accounting standards board “fasb” accounting standards codification “asc” topic 280 segment reporting “fasb asc topic 280” evaluate business performance based upon several metrics using revenue growth segment profit primary financial measures 2018 following changes made verticals reporting segments • first quarter 2018 combined historical factory metrology 3d machine vision verticals single reporting segment 3d factory replaced factory metrology reporting segment due linkage two historical verticals related type class customers served nature products services provided nature production processes 3d machine vision vertical previously reported reporting segment • first quarter 2018 renamed construction bimcim vertical reporting segment “construction bim” • first quarter 2018 renamed reporting segment “emerging verticals” • third quarter 2018 merged historical factory metrology 3d machine vision verticals one vertical named “3d factory” greater consistency realigned reporting segments • third quarter 2018 segregated operations acquisitions laser control systems limited “laser control systems” lanmark controls inc “lanmark” along operations resulting acquisition substantially assets instrument associates llc dba nutfield technology “nutfield” vertical named “photonics” creation vertical enables us better focus product range directed laser steering operations historically reported 3d factory reporting segment first six months 2018 historical factory metrology reporting segment 2017 included emerging verticals formerly known “other” reporting segment due change performed qualitative goodwill impairment analysis third quarter 2018 management concluded goodwill impairment time vertical reporting change • third quarter 2018 renamed product design vertical “3d design” • fourth quarter 2018 renamed 3d factory vertical reporting segment “3d manufacturing” changes total consolidated financial condition results operations previously reported result changes verticals reporting segments amounts related reporting segment information year ended december 31 2017 restated throughout annual report form 10k reflect changes reporting segments amounts related reporting segment information year ended december 31 2016 restated impacted changes reporting segments reporting segments continue employ consistent accounting policies result assessments reporting segments report activities following three reporting segments • 3d manufacturing reporting segment contains solely 3d manufacturing vertical provides standardized customized solutions 3d measurement inspection industrial manufacturing environment applications include alignment part inspection dimensional analysis first article inspection incoming inprocess inspection machine calibration noncontact inspection robot calibration tool building setup assembly guidance • construction bim reporting segment contains solely construction bim vertical provides solutions asbuilt data capturing 3d visualization building information modeling applications allowing customers architecture engineering construction markets quickly accurately extract twodimensional “2d” 3d measurement points applications include asbuilt documentation construction monitoring surveying asset facility management heritage preservation • emerging verticals reporting segment includes 3d design public safety forensics photonics verticals 3d design vertical provides advanced 3d solutions capture edit 3d shapes products people andor environments design purposes product development computer graphics dental medical applications public safety forensics vertical provides solutions public safety officials professionals capture environmental situational scenes 2d 3d crime crash fire scene investigations environmental safety evaluations photonics vertical develops markets galvanometerbased laser measurement products solutions operating segments meet criteria reporting segments aggregated emerging verticals reporting segment combined based aggregation criteria quantitative thresholds accordance provisions fasb asc topic 280 reporting segments determined accordance internal management structure based operating activities segment responsible product management sales strategy profitability see note 18 “segment reporting” information principles consolidationour consolidated financial statements include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive loss foreign currency transaction gains losses included net income loss variable interest entitywe invest investees exert significant influence effective control investee currently accounted using equity method accounting equity net income loss equity method investment recorded income loss corresponding increase decrease investment distributions received equity investee reduce investment distributions equity investee representing share equity investees earnings treated cash proceeds operations distributions excess equity investees earnings considered return capital treated cash proceeds investing activities consolidated statements cash flows revenue recognition product warranty extended warranty contractsrevenue recognized performance obligations within contract satisfied amount reflects consideration expect receive exchange satisfaction performance obligations standalone selling price contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances exception software licenses respect software licenses use residual method allocating contract price performance obligations relating software licenses revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customer location determined agreed upon shipping terms time entitled payment title control passed customer fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required risks rewards ownership passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services payment products services collected within short period time following transfer control commencement delivery services applicable revenues presented net salesrelated taxes cash equivalentswe consider cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents deposits foreign banks totaling 775 million 988 million december 31 2018 2017 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due make judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages write accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout “fifo” method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging devices utilized sales representatives present products customers management expects sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins sales demonstration inventory remains classified inventory available sale required refurbishment prior sale minimal service inventory typically used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining useful life typically three years see note 6 “inventories” information regarding inventories reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting potentially obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed beginning date asset placed service using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 129 million 123 million 109 million 2018 2017 2016 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes business combinationswe allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates critical estimates also made valuing earnouts represent arrangements pay former owners based satisfaction performance criteria fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill intangible assetsgoodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired evaluate goodwill impairment annually october 1 indicator impairment exists asset impaired difference carrying value asset reflected financial statements current fair value recognized expense period impairment occurs see note 7 “goodwill” note 8 “intangible assets” information regarding goodwill intangible assets respectively period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2018 2017 2016 intangible assets principally include patents existing product technology customer relationships arose connection acquisitions intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2018 2017 indefinitelived intangible assets product technology patents recorded cost amortization expense computed using straightline method lives product technology patents 7 20 years remaining weightedaverage amortization period intangible assets eight years longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount asset group may fully recoverable comparing projected undiscounted future cash flows carrying value asset group management concluded indicators impairment assets years ended december 31 2018 2017 2016 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred date time incurred attainment related products technological feasibility general release customers short reserve warrantieswe establish time sale liability oneyear warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future income taxeswe review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred tax assets taxing jurisdiction operate unless “more likely not” recover assets means evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income recognize tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes see note 12 “income taxes” information regarding income taxes earnings loss per share “eps”basic earnings loss per share computed dividing net income loss weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted eps presented note 15 “earnings loss per share” accounting stockbased compensationwe two stockbased employee director compensation plans described fully note 14 “stock compensation plans” measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition estimated date grant using blackscholes optionpricing model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance conditions furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows deferred income tax benefit line item elect account forfeitures related service conditionbased awards occur concentration credit riskfinancial instruments expose us concentrations credit risk consist principally shortterm investments operating demand deposit accounts policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits continually monitor banking relationships believe exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently adopted accounting standardsin january 2017 fasb issued asu 201701 business combinations topic 805 clarifying definition business “asu 201701” order clarify definition business provide additional guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses fasb asc topic 805 recognized three elements business inputs processes outputs integrated set assets activities collectively referred “set” business usually outputs required present additionally inputs processes seller used operating set required market participants could acquire set continue produce outputs asu 201701 provides screen determine set business screen requires substantially fair value gross assets acquired disposed concentrated single identifiable asset group similar identifiable assets set business screen met new guidance 1 requires considered business set must include minimum input substantive process together significantly contribute ability create output 2 removes evaluation whether market participant could replace missing elements new guidance provides framework assist entities evaluating whether input substantive process present framework includes two sets criteria consider depend whether set outputs although outputs required set business outputs generally key element business asu 201701 provides stringent criteria sets without outputs narrowly defines term output asu 201701 became effective us january 1 2018 applied prospectively adoption new guidance material impact consolidated financial statements october 2016 fasb issued asu 201616 income taxes topic 740 intraentity transfers assets inventory “asu 201616” removes prohibition fasb asc topic 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory asu requires tax effects intercompany transactions sales inventory recognized transfer occurs instead deferred transferred asset sold third party otherwise recovered use asset new guidance must applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption asu 201616 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments “asu 201615” clarifies companies present classify certain cash receipts cash payments statement cash flows asu 201615 became effective us january 1 2018 applied modified retrospective basis adoption new guidance material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” amending accounting guidance related revenue recognition asu subsequently issued amendments revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services additional disclosures required provide nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract adopted asu 201409 effective january 1 2018 using modified retrospective method adoption following summary impacts significant revenue stream • measurement equipment related software prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 sales measurement imaging equipment related software sales generally recognized upon shipment considered earnings process complete shipping date related software sold measurement imaging equipment functions together equipment deliver tangible product’s essential functionality customers frequently purchase extended warranties purchase measurement equipment related software new adopted guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 allocate contract price performance obligations based best estimate standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances exception software licenses respect software licenses use residual method allocating contract price performance obligations relating software licenses revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customer location determined agreed upon shipping terms time entitled payment title control passed customer adoption new guidance result material changes accounting revenue related measurement imaging equipment related software • extended warranties prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 extended warranty sales recognized straightline basis term warranty extended warranty sales include contract periods extend one month three years unearned service revenues reported current noncurrent liabilities consolidated balance sheets appropriately reflect remaining performance obligations related contracts adoption new guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 result material changes accounting revenue related extended warranties • software prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 softwareonly sales recognized significant production modification customization software required following criteria met persuasive evidence sales agreement existed delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support maintenance renewals sold recognized straightline basis term maintenance agreement adoption new guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 result material changes accounting revenue related softwareonly sales maintenance renewals unearned service revenue liabilities reported consolidated balance sheets reflect contract liabilities satisfy remaining performance obligations extended warranties software maintenance current portion unearned service revenues consolidated balance sheets expect recognize revenue within twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities unearned service revenues less current portion consolidated balance sheets expect recognize revenue extending beyond twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities customer deposits consolidated balance sheets represent customer prepayments contracts performance obligations must satisfy future recognize related contract revenue amounts generally related performance obligations delivered less 12 months year ended december 31 2018 recognized 250 million service revenue deferred consolidated balance sheet december 31 2017 prior accounting guidance fasb asc topic 605 applicable reporting periods january 1 2018 recognized sales commission expense incurred new guidance fasb asc topic 606 applicable reporting periods beginning january 1 2018 must capitalize commission expense amortize costs ratably term contract accordance practical expedient modified retrospective method adoption recorded net increase opening retained earnings january 1 2018 18 million recognized associated 24 million deferred cost asset due cumulative impact adopting new guidance december 31 2018 deferred cost asset related deferred commissions approximately 27 million classification purposes 18 million 09 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2018 elected practical expedient account shipping handling activities fulfill promise transfer good shipping handling fees billed customers sales transaction recorded product sales shipping handling costs incurred recorded cost sales additionally elected practical expedient exclude sales value added sales taxes collect concurrently revenueproducing activities accounting policy elections consistent manner historically recorded shipping handling fees taxes nature certain contracts gives rise variable consideration may constrained primarily related allowance sales returns accordance adoption new guidance required estimate contract asset related sales returns record corresponding adjustment cost sales historically allowance sales returns material approximately 01 million december 31 2018 adoption new guidance result material changes accounting variable consideration related sales returns corresponding contract asset related returns see note 3 “revenues” information impact recently issued accounting standardsin january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test current guidance performance step 2 requires us calculate implied fair value goodwill following procedures would required determine fair value assets acquired liabilities assumed business combination new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment result reporting units subject impairment assessment still option perform qualitative assessment reporting unit determine quantitative impairment test necessary asu 201704 becomes effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted annual interim goodwill impairment tests january 1 2017 amendments asu applied prospective basis disclosure nature reason change accounting principle required upon transition disclosure required first annual period interim period within first annual period initially adopt amendments asu plan adopt guidance fiscal year ending december 31 2020 expect adoption guidance material impact consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201811 lease topic 842 targeted improvements issued fasb july 2018 allows cumulativeeffect adjustment transition method adoption new guidance effective fiscal years beginning december 15 2018 interim periods within years plan adopt asu 201602 first quarter 2019 cumulativeeffect adjustment made january 1 2019 process calculating impact adoption asu consolidated financial statements currently finalizing implementation lease management software assist task believe significant changes related recognition new rightofuse assets lease liabilities balance sheet operating leases function lessee estimate impact adoption asu 201602 14 million 17 million increase rightof use assets lease liabilities plan elect certain practical expedients available transition provisions allow aggregation nonlease components related lease components evaluating accounting treatment ii apply modified retrospective adoption method utilizing simplified transition option allows entities continue apply legacy guidance fasb asc topic 840 including disclosure requirements comparative periods presented year adoption iii use hindsight determining lease term considering lessee options extend terminate lease purchase underlying asset assessing impairment entity’s rightofuse assets adoption asu 201602 also require initial direct costs incremental costs would incurred lease obtained included rightofuse assets expect recognition costs upon adoption material impact rightofuse assets consolidated financial statements reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current period presentation • certain reclassifications made reporting segments segment profit year ended december 31 2016 note 18 “segment reporting” result changes methodology allocating manufacturing variances segments reclassifications impacted segment reporting footnote disclosure • first quarter 2018 combined historical factory metrology 3d machine vision verticals single reporting segment 3d factory replaced factory metrology reporting segment due linkage two historical verticals related type class customers served nature products services provided nature production processes 3d machine vision vertical previously reported reporting segment • first quarter 2018 renamed construction bimcim vertical reporting segment “construction bim” • first quarter 2018 renamed reporting segment “emerging verticals” • third quarter 2018 merged historical factory metrology 3d machine vision verticals one vertical named “3d factory” greater consistency realigned reporting segments • third quarter 2018 segregated operations acquisitions laser control systems lanmark along operations resulting acquisition substantially assets nutfield vertical named “photonics” creation vertical enables us better focus product range directed laser steering operations historically reported 3d factory reporting segment first six months 2018 historical factory metrology reporting segment 2017 included emerging verticals formerly known “other” reporting segment due change performed qualitative goodwill impairment analysis third quarter 2018 management concluded goodwill impairment time vertical reporting change • third quarter 2018 renamed product design vertical “3d design” • fourth quarter 2018 renamed 3d factory vertical reporting segment “3d manufacturing” amounts related reporting segment information year ended december 31 2017 restated throughout annual report form 10k reflect changes reporting segments amounts related reporting segment information year ended december 31 2016 restated impacted changes reporting segments reporting segments continue employ consistent accounting policies 2 supplemental cash flow information selected cash payments noncash activities follows 3 revenues following tables present revenues sales type presented consolidated statements operations disaggregated timing transfer goods services thousands following table presents revenues disaggregated geography based billing addresses customers thousands 1 regions represent europe middle east africa emea asiapacific apac canada mexico brazil americas revenue related measurement imaging equipment related software allocate contract price performance obligations based best estimate standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances exception software licenses respect software licenses use residual method allocating contract price performance obligations relating software licenses revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customer location determined agreed upon shipping terms time entitled payment title control passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement payment products services collected within short period time following transfer control commencement delivery services applicable customers frequently purchase extended warranties purchase measurement equipment related software warranties considered performance obligation services transferred customer time recognize revenue straightline basis warranty term extended warranty sales include contract periods extend one month three years capitalize commission expenses related deliverables transferred customer time amortize costs ratably term contract december 31 2018 deferred cost asset related deferred commissions approximately 27 million classification purposes 18 million 09 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2018 unearned service revenue liabilities reported consolidated balance sheets reflect contract liabilities satisfy remaining performance obligations extended warranties software maintenance current portion unearned service revenues consolidated balance sheets expect recognize revenue within twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities unearned service revenues less current portion consolidated balance sheets expect recognize revenue extending beyond twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities customer deposits consolidated balance sheets represent customer prepayments contracts performance obligations must satisfy future recognize related contract revenue amounts generally related performance obligations delivered less 12 months year ended december 31 2018 recognized 250 million service revenue deferred consolidated balance sheet december 31 2017 nature certain contracts gives rise variable consideration may constrained primarily related allowance sales returns required estimate contract asset related sales returns record corresponding adjustment cost sales allowance sales returns approximately 01 million december 31 2018 shipping handling fees billed customers sales transaction recorded product sales shipping handling costs incurred recorded cost sales exclude sales value added sales taxes collect concurrently revenueproducing activities 4 allowance doubtful accounts activity allowance doubtful accounts follows 5 shortterm investments shortterm investments december 31 2018 consisted us treasury bills totaling 248 million consisting 90 million maturing march 14 2019 109 million maturing june 6 2019 49 million maturing june 20 2019 shortterm investments december 31 2017 consisted us treasury bills totaling 110 million matured january 11 2018 interest rates us treasury bills held december 31 2018 maturing march 14 2019 june 6 2019 june 20 2019 22 24 23 respectively less one percent us treasury bills held december 31 2017 investments classified heldtomaturity recorded cost plus accrued interest approximates fair value 6 inventories stated lower cost net realizable value using firstin firstout method three principal categories inventory 1 manufactured product sold 2 sales demonstration inventory completed product used support sales force demonstrations held sale 3 service inventory completed product parts used support service department held sale shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value expect refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins service inventory used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining life typically three years inventories consist following 7 goodwill december 31 2018 2017 related acquisitions evaluate reporting unit’s fair value compared carrying value october 1st year frequently events changes circumstances indicate carrying value may exceed fair value december 31 2017 evaluated reporting units fair value compared carrying value used step 1 quantitative goodwill impairment test fair value reporting units measured using discounted cash flow model incorporated discount rates commensurate risks involved reporting unit market approach key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change required significant management judgment market approach relied analysis publiclytraded companies similar us derived range revenue profit multiples publiclytraded companies used market approach selected based defined peer group resulting multiples applied reporting unit determine fair value october 1 2018 performed qualitative assessment reporting unit level determine whether existence events circumstances lead determination likely fair value reporting unit less carrying amount identify event circumstance time impairments goodwill charged earnings period impairment identified focus five operating segments 3d manufacturing construction bim public safety forensics 3d design photonics december 31 2018 2017 goodwill identified impaired increase goodwill 2018 2017 reflected acquisitions completed periods changes foreign exchange rates 8 intangible assets intangible assets consist following amortization expense 54 million 45 million 29 million 2018 2017 2016 respectively estimated amortization expense years 2019 2023 thereafter follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 fair value measurements guidance fair value measurements disclosures defines fair value establishes framework measuring fair value requires enhanced disclosures assets liabilities measured fair value fair value defined price asset could exchanged current transaction knowledgeable willing parties liability’s fair value defined amount would paid transfer liability new obligor amount would paid settle liability creditor available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models used determine fair value models employ valuation techniques involve level management estimation judgment degree dependent price transparency instruments market instruments’ complexity assets liabilities recorded fair value recurring basis consolidated balance sheets categorized based upon level judgment associated inputs used measure fair value hierarchical levels defined guidance fair value measurements directly related amount subjectivity associated inputs fair valuation assets liabilities follows level 1 valuation based upon quoted market price identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques fair value recurring basis assets liabilities measured fair value recurring basis categorized tables based upon lowest level significant input valuations historically presented shortterm investments fair value table presented shortterm investments accompanying consolidated balance sheets comprised us treasury bills investments classified heldtomaturity investments recorded fair value recurring basis consolidated balance sheets removed shortterm investments table 1 contingent consideration liability represents arrangements pay former owners certain companies acquired based former owners attaining future product release milestones use probabilityweighted discounted cash flow model estimate fair value contingent consideration liabilities probability weightings developed internally assessed quarterly basis year ended december 31 2018 paid 09 million part arrangements year ended december 31 2017 paid 05 million part arrangements remaining change fair value contingent consideration december 31 2017 december 31 2018 related various business acquisitions made year ended december 31 2018 included laser controls system lanmark optotech srl subsidiary open technologies srl collectively “open technologies” well changes foreign currency exchange rates undiscounted maximum payment december 31 2018 arrangements 60 million based certain milestones 11 expense income net expense income net consists following 12 income taxes income loss income tax benefit expense consists following components income tax benefit expense income taxes follows reconciliations income tax expense us federal statutory income tax rate compared actual income tax benefit expense summarized components net deferred income tax asset liabilities follows december 22 2017 united states enacted us tax cuts jobs act 2017 “us tax reform” resulting significant modifications existing law us tax reform changes include lowering statutory corporate tax rate 35 21 eliminating certain deductions imposing mandatory tax accumulated earnings foreign subsidiaries introducing new tax regimes changing foreign earnings subject united states taxation statutory corporate tax rate reduction effective tax years beginning january 1 2018 accordance us tax reform recorded provisional amount 194 million additional income tax expense fourth quarter 2017 period legislation enacted portion 194 million provisional amount related transition tax mandatory deemed repatriation foreign earnings 174 million based best estimate guidance available time portion 194 million related remeasurement certain deferred tax assets liabilities based rates expected reverse future 20 million time securities exchange commission staff accounting bulletin 118 “sab 118” issued provided additional clarification regarding application fasb asc topic 740 company necessary information available prepared analyzed reasonable detail complete accounting certain income tax effects us tax reform december 22 2018 marked end measurement period sab 118 additional guidance released sab 118 remeasurement period completed transition tax analysis resulted income tax benefit 10 million 18 million decrease deferred tax assets recorded fourth quarter 2018 related adjustments transition tax mandatory deemed repatriation foreign earnings domestic entities deferred income tax assets amount 72 million 77 million december 31 2018 december 31 2017 respectively december 31 2018 2017 foreign subsidiaries deferred tax assets primarily relating net operating losses 65 million 79 million respectively expire next 1 9 years others carried forward indefinitely valuation allowance deferred tax assets december 31 2018 2017 19 million 16 million respectively net change total valuation allowance years ended december 31 2018 2017 2016 03 million 07 million 01 million increase respectively valuation allowance december 31 2018 2017 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain review tax contingencies regular basis make appropriate accruals necessary file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2018 recognize accrued interest penalties related unrecognized tax benefits income tax expense total amount unrecognized tax benefits recognized would affect effective tax rate material currently anticipate total amount unrecognized tax benefits result material changes financial position subject income taxes federal state foreign country level tax returns subject examination us federal level 2015 forward state level subject three four year statute limitations depending state 13 commitments contingencies leases lease buildings equipment noncancellable operating leases 2026 leases include costescalation clauses costescalation clauses recognized straightline basis lease term following schedule future minimum lease payments required noncancellable operating leases initial terms excess one year effect december 31 2018 rent expense 2018 2017 2016 86 million 75 million 77 million respectively purchase commitments enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2018 approximately 569 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions december 31 2018 also 23 million longterm commitments purchases delivered 12 months legal proceedings involved legal proceedings routine litigation arising normal course business none believe material adverse effect business financial condition results operations us government contracting matter sold products related services us government “government” general services administration “gsa” federal supply schedule contracts “gsa contracts” since 2002 currently selling products related services government two gsa contracts gsa contract subject extensive legal regulatory requirements includes among provisions price reduction clause “price reduction clause” generally requires us reduce prices billed government gsa contracts correspond lowest prices billed certain benchmark customers late fourth quarter 2018 internal review preliminarily determined certain pricing practices may resulted government overcharged price reduction clauses gsa contracts gsa matter result begun remediation efforts including limited identification additional controls procedures ensure future compliance pricing requirements gsa contracts also retained outside legal counsel assist efforts conduct review pricing practices gsa contracts “review” february 14 2019 reported gsa matter gsa office inspector general sixyear period ended december 31 2018 sales government gsa contracts approximately 535 million aggregate sales government gsa contracts represented approximately 35 total sales year ended december 31 2018 result gsa matter fourth quarter 2018 reduced total sales 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts addition fourth quarter 2018 recorded 05 million imputed interest related estimated cumulative sales adjustment increased expense resulted estimated total liability 53 million gsa matter estimate based preliminary review date annual report form 10k subject change based results review conducted outside legal counsel discussions government reported matter gsa government may conduct investigation review including audit intend cooperate fully government inquiry government’s review investigation matter could result civil criminal penalties administrative sanctions contract remedies imposed us including limited termination gsa contracts repayments amounts already received gsa contracts forfeiture profits damages suspension payments fines suspension debarment business government possibly us state local governments may also subject litigation recovery federal false claims act possibly similar state laws could include claims treble damages penalties fees costs result cannot reasonably predict outcome government’s review investigation matter time resulting future financial impact us outcomes could material adverse effect reputation sales results operations cash flows financial condition trading price common stock addition incurred continue incur legal related costs connection review government’s response matter 14 stock compensation plans two compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 2009 equity incentive plan “2009 plan” 2014 equity incentive plan “2014 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 equity incentive plan “2004 plan” effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 122943 options outstanding december 31 2018 2009 plan exercise prices 4333 5754 options outstanding 2009 plan 10year term 7 years grants beginning 2010 vest 3year period may 2014 shareholders approved 2014 plan authorizing us grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason may 2018 shareholders approved amendment 2014 plan increased number shares available issuance 2014 plan 1000000 shares maximum 2974543 shares available issuance 2014 plan amended plus number shares exceed 891960 underlying awards outstanding 2004 plan 2009 plan may 29 2014 thereafter terminate expire unexercised canceled forfeited lapse reason 670047 options outstanding december 31 2018 2014 plan exercise prices 2998 6130 options outstanding 2014 plan 7year term generally vest 3year period awards outstanding 2004 plan december 31 2018 make grants 2004 plan 2009 plan upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually nonemployee directors granted restricted shares equal 50 compensation first business day following annual meeting shareholders calculated using closing price common stock day addition lead director annually granted restricted shares value equal 40000 first business day following annual meeting shareholders calculated using closing price common stock day shares restricted stock granted annually nonemployee directors lead director vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board record compensation cost associated restricted stock grants straightline basis vesting term also beginning october 2018 nonemployee directors may elect annual cash retainers annual equity retainers paid form deferred stock units pursuant 2014 plan 2018 nonemployee director deferred compensation plan deferred stock unit represents right receive one share common stock upon nonemployee directors separation service company record compensation cost associated deferred stock units period service annually upon approval compensation committee grant stock options restricted stock units certain employees also grant stock options restricted stock units certain new employees throughout year prior 2016 awards vested three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options 2015 granted performancebased stock options restricted stock units certain executives awards vested three annual installments beginning one year grant date applicable performance measures strategic objectives achieved related stockbased compensation expense recognized requisite service period taking account probability would satisfy performance measures strategic objectives addition certain strategic objectives performancebased stock options restricted stock units granted 2015 earned vested based 1 achievement specified revenue eps targets 2 total shareholder return “tsr” relative tsr attained companies within defined peer group due tsr presence certain performancebased grants fair value awards determined using monte carlo simulation valuation model expensed market condition awards threeyear vesting period regardless value award recipients ultimately receive march 2018 compensation committee determined 7743 performancebased stock options 266 restricted stock units earned vested 2017 performance period 17160 stock options 640 restricted stock units determined unearned required metrics achieved december 31 2018 performancebased stock options restricted stock units granted 2015 either vested forfeited earned grant performancebased stock options restricted stock units employees 2018 instead annual grant march 2018 consisted stock options restricted stock units subject timebased vesting number stock options restricted stock units granted based employee’s individual objectives performance operational metrics assigned employee overall contribution company last year restricted stock unit awards vest full threeyear anniversary grant date stock options vest three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options blackscholes option valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weightedaverage grantdate fair value stock options granted years ended december 31 2018 2017 2016 valued using blackscholes option valuation model 2343 1451 1290 per option respectively stock options granted years ended december 31 2018 2017 2016 valued using blackscholes option valuation model used following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued market condition awards granted years ended december 31 2018 2017 2016 monte carlo simulation valuation model used determine fair value stock options restricted stock units granted 2018 summary stock option activity weighted average exercise prices follows aggregate intrinsic value stock options exercised years ended december 31 2018 2017 2016 75 million 12 million 17 million respectively total fair value stock options vested years ended december 31 2018 2017 2016 37 million 41 million 38 million respectively following table summarizes restricted stock restricted stock unit activity weighted average grantdate fair values year ended december 31 2018 recorded total stockbased compensation expense associated stock incentive plans 76 million 65 million 54 million 2018 2017 2016 respectively december 31 2018 103 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 18 years 15 earnings loss per share basic earnings loss per share computed dividing net income loss weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report net loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted earnings loss per share presented 16 employee retirement benefit plan maintain 401k defined contribution retirement plan eligible us employees costs charged operations connection 401k plan 2018 2017 2016 aggregated 21 million 17 million 14 million respectively 17 variable interest entity variable interest entity “vie” entity one three characteristics 1 controlled someone shareowners partners 2 shareowners partners economically exposed entitys earnings example protected losses 3 lacks sufficient equity permit entity finance activities without additional subordinated financial support parties april 27 2018 invested 18 million present4d gmbh “present4d” software solutions provider professional virtual reality presentations training environments form equity capital contribution represents minority investment present4d investments business purpose coordinate design development modules supporting compatibility virtual reality existing software offerings investment date present4d thinly capitalized lacked sufficient equity finance activities without additional subordinated financial support classified vie power decisions significantly affect present4d’s economic performance represent primary beneficiary april 27 2020 present4d may request additional equity financing 18 million us exchange additional share capital additional equity financing would discretion provided support present4d periods presented outside initial investment 18 million intend provide future support present4d continue evaluate whether intend obtain aforementioned additional share capital future 165 portion present4d’s net loss year ended december 31 2018 approximately 01 million present4d currently accounted using equity method accounting equity net loss equity method investment recorded loss corresponding decrease investment unconsolidated vie december 31 2018 17 million included longterm assets consolidated balance sheet december 31 2018 18 million represents maximum exposure loss involvement present4d vie investments december 31 2017 18 segment reporting three reporting segments 3d manufacturing construction bim emerging verticals segments based upon vertical markets currently serve business activities meet criteria reporting segments aggregated emerging verticals category develop manufacture market support sell cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segments activities represent 99 consolidated sales chief operating decision maker codm chief executive officer evaluates segment performance allocates resources based upon profitable growth use segment profit evaluate performance reporting segments segment profit calculated gross profit net selling marketing expenses reporting segment definition segment profit may comparable similarlytitled measures reported companies segment structure presented represents change prior year described note 1 “summary significant accounting policies” amounts related reporting segment information year ended december 31 2017 restated throughout annual report form 10k reflect changes reporting segments amounts related reporting segment information year ended december 31 2016 restated impacted changes reporting segments reporting segments continue employ consistent accounting policies following tables present information reporting segments including reconciliation total segment profit income loss continuing operations included consolidated statements operations years ended 2018 2017 2016 total sales external customers based upon geographic location customer longlived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated applicable 19 business combinations april 2017 completed acquisition substantially assets nutfield component technology business located hudson new hampshire specializes design manufacture advanced galvanometerbased optical scanners scan heads laser kits total purchase price approximately 55 million acquisition supports longterm strategy expand presence key markets improve existing product lines innovative technology results acquired business’ operations date acquisition included consolidated financial statements years ended december 31 2018 december 31 2017 march 9 2018 acquired outstanding shares laser control systems laser component technology business located bedfordshire united kingdom specializes design manufacture advanced digital scan heads laser software purchase price 17 million additional 07 million contingent consideration may earned former owners certain milestones met acquisition supports photonics vertical longterm strategy expand presence product portfolio photonics applications results laser control systems’ operations date acquisition included consolidated financial statements year ended december 31 2018 march 16 2018 acquired outstanding shares photocore ag visionbased 3d measurement application software developer zurich switzerland total purchase price 24 million acquisition supports construction bim vertical longterm strategy improve existing software offerings innovative technology photogrammetry results photocore ag’s operations date acquisition included consolidated financial statements year ended december 31 2018 july 6 2018 acquired outstanding shares lanmark highspeed laser marking control boards laser marking software provider located acton massachusetts purchase price 63 million additional 10 million contingent consideration may earned former owners certain milestones met acquisition supports development components used new 3d laser inspection product development order expand product portfolio photonics vertical results lanmark’s operations date acquisition included consolidated financial statements year ended december 31 2018 july 13 2018 acquired issued outstanding corporate capital open technologies 3d structured light scanning solution company located brescia italy aggregate purchase price €185 million 216 million subject postclosing adjustments based actual net working capital net financial position transaction expenses aggregate purchase price includes €40 million 47 million contingent consideration may earned former owners certain product development milestones met us dollar amounts converted euros based foreign exchange rate effect closing date acquisition supports 3d design vertical longterm strategy establish presence 3d measurement technology used industries applications especially dental medical results open technologies’ operations date acquisition included consolidated financial statements year ended december 31 2018 acquisitions nutfield laser control systems photocore ag lanmark open technologies constitute business combinations defined fasb asc topic 805 business combinations accordingly assets acquired liabilities assumed recorded fair values date acquisition purchase price allocation marked “preliminary” based information available make estimates fair value may change information becomes available additional analyses completed believe information provides reasonable basis estimating fair values may obtain information evidence measurement period result changes estimated fair value amounts measurement period ends earlier one year acquisition date receive information facts circumstances existed acquisition date subsequent adjustments necessary recognized period amounts determined refinements include 1 changes estimated fair value certain intangible assets acquired 2 changes deferred tax assets liabilities related fair value estimates purchase price allocations marked “final” represent final determination fair value assets acquired liabilities assumed acquisitions following summary allocations purchase price fair values assets acquired liabilities assumed date acquisition 1 goodwill arising acquisitions consists largely expected synergies combining operations well value workforce portion goodwill expected tax deductible nutfield 2 laser control systems lanmark open technologies total consists primarily fair value projected contingent consideration 3 amounts converted euros us dollars based foreign exchange rate closing date acquisition following details purchase price allocated intangible assets acquired acquisitions noted goodwill nutfield laser control systems lanmark open technologies acquisitions allocated emerging verticals reporting segment goodwill photocore ag acquisition allocated construction bim reporting segment acquisition integration costs included components consideration transferred recorded expense period costs incurred date incurred approximately 09 million acquisition integration costs nutfield laser control systems photocore ag lanmark open technologies acquisitions pro forma financial results nutfield laser control systems photocore ag lanmark open technologies presented effects transactions individually aggregate material consolidated results operations 20 subsequent events january 9 2019 entered letter agreement “letter agreement” dr simon raab setting forth terms dr raab’s retirement president chief executive officer member board directors dr raab continue president chief executive officer remain board directors successor appointed letter agreement provides following compensation arrangements dr raab incentive retain services transition period • base salary dr raab’s base salary 775000 continue retirement date • shortterm incentive plan dr raab eligible participate shortterm incentive plan 2019 target payout 100 base salary conditioned upon achievement 2019 financial targets approved compensation committee event dr raab’s retirement occurs prior end 2019 eligible receive incentive without pro ration payout dr raab shortterm incentive plan could range 0 200 base salary depending upon achievement 2019 financial targets • longterm incentives lieu annual grant stock options consideration dr raab’s commitment provide transition assistance successor period six months following retirement date january 9 2019 dr raab received grant 24606 restricted stock units vest six months following retirement date addition dr raab’s outstanding unvested stock options fully vest retirement date permitted exercise options full term option grant january 29 2019 entered second amendment amended restated lease agreement “second amendment” emma investments llc “landlord” respect facility located 125 technology park lake mary florida “building” pursuant second amendment agreed among items extend initial term lease approximately 35000 square feet production research development service operations manufacturing space building leased original amended restated lease agreement effective october 12 2009 june 30 2019 march 31 2025 second amendment also provides us tenant improvement allowance 01 million toward design construction certain tenant improvements made building reimbursement basis subject satisfaction certain conditions tenant improvements completed march 31 2021 reimbursement allowance deemed waived us 21 quarterly result operations unaudited 1 fourth quarter 2018 sales reduced 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts 2 third quarter 2018 gross profit reduced 47 million inventory reserve charge resulting analysis inventory reserves connection new product introductions acquisitions increased reserve excess obsolete inventory 3 fourth quarter 2018 additional guidance released sab 118 remeasurement period related us tax reform completed transition tax analysis resulted income tax benefit 10 million 1 fourth quarter 2017 194 million additional income tax expense recorded pursuant us tax reform 174 million expense related provisional amount transition tax mandatory deemed repatriation foreign earnings 20 million expense related remeasurement deferred tax assets liabilities item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc opinion financial statements audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2019 2018 related consolidated statements operations comprehensive loss income shareholders’ equity cash flows three years period ended december 31 2019 related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2019 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” report dated february 19 2020 expressed unqualified opinion change accounting principle discussed note 1 financial statements company changed method accounting leases 2019 due adoption accounting standards codification topic 842 leases basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate reserve excess obsolete inventory described note 1 financial statements reserve excess obsolete inventory established utilizing company’s past sales history future sales forecasts inventory considered potentially obsolete product withdrawn market product sales past 12 months product sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected future sales resulting obsolete excess items reviewed determine substitute usage exists items without identified current future usage reserved amount equal 100 firstin firstout cost inventory identified reserve excess obsolete inventory critical audit matter principal consideration determination reserve excess obsolete inventory critical audit matter high risk estimation uncertainty due significant judgments management’s analysis included management’s assessment current future usage identified potentially excess obsolete inventory management’s assessment based qualitative quantitative factors impact competitors impact competing products product market acceptance introduction newer product offerings product failures dependence suppliers materials considerations evaluated management making assessment excess obsolete inventories audit procedures related reserve excess obsolete inventory included following among others •we tested design operating effectiveness key controls relating excess obsolete reserve •we tested calculation current inventories within excess obsolete reserve recalculating analysis previous 12 months usage evaluating reasonableness forecasted sales •we tested significant assumptions made management reserving potentially excess obsolete inventory part procedures obtained inspected corroborating information support expectation future usage included evidence forecasts future sales evaluation product repair rates outstanding products field well need replacement parts also inquired outstanding purchase orders customers relevant evidence available corroborate management’s assertions applicable income taxes described note 12 financial statements company multinational corporation subject income taxes united states numerous foreign jurisdictions company’s effective tax rate directly impacted application complex tax laws regulations highly dependent upon geographic mix worldwide earnings losses tax regulations country geographic region operate availability tax credit losscarryforwards addition recoverability deferred tax assets domestic foreign jurisdictions based weight positive negative evidence recoverability includes future reversals deferred tax liabilities projections future taxable income tax planning strategies identified income tax expense benefit deferred tax assets liabilities critical audit matter principal consideration determination income tax expense benefit valuation recoverability deferred tax assets liabilities critical audit matter due multinational presence company numerous foreign jurisdictions varying complex tax laws regulations rules may subject interpretation depending jurisdiction may involve significant management judgment addition high risk estimation uncertainty due significant management judgment related establishing reversing valuation allowance deferred tax asset jurisdiction may based various forms positive negative evidence regarding recoverability deferred tax asset audit procedures related income tax expense benefit deferred tax asset liability amounts included following among others •we tested design operating effectiveness key controls relating income tax provision deferred tax asset liability amounts also tested management’s controls around review completeness accuracy qualitative quantitative valuation allowance analysis •we involved foreign tax professionals member firms assess significant income tax positions calculations completeness accuracy addition reconciled tax provision calculations underlying accounting records tax returns evidential documentation •we involved international tax professionals firm test company’s assumptions regarding geographic mix worldwide earnings losses part procedures noted company’s geographic mix earnings losses calculated pursuant third party transfer pricing studies performed qualified parties •we tested company’s analysis recoverability deferred tax assets jurisdictions based evidence received management support balances grant thornton llp served company’s auditor since 2004 orlando florida february 19 2020 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive loss income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2019 2018 2017 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2019 2018 2017 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “faro” “company” “us” “we” “our” design develop manufacture market support software driven threedimensional “3d” measurement imaging solutions technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage applications faroarm® faro scanarm® faro laser trackertm faro laser projector companion cam2® buildit projector software solutions provide computeraided design “cad” based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications automotive aerospace metal machine fabrication industrial manufacturing markets faro focus faro scanplan companion faro scene buildit faro asbuilttm faro zone public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications primarily architecture engineering construction public safety markets faro scanarm® companion scene software also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle since fourth quarter 2016 operated five verticals3d manufacturing construction building information modeling “construction bim” public safety forensics 3d design photonicsand three reporting segments3d manufacturing construction bim emerging verticals discussed quarterly report form 10q third quarter 2019 new management team led new chief executive officer “ceo” formulated began implement new comprehensive strategic plan business part strategic planning process identified areas business needed enhanced focus change order improve efficiency cost structure fourth quarter 2019 reassessed redefined gotomarket strategy refocused marketing engagement customers reevaluated hardware product portfolio part new strategic plan based recommendation ceo also chief operating decision maker “codm” fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety principles consolidationour consolidated financial statements include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive loss foreign currency transaction gains losses included net income loss revenue recognition product warranty extended warranty contractsrevenue recognized performance obligations within contract satisfied amount reflects consideration expect receive exchange satisfaction performance obligations standalone selling price contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances exception software licenses respect software licenses use residual method allocating contract price performance obligations relating software licenses revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customers location determined agreed upon shipping terms time entitled payment title control passed customer fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required risks rewards ownership passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services payment products services collected within short period time following transfer control commencement delivery services applicable revenues presented net salesrelated taxes cash equivalentswe consider cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents deposits foreign banks totaling 893 million 775 million december 31 2019 2018 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due make judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages write accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout “fifo” method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging devices utilized sales representatives present products customers management expects sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins sales demonstration inventory remains classified inventory available sale required refurbishment prior sale minimal service inventory typically used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining useful life typically three years see note 6 “inventories” information regarding inventories reserve excess obsolete inventorybecause value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting potentially obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding one thousand dollars capitalized recorded cost depreciation computed beginning date asset placed service using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 130 million 129 million 123 million 2019 2018 2017 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes balances major classes depreciable assets total accumulated depreciation december 31 2019 2018 follows business combinationswe allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates critical estimates also made valuing earnouts represent arrangements pay former owners based satisfaction performance criteria fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill intangible assetsgoodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist ie likely fair value reporting unit less carrying value determine carrying value recorded goodwill indefinite lived intangible assets impaired changed timing annual test goodwill 2019 align updated strategic plan annual budgetary process accordingly performed annual quantitative test impairment recorded goodwill december 10 2019 result test estimated fair value photonics reporting unit included goodwill recognized instrument associates llc dba nutfield technology “nutfield” laser control systems limited “laser control systems” lanmark controls inc “lanmark” acquisitions 3d design reporting unit included goodwill recognized acquisition optotech srl subsidiary open technologies srl collectively “open technologies” determined significantly less carrying value reporting unit indicating full impairment 212 million impairment loss driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan management concluded goodwill impairment years ended december 31 2018 2017 see note 7 “goodwill” information regarding goodwill intangible assets principally include patents existing product technology customer relationships arose connection acquisitions intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2019 2018 indefinitelived intangible assets product technology patents recorded cost amortization expense computed using straightline method lives product technology patents 7 20 years remaining weightedaverage amortization period intangible assets 4 years result historical projected financial performance lower expectations changes goforward strategy connection new strategic plan estimated fair value acquired intangibles recognized nutfield laser control systems lanmark open technologies acquisitions determined less carrying value net carrying value assets recognized impairment charge related acquired intangibles 105 million 2019 see note 8 “intangible assets” information regarding intangible assets research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred date time incurred attainment related products technological feasibility general release customers short reserve warrantieswe establish time sale liability oneyear warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future income taxeswe review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred tax assets taxing jurisdiction operate unless “more likely not” recover assets means evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income recognize tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes see note 12 “income taxes” information regarding income taxes loss earnings per share “eps”basic loss earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted eps presented note 15 “loss earnings per share” accounting stockbased compensationwe two stockbased employee director compensation plans described fully note 14 “stock compensation plans” measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock restricted stock units performancebased awards granted directors employees fair value stock options including performance awards without market condition estimated date grant using blackscholes optionvaluation model fair value restricted stock unit awards stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock restricted stock units including performance awards without market condition estimated using current market price common stock date grant expense stockbased compensation stock options restricted stock awards restricted stock units performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance conditions furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive income taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows deferred income tax benefit line item elect account forfeitures related service conditionbased awards occur concentration credit riskfinancial instruments expose us concentrations credit risk consist principally shortterm investments operating demand deposit accounts policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits continually monitor banking relationships believe exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently adopted accounting standardsin february 2016 fasb issued accounting standards update “asu” 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201811 leases topic 842 targeted improvements issued fasb july 2018 allows cumulativeeffect adjustment transition method adoption adopted asu 201602 effective january 1 2019 utilizing cumulativeeffect adjustment transition method adoption resulted recognition consolidated balance sheet december 31 2019 184 million rightofuse assets operating leases 196 million lease liability operating leases 08 million property equipment net finance leases 08 million lease liability finance leases function lessee elected certain practical expedients available transition provisions allow aggregation nonlease components related lease components evaluating accounting treatment ii apply modified retrospective adoption method utilizing simplified transition option allows us continue apply legacy guidance fasb asc topic 840 including disclosure requirements comparative periods presented year adoption iii use hindsight determining lease term considering options extend terminate lease purchase underlying asset assessing impairment rightofuse assets adoption asu 201602 also required us include initial direct costs incremental costs would incurred lease obtained rightofuse assets recognition costs connection adoption guidance material impact consolidated financial statements january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment adopted guidance connection annual impairment test fiscal year ended december 31 2019 adoption guidance material impact consolidated financial statements impact recently issued accounting standardsin june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments “asu 201613” requires measurement recognition expected credit losses financial assets held amortized cost asu 201613 subsequent related amendments asu 201613 replace existing incurred loss impairment model expected loss model requires use forwardlooking information calculate credit loss estimates also eliminates concept otherthantemporary impairment requires credit losses related availableforsale debt securities recorded allowance credit losses rather reduction amortized cost basis securities changes result earlier recognition credit losses adopted asu 201613 effective january 1 2020 adoption new guidance material impact consolidated financial statements reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current period presentation •depreciation amortization expenses reported accompanying statements operations reflect departmental costs previously expenses reported separate line item operating expenses amounts related depreciation amortization expenses years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification depreciation amortization expenses conform current period presentation set forth following tables •selling marketing expenses general administrative expenses reported accompanying statements operations together one line selling general administrative previously expenses reported two separate line items operating expenses amounts related selling general administrative expenses years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification selling general administrative expenses conform current period presentation set forth following tables •software maintenance revenue reported accompanying statements operations component product sales previously revenues reported service sales amounts related software maintenance sales years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification software maintenance sales conform current period presentation set forth following tables •software maintenance cost sales reported accompanying statements operations component product cost sales previously cost sales reported service cost sales amounts related software maintenance cost sales years ended december 31 2018 2017 restated throughout annual report form 10k reflect reclassification software maintenance cost sales conform current period presentation set forth following tables 2 supplemental cash flow information selected cash payments noncash activities follows 3 revenues following tables present revenues sales type presented consolidated statements operations disaggregated timing transfer goods services thousands following table presents revenues disaggregated geography based billing addresses customers thousands 1 regions represent europe middle east africa emea asiapacific excluding china apac canada mexico brazil americas revenue related measurement imaging equipment related software allocate contract price performance obligations based best estimate standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances exception software licenses respect software licenses use residual method allocating contract price performance obligations relating software licenses revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customer location determined agreed upon shipping terms time entitled payment title control passed customer software arrangements generally include shortterm maintenance considered pcs considered separate performance obligation generally establish standalone sales price pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement payment products services collected within short period time following transfer control commencement delivery services applicable customers frequently purchase extended warranties purchase measurement equipment related software warranties considered performance obligation services transferred customer time recognize revenue straightline basis warranty term extended warranty sales include contract periods extend one month three years capitalize commission expenses related deliverables transferred customer time amortize costs ratably term contract december 31 2019 deferred cost asset related deferred commissions approximately 31 million classification purposes 21 million 10 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2019 december 31 2018 deferred cost asset related deferred commissions approximately 27 million classification purposes 18 million 09 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2018 unearned service revenue liabilities reported consolidated balance sheets reflect contract liabilities satisfy remaining performance obligations extended warranties software maintenance current portion unearned service revenues consolidated balance sheets expect recognize revenue within twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities unearned service revenues less current portion consolidated balance sheets expect recognize revenue extending beyond twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities customer deposits consolidated balance sheets represent customer prepayments contracts performance obligations must satisfy future recognize related contract revenue amounts generally related performance obligations delivered less 12 months year ended december 31 2019 recognized 302 million service revenue deferred consolidated balance sheet december 31 2018 year ended december 31 2018 recognized 250 million service revenue deferred consolidated balance sheet december 31 2017 nature certain contracts gives rise variable consideration primarily related allowance sales returns required estimate contract asset related sales returns record corresponding adjustment cost sales allowance sales returns approximately 01 million december 31 2019 december 31 2018 shipping handling fees billed customers sales transaction recorded product sales shipping handling costs incurred recorded cost sales exclude sales valueadded sales taxes collect concurrently revenueproducing activities 4 allowance doubtful accounts activity allowance doubtful accounts follows 5 shortterm investments shortterm investments december 31 2019 comprised us treasury bills totaling 248 million consisting 89 million maturing march 12 2020 159 million maturing june 11 2020 interest rates us treasury bills held december 31 2019 maturing march 12 2020 june 11 2020 18 14 respectively shortterm investments december 31 2018 comprised us treasury bills totaling 248 million consisting 90 million matured march 14 2019 109 million matured june 6 2019 49 million matured june 20 2019 interest rates us treasury bills held december 31 2018 matured march 14 2019 june 6 2019 june 20 2019 22 24 23 respectively investments classified heldtomaturity recorded cost plus accrued interest approximates fair value intend sell investments likely required sell investments recover amortized cost bases 6 inventories stated lower cost net realizable value using firstin firstout method three principal categories inventory 1 manufactured product sold 2 sales demonstration inventory completed product used support sales force demonstrations held sale 3 service inventory completed product parts used support service department held sale shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value expect refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins service inventory used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining life typically three years inventories consist following 7 goodwill approximately 497 million 673 million goodwill december 31 2019 2018 respectively changes balances shown test goodwill impairment annually frequently event occurs circumstances would indicate likely fair value reporting unit less carrying value changed timing annual test goodwill 2019 align updated strategic plan annual budgetary process accordingly connection preparation financial statements quarter year ended december 31 2019 performed annual quantitative test impairment recorded goodwill december 10 2019 result test estimated fair value photonics reporting unit included goodwill recognized nutfield laser control systems lanmark acquisitions 3d design reporting unit included goodwill recognized open technologies acquisition determined less carrying value reporting unit indicating full impairment driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan part new strategic plan based recommendation ceo also codm fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety accordingly reporting segment goodwill balances december 31 2019 2018 respectively 8 intangible assets intangible assets consist following result historical projected financial performance lower expectations changes goforward strategy connection new strategic plan estimated fair value acquired intangibles recognized nutfield laser control systems lanmark open technologies acquisitions determined less carrying value net carrying value assets recognized impairment charge related acquired intangibles 105 million fourth quarter 2019 impairment charge primarily related customer relationship technology intangible assets amortization expense 56 million 54 million 45 million 2019 2018 2017 respectively estimated amortization expense years 2020 2024 thereafter follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 fair value measurements guidance fair value measurements disclosures defines fair value establishes framework measuring fair value requires enhanced disclosures assets liabilities measured fair value fair value defined price asset could exchanged current transaction knowledgeable willing parties liability’s fair value defined amount would paid transfer liability new obligor amount would paid settle liability creditor available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models used determine fair value models employ valuation techniques involve level management estimation judgment degree dependent price transparency instruments market instruments’ complexity assets liabilities recorded fair value recurring basis consolidated balance sheets categorized based upon level judgment associated inputs used measure fair value hierarchical levels defined guidance fair value measurements directly related amount subjectivity associated inputs fair valuation assets liabilities follows level 1 valuation based upon quoted market prices identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques fair value recurring basis assets liabilities measured fair value recurring basis categorized tables based upon lowest level significant input valuations historically presented shortterm investments fair value table presented shortterm investments accompanying consolidated balance sheets comprised us treasury bills investments classified heldtomaturity investments recorded fair value recurring basis consolidated balance sheets removed shortterm investments table 1contingent consideration liability represents arrangements pay former owners certain companies acquired based former owners attaining future product release milestones use probabilityweighted discounted cash flow model estimate fair value contingent consideration liabilities probability weightings developed internally assessed quarterly basis year ended december 31 2019 paid 31 million part arrangements year ended december 31 2018 paid 09 million part arrangements remaining change fair value contingent consideration december 31 2018 december 31 2019 related changes estimates regarding probability former owners attain certain product release milestones undiscounted maximum payment december 31 2019 arrangements 08 million based certain milestones 11 expense income net expense income net consists following 12 income taxes loss income tax expense benefit consists following components income tax expense benefit income taxes follows reconciliations income tax expense us federal statutory income tax rate compared actual income tax expense benefit summarized components net deferred income tax assets liabilities follows domestic entities deferred income tax assets amount 153 million 72 million december 31 2019 december 31 2018 respectively december 31 2019 2018 foreign subsidiaries deferred tax assets primarily relating net operating losses 72 million 65 million respectively majority carried forward indefinitely valuation allowance deferred tax assets december 31 2019 2018 104 million 19 million respectively net change total valuation allowance years ended december 31 2019 2018 2017 85 million 03 million 07 million increase respectively valuation allowance december 31 2019 2018 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain review tax contingencies regular basis make appropriate accruals necessary december 31 2019 2018 2017 unrecognized tax benefits totaled 19 million 03 million 03 million respectively included income taxes payable less current portion consolidated balance sheet reconciliation beginning ending amount unrecognized tax benefits follows file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2019 recognize accrued interest penalties related unrecognized tax benefits income tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 19 million currently anticipate total amount unrecognized tax benefits result material changes financial position subject income taxes federal state foreign country level tax returns subject examination us state level subject three four year statute limitations depending state 13 commitments contingencies purchase commitments enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2019 approximately 526 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions december 31 2019 also 15 million longterm commitments purchases delivered 12 months legal proceedings involved legal proceedings routine litigation arising normal course business none believe material adverse effect business financial condition results operations us government contracting matter sold products related services us government “government” general services administration “gsa” federal supply schedule contracts “gsa contracts” since 2002 currently selling products related services government two gsa contracts gsa contract subject extensive legal regulatory requirements includes among provisions price reduction clause “price reduction clause” generally requires us reduce prices billed government gsa contracts correspond lowest prices billed certain benchmark customers late fourth quarter 2018 internal review preliminarily determined certain pricing practices may resulted government overcharged price reduction clauses gsa contracts “gsa matter” result performed remediation efforts including limited identification additional controls procedures ensure future compliance pricing requirements gsa contracts also retained outside legal counsel forensic accountants assist efforts conduct comprehensive review pricing practices gsa contracts “review” february 14 2019 reported gsa matter gsa office inspector general result gsa matter fourth quarter 2018 reduced total sales 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts addition fourth quarter 2018 recorded 05 million imputed interest related estimated cumulative sales adjustment increased interest expense net resulted estimated total liability 53 million gsa matter estimate based preliminary review february 20 2019 date annual report form 10k year ended december 31 2018 july 15 2019 submitted report gsa office inspector general setting forth findings review conducted outside legal counsel forensic accountants based results review reduced total sales second quarter 2019 incremental 58 million sales adjustment reflecting estimated aggregate overcharge 106 million gsa contracts period july 2011 march 2019 addition recorded incremental 08 million imputed interest related estimated cumulative sales adjustment 2019 increased interest expense net resulted 66 million total incremental increase estimated total liability gsa matter date filing annual report form 10k recorded aggregate estimated total liability gsa matter 119 million estimate based information date annual report form 10k subject change based discussions outside legal counsel government january 2020 received requests additional information gsa office inspector general working gsa responding inquiries intend cooperate fully government inquiries government’s review investigation matter could result civil criminal penalties administrative sanctions contract remedies imposed us including limited termination gsa contracts repayments amounts already received gsa contracts forfeiture profits damages suspension payments fines suspension debarment business government possibly us state local governments may also subject litigation recovery federal false claims act possibly similar state laws could include claims treble damages penalties fees costs result cannot reasonably predict outcome government’s review investigation matter time resulting future financial impact us outcomes could material adverse effect reputation sales results operations cash flows financial condition trading price common stock addition incurred continue incur legal related costs connection review government’s response matter 14 stock compensation plans two compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 2009 equity incentive plan “2009 plan” 2014 equity incentive plan “2014 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 equity incentive plan “2004 plan” effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 74386 options outstanding december 31 2019 2009 plan exercise prices 4333 5754 options outstanding 2009 plan 7year term may 2014 shareholders approved 2014 plan authorizing us grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason may 2018 shareholders approved amendment 2014 plan increased number shares available issuance 2014 plan 1000000 shares maximum 2974543 shares available issuance 2014 plan amended plus number shares exceed 891960 underlying awards outstanding 2004 plan 2009 plan may 29 2014 thereafter terminate expire unexercised canceled forfeited lapse reason 412343 options outstanding december 31 2019 2014 plan exercise prices 3305 6130 options outstanding 2014 plan 7year term generally vest 3year period upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually nonemployee directors granted restricted shares equal 50 compensation first business day following annual meeting shareholders calculated using closing price common stock day addition independent chairman board annually granted restricted shares value equal 50000 lead director one appointed would annually granted restricted shares value equal 40000 first business day following annual meeting shareholders calculated using closing price common stock day shares restricted stock granted annually nonemployee directors independent chairman board applicable lead director vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board record compensation cost associated restricted stock grants straightline basis vesting term nonemployee directors also may elect annual cash retainers annual equity retainers paid form deferred stock units pursuant 2014 plan 2018 nonemployee director deferred compensation plan deferred stock unit represents right receive one share common stock upon nonemployee directors separation service company record compensation cost associated deferred stock units period service annually upon approval compensation committee grant stockbased awards historically form stock options andor restricted stock units certain employees also grant stockbased awards historically form stock options andor restricted stock units certain new employees throughout year fair value stockbased awards determined using current market price common stock grant date case restricted stock units without market condition b monte carlo simulation valuation model case performancebased restricted stock units market condition c blackscholes option valuation model case stock options annual grants february 2019 stockbased awards granted michael burger upon commencement service president chief executive officer june 2019 allen muhich upon commencement service chief financial officer july 2019 consisted performancebased restricted stock units timebased restricted stock units annual grants march 2018 consisted timebased stock options timebased restricted stock units number stock options andor restricted stock units granted based employee’s individual objectives performance operational metrics assigned employee overall contribution company prior year stockbased awards granted 2019 timebased restricted stock units vest three equal annual installments beginning one year grant date performancebased restricted stock unit awards vest end 3year performance period applicable performance measure achieved related stockbased compensation expense recognized requisite service period taking account probability satisfy performance measure performancebased restricted stock units granted 2019 earned vest based upon total shareholder return “tsr” relative tsr attained companies within defined benchmark group russell 2000 growth index due tsr presence performancebased restricted stock units fair value awards determined using monte carlo simulation valuation model expense market condition awards threeyear vesting period regardless value award recipients ultimately receive stockbased awards granted 2018 timebased restricted stock unit awards vest full threeyear anniversary grant date stock options vest three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options monte carlo simulation valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weightedaverage grantdate fair value performancebased restricted stock units granted 2019 valued using monte carlo simulation valuation model 6616 performancebased restricted stock units granted 2018 2017 performancebased restricted stock units granted 2019 valued using monte carlo simulation valuation model used following assumptions blackscholes option valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weightedaverage grant date fair value stock options granted years ended december 31 2018 2017 valued using blackscholes option valuation model 2343 1451 per option respectively stock options granted 2019 stock options granted years ended december 31 2018 2017 valued using blackscholes option valuation model used following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows aggregate intrinsic value stock options exercised years ended december 31 2019 2018 2017 34 million 75 million 12 million respectively total fair value stock options vested years ended december 31 2019 2018 2017 51 million 37 million 41 million respectively following table summarizes restricted stock restricted stock unit activity weightedaverage grant date fair values year ended december 31 2019 recorded total stockbased compensation expense associated stock incentive plans 111 million 76 million 65 million 2019 2018 2017 respectively december 31 2019 117 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weightedaverage period 20 years following table summarizes total stockbased compensation expense line items consolidated statement operations 15 loss earnings per share basic loss earnings per share computed dividing net loss income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic loss earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report net loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted earnings loss per share presented 16 employee retirement benefit plan maintain 401k defined contribution retirement plan eligible us employees costs charged operations connection 401k plan 2019 2018 2017 aggregated 22 million 21 million 17 million respectively 17 variable interest entity variable interest entity “vie” entity one three characteristics 1 controlled someone shareowners partners 2 shareowners partners economically exposed entitys earnings example protected losses 3 lacks sufficient equity permit entity finance activities without additional subordinated financial support parties april 27 2018 invested 18 million present4d gmbh “present4d” software solutions provider professional virtual reality presentations training environments form equity capital contribution represented minority investment present4d investments business purpose coordinate design development modules supporting compatibility virtual reality existing software offerings investment date present4d thinly capitalized lacked sufficient equity finance activities without additional subordinated financial support classified vie power decisions significantly affect present4d’s economic performance represent primary beneficiary april 27 2020 present4d may request additional equity financing 18 million us exchange additional share capital additional equity financing would discretion july 2019 originated 05 million note present4d may convert additional equity present4d discretion event default note collateralized perpetual royaltyfree nonexclusive transferable sublicensable license granted us use present4d’s software intend provide future support present4d obtain aforementioned additional share capital future intend use perpetual royaltyfree nonexclusive transferable sublicensable license granted us use present4d’s software year ended december 31 2019 wrote investment note receivable present4d recognized total loss 22 million portion present4d’s net loss year ended december 31 2019 approximately 02 million remaining asset related present4d december 31 2019 investment unconsolidated vie 17 million december 31 2018 included longterm assets consolidated balance sheet date remaining exposure loss involvement present4d 18 geographic information since fourth quarter 2016 operated five verticals3d manufacturing construction building information modeling “construction bim” public safety forensics 3d design photonicsand three reporting segments3d manufacturing construction bim emerging verticals discussed quarterly report form 10q third quarter 2019 new management team led new chief executive officer “ceo” formulated began implement new comprehensive strategic plan business part strategic planning process identified areas business needed enhanced focus change order improve efficiency cost structure fourth quarter 2019 reassessed redefined gotomarket strategy refocused marketing engagement customers reevaluated hardware product portfolio part new strategic plan based recommendation ceo also chief operating decision maker “codm” fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety activities represent 99 consolidated sales total sales external customers based upon geographic location customer longlived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated applicable 19 leases operating finance leases manufacturing facilities corporate offices research development facilities sales training facilities vehicles certain equipment assume role lessee lease assets lessor leases remaining lease terms less one year approximately seven years include options extend leases eight years include options terminate leases within three months currently sublease leased assets determine arrangement lease inception operating leases included operating lease rightofuse “rou” asset lease liability lease liability less current portion consolidated balance sheets finance leases included property equipment net lease liability lease liability less current portion condensed consolidated balance sheets rou assets represent right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease operating lease rou assets lease liabilities recognized commencement date lease based present value lease payments lease term variable lease payments depend index rate include variable portion calculating rou assets lease liabilities variable lease payments depend index rate expensed incurred leases provide implicit rate use incremental borrowing rate based information available commencement date lease determine present value lease payments use implicit rate readily determinable operating lease rou assets also include lease payments made lease incentives lease terms may include options extend terminate lease reasonably certain exercise option time lease commenced lease expense lease payments recognized straightline basis lease term lease agreements lease nonlease components account lease nonlease components single lease component components lease expense follows recognize lease payments made shortterm leases terms 12 months less payments incurred shortterm lease cost year ended december 31 2019 02 million supplemental balance sheet information related leases follows supplemental cash flow information related leases follows maturities lease liabilities follows 20 business combinations april 2017 completed acquisition substantially assets nutfield component technology business located hudson new hampshire specializes design manufacture advanced galvanometerbased optical scanners scan heads laser kits total purchase price approximately 55 million fourth quarter 2019 impaired goodwill intangible assets related acquisition see note 7 “goodwill” note 8 “intangible assets” information results acquired business’ operations date acquisition included consolidated financial statements years ended december 31 2019 december 31 2018 december 31 2017 march 9 2018 acquired outstanding shares laser control systems laser component technology business located bedfordshire united kingdom specializes design manufacture advanced digital scan heads laser software purchase price 17 million paid additional 06 million contingent consideration earned former owners meeting certain milestones fourth quarter 2019 impaired goodwill intangible assets related acquisition see note 7 “goodwill” note 8 “intangible assets” information results laser control systems’ operations date acquisition included consolidated financial statements years ended december 31 2019 december 31 2018 march 16 2018 acquired outstanding shares photocore ag visionbased 3d measurement application software developer zurich switzerland total purchase price 24 million acquisition supports longterm strategy improve existing software offerings innovative technology photogrammetry results photocore ag’s operations date acquisition included consolidated financial statements years ended december 31 2019 december 31 2018 july 6 2018 acquired outstanding shares lanmark highspeed laser marking control boards laser marking software provider located acton massachusetts purchase price 63 million paid additional 03 million contingent consideration earned former owners meeting certain milestones fourth quarter 2019 impaired goodwill intangible assets related acquisition see note 7 “goodwill” note 8 “intangible assets” information results lanmark’s operations date acquisition included consolidated financial statements years ended december 31 2019 december 31 2018 july 13 2018 acquired issued outstanding corporate capital open technologies 3d structured light scanning solution company located brescia italy aggregate purchase price €185 million 216 million subject postclosing adjustments based actual net working capital net financial position transaction expenses paid additional 22 million contingent consideration earned former owners meeting certain product development milestones additional €20 million 22 million contingent consideration may earned former owners certain product development milestones met future us dollar amounts converted euros based foreign exchange rate effect closing date acquisition fourth quarter 2019 impaired goodwill intangible assets related acquisition see note 7 “goodwill” note 8 “intangible assets” information results open technologies’ operations date acquisition included consolidated financial statements years ended december 31 2019 december 31 2018 acquisitions nutfield laser control systems photocore ag lanmark open technologies constitute business combinations defined fasb asc topic 805 business combinations accordingly assets acquired liabilities assumed recorded fair values date acquisition purchase price allocations represent final determination fair value assets acquired liabilities assumed acquisitions year ended december 31 2019 certain refinements booked open technologies acquisition part finalization process included reduction 26 million valuation customer relationship intangible recognition deferred tax liability 19 million goodwill increased 44 million result changes finalization process following summary allocations purchase price fair values assets acquired liabilities assumed date acquisition 1the goodwill arising acquisitions consists largely expected synergies combining operations well value workforce portion goodwill expected tax deductible nutfield 2for laser control systems lanmark open technologies total consists primarily fair value projected contingent consideration 3amounts converted euros us dollars based foreign exchange rate closing date acquisition following details purchase price allocated intangible assets acquired acquisitions noted test goodwill impairment annually frequently event occurs circumstances would indicate likely fair value reporting unit less carrying value changed timing annual test goodwill 2019 align updated strategic plan annual budgetary process accordingly performed annual quantitative test impairment recorded goodwill december 10 2019 result test estimated fair value photonics reporting unit included goodwill recognized nutfield laser control systems lanmark acquisitions 3d design reporting unit included goodwill recognized open technologies acquisition determined less carrying value reporting unit indicating full impairment driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan additionally result historical projected financial performance lower expectations changes goforward strategy connection new strategic plan estimated fair value acquired intangibles recognized nutfield laser control systems lanmark open technologies acquisitions determined less carrying value net carrying value assets recognized impairment charge related acquired intangibles 105 million fourth quarter 2019 acquisition integration costs included components consideration transferred recorded expense period costs incurred date incurred approximately 08 million acquisition integration costs nutfield laser control systems photocore ag lanmark open technologies acquisitions pro forma financial results nutfield laser control systems photocore ag lanmark open technologies presented effects transactions individually aggregate material consolidated results operations 21 subsequent events february 14 2020 board directors approved global restructuring plan “restructuring plan” intended support strategic plan effort improve operating performance ensure appropriately structured resourced deliver sustainable value shareholders customers key activities restructuring plan include continued focus efficiency costsaving efforts includes decreasing total headcount approximately 500 employees upon completion restructuring plan activities expected substantially completed end 2021 estimate restructuring plan reduce gross annual pretax expenses approximately 40 million realized fourth quarter 2020 annualized basis estimate implementation restructuring plan result pretax charges approximately 26 million 36 million addition pretax charges approximately 49 million recorded fourth quarter 2019 connection implementation new strategic plan expect 18 million 22 million additional charges form cash charges actual results including costs restructuring plan may differ materially expectations resulting inability realize expected benefits restructuring plan new strategic plan negatively impacting ability execute future plans strategies could material adverse effect business financial condition results operations 22 quarterly result operations unaudited 1for second quarter 2019 sales reduced incremental 58 million sales adjustment related gsa contracts based results review conducted outside legal counsel forensic accountants 2for fourth quarter 2019 gross profit reduced 151 million inventory reserve charge primarily driven evaluation hardware product portfolio increased reserve excess obsolete inventory 3for fourth quarter 2019 incurred impairment loss 352 million included 212 million goodwill 105 million intangible assets associated recent acquisitions 14 million intangible assets related capitalized patents 21 million asset writedowns 1for fourth quarter 2018 sales reduced 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts 2for third quarter 2018 gross profit reduced 47 million inventory reserve charge resulting analysis inventory reserves connection new product introductions acquisitions increased reserve excess obsolete inventory 3for fourth quarter 2018 additional guidance released securities exchange commissions staff accounting bulletin 118 remeasurement period related us tax cuts jobs act 2017 completed transition tax analysis resulted income tax benefit 10 million item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc opinion financial statements audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2020 2019 related consolidated statements operations comprehensive income loss changes shareholders’ equity cash flows three years period ended december 31 2020 related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2020 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” report dated february 17 2021 expressed unqualified opinion basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate reserve excess obsolete inventory described note 1 financial statements reserve excess obsolete inventory established utilizing company’s past sales history future sales forecasts inventory considered potentially obsolete product withdrawn market product sales past 12 months product sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess items reviewed determine substitute usage exists items without identified current future usage reserved amount equal 100 firstin firstout cost inventory identified reserve excess obsolete inventory critical audit matter principal consideration determination reserve excess obsolete inventory critical audit matter high risk estimation uncertainty due significant judgments management’s analysis included management’s assessment current future usage identified potentially excess obsolete inventory management’s assessment based qualitative quantitative factors impact competitors impact competing products product market acceptance introduction newer product offerings product failures dependence suppliers materials considerations evaluated management making assessment excess obsolete inventories audit procedures related reserve excess obsolete inventory included following among others •we evaluated design tested operating effectiveness key controls relating excess obsolete reserve •we tested calculation current inventories within excess obsolete reserve recalculating analysis previous 12 months usage evaluating reasonableness forecasted sales •we tested significant assumptions made management reserving potentially excess obsolete inventory part procedures obtained inspected corroborating information support expectation future usage included evidence forecasts future sales evaluation product repair rates outstanding products field well need replacement parts also inquired outstanding purchase orders customers relevant evidence available corroborate management’s assertions applicable income taxes described note 12 financial statements company multinational corporation subject income taxes united states numerous foreign jurisdictions company’s effective tax rate directly impacted application complex tax laws regulations highly dependent upon geographic mix worldwide earnings losses tax regulations country geographic region operate availability tax credit loss carryforwards addition recoverability deferred tax assets domestic foreign jurisdictions based weight positive negative evidence recoverability includes future reversals deferred tax liabilities projections future taxable income tax planning strategies identified income tax benefit expense deferred tax assets liabilities critical audit matter principal consideration determination income tax benefit expense valuation recoverability deferred tax assets liabilities critical audit matter due multinational presence company numerous foreign jurisdictions varying complex tax laws regulations rules may subject interpretation depending jurisdiction may involve significant management judgment addition high risk estimation uncertainty due significant management judgment related establishing reversing valuation allowance deferred tax asset jurisdiction may based various forms positive negative evidence regarding recoverability deferred tax asset audit effort involved use professionals specialized skills knowledge assist evaluating audit evidence obtained audit procedures related income tax benefit expense deferred tax asset liability amounts included following among others •we evaluated design tested operating effectiveness key controls relating income tax provision deferred tax asset liability amounts including development future earnings assumptions around timing reversals existing taxable temporary differences also tested management’s controls around review completeness accuracy qualitative quantitative valuation allowance analysis •we involved foreign tax professionals member firms assess significant income tax positions calculations completeness accuracy addition reconciled tax provision calculations underlying accounting records tax returns supporting documentation •we involved international tax professionals firm test company’s assumptions regarding geographic mix worldwide earnings losses part procedures noted company’s geographic mix earnings losses calculated pursuant third party transfer pricing studies performed qualified parties addition involved specialists review company’s transfer pricing assertions •we tested company’s analysis recoverability deferred tax assets jurisdictions based evidence received management support balances grant thornton llp served company’s auditor since 2004 orlando florida february 17 2021 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive income loss accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2020 2019 2018 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2020 2019 2018 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “faro” “company” “us” “we” “our” design develop manufacture market support software driven threedimensional “3d” measurement imaging realization solutions 3d metrology architecture engineering construction “aec” public safety analytics markets enable customers capture measure manipulate interact share data physical world virtual environment translate information back physical domain technology enables highly accurate 3d measurement imaging comparison projection parts complex structures within production assembly quality assurance processes faro suite 3d products software solutions used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction assembly layout machine guidance well investigation reconstructions crash crime scenes sell majority solutions direct sales force across range industries including automotive aerospace metal machine fabrication surveying architecture engineering construction public safety forensics industries historically operated five verticals3d manufacturing construction building information modeling “construction bim” public safety forensics 3d design photonicsand three reporting segments3d manufacturing construction bim emerging verticals second half 2019 chief executive officer “ceo” faros management team formulated began implement new comprehensive strategic plan business strategic planning process included extensive conversations employees customers investors suppliers identify company provide sustained differentiated customer value opportunities existed improve operating efficiencies identified areas business needed enhanced focus change order improve efficiency cost structure part strategic plan reassessed redefined gotomarket strategy refocused marketing engagement customers reevaluated hardware software product portfolio examined key decisions made throughout global organization additionally focused organizational optimization efforts including simplification overly complex management structure part new strategic plan based recommendation ceo also chief operating decision maker “codm” fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety principles consolidationour consolidated financial statements include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive loss foreign currency transaction gains losses included net income loss revenue recognition product warranty extended warranty contractsrevenue recognized performance obligations within contract satisfied amount reflects consideration expect receive exchange satisfaction performance obligations standalone selling price contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price make allocation estimate utilizing data sale applicable products services customers separately similar circumstances revenue related measurement imaging equipment related software generally recognized upon shipment facilities delivered customers location determined agreed upon shipping terms time entitled payment title control passed customer fees billed customers associated distribution products classified revenue generally warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped support product lines also sell hardware service contracts revenues recognized straightline basis term contract hardware service contracts generally extend one month three years costs relating hardware service contracts recognized incurred revenue sales software recognized significant production modification customization software required risks rewards ownership passed customer software arrangements generally include shortterm maintenance considered postcontract support “pcs” considered separate performance obligation generally establish standalone sales price pcs component based software maintenance contract renewals software maintenance contracts sold recognized straightline basis term contract revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services payment products services collected within short period time following transfer control commencement delivery services applicable revenues presented net salesrelated taxes cash equivalentswe consider cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents deposits foreign banks totaling 1192 million 893 million december 31 2020 2019 respectively accounts receivable related allowance credit lossescredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance credit losses accounts outstanding longer contractual payment terms considered past due make judgments collectability accounts receivable based historical trends future expectations management estimates allowance credit losses adjusts gross trade accounts receivable net realizable value allowance credit losses based analysis receivables possible impairment issues historical writeoff percentages write accounts receivable become uncollectible payments subsequently received receivables credited allowance credit losses generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout “fifo” method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging devices utilized sales representatives present products customers management expects sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins sales demonstration inventory remains classified inventory available sale required refurbishment prior sale minimal service inventory typically used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining useful life typically three years see note 6 “inventories” information regarding inventories reserve excess obsolete inventorybecause value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting potentially obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding one thousand dollars capitalized recorded cost depreciation computed beginning date asset placed service using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 108 million 130 million 129 million 2020 2019 2018 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes balances major classes depreciable assets total accumulated depreciation december 31 2020 2019 follows business combinationswe allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows include consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates critical estimates also made valuing earnouts represent arrangements pay former owners based satisfaction performance criteria fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill intangible assetsgoodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review year frequently indicators potential impairment exist ie likely fair value reporting unit less carrying value determine carrying value recorded goodwill indefinite lived intangible assets impaired period single reporting unit elect perform qualitative assessment determine whether necessary perform quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform quantitative goodwill impairment test calculate fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value record amount impairment loss management concluded goodwill impairment year ended december 31 2020 212 million impairment loss year ended december 31 2019 goodwill impairment year ended december 31 2018 test goodwill impairment annually december 31 reporting year frequently event occurs circumstances would indicate likely fair value reporting unit less carrying value performed annual quantitative test goodwill 2020 2018 december 31 changed timing annual test goodwill 2019 align updated strategic plan annual budgetary process accordingly performed annual quantitative test impairment recorded goodwill december 10 2019 result test estimated fair value photonics reporting unit included goodwill recognized instrument associates llc dba nutfield technology “nutfield” laser control systems limited “laser control systems” lanmark controls inc “lanmark” acquisitions 3d design reporting unit included goodwill recognized acquisition optotech srl subsidiary open technologies srl collectively “open technologies” determined significantly less carrying value reporting unit indicating full impairment 212 million impairment loss driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan see note 7 “goodwill” information regarding goodwill intangible assets principally include patents existing product technology customer relationships arose connection acquisitions intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2020 2019 indefinitelived intangible assets product technology patents recorded cost amortization expense computed using straightline method lives product technology patents 7 20 years remaining weightedaverage amortization period intangible assets 5 years result historical projected financial performance lower expectations changes goforward strategy connection new strategic plan estimated fair value acquired intangibles recognized nutfield laser control systems lanmark open technologies acquisitions determined less net carrying value assets recognized impairment charge related acquired intangibles 105 million 2019 recognized impairment charges related intangibles 2020 2018 see note 8 “intangible assets” information regarding intangible assets research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred date time incurred attainment related products technological feasibility general release customers short reserve warrantieswe establish time sale liability oneyear warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future income taxeswe review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred tax assets taxing jurisdiction operate unless “more likely not” recover assets means evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income recognize tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes see note 12 “income taxes” information regarding income taxes earnings loss per share “eps”basic loss earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted eps presented note 15 “loss earnings per share” accounting stockbased compensationwe two stockbased employee director compensation plans described fully note 14 “stock compensation plans” measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock restricted stock units performancebased awards granted directors employees fair value stock options including performance awards without market condition estimated date grant using blackscholes optionvaluation model fair value restricted stock unit awards stock options market condition estimated date grant using monte carlo simulation valuation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock restricted stock units including performance awards without market condition estimated using current market price common stock date grant expense stockbased compensation stock options restricted stock awards restricted stock units performance awards requisite service period awards service condition expense stockbased compensation using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation straightline basis requisite service period separately vesting portion award taking account probability satisfy performance conditions furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive income taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows deferred income tax benefit line item elect account forfeitures related service conditionbased awards occur concentration credit riskfinancial instruments expose us concentrations credit risk consist principally shortterm investments operating demand deposit accounts policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits continually monitor banking relationships believe exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently adopted accounting standardsin february 2016 fasb issued accounting standards update “asu” 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201811 leases topic 842 targeted improvements issued fasb july 2018 allows cumulativeeffect adjustment transition method adoption adopted asu 201602 effective january 1 2019 utilizing cumulativeeffect adjustment transition method adoption resulted recognition consolidated balance sheet december 31 2019 184 million rightofuse assets operating leases 196 million lease liability operating leases 08 million property equipment net finance leases 08 million lease liability finance leases function lessee elected certain practical expedients available transition provisions allow aggregation nonlease components related lease components evaluating accounting treatment ii apply modified retrospective adoption method utilizing simplified transition option allows us continue apply legacy guidance fasb asc topic 840 including disclosure requirements comparative periods presented year adoption iii use hindsight determining lease term considering options extend terminate lease purchase underlying asset assessing impairment rightofuse assets adoption asu 201602 also required us include initial direct costs incremental costs would incurred lease obtained rightofuse assets recognition costs connection adoption guidance material impact consolidated financial statements january 2017 fasb issued asu 201704 intangible goodwill topic 350 simplifying test goodwill impairment “asu 201704” intended simplify subsequent measurement goodwill eliminating step 2 goodwill impairment test new guidance perform goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting unit’s fair value amount goodwill allocated reporting unit new guidance also eliminates requirements reporting unit zero negative carrying amount perform step 2 goodwill impairment test fails qualitative assessment adopted guidance connection annual impairment test fiscal year ended december 31 2019 adoption guidance material impact consolidated financial statements june 2016 fasb issued asu 201613 financial instruments credit losses topic 326 measurement credit losses financial instruments “asu 201613” requires measurement recognition expected credit losses financial assets held amortized cost asu 201613 subsequent related amendments asu 201613 replace existing incurred loss impairment model expected loss model requires use forwardlooking information calculate credit loss estimates also eliminates concept otherthantemporary impairment requires credit losses related availableforsale debt securities recorded allowance credit losses rather reduction amortized cost basis securities changes result earlier recognition credit losses adopted asu 201613 effective january 1 2020 adoption new guidance material impact consolidated financial statements reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current period presentation •depreciation amortization expenses reported accompanying statements operations reflect departmental costs previously expenses reported separate line item operating expenses amounts related depreciation amortization expenses year ended december 31 2018 restated throughout annual report form 10k reflect reclassification depreciation amortization expenses conform current period presentation set forth following tables •selling marketing expenses general administrative expenses reported accompanying statements operations together one line selling general administrative previously expenses reported two separate line items operating expenses amounts related selling general administrative expenses year ended december 31 2018 reclassified throughout annual report form 10k reflect reclassification selling general administrative expenses conform current period presentation set forth following tables •software maintenance revenue reported accompanying statements operations component product sales previously revenues reported service sales amounts related software maintenance sales year ended december 31 2018 reclassified throughout annual report form 10k reflect reclassification software maintenance sales conform current period presentation set forth following tables •software maintenance cost sales reported accompanying statements operations component product cost sales previously cost sales reported service cost sales amounts related software maintenance cost sales year ended december 31 2018 reclassified throughout annual report form 10k reflect reclassification software maintenance cost sales conform current period presentation set forth following tables 2 supplemental cash flow information selected cash payments noncash activities follows 3 revenues following tables present revenues sales type presented consolidated statements operations disaggregated timing transfer goods services thousands following table presents revenues disaggregated geography based billing addresses customers thousands 1 regions represent europe middle east africa emea asiapacific excluding china apac mexico brazil americas capitalize commission expenses related deliverables transferred customer time amortize costs ratably term contract december 31 2020 deferred cost asset related deferred commissions approximately 41 million classification purposes 26 million 15 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2020 december 31 2019 deferred cost asset related deferred commissions approximately 31 million classification purposes 21 million 10 million comprised within prepaid expenses current assets longterm assets respectively consolidated balance sheet december 31 2019 unearned service revenue liabilities reported consolidated balance sheets reflect contract liabilities satisfy remaining performance obligations extended warranties software maintenance current portion unearned service revenues consolidated balance sheets expect recognize revenue within twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities unearned service revenues less current portion consolidated balance sheets expect recognize revenue extending beyond twelve months applicable balance sheet date relating extended warranty software maintenance contract liabilities customer deposits consolidated balance sheets represent customer prepayments contracts performance obligations must satisfy future recognize related contract revenue amounts generally related performance obligations delivered less 12 months year ended december 31 2020 recognized 352 million revenue deferred consolidated balance sheet december 31 2019 year ended december 31 2019 recognized 302 million revenue deferred consolidated balance sheet december 31 2018 nature certain contracts gives rise variable consideration primarily related allowance sales returns required estimate contract asset related sales returns record corresponding adjustment cost sales allowance sales returns december 31 2020 december 31 2019 approximately 03 million 01 million respectively shipping handling fees billed customers sales transaction recorded product sales shipping handling costs incurred recorded cost sales exclude sales valueadded sales taxes collect concurrently revenueproducing activities 4 allowance credit losses activity allowance credit losses follows 5 shortterm investments shortterm investments december 31 2020 shortterm investments december 31 2019 comprised us treasury bills totaling 248 million consisting 89 million matured march 12 2020 159 million matured june 11 2020 interest rates us treasury bills held december 31 2019 matured march 12 2020 june 11 2020 18 14 respectively investments classified heldtomaturity recorded cost plus accrued interest approximates fair value 6 inventories stated lower cost net realizable value using firstin firstout method three principal categories inventory 1 manufactured product sold 2 sales demonstration inventory completed product used support sales force demonstrations held sale 3 service inventory completed product parts used support service department held sale shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory held sales representatives three years time refurbished transferred finished goods used equipment stated lower cost net realizable value expect refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins service inventory used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining life typically three years inventories consist following 7 goodwill approximately 575 million 497 million goodwill december 31 2020 2019 respectively changes balances shown test goodwill impairment annually december 31 reporting year frequently event occurs circumstances would indicate likely fair value reporting unit less carrying value performed annual quantitative test goodwill 2020 december 31 2020 recorded impairment expense year ended december 31 2020 2019 changed timing annual test goodwill align updated strategic plan annual budgetary process accordingly connection preparation financial statements year ended december 31 2019 performed annual quantitative test impairment recorded goodwill december 10 2019 result test estimated fair value photonics reporting unit included goodwill recognized nutfield laser control systems lanmark acquisitions 3d design reporting unit included goodwill recognized open technologies acquisition determined less carrying value reporting unit indicating full impairment driven primarily historical projected financial performance lower expectations changes goforward strategy connection new strategic plan part new strategic plan based recommendation ceo also codm fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety accordingly reporting segment goodwill balances december 31 2020 2019 respectively 8 intangible assets intangible assets consist following year ended december 31 2019 result historical projected financial performance lower expectations changes goforward strategy connection new strategic plan estimated fair value acquired intangibles recognized nutfield laser control systems lanmark open technologies acquisitions determined less carrying value net carrying value assets recognized impairment charge related acquired intangibles 105 million fourth quarter 2019 impairment charge primarily related customer relationship technology intangible assets amortization expense 34 million 56 million 54 million 2020 2019 2018 respectively estimated amortization expense years 2021 2025 thereafter follows 9 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 10 fair value measurements guidance fair value measurements disclosures defines fair value establishes framework measuring fair value requires enhanced disclosures assets liabilities measured fair value fair value defined price asset could exchanged current transaction knowledgeable willing parties liability’s fair value defined amount would paid transfer liability new obligor amount would paid settle liability creditor available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models used determine fair value models employ valuation techniques involve level management estimation judgment degree dependent price transparency instruments market instruments’ complexity assets liabilities recorded fair value recurring basis consolidated balance sheets categorized based upon level judgment associated inputs used measure fair value hierarchical levels defined guidance fair value measurements directly related amount subjectivity associated inputs fair valuation assets liabilities follows level 1 valuation based upon quoted market prices identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques fair value recurring basis assets liabilities measured fair value recurring basis categorized tables based upon lowest level significant input valuations historically presented shortterm investments fair value table presented shortterm investments accompanying consolidated balance sheets comprised us treasury bills investments classified heldtomaturity investments recorded fair value recurring basis consolidated balance sheets removed shortterm investments table 1contingent consideration liability represents arrangements pay former owners certain companies acquired based former owners attaining future product release milestones use probabilityweighted discounted cash flow model estimate fair value contingent consideration liabilities probabilityweightings developed internally assessed quarterly basis change fair value contingent consideration december 31 2019 december 31 2020 primarily related execution new strategic plan disposed acquired company related arrangement pay former owners well consummation new arrangement pay former owners recent acquisition undiscounted maximum payment december 31 2020 arrangements 12 million based certain milestones 11 expense income net expense income net consists following 12 income taxes income loss income tax benefit expense consists following components income tax expense benefit income taxes follows fiscal 2020 completed intraentity transfers certain intellectual property rights “ip rights” resulted company establishing deferred tax assets related tax benefits 192 million based fair value ip rights transferred december 2020 determination fair value involves significant judgment future revenue growth operating profit discount rates unforeseen events circumstances may occur could affect either accuracy validity assumptions estimates actual results sustainability future tax benefits may dependent upon acceptance valuation estimates assumptions taxing authorities jurisdictions impacted intraentity transfers ip rights reconciliations income tax expense us federal statutory income tax rate compared actual income tax benefit expense summarized components net deferred income tax assets liabilities follows domestic entities deferred income tax assets amount 214 million 153 million december 31 2020 december 31 2019 respectively december 31 2020 us federal state net operating loss carryforwards 13 million 284 million respectively federal state net operating loss carryforwards begin expire 2035 2029 respectively also federal state rd credits 23 million 04 million respectively federal credits begin expire 2039 state credits carryforward indefinitely december 31 2020 foreign subsidiaries deferred tax assets primarily relating intangibles 194 million net operating losses 71 million majority carried forward indefinitely december 31 2019 foreign subsidiaries deferred tax assets primarily relating net operating losses 72 million valuation allowance deferred tax assets december 31 2020 2019 69 million 104 million respectively net change total valuation allowance years ended december 31 2020 2019 2018 37 million decrease 85 million increase 05 million increase respectively valuation allowance december 31 2020 2019 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment december 22 2017 united states enacted us tax cuts jobs act resulting significant modifications existing law included transition tax mandatory deemed repatriation foreign earnings result us tax cuts jobs act company repatriate foreign earnings profits us minimal us income tax consequences transition tax gilti tax company reinvested large portion undistributed foreign earnings profits acquisitions investments intends bring back portion foreign cash certain jurisdictions company subject local withholding taxes subject already transition tax gilti tax december 31 2020 provided approximately 04 million withholding tax foreign earnings profits certain jurisdictions intend invest earnings indefinitely significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain review tax contingencies regular basis make appropriate accruals necessary december 31 2020 2019 2018 unrecognized tax benefits totaled 19 million 19 million 03 million respectively included income taxes payable less current portion consolidated balance sheet reconciliation beginning ending amount unrecognized tax benefits follows file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2020 recognize accrued interest penalties related unrecognized tax benefits income tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 19 million currently anticipate total amount unrecognized tax benefits result material changes financial position subject income taxes federal state foreign country level tax returns subject examination us state level subject three four year statute limitations depending state 13 commitments contingencies purchase commitments enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2020 approximately 442 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions december 31 2020 also 09 million longterm commitments purchases delivered 12 months legal proceedings involved legal proceedings routine litigation arising normal course business none believe material adverse effect business financial condition results operations us government contracting matter sold products related services us government “government” general services administration “gsa” federal supply schedule contracts “gsa contracts” since 2002 currently selling products related services government two gsa contracts gsa contract subject extensive legal regulatory requirements includes among provisions price reduction clause “price reduction clause” generally requires us reduce prices billed government gsa contracts correspond lowest prices billed certain benchmark customers late fourth quarter 2018 internal review preliminarily determined certain pricing practices may resulted government overcharged price reduction clauses gsa contracts “gsa matter” result performed remediation efforts including limited identification additional controls procedures ensure future compliance pricing requirements gsa contracts also retained outside legal counsel forensic accountants assist efforts conduct comprehensive review pricing practices gsa contracts “review” february 14 2019 reported gsa matter gsa office inspector general result gsa matter fourth quarter 2018 reduced total sales 48 million estimated cumulative sales adjustment representative last six years estimated overcharges government gsa contracts addition fourth quarter 2018 recorded 05 million imputed interest related estimated cumulative sales adjustment increased interest expense net resulted estimated total liability 53 million gsa matter estimate based preliminary review february 20 2019 date annual report form 10k year ended december 31 2018 july 15 2019 submitted report gsa office inspector general setting forth findings review conducted outside legal counsel forensic accountants based results review reduced total sales second quarter 2019 incremental 58 million sales adjustment reflecting estimated aggregate overcharge 106 million gsa contracts period july 2011 march 2019 addition recorded incremental 07 million imputed interest related estimated cumulative sales adjustment 2019 increased interest expense net resulted 65 million total incremental increase estimated total liability gsa matter january 2020 received requests additional information gsa office inspector general corresponded june 2020 result continuing investigation reduced total sales second quarter 2020 incremental 06 million sales adjustment reflecting estimated aggregate overcharge 112 million gsa contracts period july 2011 december 2020 working gsa responding additional inquiries arising investigation recorded incremental 02 million imputed interest related estimated cumulative sales adjustment third quarter 2020 determined fourth quarter 2020 adjustment reduce imputed interest 07 million required date filing annual report form 10k recorded aggregate estimated total liability gsa matter 123 million estimate based information date annual report form 10k subject change based discussions outside legal counsel government intend cooperate fully government inquiries government’s review investigation matter could result civil criminal penalties administrative sanctions contract remedies imposed us including limited termination gsa contracts repayments amounts already received gsa contracts forfeiture profits damages suspension payments fines suspension debarment business government possibly us state local governments may also subject litigation recovery federal false claims act possibly similar state laws could include claims treble damages penalties fees costs result cannot reasonably predict outcome government’s review investigation matter time resulting future financial impact us outcomes could material adverse effect reputation sales results operations cash flows financial condition trading price common stock addition incurred continue incur legal related costs connection review government’s response matter 14 stock compensation plans two compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 2009 equity incentive plan “2009 plan” 2014 equity incentive plan “2014 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 equity incentive plan “2004 plan” effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 17150 options outstanding december 31 2020 2009 plan exercise price 5754 options outstanding 2009 plan 7year term may 2014 shareholders approved 2014 plan authorizing us grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason may 2018 shareholders approved amendment 2014 plan increased number shares available issuance 2014 plan 1000000 shares maximum 2974543 shares available issuance 2014 plan amended plus number shares exceed 891960 underlying awards outstanding 2004 plan 2009 plan may 29 2014 thereafter terminate expire unexercised canceled forfeited lapse reason 137898 options outstanding december 31 2020 2014 plan exercise prices 3305 6130 options outstanding 2014 plan 7year term generally vest 3year period upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually nonemployee directors granted restricted shares equal 100000 first business day following annual meeting shareholders calculated using closing price common stock day addition independent chairman board annually granted restricted shares value equal 50000 lead director one appointed would annually granted restricted shares value equal 40000 first business day following annual meeting shareholders calculated using closing price common stock day shares restricted stock granted annually nonemployee directors independent chairman board applicable lead director vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board record compensation cost associated restricted stock grants straightline basis vesting term nonemployee directors also may elect annual cash retainers annual equity retainers paid form deferred stock units pursuant 2014 plan 2018 nonemployee director deferred compensation plan deferred stock unit represents right receive one share common stock upon nonemployee directors separation service company record compensation cost associated deferred stock units period service annually upon approval compensation committee grant stockbased awards historically form stock options andor restricted stock units certain employees also grant stockbased awards historically form stock options andor restricted stock units certain new employees throughout year fair value stockbased awards determined using current market price common stock grant date case restricted stock units without market condition b monte carlo simulation valuation model case performancebased restricted stock units market condition c blackscholes option valuation model case stock options stockbased awards granted 2019 2020 timebased restricted stock units vest three equal annual installments beginning one year grant date performancebased restricted stock unit awards vest end 3year performance period applicable performance measure achieved related stockbased compensation expense recognized requisite service period taking account probability satisfy performance measure performancebased restricted stock units granted 2020 earned vest based upon total shareholder return “tsr” relative tsr attained companies within defined benchmark group russell 2000 growth index due tsr presence performancebased restricted stock units fair value awards determined using monte carlo simulation valuation model expense market condition awards threeyear vesting period regardless value award recipients ultimately receive monte carlo simulation valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weightedaverage grantdate fair value performancebased restricted stock units granted 2020 2019 valued using monte carlo simulation valuation model 8038 6616 respectively performancebased restricted stock units granted 2020 2019 valued using monte carlo simulation valuation model used following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows aggregate intrinsic value stock options exercised years ended december 31 2020 2019 2018 42 million 34 million 75 million respectively total fair value stock options vested years ended december 31 2020 2019 2018 08 million 51 million 37 million respectively following table summarizes restricted stock restricted stock unit activity weightedaverage grant date fair values year ended december 31 2020 recorded total stockbased compensation expense associated stock incentive plans 83 million 111 million 76 million 2020 2019 2018 respectively december 31 2020 136 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weightedaverage period 19 years following table summarizes total stockbased compensation expense line items consolidated statement operations 15 earnings per share basic earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method report net loss period presented diluted loss per share calculation include potential common stock inclusion shares calculation would antidilutive effect reconciliation number common shares used calculation basic diluted earnings per share presented 16 employee retirement benefit plan maintain 401k defined contribution retirement plan eligible us employees costs charged operations connection 401k plan 2020 2019 2018 aggregated 18 million 22 million 21 million respectively 17 variable interest entity variable interest entity “vie” entity one three characteristics 1 controlled someone shareowners partners 2 shareowners partners economically exposed entitys earnings example protected losses 3 lacks sufficient equity permit entity finance activities without additional subordinated financial support parties april 27 2018 invested 18 million present4d gmbh “present4d” software solutions provider professional virtual reality presentations training environments form equity capital contribution represented minority investment present4d investments business purpose coordinate design development modules supporting compatibility virtual reality existing software offerings investment date present4d thinly capitalized lacked sufficient equity finance activities without additional subordinated financial support classified vie power decisions significantly affect present4d’s economic performance represent primary beneficiary april 27 2020 present4d may request additional equity financing 18 million us exchange additional share capital additional equity financing would discretion july 2019 originated 05 million note present4d may convert additional equity present4d discretion event default note collateralized perpetual royaltyfree nonexclusive transferable sublicensable license granted us use present4d’s software intend provide future support present4d obtain aforementioned additional share capital future intend use perpetual royaltyfree nonexclusive transferable sublicensable license granted us use present4d’s software year ended december 31 2019 wrote investment note receivable present4d recognized total loss 22 million portion present4d’s net loss year ended december 31 2019 approximately 02 million remaining asset related present4d december 31 2020 december 31 2019 remaining exposure loss involvement present4d 18 geographic information historically operated five verticals3d manufacturing construction building information modeling “construction bim” public safety forensics 3d design photonicsand three reporting segments3d manufacturing construction bim emerging verticals second half 2019 chief executive officer “ceo” faros management team formulated began implement new comprehensive strategic plan business strategic planning process included extensive conversations employees customers investors suppliers identify company provide sustained differentiated customer value opportunities existed improve operating efficiencies identified areas business needed enhanced focus change order improve efficiency cost structure part strategic plan reassessed redefined gotomarket strategy refocused marketing engagement customers reevaluated hardware software product portfolio examined key decisions made throughout global organization additionally focused organizational optimization efforts including simplification overly complex management structure part new strategic plan based recommendation ceo also chief operating decision maker “codm” fourth quarter 2019 eliminated vertical structure began reorganizing company functional structure executive leadership team comprised functional leaders areas sales marketing operations research development general administrative resources allocated function consolidated unit level longer separate business units segment managers vertical leaders report codm respect operations operating results planning levels components total company level instead codm allocates resources evaluates performance companywide basis based changes commencing fourth quarter 2019 reporting one reporting segment develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software 3d documentation systems reporting segment sells variety end markets including automotive aerospace metal machine fabrication architecture engineering construction public safety activities represent 99 consolidated sales total sales external customers based upon geographic location customer longlived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated applicable 19 leases operating finance leases manufacturing facilities corporate offices research development facilities sales training facilities vehicles certain equipment assume role lessee lease assets lessor leases remaining lease terms less one year approximately ten years include options extend leases eight years include options terminate leases within three months currently sublease leased assets determine arrangement lease inception operating leases included operating lease rightofuse “rou” asset lease liability lease liability less current portion consolidated balance sheets finance leases included property equipment net lease liability lease liability less current portion condensed consolidated balance sheets rou assets represent right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease operating lease rou assets lease liabilities recognized commencement date lease based present value lease payments lease term variable lease payments depend index rate include variable portion calculating rou assets lease liabilities variable lease payments depend index rate expensed incurred leases provide implicit rate use incremental borrowing rate based information available commencement date lease determine present value lease payments use implicit rate readily determinable operating lease rou assets also include lease payments made lease incentives lease terms may include options extend terminate lease reasonably certain exercise option time lease commenced lease expense lease payments recognized straightline basis lease term lease agreements lease nonlease components account lease nonlease components single lease component components lease expense follows recognize lease payments made shortterm leases terms 12 months less payments incurred shortterm lease cost year ended december 31 2020 december 31 2019 01 million 02 million respectively supplemental balance sheet information related leases follows supplemental cash flow information related leases follows maturities lease liabilities follows 20 business combinations august 21 2020 acquired outstanding shares advanced technical solutions scandinavia ab “ats” swedish company focused 3d digital twin solution technology purchase price €51 million 60 million paid net cash acquired subject certain additional postclosing adjustments €10 million 12 million contingent consideration may earned former owners certain product development milestones met threeyear period us dollar amounts converted euros based foreign exchange rate effect closing date acquisition believe acquisition enables company provide high accuracy 3d digital twin simulations industries automotive aerospace results ats’s operations date acquisition included consolidated financial statements december 31 2020 year ended december 31 2020 acquisition ats constitutes business combinations defined asc topic 805 business combinations accordingly assets acquired liabilities assumed recorded fair values date acquisition purchase price allocations represent finalized determination fair value assets acquired liabilities assumed acquisition following summary allocations purchase price fair values assets acquired liabilities assumed date acquisition 1 total consists primarily fair value projected contingent consideration 2 amounts converted euros us dollars based foreign exchange rate closing date acquisition goodwill arising acquisition consists largely expected synergies combining operations well value workforce goodwill tax deductible acquisition integration costs included components consideration transferred recorded expense period costs incurred date incurred material acquisition integration costs ats acquisition pro forma financial results ats presented effect transaction material consolidated financial results following details purchase price allocated intangible assets acquired ats acquisition 21 restructuring first quarter 2020 board directors approved global restructuring plan “restructuring plan” intended support strategic plan effort improve operating performance ensure appropriately structured resourced deliver increased sustainable value shareholders customers key activities restructuring plan include continued focus efficiency costsaving efforts includes decreasing total headcount approximately 500 employees upon completion restructuring plan activities expected substantially completed end 2021 pretax charges approximately 49 million recorded fourth quarter 2019 connection implementation new strategic plan included following •212 million impairment goodwill •128 million charge increasing reserve excess obsolete inventory •105 million impairment intangible assets associated recent acquisitions •14 million impairment intangible assets related capitalized patents •34 million impairment assets charges connection restructuring plan recorded pretax charge approximately 158 million year ended december 31 2020 primarily consisting severance related benefits professional fees related charges costs including noncash expense 04 million related disposal photonics business 3d design related assets received 07 million cash payments disposal photonics business 3d design related assets second quarter estimate total additional pretax charges 5 million 15 million fiscal year 2021 time continuing evaluate future key activities additional charges originate actual results including costs restructuring plan may differ materially expectations resulting inability realize expected benefits restructuring plan new strategic plan negatively impacting ability execute future plans strategies could material adverse effect business financial condition results operations connection restructuring plan paid approximately 131 million year ended december 31 2020 primarily consisting severance related benefits expect additional 7 million 9 million cash payments made fiscal year 2021 related restructuring plan activity related accrued restructuring charge cash payments year ended december 31 2020 follows 22 quarterly result operations unaudited 1for second quarter 2020 sales reduced incremental 06 million sales adjustment related gsa contracts based results review conducted outside legal counsel forensic accountants 2during 2020 connection restructuring plan recorded pretax charge approximately 137 million first quarter 2020 06 million second quarter 03 million third quarter 12 million fourth quarter primarily consisting severance related benefits professional fees related charges costs including noncash expense 04 million related disposal photonics business 3d design related assets 1for second quarter 2019 sales reduced incremental 58 million sales adjustment related gsa contracts based results review conducted outside legal counsel forensic accountants 2for fourth quarter 2019 gross profit reduced 151 million inventory reserve charge primarily driven evaluation hardware software product portfolio increased reserve excess obsolete inventory 3for fourth quarter 2019 incurred impairment loss 352 million included 212 million goodwill 105 million intangible assets associated recent acquisitions 14 million intangible assets related capitalized patents 21 million asset writedowns item 9item 8 financial statements supplementary data independent auditors report board directors shareholders faro technologies inc audited accompanying consolidated balance sheet faro technologies inc subsidiaries december 31 2000 related consolidated statements operations shareholders equity cash flows year ended financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects consolidated financial position faro technologies inc subsidiaries december 31 2000 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states ernst young llp orlando florida march 8 2001 independent auditors report board directors shareholders faro technologies inc audited accompanying consolidated balance sheets faro technologies inc subsidiaries december 31 1999 related consolidated statements operations shareholders equity cash flows two years period ended december 31 1999 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position faro technologies inc subsidiaries december 31 1999 results operations cash flows two years period ended december 31 1999 conformity accounting principles generally accepted united states america deloitte touche llp certified public accountants tampa florida march 17 2000 faro technologies inc subsidiaries consolidated balance sheets see notes consolidated financial statements faro technologies inc subsidiaries consolidated statements operations see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders equity see accompanying notes consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows see notes consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2000 1999 1998 1 summary significant accounting policies description businessfaro technologies inc subsidiaries develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software company four whollyowned subsidiaries faro fsc ltd faro europe gmbh co kg german company faro japan kkk japanese company antares lda portuguese company principles consolidationthe consolidated financial statements include accounts faro technologies inc whollyowned subsidiaries collectively company significant intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect period end assets liabilities average exchange rates reporting period results operations adjustments resulting translation financial statements reflected separate component comprehensive loss revenue recognition product warranty extended maintenance contracts revenue related companys 3d measurement equipment related software recognized upon shipment company considers earnings process substantially complete shipping date revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed extended maintenance plan revenues recognized proportion maintenance costs projected incurred company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expenses recorded products shipped costs relating extended maintenance plans recognized incurred december 1999 securities exchange commission issued staff accounting bulletin 101 summarizing views applying generally accepted accounting principles revenue recognition financial statements companys policy revenue recognition consistent bulletin cash equivalentsthe company considers cash hand amounts deposit financial institutions original maturities three months less cash equivalents shortterm investments debt securities maturities three months less classified trading securities carried market value based upon quoted market prices investments respective balance sheet date accordingly net realized unrealized gains losses trading securities included income consolidated statements operations december 31 2000 cash equivalents consisted cash hand overnight investments gross unrealized gain loss trading securities unrealized loss approximately 18000 1999 unrealized gain approximately 3000 1998 faro technologies inc subsidiaries notes consolidated financial statementscontinued investmentsshortterm investments ordinarily consist shortterm debt securities acquired cash immediately needed operations december 31 2000 1999 amounts consisted government agency securities maturities exceeding one year investments ordinarily consist debt securities acquired cash immediately needed operations amounts maturities least one year none maturities exceeding two years december 31 2000 1999 investments consisted following management determines appropriate classification short term investments debt securities time purchase reevaluates determinations balance sheet date investments debt securities classified held maturity company positive intent ability hold securities maturity held maturity securities stated amortized cost amortized cost debt securities adjusted amortization premiums accretion discounts maturity amortization interest included income consolidated statements operations companys investments debt securities diversified among high credit quality securities accordance companys investment policy gross unrealized gain loss held maturity debt securities unrealized gain approximately 65000 december 31 2000 unrealized loss approximately 83000 december 31 1999 inventoriesinventories stated lower average cost market order achieve better matching production costs revenues generated production certain fixed overhead costs certain general administrative costs related production capitalized inventory incurred charged cost sales product costs time sale sales demonstration inventory comprised measuring devices utilized sales representatives present companys products customers products remain sales demonstration inventory six twelve months subsequently sold prices produce slightly reduced gross margins property equipmentproperty equipment recorded cost depreciation computed using straightline decliningbalance methods estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease faro technologies inc subsidiaries notes consolidated financial statementscontinued intangiblesgoodwill represents excess purchase price fair value businesses acquired amortized straightline basis 5 years acquired intangibles principally include core technology existing product technology workforce place customer relationships arose connection acquisition cats acquired intangibles recorded fair value date acquisition amortized estimated useful lives primarily 3 5 years product design costs incurred development products technological feasibility attained capitalized amortized using straightline method estimated economic lives related products exceed 3 years company considers technological feasibility established company completed planning designing coding testing activities necessary establish design specifications including function features technical performance requirements capitalization product design costs ceases amortization costs begins product available general release customers patents recorded cost amortization computed using straight line method lives patents 17 years intangibles amortized periods ranging 3 5 years research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products technological feasibility recorded expenses period incurred income taxesdeferred tax assets liabilities reflect future income tax effects temporary differences consolidated financial statement carrying amounts existing assets liabilities respective tax bases measured using enacted tax rates apply taxable income years temporary differences expected recovered settled deferred tax assets reduced valuation allowance opinion management likely portion deferred tax assets realized fair value financial instrumentsthe companys financial instruments include cash equivalents shortterm investments accounts receivable investments accounts payable carrying amounts financial instruments approximate fair value due short term nature instruments earnings per sharebasic earnings per share eps computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution securities could share earnings reconciliation number common shares used calculation basic diluted eps presented note 13 concentration credit riskfinancial instruments potentially expose company concentrations credit risk consist principally operating demand deposit accounts companys policy place operating demand deposit accounts high credit quality financial institutions faro technologies inc subsidiaries notes consolidated financial statementscontinued june 1996 company entered original equipment manufacturer oem agreement mitutoyo corporation mitutoyo japanese company manufactures markets metrology tools agreement mitutoyo sells companys products name spinarm agreement grants mitutoyo nonexclusive right sales japan expired june 2000 renewed successive oneyear term 2000 1999 company entered oem agreement brown sharpe manufacturing company brown sharpe north kingstown rhode island company world leader manufacture traditional cmms metrology products brown sharpe market faroarmr worldwide name gage 2000 agreement grants brown sharpe nonexclusive distribution right worldwide expires march 2002 renewable successive oneyear terms customer represented 10 companys total sales years ended december 31 2000 1999 1998 stockbased compensationin accordance statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 company elected continue account employee stock compensation plans accounting principle board apb opinion 25 pro forma disclosures net earnings per share fair value based method accounting defined sfas 123 applied intrinsic value based method compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock fair value based method compensation cost measured grant date based value award recognized service period usually vesting period longlived assetslonglived assets including property equipment certain intangible assets held used company reviewed impairment whenever events changes circumstances indicate carrying value assets may recoverable impairment losses recognized expected future undiscounted cash flows related assets less carrying values measurement impairment loss based fair value asset longlived assets certain identifiable intangibles disposed reported lower carrying amount fair value less cost sell see note 2 regarding impairment certain developed core technology estimatesthe preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting pronouncementsin june 2000 fasb issued statement 138 accounting certain hedging activities amended statement 133 accounting derivative instruments hedging activities statement 138 must adopted concurrently adoption statement 133 company adopted new statements effective january 1 2001 faro technologies inc subsidiaries notes consolidated financial statementscontinued statements require company recognize derivatives balance sheet fair value companys adoption statements significant effect results operations financial position april 2000 financial accounting standards board issued fasb interpretation 44 accounting certain transactions involving stock compensation interpretation apb opinion 25 among issues interpretation clarifies definition employees purposes applying opinion 25 criteria determining whether plan qualifies noncompensatory plan accounting consequence various modifications terms previously fixed stock option award accounting exchange stock compensation awards business combination interpretation effective july 1 2000 certain conclusions interpretation cover specific events occur either december 15 1998 january 12 2000 extent interpretation covers events occurring period december 31 1998 january 12 2000 effective date july 1 2000 effect applying interpretation recognized prospective basis july 1 2000 implementation interpretation material impact companys financial statements reclassificationscertain prior year amounts reclassified conform current year financial statement presentation 2 acquisition cats 1998 company acquired cats gmbh total consideration 16 million including direct costs acquisition consisting 5 million cash 916668 shares companys common stock assumption certain outstanding liabilities cats addition 333332 shares common stock placed escrow issued provided cats met certain performance criteria within specified timeframe subsequently escrow shares issued company february 2000 accordance agreement acquisition agreement provided company provide loan two former shareholders cats fund tax liability connection companys acquisition cats former cats shareholders remain key employees company august 2 1999 company former cats shareholders entered loan agreement pursuant company agreed loan former cats shareholders amount equal german tax obligation connection companys acquisition cats june 2000 german tax authorities issued tax assessment former cats shareholders connection therewith june 20 2000 company former cats shareholders entered amended restated loan agreement company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 43 grant borrowers option extend term additional three years collateral loans former cats shareholders pledged company 177074 shares companys common stock loans nonrecourse obligation former cats shareholders faro technologies inc subsidiaries notes consolidated financial statementscontinued acquisition recorded purchase method accounting final allocation among tangible intangible assets liabilities follows valuation cats based managements estimates tax net cash flows gives explicit consideration security exchange commissions sec views inprocess research development purchase transactions making allocation purchase price company considered present value cash flows income status projects completion costs project risk specifically company considered 1 value core technology ensured relative allocations core technology inprocess technology consistent relative contributions final products 2 stage completion individual projects ensured value considered efforts completed transaction date amount allocated inprocess research development 32 million expensed upon acquisition determined underlying projects reached technological feasibility alternative future use successful future development uncertain fourth quarter 1999 company recorded writedown developed core technology approximately 31 million consolidated statement operations writedown accordance sfas 121 accounting impairment longlived assets sfas 121 developed core technology determined impaired anticipated future cash flows resulting software products acquired cats gmbh indicate recoverability portion developed core technology reasonably assured estimated fair value developed core technology determined calculating present value estimated future cash flows operating results cats included consolidated statements operations since date acquisition following unaudited pro forma results operations year ended december 31 1998 presented informational purposes assuming company acquired cats january 1 1998 32 million charge inprocess research development excluded pro forma results represents material nonrecurring charge faro technologies inc subsidiaries notes consolidated financial statementscontinued pro forma results operations prepared comparative purposes purport indicative results operations actually would resulted acquisition occurred date indicated may result future 3 supplemental cash flow information selected cash payments non cash activities follows 4 allowance doubtful accounts allowance doubtful accounts follows 5 inventories net consist following faro technologies inc subsidiaries notes consolidated financial statementscontinued allowance obsolete slowmoving inventory follows 6 intangible assets intangible assets consist following 8 notes payable debt company available line credit 1000000 drawings line credit bear interest equivalent 30day commercial paper rate plus 265 amounts outstanding line credit december 31 2000 1999 faro technologies inc subsidiaries notes consolidated financial statementscontinued longterm debt consists following longterm debt 49260 17490 included longterm liabilities accompanying consolidated balance sheet december 31 2000 1999 respectively longterm debt december 31 2000 due follows 200117397 200217834 200316264 20046403 2005 5996 thereafter2762 secured note collateralized telephone system repaid full 2000 1999 subsidiary financed purchase motor vehicle term loan expires 2003 2000 subsidiary entered capital leases automotive equipment initial term 36 60 months present value minimum lease payments due lease agreements included longterm debt december 31 2000 9 related party transactions leasesthe company leases plant office building xenon research inc xenon 26 shareholder pursuant terms lease agreement expires 2006 company fiveyear renewal option base rent renewal periods reflect changes us bureau labor statistics consumer price index urban consumers rent expense lease approximately 355000 2000 358000 1999 300000 1998 related party loanson june 20 2000 company former cats shareholders entered amended restated loan agreement pursuant company granted loans former cats shareholders aggregate amount 11 million loans outstanding term three years interest rate approximately 43 grant borrowers option extend term additional three years see note 2 notes consolidated financial statements 10 income taxes income loss income taxes consisted following faro technologies inc subsidiaries notes consolidated financial statementscontinued components income tax expense benefit follows faro technologies inc subsidiaries notes consolidated financial statementscontinued components companys net deferred tax asset december 31 2000 1999 follows december 31 2000 companys foreign subsidiaries deferred tax assets relating net operating loss carryforwards expire intangible assets 3360729 3131325 respectively financial reporting purposes valuation allowance 6492054 recognized offset deferred tax assets relating net operating losses intangible assets 11 commitments contingencies leasesthe following schedule future minimum lease payments required noncancelable operating leases including leases related parties see note 9 effect december 31 2000 rent expense 2000 1999 1998 approximately 1100000 973000 641000 respectively faro technologies inc subsidiaries notes consolidated financial statementscontinued litigationthe company involved pending legal proceedings routine litigation arising ordinary course business company believe results litigation even outcome unfavorable company would material adverse effect companys business financial condition results operations 12 stock option plans stock warrants company three stock option plans provide granting stock options key employees nonemployee members board directors 1993 stock option plan 1993 plan 1997 employee stock option plan 1997 plan provide granting incentive stock options nonqualified stock options officers key employees company nonemployee director plan provides granting nonqualified stock options formula options nonemployee directors additionally connection initial public offering 1997 company issued warrants purchase 100000 shares common stock 1320 per share warrants expire 2002 company authorized grant options 1000000 shares common stock 1993 plan 295997 133218 options granted exercise prices 36 360 respectively options vest primarily 3 4 year periods company authorized grant options 1400000 shares common stock 1997 plan 1099644 options granted exercise prices 263 1430 meant qualify treatment incentive stock options vest threeyear period company authorized grant 250000 shares common stock nonemployee director plan nonemployee director granted 3000 options upon election board directors formula options formula options granted directors generally granted upon terms conditions options granted officers employees options vest threeyear period additionally 1997 certain nonemployee directors granted options purchase 160000 common stock consideration prior service board directors options vested upon grant exercise price 12 additionally companys 1997 nonemployee directors fee plan authorized issue 250000 shares common stock permits nonemployee directors elect receive directors fees form common stock rather cash common stock issued lieu cash directors fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter compensation cost charged operations associated companys stock option plans 123404 168912 172164 2000 1999 1998 respectively compensation cost based difference value stock date grant exercise price multiplied number shares vested year faro technologies inc subsidiaries notes consolidated financial statementscontinued summary stock option activity weighted average exercise prices follows summary stock options outstanding exercisable december 31 2000 follows remaining nonexercisable options december 31 2000 become exercisable follows faro technologies inc subsidiaries notes consolidated financial statementscontinued compensation cost companys stockbased compensation plans determined consistent sfas 123 companys net earnings per share would follows company used blackscholes optionpricing model determine fair value grants made following assumptions applied determining pro forma compensation cost effects applying sfas 123 pro forma disclosures representative effects expected reported net income loss income per share future years since disclosures reflect compensation expense options granted prior 1996 13 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented 14 benefit plan company maintains 401k defined contribution retirement plan us employees provides benefits employees meeting certain age service requirements company may make discretionary contribution plan year determined board faro technologies inc subsidiaries notes consolidated financial statementscontinued directors discretionary contributions employer matches made participants account cannot exceed 6 compensation company contribution expense 2000 approximately 35000 company made contributions plan prior 2000 15 segment geographic data company develops manufactures markets supports computer aided design cadbased quality assurance products cadbased inspection statistical process control software one line business represents 99 consolidated sales company operates sales teams established geographic area team equipped deliver entire line company products customers within geographic area company aggregated sales teams single operating segment result similarities nature products sold type customers methods used distribute companys products following table presents information company geographic area geographical information represents sales respective countries whereas longlived assets held respective countries 16 quarterly results operations unaudited faro technologies inc subsidiaries notes consolidated financial statementscontinued fourth quarter 1999 includes unusual charges approximately 3073000 related impairment existing developed core software technology acquired cats gmbh unusual charges approximately 900000 related obsolete inventory writedown demonstration inventory identified worldwide physical inventory unusual charges approximately 1200000 related writeoff certain patents capitalized research development costs due changes technology item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries december 31 2012 2011 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2012 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2012 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states faro technologies inc subsidiaries’ internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 27 2013 expressed unqualified opinion grant thornton llp orlando florida february 27 2013 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2012 2011 2010 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2012 2011 2010 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement imaging systems manufacturing industrial building construction forensic applications company’s principal products include faroarm faro laser scanarm faro gage articulated electromechanical measuring devices faro laser tracker ion faro focus3d faro 3d imager amp laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 532 375 december 31 2012 2011 respectively company intend repatriate funds accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately 6 12 months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty company relies upon past sales history future sales forecasts provide basis determination reserve inventory considered obsolete company withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered excess quantity hand exceeds 12 months remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory company’s products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows machinery equipment 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset remaining term lease exceed 7 years depreciation expense 5769 5394 4842 2012 2011 2010 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test company believes result qualitative assessment likely fair value reporting unit less carrying amount first second steps goodwill impairment test unnecessary company elected early adopt accounting guidance beginning fourth quarter 2011 prospective basis goodwill impairment tests necessary performing qualitative assessment goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows “dcf” reporting unit carrying amount reporting unit exceeds fair value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2012 2011 2010 intangible assets principally include patents existing product technology customer relationships arose connection company’s acquisitions iqvolution ag dimensional photonics international intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years product technology patents recorded cost amortization computed using straightline method lives patents longlived assetslonglived assets goodwill indefinite lived intangible assets evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded impairment assets years ended december 31 2012 2011 2010 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability embedded twelvemonth warranties included products creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month included cost salesservice accompanying consolidated statements operations repair rate multiplied number installationmonths warranty product group sold period determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installation month major product group number units remaining warranty remaining number months unit warranty expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred tax assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income twoyear period company recognizes tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions less 50 likelihood tax benefit sustained tax benefit recognized financial statements ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities due shortterm nature carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share concentration credit riskfinancial instruments expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards june 2011 financial accounting standards board “fasb” issued accounting standards update “asu” 201105 comprehensive income topic 220 presentation comprehensive income “asu 201105” asu 201105 requires companies present components net income comprehensive income either one continuous statement two consecutive statements eliminates option present components comprehensive income part changes shareholders’ equity standard change items must reported comprehensive income items measured must reclassified net income company elected present components net income comprehensive income two consecutive statements asu 201105 effective interim annual periods beginning december 15 2011 adoption asu 201105 quarter ended march 31 2012 subsequent periods impacted presentation effect company’s consolidated financial statements financial condition december 2011 fasb issued asu 201112 comprehensive income topic 220 deferral effective date amendments presentation reclassifications items accumulated comprehensive income accounting standards update 201105 “asu 201112” asu 201112 defers specific requirement present items reclassified accumulated comprehensive income net income separately respective components net income comprehensive income part update fasb defer requirement report comprehensive income either single continuous statement two separate consecutive financial statements february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income “asu 201203” effective reporting periods beginning december 31 2012 specific requirements asu 201302 expected impact company’s consolidated financial statements 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts 4 shortterm investments shortterm investments 650 million december 31 2012 2011 comprised us treasury bills mature june 13 2013 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost fair value us treasury bills december 31 2012 2011 approximated cost 5 inventories consist following 6 goodwill company’s goodwill december 31 2012 2011 related previous acquisitions three businesses company evaluates reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value company first performs qualitative assessment determine whether necessary perform twostep goodwill impairment test step 1 quantitative goodwill impairment test performed fair value reporting unit measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2012 americas region europeafrica region asia pacific region shown table december 31 2012 2011 company goodwill identified impaired changes goodwill 02 million 2012 04 million 2011 due adjustments changes foreign exchange rates related acquisition made 2005 7 intangible assets intangible assets consist following amortization expense 1207 1318 1484 2012 2011 2010 respectively estimated amortization expense years 2013 2017 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2012 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended expires march 31 2015 company drawn line credit 2012 2011 10 capital leases assets capital leases 230 401 december 31 2012 2011 respectively accumulated depreciation assets capital leases 195 294 december 31 2012 2011 respectively 11 expense net expense net consists following 12 income taxes december 31 2012 2011 company’s gross unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company subsidiaries file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2012 company recognizes accrued interest penalties related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2005 forward state level subject three five year statute limitations united states internal revenue service “irs” commenced examination company’s 2009 income tax returns june 2011 currently process company believes provided appropriately uncertain tax positions may arise effective income tax rate 2012 2011 2010 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 09 million 005 per share year ended december 31 2012 09 million 005 per share year ended december 31 2011 02 million 001 per share year ended december 31 2010 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional sixyear extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 03 million 002 per share year ended december 31 2012 03 million 002 per share year ended december 31 2011 07 million 004 per share year ended december 31 2010 december 31 2012 2011 company’s domestic entities deferred income tax assets amount 4264 4957 respectively december 31 2012 2011 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 5 15 years others carried forward indefinitely 14826 14939 respectively financial reporting purposes valuation allowance 11763 11760 respectively recognized offset deferred tax assets relating net operating losses company maintains valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company released valuation allowance approximately 12 million year ended december 31 2010 related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company recognized us tax expense undistributed international earnings intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 671 million 508 million december 31 2012 2011 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary income taxes consists following components income tax expense follows income tax expense years ended december 31 2012 2011 2010 differs amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows 13 commitments contingencies leases company leases buildings equipment operating leases 2019 following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2012 rent expense 2012 2011 2010 4917 5176 4044 respectively patent matters july 11 2008 metris usa inc affiliates metris nv metris ipr nv 3d scanners ltd filed complaint company patent infringement us district court district massachusetts “massachusetts court” concerning us patent nos 6611617 7313264 hereinafter “patentsinsuit” following acquisition nikon corporation late 2009 metris usa inc subsequently changed name nikon metrology inc metris nv changed name nikon metrology nv metris ipr nv dissolved merged nikon metrology nv refer nikon metrology inc nikon metrology nv 3d scanners ltd “plaintiffs” “nikon” company responded complaint counterclaims alleging patentsinsuit generally directed laser scanning devices invalid noninfringed unenforceable due fraud prosecution patents us patent trademark office august 31 2009 massachusetts court granted company’s motion add counterclaims defenses violation federal state antitrust unfair competition laws based alleged knowing assertion invalid fraudulent patents company also filed amended counterclaim add plaintiff’s parent company nikon corporation counterclaim defendant july 14 2010 company filed motion summary judgment noninfringement patentsinsuit august 31 2010 nikon filed motion summary judgment company’s counterclaims antitrust violations unfair trade practices september 19 2011 massachusetts court ruled company infringe us patent 6611617 massachusetts court also granted nikon’s motion summary judgment company’s counterclaims antitrust violations unfair trade practices massachusetts court denied company’s motion summary judgment noninfringement us patent 7313264 effect ruling reduce eliminate company’s exposure respect claims associated us patent 6611617 patent dispute respect us patent 7313264 continued august 10 2012 following twoweek jury trial remaining claims related us patent 7313264 jury determined asserted patent claims invalid august 13 2012 massachusetts court entered judgment company massachusetts court sustained verdict january 23 2013 hearing company’s motion attorneys’ fees occurred february 4 2013 company awaiting results hearing litigation mentioned company involved legal proceedings routine litigation arising normal course business none company believes material adverse effect company’s business financial condition results operations 14 stock compensation plans company four stock option plans provide granting stock options sharebased awards key employees nonemployee members board directors 1997 employee stock option plan “1997 plan” provides granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director stock option plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors company authorized grant awards 1400000 shares common stock 1997 plan options outstanding company also authorized grant awards 250000 shares common stock 1997 nonemployee stock option director plan 3000 options currently outstanding exercise price 2156 company also authorized grant awards 1750000 shares common stock 2004 plan 230019 options currently outstanding exercise prices 1304 3106 944 restricted stock units outstanding stock price 2430 options restricted stock units 10year term 7 years grants beginning 2010 vest 3year period company make grants 1997 plan 1997 nonemployee stock option director plan 2004 plan company authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminate expire unexercised canceled forfeited lapse reason 598485 options currently outstanding 2009 plan exercise prices 1704 5701 prior 2009 upon election board nonemployee director granted 3400 restricted shares common stock vested ratably three years day following annual meeting shareholders nonemployee director nonemployee director received initial equity grant year granted 2200 restricted shares common stock vested ratably three years beginning 2009 upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually first business day following annual meeting shareholders nonemployee director granted restricted shares common stock value equal 70000 calculated closing share price day shares restricted stock vest day prior following year’s annual meeting date subject director’s continued membership board company records compensation cost associated restricted stock unit grants straightline basis vesting term compensation costs charged operations associated company’s stock incentive plans 4080 2756 2416 2012 2011 2010 respectively changes stock option associated compensation cost due vesting options accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2012 2011 2010 2228 1415 930 respectively aggregate intrinsic value stock options exercised years ended december 31 2012 2011 2010 71 million 104 million 07 million respectively total fair value stock options using blackscholes option pricing model vested years ended december 31 2012 2011 2010 17 million 16 million 17 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2012 december 31 2012 65 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 19 years 15 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 238266 0 605506 potentially dilutive securities included 2012 2011 2010 respectively antidilutive 16 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees company terminated matching contributions april 18 2009 reinstated march 1 2011 costs charged operations connection 401k plan 2012 2011 aggregated 876 640 respectively 17 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company includes costs related corporate americas region company incur rd expenses asia region company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total consolidated revenue net sales external customers based upon geographic location customer long lived assets consist primarily property plant equipment goodwill attributed geographic area located originated 18 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2016 2015 related consolidated statements operations comprehensive income loss shareholders’ equity cash flows three years period ended december 31 2016 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2016 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2016 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 24 2017 expressed unqualified opinion grant thornton llp orlando florida february 24 2017 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive income loss accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2016 2015 2014 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2016 2015 2014 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “faro” “company” “us” “we” “our” design develop manufacture market support software driven threedimensional 3d measurement imaging realization systems technology permits highprecision 3d measurement imaging comparison parts complex structures within production quality assurance processes devices used inspection components assemblies rapid prototyping reverse engineering documenting large volume structures 3d surveying construction well investigation reconstruction accident sites crime scenes sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety forensics cultural heritage applications faroarm® faro laser scanarm® faro gage® faro laser trackertm faro laser projector faro cobalt array imager companion cam2® buildit software solutions provide computeraided design cad based inspection factorylevel statistical process control highdensity surveying laserguided assembly production together products integrate measurement quality inspection reverse engineering functions cad 3d software improve productivity enhance product quality decrease rework scrap manufacturing process mainly supporting applications factory metrology vertical faro focus faro scanner freestyle3dx laser scanners companion scene faro pointsense faro public safety forensics software offerings utilized wide variety 3d modeling documentation highdensity surveying applications construction building information modelingconstruction information management “construction bimcim” public safety forensics verticals faro laser scanarm® faro cobalt array imager faro scanner freestyle3dx laser scanners companion scene software also enable fully digital workflow used capture real world geometry purpose empowering design enabling innovation speeding design cycle supporting product design vertical faro visual inspecttm enables large complex 3d cad data transferred tablet device used mobile visualization comparison real world conditions facilitating inprocess inspection assembly guidance positioning applications factory metrology construction bimcim verticals reportable segmentsduring fiscal 2016 evaluated reportable segment structure based new management organization changes implemented connection initiatives reorganize business around certain vertical markets result assessment report activities following three reportable segments • factory metrology segment provides solutions manual automated measurement inspection industrial manufacturing environment applications include alignment part inspection dimensional analysis first article inspection incoming inprocess inspection machine calibration noncontact inspection robot calibration tool building setup assembly guidance • construction bimcim segment provides solutions asbuilt data capturing 3d visualization building information modeling construction information management applications allowing customers architecture engineering construction markets quickly accurately extract 2d 3d measurement points applications include asbuilt documentation construction monitoring surveying asset facility management heritage preservation • segment includes product design public safety forensics 3d solutions operating segments product design organization provides advanced 3d solutions assist engineering design movable object enabling full digital workflow applications include reverse engineering virtual simulation public safety forensics organization provides solutions public safety officials professionals capture environmental situational scenes 2d 3d crime crash fire scene investigations environmental safety evaluations 3d solutions organization provides customized 3d solutions customers require customized 3d measurement realization solutions otherwise addressed offtheshelf product offerings operating segments meet criteria reportable segments aggregated category combined based aggregation criteria quantitative thresholds accordance provisions financial accounting standards board “fasb” accounting standards codification “asc” topic 280 “segment reporting” “fasb asc topic 280” new reportable segments determined accordance internal management structure based operating activities evaluate business performance based upon several metrics using profitable revenue growth segment profit primary financial measure change total consolidated financial condition results operations previously reported result change reportable segments report segment information accordance provisions fasb asc topic 280 see note 17 “segment reporting” information principles consolidationour consolidated financial statements include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income foreign currency transaction gains losses included income revenue recognition product warranty extended warranty contractsrevenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related measurement imaging realization equipment related software generally recognized upon shipment consider earnings process complete shipping date related software sold equipment function together deliver tangible product’s essential functionality fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support pcs generally establish vendorspecific objective evidence vsoe fair value pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenues presented net salesrelated taxes cash equivalentswe consider cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents deposits foreign banks totaling 873 million 712 million december 31 2016 2015 respectively intend repatriate funds see note 12 “income taxes” accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due make judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages write accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout “fifo” method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging realization devices utilized sales representatives present products customers third quarter 2015 management reassessed certain inventory policies based thencurrent sales customer trends light new product introductions impacting entire product portfolio result policy amendments management expects sales demonstration inventory held sales representatives three years time would refurbished transferred finished goods used equipment stated lo wer cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins sales demonstration inventory remains classified inventory available sale required refurbishment prior sale minimal service inventory typically used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining useful life typically three years reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed beginning date asset placed service using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 10933 9238 6171 2016 2015 2014 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes business combinationswe allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2016 2015 2014 intangible assets principally include patents existing product technology customer relationships arose connection acquisitions intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2016 2015 indefinitelived intangible assets product technology patents recorded cost amortization computed using straightline method lives product technology patents 7 20 years remaining weightedaverage amortization period intangible assets nine years longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded indications impairment assets years ended december 31 2016 2015 2014 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantieswe establish time sale liability one year warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future income taxeswe review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred tax assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income least twoyear period recognize tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes earnings per share epsbasic earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee director stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method reconciliation number common shares used calculation basic diluted eps presented note 15 “earnings per share” accounting stockbased compensationwe several stockbased employee director compensation plans described fully note 14 “stock compensation plans” measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition estimated date grant using blackscholes optionpricing model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant additionally calculating compensation expense awards also required estimate extent awards forfeited prior vesting many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates forfeiture differ current estimates amounts recorded cumulative adjustment previously recorded amounts expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation adjusted estimated forfeitures using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation adjusted estimated forfeitures straightline basis requisite service period separately vesting portion award taking account probability satisfy performance conditions furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive excess tax benefits credited additional paidin capital deduction reduces cash taxes payable tax deductions excess compensation cost classified financing cash inflows consolidated statements cash flows concentration credit riskfinancial instruments expose us concentrations credit risk consist principally shortterm investments operating demand deposit accounts policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits continually monitor banking relationships believe exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards october 2016 fasb issued accounting standards update “asu” 201616 income taxes topic 740 intraentity transfers assets inventory “asu 201616” removes prohibition asc 740 immediate recognition current deferred income tax effects intraentity transfers assets inventory asu requires tax effects intercompany transactions sales inventory recognized transfer occurs instead deferred transferred asset sold third party otherwise recovered use asset new guidance must applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption effective annual periods beginning december 15 2017 interim period therein early adoption permitted expect adoption guidance material impact consolidated financial statements august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments “asu 201615” clarifies companies present classify certain cash receipts cash payments statement cash flows asu 201615 effective annual periods beginning december 15 2017 interim periods therein early adoption permitted expect adoption guidance material impact consolidated financial statements may 2014 fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” amending accounting guidance related revenue recognition asu subsequently issued amendments revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services additional disclosures required provide nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract asu subsequently issued amendments revenue recognition accounting guidance effective us january 1 2018 permit use either retrospective cumulative effective transition method yet selected transition method determined effect revenue recognition accounting guidance ongoing financial reporting march 2016 fasb issued asu 201609 compensation stock compensation topic 718 improvements employee sharebased payment accounting “asu 201609” intended simplify several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities classification statement cash flows asu 201609 became effective annual periods beginning december 15 2016 interim periods therein fiscal year 2017 adopted asu 201609 effective january 1 2017 new guidance excess tax benefits previously recognized related tax deduction reduced current taxes payable recorded modified retrospective basis achieved cumulativeeffect adjustment retained earnings beginning period new guidance adopted historically recognized excess tax benefits option exercised share vested since us net operating loss carryforward therefore tax benefit allowed current guidance adjustment retained earnings required new guidance taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows effective january 1 2017 adopted portion guidance prospective basis approach incorporates net inflow outflow taxrelated cash flows resulting sharebased payments deferred income tax benefit expense line item presents along income tax cash flows operating activities statement cash flows also elected account forfeitures related service conditionbased awards occur effective january 1 2017 change treatment estimating forfeitures previous years however continue assess performance conditionbased awards quarterly required adopting new policy using modified retrospective approach assessed cumulative effect adjustment recorded retaining earnings difference amount compensation cost previously recorded amount would recorded without assuming forfeitures cumulative effect adjustment recorded retained earnings material continue assess impact adopted guidance quarterly basis expect adoption guidance material impact consolidated financial statements february 2016 fasb issued asu 201602 leases topic 842 “asu 201602” intended increase transparency comparability among organizations recognizing lease assets lease liabilities balance sheet disclosing key information leasing arrangements enable users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 must applied modified retrospective basis effective fiscal years beginning december 15 2018 interim periods within years early adoption permitted evaluating impact adopting standard consolidated financial statements related disclosures july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory “asu 201511” changes measurement principle inventory lower cost market lower cost net realizable value asu 201511 defines net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation new guidance must applied prospective basis became effective fiscal years beginning december 15 2016 fiscal year 2017 interim periods within years early adoption permitted adopted asu 201511 effective january 1 2017 adoption standard material impact consolidated financial statements reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current period presentation example • certain prior year stock compensation expenses reclassified cost sales general administrative selling marketing research development expenses accompanying consolidated financial statements reflect appropriate departmental costs • goodwill balances activity presented note 6 “goodwill” year ended december 31 2015 reclassified conform current period presentation result realignment reporting units • third quarter 2016 reclassified certain service costs previously classified product costs reclassification material impact either current prior years prior year amounts reclassified consolidated financial statements 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts activity allowance doubtful accounts follows 4 shortterm investments shortterm investments december 31 2016 consisted us treasury bills totaling 429 million mature june 15 2017 shortterm investments december 31 2015 consisted us treasury bills totaling 430 million matured april 14 2016 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost plus accrued interest approximates fair value fair value us treasury bills december 31 2016 december 31 2015 classed level 1 traded sufficient frequency volume enable us obtain pricing information ongoing basis discussion fair value refer note 10 “fair value measurements” 5 inventories consist following 6 goodwill december 31 2016 2015 related previous acquisitions evaluate reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value first perform qualitative assessment determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount necessary perform twostep goodwill impairment test step 1 quantitative goodwill impairment test performed fair value reporting units measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit market approach key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment market approach relies analysis publiclytraded companies similar us derives range revenue profit multiples publiclytraded companies used market approach selected based defined peer group resulting multiples applied reporting unit determine fair value impairments goodwill charged earnings period impairment identified 2016 realigned organizational structure focus five operating segments factory metrology construction bimcim product design public safety forensics 3d solutions result change new operating segments 2016 realigned reporting units goodwill tested december 31 2016 factory metrology construction bimcim public safety forensics shown table goodwill amounts year ended december 31 2015 reclassified conform current period presentation december 31 2016 2015 goodwill identified impaired increase goodwill 2016 2015 reflected acquisitions completed periods partially offset changes foreign exchange rates 7 intangible assets intangible assets consist following amortization expense 2935 1979 1257 2016 2015 2014 respectively estimated amortization expense years 2017 2021 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 entered loan agreement providing available line credit 30 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 amended restated loan agreement required us maintain minimum cash balance 25 million tangible net worth measured end fiscal quarters term amended restated loan agreement amended expired march 31 2015 extend loan agreement draw line credit 2015 2014 10 fair value measurements guidance fair value measurements disclosures defines fair value establishes framework measuring fair value requires enhanced disclosures assets liabilities measured fair value fair value defined price asset could exchanged current transaction knowledgeable willing parties liability’s fair value defined amount would paid transfer liability new obligor amount would paid settle liability creditor available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models used determine fair value models employ valuation techniques involve level management estimation judgment degree dependent price transparency instruments market instruments’ complexity assets liabilities recorded fair value recurring basis consolidated balance sheets categorized based upon level judgment associated inputs used measure fair value hierarchical levels defined guidance fair value measurements directly related amount subjectivity associated inputs fair valuation assets liabilities follows level 1 valuation based upon quoted market price identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques fair value recurring basis assets liabilities measured fair value recurring basis categorized tables based upon lowest level significant input valuations 1 shortterm investments accompanying consolidated balance sheets sixmonth us treasury bills fair values assets based level 1 inputs fair value hierarchy 2 contingent consideration liability represents arrangements pay former owners certain companies acquired undiscounted maximum payment arrangements 79 million based future revenues gross profits certain milestones estimated fair value contingent consideration using monte carlo simulation based significant inputs primarily forecasted future results acquired businesses observable market thus represents level 3 measure year ended december 31 2016 paid 08 million part arrangements payments arrangements due year ended december 31 2015 remaining change fair value contingent consideration december 31 2015 december 31 2016 related changes foreign currency exchange rates 11 expense income net expense income net consists following 12 income taxes income loss income tax expense benefit consists following components income tax expense benefit income taxes follows reconciliations income tax expense us federal statutory income tax rate compared actual income tax expense benefit summarized components net deferred income tax asset liabilities follows effective income tax rate 2016 2015 2014 includes reduction statutory corporate tax rates operations switzerland aggregate dollar effect favorable tax rate approximately 10 million 006 per share year ended december 31 2016 27 million 016 per share year ended december 31 2015 19 million 011 per share year ended december 31 2014 domestic entities deferred income tax assets amount 78 million 52 million december 31 2016 december 31 2015 respectively december 31 2016 2015 foreign subsidiaries deferred tax assets primarily relating net operating losses 64 million 66 million respectively expire next 1 9 years others carried forward indefinitely valuation allowance deferred tax assets december 31 2016 2015 09 million 08 million respectively net change total valuation allowance years ended december 31 2016 2015 2014 01 million increase 10 million 50 million decrease respectively year ended december 31 2014 identified certain immaterial errors related deferred tax assets related valuation allowance result decreased deferred tax assets related valuation allowance 47 million correct grossup error december 31 2014 believe error material consolidated financial statements prior interim annual periods correction error material 2014 consolidated financial statements valuation allowance december 31 2016 2015 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment primary change impacting valuation allowance year ended december 31 2016 related changes foreign statutory tax rates recognized us tax expense undistributed international earnings intend reinvest earnings outside us foreseeable future net undistributed international earnings approximately 1314 million 1195 million december 31 2016 2015 respectively significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain review tax contingencies regular basis make appropriate accruals necessary december 31 2016 2015 unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties estimate unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2016 recognize accrued interest penalties related unrecognized tax benefits income tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million currently anticipate total amount unrecognized tax benefits result material changes financial position subject income taxes federal state foreign country level tax returns subject examination us federal level 2013 forward state level subject three four year statute limitations depending state fourth quarter 2016 internal revenue service notified company examination 2014 us federal income tax return date examination procedures performed issues identified 13 commitments contingencies leases lease buildings equipment noncancellable operating leases 2026 leases include costescalation clauses costescalation clauses recognized straightline basis lease term following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2016 rent expense 2016 2015 2014 7720 6874 6119 respectively purchase commitments enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2016 approximately 294 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions december 31 2016 also 303 million longterm commitments purchases delivered 12 months legal proceedings involved legal proceedings routine litigation arising normal course business none believe material adverse effect business financial condition results operations 14 stock compensation plans three compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” 2014 equity incentive plan “2014 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors authorized grant awards 1750000 shares common stock 2004 plan 3500 options outstanding december 31 2016 exercise price 2436 also authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 504658 options outstanding december 31 2016 2009 plan exercise prices 2430 5754 options outstanding 2004 plan 2009 plan 10year term 7 years grants beginning 2010 vest 3year period may 2014 shareholders approved 2014 plan authorizing us grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason 517171 options outstanding december 31 2016 2014 plan exercise prices 2998 6263 options outstanding 2014 plan 7year term generally vest 3year period make grants 2004 plan 2009 plan upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually nonemployee directors granted restricted shares equal 50 compensation first business day following annual meeting shareholders calculated using closing price common stock day shares restricted stock vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board record compensation cost associated restricted stock grants straightline basis vesting term annually upon approval compensation committee grant stock options restricted stock units certain employees also grant stock options restricted stock units certain new employees throughout year prior 2016 awards vested three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options 2015 granted performancebased stock options restricted stock units certain executives awards vest three annual installments beginning one year grant date applicable performance measures strategic objectives achieved related stockbased compensation expense recognized requisite service period taking account probability satisfy performance measures strategic objectives addition certain strategic objectives performancebased stock options restricted stock units granted 2015 earned vest based 1 achievement specified revenue eps targets 2 total shareholder return tsr relative tsr attained companies within defined peer group due tsr presence certain performancebased grants fair value awards determined using monte carlo simulation valuation model expense market condition awards threeyear vesting period regardless value award recipients ultimately receive february 2016 compensation committee determined number performancebased stock options restricted stock units earned 2015 performance period based performance strategic objectives achieved 2015 7225 stock options 226 restricted stock units earned vested 23328 stock options 677 restricted stock units determined unearned required metrics achieved grant performancebased stock options restricted stock units employees 2016 instead annual grant march 2016 consisted stock options restricted stock units subject timebased vesting number stock options andor restricted stock units granted based employee’s individual objectives performance operational metrics assigned employee overall contribution last year restricted stock unit awards vest full threeyear anniversary grant date stock options vest three equal annual installments beginning one year grant date fair value stockbased awards determined using current market price common stock grant date case restricted stock units b blackscholes option valuation model case stock options may 2016 granted aggregate 18615 restricted stock units certain nonexecutive key employees retention incentive recognition significant efforts required employees assist us executing initiatives 2016 reorganize business around certain vertical markets modernize sales process improve efficiency sales organization accelerate maintain consistent schedule new product introductions harmonize global functions improve effectiveness restricted stock unit awards vest full threeyear anniversary grant date fair value restricted stock units determined using current market price common stock grant date blackscholes option valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weightedaverage grantdate fair value stock options granted years ended december 31 2016 2015 2014 valued using blackscholes option valuation model 1290 1508 1938 per option respectively stock options granted years ended december 31 2016 2015 2014 valued using blackscholes option valuation model used following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued market condition awards granted year ended december 31 2016 monte carlo simulation valuation model used determine fair value stock options restricted stock units granted 2016 2015 granted performancebased stock options restricted stock units included presence market condition valued using monte carlo simulation model valuation model incorporates assumptions stock price volatility expected life options awards riskfree interest rate dividend yield assumptions used estimate fair value performancebased stock options restricted stock units granted 2015 valued monte carlo simulation model follows summary stock option activity weighted average exercise prices follows aggregate intrinsic value stock options exercised years ended december 31 2016 2015 2014 17 million 17 million 22 million respectively total fair value stock options vested years ended december 31 2016 2015 2014 38 million 39 million 37 million respectively following table summarizes restricted stock restricted stock unit activity weighted average grantdate fair values year ended december 31 2016 recorded total stockbased compensation expense associated stock incentive plans 5374 4306 4678 2016 2015 2014 respectively december 31 2016 83 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 18 years 15 earnings per share basic earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee director stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method reconciliation number common shares used calculation basic diluted earnings per share eps presented 16 employee retirement benefit plan maintain 401k defined contribution retirement plan eligible us employees costs charged operations connection 401k plan 2016 2015 2014 aggregated 1390 1334 1127 respectively 17 segment reporting three reportable segments factory metrology construction bimcim segments based upon vertical markets currently serve business activities meet criteria reportable segments aggregated category develop manufacture market support sell cadbased quality assurance products integrated cadbased inspection statistical process control software threedimensional documentation systems reportable segments activities represent 99 consolidated sales chief operating decision maker codm chief executive officer evaluates segment performance allocates resources based upon profitable growth use segment profit evaluate performance reportable segments segment profit calculated gross profit net selling marketing expenses reporting segment definition segment profit may comparable similarly titled measures reported companies segment structure presented represents change geographic segments due reorganization efforts taken place year ended december 31 2016 prior period amounts restated reflect change reporting segments employ consistent accounting policies following tables present information reportable segments years ended december 31 2016 2015 2014 net sales external customers based upon geographic location customer longlived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated 18 business combinations february 2015 completed acquisition aras 360 technologies inc “aras” purchase price net cash acquired 76 million paid cash hand subject certain additional postclosing adjustments additional 40 million contingent consideration may earned twoyear period none earned december 31 2016 aras privatelyheld business headquartered canada produces full suite accident crime reconstruction software tools offer advanced graphics analytical tools ability work large point cloud data acquisition complements portfolio within public safety forensics vertical march 2015 completed acquisition kubit gmbh purchase price net cash acquired 44 million paid cash hand subject certain additional postclosing adjustments additional 33 million contingent consideration may earned threeyear period 04 million earned december 31 2016 acquisition also included substantially assets kubit gmbh’s us distributor kubit usa inc collectively “kubit” kubit privatelyheld business operating facilities germany united states develops software surveying asbuilt documentation acquisition complements portfolio software products specifically construction bimcim vertical july 2016 acquired buildit software solutions ltd “buildit” purchase price net cash acquired 39 million paid cash hand subject certain additional postclosing adjustments buildit software solutions business located montreal canada specializes processconfigurable 3d metrology software solutions hardware agnostic interfaces addition buildit enhances metrology portfolio providing customers greater software options use variety applications reduce inspection assembly times increase productivity august 2016 acquired laser projection technologies inc “lpt” purchase price net cash acquired 172 million paid cash hand subject certain additional postclosing adjustments lpt located londonderry new hampshire specializes laser projection measurement systems used throughout manufacturing environments around globe maximize productivity efficiency acquisition enhances portfolio 3d measurement solutions supports longterm strategy expand presence key markets december 2016 acquired mwftechnology gmbh “mwf” purchase price net cash acquired 66 million paid cash hand subject certain postclosing adjustments mwf innovator mobile augmented reality solutions located near frankfurt germany provides technology enables large complex 3d cad data transferred tablet device use mobile visualization comparison real world conditions enables real time actionable manufacturing insight inprocess inspection assembly guidance positioning acquisitions aras kubit buildit lpt mwf constitute business combinations defined fasb asc topic 805 business combinations accordingly assets acquired liabilities assumed recorded fair values date acquisition purchase price allocations marked “preliminary” based information available make estimates fair value may change information becomes available additional analyses completed believe information provided reasonable basis estimating fair values may obtain information evidence measurement period may result changes estimated fair value amounts measurement period ends earlier one year acquisition date received information facts circumstances existed acquisition date subsequent adjustments necessary recognized period amounts determined refinements include 1 changes estimated fair value certain intangible assets acquired 2 changes deferred tax assets liabilities related fair value estimates purchase price allocations marked “final” represent final determination fair value assets acquired liabilities assumed acquisitions following summary allocations purchase price fair values assets acquired liabilities assumed date acquisition 1 goodwill arising acquisitions consists largely expected synergies combining operations well value workforce goodwill value expected tax deductible following details purchase price allocated intangible assets acquired acquisitions noted acquisition integration costs included components consideration transferred recorded expense period costs incurred date incurred approximately 10 million acquisition integration costs aras kubit buildit lpt mwf acquisitions pro forma results operations aras kubit buildit lpt mwf presented effects acquisitions individually aggregate material consolidated results operations 19 quarterly result operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries december 31 2010 2009 related statements operations shareholders’ equity comprehensive income cash flows three years period ended december 31 2010 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states faro technologies inc subsidiaries’ internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 25 2011 expressed unqualified opinion grant thornton llp orlando florida february 25 2011 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity comprehensive income years ended december 31 2010 2009 2008 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2010 2009 2008 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “company” “faro” design develop manufacture market support softwarebased threedimensional measurement imaging systems manufacturing industrial building construction forensic applications company’s principal products include faroarm faro laser scanarm faro gage articulated electromechanical measuring devices faro laser tracker ion faro focus3d faro 3d imager amp laserbased measuring devices markets company’s products include automobile aerospace heavy equipment law enforcement agencies company sells vast majority products direct sales force located many world’s largest industrialized countries principles consolidationthe consolidated financial statements company include accounts faro technologies inc subsidiaries intercompany transactions balances eliminated financial statements company’s foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income revenue recognition product warranty extended maintenance contractsrevenue related company’s measurement systems integrated combinations measurement device computer software loaded computer measurement device generally recognized upon shipment company considers earnings process substantially complete shipping date company warrants products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped company separately sells one three year extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended maintenance plans recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use company’s technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year cash equivalentsthe company considers cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents company deposits foreign banks totaling 34763 23181 december 31 2010 2009 respectively accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 3090 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due company makes judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages company writes accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts company generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring devices utilized sales representatives present company’s products customers products remain sales demonstration inventory approximately six twelve months subsequently sold prices produce slightly reduced gross margins service inventory comprised inventory expected sold within twelve months training loaned equipment property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed using straightline method estimated useful lives various classes assets follows leasehold improvements amortized straightline basis lesser life asset term lease exceed 7 years depreciation expense 4842 4143 3485 2010 2009 2008 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired indefinitelife identifiable intangible assets goodwill amortized tested impairment company performs annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs goodwill impairment test applied using twostep approach performing first step company calculates fair values reporting units using discounted cash flows reporting unit carrying amount reporting unit exceeds fair market value second step performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit calculated first step less fair values net tangible intangible assets reporting unit goodwill carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill management concluded goodwill impairment years ended december 31 2010 2009 2008 acquired intangibles principally include patents existing product technology customer relationships arose connection company’s acquisition iqvolution ag dimensional photonics international acquired intangibles recorded fair value date acquisition amortized estimated useful lives 3 15 years patents recorded cost amortization computed using straightline method lives patents longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded impairment assets years ended december 31 2010 2009 2008 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantiesthe company establishes liability included twelvemonth warranties creation warranty reserve estimate repair expenses likely incurred remaining period warranty measured installationmonths major product group warranty reserve reflected accrued liabilities accompanying consolidated balance sheets warranty expense estimated determining total repair expenses product group period determining rate repair expense per installation month repair rate multiplied number installationmonths warranty product group sold period determine provision warranty expenses period company evaluates exposure warranty costs end period using estimated expense per installation month major product group number units remaining warranty remaining number months unit warranty expenses historically within expectations company cannot guarantee continue future income taxesthe company reviews deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax liabilities projections future taxable income tax planning strategies company might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability company establishes valuation allowance net deferred assets taxing jurisdiction company operates unless “more likely not” company recover assets means future company’s evaluation need valuation allowance significantly influenced company’s ability achieve profitability company’s ability predict achieve future projections taxable income twoyear period company recognizes tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions less 50 likelihood tax benefit sustained tax benefit recognized financial statements ordinary course business company subsidiaries examined various federal state foreign tax authorities company regularly assesses potential outcomes examinations future examinations current prior years determining adequacy provision income taxes fair value financial instrumentsthe company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accruals due shortterm nature carrying amounts financial instruments approximate fair value earnings per sharebasic earnings per share “eps” computed dividing earnings available common shareholders weightedaverage number common shares outstanding period diluted eps includes effect dilutive stock options equity instruments reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share concentration credit riskfinancial instruments expose company concentrations credit risk consist principally shortterm investments operating demand deposit accounts company’s policy place operating demand deposit accounts high credit quality financial institutions estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standards january 1 2008 company adopted financial accounting standards board fasb accounting standards codification asc 82010 formerly statement financial accounting standards sfas 157 “fair value measurements disclosures” statement defines fair value establishes framework measuring fair value accordance us gaap expands disclosures fair value measurements statement require new fair value measurements rather applies accounting pronouncements require permit fair value measurements company previously adopted provisions pronouncement financial assets liabilities january 1 2008 effective january 1 2009 company adopted asc 82010 nonfinancial assets liabilities measured fair value nonrecurring basis adoption asc 82010 material impact company’s consolidated financial position results operations cash flows january 1 2009 company adopted fasb asc 80520 formerly sfas 141 revised “business combinationsidentifiable assets liabilities noncontrolling interest” asc 80520 asc 80520 requires acquirer recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date statement also requires acquirer business combination consummated stages recognize identifiable assets liabilities well noncontrolling interest acquiree full amounts fair values provisions asc 80520 effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 adoption asc 80520 material impact company’s financial position results operations january 1 2009 company adopted fasb asc 81010 formerly sfas 160 “consolidation” asc 81010 asc 81010 establishes accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary asc 81010 effective prospectively except certain retrospective disclosure requirements fiscal years beginning december 15 2008 adoption asc 81010 material impact company’s financial position results operations january 1 2009 company adopted fasb asc 81510 formerly sfas 161 “derivatives hedging” asc 81510 statement requires enhanced disclosures entity’s derivative hedging activities asc 81510 effective financial statements issued fiscal years interim periods beginning november 15 2008 adoption asc 81510 material impact company’s consolidated financial statements june 2009 fasb issued guidance codified within asc topic 810 consolidation asc 810 asc 810 requires entities perform analysis determine whether enterprise’s variable interest interests give controlling financial interest variable interest entity analysis identifies primary beneficiary variable interest entity one power direct activities variable interest entity significantly impact entity’s economic performance obligation absorb losses entity could potentially significant variable interest guidance effective beginning annual reporting period commencing november 15 2009 early adoption prohibited adoption asc 810 january 1 2010 material effect company’s financial position results operations october 2009 fasb issued accounting standards update asu 200913 multipledelivery revenue arrangements asu 200913 asu 200913 establishes accounting reporting guidance arrangements including multiple revenuegenerating activities provides amendments criteria separating deliverables measuring allocating arrangement consideration one units accounting amendments asu 200913 also establish selling price hierarchy determining selling price deliverable significantly enhanced disclosures also required asu 200913 provide information vendor’s multipledeliverable revenue arrangements including information nature terms significant deliverables performance within arrangements amendments also require reporting company provide information significant judgments made changes judgments application relative sellingprice method affects timing amount revenue recognition amendments asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early application permitted company implemented new standard january 1 2011 expect adoption asu 200913 material impact consolidated financial statements january 2010 fasb issued asu 20106 improving disclosures fair value measurements asu 20106 requires reporting entities make new disclosures recurring nonrecurring fairvalue measurements including significant transfers level 1 level 2 fairvalue measurements information purchases sales issuances settlements gross basis reconciliation level 3 fairvalue measurements asu 20106 effective annual reporting periods beginning december 15 2009 except level 3 reconciliation disclosures effective annual periods beginning december 15 2010 adoption asu 20106 material impact company’s consolidated financial statements expected material impact portion effective 2010 year end july 2010 fasb issued guidance enhance disclosures credit quality creditor’s financing receivables adequacy allowance credit losses amended guidance effective periodend balances beginning first interim annual reporting period ending december 15 2010 amended guidance effective activity reporting period beginning first interim annual reporting period beginning december 15 2010 company expects amended guidance impact disclosures future periods otherwise significant effect consolidated financial statements october 2009 fasb issued asu 200913 amends asc topic 605 “revenue recognition” guidance relates determination individual deliverables included multipleelement arrangement may treated separate units accounting modifies manner transaction consideration allocated across individual deliverables also guidance expands disclosure requirements revenue arrangements multiple deliverables asu 200913 effective beginning january 1 2011 may applied retrospectively periods presented prospectively arrangements entered materially modified adoption date company expect asu 200913 material impact company’s consolidated financial statements 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts allowance doubtful accounts follows 4 short term investments shortterm investments 650 million december 31 2010 2009 comprised us treasury bills mature june 17 2011 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost fair value us treasury bills december 31 2010 2009 approximated cost 5 inventories consist following 6 goodwill company’s goodwill december 31 2010 2009 related acquisition three previous businesses company evaluates reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value recoverability goodwill measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment impairments goodwill charged earnings period impairment identified company three reporting units goodwill tested december 31 2010 americas region europeasia region asia pacific region shown table december 31 2010 2009 company goodwill identified impaired changes goodwill 09 million 2010 10 million 2009 adjustments changes foreign exchange rates related acquisition made 2005 7 intangible assets intangible assets consist following amortization expense 1484 1387 1021 2010 2009 2008 respectively estimated amortization expense years 2011 2015 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 company entered loan agreement providing available line credit 300 million recently amended june 18 2009 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 225 250 require company maintain minimum cash balance tangible net worth measured end company’s fiscal quarters december 31 2010 company compliance covenants amended restated loan agreement amended term amended restated loan agreement amended extends march 31 2012 company drawn line credit january 2010 company’s subsidiary china opened short term line credit expiring july 6 2010 bank china approximately 25 million bore interest 486 subsidiary drew approximately 25 million temporary loan process approving additional capital investment approved chinese government approval received loan repaid april 19 2010 10 capital leases assets capital leases 381 366 december 31 2010 2009 respectively accumulated depreciation assets capital leases 202 134 december 31 2010 2009 respectively 11 income expense net income expense net consists following 12 income taxes fiscal 2010 company decreased unrecognized tax benefit 04 million decrease due tax developments primarily related us operations impacted company’s valuation uncertain tax positions december 31 2010 company’s gross unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties company estimates unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows company subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2010 company recognizes accrued interest penalties related unrecognized tax benefits tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million faro currently anticipate total amount unrecognized tax benefits result material changes financial position company subject income taxes federal state foreign country level company’s tax returns subject examination us federal level 2005 forward state level subject three five year statute limitations united states internal revenue service “irs” commenced examination company’s 2005 2007 income tax returns late 2007 examination resulted assessment approximately 26 million related valuation certain intangible assets contributed foreign subsidiary company rd cost sharing arrangement entered 2001 assessment paid january 2010 included income tax expense year ended december 31 2009 company expect assessment prospective impact global effective tax rate company believes provided appropriately uncertain tax positions may arise company currently examination germany effective income tax rate 2010 2009 2008 includes reduction statutory corporate tax rates company’s operations switzerland favorable tax rate ruling requires company maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 02 million 001 per share year ended december 31 2010 12 million 007 per share year ended december 31 2009 21 million 013 per share year ended december 31 2008 2005 company opened regional headquarters began manufacture products singapore third quarter 2006 company received confirmation tax holiday operations singapore economic development board period four years commencing january 1 2006 additional six year extension favorable tax rate subject certain terms conditions including employment spending capital investment aggregate dollar effect favorable tax rate approximately 07 million 004 per share year ended december 31 2010 11 million 007 per share year ended december 31 2009 16 million 010 per share year ended december 31 2008 december 31 2010 2009 company’s domestic entities deferred income tax assets amount 4564 4789 respectively december 31 2010 2009 company’s foreign subsidiaries deferred income tax assets relating net operating loss carry forwards expire 5 15 years others carried forward indefinitely 14084 12181 respectively financial reporting purposes valuation allowance 11148 10603 respectively recognized offset deferred tax assets relating net operating losses company maintains valuation allowance net operating losses jurisdictions history earnings last three years company believes deferred tax assets morelikelythannot realized based upon twoyear projections taxable income company released valuation allowance approximately 12 million related net operating losses subsidiary germany result included group consolidated tax filing net taxable earnings company refundable income taxes related domestic net operating losses approximately 79 million incurred year ended december 31 2009 carried back 2005 2006 recorded prepaid expenses current assets accompanying consolidated balance sheets company recognized us tax expense undistributed international earnings intends reinvest earnings outside us foreseeable future company’s net undistributed international earnings approximately 384 million 390 million december 31 2010 2009 respectively significant judgment required determining company’s worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain company reviews tax contingencies regular basis makes appropriate accruals necessary income loss income taxes consists following components income tax expense follows income tax expense years ended december 31 2010 2009 2008 differs amount computed applying federal statutory corporate rate income taxes differences reconciled follows components company’s net deferred income tax asset follows 13 commitments contingencies leasesthe company leases buildings equipment operating leases 2019 following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2010 rent expense 2010 2009 2008 approximately 4044 4680 4644 respectively patent matterson july 11 2008 metris usa inc affiliates metris nv metris ipr nv 3d scanners ltd filed complaint company patent infringement us district court district massachusetts “massachusetts court” concerning us patent nos 6611617 7313264 hereinafter “patentsinsuit” following acquisition nikon corporation late 2009 metris usa inc subsequently changed name nikon metrology inc metris nv changed name nikon metrology nv metris ipr nv dissolved merged nikon metrology nv refer nikon metrology inc nikon metrology nv 3d scanners ltd “plaintiffs” “nikon” company responded complaint counterclaims alleging patentsinsuit generally directed laser scanning devices invalid noninfringed unenforceable due fraud prosecution patents us patent trademark office august 31 2009 massachusetts court granted company’s motion add counterclaims defenses violation federal state antitrust unfair competition laws based alleged knowing assertion invalid fraudulent patents company also filed amended counterclaim add plaintiff’s parent company nikon corporation counterclaim defendant january 29 2010 company filed motion summary judgment patentsinsuit unenforceable due inequitable conduct patent prosecution evidentiary hearings issue inequitable conduct commenced july 19 2010 concluded october 22 2010 posttrial briefing concluded december 10 2010 court yet issued decision july 14 2010 company filed motion summary judgment noninfringement patentsinsuit hearing date set addition first quarter 2010 nikon served supplemental interrogatory answer revising alleged date conception patentsinsuit earlier date company filed motion strike supplemental interrogatory answer parties waiting hearing date motion august 31 2010 nikon filed motion summary judgment company’s counterclaims antitrust violations unfair trade practices company filed opposition october 12 2010 hearing date set motion motions summary judgment expected filed mediation hearing conducted february 18 2011 company currently expects litigation continue company believes infringe patentsinsuit andor patentsinsuit invalid unenforceable company anticipate lawsuit material impact company however outcome difficult predict adverse determination could material impact company’s business financial condition results operations litigation mentioned company involved legal proceedings routine litigation arising normal course business none company believes material adverse effect company’s business financial condition results operations 14 stock compensation plans company four stock option plans provide granting stock options key employees nonemployee members board directors 1997 employee stock option plan “1997 plan” provides granting incentive stock options nonqualified stock options officers key employees company 1997 nonemployee director stock option plan provides granting nonqualified stock options formula options nonemployee directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors company authorized grant awards 1400000 shares common stock 1997 plan 57309 options currently outstanding exercise prices 150 2740 options 10 year term vest 3year period company also authorized grant awards 250000 shares common stock 1997 nonemployee stock option director plan 54000 options currently outstanding exercise prices 161 2156 company also authorized grant awards 1750000 shares common stock 2004 plan 780989 options currently outstanding exercise prices 1250 3145 10219 restricted stock units outstanding stock price 1304 3106 options restricted stock units 10year term 7 years grants beginning 2010 vest 3year period company make grants 1997 plan 1997 nonemployee stock option director plan 2004 plan company authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminate expire unexercised canceled forfeited lapse reason 206561 options currently outstanding 2009 plan exercise prices 1704 2551 prior 2009 upon election board nonemployee director granted 3400 restricted shares common stock vested ratably three years day following annual meeting shareholders nonemployee director nonemployee director received initial equity grant year granted 2200 restricted shares common stock vested ratably three years beginning 2009 nonemployee director granted restricted shares common stock value equal 70000 calculated closing share price day following annual meeting shareholders shares restricted stock vest first anniversary grant date subject director’s continued membership board company records compensation cost associated restricted stock unit grants straightline basis vesting term addition four stock incentive plans company 1997 nonemployee directors fee plan 1997 fee plan company authorized issue 250000 shares common stock permits nonemployee directors elect receive directors’ fees form common stock rather cash common stock issued lieu cash directors’ fees issued end quarter fees earned number shares based fair market value common stock five trading days immediately preceding last business day quarter 1997 fee plan also permits nonemployee directors irrevocably elect defer receipt portion shares common stock would otherwise payable compensation costs charged operations associated company’s stock incentive plans 2416 2449 2098 2010 2009 2008 respectively changes stock option associated compensation cost due vesting options accrual expenses relating issuance restricted stock company used blackscholes optionpricing model determine fair value grants made using following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2010 2009 2008 930 508 1399 respectively aggregate intrinsic value stock options exercised years ended december 31 2010 2009 2008 07 million 005 million 02 million respectively total fair value stock options using blackscholes optionpricing model vested years ended december 31 2010 2009 2008 17 million 17 million 081 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2010 december 31 2010 23 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 17 years 15 earnings per share reconciliation number common shares used calculation basic diluted earnings per share eps presented effect 605506 1030578 509290 potentially dilutive securities included 2010 2009 2008 respectively antidilutive 16 employee retirement benefit plan company maintains 401k defined contribution retirement plan eligible us employees company terminated matching contributions april 18 2009 costs charged operations connection 401k plan 2009 2008 aggregated 291 909 respectively 17 segment reporting company three reportable segments based upon geographic regions americas europeafrica asia pacific company includes costs related corporate americas region company incur rd expenses asia region company develops manufactures markets supports sells cadbased quality assurance products integrated cadbased inspection statistical process control software regions activities represent approximately 99 consolidated sales company evaluates performance allocates resources based upon profitable growth assets deployed following table presents information company’s reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total revenue 18 quarterly results operations unaudited item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors shareholders faro technologies inc subsidiaries audited accompanying consolidated balance sheets faro technologies inc florida corporation subsidiaries “company” december 31 2015 2014 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2015 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position faro technologies inc subsidiaries december 31 2015 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2015 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 29 2016 expressed adverse opinion grant thornton llp orlando florida february 29 2016 faro technologies inc subsidiaries consolidated balance sheets accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements operations accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements comprehensive loss income accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements shareholders’ equity years ended december 31 2015 2014 2013 accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries consolidated statements cash flows accompanying notes integral part consolidated financial statements faro technologies inc subsidiaries notes consolidated financial statements years ended december 31 2015 2014 2013 thousands except share per share data otherwise noted 1 summary significant accounting policies description businessfaro technologies inc subsidiaries collectively “faro” “company” “us” “we” “our” designs develops manufactures markets supports software driven threedimensional 3d measurement imaging realization systems sell majority products direct sales force across broad number customers range manufacturing industrial architecture surveying building information modeling construction public safety cultural heritage applications faroarm® faro laser scanarm® faro gage faro laser tracker™ faro cobalt array 3d imager companion cam2® software provide computeraided design cad based inspection andor factorylevel statistical process control highdensity surveying together products integrate measurement quality inspection reverse engineering functions cad software improve productivity enhance product quality decrease rework scrap manufacturing process faro focus3d faro freestyle3d laser scanners companion scene faro public safety software faro 3d software utilized wide variety 3d modeling documentation highdensity surveying applications including two key vertical markets building information modeling bimconstruction information management cim public safety principles consolidationour consolidated financial statements include accounts faro technologies inc subsidiaries wholly owned intercompany transactions balances eliminated financial statements foreign subsidiaries translated us dollars using exchange rates effect periodend assets liabilities average exchange rates reporting period results operations adjustments resulting financial statement translations reflected separate component accumulated comprehensive income foreign currency transaction gains losses included income revenue recognition product warranty extended warranty contractsrevenue recognized price fixed collectability reasonably assured title risks rewards ownership passed customer earnings process complete revenue related measurement imaging realization equipment related software generally recognized upon shipment consider earnings process complete shipping date related software sold equipment function together deliver tangible product’s essential functionality fees billed customers associated distribution products classified revenue warrant products defects design materials workmanship one year provision estimated future costs relating warranty expense recorded products shipped separately sell extended warranties extended warranty revenues recognized straightline basis term warranty costs relating extended warranties recognized incurred revenue sales software recognized significant production modification customization software required following criteria met persuasive evidence sales agreement exists delivery occurred sales price fixed determinable deemed collectible software arrangements generally include shortterm maintenance considered postcontract support pcs generally establish vendorspecific objective evidence vsoe fair value pcs component based maintenance renewal rate maintenance renewals sold recognized straightline basis term maintenance agreement revenues resulting sales comprehensive support training technology consulting services recognized services performed deferred billed advance performance services revenue licensing agreements use technology medical applications generally recognized licensees use technology amounts representing royalties current year received yearend estimated due based historical data recognized current year revenues presented net salesrelated taxes cash equivalentswe consider cash hand amounts deposit financial institutions maturities three months less purchased cash equivalents deposits foreign banks totaling 712 million 589 million december 31 2015 2014 respectively intend repatriate funds see note 12 income taxes accounts receivable related allowance doubtful accountscredit extended customers based evaluation customer’s financial condition generally collateral required accounts receivable generally due within 30 90 days stated amounts due customers net allowance doubtful accounts outstanding longer contractual payment terms considered past due make judgments collectability accounts receivable based historical trends future expectations management estimates allowance doubtful accounts adjusts gross trade accounts receivable net realizable value allowance doubtful accounts based analysis receivables possible impairment issues historical writeoff percentages write accounts receivable become uncollectible payments subsequently received receivables credited allowance doubtful accounts generally charge interest past due receivables inventoriesinventories stated lower cost net realizable value using firstin firstout fifo method shipping handling costs classified component cost sales consolidated statements operations sales demonstration inventory comprised measuring imaging realization devices utilized sales representatives present products customers third quarter 2015 management reassessed certain inventory policies based recent sales customer trends light new product introductions impacting entire product portfolio result recent policy amendments management expects sales demonstration inventory held sales representatives three years time would refurbished transferred finished goods used equipment stated lower cost net realizable value management expects refurbished units remain finished goods inventory sold within 12 months prices produce reduced gross margins reflect revised expectation 185 million sales demonstration inventory reclassified “inventories net” current asset “service sales demonstration inventory net” longterm asset december 31 2015 consolidated balance sheet addition reclassified 162 million sales demonstration inventory “inventories net” “service sales demonstration inventory net” consolidated balance sheet december 31 2014 reclassified 30 million sales demonstration inventory finished goods december 31 2014 conform current policy sales demonstration inventory remains classified inventory available sale required refurbishment prior sale minimal service inventory typically used provide temporary replacement product customer covered premium warranty customer’s unit requires service repair training equipment service inventory available sale however management expect service inventory sold within 12 months classifies inventory longterm asset service inventory utilize training repairs deem longer available sale transferred fixed assets lower cost net realizable value depreciated remaining useful life typically three years transferred 30 million service inventory “property equipment” 2015 reserve excess obsolete inventorysince value inventory ultimately realized cannot known exact certainty rely upon past sales history future sales forecasts provide basis determination reserve inventory considered potentially obsolete withdrawn products market sales product past 12 months sales forecasted next 12 months inventory considered potentially excess quantity hand exceeds 12 months expected remaining usage resulting obsolete excess parts reviewed determine substitute usage future need exists items without identified current future usage reserved amount equal 100 fifo cost inventory products subject changes technologies may make certain products components obsolete less competitive may increase historical provisions reserve property equipmentproperty equipment purchases exceeding thousand dollars capitalized recorded cost depreciation computed beginning date asset placed service using straightline method estimated useful lives various classes assets follows machinery equipment software 2 5 years furniture fixtures 3 10 years leasehold improvements amortized straightline basis lesser life asset remaining term lease depreciation expense 9238 6171 5825 2015 2014 2013 respectively accelerated methods depreciation used income tax purposes contrast book purposes result appropriate provisions made related deferred income taxes business combinationswe allocate fair value purchase consideration assets acquired liabilities assumed based fair values acquisition date excess fair value purchase consideration fair value assets acquired liabilities assumed recorded goodwill determining fair values assets acquired liabilities assumed management makes significant estimates assumptions especially respect intangible assets critical estimates valuing intangible assets include limited expected future cash flows includes consideration future growth rates margins customer attrition rates future changes technology brand awareness loyalty position discount rates fair value estimates based assumptions management believes market participant would use pricing asset liability amounts recorded business combination may change measurement period exceed one year date acquisition additional information conditions existing acquisition date becomes available goodwill intangiblesgoodwill represents excess cost business acquisition fair value net assets acquired amortize goodwill however perform annual review fourth quarter year frequently indicators potential impairment exist determine carrying value recorded goodwill indefinite lived intangible assets impaired asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs period reporting units elect perform qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test believe result qualitative assessment likely fair value reporting unit containing goodwill less carrying amount first second steps quantitative goodwill impairment test unnecessary elect bypass qualitative assessment option qualitative assessment performed resulted company unable conclude likely fair value reporting unit containing goodwill greater carrying amount perform twostep quantitative goodwill impairment test perform first step twostep quantitative goodwill impairment test calculating fair value reporting unit using discounted cash flow method market approach method comparing respective fair value carrying amount reporting unit carrying amount reporting unit exceeds fair value perform second step quantitative goodwill impairment test measure amount impairment loss management concluded goodwill impairment years ended december 31 2015 2014 2013 intangible assets principally include patents existing product technology customer relationships arose connection acquisitions intangible assets recorded fair value date acquisition amortized estimated useful lives 3 20 years december 31 2015 indefinitelived intangible assets product technology patents recorded cost amortization computed using straightline method lives product technology patents 7 20 years remaining weightedaverage amortization period intangible assets nine years longlived assetslonglived assets goodwill evaluated impairment events changes business circumstances indicate carrying amount assets may fully recoverable management concluded indications impairment assets years ended december 31 2015 2014 2013 research developmentresearch development costs incurred discovery new knowledge resulting translation new knowledge plans designs new products prior attainment related products’ technological feasibility recorded expenses period incurred reserve warrantieswe establish time sale liability one year warranty included initial purchase price products based upon estimate repair expenses likely incurred warranty period warranty period measured installationmonths major product group warranty reserve included accrued liabilities accompanying consolidated balance sheets warranty expense estimated applying actual total repair expenses product group prior period determining rate repair expense per installationmonth repair rate multiplied number installationmonths warranty product group determine provision warranty expenses period evaluate exposure warranty costs end period using estimated expense per installationmonth major product group number units remaining warranty remaining number months unit warranty history new product introductions enhancements existing products may result unforeseen issues increase warranty costs expenses historically within expectations cannot guarantee continue future income taxeswe review deferred tax assets regular basis evaluate recoverability based upon expected future reversals deferred tax assets liabilities projections future taxable income tax planning strategies might employ utilize assets including net operating loss carryforwards based positive negative evidence recoverability establish valuation allowance net deferred tax assets taxing jurisdiction operate unless “more likely not” recover assets means future evaluation need valuation allowance significantly influenced ability maintain profitability ability predict achieve future projections taxable income least twoyear period recognize tax benefits related uncertain tax positions likely tax position sustained upon examination taxing authorities positions likely tax benefit sustained tax benefit recognized financial statements ordinary course business examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes earnings per share epsbasic earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee director stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method reconciliation number common shares used calculation basic diluted eps presented note 15 earnings per share accounting stockbased compensationwe several stockbased employee director compensation plans described fully note 14 stock compensation plans measure record compensation expense using applicable accounting guidance sharebased payments related stock options restricted stock performancebased awards granted directors employees fair value stock options including performance awards without market condition estimated date grant using blackscholes optionpricing model fair value restricted stock awards stock options market condition estimated date grant using monte carlo simulation model blackscholes monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield valuing stock options significant judgment required determining expected volatility common stock expected life individuals hold stock options prior exercising expected volatility stock options based historical implied volatility common stock volatility restricted stock units market condition based historical volatility stock companies within defined peer group expected life stock options derived historical actual term option grants estimate future exercises remaining contractual period option volatility estimated life assumptions bear risk change subsequent grant date stock options assumptions may difficult measure represent future expectations based historical experience expected volatility expected life may change future could substantially change grantdate fair value future awards stock options ultimately expense record fair value restricted stock including performance awards without market condition estimated using current market price common stock date grant additionally calculating compensation expense awards also required estimate extent awards forfeited prior vesting many factors considered estimating expected forfeitures including types awards employee class historical experience extent actual results updated estimates forfeiture differ current estimates amounts recorded cumulative adjustment previously recorded amounts expense stockbased compensation stock options restricted stock awards performance awards requisite service period awards service condition expense stockbased compensation adjusted estimated forfeitures using straightline method requisite service period entire award awards performance service conditions expense stockbased compensation adjusted estimated forfeitures straightline basis requisite service period separately vesting portion award taking account probability satisfy performance conditions furthermore expense awards market condition threeyear vesting period regardless value award recipients ultimately receive excess tax benefits credited common stock deduction reduces cash taxes payable tax deductions excess compensation cost classified financing cash inflows consolidated statements cash flows concentration credit riskfinancial instruments expose us concentrations credit risk consist principally shortterm investments operating demand deposit accounts policy place operating demand deposit accounts high credit quality financial institutions balances times may exceed federally insured limits continually monitor banking relationships believe exposed significant credit risk operating demand deposit accounts estimatesthe preparation financial statements conformity accounting principles generally accepted united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates impact recently issued accounting standardsin september 2015 financial accounting standards board “fasb” issued accounting standards update “asu” 201516 business combinations topic 805 simplifying accounting measurementperiod adjustments eliminates requirement acquirer business combination account measurementperiod adjustments retrospectively instead acquirers must recognize measurementperiod adjustments period amounts determined new guidance effective fiscal years beginning december 15 2015 interim periods within fiscal years early adoption permitted believe implementation standard material impact consolidated financial statements july 2015 fasb issued asu 201511 inventory topic 330 simplifying measurement inventory changes measurement principle inventory lower cost market lower cost net realizable value asu 201511 defines net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation new guidance must applied prospective basis effective fiscal years beginning december 15 2015 interim periods within years early adoption permitted believe implementation standard material impact consolidated financial statements may 2014 fasb issued amendment accounting guidance related revenue recognition amendment result joint project fasb international accounting standards board “iasb” clarify principles recognizing revenue develop common revenue standards us gaap international financial reporting standards meet objectives fasb issued asu 201409 revenue contracts customers topic 606 “asu 201409” asu 201409 based principle revenue recognized depict transfer goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 also requires additional disclosure nature amount timing uncertainty revenue cash flows arising customer contracts including significant judgments changes judgments assets recognized costs incurred obtain fulfill contract august 2015 fasb issued asu 201514 revenue contracts customers topic 606 deferral effective date deferring effective date asu 201409 one year deferral new standard effective us january 1 2018 standard permits use either retrospective cumulative effective transition method evaluating impact adopting standard consolidated financial statements related disclosures yet selected transition method determined effect standard ongoing financial reporting reclassificationscertain prior year amounts reclassified accompanying consolidated financial statements conform current period presentation example certain prior year inventory balances reclassified accompanying consolidated financial statements reflect changes management’s expectations see note 5 inventories additional information 2 supplemental cash flow information selected cash payments noncash activities follows 3 allowance doubtful accounts activity allowance doubtful accounts follows 4 shortterm investments shortterm investments 430 million 650 million december 31 2015 2014 respectively comprised sixmonth us treasury bills mature april 14 2016 interest rate us treasury bills less one percent investments classified heldtomaturity recorded cost plus accrued interest approximates fair value fair value us treasury bills december 31 2015 2014 classed level 1 traded sufficient frequency volume enable us obtain pricing information ongoing basis discussion fair value refer note 10 fair value measurements 5 inventories consist following based upon planned timing new product introductions sudden significant decline demand products three months ended september 26 2015 onhand inventory levels exceeded estimated requirements resulting excess inventory use several contract manufacturers suppliers provide manufacturing services products normal course business reduce manufacturing lead times ensure adequate component availability enter agreements manufacturers suppliers purchase sufficient inventory based forecast demand september 26 2105 purchase commitments suppliers inventory longer expected utilize product lifecycle warranty commitments consequently recorded 59 million writedown excess inventory 20 million loss purchase commitments third quarter 2015 aggregate 79 million included within consolidated statement cash flows year ended december 31 2015 caption “writedown inventories” 6 goodwill december 31 2015 2014 related previous acquisitions evaluate reporting unit’s fair value compared carrying value december 31 year frequently events changes circumstances indicate carrying value may exceed fair value first performed qualitative assessment determine whether necessary perform twostep goodwill impairment test concluded quantitative goodwill impairment test step 1 necessary fair value reporting units measured using discounted cash flow model incorporating discount rates commensurate risks involved reporting unit market approach key assumptions used discounted cash flow model include discount rates growth rates cash flow projections terminal value rates susceptible change require significant management judgment market approach relies analysis publiclytraded companies similar us derives range revenue profit multiples publiclytraded companies used market approach selected based defined peer group resulting multiples applied reporting unit determine fair value impairments goodwill charged earnings period impairment identified two reporting units goodwill tested december 31 2015 americas region europeafrica region shown table december 31 2015 2014 goodwill identified impaired increase goodwill 2015 reflected acquisitions completed 2015 partially offset changes foreign exchange rates decrease goodwill 2014 related changes foreign exchange rates partially offset goodwill resulting acquisition completed 2014 7 intangible assets intangible assets consist following amortization expense 1979 1257 1213 2015 2014 2013 respectively estimated amortization expense years 2016 2020 thereafter follows 8 accrued liabilities accrued liabilities consist following activity related accrued warranties follows 9 line credit july 11 2006 entered loan agreement providing available line credit 300 million recently amended march 15 2012 loans amended restated loan agreement amended bear interest rate libor plus fixed percentage 150 200 amended restated loan agreement required us maintain minimum cash balance 25 million tangible net worth measured end fiscal quarters term amended restated loan agreement amended expired march 31 2015 extend loan agreement draw line credit 2015 2014 2013 10 fair value measurements guidance fair value measurements disclosures defines fair value establishes framework measuring fair value requires enhanced disclosures assets liabilities measured fair value fair value defined price asset could exchanged current transaction knowledgeable willing parties liability’s fair value defined amount would paid transfer liability new obligor amount would paid settle liability creditor available fair value based observable market prices parameters derived prices parameters observable prices inputs available valuation models used determine fair value models employ valuation techniques involve level management estimation judgment degree dependent price transparency instruments market instruments’ complexity assets liabilities recorded fair value recurring basis consolidated balance sheets categorized based upon level judgment associated inputs used measure fair value hierarchical levels defined guidance fair value measurements directly related amount subjectivity associated inputs fair valuation assets liabilities follows level 1 valuation based upon quoted market price identical instruments traded active markets level 2 valuation based quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use significant assumptions observable market valuation techniques include use discounted cash flow models similar techniques fair value recurring basis assets liabilities measured fair value recurring basis categorized tables based upon lowest level significant input valuations 1 shortterm investments accompanying consolidated balance sheets sixmonth us treasury bills fair values assets based level 1 inputs fair value hierarchy 2 contingent consideration liability represents arrangements pay former owners certain companies acquired undiscounted maximum payment arrangements 79 million end fiscal 2015 based future revenues gross profits certain milestones estimated fair value contingent consideration using monte carlo simulation based significant inputs primarily forecasted future results acquired businesses observable market thus represents level 3 measure contingent consideration liability included longterm liabilities consolidated balance sheets 11 income expense net income expense net consists following 12 income taxes income loss income tax benefit expense consists following components income tax benefit expense income taxes follows reconciliations income tax expense us federal statutory income tax rate compared actual income tax benefit expense summarized components net deferred income tax asset liabilities follows effective income tax rate 2015 2014 2013 includes reduction statutory corporate tax rates operations switzerland favorable tax rate ruling requires us maintain certain level manufacturing operations switzerland aggregate dollar effect favorable tax rate approximately 27 million 016 per share year ended december 31 2015 19 million 011 per share year ended december 31 2014 15 million 009 per share year ended december 31 2013 domestic entities deferred income tax assets amount 52 million december 31 2015 december 31 2014 december 31 2015 2014 foreign subsidiaries deferred tax assets primarily relating net operating losses expire next 1 18 years others carried forward indefinitely 66 million 92 million respectively valuation allowance deferred tax assets december 31 2015 2014 08 million 18 million respectively net decrease total valuation allowance years ended december 31 2015 2014 2013 10 million 50 million 02 million respectively year ended december 31 2014 identified certain immaterial errors related deferred tax assets related valuation allowance result decreased deferred tax assets related valuation allowance 47 million correct grossup error table adjusted reflect adjustment believe error material consolidated financial statements prior interim annual periods correction error material 2014 consolidated financial statements valuation allowance december 31 2015 2014 primarily related foreign net operating loss carryforwards judgment management likely realized assessing realizability deferred tax assets management considers whether likely deferred tax assets realized ultimate realization deferred tax assets depends generation future taxable income periods temporary differences deductible management considers scheduled reversal deferred tax liabilities including impact available carryback carryforward periods projected taxable income taxplanning strategies making assessment 2014 certain foreign subsidiaries previously generated losses established pattern profitability resulted company concluding valuation allowance reversed based assessment previously described result 2014 recorded 45 million discrete tax adjustment remaining changes impacting valuation allowance year ended december 31 2014 related changes foreign currency recognized us tax expense undistributed international earnings intend reinvest earnings outside us foreseeable future net undistributed international earnings approximately 1195 million 1062 million december 31 2015 2014 respectively significant judgment required determining worldwide provision income taxes ordinary course global business many transactions ultimate tax outcome uncertain review tax contingencies regular basis make appropriate accruals necessary december 31 2015 2014 unrecognized tax benefits totaled 03 million includes approximately 003 million interest penalties estimate unrecognized tax benefits change significantly within next year reconciliation beginning ending amount unrecognized tax benefits follows file income tax returns us federal jurisdiction various state foreign jurisdictions table summarizes open tax years ongoing tax examinations major jurisdictions december 31 2015 recognize accrued interest penalties related unrecognized tax benefits income tax expense total amount unrecognized tax benefits recognized would affect effective tax rate 03 million currently anticipate total amount unrecognized tax benefits result material changes financial position subject income taxes federal state foreign country level tax returns subject examination us federal level 2011 forward state level subject three four year statute limitations september 2013 us internal revenue service issued new regulations capitalizing deducting costs incurred acquire produce improve tangible property adopted new regulations january 1 2014 material effect consolidated financial statements 13 commitments contingencies leases lease buildings equipment noncancellable operating leases 2026 following schedule future minimum lease payments required noncancelable operating leases initial terms excess one year effect december 31 2015 rent expense 2015 2014 2013 6874 6119 5227 respectively purchase commitments enter purchase commitments products services ordinary course business purchases generally cover production requirements 60 120 days well materials necessary service customer units product lifecycle warranty commitments december 31 2015 107 million purchase commitments expected delivered within next 12 months ensure adequate component availability preparation new product introductions december 31 2015 also 45 million longterm commitments purchases delivered 2017 legal proceedings involved legal proceedings routine litigation arising normal course business none believe material adverse effect business financial condition results operations 14 stock compensation plans three compensation plans provide granting stock options sharebased awards key employees nonemployee members board directors 2004 equity incentive plan “2004 plan” 2009 equity incentive plan “2009 plan” 2014 equity incentive plan “2014 plan” provide granting options restricted stock restricted stock units stock appreciation rights employees nonemployee directors authorized grant awards 1750000 shares common stock 2004 plan 69587 options outstanding december 31 2015 exercise prices 1304 2436 also authorized grant awards 1781546 shares common stock 2009 plan well shares underlying awards outstanding 2004 plan effective date 2009 plan thereafter terminated expired unexercised canceled forfeited lapsed reason 677869 options outstanding december 31 2015 2009 plan exercise prices 2430 5754 options outstanding 2004 plan 2009 plan 10year term 7 years grants beginning 2010 vest 3year period may 2014 shareholders approved 2014 plan authorizing us grant awards 1974543 shares common stock well shares underlying awards outstanding 2004 plan 2009 plan effective date 2014 plan thereafter terminate expire unexercised canceled forfeited lapse reason 339452 options outstanding december 31 2015 2014 plan exercise prices 2998 6263 options outstanding 2014 plan 7year term generally vest 3year period make grants 2004 plan 2009 plan beginning 2013 upon election board nonemployee director receives initial equity grant shares restricted common stock value equal 100000 calculated using closing share price date nonemployee director’s election board initial restricted stock grant vests third anniversary grant date subject nonemployee director’s continued membership board annually nonemployee directors granted restricted shares equal 50 compensation first business day following annual meeting shareholders calculated using closing price common stock day shares restricted stock vest day prior following year’s annual meeting date subject nonemployee director’s continued membership board record compensation cost associated restricted stock unit grants straightline basis vesting term annually upon approval compensation committee grant stock options restricted stock units certain employees also grant stock options certain new employees throughout year awards nonperformancebased subject timebased vesting vest three equal annual installments beginning one year grant date related stockbased compensation recognized requisite service period 2015 began granting performancebased stock options restricted stock units certain executives awards vest three equal annual installments beginning one year grant date applicable performance goals strategic objectives achieved related stockbased compensation expense recognized requisite service period taking account probability satisfy performance goals strategic objectives addition certain strategic objectives awards issued 2015 performancebased stock options restricted stock unit grant determined based 1 achievement specified revenue eps targets 2 total shareholder return tsr relative tsr attained companies within defined peer group due tsr presence certain performancebased grants fair value awards determined using monte carlo simulation valuation model expense market condition awards threeyear vesting period regardless value award recipients ultimately receive monte carlo simulation valuation models incorporate assumptions stock price volatility expected life options awards riskfree interest rate dividend yield weighted average fair value stock options restricted stock units granted 2015 valued based monte carlo simulation valuation model 1997 4445 respectively assumptions used estimate fair value performancebased stock options restricted stock units granted 2015 monte carlo simulation model follows stock options granted using blackscholes optionpricing model used following assumptions historical information primary basis selection expected dividend yield expected volatility expected lives options riskfree interest rate based yields us zero coupon issues us treasury issues term equal expected life option valued summary stock option activity weighted average exercise prices follows weightedaverage grantdate fair value stock options granted years ended december 31 2015 2014 2013 1508 1938 1441 respectively aggregate intrinsic value stock options exercised years ended december 31 2015 2014 2013 17 million 22 million 37 million respectively total fair value stock options using blackscholes option pricing model vested years ended december 31 2015 2014 2013 39 million 37 million 33 million respectively following table summarizes restricted stock activity weighted average grantdate fair values year ended december 31 2015 recorded total stockbased compensation expense associated stock incentive plans 4306 4678 4409 2015 2014 2013 respectively december 31 2015 70 million total unrecognized stockbased compensation expense related nonvested stockbased compensation arrangements expense expected recognized weighted average period 17 years 15 earnings per share basic earnings per share computed dividing net income weighted average number shares outstanding diluted earnings per share computed also considering impact potential common stock net income weighted average number shares outstanding potential common stock consists employee director stock options restricted stock restricted stock units performancebased awards potential common stock excluded basic earnings per share calculation included diluted earnings per share calculation would antidilutive performancebased awards included computation diluted earnings per share extent underlying performance conditions applicable market condition satisfied end reporting period ii would considered satisfied end reporting period end related contingency period result would dilutive treasury stock method reconciliation number common shares used calculation basic diluted earnings per share eps presented 16 employee retirement benefit plan maintain 401k defined contribution retirement plan eligible us employees costs charged operations connection 401k plan 2015 2014 2013 aggregated 1334 1127 934 respectively 17 segment reporting three reportable segments based upon geographic regions americas europeafrica asiapacific include costs related corporate americas region incur research development expenses asiapacific region develop manufacture market support sell cadbased quality assurance products integrated cadbased inspection statistical process control software threedimensional documentation systems regions activities represent 99 consolidated sales chief operating decision maker codm chief executive officer evaluates segment performance allocates resources based upon profitable growth assets deployed segments employ consistent accounting policies following table presents information reportable segments geographical sales information presented represents sales customers located respective region whereas longlived assets information represents assets held respective regions customers individually accounted 10 total consolidated revenue net sales external customers based upon geographic location customer long lived assets consist primarily property plant equipment goodwill intangible assets attributed geographic area located originated 18 business combinations february 2015 completed acquisition aras 360 technologies inc “aras” purchase price 77 million paid cash hand subject certain additional postclosing adjustments additional 40 million contingent consideration may earned twoyear period aras privatelyheld business headquartered canada produces full suite accident crime reconstruction software tools offer advanced graphics analytical tools ability work large point cloud data acquisition expected complement portfolio within public safety market march 2015 completed acquisition kubit gmbh purchase price 45 million paid cash hand subject certain additional postclosing adjustments additional 33 million contingent consideration may earned threeyear period acquisition also included substantially assets kubit gmbh’s us distributor kubit usa inc collectively “kubit” kubit privatelyheld business operating facilities germany united states develops software surveying asbuilt documentation acquisition expected complement portfolio software products specifically building information modeling construction information management market acquisition aras kubit constitutes business combination defined fasb accounting standards codification “asc” topic 805 business combinations accordingly assets acquired liabilities assumed recorded fair values date acquisition following summary allocation purchase price fair values assets acquired liabilities assumed date acquisition goodwill arising acquisitions consists largely expected synergies combining operations well value workforce intangible assets acquired aras kubit amortized weightedaverage life 8 years intangible assets goodwill aras assigned americas reporting unit kubit intangible assets goodwill mainly assigned europeafrica reporting unit goodwill value expected tax deductible acquisition integration costs included components consideration transferred recorded expense period costs incurred date incurred approximately 02 million acquisition integration costs aras kubit acquisitions furnished pro forma financial information related acquisitions aras kubit information material individually aggregate overall financial results 19 quarterly results operations unaudited item 9 nannannannanitem 15 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report ernst young llp independent certified public accountants filed part form 10k additionally incorporated herein reference exhibit 992 registrant’s annual report form 10k year ended december 31 2001 audited financial statements spatialmetrix corporation “smx” two years period ended december 31 2001 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits exhibit description 31 articles incorporation amended filed exhibit 31 registrant’s registration statement form s1 33332983 incorporated herein reference 32 bylaws amended filed exhibit 32 registrant’s registration statement form s1 33332983 incorporated herein reference 41 specimen stock certificate filed exhibit 41 registrant’s registration statement form s1 33332983 incorporated herein reference 101 1993 stock option plan amended filed exhibit 101 registrant’s registration statement form s1 33332983 incorporated herein reference 102 1997 employee stock option plan filed exhibit 102 registrant’s registration statement form s1 33332983 incorporated herein reference 103 1997 nonemployee director stock option plan filed exhibit 103 registrant’s registration statement form s1 33332983 incorporated herein reference 104 amended restated loan agreement dated june 20 2000 registrant wendelin scharbach together promissory note stock pledge agreement affidavit indemnity agreement forms attached hereto exhibits b c thereto 105 amended restated loan agreement dated june 20 2000 registrant sigfried buss together promissory note stock pledge agreement affidavit indemnity agreement forms attached hereto exhibits b c thereto exhibit description 106 wcma note loan security agreement dated april 23 1997 registrant merrill lynch business financial services inc filed exhibit 106 registrant’s registration statement form s1 33332983 incorporated herein reference 107 business lease dated march 1 1991 registrant successorbymerger faro medical technologies us inc xenon research inc filed exhibit 107 registrant’s registration statement form s1 33332983 incorporated herein reference 108 nonexclusive unique application reseller agreement dated september 9 1996 registrant autodesk inc filed exhibit 109 registrant’s registration statement form s1 33332983 incorporated herein reference 109 form patent confidentiality agreement registrant employees filed exhibit 1010 registrant’s registration statement form s1 33332983 incorporated herein reference 1010 nonexclusive unique application reseller agreement dated march 1 1998 registrant autodesk inc filed exhibit 1011 registrant’s form 10k calendar year 1997 023081 incorporated herein reference 1011 first amendment business lease dated january 20 1998 registrant successor merger faro medical technologies us inc xenon research inc filed exhibit 1012 registrant’s form 10k calendar year 1997 023081 incorporated herein reference 1012 wcma line credit 74007k27 dated may 30 2002 registrant merrill lynch business financial services inc filed herewith 1013 agreement plan merger dated september 14 2001 amended registrant spatialmetrix corporation filed exhibit 21 registrant’s current report form 8k dated january 16 2002 incorporated herein reference 211 list subsidiaries filed exhibit 211 registrant’s form 10k calendar year 2001 023081 incorporated herein reference 231 consent ernst young llp filed herewith 241 power attorney relating subsequent amendments included signature pages report exhibit description 991 properties filed exhibit 991 registrant’s form 10k calendar year 2001 023081 incorporated herein reference 992 audited financial statements spatialmetrix corporation two years period ended december 31 2001 filed exhibit 992 registrant’s form 10k calendar year 2001 023081 incorporated herein reference 993 written statement chief executive officer pursuant 18 usc section 1350 994 written statement principal financial officer pursuant 18 usc section 1350 b reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc gregory fraser gregory fraser executive vice president secretary treasurer duly authorized officer principal financial officer date march 28 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof signature title date simon raab simon raab chairman board president chief executive officer principal executive officer director march 28 2003 gregory fraser gregory fraser executive vice president secretary treasurer director march 28 2003 hubert d’amours hubert d’amours director march 28 2003 stephen r cole stephen r cole director march 28 2003 norman h schipper norman h schipper director march 28 2003 andre julien andre julien director march 28 2003 john caldwell john caldwell director march 28 2003item 15 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report ernst young llp independent certified public accountants filed part form 10k additionally incorporated herein reference exhibit 992 registrants annual report form 10k year ended december 31 2001 audited financial statements spatialmetrix corporation smx two years period ended december 31 2001 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits exhibit description 31 articles incorporation amended filed exhibit 31 registrants registration statement form s1 33332983 incorporated herein reference 32 bylaws amended filed exhibit 32 registrants registration statement form s1 33332983 incorporated herein reference 41 specimen stock certificate filed exhibit 41 registrants registration statement form s1 33332983 incorporated herein reference 42 registration rights agreement dated november 11 2003 among faro technologies inc investors named signature pages thereto filed exhibit 41 registrants current report form 8k dated november 11 2003and incorporated herein reference 101 1993 stock option plan amended filed exhibit 101 registrants registration statement form s1 33332983 incorporated herein reference 102 1997 employee stock option plan filed exhibit 102 registrants registration statement form s1 33332983 incorporated herein reference 103 1997 nonemployee director stock option plan filed exhibit 103 registrants registration statement form s1 33332983 incorporated herein reference exhibit description 104 business lease dated march 1 1991 registrant successorbymerger faro medical technologies us inc xenon research inc filed exhibit 107 registrants registration statement form s1 33332983 incorporated herein reference 105 first amendment business lease dated january 20 1998 registrant successor merger faro medical technologies us inc xenon research inc filed exhibit 1012 registrants form 10k calendar year 1997 023081 incorporated herein reference 106 securities purchase agreement dated november 11 2003 among company xenon research snc florida corporation gregory fraser investors named signature pages thereto filed exhibit 101 registrants current report form 8k dated november 11 2003 incorporated herein reference 107 loan agreement dated september 17 2003 faro technologies inc suntrust bank filed exhibit 102 registrants current report form 8k dated november 11 2003 incorporated herein reference 211 list subsidiaries filed exhibit 211 registrants form 10k calendar year 2001 023081 incorporated herein reference 231 consent ernst young llp filed herewith exhibit description 241 power attorney relating subsequent amendments included signature pages report 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant section 906 sarbanesoxley act 2002 991 properties calendar year 2003 992 audited financial statements spatialmetrix corporation two years period ended december 31 2001 filed exhibit 992 registrants form 10k calendar year 2001 023081 incorporated herein reference b reports form 8k october 30 2003 company filed report form 8k connection press release announcing results operations quarter ended september 27 2003 november 12 2003 company filed report form 8k connection press release announcing private placement company common stock company two cofounders november 13 2003 company filed report form 8k connection sale certain institutional investors company 1158000 shares company common stock two companys founders 772000 shares company common stock signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date march 23 2004 gregory fraser gregory fraser executive vice president secretary treasurer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules reports form 8k documents filed part report following documents filed part report 1 financial statements included part ii item 8 index consolidated financial statements faro technologies inc report grant thornton llp independent certified public accountants filed part form 10k 2 financial statement schedules listed index consolidated financial statements included part ii item 8 omitted applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits exhibit description 31 articles incorporation amended filed exhibit 31 registrant’s registration statement form s1 33332983 incorporated herein reference 32 bylaws amended filed exhibit 32 registrant’s registration statement form s1 33332983 incorporated herein reference 41 specimen stock certificate filed exhibit 41 registrant’s registration statement form s1 33332983 incorporated herein reference 101 stock option plan amended filed exhibit 101 registrant’s registration statement form s1 33332983 incorporated herein reference 102 employee stock option plan filed exhibit 102 registrant’s registration statement form s1 33332983 incorporated herein reference 103 nonemployee director stock option plan filed exhibit 103 registrant’s registration statement form s1 33332983 incorporated herein reference exhibit description 104 business lease dated march 1 1991 registrant successorbymerger faro medical technologies us inc xenon research inc filed exhibit 107 registrant’s registration statement form s1 33332983 incorporated herein reference 105 nonexclusive unique application reseller agreement dated september 9 1996 registrant autodesk inc filed exhibit 109 registrant’s registration statement form s1 33332983 incorporated herein reference 106 form patent confidentiality agreement registrant employees filed exhibit 1010 registrant’s registration statement form s1 33332983 incorporated herein reference 107 nonexclusive unique application reseller agreement dated march 1 1998 registrant autodesk inc filed exhibit 1011 registrant’s form 10k calendar year 1997 023081 incorporated herein reference 108 first amendment business lease dated january 20 1998 registrant successor merger faro medical technologies us inc xenon research inc filed exhibit 1012 registrant’s form 10k calendar year 1997 023081 incorporated herein reference 109 agreement plan merger dated september 14 2001 amended registrant spatialmetrix corporation filed exhibit 21 registrant’s current report form 8k dated january 16 2002 incorporated herein reference 1010 securities purchase agreement dated november 11 2003 among company xenon research inc florida corporation gregory fraser investors named signature pages thereto filed exhibit 101 registrant’s current report form 8k dated november 11 2003and incorporated herein reference 1011 loan agreement dated september 17 2003 faro technologies inc suntrust bank filed exhibit 102 registrant’s current report form 8k dated november 11 2003and incorporated herein reference 211 list subsidiaries filed herewith 231 consent grant thornton llp filed herewith 232 consent ernst young llp filed herewith exhibit description 241 power attorney relating subsequent amendments included signature pages report 31a certification principal financial officer pursuant section 302 sarbanesoxley act 2002 31b certification chief executive officer pursuant section 302 sarbanesoxley act 2002 32a certification chief executive officer pursuant section 906 sarbanesoxley act 2002 32b certification chief executive officer pursuant section 906 sarbanesoxley act 2002 991 properties filed herewith b reports form 8k november 18 2004 company filed report form 8k connection change company’s certifying accountant january 8 2005 company filed report form 8k connection press release announcing sales new order results quarter year ended december 31 2004 march 10 2005 company filed report form 8k connection press release announcing earnings quarter year ended december 31 2004 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab gregory fraser individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof signature title date simon raab chairman board chief executive officer march 16 2005 simon raab principal executive officer director gregory fraser executive vice president secretary treasurer director march 16 2005 gregory fraser principal financial officer principal accounting officer john caldwell director march 16 2005 john caldwell hubert d’amours director march 16 2005 hubert damours stephen r cole director march 16 2005 stephen r cole norman h schipper director march 16 2005 norman h schipper andre julien director march 16 2005 andre julienitem 15 exhibits financial statement schedules documents filed part report following documents filed part report 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 financial statement schedules schedule ii valuation qualifying accounts filed part hereof along related report independent registered public accounting firm company’s financial statement schedule schedules omitted information required set forth therein applicable included consolidated financial statements notes thereto 3 exhibits schedule ii valuation qualifying accounts valuation qualifying accounts follows three years ended december 31 2005 report ernst young llp independent registered public accounting firm board directors shareholders faro technologies inc audited consolidated financial statements faro technologies inc year ended december 31 2003 issued report thereon dated february 20 2004 included elsewhere annual report audit also included information related year ended december 31 2003 shown schedule ii annual report schedule responsibility company’s management responsibility express opinion based audit opinion financial statement schedule referred considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp orlando florida february 20 2004 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab jay w freeland individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof signature title date simon raab june 29 2006 simon raab chairman board cochief executive officer principal executive officer director jay w freeland june 29 2006 jay w freeland cochief executive officer president chief operating officer principal executive officer director barbara r smith june 29 2006 barbara r smith senior vice president chief financial officer principal financial officer principal accounting officer gregory fraser june 29 2006 gregory fraser executive vice president secretary director john caldwell june 29 2006 john caldwell director hubert d’amours june 29 2006 hubert d’amours director stephen r cole june 29 2006 stephen r cole director norman h schipper june 29 2006 norman h schipper director andre julien june 29 2006 andre julien directoritem 15 exhibits financial statement schedules documents filed part report following documents filed part report 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 financial statement schedules schedule iivaluation qualifying accounts filed part hereof along related report independent registered public accounting firm company’s financial statement schedule schedules omitted information required set forth therein applicable included consolidated financial statements notes thereto 3 exhibits indicates management contracts compensatory plans arrangements schedule iivaluation qualifying accounts valuation qualifying accounts follows three years ended december 31 2006 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date march 15 2007 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules documents filed part report following documents filed part report 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 financial statement schedules schedule iivaluation qualifying accounts filed part hereof along related report independent registered public accounting firm company’s financial statement schedule schedules omitted information required set forth therein applicable included consolidated financial statements notes thereto 3 exhibits indicates management contracts compensatory plans arrangements schedule iivaluation qualifying accounts valuation qualifying accounts follows three years ended december 31 2007 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date march 10 2008 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules documents filed part report following documents filed part report 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 financial statement schedules schedule ii valuation qualifying accounts filed part hereof along related report independent registered public accounting firm company’s financial statement schedule schedules omitted information required set forth therein applicable included consolidated financial statements notes thereto 3 exhibits indicates management contracts compensatory plans arrangements schedule iivaluation qualifying accounts valuation qualifying accounts follows three years ended december 31 2008 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 27 2009 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules documents filed part report following documents filed part annual report form 10k 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 financial statement schedules schedule iivaluation qualifying accounts filed part hereof along related report independent registered public accounting firm company’s financial statement schedule schedules omitted information required set forth therein applicable included consolidated financial statements notes thereto 3 exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k schedule iivaluation qualifying accounts valuation qualifying accounts follows three years ended december 31 2009 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 26 2010 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland individually true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit index indicates management contracts compensatory plans arrangementsitem 15 exhibits financial statement schedules documents filed part report following documents filed part annual report form 10k 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 28 2012 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit indexitem 15 exhibits financial statement schedules documents filed part report following documents filed part annual report form 10k 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 26 2014 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit index indicates management contracts compensatory plans arrangementsitem 15 exhibits financial statement schedules documents filed part report following documents filed part annual report form 10k 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 25 2015 peter g abram peter g abram senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit index indicates management contracts compensatory plans arrangementsitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements required item included part ii item 8 annual report form 10k caption “financial statement supplementary data” consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements reports independent registered public accounting firm 2 financial statement schedules financial statement schedules omitted either required applicable required information otherwise included consolidated financial statements notes thereto b exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k exhibit index indicates management contracts compensatory plans arrangements schedules exhibits omitted pursuant item 601b2 regulation sk registrant agrees furnish supplementally copy omitted schedules exhibits securities exchange commission upon request item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab robert seidel jody gale true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements required item included part ii item 8 annual report form 10k caption “financial statements supplementary data” report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements comprehensive loss income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted either required applicable required information otherwise included consolidated financial statements notes thereto b exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k exhibit index indicates management contracts compensatory plans arrangements schedules exhibits omitted pursuant item 601b2 regulation sk registrant agrees furnish supplementally copy omitted schedules exhibits securities exchange commission upon request item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab robert seidel jody gale true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements required item included part ii item 8 annual report form 10k caption “financial statements supplementary data” report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements comprehensive loss income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted either required applicable required information otherwise included consolidated financial statements notes thereto b exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k exhibit index indicates management contracts compensatory plans arrangements schedules exhibits omitted pursuant item 601b2 regulation sk registrant agrees furnish supplementally copy omitted schedules exhibits securities exchange commission upon request item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints michael burger allen muhich true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents may lawfully cause done virtue hereofitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements required item included part ii item 8 annual report form 10k caption “financial statements supplementary data” report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted either required applicable required information otherwise included consolidated financial statements notes thereto b exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k exhibit index indicates management contracts compensatory plans arrangements schedules exhibits omitted pursuant item 601b2 regulation sk registrant agrees furnish supplementally copy omitted schedules exhibits securities exchange commission upon request item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints michael burger allen muhich true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents may lawfully cause done virtue hereofnanitem 15 exhibits financial statement schedules documents filed part report following documents filed part annual report form 10k 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit indexitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements required item included part ii item 8 annual report form 10k caption “financial statement supplementary data” consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements reports independent registered public accounting firm 2 financial statement schedules financial statement schedules omitted either required applicable required information otherwise included consolidated financial statements notes thereto b exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 24 2017 robert seidel robert seidel chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab robert seidel jody gale true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents may lawfully cause done virtue hereof exhibit index indicates management contracts compensatory plans arrangements schedules exhibits omitted pursuant item 601b2 regulation sk registrant agrees furnish supplementally copy omitted schedules exhibits securities exchange commission upon requestitem 15 exhibits financial statement schedules documents filed part report following documents filed part annual report form 10k 1 consolidated financial statements included part ii item 8 consolidated financial statements notes thereto report independent registered public accounting firm 2 exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 25 2011 keith bair keith bair senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints jay w freeland true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents either may lawfully cause done virtue hereof exhibit index indicates management contracts compensatory plans arrangementsitem 15 exhibits financial statement schedules 1 financial statements following consolidated financial statements required item included part ii item 8 annual report form 10k caption “financial statement supplementary data” consolidated balance sheets consolidated statements operations consolidated statements comprehensive loss income consolidated statements shareholders’ equity consolidated statements cash flows notes consolidated financial statements reports independent registered public accounting firm 2 financial statement schedules financial statement schedules omitted either required applicable required information otherwise included consolidated financial statements notes thereto b exhibits listed accompanying exhibit index filed incorporated reference part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized faro technologies inc date february 29 2016 laura murphywolf laura murphywolf senior vice president chief financial officer duly authorized officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated person whose signature appears constitutes appoints simon raab laura murphywolf jody gale true lawful attorneyinfact agent full power substitution revocation name place stead capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents may lawfully cause done virtue hereof exhibit index indicates management contracts compensatory plans arrangements