FARO Technologies Inc (FARO) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to the FARO Technologies conference call in conjunction with its fourth quarter 2012 earnings release. For opening remarks and introductions I would now turn the call over to Vic Allgeier. Mr. Allgeier, you may begin.

Thank you and good morning everyone. My name is Vic Allgeier, the TTC Group, FARO's Investor Relations firm. Yesterday after the market closed, FARO released its FOURTH quarter results. By now, you should have received a copy of the press release. If you have not received a copy of the press release, please call Nancy Setteducati at 407- 333-9911. The press release is also available on FARO's website at www.faro.com.

Representing the Company today are Jay Freeland, President and Chief Executive Officer and Keith Bair, Senior Vice President and Chief Financial Officer. Keith and Jay will deliver prepared remarks first, and will then be available for questions.

I would like to remind you that in order to help you understand the Company and its results, management may make some forward-looking statements during the course of this call. These statements can be identified by words such as expect, will, believe, potential, continue, predict, target, growth targets, goals, guidance and similar words. It is possible that the Company's actual results may differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are the risk factors set forth in yesterday's press release and in the Company's filings with the SEC.

I will now turn the call over to Keith.

Thanks, Vic. Sales in the fourth quarter 2012 were $80.7 million a 4.7% increase from $77.1 million in the fourth quarter of 2011. That brought our 2012 annual sales to $273.4 million. A 7.6% increase from $254.2 million in 2011. On a regional basis fourth quarter sales in 2012 in the Americas increased 5.4%, to $33.0 million compared to $31.3 million in the fourth quarter of 2011. Sales increased 5.4% in Europe to $32.9 million from $31.2 million in the fourth quarter of 2011. And sales in the Asia-Pacific region increased 1.4% to $14.8 million from $14.6 million in the fourth quarter of 2011. The effective changes in foreign exchange rates on sales was a decrease of approximately $1.4 million in the fourth quarter 2012, compared to the fourth quarter of 2011.

Comparing year-over-year growth, 2012 sales in the Americas increased 11.4%, to $108.6 million from $97.5 million in 2011. Europe sales for 2012 increased 0.5%, to $100.1 million from $99.6 million in 2011. Asia sales increased 13.3% in 2012, to $64.7 million from $57.1 million in 2011. The effective changes in foreign exchange rates on sales was a decrease of $8.7 million in fiscal year 2012 compared to fiscal year 2011.

New orders increased 6.5% in the fourth quarter of 2012, to approximately $82.1 million, compared to approximately $77.1 million in the fourth quarter of 2011. On an annual basis new orders increased 8%, to $276.2 million in 2012 from $255.7 million in 2011. On a regional basis fourth quarter orders in 2012 in the Americas decreased 0.3%, to $33.5 million compared to $33.6 million in the fourth quarter of 2011. Orders increased 11.3% in Europe to $30.6 million from $27.5 million in the fourth quarter of 2011. Orders in the Asia-Pacific region increased 12.5%, to $18 million compared to $16 million in the year ago quarter. Again comparing year-over-year orders growth new orders in the Americas increased 8.9% to $109.4 million in 2012 from $100.5 million in 2011. Orders increased 0.9% in Europe to $97.8 million in 2012 compared to $96.9 million in 2011. And orders increased by 18.4% in Asia in 2012 to $69 million from $58.3 million in 2011.

The top five customers by sales volume in 2012 were the US Military,Boeing, Volkswagen, PT Smart Mitra Solutions and BMW. Together these five customers represented only 2.5% of our sales. The top 10 customer in 2012 together represented only 3.7% of our sales. Once again indicating our lack of dependence on any one or a handful of customers.

Our gross margin was 53.4% in the fourth quarter 2012 compared to 56.5% in a year ago quarter. Primarily due to a decrease in product gross margin to 56.1% in the fourth quarter of 2012 from 60.8% in the fourth quarter of 2011 as result of lower average selling prices related to sales promotions and an increase of sales of laser scanner product to distributors. Gross margin from service revenues increased to 37.5% in the fourth quarter of 2012 compared to 30.9% in the fourth quarter 2011.

Gross margin in fiscal 2012 was 54.7% compared to 56.5% in fiscal 2011. Gross margin from product sales decreased to 58.7% in fiscal 2012 from 61.2% in 2011 as result of lower average selling prices, a change in the historical sales mix caused by an increase in the sales of the laser scanner product which currently has a lower gross margin and an increase in the sales mix of the laser scanner products sold to distributors. Gross margin from service revenues increased to 34.8% in fiscal 2012 compared to 32.4% in fiscal 2011.

Selling expenses were 22.8% of sales in the fourth quarter 2012compared to 23.3% in the year ago quarter. Selling expenses increased to $18.4 million in the fourth quarter 2012 from $18 million in the fourth quarter 2011. Primarily as result of an increase in compensation of travel expenses. In 2012 selling expenses decreased to 23.6% of sales compared to 24.4% of sales in fiscal 2011.

Administrative expenses in the fourth quarter of 2012 were 8.7% of sales compared to 8.9% in the fourth quarter of 2011. Increasing by approximately $100,000 to $7 million from $6.9 million in 2011. Primarily as a result of an increase in legal and professional fees of $200,000 related to patent litigation. In fiscal 2012 general and administrative expenses increased to $29.1 million representing 10.6% of sales compared to 10.5% of sales in fiscal 2011. Primarily due to an increase of $1 million related to the FCPA Monitor and an increase in legal and professional fees of $1.4 million related to patent litigation. In total in fiscal 2012 legal and professional fees related to the FCPA Monitor were $1.4 million and patent costs were $2.3 million.

Research and development expenses increased to $4.6 million in the fourth quarter 2012 or 5.7% of sales compared to $4.2 million or 5.4% of sales in the fourth quarter of 2011. R&D expenses for fiscal 2012 increased $2.4 million or 15.7% to $17.6 million for the year ended December 31, 2012, from $15.2 million for the year ended December 31, 2011. Primarily due to an increase in compensation of $1.7 million and subcontractor expenses $900,000 offset by expenses of $400,000 incurred in the prior year related to the closing and relocation of the R&D facility in Andover, MA to our existing facility in Kennett Square, PA. Research and development expenses as a percentage of sales increased to 6.4% for the year ended December 31, 2012, from 6% for the year ended December 31, 2011.

Operating margin for the fourth quarter 2012 decreased to 13.9% from 16.7% in the year ago quarter. Primarily due to the effects of lower gross margins. Operator margin for fiscal 2012 decreased to 11.5% from 12.9% in fiscal 2011.

Other income expenses net increased to an expense of $500,000 in the fourth quarter of 2012 compared to an expense of $400,000 in the fourth quarter of 2011. Primarily as result of an increase in foreign currency losses due to the effects of changes in foreign exchange rates on the intercompany account balances denominated in different currencies. On a year-to-date basis other income and expense decreased to an expense of $600,000 in fiscal 2012 compared to an expense of $1.2 million in fiscal 2011. Primarily as result of decrease in foreign exchange transaction losses due to the effects of changes in foreign exchange rates on the intercompany account balances denominated in different currencies.

Income tax expense was $2.9 million in the fourth quarter 2012 and 2011. The effective income tax rate was 26.8% in the fourth quarter 2012 compared to 23.8% in the fourth quarter 2011. Income tax expense decreased to $7.9 million for fiscal 2012 compared to $8.3 million in fiscal 2011. Primarily as result of a decrease in pretax income. The Company's effective rate for fiscal 2012 was 25.7% compared to 26.3% in fiscal 2011.

Net income decreased to $7.8 million or $0.46 per share in the fourth quarter 2012 compared to $9.5 million or $0.56 per share in the fourth quarter of 2011. Net income for fiscal 2012 was $23 million or $1.34 per share compared to net income of $23.4 million or $1.39 per share in fiscal 2011.

I will now discuss a few balance sheet and cash flow items. Cash and short term investments were $158.2 million at December 31, 2012, compared to $129.5 million at December 31, 2011. Accounts receivable was $62.6 million at December 31, 2012 compared to $57.5 million at December 31, 2011. Days of sales outstanding at December 31, 2012, increased to 71 days from 68 days at December 31, 2011. Primarily as result of an increase in DSOs in Europe. Inventories increased to $68 million at December 31, 2012, from $67.3 million at December 31, 2011. The increase in inventories was primarily related to an increase in demo and service inventories of $3.7 million offset by a reduction in raw materials and finished goods of $3 million.

Finally, I will conclude with some statistics regarding our headcount numbers. We had 961 employees at December 31, 2012, compared to 885 at December 31, 2011. An increase of 76 employees or 8.6%. Account manager headcount increased 12.5%,from 160 at December 31, 2011 to 180 at December 31, 2012. With 61 account managers in the Americas, 56 in account managers in Europe and 63 account managers in Asia. Geographically we now have 384 employees in the Americas, 324 employees in Europe, and 253 employees in the Asian Pacific region.

I will now hand call over to Jay.

Thanks, Keith. Economic uncertainty continued in the fourth quarter putting continued strain on the speed of which customers make their purchase decision. Globally sales increased almost 5% in the fourth quarter. Leaving full year sales growth at almost 8%. Yes the market environment was difficult ; however, this is not the type of sales growth FARO strives to achieve. The Americas and Europe both grew approximately 5% in Q4 while Asia grew just 1%, demonstrating the amount of pressure all three regions faced. For the full year Asia and the Americas both had double-digit sales growth at 13% and 11% respectively, but Europe was flat year-over-year.

European customers continue to be concerned over the slow pace of progress and addressing the euro zone's fiscal issues. We believe the region has stabilized , but economic conditions are still less than desirable. Asia was also impacted by European concerns in the fourth quarter a continuation of the impact we experienced in Q3. The Americas improved in December once the U.S. election cycle passed; however, U.S. customers are still cautious in their business planning and CapEx purchasing due to the ongoing fiscal concerns here. In total it is not an ideal market environment; however, we see a path to growth and continued improvement in the business model in 2013. I will discuss that more in a bit.

The Focus Laser Scanner is highly successful in the marketplace again last quarter. Sales through distribution reached 66% of all Laser Scanner sales in Q4 up from 52% in Q3 demonstrating both the positive impact of the Trimble agreement as well as the ongoing success of our other distributors in selling this product. Market acceptance has been very strong, and the Focus Laser Scanner remains the only product of its kind in terms of its features, ease of use and its price. Average selling price through distribution is approximately 25% lower than list price. This has a negative impact on gross margin; however, overall operating margin improves with incremental Laser Scanner sales since there are little to no sales or marketing expense associated with it. In 2013 we expect the Focus to perform well again as the Trimble relationship builds momentum and as other verticals adopt more broadly.

The Vantage Laser Tracker launched in Q3 performed well again in Q4. Running at full capacity we sold everything we built during the quarter, and went into 2013 with good backlog log. Early reliability data is good, and overall customer feedback is very positive. In the fourth quarter we ran sales promotion for the Arm and [LOP] product lines similar to the promotions we ran in Q3. These promotions were primarily targeted at getting customers to purchase in the current quarter. The promotions were successful in generating sales volume for the business, but not enough to drive our overall sales growth rates to the targets we set for ourselves internally. Though the promotions had some impact on gross margins, they generated sales volume that otherwise would not have been here this quarter thus helping the business in total. We are scaling back the promotions in Q1 of this year and anticipate a return to normal pricing by the second half.

Sales to new customers were 42% in Q4, a 7 point improvement from Q3. Some of this growth was driven by the increase in sales through distribution referenced in my earlier comments. We continue to target a 50/50 split in this metric to help drive adoption of our technology in the marketplace. As the Laser Scanner becomes a bigger piece of the portfolio the metric may even skew higher in favor of new customers since most customers in the Laser Scanner space are new to FARO.

The R&D pipeline at FARO continues to improve. As mentioned last quarter we have several new programs in development as part of our Cambrian Explosion initiative. We are also actively driving the next generation developments for our existing products. We target a complete disruption to our product portfolio every three to four years. The Vantage Laser Tracker and the latest version of our CAM2 Measure 10 Software are great examples of our engineering teams ability to execute in this regard.

Equally important in 2012 we had 45 patent initial patent filings an increase of 50% over 2011. We now have 251 patents in force and 333 pending worldwide. Looking forward to 2013 and although we do not discuss specific product programs or release dates, we do anticipate having product releases during the course of this coming year.

Operationally the FARO team kept things tight in the quarter helping offset slower sales growth and lower gross margin. Operating cost as a percentage of sales declined in (Inaudible) sales, with marketing costs as percentage of sales remaining constant and R&D increasing slightly. We anticipate generating additional leverage from the model in 2013 and have planned the business accordingly.

As many of you know, I have been making fairly significant leadership changes at FARO over the last 12 months. These changes were not necessarily driven by financial performance. They were however tightly connected to where I want to take this Company;how I want it to grow ; and making sure we have the right people in place to ensure our success. Our new managing director in Europe, Ralf Drews, is off to a great start, and has already brought a fresh perspective to the team over there, as well as to the strategic vision the Board and I have for FARO. The first set of candidates for the Americas managing director role looks extremely good. It took six months for me to find the right person for Europe and three more months to have him start with the Company. Though I do not want the Americas process to take that long, I will not force speed either. Finding the best fit for this role is priority number one over anything else. I believe we are in the early stages of a significant and exciting transformation of our Company all focused on fulfilling the vision we have for FARO.

With 2012 behind us and 2013 underway, I feel great about the Company's prospects. Economic conditions are difficult for sure; however, FARO has faced challenging environments in the past and successfully pushed through them. In keeping with our past practice we are not providing specific financial guidance for 2013. We certainly believe we will grow this year, and also believe that we will improve the overall operating performance of the Company. We have a world class technology portfolio, the best people in the industry, and the vision to expand this Company significantly over the coming years.

In short we are the world most trusted source for 3D measurement and imaging technology. Will it be a challenge to achieve our historical and long-term growth rates in 2013, yes. Do we have a team that is absolutely focused on executing and positioning us to meet that challenge, absolutely.

As always, I would like to thank the FARO team for their hard work and dedication to making FARO. Thank you for your attention this morning ,and I will now open the call to questions.

(Operator Instructions). We will first go to the site of Chris Godby with Stephens. Your line is now open.

Good morning, everyone. Thanks for take my call.

Good morning, Chris.

First of all, thinking about order trends, obviously very solid in the fourth quarter considering the macro environment. Have you seen that positive momentum from 4Q carry in to 1Q 2013?

Without talking specifically about Q1, what I will say is as you know historically Q1 sequentially, Q4 to Q1, declines, because Q4 tends to be a bigger quarter for us. So from a market environment standpoint is it possible we would see that typical sequential decline Q4 to Q1, yes. I think history has shown that, and I am not sure there is anything different in the history that would imply something other than that. What I will say is the market environment in Q1 feels very similar to Q4. Obviously we are part way into the quarter now.

Our typical trends of still seeing as much as half of our sales during the final couple weeks of the quarter is in place. So we have only seen a portion of what we actually will see for the full quarter at this point, but generally speaking I think the market environment is fairly similar to Q4.

Great, thanks. That is good color. And then as a follow-up can you talk about your progress breaking in to the insurance industry with the Laser Scanner?

I would say it is still very early stage at this point. The person I hired in the business development role to drive that for us as specific initiative has found, number one, that there is definite interest both on the underwriting side of the house as well as the claims adjustment side of the house. Not surprisingly there tends to be more interest at the firmsthat are covering or insuring the larger types of assets.

So I am not sure this is a consumer portfolio product yet at this point, and quite frankly I am not sure we really expected it to be there in the early stages any ways. Most of the insurers we have talked with have specific technology adoption groups. And we have had what I would call good initial dialog with those folks as well. All of which is geared at what is the right model for utilization inside the insurance carrier, and what is the best way to approach them. In total I feel pretty good about the progress that has been made there, but it is definitely still earlier stage.

Great, thanks for taking my call.

Thanks, Chris.

We will next go to the site of Patrick Newton with Stifel. Your line is open.

Good morning. Thanks for taking my question. I have several , so I will try to get through as many as possible. Number one, I would assume that the Trimble relationship and you elude to as much, was that a big point of success in the quarter. Can you help us understand sell-in versus sell through? I believe that you do recognize revenue on sell-in, and if you could let us know or help us understand what the stocking effect was in the quarter and how that should play out, and is there any potential that we see any kind of hiccup as we reach a normalized sell-in sell-through type of metric?

Sure. You are correct we do recognize revenue on sell-in and you are right that the Trimble relationship definitely had benefit in Q4, though I would say it is still at what I would call the early stages. When you look at the benefit for the quarter, the Trimble distributors that are out there, I break them into two categories. You have the ones we had already established individually they were already selling the FARO Laser Scanner into the marketplace directly. So the transition to the FARO agreement with Trimble and the private label product was simply a transition of selling as those distributors finish selling the FARO units that they already had then they transition to the new Trimble unit and started selling those, and in all cases the bulk of the distributors it is not like they are carrying 20 units on their shelves. They tend to carry 4, 5, 2, 6. That is sort of the size of portfolio that we are seeing, whichis that not a bad thing because that ensures -- I should not say ensure. But it gives us the best possible flow that they are not putting 20 or 30 units on the shelf, and then there is no active for three or four months.

Then if you take the other group, which is the distributors who had not previously been working with FARO, I would call that group in the ramp up and learning phase. We saw this with not just Trimble distributors with all the distributors we have set up over the past year and half to two years we have been doing this now, there is a sequence of get them to understand the product. They order their first set of the products, it might be 1 or 2, it might be 3 or 4 that is fairly typical, not a whole lot more than that depending on the size of the distributor.

The products come in. Our application engineer will spend some time training. In the case of the Trimble agreement now we spend a descent amount of time in the quarter also doing train the trainer with the Trimble folks to try to allow them to have more of that relationship on an ongoing basis with their distributors, because that is similar to how they already operate with their other products that they sell through. So those newer distributors there is more sell-in than there is sell-through for the quarter for sure because they are just getting ramped up.

Though like I said it is not like they are all taking 20 units a pop and there was a significant onetime influx from that. The existing distributors which were a descent portion of Trimble's base going into the relationship they were clearly in sell-through mode throughout the entire quarter. So I think it was well balanced in that regard.

Thanks for the details, Jay. Just to confirm, I believe in prior conference calls you had said that you were roughly 20% to 25% penetrated in to Trimble prior to the OEM relationship; is that fair? Just to give us a sense of the existing Trimble distributors versus new.

I don't know if I said exactly 20% to 25%, but for sure we were at what I would call less than their majority, let me say it that way. And what I will say is that there are still some Trimble distributors that have not fully adopted the technology yet, so there is still some initial sell in that is incurring today. And some of that is really just timing more than anything else. We wanted to manage this appropriately with the Trimble folks.

And the Trimble team has been fantastic in getting this launched. They have done all the right things. They have been marketing it aggressively. We have seen Trimble independent ads for the product line in different trade publications and with different organizations that work with the product. And from a support standpoint we wanted to make sure this was laid out in a fairly cohesive and structured manner.

Okay. Shifting gears to Europe. From a top line perspective I think my math shows it is a little over 56% sequentially. Can you help us understand the growth from a FLS perspective relative to the rest of the business? And as we think about the changes that you have made there, you talked about the new GM in place in 2011 I think you turned about 30% of the account managers. Is this the leading edge of productivity gains from the turn over you had, or should we anticipate continue productive gains in that geography?

Let me go in reverses order. I will talk about the people part and I will let Keith talk about the number part. I would say you are right, number one, that there was about 30% turn within say a quarter of the initial changes that occurred during first quarter and the beginning of the second quarter of last year. Clearly that team has stabilized.

So when you got to Q4,you have minimal turn over and you have the existing team, of course, that had already been there and you have the new ones who are now any where from still maybe a month or two upwards to four or five months on board. So, yes, you are starting to see productivity. Are they fully productive yet, definitely not. We still see that learning curve as being nine to 12 months for the typical account manager.

So I would anticipate that that new group starts getting additional productivity even here in Q1, and as we get to Q2 that is when they ought to be hitting what we consider full stride. Looking at the current year no doubt we are going to continue adding account managers to help drive the growth we are anticipating for year, and that is part of the standard model for us.

We definitely still see substantial opportunity to split territories and do it in a way that you are not stealing necessarily from the existing account managers. You are not jeopardizing and cannibalizing the work that they have done, so that it is truly in fact an incremental add to the Company as you split that territory and bring in the new folks. And the Keith can talk about the numbers side.

As far as sequential you are right it is a 56% increase. But historically Q4 primarily in Europe has been roughly in the 40% mid 40% growth sequentially. I think what you see though is Q2 and Q3 sequentially, Q2 was flat. Q3 was down, so I think given the historical growth in Q4 there was probably a lot of delayed orders that just did not ship in Q2 and Q3, and now you see some of the budget flush that historically they have experienced in Q4.

So we should read that as Laser Scanner relative to the rest of the business it was good across the board and Laser Scanner was not an outsized contributor to the 56% sequentially increase.

I am not breaking it out by product line. I am just saying in total.

What I would say, Patrick, is there is good growth coming across the board. It does vary, obviously, by product line for sure. It is not like we have a whole bunch of product lines sitting flat and the LS is the only thing moving.

Okay. The last one for me is, Jay, you talked about new products, you talked about investments, and you talked about refreshes coming roughly on average ever three years. I believe your Focus Laser Scanner was launched in 4Q of 2010 meaning that it is right on that cusp of a three year refresh, but you lack a material competitor in this business. Is this a product line that is at the focus or leading edge of perhaps where you are investing?

So let me hit a couple of points there without trying to be coy about it. Every three to four years, so the four is still in there too. But are we putting significant investments into the Laser Scanner for sure. We love what we have done with the Focus Laser Scanner, and it has proven itself to be a fantastic product in the marketplace. We are a Company that firmly believes that you disrupt yourself as fast as you can, you do not wait for the others to do it, and you do not wait, if you are done and you are ready to go, you let it go.

So is it possible that the LS could be on a three year stint instead of a four year stint sure it is possible just like any of the other products, and I am certainly not going to commit to anyone of them. And to be fair we think of it the same way across the other product lines as well, not just the LS even though it is the newer and the one people like to talk about a lot because it is a brand new market for us. But we are investing fairly significant across the board in all of them would be the way to describe it.

All right. Thank you. Good luck.

Thanks , Patrick.

We will go next to the site of Jim Ricchiuti with Needham & Company .

Good morning. Jay,looking at the Q4 to Q1 seasonality, I guess it is average low double-digit declines over the last few years. Is there any reason to think that you would not see a similar pattern, or does the fact that you are still in somewhat of a channel fill with Trimble does that change things at all?

In that order I think, number one, I think you are correct that typical the sequential decline is low double-digit. Is that about right, Keith?

Yes.

11% 12%, 13%. It is probably too early to say definitively but what I will say as the Laser Scanner has become a bigger piece of the portfolio, we all know it is number two now and two years ago it was insignificant, not meaningless but it was financially insignificant to the Company. So that is shift for sure, and as we sell more and more through Trimble, do I believe that the seasonal patterns will shift overtime, for sure.

So does that mean -- what I cannot tell you, Jim, is it a slow role where it slowly eats away say the sequential decline from Q4 to Q1 or the giant increase that we sometimes see from Q3 to Q4, is it a sequential change or is there some step function we are going to experience, it is too early to tell that. I do believe it does affect it overtime. There definitely appears to be at least a different purchasing pattern over in that marketplace than what we see in the industrial world.

That is helpful. Turning to margins. Your service margins in the last two quarters have been meaningfully above levels we have seen in the last couple of years including what looks like a record level for Q4. What is driving this, is it sustainable?

Well, it is primarily increase in our warranty sales, and the warranty sales has a much higher gross margin compared to the rest of our service business. I think in all regions they have been focus over the past few years on increasing the sales of those warranties, because as you noted they are very profitable compared to training or the customer service work they pay by the drink.

Some things we have done there, to add some more color, there is two that stand out to me. One is changing the process by which we actually attack the warranty sale and how we address the customer and the way with which go about that and down to the actually sales person level has shifted fairly significantly in all three regions over the last two years. And then the broader side of it is, depending on the region whether you call it the extended warranty or you call it we found in places like Asia that warranty as a term does not resonate the same way as service agreement seems to feel more proactive and more value an added. So depending on how you shift the actually offering itself as a solution to the customer has had the some impact on customer acceptance as well.

Thanks. One final question and I will jump back in queue. Jay, you eluded recently in some of your public commentary about the possibility of making an acquisition that would potentially be more meaningful to revenue than some of the previous acquisitions you have done which have been more technology related. Any update on where you are with that?

I certainly still believe that is the case. As we look to aggressively grow the Company, and again I have talked about this transformation of FARO the next wave of transformation one of the things that that includes is the possibility of larger acquisitions. Yes, it is absolutely still possible in 2013. Yes, there are candidates out there that we are looking at. Without, obviously, saying anything specific about who they are.

What I would say though is the onething that does remain a constant for us is that the profile we look for must have what we consider to be market changing or market influencing or cutting edge, leading edge technology that can be leveraged and accelerated is critical factor number one. And if you clear that, you are looking at the team; what kind of people are we getting, are they right fit for FARO, do they think the way we do, do they think way outside of the box and do they share that same sort of aggressive view of the world of how we can help solve customer problems and third then becomes the financial profile.

The big difference obviously is if you are looking at a smaller startup type the financial profile and what you look at is sizeably lighter in terms of its impact versus a larger company that has a fully establish operation and in many cases global operation.

Okay. Thank as lot.

(Operator Instructions). We will now go to the site of Rob Mason with R W Baird. Your line is open.

Jay, could you give us your assessment of how you view order or deal close rates as you existed the fourth quarter. It seems like there was a couple of dynamics at play around the Trimble stocking orders perhaps customers that had been sitting on potential orders for a couple of orders and maybe budgets were released. Just as you existed fourth quarter what is your assessment of close rates, has there been much change there underlying?

Without saying the specific number increases, I would say number one, close rates in improved in Q4 for sure. A part of that certainly is the Trimble agreement as you are selling through and selling into that relationship as it has gotten better and better that is a piece of it. And then a portion of it I would say is your Q4 budget flush that we see historically. I would say the flush was not as robust as we are used to seeing. That obviously demonstrates itself in the numbers. When you look at the growth rate, it is good, but it is not what we historically like to see. From a color standpoint I will say that the budget flush this year occurred much later much later in the quarter.

Usually you really start seeing the activity pickup right after the U.S. Thanksgiving holiday, and it was deep into the quarter this year that that process started, which was both nerve racking on the front end and then hair brained or whitening on the delivery side of it as well. I think that was as much a function of just the overall environment customers knowing they had the budget but waiting that much longer to be absolutely certain there was not going to be an (Inaudible) to hold up on purchases at the last second.

I think we certainly saw that in the Americas and Europe. Asia for us and I think for many industrial company's Q1 particularly Japan and China in some respect Q1 for us tends to be their Q4, so we actually are looking in Q1 now for what that budget flush looks like in Asia, and does it follow a similar pattern where it tends to be really tail end of the quarter late March instead of early March or late February like we have historically seen.

Could you make a distinction between close rates among the Laser Scanner which obviously you did have the Trimble dynamic occurring and the core metrology products?

I could. Though it is still an earlier market for us I would say close rates for Laser Scanner are fairly consistent and what I would say are they improving some, probably -- I should not say probably. They are because you have more potential distributors just by the Trimble agreement alone that we are selling in to and then eventually selling through. On the metrology side what I would say is that they are coming off what are certainly not historically lows. 2009 would be the historical low on close rates for industrial customers on the metrology side, but Q2 and Q3 were slow relative in the metrology relative to what we are used to. Q4 definitely improved, but still not at what I would call our normal close rates on the metrology side. Definitely better, but not completely normal yet.

When would you expect to have all of the initial stocking orders to the Trimble distributors?

I think the larger majority have occurred already. There are still some occurring in Q1 for sure. We know there are a chunk of Trimble distributors that we have just not gotten to yet. By the end of Q1 are down to probably just what I call the stragglers the tail end, yes I think by the end of Q1 we are there. That seems to be where we are at this point. Certainly by the end of the first half all of the initial sell-in is done and you already well into sell through with most of them.

Okay. Keith, real quick. You called out the patent and legal fees for last year, what would you expect that number to look like in 2013?

Without putting a specific number around it I think, first of all, much, much lower. I think it depends on Nikon's decision is going to determine how much we spend going forward whether they decide to appeal or what the process is from there. But certainly we would not expect to incur the costs that we did this year. We went through a jury trial this year and that is a very expensive thing to do. I think we are getting to the end of that, but again it is pretty much in Nikon's court depending on their decision to appeal and where they want to go from here.

And certainly the Monitor cost which were significant in 2012 are gone.

Right. Okay. Thank you very much.

Thanks, Rob.

We will next go to the site of Jim Ricchiuti from Needham & Company with a follow-up question. Your line is now open.

Thanks. I just wanted to pick up on some of the order patterns in the Americas. It sounded like post election and certainly late in the quarter you saw a burst of activity, and I am wondering in the March quarter what kind of affect you might be seeing if any from sequestration? Is there any caution on the part of customers in the U.S. regarding that?

I think is there caution, for sure. But actually that caution from our perspective has been baked into the behavior for at least a quarter and a half now and arguably you started seeing it in Q3 because the Americas started slow a bit in Q3 as well. The thought process is the customers we talked to were expecting sequestration by the end of the year any ways so yes it got kicked a little further down, but they were already expecting it, they are still expecting it.

I don't think that has changed the behavior pattern relative to the last six months. Are they more concerned about it currently than they were say 12 months ago, absolutely, no doubt there. But we have been seeing it and managing through it and what I would call watching that stabilizes over that six month time period. You get over that initial fear, things slow down, the decision process slows down and then you get to a new normal for lack of a better word, that drives decision patterns from there.

Okay. Jay, on the change in the Americas leadership in the Company has there been an accompanying churn factor in the Americas as a result of the change, similar to what you experienced in Europe?

Definitely not similar to what we saw in Europe. The big occurrence in Europe was obviously the change with the managing director and within a month of that changing the sales leadership and the combination of those two then lead to the substantial account manager turn that Patrick referenced earlier. When you look at the Americas the sales leadership is fully intact. The sales leaders has been in that role for several years now and is still in that role, so when you look at account manager churn it is no different from normal for us in the Americas. That is the biggest difference for sure between the change in Europe versus the change in the Americas.

Okay. Thanks. And lastly indicate the tax rate which we assume for this year?

I think we continue to fluctuate between 26% and 28%. We had some benefit in both 2012 and 2011 from the effect of the exercise of incentive stock options. We are shifting more now toward non qualified options that have a different tax treatment, so we may not continue to see that affect from the employee exercise, but I think the 26% to 28% is probably still a good range.

Okay. Thank as lot.

And we are have a question from Patrick Newton with Stifel. Your line is open.

Jay (Inaudible) budget flush in 4Q was not as robust as in the past. And when I look at your average sequential 4Q growth rate over the last 12 years, it is 22%, and the high is 33%, which was in December of 2007, so you just matched that high on a sequential basis. Am I to interrupt that the sequential uptick with lack of a normal seasonal budget flush means that the delta between what is a record sequential uptick in revenue and sub seasonal budget flush is driven by the Focus Laser Scanner?

Certainly not entirely by the Focus Laser Scanner, but you are right you have to put some of that in to the mix because in 2007 Laser Scanner sales were completely insignificant relative to size of the Company -- relative to the Company's financials. So it is definitely a piece of it, and itwould tie to my feeling that on the metrology there was budget flush, but not at the same rate.

Okay. And then on the promotion side I believe, correct if I am wrong, that your prior promotions in the 3Q, 4Q time frame were largely bundled promotions; is that true or did you move beyond that and expand your promotion packages in 4Q?

It was primarily still the bundled promotion and that is part that we start unwinding here in Q1 and finish unwinding in Q2.

Okay. And can you quantify at all the success of the promotions, or how much revenue you think you might have pulled in and how we should think about that impacting Q1 and Q2 as you unwind these promotions?

Certainly not with a specific number. It definitely had some benefit and again we also tend to target the promotions at the customers that are sitting on the fence. There was not a ton of trying to get people who are way far away from the fence, because many of them would not have closed anyways. We tried to target it at the fence sitters. Did it help get some of them over the wall in the current quarter, no question about it. Would we have gotten that revenue eventually, I think we probably would have. Would it have occurred in Q1 or Q2, it is hard to tell, but it probably would have been in that time frame. Do I think it robbed Peter to pay Paul, so to speak, within Q1 versus Q4 not dramatically.

Okay. Thank you.

(Operator Instructions). At this time there seems to be no additional questions.

Very good. Thank you very much everybody for your attention this morning, and look forward to updating you at the end of Q1. Thanks.

This does concludes today's program. You may disconnect at any time.