Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - STRATASYS INC | Financial_Report.xls |
EX-31.2 - CERTIFICATION PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - STRATASYS INC | exhibit31-2.htm |
EX-21.1 - SUBSIDIARIES OF THE COMPANY - STRATASYS INC | exhibit21-1.htm |
EX-31.1 - CERTIFICATION PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - STRATASYS INC | exhibit31-1.htm |
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - STRATASYS INC | exhibit32-2.htm |
EX-23.1 - CONSENT OF GRANT THORNTON LLP - STRATASYS INC | exhibit23-1.htm |
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - STRATASYS INC | exhibit32-1.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||
[ √ ] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2011 | ||
OR | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from __________ to __________ |
Commission file number 1-13400
STRATASYS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-3658792 | |
State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization | Identification No.) | |
7665 Commerce Way, Eden Prairie, Minnesota | 55344 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrants telephone number, including area code | (952) 937-3000 | |
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
Common stock, $.01 par value | NASDAQ Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ √ ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). Yes [ √ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ √ ]
Large accelerated filer [ ] | Accelerated filer [ √ ] | |
Non-accelerated filer [ ] | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ √ ]
The aggregate market value of the registrants Common Stock held by non-affiliates of the registrant as of June 30, 2011, the last business day of the registrants most recently completed second quarter, was approximately $682,000,000. On such date, the closing price of the Registrants Common Stock, as quoted on the Nasdaq Global Select Market was $33.70.
The registrant had 21,287,065 shares of common stock outstanding as of March 1, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement to be filed with the Securities and Exchange Commission with respect to the registrants Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report.
TABLE OF CONTENTS
Page | |||
Part I | |||
Item 1. | Business | 1 | |
Item 1A. | Risk Factors | 15 | |
Item 1B. | Unresolved Staff Comments | 22 | |
Item 2. | Properties | 22 | |
Item 3. | Legal Proceedings | 23 | |
Item 4. | Mining Safety Disclosures | 23 | |
Part II | |||
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities |
24 | |
Item 6. | Selected Financial Data | 26 | |
Item 7. | Managements Discussion
and Analysis of Financial Condition and Results of Operation |
27 | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 42 | |
Item 8. | Financial Statements and Supplementary Data | 42 | |
Item 9. | Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure |
42 | |
Item 9A. | Controls and Procedures | 42 | |
Item 9B. | Other Information | 43 | |
Part III | |||
Item 10. | Directors, Executive Officers and Corporate Governance | 43 | |
Item 11. | Executive Compensation | 43 | |
Item 12. | Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters |
43 | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 43 | |
Item 14. | Principal Accountant Fees and Services | 43 | |
Part IV | |||
Item 15. | Exhibits and Financial Statement Schedules | 44 | |
Signatures |
PART I
Item 1. Business.
General Development of Business
Stratasys, Inc. is a worldwide leading manufacturer of three-dimensional (3D) printers and 3D production systems for the office-based rapid prototyping (RP) and direct digital manufacturing (DDM) markets. Our 3D printers and 3D production systems provide 3D computer-aided design (CAD) users a fast, office-friendly, and low-cost alternative for building functional 3D parts. We develop, manufacture and sell a broad product line of 3D printers and 3D production systems (and related proprietary consumable materials) that create physical parts from CAD designs. We also offer rapid prototyping and production part manufacturing services through our centers located in North America, Europe and Australia. As of December 31, 2011, we hold more than 350 granted or pending additive fabrication patents globally. Stratasys products are used in the aerospace, defense, automotive, medical, business and industrial equipment, education, jewelry, architecture, dental, and consumer-products markets.
We were incorporated in Delaware in 1989 and our executive offices are located in Eden Prairie, Minnesota. Most of our systems are based on our core patented fused deposition modeling (FDM®) technology and on our patented Genisys® technology, which we purchased from IBM in 1994. We sold our first commercial product in April 1992, and in February 2002, we introduced the first 3D printer in our Dimension® product line. The Dimension line offers modeling capabilities in durable ABS plastic using a desktop 3D printer platform. In May 2007, we began offering high-performance systems that were specifically designed for DDM, which is the production of end use parts and tools used in fabrication and assembly. Other recent significant developments in our business are set forth below:
- In May 2011, we acquired Solidscape, Inc.
for $39.1 million in cash. Solidscape is a manufacturer of high precision 3D
printers and is a proven leader in investment casting applications that
require ultra-fine feature detail. This addition provides us with access to
markets that we did not previously serve, including the under-penetrated
jewelry, dental and precision industrial casting markets. We believe this
acquisition provides the potential to expand our technology platform into new
applications and will create synergies, particularly in our respective sales
channels, manufacturing, and research and development.
- In July 2011, we introduced the Fortus 250mc Production System. The Fortus
250mc combines the ease-of-use and affordability of Dimension 3D Printers with
the control of Insight Software, used to drive the Fortus line of production
systems. With Insight, users will have added control of build speed, part
accuracy, and feature detail. The Fortus 250mc uses Stratasys SR-30 soluble
support material, which has a faster dissolve time than other soluble support
materials.
- In September 2011, we completed the initial term of a Master Original
Equipment Manufacturer Agreement (the OEM Agreement) with Hewlett-Packard
Company (HP), and are now in an extension term, which currently expires
September 30, 2012. Under the OEM Agreement, we are manufacturing a line of
FDM (Fused Deposition Modeling) 3D printers and related accessories and
consumables exclusively for HP for resale under the HP DesignJet brand in
certain countries. The OEM Agreement now includes Austria, Switzerland and
Ireland in addition to France, Germany, Italy, Spain and the United Kingdom.
We believe this distribution channel continues to be a valuable approach to
increase sales and enhance awareness of 3D printing.
- In December 2011, we extended our collaborative agreement with a Fortune 500 global manufacturing company to develop new platforms for DDM applications. Due to the success of this arrangement, we are continuing this relationship under similar terms and objectives and have received a purchase order for $1.9 million expected to be fulfilled in 2012. In 2011, 2010 and 2009, we offset approximately $0.7 million, $1.2 million and $2.2 million, respectively, of R&D expenses with monies received from this customer. As a result of prior collaborations with this Fortune 500 company, we had a commercial release of the Fortus 900mc in August 2008, which has the largest build envelop in our current product line.
1
- In July 2011, we introduced our newest ABS-ESD7 part build material. ABS-ESD7 is a thermoplastic with static dissipative properties for applications where a static charge can damage products, impair their performance or cause an explosion. This makes ABS-ESD7 ideal for DDM applications and is most widely used to create jigs and fixtures for the assembly of electronic components, but it is also useful for building functional prototypes of fuel storage and delivery products, as well as cases, enclosures and packaging. ABS-ESD7 also eliminates another common static electricity problem: the attraction and buildup of particulate, such as dust or powders, which can degrade product performance.
- In February 2011, we obtained ISO 9001:2008 certification. ISO 9001:2008 is a standard established by the International Organization for Standardization that provides a set of standardized requirements for a quality management system. We believe that ISO certification of our quality management systems will help us expand our products applicability to RP and DDM in key markets such as aerospace, defense, medical and automotive.
- In February 2012, RedEye obtained AS9100C
certification. AS9100 is the quality management system for the aviation,
space, and defense industries. AS9100 fully incorporates ISO 9001:2008 while
adding nearly 100 additional requirements specific to quality and safety for
aerospace. We believe that AS9100C certification in RedEye will help us expand
our services applicability to DDM in the aerospace and defense
markets.
- In December 2010, we purchased a 90,000 square foot facility that will be used to expand production capacity for machines and consumables, as well as streamline and consolidate warehousing and shipping operations. Initial improvements to the facility were made and a portion of the building was occupied in July 2011.
Description of Business
We develop, manufacture, market, and service a family of 3D printers and 3D production systems that enable design and manufacturing engineers to create physical models, parts, tooling and prototypes out of plastic and other materials directly from a CAD workstation. Our high-performance RP systems are used both to create prototype models as well as produce parts for end-user, or DDM, applications. Our 3D printers and 3D production systems can be used in office environments without expensive facility modification. In many industries, the models and prototypes required for product development are produced laboriously by hand-sculpting or machining, a traditional process that can take days or weeks. Our computerized modeling systems use our proprietary technology to make models and prototypes as well as end-use parts directly from a designers 3D CAD file in a matter of hours. This can eliminate machining and tooling costs and allows for inexpensive design changes. In addition to selling high-performance RP systems and 3D printers, our RedEye paid parts service makes and sells physical models, tooling, prototypes and parts for RP and DDM applications based on the customers CAD files.
The 3D printers and high-performance RP systems using our FDM technology to produce prototypes and parts from industrial production-grade plastic do not rely on lasers. This affords our products a number of significant advantages over other commercially available 3D rapid prototyping technologies that rely primarily on lasers to create models. Such benefits include:
- the ability to use the device in an office environment due to the absence of hazardous emissions
- little or no post-processing
- minimal material waste
- better processing and build repeatability
- ease of use
- minimal system set up
- the availability of a variety of thermoplastic materials
- modeling in product-grade plastics for functional testing
2
- no need for costly replacement lasers and laser parts
- higher reliability
Our systems can also run virtually unattended, producing models while designers perform other tasks.
The process involved in the development of a 3D model using our FDM systems begins with the creation of a 3D geometric design on a CAD workstation. The design is then imported into our proprietary software program, which mathematically slices the CAD design into horizontal layers that are automatically downloaded into the system. A spool of thin thermoplastic modeling material feeds into a moving FDM extrusion head, which heats the material to a semi-liquid state. This semi-liquid material is extruded, deposited and bonded, one ultra-thin layer at a time, on a base (the X-Y Stage) in a thermally-controlled modeling chamber. As the material is directed into place by the computer-controlled head, layer upon layer, the material bonds and solidifies, creating a precise and strong model.
Our Solidscape 3D printing technology uses a Drop-on-Demand (DoD) thermoplastic ink-jetting technology to produce wax-like patterns for lost-wax casting/investment casting and mold making applications. The process begins with the creation of a 3D geometric design on a CAD workstation. The CAD file is then input into the 3D printer using Solidscape proprietary graphical front-end software, ModelWorks®. The 3D printer creates solid 3D parts through an additive, layer-by-layer process, using patent-protected, DoD thermoplastic ink-jetting technology and high-precision milling of each layer. The parts produced are extremely high resolution with precise details and fine surface finish.
Based upon data and estimates furnished in the 2011 Wohlers Report, through 2010 we shipped approximately 38% of all industrial RP systems sold worldwide since 1996. The 2011 Wohlers Report also states that we sold 42% of all industrial RP systems sold globally in 2010.
Applications for 3D Production Systems and 3D Printers
Both 3D production systems and 3D printers allow for the physical modeling of a design using a special class of machine technology. These systems take data created from CAD files, CT and MRI scan data, or 3D digitized data to quickly produce models, using an additive approach. Traditionally, RP and 3D printing have been used by organizations to accelerate product development. Many companies use RP and 3D printing models to test form, fit and function to help improve the time to market.
Frequently, users report rapid pay-back times from using RP and 3D printing, as they accelerate their product development cycle and reduce post-design flaws through more extensive design verification and testing.
DDM involves the use of our systems for the direct manufacture of parts that are subsequently incorporated into the users end product or process. DDM is particularly attractive in applications that require short-run or low-volume parts that require rapid turn-around, and for which tooling would not be appropriate due to small volumes. For example, customers produce parts for high-end, specialized vehicles or parts that are subsequently used in the assembly of their unique products. Our Fortus 360mc, 400mc, 900mc and Solidscape systems are well suited for these types of applications.
An emerging portion of the DDM market segment is the production of manufacturing tools that aid in the customers production and assembly process. We believe this fabrication and assembly tool market is substantially larger than the $1.1 billion additive fabrication market that we currently serve. In addition, we have seen a growing number of applications for end-use parts.
We have shipped over 22,000 systems since our inception. A wide variety of design and manufacturing organizations use our systems. Current markets and applications include:
|
|
3
|
| |
|
|
Products
3D Production Systems and 3D Printers
We have been developing, enhancing and expanding our high-performance systems and 3D printers since our inception in 1989. We have improved both the speed and the accuracy of our high-performance Fortus systems, expanded their build envelopes, introduced a number of new modeling materials and developed and introduced a low-cost 3D printer. We have also enhanced and upgraded the software that our systems use to read CAD files and build parts. In May 2011, we acquired Solidscape whose 3D printers use DoD thermoplastic ink-jetting technology and high-precision milling produces extremely high resolution parts with precise details and fine surface finish.
Each of our products is based upon either our patented FDM process, Solidscape DoD thermoplastic ink-jetting technology or technology acquired from IBM. Our products are sold as integrated systems, consisting of an RP machine, the software to convert the CAD designs into a machine compatible format and modeling and support materials. Each of our products is compatible with an office environment and does not require an operator to be present while it is running.
Our family of 3D printers and high-performance systems affords a customers product development team, including engineers, designers and managers, the ability to create prototypes through all stages of the development cycle. Our products meet the needs of a demanding and diverse industrial base by offering a wide range of capability and price from which to choose. The domestic end user list prices of our systems range from $13,900 for the uPrint Personal 3D Printer to $379,900 for our high performance Fortus 900mc.
The Dimension line of 3D printers allows users to create parts in ABSplus plastic. ABS usually offers the part strength required for true form, fit and functional testing. Dimension 3D printers operate in an office environment and provide speed, ease of use and networking capabilities at a competitive price. They feature our Catalyst EX® software, which offers a single push-button operation by automating all of the required build procedures. We introduced the uPrint Personal 3D Printer in January 2009 at a list price of $14,900. In January 2010, we expanded the Dimension uPrint product line by introducing the uPrint Plus. This system offers the same small footprint as the previously introduced uPrint but offers a 33% larger build envelop. It also allows the user to print in seven additional colors and offers two resolution settings. Using Dimensions proven FDM technology, the uPrint and uPrint Plus build models with Stratasys ABSplus a material that is on average 40 percent stronger than our standard ABS material, making it ideal for testing the form, fit and function of models and prototypes. The Dimension 1200es SST, introduced in January 2008 and priced at a domestic end user list price of $32,900, offers the ability to build larger parts and creates parts from our ABSplus material as well.
The Fortus 400mc was introduced in July 2007 and allowed for an increase in repeatability, part accuracy and material strength. In addition, in January 2008, we introduced the Fortus 360mc, which offers similar part quality to the Fortus 400mc, but fewer material choices and slower build speeds. Both of these systems can be configured to meet specific customer needs. The InSight software used by our Fortus systems offers the customer an array of features that is more flexible than Catalyst EX, ranging from a fully automated build process to one that allows the user to customize each step. Domestic end user prices for these systems range from of $85,900 to $258,900 depending on the configuration and needs of the customer.
4
In December 2007, we introduced the Fortus 900mc, which represents our largest system ever. It is capable of building parts measuring 4.5 feet diagonally, nine times larger volumetrically than parts built by the Fortus 400mc. The Fortus 900mc uses ball-screw technology, which improves part accuracy, positional repeatability and tolerances. This product is the direct result of a $3.6 million development contract from a Fortune 500 global manufacturing company entered into in September 2005 to advance our proprietary FDM® technology for direct digital manufacturing applications.
Our 3D printers and 3D production systems incorporate our WaterWorks soluble support system. The patented WaterWorks process allows for the easy removal of supports from a completed prototype by simple immersion into a water-based solution. Because our support materials dissolve in a solution, many post-processing steps required in our competitors systems are not required with our systems.
Our Solidscape line of 3D printers incorporates ModelWorks software and printing technology, ideal for small parts and assemblies used in personal consumer electronics such as mobile phones, pagers, MP3 players; biomedical products such as biocompatible implants, dental prosthetics, orthodontic appliances, toys, medical research, orthopedics; and jewelry products such as investment cast fine jewelry, spin cast and plated fashion jewelry. The R66Plus is the entry point to the Solidscape line of 3D printers and is most often used by custom retail jewelers to produce high quality fully castable wax masters for intricate jewelry designs. The T76PLUS is ideal for traditional manufacturers, larger custom retailers and high volume service bureaus. This system is also capable of producing high quality, fully castable wax masters for intricate designs. The D76PLUS is ideal for medium sized dental laboratories and is used to produce high quality castable and pressable dental restorations. The end user list prices of our Solidscape 3D printers range from $30,650 to $45,650.
We periodically discontinue manufacturing older products. We discontinued the Prodigy Plus system in 2007, the Vantage and Titan systems during 2008, and the BST 768, SST 768, Fortus 200mc and Maxum systems during 2009. Although we have discontinued the manufacture of these systems, we continue to provide service support in the field and offer next generation systems in those categories.
Part Build Materials
The modeling and support filament used in the RP and DDM systems and 3D printers that we sell are consumable products that generate recurring revenue. We believe that FDM technology allows the use of a greater variety of production grade thermoplastic building materials than other RP technologies. We continue to develop filament modeling materials that meet our customers needs for increased speed, strength, accuracy, surface resolution, chemical and heat resistance, color, and mechanical properties. These materials are processed into our patented filament form, which is then fed into the FDM systems. Our spool-based system has proven to be a significant advantage for our products over ultraviolet (UV) polymer systems or powder based systems, because our system allows the user to quickly change material by simply mounting the lightweight spool and feeding the desired filament into the FDM devices. The spool-based system also compares favorably with stereo lithography (SLA) UV polymer systems, because the spool-based system allows the customer to use it in an office environment and to purchase a single spool, as compared to an entire vat of SLA UV polymer with a limited vat life, thereby reducing the customers up-front costs.
Currently, we have ten part build materials in multiple colors commercially available for use with our FDM technology:
- ABS is an engineering thermoplastic material (named for its three initial monomers, acrylonitrile, butadiene, and styrene), which offers a balance of strength, toughness and thermal resistance and is used commercially to make products such as cell phones, computer cases and toys.
- Polycarbonate (PC) is an engineering thermoplastic material, which is
used commercially for demanding applications in a number of industries. PC
offers superior impact strength coupled with resistance to heat and corrosive
agents.
- PC-ABS is a blend of PC and ABS plastic. The blend combines the strength
of PC with the flexibility of ABS.
- Polyphenylsufone (PPSF) is a specialty thermoplastic material that offers excellent mechanical properties while being subjected to demanding thermal and chemical environments. PPSF is used to make prototype parts for numerous industries, including automotive, fluid and chemical handling, aerospace, and medical sterilization.
5
- PC-ISO is a derivative of PC that is translucent and can be sterilized for medical device or surgical jig and fixture production or prototyping.
- ABS-M30i is a biocompatible material ideal for direct digital manufacturing applications in the medical, food and pharmaceutical equipment industries with ISO 10993 certification relating to ethylene oxide sterilization requirements.
- ABSplus and M-30, like ABS, are thermoplastic materials with all the associated benefits. ABSplus has the added benefit of creating additional part strength. Parts built with these materials are on average 40% stronger than our standard ABS parts.
- ABSi is a higher grade translucent ABS, which features greater impact strength than our standard ABS. It can also be used in medical applications, including gamma-ray sterilization.
- ULTEM 9085 is a strong, light weight, flame and chemically resistant thermoplastic material that is frequently used in aerospace, automotive and military applications.
- ABS-ESD7 (our newest material) is an ABS thermoplastic with static dissipative properties for applications where a static charge can damage products, impair their performance or cause an explosion. Most widely used to create jigs and fixtures for the assembly of electronic components, it is also useful for building functional prototypes of fuel storage and delivery products, as well as cases, enclosures and packaging.
Our Solidscape 3D materials are non-toxic thermoplastic materials featuring excellent lost wax casting qualities, including fast melt out, no ash or residue and no thermal expansion. Currently, we have three modeling materials commercially available for use with our Solidscape technology:
- Indura®Cast is a thermalpolyester formula that completely vaporizes during burnout, leaving no ash residue, resulting in highly accurate casting. The resulting models accurately retain the finest details, greatly reducing the time needed for post processing refinement.
- plusCast is a thermalpolyester formula developed to help retail jewelers and manufacturers meet the market demand for finished goods using less precious materials. Test results indicate it to be up to 30% stronger than InduraCast and the increased durability enables designers to incorporate even more intricate details with thinner walls into their work to produce lighter weight finished jewelry.
- DentaCast® is a thermalpolyester material formulated to deliver high casting yields for dental applications.
In addition to the modeling materials, support material is used during the build process. Our proprietary water-soluble support material, WaterWorks, is dissolved from the finished part after the FDM build process in our automatic WaveWash system, which was introduced in 2010. We also offer a soluble support material called SR-30, which can dissolve 69% faster than the previous soluble support material. Other proprietary support materials that are removed from the final model by hand are also available.
Our Solidscape 3D printing systems use Indura®Fill material to automatically generate a support structure for the model during the build process. This saves the CAD designer the time and effort of configuring supports. After the printing is complete, the InduraFill material dissolves away in a liquid solution.
Each material has specific characteristics that make it appropriate for various applications. The ability to use different materials allows the user to match the material to the end use application, whether it is a pattern for tooling, a concept model, a functional prototype, a DDM manufacturing tool, or a DDM end use part. ABS and ABSplus are offered in numerous colors, including white, black, red, blue, yellow, olive, nectarine and dark grey. We also offer a service to create custom colors for unique customer needs.
6
Operating Software
Our high-performance systems and 3D printers use one of two software products that convert the three-dimensional CAD databases into the appropriate code to operate our FDM system. The software products also provide a wide range of features, including automatic support generation, part scaling, positioning and nesting, as well as geometric editing capabilities. The software is integrated into the system and is not sold as a stand-alone product.
Catalyst EX, our entry-level software product, enables users to build prototype parts at the push of a button. It was introduced in 2000 and is used on Dimension 1200es SST and BST, Dimension Elite, uPrint, and uPrint Plus. HPs Designjet printers use a version of Catalyst EX, branded under the HP Designjet 3D Software Solution name.
Our InSight preprocessing software is used on our Fortus products Fortus 250mc, 360mc, 400mc, and 900mc. It increases build speed and improves the design engineers control and efficiency over the entire build process. It has a broad set of features that facilitate demanding applications ranging from a single push button for automatic preprocessing to individual editing and manipulation tools for each process step.
We continuously improve both software products to meet the demands of our sophisticated customers. Our latest software enhancement is Smart Supports, a software feature that reconfigures the way support material is structured in the build process in order to reduce support material usage by as much as 40%. Throughput enhancements, advanced build algorithms and features such as Smart Supports are intended to keep pace with complex industrial geometric designs while saving valuable operator time.
Our Solidscape systems employ ModelWorks software that has a familiar Windows interface. ModelWorks permits selection of desired resolution and allows setup of variable slice thicknesses supported in the same model or pattern. ModelWorks also automatically generates the model support structure as well as the positioning and orientation on the build plate. Click-It® software controls the material deposition (Drop on Demand) utilizing the proprietary Smooth Curvature Printing technology, which enables the printers to deliver the high precision.
Services
Maintenance, Leasing, Training and Contract Engineering
We also provide a number of services in relation to our rapid prototyping business. We provide maintenance to our customers directly or through third-party service organizations under standard warranty contracts and separate maintenance contracts. In the United States, we lease or rent 3D printers and 3D production systems to customers that may not be interested in purchasing a printer. We offer training to our customers, particularly on our high-performance systems. We also offer contract engineering services to third parties in connection with the strategic development and use of our systems and services by incorporating our proprietary technology.
RedEye Paid Parts
Our RedEye paid parts service produces prototypes and end-use parts for customers from a customer-provided CAD file. This allows the customer to benefit from our knowledge base, capitalize on the variety of materials and machine types available through our service center, and take advantage of additional capacity using the latest in proven RP and DDM technologies and processes. Our RedEye on Demand website service, www.redeyeondemand.com, enables our customers to obtain quotes and order parts around the clock, seven days a week.
Foreign Service Bureaus
We have a relationship with two foreign service bureaus, RapidPro and the Materialise Group. These service bureaus utilize Stratasys printers, along with other technologies, to produce prototypes. Stratasys collects a portion of the revenue generated by these printers. RapidPro is an Australian-based rapid manufacturing bureau. The Materialise Group is headquartered in Belgium and specializes in the field of rapid industrial and medical prototyping.
7
Marketing, Distribution and Customers
Marketing and Customers
The focus of our marketing begins with the identification of customer needs. We feature a broad array of products that allow us to meet the precise needs of engineers, designers, educators, marketers and manufacturers. Our products range from uPrint, with a domestic end user price of $13,900, to a high productivity Fortus 900mc, priced domestically up to $379,900. We currently offer twelve systems, excluding the HP branded printers, between these price points, that meet diverse material, size and performance criteria.
We have sold systems to the following representative customers:
No customer accounted for more than 10% of sales in 2011, 2010, or 2009.
We use a variety of tactical marketing methods to reach potential customers:
|
|
In addition, we have developed domestic and international on-site demonstration capabilities.
Sales Field Structure
Our sales organization uses a reseller network and is divided into two groups based on geographical areas. The Americas sales organization covers North, Latin American and the International sales organization covers all other areas of the world. This structure allows us to align our sales and marketing resources with our diverse customer base and, specifically in the United States, provides more than three times the sales support for high-end systems compared to a direct sales channel.
8
Americas Sales Organization
The Americas sales organization provides sales support to a network of more than 100 reseller locations in North, Central and South America. On January 1, 2009, we began selling our Fortus 3D Production Systems through a select group of North American resellers that had previously distributed only the Dimension 3D printer product line. This sales strategy leverages our success with a network of independent regional resellers that we believe is the strongest sales channel in the industry. By replacing our Fortus 3D Production Systems direct sales channel with our existing reseller channel, we have converted a significant portion of our fixed selling costs to a variable cost structure.
International Sales Organization
The International sales organization uses a network of more than 100 resellers to market, sell, and service our 3D printers and Fortus 3D Production Systems. Our International sales organization supports all major regions of the world outside of the Americas including Europe, the Middle East, Korea, Taiwan, Japan, and China. We also operate international sales and service centers in Frankfurt, Germany; Genoa, Italy; Bangalore, India; and Hong Kong.
Reseller Network
We use an extensive world-wide reseller network to market and sell our 3D printers, Fortus 3D production systems, and consumable materials, and to provide maintenance service and replacement parts. Most of the reseller outlets have 3D printers available for tradeshows, product demonstrations and other promotional activities. Many of them also enjoy a long-term presence in their respective territories making this distribution model highly effective relative to a direct sales model. In addition to our 3D Printers and 3D production systems, most resellers sell and service a third-party 3D solid CAD software package.
In September 2011, we completed the initial term of a Master Original Equipment Manufacturer Agreement (the OEM Agreement) with Hewlett-Packard Company (HP), and are now in an extension term, which currently expires September 30, 2012. Under the OEM agreement we are developing and manufacturing a line of FDM 3D printers and related accessories and consumables exclusively for HP for resale under the HP brand in France, Germany, Italy, Spain, the United Kingdom, Austria, Switzerland and Ireland. In March of 2010, we delivered our first shipment of 3D printers to HP under this OEM Agreement. In April of 2010, HP launched our support removal system and the WaveWash system in those countries under the HP brand name, HP Designjet 3D Removal System.
HP has agreed not to sell any 3D printers manufactured by any other companies, including HP, throughout the world for the term of the OEM Agreement. The term of the OEM Agreement will be extended for additional one-year periods unless the agreement is terminated on advance notice by either party. During the term of the OEM Agreement, we have agreed not to sell comparable products covered by the Agreement directly or indirectly in the territory covered by the OEM Agreement. The OEM Agreement does not require HP to purchase any minimum quantity of products. After the initial term, or by mutual agreement, the territory in which HP will have the exclusive right to sell the 3D printers covered by the OEM Agreement may be expanded to additional countries. Ultimately, our mutual intention is for HP to sell our low-cost 3D printers globally.
RedEye Paid Parts
In 2006, we established a dedicated sales channel to offer our RedEye paid parts services through our RedEye on Demand instant Internet quoting system. This team is responsible for growing our paid parts service and nurturing customers who have RP and DDM part needs. Our objective is to ensure that the customer has a favorable experience when solving their internal part requirements. Besides a commitment to customer satisfaction, an essential objective of this operation is to increase the number of quality FDM parts in the marketplace, which, in turn, we believe will also support the expansion of our system sales. In 2007, we launched software that enabled instant part quoting via RedEye RPM, later rebranded as RedEye on Demand, in both Europe and Australia.
In December 2008, we announced that AutoCAD users can order digitally manufactured prototypes and production parts quickly and easily through an on-demand 3D printing capability supported by our RedEye paid parts service. AutoCAD 2009 subscription customers had access to this functionality via a bonus pack. Included in the bonus pack was on-line ordering capability, giving designers and engineers the ability to get instant quotes and place orders from our RedEye paid parts service. AutoCAD 2010 and 2011 subscription customers continue to have access to this functionality.
9
Customer Support
Our Customer Support department provides on-site system installation and maintenance services and remote technical support to users of our products. We offer services on a time and materials basis as well as through a number of post-warranty maintenance contracts with varying levels of support and pricing. Our domestic customers can use a toll-free telephone number to request technical assistance, schedule service visits, order parts and supplies, or directly contact a manager within the Customer Support department. Our help desk provides technical support via phone, fax, and e-mail to international customers, resellers, and our field service personnel.
The uPrint maintenance and servicing is performed by a third-party service organization or selected resellers in certain international locations. For our high performance systems, we employ a field service organization and third-party service organizations that perform system installation, basic operation and maintenance training, and a full range of maintenance and repair services at customer sites. Field representatives have been trained and certified to service all of our products. Representatives are strategically located in regional offices across North America. They have secure remote access to a customer service database containing service history and technical documentation to aid in troubleshooting and repairing systems.
Customer Support is represented on cross-functional product development teams within Stratasys to ensure that products are designed for serviceability and to provide our internal design and engineering departments with feedback on field issues. Failure analysis, corrective action, and continuation engineering efforts are driven by data collected in the field. Ongoing customer support initiatives include development of advanced diagnostic and troubleshooting techniques and comprehensive preventative maintenance programs, an expanded training and certification program for technical personnel, and improved communication between the field and the factory.
Warranty and Service
We offer a one-year warranty on Fortus 3D production systems and uPrint systems worldwide. In addition we offer a one-year warranty on all other systems sold internationally and systems sold into the education market domestically. All other domestically sold systems have a 90-day warranty. We also offer annual and multiple-year service and maintenance contracts for our systems. Service contracts for our systems have a domestic end user price from approximately $2,000 to $49,000 per year.
Manufacturing
Our manufacturing process consists of assembling systems using purchased components from our proprietary designs and producing proprietary consumable filament to be used by our systems. We currently operate on a build-to-forecast basis and obtain all parts used in the manufacturing process either from distributors of standard electrical or mechanical parts or from custom fabricators of our proprietary designs. Our suppliers are measured by on-time performance and quality.
We purchase major component parts for our Fortus 3D Production Systems and 3D printing systems from various outside suppliers, subcontractors and other sources and assemble them in our Minnesota facilities. Our production floor has been organized using demand-flow techniques (DFT) in order to maximize efficiency and quality. Using DFT, our production lines are balanced, and as capacity constraints arise, we can avoid the requirements of reconfiguring our production floor.
Computer-based Material Requirements Planning (MRP) is used for reordering to ensure on-time delivery of forecasted parts. All operators and assemblers are certified and trained on up-to-date assembly and test procedures, including Assembly Requirement Documents, which originate in engineering. The assembly process includes semi-automated functional tests of key subassemblies. Key functional characteristics are verified through these tests and the results are stored in a statistical database. At the completion of assembly, we perform a complete power up and final quality test to ensure the quality of our products before shipment to customers. The complete final quality tests must be run error free before the system can be cleared for shipment. We maintain a history log on all products that shows revision level configuration and a complete history during the manufacturing and test process. All issues on the system during the manufacturing process are logged, tracked and used to make continuous process improvements of our production processes. Other manufacturing strengths that are incorporated into our new designs are the commonality of designs among our different products as well as the incorporation of Six Sigma concepts. Our filament production utilizes Factory Physics® techniques to manage critical buffers of time, capacity and inventory to ensure product availability. We also utilize the 5S method (Sort, Set-in-order, Shine, Standardize and Sustain) as part of our lean manufacturing initiatives to improve organization and efficiency.
10
To provide customers with assurance regarding the quality and consistency of our systems, we obtained ISO 9001: 2008 certification in February 2011. ISO 9001: 2008 provides a structure for a quality management system that strives for customer satisfaction, consistent quality, and efficiency. In addition, there are internal benefits such as improved customer satisfaction, interdepartmental communications, work processes, and customer-and-supplier partnerships. The ISO 9000 family of standards relates to quality management systems and is designed to help organizations ensure they meet the needs of customers and other stakeholders.
We maintain an inventory of parts to facilitate the timely assembly of products required by the production plan. While most components are available from multiple suppliers, certain components used in our systems and consumables are only available from single or limited sources. We consider these single-source suppliers to be very reliable, but the loss of one of these suppliers could result in the delay of the manufacture and delivery of those materials and compounds. This type of delay could require us to find and re-qualify the product supplied by one or more new vendors. Although we consider our relationships with our suppliers to be good, we continue to develop risk management plans for these critical suppliers.
Research, Development and Engineering
We believe that ongoing research, development and engineering efforts are essential to our continued success. Accordingly, our engineering development efforts will continue to focus on customer requested enhancements, improvements to the FDM technology and development of new modeling processes, materials, software, user applications and products. We have devoted significant time and resources to the development of a universally compatible and user-friendly software system. We are committed to designing products using the principles of Six Sigma. We continue to standardize our product platforms, leveraging each new design so that it will result in multiple product offerings that are developed faster and at reduced expense. The Fortus, 250mc, 360mc, 400mc, 900mc, Dimension, and uPrint products as well as the Catalyst EX and InSight software products are examples of this successful strategic initiative. For the years ended December 31, 2011, 2010 and 2009, our research, development and engineering expenses were approximately $14.4 million, $9.8 million and $7.7 million, respectively.
Our relationship with HP has increased our focus on product reliability. HP requires a superior quality standard and demands extensive testing prior to production to ensure consistency. This focus, combined with HPs standards, has created a positive effect on the overall quality of our systems.
Our filament development and production operation is located at our facilities in Eden Prairie, MN. We regard the filament formulation and manufacturing process as a trade secret and hold patent claims on filament usage in our products. We purchase and formulate raw materials for our consumable filament production from various polymer resin suppliers with different levels of processing and value add applied to the raw materials.
Intellectual Property
We consider our proprietary technology to be material to the development, manufacturing, and sale of our products and services and seek to protect our technology through a combination of patents and confidentiality agreements with our employees and third parties. All patents and patent applications for rapid prototyping processes and apparatuses associated with the Stratasys FDM technology have been assigned to us by their inventors. As part of our purchase of rapid prototyping technology assets from IBM, we were also assigned the rights and title to several patents developed by IBM. We recorded these patents domestically and in certain foreign countries. The United States patents covering our proprietary technology will expire at various times through 2030. In total, we currently own over 255 FDM-related U.S. and international patents and patent applications, and we have been assigned rights under an additional 45 UV polymer-based U.S. patents.
11
Our registered trademarks include:
|
|
|
Other trademarks include:
|
|
|
Each of the registered trademarks has a duration of 10 years and may be renewed every 10 years while it is in use. Trademark applications have also been filed in Japan, the European Community, China, the Republic of Korea, Canada, and Hong Kong.
We have also registered a number of Internet domain names, including the following:
|
|
|
Backlog
Our total backlog of system orders at December 31, 2011 was approximately $12.5 million, as compared with approximately $8.6 million at December 31, 2010. We estimate that most of our backlog will ship by the end of first quarter of 2012.
Seasonality
Historically, our results of operations have been subject to seasonal factors. Stronger demand for our products has occurred in our fourth quarter primarily due to our customers capital expenditure budget cycles and our sales compensation incentive programs. Our first and third quarters have historically been our weakest quarters for overall unit demand. Although the first quarter has had higher volumes in recent years from the successful introduction of new products, it is typically a slow quarter for capital expenditures in general. The third quarter is typically when we see our largest volume of educational related sales, which normally qualify for special discounts as part of our long-term market penetration strategy.
12
Competition
We compete in a marketplace that is still primarily using conventional methods of model-making and prototype development. We believe that there is currently no other producer of industrial 3D modeling devices that uses a single-step, non-toxic technology similar to our FDM technology. Most of the commercial 3D printing and other RP systems manufactured by our competitors involve additional post-processing steps, such as curing the part after construction of the model or prototype. In addition, our FDM technology does not rely on the laser or light technology used by other commercial manufacturers in the RP industry.
Our competitors employ a number of different technologies in their RP devices. 3D Systems and CMET use stereo lithography (SLA) in their products. 3D Systems and EOS GmbH produce machines that use selective laser sintering (SLS) to harden powdered material. Z Corp. uses inkjet technology to bond powdered materials such as starch. 3D Systems and Objet Geometries have developed prototyping systems that use inkjet technology to deposit resin material layer by layer. A smoothing or milling process is often required between each deposited layer to maintain accuracy in these processes, which reduces material yields. Envisiontec utilizes a photopolymer mask and a light process to build models and Solido uses a plastic sheet lamination technique. In a new hobbyist market, we have also seen companies develop systems that are based on basic, early-stage, open-source technology but which lack the sophisticated system controls needed for the professional market. We believe that our FDM and Solidscape systems have important advantages over our competitors products. These advantages include:
- the ability to be
used in an office environment
- the availability to use multiple production-grade
modeling materials
- a one-step automated modeling process
- low acquisition price
- ease of use
- automatic hands free support removal
- higher reliability
Based on data and estimates presented in the 2011 Wohlers Report, in 2010 we shipped more commercial units globally than any other company in the RP industry, and we were the second largest in terms of revenue. The 2011 Wohlers Report also states that we sold 42% of all industrial RP systems sold globally in 2010. We believe that this trend continued in 2011 as well.
Employees
As of March 1, 2012, we had 530 full-time employees and contractors or temporary employees globally. While we have separate internal departments, such as manufacturing, marketing, engineering and sales, many employees perform overlapping functions within the organization. No employee is represented by a union, and we have not experienced any work stoppages. We believe our employee relations are good.
Governmental Regulation
We are subject to various local, state and federal laws, regulations and agencies that affect businesses generally. These include:
- regulations
promulgated by federal and state environmental and health agencies
- the federal Occupational Safety and Health Administration
13
- the U.S. Foreign
Corrupt Practices Act
- laws pertaining to the hiring, treatment, safety
and discharge of employees
- export control regulations for U.S. made
products
- CE regulations for the European market
Environmental Regulation
We offer innovative, high quality products and services that are environmentally friendly. We also offer a green recycling program that ensures a lower impact on the environment by recycling used filament cartridges, canisters and spools.
In the European marketplace, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and Electronic Equipment (WEEE) and the Directive on Restriction of Use of Certain Hazardous Substances (RoHS). WEEE aims to prevent waste by encouraging reuse and recycling and RoHS restricts the use of six hazardous substances in electrical and electronic products. Our products and certain components of such products put on the market in the EU (whether or not manufactured in the EU) are potentially subject to WEEE and RoHS. We monitor the development of such directives and comply with such directives in the required time frames.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Stratasys) file electronically with the SEC. The SECs website is www.sec.gov.
Our website is www.stratasys.com. We make available free of charge through our Internet site, via a link to the SECs website at www.sec.gov, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive officers; and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
We make available on www.stratasys.com our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q for the current fiscal year and our most recent proxy statement, although in some cases these documents are not available on our site as soon as they are available on the SECs site. You will need to have on your computer the Adobe Acrobat Reader software to view these documents, which are in PDF format. If you do not have Adobe Acrobat, a link to Adobes Internet site, from which you can download the software, is provided. The information on our website is not incorporated by reference into this report.
Financial Information About Operations In the United States and Other Countries
The information required by this item is incorporated by reference to our Financial Statements included elsewhere in this report. (See Part IV, Item 15, Note 19.)
14
Item 1A. Risk Factors.
Many of the factors that affect our business and operations involve risk and uncertainty. The following describes the principal risks affecting us and our business. Additional risks and uncertainties, not presently known to us or currently deemed material, could negatively impact our results of operations or financial condition in the future.
We may not be able to introduce new high-performance systems, 3D printing systems and materials acceptable to the market or to improve the technology and software used in our current systems.
Our ability to compete in the high-performance and 3D printing market depends, in large part, on our success in enhancing our existing product lines and in developing new products. Even if we successfully enhance existing systems or create new systems, it is likely that new systems and technologies that we develop will eventually supplant our existing systems or our competitors will create systems that will replace ours. The RP industry is subject to rapid and substantial innovation and technological change. We may be unsuccessful at enhancing existing systems or developing new systems or materials on a timely basis, and any of our products may be rendered obsolete or uneconomical by our or others technological advances.
If the 3D printing market does not continue to accept our systems, or if our Fortus high-performance systems do not meet the needs for DDM applications, our revenues may stagnate or decline.
We derive a substantial portion of our sales from the sale of 3D printers and Fortus 3D production systems. If the market for 3D printers or high-performance systems declines or if competitors introduce products that compete successfully against ours, we may not be able to sustain the sales of those products. If that happens, our revenues may not increase and could decline.
If we are unable to maintain revenues and gross margins from sales of our existing products, our profitability will be adversely affected.
Our current strategy is to attempt to manage the prices of our high-performance systems and 3D printers to expand the market and increase sales. In conjunction with that strategy, we are constantly seeking to reduce our direct manufacturing costs as well. Our engineering and selling, general and administrative expenses, however, generally do not vary substantially in relation to our sales. Accordingly, if our strategy is successful and we increase our revenues while maintaining our gross margins, our operating profits generally will increase faster as a percentage of revenues than the percentage increase in revenues. Conversely, if our revenues or gross margins decline, our operating profits generally will decline faster than the decline in revenues or gross margins. Therefore, declines in our revenues may lead to disproportionate reductions in our operating profits.
Hewlett-Packard may not expand distribution under our OEM Agreement beyond its current territory of eight European countries, and the OEM Agreement may not continue beyond its current term ending on September 30, 2012.
Our Agreement with HP has a current term that ends on September 30, 2012, and has an initial territory of eight European countries. There can be no assurance that HP will expand the territory in which they sell our 3D printers and other products. Furthermore, even though the OEM Agreement will automatically be renewed for one-year terms unless either party terminates it on advance written notice, there can be no assurance that the OEM Agreement will continue beyond its initial term or any renewal term. If HP does not expand the territory or the Agreement is terminated, we will not achieve the anticipated benefits of entering into the OEM Agreement, which include substantial additional revenue and profits as well as validation of our products in the market place.
Since we will be selling our 3D printers and related products to HP on an OEM basis, our margins on those products will be lower than those on the products that we presently sell, which may reduce our overall profitability.
HP will be selling our 3D printers and related products through its own reseller network. Accordingly, the prices we charge to HP for those products will be less than the prices we presently charge to our own reseller network. As a result, our margins will be lower on our sales to HP. We intend to compensate for these lower margins by expanding the market for our 3D printers, thereby substantially increasing the number of 3D printers sold and our overall revenues and profits. However, there can be no assurance that we will be able to increase our revenue sufficiently to maintain or increase our profitability over time.
15
If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial condition may be adversely affected.
We maintain an inventory for most of our necessary supplies, which facilitates the assembly of our systems and the manufacture of our consumables. While most components for our systems and materials and compounds for our consumables are available from multiple suppliers, certain of those items are only available from single or limited sources. Should any of our present single or limited source suppliers become unavailable or inadequate, we would be required to spend a significant amount of time and expense to develop alternate sources of supply. It would also require us to re-qualify any product supplied by one or more new vendors. Accordingly, the loss of a supplier with vendor-specific components, materials or compounds could result in a delay in the manufacture and delivery of our systems or consumables. In addition, if we were unable to find a suitable supplier for a particular component, material or compound, we could be required to modify our existing products to accommodate substitute components, material or compounds. As a result, the loss of a single or limited source supplier and resulting delays in delivery could adversely affect our relationship with our customers and our results of operations and financial condition.
If other manufacturers were to successfully develop and market consumables for use in our systems, our revenues and profits could be adversely affected.
We presently sell substantially all of the consumables that our customers use in our systems. However, even though we attempt to protect against replication of our consumables through patents and trade secrets and we provide that our warranties are valid only if customers use consumables that we certify, it is possible that other manufacturers could increase their development of consumables that could be used successfully in our systems. If our customers were to purchase consumables from other manufacturers, we would lose some of our sales and could be forced to reduce prices, which would impair our overall revenue and profitability.
If we fail to grow our RedEye paid parts service as anticipated, our net sales and profitability will be adversely affected.
We are attempting to grow our RedEye paid parts service substantially. To this end, we have made significant infrastructure, technological and sales and marketing investments. These investments include a dedicated facility, increased staffing, use of a substantial number of our Fortus 3D Production Systems exclusively for Paid Parts, and the development and launch of our RedEye on Demand service, which enables customers to obtain quotes for and order parts over the Internet. If our RedEye paid parts service does not generate the level of sales required to support our investment, our net sales and profitability will be adversely affected. Our competitors consolidation efforts in the service bureau industry may also adversely affect RedEyes efforts to grow.
If any of our manufacturing facilities is disrupted, sales of our products will be disrupted, and we could incur unforeseen costs.
We perform the final assembly of our 3D printers and high-performance systems and we manufacture our filament at our facilities in Eden Prairie, Minnesota. Our Solidscape subsidiary manufactures its 3D printers at a single facility in Merrimack, New Hampshire. If the operations of any of these facilities is disrupted, we would be unable to fulfill customer orders for the period of the disruption. We would not be able to recognize revenue on orders that we could not ship, and we might need to modify our standard sales terms to secure the commitment of new customers during the period of the disruption and perhaps longer. Depending on the cause of the disruption, we could incur significant costs to remedy the disruption and resume product shipments. Such a disruption could have a material adverse effect on our revenue, results of operations and earnings.
We own most of our manufacturing and office facilities, which may limit our ability to move our operations. If we were to move some of all of our operations, we could incur unforeseen charges.
We own four buildings in Eden Prairie, Minnesota, which we use to conduct most of our manufacturing and assembly operations. Ownership of these buildings may adversely affect our ability to move some or all of our operations to other locations that may be more favorable. If we were to move any of our operations to other locations, we may have difficulty selling or leasing the property that we have vacated. This could result in an impairment charge, which could have a material adverse effect on our results of operations in one or more periods.
16
A loss of a significant number of our resellers would impair our ability to sell and service our products and could result in a reduction of sales and net income.
We sell all of our products through resellers. We rely heavily on these resellers to sell our products to end users in their respective geographic regions and rely exclusively on resellers to service our products outside the United States. If a significant number of those resellers were to terminate their relationship with us or otherwise fail or refuse to sell or service our products, we may not be able to find replacements that are as qualified or as successful in selling or servicing our products. If we are unable to find qualified and successful replacements, our sales will suffer, which would have a material adverse affect on our net income.
Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenues and our profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property.
We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign patents or pending applications corresponding to our U.S. patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue or gross margins, which would adversely affect our net income.
We may be subject to alleged infringement claims.
Although we perform extensive patent and trademark searches, we may be subject to intellectual property infringement claims from individuals, vendors and other companies who have acquired or developed patents in the fields of 3D printing or consumable production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adversely impacted.
As our patents expire, additional competitors using our technology could enter the market, which could require us to reduce our prices and result in a reduction of our market share. Competitors introduction of lower quality products using our technology could also negatively affect the reputation and image of our products in the marketplace.
17
The initial patents for our technology began expiring in 2011. Upon expiration of those patents, our competitors may introduce products using the same technology as ours that have lower prices than those for our products. To compete, we may need to reduce our prices, which would adversely affect our revenues, margins and profitability. Additionally, the expiration of our patents could reduce barriers to entry into the market for additive fabrication systems, which could result in the reduction of our market share and earnings potential. If competitors using our technology were to introduce products of inferior quality, our potential customers may view our products negatively, which would have an adverse effect on our image and reputation and on our ability to compete with systems using other additive fabrication technologies.
If our goodwill becomes impaired, we may be required to record a significant charge to earnings.
As of December 31, 2011, the book value of our goodwill was approximately $25.4 million, most of which was recorded as a result of our acquisition of Solidscape. Accounting rules require us to take a charge against our earnings to the extent that goodwill is impaired. Accordingly, market conditions or other factors related to our performance could result in a material impairment of our goodwill and attendant charge against our earnings, which could have a material adverse effect on our results of operations.
If our intangible assets become impaired, we may be required to record a significant charge to earnings.
As of December 31, 2011, the net book value of our other intangible assets was approximately $25.3 million. Accounting rules require us to take a charge against our earnings to the extent that any of these intangible assets were to be impaired. Accordingly, invalidation of our patents, trademarks or other intellectual property or the impairment of other intangible assets due to litigation, obsolescence, competitive factors or other reasons could result in a material charge against our earnings and have a material adverse effect on our results of operations.
If our investments become impaired, we may be required to record a significant charge to earnings.
Our investments include one tax-free auction rate security and municipal government bonds and commercial bonds. Given the current volatility in interest rates and the potential impact of higher interest rates on the issuers of these securities, a significant increase in interest rates could impair the ability of one or more issuers to pay interest on, or principal of, these obligations. Defaults by these issuers or their insurers could cause an impairment of the value of our investments, resulting in a charge against our earnings. Any such charge could have a material adverse effect on our results of operations.
Estimating our income tax rate is complex and subject to uncertainty.
The computation of income tax expense (benefit) is complex because it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under accounting principles generally accepted in the United States. Income tax expense (benefit) for interim quarters is based on a forecast of our global tax rate for the year, which includes forward looking financial projections. Such financial projections are based on numerous assumptions, including the expectations of profit and loss by jurisdiction. It is difficult to accurately forecast various items that make up the projections, and such items may be treated as discrete accounting. Examples of items that could cause variability in our income tax rate include our mix of income by jurisdiction, tax deductions for stock option expense, the application of transfer pricing rules, and tax audits. Future events, such as changes in our business and the tax law in the jurisdictions where we do business, could also affect our rate. For these reasons, our global tax rate may be materially different than our estimate.
If we do not generate sufficient future taxable income, we may be required to recognize deferred tax asset valuation allowances.
The value of our deferred tax assets depends, in part, on our ability to use them to offset taxable income in future years. If we are unable to generate sufficient future taxable income in the U.S. and certain other jurisdictions, or if there are significant changes in tax laws or the tax rates or the period within which the underlying temporary differences become taxable or deductible, we could be required to record valuation allowances against our deferred tax assets. Such allowances would result in an increase in our effective tax rate and have a negative impact on our operating results. If our estimated future taxable income is increased, the valuation allowances for deferred tax assets may be reduced. These changes may also contribute to the volatility of our financial results.
18
We operate a global business that exposes us to additional risks.
Our sales outside of the United States accounted for approximately 47% of our consolidated net sales in 2011. We continue to expand into international markets. The future growth and profitability of our foreign markets are subject to a variety of risks and uncertainties. Any of the following factors could adversely affect our sales to customers located outside of the United States:
- Fluctuations in foreign currency exchange
rates.
- The inability to protect our intellectual property
in foreign countries.
- Political or economic instability in regions where
we sell our products.
- Changes in foreign regulatory
requirements.
- Seasonal fluctuations in business activity in
certain countries.
- Changes in export controls and
tariffs.
- Energy costs.
- Public health issues.
- Unrest in the Middle East.
Our business depends on our customers demand for our products and services, the general economic health of current and prospective customers, and their desire or ability to make investments in technology. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in ways that reduce demand for our products and disrupt our manufacturing and sales plans and efforts. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could impair our ability to get products to our customers and increase our manufacturing and delivery costs. Changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are typically made on unsecured credit terms that are generally consistent with the prevailing business practices in the country in which the customer is located. A deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on our business.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our affiliated entities or our respective officers, directors, employees and agents may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our results of operations. In addition, actual or alleged violations could damage our reputation and ability to do business.
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter-to-quarter and year-to-year and are likely to continue to vary due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. Fluctuations in our operating results and financial condition may be due to a number of factors, including, but not limited to, those listed below and those identified throughout this Risk Factors section:
- changes in the pricing of HP products
sales;
- changes in the volume of systems sold through HP and the impact on revenues and margins;
19
- changes in the amount that we spend to develop,
acquire or license new products, consumables, technologies or
businesses;
- changes in the amount we spend to promote our
products and services;
- changes in the cost of satisfying our warranty
obligations and servicing our installed base of systems;
- delays between our expenditures to develop and
market new or enhanced systems and consumables and the generation of sales
from those products;
- development of new competitive systems by
others;
- changes in accounting rules and tax
laws;
- the mix of high-performance systems, 3D printers
and consumables that we sell during any period;
- the geographic distribution of our
sales;
- our responses to price
competition;
- market acceptance of our
products;
- general economic and industry conditions that
affect customer demand;
- changes in interest rates that affect returns on
our cash balances and short-term investments;
- failure of a development partner to continue
supporting certain product development efforts it is funding;
and
- our level of research and development activities.
Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our operating results as an indicator of future performance.
Default in payment by one or more resellers that have large account receivable balances could adversely impact our results of operations and financial condition.
From time to time, accounts receivable balances have been concentrated with certain resellers. Default by one or more of these resellers or customers could result in a significant charge against our current reported earnings. We have reviewed our policies that govern credit and collections, and will continue to monitor them in light of current payment status and economic conditions. However, there can be no assurance that our efforts to identify potential credit risks will be successful. Our inability to timely identify resellers that are credit risks could result in defaults at a time when such resellers have high accounts receivable balances with us. Such a default would result in a significant charge against our earnings and adversely affect our results of operations and financial condition.
If we are unable to retain our key operating personnel and attract additional skilled operating personnel, our development of new products will be delayed and our personnel costs will increase.
Our growth plans require us to retain key employees in, and to hire additional skilled employees for, our operating departments, such as engineering and software development, to enhance existing products and develop new products. Our inability to retain and hire key engineers and other employees could delay our development and introduction of new products, which would adversely affect our revenues. In addition, a possible shortage of such personnel in the Minneapolis or New Hampshire regions could require us to pay more to retain and hire key employees, thereby increasing our costs.
Our common stock price has been and may continue to be highly volatile.
During 2011, our common stock traded at prices ranging between $18.00 and $55.43. Factors that we believe have caused or may cause this volatility include, among other things:
- investors expectations of the impact of our OEM
agreement with HP and how the relationship with HP could change over
time;
- the volatile global economy;
- actual or anticipated variations in quarterly or
annual operating results;
- the issuance of patents or other technological innovations;
20
- announcements of new products;
- our competitors' announcements of new
products;
- changes in financial estimates or recommendations
by securities analysts;
- the employment and termination of key personnel;
and
- sales or purchases of our common stock by our Company or by our executive officers or directors
Many of these factors are beyond our control. These factors may have a material adverse effect on the market price of our common stock, regardless of our operating performance.
If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports. Section 404 also requires our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting.
Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving Stratasys have been, or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our management has determined, and our independent registered public accounting firm has concluded in its audit, that our internal controls over financial reporting were effective as of December 31, 2011. However, our evaluation did not include the internal controls related to the acquisition of Solidscape, Inc. that occurred on May 3, 2011. Total assets and net sales related to this acquisition represent 21.4% and 5.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011. Thus, we cannot assure you that we or our independent registered accounting firm will not identify a material weakness in our internal controls or the internal controls of our Solidscape subsidiary in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.
As part of our growth strategy, we may acquire or make investments in other businesses, patents, technologies, products or services, and our failure to do so successfully may adversely affect our competitive position or financial results.
We have made and expect to continue to make acquisitions or investments to expand our suite of products and services. Our growth could be hampered if we are unable to identify suitable acquisitions and investments or agree on the terms of any such acquisition or investment. We may not be able to consummate any such transaction if we lack sufficient resources to finance the transaction on our own and cannot obtain financing at a reasonable cost. If we are not able to complete such acquisitions and successfully integrate them, or to complete investments and successfully realize their intended benefits, our competitive position may suffer, which could have adverse impacts on our revenues, revenue growth and results of operations.
21
Our acquisition transactions may not succeed in generating the intended benefits and may, therefore, adversely affect shareholder value or our financial results.
Integration of new businesses or technologies into our business may have any of the following adverse effects:
- We may have difficulty transitioning customers and
other business relationships to Stratasys.
- We may have problems unifying management following
a transaction.
- We may lose key employees from our existing or
acquired businesses.
- We may experience intensified competition from
other companies seeking to expand sales and market share during the
integration period.
- Our managements attention may be diverted to the
assimilation of the technology and personnel of acquired businesses or new
product or service lines.
- We may experience difficulties in coordinating geographically disparate organizations and corporate cultures and integrating management personnel with different business backgrounds.
The inability of our management to successfully integrate acquired businesses, and any related diversion of managements attention, could have a material adverse effect on our business, operating results and financial condition.
Business combinations and other acquisition transactions may have a direct adverse effect on our financial condition, results of operations or liquidity, or on our stock price.
In order to complete such transactions, we may have to use cash, issue new equity securities with dilutive effects on existing stockholders, take on new debt, assume contingent liabilities or amortize assets or expenses in a manner that might have a material adverse effect on our balance sheet, results of operations or liquidity. We are required to record certain acquisition-related costs and other items as current period expenses, which would have the effect of reducing our reported earnings in the period in which an acquisition is consummated. We are also required to record post-closing goodwill or other long-lived asset impairment charges in the period in which they occur, which could result in a significant charge to our earnings in that period. These and other potential negative effects of an acquisition transaction could prevent us from realizing the benefits of such transactions and have a material adverse impact on our stock price, revenues, revenue growth, balance sheet, results of operations and liquidity.
The foregoing list is not exhaustive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact our business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, and results of operations.
We assume no obligation (and specifically disclaim any such obligation) to update these Risk Factors or any other forward-looking statements contained in this Annual Report to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our executive offices and production facilities presently comprise approximately 287,800 available square feet in four buildings we own in Eden Prairie, Minnesota, near Minneapolis.
On August 1, 2001, we purchased our Eden Prairie manufacturing facility and land for approximately $3.0 million. The facility consists of 62,100 square feet, and is used for machine assembly, inventory storage, operations and sales support.
22
In March 2004, we purchased an additional 43,900 square foot manufacturing facility for approximately $1.2 million. The facility is located near our manufacturing facility in Eden Prairie, Minnesota, and is used for our RedEye paid parts service.
In November 2005, we purchased an additional 91,800 square foot manufacturing facility for approximately $5.1 million. By the end of 2008, we had substantially completed the improvements needed to make this facility suitable for our specific usage and had spent approximately $3.3 million. This facility is used for R&D, filament manufacturing, and administrative, marketing and sales activities and is adjacent to our system manufacturing facility in Eden Prairie, Minnesota.
In December 2010, we purchased an additional 90,000 square foot manufacturing facility for approximately $3.0 million. This facility is located in Eden Prairie, Minnesota and will be used to expand production capacity for machines and consumables, as well as streamline and consolidate warehousing and shipping operations. Initial improvements to the facility were made and a portion of the building was occupied in July 2011.
We occupy a 40,835 square foot warehouse in Eden Prairie, Minnesota, for shipping and storage under a lease that expires in March 2012. We also occupy a 9,070 square foot facility in Minneapolis, Minnesota, for research and development under a lease that expires in September 2012. We are also responsible for real estate taxes, insurance, utilities, trash removal, and maintenance expenses at these facilities.
Solidscape occupies a 28,590 square foot facility in Merrimack, New Hampshire that is under a lease that expires in August 2013. We are also responsible for real estate taxes, insurance, utilities, trash removal, and maintenance expenses at this facility.
We occupy a 7,583 square foot North American sales office in Rancho Cucamonga, California under a lease that expires in July 2016. We are also responsible for real estate taxes, insurance, utilities, trash removal, and maintenance expenses at this facility.
We have four international sales and service offices under lease. Our German subsidiary leases 16,081 square feet of space in Frankfurt, Germany under a lease that expires in June 2016. Our Italian subsidiary leases 6,857 square feet in Genoa, Italy, under a lease that expires in August 2016. We occupy a 30 square foot sales office located in Hong Kong under a lease that expires in March 2012. We have approximately 1,800 square feet, which is used for a sales office, in Bangalore, India, under a lease that expires in January 2014.
Item 3. Legal Proceedings.
We are party to various legal proceedings, the outcome of which, in the opinion of management, will not have a material adverse effect on the Companys financial position.
Item 4. Mine Safety Disclosures
Not applicable.
23
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol SSYS.
The following table sets forth the high and low closing sale prices of our common stock for each quarter from January 1, 2010 through the fiscal year ended December 31, 2011 reported on the Nasdaq Global Select Market.
High | Low | |||||
Closing Sale Prices | ||||||
Fiscal Year Ended December 31, 2010 | ||||||
January 1, 2010 March 31, 2010 | $ | 30.11 | $ | 17.35 | ||
April 1, 2010 June 30, 2010 | 27.40 | 21.79 | ||||
July 1, 2010 September 30, 2010 | 27.84 | 20.81 | ||||
October 1, 2010 December 31, 2010 | 34.87 | 26.48 | ||||
Fiscal Year Ended December 31, 2011 | ||||||
January 1, 2011 March 31, 2011 | $ | 49.59 | $ | 32.50 | ||
April 1, 2011 June 30, 2011 | 55.43 | 30.21 | ||||
July 1, 2011 September 30, 2011 | 39.34 | 18.54 | ||||
October 1, 2011 December 31, 2011 | 31.84 | 18.00 |
There were approximately 80 record and 11,919 beneficial owners of our common stock as of March 1, 2012.
Dividends
We have not paid or declared any cash dividends to date. We intend to retain earnings, if any, to support the growth of our business.
Repurchases of Common Stock
We did not repurchase any shares of our common stock during 2011.
24
Performance Graph
The following graph compares on a cumulative basis the yearly percentage change, assuming dividend reinvestment, over the last five fiscal years in (a) the total stockholder return on our Common Stock with (b) the total return on the Nasdaq (US) Composite Index, and (c) the total return on the information technology sector of the Standard & Poors SmallCap 600 Index (S&P 600 Info Tech Index). The S&P 600 Info Tech Index consists of 125 of the 600 stocks comprising the Standard & Poors SmallCap 600 Index, a capitalization-weighted index of domestic stocks chosen for market size, liquidity and industry representation. We are a component company of the S&P 600 Info Tech Index. The following graph assumes that $100 had been invested in each of Stratasys, the Nasdaq (US) Composite Index, and the S&P 600 Info Tech Index on December 31, 2006.
Comparison of Cumulative 5 Year Total Return
25
Item 6. Selected Financial Data.
The selected consolidated financial data as of and for the five-year period ended December 31, 2011, should be read in conjunction with the Consolidated Financial Statements and related Notes for the year ended December 31, 2011, and the Managements Discussion and Analysis of Financial Condition and Results of Operations.
Years Ended December 31, | |||||||||||||||
(In Thousands, Except Per Share Amounts) | |||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||
Statement of Operations Data: | |||||||||||||||
Net sales | $ | 155,894 | $ | 117,843 | $ | 98,975 | $ | 124,495 | $ | 112,243 | |||||
Gross profit | 82,404 | 56,086 | 46,384 | 66,412 | 59,708 | ||||||||||
Research and development | 14,360 | 9,755 | 7,737 | 8,973 | 7,465 | ||||||||||
Selling, general and administrative | |||||||||||||||
expenses | 39,038 | 32,863 | 32,823 | 36,843 | 33,770 | ||||||||||
Operating income | 29,006 | 13,467 | 5,824 | 20,596 | 18,473 | ||||||||||
Net income | 20,626 | 9,370 | 4,116 | 13,615 | 14,324 | ||||||||||
Net income per basic common share | 0.98 | 0.46 | 0.20 | 0.66 | 0.69 | ||||||||||
Weighted average basic shares | |||||||||||||||
outstanding | 21,133 | 20,579 | 20,236 | 20,676 | 20,772 | ||||||||||
Net income per diluted common | |||||||||||||||
share | $ | 0.95 | $ | 0.44 | $ | 0.20 | $ | 0.65 | $ | 0.66 | |||||
Weighted average diluted shares | |||||||||||||||
outstanding | 21,653 | 21,130 | 20,268 | 21,079 | 21,567 | ||||||||||
Balance Sheet Data: | |||||||||||||||
Working capital | $ | 64,087 | $ | 60,196 | $ | 82,838 | $ | 63,296 | $ | 64,100 | |||||
Total assets | 221,770 | 178,460 | 153,137 | 147,743 | 148,757 | ||||||||||
Long term debt | --- | --- | --- | --- | --- | ||||||||||
Stockholders equity | 183,311 | 152,282 | 129,583 | 122,562 | 123,834 |
26
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.
Introduction
Managements Discussion and Analysis of Financial Condition and Results of Operations is intended to facilitate an understanding of our business and results of operations. It should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. All amounts in the following discussions are stated in thousands, except employees, share and per share data, prices for systems, or as otherwise indicated.
General
We develop, manufacture, and market a family of 3D printing, rapid prototyping (RP) and direct digital manufacturing (DDM) systems, which enable engineers and designers to create physical models, tooling, jigs, fixtures, prototypes, and end use parts out of production grade thermoplastic directly from a computer aided design (CAD) workstation. Our systems and related consumable products are distributed mainly through a world-wide network of value added resellers that sell and service our products to end users as well as through our OEM Agreement with HP. We also operate a service business that uses our systems to print parts from a customers CAD file, typically in situations where these customers have not yet purchased a system or do not have enough capacity on their existing systems.
Our Market Strategy
We believe that the Fused Deposition Modeling (FDM) technology used by most of our systems has significant advantages over other commercially available 3D printing technologies. When compared to other 3D printing technologies, our systems are typically easier to use, are more acceptable in an office environment and can produce durable models in a wide variety of production grade thermoplastics. Our Solidscape DoD thermoplastic ink-jetting technology offers easy to use systems producing high precision castable wax models. Our overall business strategies are designed to increase customer awareness of these advantages, provide our customers with high-quality new products and services based on the capabilities of these technologies, expand the distribution channel of our systems and lower the overall cost of creating physical models, parts, tooling and prototypes from a CAD file.
Our current market strategy focuses on the following areas:
- Expanding the distribution channel for our Dimension products. Although we continue to manufacture an HP-branded 3D printer for distribution in Europe, we are also making progress in expanding independent channel strategies that will augment our HP collaboration. We have initiated a program in the U.S to recruit and train a significant number of new selling agents that will focus exclusively on selling our most affordable products. We expect this initiative, combined with other programs we have planned, will drive incremental sales volume.
The OEM Agreement with HP now includes Austria, Switzerland and Ireland in addition to France, Germany, Italy, Spain and the United Kingdom. We believe this distribution channel continues to be a valuable approach to increase sales and enhance awareness of 3D printing.
- Expand our market position in the 3D printing
market by introducing new products. In July
2011, we introduced the Fortus 250mc Production System. The Fortus 250mc
combines the ease-of-use and affordability of Dimension 3D Printers with the
control of Insight Software, used to drive the Fortus line of production
systems. With Insight, users will have added control of build speed, part
accuracy, and feature detail. The Fortus 250mc uses Stratasys SR-30 soluble
support material, which has a faster dissolve time than other soluble support
materials.
- Expand our position in the RP and DDM markets by developing new and improved proprietary products. We have built a leadership position in the RP and DDM markets by helping customers build stable, strong, and durable parts for testing and end-use. Our Fortus 3D Production Systems are ideally suited for DDM applications such as the production of manufacturing tools and low-volume end-use parts. Our Solidscape technology offers high precision castable wax models that are ideal when our customers have the need for fine feature detail and is particularly well suited for DDM applications in the jewelry and dental markets. We plan to expand our presence in these areas by offering improved system capabilities and new and improved material properties. We believe that the recent acquisition of Solidscape will open up additional industrial market opportunities as we continue to develop this technology. We also continued to collaborate with a Fortune 500 global manufacturing company to advance our proprietary FDM technology for direct digital manufacturing applications and will maintain this collaboration into 2012 for the seventh consecutive year.
27
-
Leverage our recent ISO 9001:2008 certification. During 2010, we worked to refine and improve our internal processes and documentation in order to obtain ISO 9001:2008 certification, a standard published by the International Organization for Standardization. In February 2011, we obtained the ISO 9001:2008 certification by maintaining a highly developed quality management system and continually improving its effectiveness in accordance with the ISO requirements. We believe that ISO certification is a key requirement in expanding our products applicability to the RP and DDM markets that we are focusing on such as aerospace, defense, medical, and automotive. We will use this registration to demonstrate our ability to consistently provide products that meet customer and applicable regulatory requirements and enhance customer satisfaction through its effective application.
-
Expand our RedEye paid parts service. We believe this is a fragmented global market dominated by a few large and numerous small companies. Sales from our RedEye paid parts service have improved during 2011. This growth has been driven in part by customers that do not have an FDM system but has also comes from current system users that have had short-term capacity constraints on their own FDM systems. We believe that another part of this sales growth has come from the rising demand for our technology in DDM applications because of the production grade thermoplastics used. To take advantage of the growth we see in our DDM customer base, we are adding staff to our existing sales force that will focus exclusively on large strategic accounts.
Description of Current Conditions
Our revenue increased 32.3% in 2011 due primarily to growth in systems and consumables sales, with service revenue increasing by 12% as compared to 2010. The increase in revenue from systems as compared to 2010 was driven mainly by higher unit volume in our Fortus 3D production systems and the acquisition of Solidscape in May 2011. We shipped 2,602 units in 2011 as compared to 2,555 in 2010. Our average selling price increased due to a shift in sales mix towards our higher-priced Fortus 3D production systems.
We have seen the professional design/engineering market environment for our products become more competitive as other manufacturers introduce systems with new technologies and capabilities that are becoming more comparable to our products. In the last 12 months, we have seen our traditional competitors lower their prices to match our prices. In a new hobbyist market, we have also seen companies develop systems that are based on basic, early-stage, open-source technology but which lack the sophisticated system controls needed for the professional market.
Despite the recent growth in market competition, we believe that over the last three years, we have been the market leader in the 3D printer commercial market and have followed a strategy of continuing to move down the price elasticity curve as evidenced by our introduction of the uPrint and uPrint Plus. Although the high-performance market is more competitive than the 3D printing market, we believe that the growth in sales of our Fortus 3D production systems has been driven mainly by the system and material performance capabilities of our systems rather than price.
As our installed base of systems has increased, the capacity to derive an increasing amount of revenue from sales of consumables, maintenance contracts, and other services has also increased. In 2011, total non-system product revenue increased by 28.2% as compared to the prior year due principally to higher consumable usage by our installed base of systems and the acquisition of Solidscape. Sales from our RedEye paid parts service increased 11.0% during 2011 as a result of increased new customer business and an increase in average sales price. Revenue from maintenance contracts increased by 12.4% in 2011 reflecting our growing installed base of systems and the reduced impact of an extension in system warranty periods implemented in 2009.
28
We expect to see unit volume increase faster than revenue growth in the near future. Revenue from our higher-priced Fortus system sales is expected to moderate relative to the high levels observed in 2011. Our recent 3D printing sales channel initiatives are expected to accelerate unit sales of our more affordable systems, which will result in lower margins on the sale of these 3D printers. We intend to compensate for these lower margins by the continued growth in the market for 3D printers and thereby substantially increasing the number of 3D printers sold and our overall revenues and profits. However, there can be no assurance that we will be able to increase our revenue sufficiently to maintain or increase our current profitability.
Given our strong cash position and no debt, we believe that we have adequate liquidity to fund our growth strategy in 2012. We may make investments in strategic acquisitions, fixed assets, process improvements, information technology (IT), and human resource development activities that will be required for future growth. Our expense levels are based in part on our expectations of future sales and we will make adjustments as we consider appropriate. While we have adjusted, and will continue to adjust, our expense levels based on both actual and anticipated sales, fluctuations in sales in a particular period could adversely impact our operating results.
We believe that our growth is largely dependent upon our ability to penetrate new markets and develop and market new RP, DDM and 3D printing systems, materials, applications, and services that meet the needs of our current and prospective customers. Our ability to implement our strategy for 2012 is subject to numerous uncertainties, many of which are described under Risk Factors, above, in this Managements Discussion and Analysis of Financial Condition and Results of Operations and in the section below captioned Forward Looking Statements and Factors That May Affect Future Results of Operations. We cannot ensure that our efforts will be successful.
Results of Operations
The following table sets forth certain statement of operations data as a percentage of net sales for the periods indicated. All items are included in or derived from our consolidated statement of operations.
For the twelve months ended December 31, | 2011 | 2010 | 2009 | |||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 47.1 | % | 52.4 | % | 53.1 | % | ||
Gross profit | 52.9 | % | 47.6 | % | 46.9 | % | ||
Research & development | 9.2 | % | 8.3 | % | 7.8 | % | ||
Selling, general and administrative | 25.0 | % | 27.9 | % | 33.2 | % | ||
Operating income | 18.6 | % | 11.4 | % | 5.9 | % | ||
Other income | 1.5 | % | 0.3 | % | 0.4 | % | ||
Income before taxes | 20.1 | % | 11.7 | % | 6.2 | % | ||
Income taxes | 6.9 | % | 3.8 | % | 2.1 | % | ||
Net income | 13.2 | % | 8.0 | % | 4.2 | % |
Net Sales
Net sales of our products and services for the last three years, as well as the percentage change were as follows:
Year-over- | Year-over- | ||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | |||||||||||
Products | $ | 127,476 | 30.8 | % | $ | 97,467 | 32.0 | % | $ | 73,829 | |||||
Services | 28,418 | 12.0 | % | 25,365 | 0.9 | % | 25,146 | ||||||||
Fair value of warrant | - | - | (4,988 | ) | - | - | |||||||||
$ | 155,894 | 32.3 | % | $ | 117,844 | 19.1 | % | $ | 98,975 |
29
Product Revenue
Revenues derived from products (including systems, consumable materials and other products) increased $30.0 million in 2011, or 30.8%, as compared to the prior year. The number of systems shipped increased by 1.8%, or 47 units, to 2,602 as compared to 2,555 units shipped in 2010. This increase in both revenue and number of systems shipped reflects strong unit sales of our higher priced Fortus 3D production systems, which increased by 78.5% as compared to the prior year, and the acquisition of Solidscape in May 2011. The increase in Fortus 3D production system unit sales was primarily due to a focus of our sales channel on selling systems into DDM applications. Consumable revenue in 2011 increased 27.4% primarily driven by an acceleration in customer usage and our growing installed base of systems.
During 2010, revenues derived from products increased $23.6 million in 2010, or 32.0%, as compared to the prior year. The number of systems shipped increased by 33.2%, or 637 units, to 2,555 as compared to 1,918 units shipped in 2009. This increase in both revenue and number of systems shipped reflects the positive impact of the economic recovery and strong sales of our Stratasys-brand 3D printer products and the HP Designjet line. Consumable revenue in 2010 increased 27.6%, which was driven by the improvement in market conditions, growing installed base of systems and new material offerings.
Service Revenue
Revenues from our service offerings (including RedEye paid parts, maintenance and other services) increased $3.1 million in 2011, or 12.0%, as compared to the prior year. Sales from our RedEye paid parts service increased 11.0% during 2011 as a result of increased new customer business and an increase in average sales price. Revenue from maintenance contracts increased by 12.4% in 2011 reflecting our acquisition of Solidscape as well as our growing base of installed systems and the reduced impact of an extension in system warranty periods implemented in 2009
Revenues from our service offerings for 2010 were relatively flat as compared to the prior year. Growth in our RedEye paid parts service revenue of 21.1% over the prior year resulted from the general economic upturn and continued recovery from a period of highly competitive pricing that occurred during the recession in 2009. This growth was offset by a decrease in maintenance revenue, which resulted from our expansion of the warranty period for our domestic Fortus systems from three months to one year.
Revenue by Region
Net sales, excluding the $5.0 million charge for the fair value of a warrant related to the OEM Agreement in 2010, and the percentage of net sales by region for the last three years, as well as the percentage change were as follows:
Year-over-Year | Year-over-Year | ||||||||||||||||||||
2011 | Change | 2010 | Change | 2009 | |||||||||||||||||
North America | $ | 82,373 | 53 | % | 25.7 | % | $ | 65,536 | 53 | % | 18.1 | % | $ | 55,503 | 56 | % | |||||
Europe | 49,885 | 32 | % | 44.3 | % | 34,572 | 28 | % | 30.6 | % | 26,474 | 27 | % | ||||||||
Asia Pacific | 21,506 | 14 | % | 4.1 | % | 20,662 | 17 | % | 29.8 | % | 15,914 | 16 | % | ||||||||
Other | 2,130 | 1 | % | 3.3 | % | 2,062 | 2 | % | 90.2 | % | 1,084 | 1 | % | ||||||||
$ | 155,894 | 100 | % | 26.9 | % | $ | 122,832 | 100 | % | 24.1 | % | $ | 98,975 | 100 | % |
Sales in all regions increased in 2011 as a result of strong sales of our Fortus 3D production systems, consumables and the acquisition of Solidscape in May 2011. Revenues in the North America region accounted for approximately 53% of total revenue in 2011. Revenues outside of North America accounted for approximately 47% of total revenue in 2011.
Sales in all regions increased in 2010 as a result of the economic recovery and continued improvement in business conditions across our core markets. Revenues in the North America region, accounted for approximately 53% of total revenue in 2011. Revenues outside of North America accounted for approximately 47% of total revenue in 2010. The international increase in sales percentage was led by higher system sales volumes in both high-performance systems as well as 3D Printers, particularly the HP Designjet line in the five European markets served by HP.
30
Fair Value of Warrant
During the first quarter of 2010, we signed the OEM Agreement with HP to develop and manufacture a line of HP-branded 3D printers. In connection with the OEM Agreement, we issued a warrant to HP during the first quarter of 2010 to purchase 500,000 shares of common stock at an exercise price of $17.78 per share. The exercise price was determined by the 20-day average market closing price of our common stock immediately prior to the issuance of the warrant. The warrant vested immediately and has a seven-year term. The grant date fair value of the warrant was classified as a reduction of revenue on the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2010. The warrant was not exercised during 2011 and remains outstanding.
Gross Profit
Gross profit and gross profit as a percentage of sales for our products and services for 2011, 2010 and 2009, as well as the percentage changes in gross profit were as follows:
Year-over- | Year-over- | |||||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | ||||||||||||||
Products | $ | 65,932 | 40.0 | % | $ | 47,109 | 45.9 | % | $ | 32,285 | ||||||||
Services | 16,472 | 18.0 | % | 13,965 | -1.0 | % | 14,099 | |||||||||||
Fair value of warrant | - | (4,988 | ) | - | - | |||||||||||||
$ | 82,404 | 46.9 | % | $ | 56,086 | 20.9 | % | $ | 46,384 | |||||||||
Gross Profit as a Percentage of Related Sales | ||||||||||||||||||
Products | 51.7 | % | 48.3 | % | 43.7 | % | ||||||||||||
Services | 58.0 | % | 55.1 | % | 56.1 | % | ||||||||||||
Total | 52.9 | % | 47.6 | % | 46.9 | % |
Product gross profit increased by $18.8 million, or 40.0%, to $65.9 million in 2011 as compared with $47.1 million in 2010. The increase is primarily attributable to increased sales of our higher-margin Fortus 3D production systems and consumables, combined with decreased lower-margin sales to HP.
Product gross profit increased by $14.8 million, or 45.9%, to $47.1 million in 2010 as compared with $32.3 million in 2009. This increase is primarily attributable to higher system revenues. The increase was also attributable to significant growth in our high-end RP systems that exceeded the rate of growth in revenue from our lower priced 3D printing systems.
Gross profit from services increased by 18.0% in 2011 as compared to the prior year due to increased growth in system maintenance and RedEye paid parts service sales. Higher sales have a positive impact on gross profit as a large portion of costs associated with our service businesses are fixed.
Gross profit from services decreased by 1.0% in 2010 as compared to the prior year. This is primarily attributable to a decrease in maintenance revenue, which resulted from our expansion of the warranty period for our domestic Fortus systems from three months to one year.
31
Operating Expenses
Operating expenses and operating expense as a percentage of sales for 2011, 2010 and 2009, as well as the percentage change in operating expenses, were as follows:
Year-over- | Year-over- | ||||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | |||||||||||||
Research and development | $ | 14,360 | 47.2 | % | $ | 9,755 | 26.1 | % | $ | 7,737 | |||||||
Selling, general & administrative | 39,038 | 18.8 | % | 32,863 | 0.1 | % | 32,823 | ||||||||||
$ | 53,398 | 25.3 | % | $ | 42,618 | 5.1 | % | $ | 40,560 | ||||||||
Percentage of Sales | 34.3 | % | 36.2 | % | 41.0 | % |
Research and development expenses increased by 47.2% during 2011 and was driven primarily by new product initiatives within 3D printing and 3D production systems, including Solidscape, as well as a decrease in research and development expense reimbursements received in connection with our collaborative agreement further discussed below. During 2010, research and development expenses increased by 26.1% as we remained committed to designing new products and materials, reducing costs on existing products, and improving the quality and reliability of all of our platforms. This spending was focused on accelerating our development efforts to address both the 3D printer and DDM market opportunities as well as improving the quality and reliability of our products. In 2011, 2010 and 2009, capitalized software additions were approximately $1.1 million, $1.2 million and $1.4 million, respectively.
In 2008, we fulfilled our responsibilities under a three-year, $3.6 million agreement with a Fortune 500 global manufacturing company to jointly advance our proprietary FDM technology for rapid manufacturing applications. This agreement entitled us to receive reimbursement payments as we achieved specific milestones stated in the agreement. This effort was focused around our high-performance systems and resulted in the commercial release of the Fortus 900mc. Because receipt of these payments represented reimbursements of costs actually incurred under this joint development project, all payments received were recorded as offsets to the research and development expenditures and are therefore not recognized as revenue.
Due to the success of this initial arrangement, we have continued this relationship under similar terms and objectives. During the years ended December 31, 2011, 2010 and 2009, approximately $0.7 million, $1.2 million and $2.2 million, respectively, of research and development expenses were offset by payments that were received from that company.
Selling, general and administrative expenses increased by 18.8% in 2011 as compared to the prior year. The increase is primarily due to expenses related to the acquisition of Solidscape and increased employee-related expenses. Selling, general and administrative expenses were relatively flat in 2010 as compared to the prior year.
Operating Income
Operating income and operating income as a percentage of sales for 2011, 2010 and 2009, as well as the percentage change in operating income were as follows:
Year-over- | Year-over- | |||||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | ||||||||||||||
Operating income | $ | 29,006 | 115.4 | % | $ | 13,467 | 131.2 | % | $ | 5,824 | ||||||||
Percentage of Sales | 18.6 | % | 11.4 | % | 5.9 | % |
Operating income in 2011 increased by $15.5 million, or 115.4%, primarily due to increased product sales led by our higher-margin Fortus systems and consumables as well as a $5.0 million charge to revenue in 2010 related to the warrant issued to HP in connection with an OEM Agreement. Operating income in 2010 increased by $7.6 million, or 131.2%, primarily due to the significant increase in revenue, partially offset by increased indirect spending. Operating income as a percentage of sales increased due to effective control of indirect spending in 2011 and 2010.
32
Other Income
Other income and other income as a percentage of sales for 2011, 2010 and 2009, as well as the percentage change in operating income were as follows:
Year-over- | Year-over- | ||||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | |||||||||||||
Interest income | $ | 923 | 0.2 | % | $ | 921 | -7.0 | % | $ | 990 | |||||||
Foreign currency transaction losses, net | (888 | ) | 43.9 | % | (617 | ) | 164.8 | % | (233 | ) | |||||||
Other | 2,311 | 3510.9 | % | 64 | 116.1 | % | (398 | ) | |||||||||
$ | 2,346 | 537.5 | % | $ | 368 | 2.5 | % | $ | 359 | ||||||||
Percentage of Sales | 1.5 | % | 0.3 | % | 0.4 | % |
Interest income in 2011 remained flat with the prior year while investments decreased due to a higher effective rate of our investment portfolio. Interest income in 2010 decreased by $69,000, or 7%, while investments increased over the prior year. This was primarily due to $170,000 of interest earned in 2009 on two bonds that were redeemed by the issuer before maturity.
We invoice sales to certain European distributors in Euros and reported results are therefore subject to fluctuations in the exchange rates of that currency in relation to the United States dollar. Our strategy is to hedge most of our Euro-denominated accounts receivable positions by entering into 30-day foreign currency forward contracts on a month-to-month basis to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. In addition, we held an unhedged Euro cash balance as of December 31, 2011 that was subject to fluctuations in foreign currency exchange rates. Subsequently, we have included this Euro cash balance in our hedging strategy to manage risks that our earnings will be adversely affected by changes in currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. Instruments to hedge risks may include foreign currency forward, swap, and option contracts. These instruments will be used to selectively manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations.
The increase in other income for 2011 as compared to the prior year is due to the gain on the sale of the Jefferson County, Alabama auction rate security that had been impaired in prior years and a gain on the sale of an equity investment that we maintained in an independent online parts quoting service. The decrease in other income for 2010 as compared to the prior year is due to a $350,000 reduction in the estimated fair value of an equity investment in 2009 that was considered to be other than temporary.
Income Taxes
Income taxes and income taxes as a percentage of net income before taxes for 2011, 2010 and 2009, as well as the percentage change were as follows:
Year-over- | Year-over- | ||||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | |||||||||||||
Income taxes | $ | 10,726 | 140.2 | % | $ | 4,466 | 116.2 | % | $ | 2,066 | |||||||
As a percent of | |||||||||||||||||
income before income taxes | 34.2 | % | 32.3 | % | 33.4 | % |
33
The following is a reconciliation of the 2011 effective income tax rate compared with the 2010 effective rate and the 2010 effective income tax rate compared with the 2009 effective rate:
2009 Effective income tax rate | 33.4 | % |
2010 percentage decrease in research and development credits | 3.0 | % |
2010 percentage decrease in tax contingency reserve | (1.1 | %) |
2010 percentage increase in manufacturing deduction | (1.5 | %) |
Other, net | (1.5 | %) |
2010 Effective income tax rate | 32.3 | % |
2011 percentage increase in tax contingency reserve | 0.9 | % |
2011 percentage decrease in manufacturing deduction | 0.8 | % |
Other, net | 0.2 | % |
2011 Effective income tax rate | 34.2 | % |
Net Income
Net income and net income as a percentage of sales for 2011, 2010 and 2009, as well as the percentage change in net income were as follows:
Year-over- | Year-over- | ||||||||||||||||
2011 | Year Change | 2010 | Year Change | 2009 | |||||||||||||
Net income | $ | 20,626 | 120.1 | % | $ | 9,370 | 127.6 | % | $ | 4,116 | |||||||
Percentage of Sales | 13.2 | % | 8.0 | % | 4.2 | % |
For the reasons cited previously in this management discussion and analysis section, our net income for the year ended December 31, 2011 was higher than the prior year and net income for 2010 was higher than the prior year.
Liquidity and Capital Resources
A summary of our statement of cash flows for the three years ended December 31, 2011 is as follows:
2011 | 2010 | 2009 | |||||||||
Net income | $ | 20,626 | $ | 9,370 | $ | 4,116 | |||||
Depreciation and amortization | 10,348 | 9,342 | 8,256 | ||||||||
Stock-based compensation | 1,587 | 1,242 | 1,137 | ||||||||
Fair value of warrant related to OEM agreement | - | 4,988 | - | ||||||||
Change in working capital and other | (10,049 | ) | (2,971 | ) | 11,981 | ||||||
Net cash provided by operating and other activities | 22,512 | 21,971 | 25,490 | ||||||||
Net cash used in investing activities | (38,806 | ) | (49,294 | ) | (6,831 | ) | |||||
Net cash provided by financing activities | 8,769 | 6,780 | 1,583 | ||||||||
Effect of exchange rate changes on cash | 63 | (219 | ) | 128 | |||||||
Net increase (decrease) in cash and cash equivalents | (7,462 | ) | (20,762 | ) | 20,370 | ||||||
Cash and cash equivalents, beginning of year | 27,554 | 48,316 | 27,946 | ||||||||
Cash and cash equivalents, end of year | $ | 20,092 | $ | 27,554 | $ | 48,316 |
Our cash and cash equivalents balance decreased by $7.5 million to $20.1 million at December 31, 2011 from $27.6 million at December 31, 2010. The decrease is primarily due to $38.8 million spent for the acquisition of investments, property and equipment, intangible assets and Solidscape partially offset by $22.5 million of cash flows from operations and $6.1 million in proceeds from the exercise of stock options.
34
The net cash provided by our operating activities over the past three years has amounted to approximately $70.0 million, principally derived from $34.1 million in net income, plus adjustments for non-cash charges of $28.0 million in depreciation and amortization, $4.0 million in stock-based compensation, $5.0 million related to the fair value of a warrant issued to HP and $1.0 million attributable to changes in net working capital and other items.
In 2011, the principal source of cash from our operating activities was our net income, as adjusted to exclude the effects of non-cash charges. Our accounts receivable balance increased to $26.2 million at December 31, 2011 from $20.1 million as of December 31, 2010. This increase was principally due to sales growth and the acquisition of Solidscape. DSOs were 61 days in 2011, 60 days in 2010 and 68 days in 2009. We believe that adequate allowances have been established for any collectability issues in our accounts receivable balance.
For the years ended December 31, 2011, 2010, and 2009, our inventory balances were $22.8 million, $17.9 million, and $14.6 million, respectively. The increase in inventory in 2011 was principally due to strong order flow and anticipated sales growth for both systems and consumables and the acquisition of Solidscape. The increase in inventory in 2010 was principally due to strong order flow and forecasts for systems and consumables.
A portion of our inventory is dedicated to the fulfillment of our service contract and warranty obligations. As we have introduced new products over the past few years, there are more platforms and models to service than in the past, which increases the requirements to maintain spare parts inventory. With the introduction of these new products, older products have been discontinued, but a certain level of inventory is still required to fulfill our ongoing service contracts. Our procedures for dealing with this inventory are more fully explained in the section below captioned Critical Accounting Policies.
Investments in sales-type leases used cash of $2.6 million in 2011 and provided cash of $0.9 million in 2010 and $1.3 million in 2009. In mid-2003 we introduced a U.S. leasing program that was principally designed for the Dimension systems. The program now includes customers in both our 3D printer and our Fortus production system product lines and we plan to continue this leasing program for the foreseeable future.
Accounts payable and other current accrued liabilities provided cash of $6.5 million in 2011, $4.5 million in 2010 and $1.1 million in 2009. In 2011, the increase was related to the timing of payments for inventory purchases and employee compensation.
Unearned revenue, principally consisting of purchased maintenance contracts and implied maintenance contracts, provided cash of $0.6 million in 2011 and $0.9 million in 2010 and used cash of $2.1 million in 2009. The increase in the unearned revenue balance in 2011 was principally due to an increase in maintenance contract sales
Our investing activities used cash of $38.8 million in 2011, $49.3 million in 2010 and $6.8 million in 2009. The purchase of investments, net of proceeds from sales and maturity of investments, provided $16.9 million in 2011, and used cash of $40.2 million in 2010. We purchased Solidscape in 2011 for $38.6 million, net of cash acquired.
At December 31, 2011, our investments included:
-
approximately $45.2 million in bonds maturing between February 2012 and November 2016, all of which had ratings between AAA and BAA1 at December 31, 2011; and
-
approximately $2.0 million of a tax-free auction rate security (ARS), which re-prices approximately every 35 days. The ARS had a rating of A1 at December 31, 2011.
During 2011, we sold our investment in a tax-free ARS issued by Jefferson County, Alabama. During the economic downturn in 2008, with the assistance of outside consultants, we determined that the ARS had incurred both a temporary and other-than-temporary impairment to its fair value and recognized such write-down in value. Due to negotiations between Jefferson County and bondholders, the market for these bonds improved and in 2011 we were able to sell the investment for $1.8 resulting in a recognized a gain of $626,000.
Property and equipment acquisitions totaled $12.8 million, $7.8 million, and $2.3 million in 2011, 2010 and 2009, respectively. Over the three-year period ended December 31, 2011, our principal property and equipment acquisitions were for manufacturing or engineering development equipment, tooling, leasehold improvements and the acquisition of computer systems and software applications. Payments for intangible assets, including patents and capitalized software, amounted to $4.3 million, $1.3 million and $1.7 million in 2010, 2009, and 2008, respectively.
35
Proceeds from the exercise of stock options provided cash of $6.1 million, $6.4 million and $1.6 million in 2011, 2010 and 2009, respectively. During 2010, we used cash of $2.1 million for the repurchase of vested stock options. The excess tax benefit from the exercise of stock options was $2.6 million and $2.5 million for the years ended December 31, 2011 and 2010, respectively. We did not repurchase any common stock during the years ended December 31, 2011, 2010 and 2009. As of December 31, 2011, we had authorization to repurchase approximately $10.9 million of common stock.
For 2012, we expect to use our cash as follows;
-
for improvements to our facilities;
-
for the continuation of our leasing program;
-
for working capital purposes;
-
for information systems and infrastructure enhancements;
-
for new product and materials development;
-
for sustaining engineering;
-
for the acquisition of equipment, including production equipment, tooling, and computers;
-
for the purchase or development of intangible assets, including patents;
-
for increased selling and marketing activities, especially as they relate to the continued market and channel development;
-
for acquisitions and/or strategic alliances
Our total current assets amounted to $93.2 million at December 31, 2011, most of which consisted of cash and cash equivalents, investments, accounts receivable, and inventories. Total current liabilities amounted to $29.1 million and we have no long-term debt. We estimate that we will spend between approximately $13.0 million and $17.0 million in 2012 for property and equipment. We also estimate that as of December 31, 2011, we had approximately $23.7 million of purchase commitments for inventory from selected vendors. In addition to purchase commitments for inventory, we have future commitments for leased facilities. We intend to finance our purchase commitments from existing cash or from cash flows from operations. The future contractual cash obligations related to these commitments are as follows:
Year ending December 31, | Facilities | Inventory | Total | ||||||
2012 | $ | 762 | $ | 23,700 | $ | 24,462 | |||
2013 | 586 | - | 586 | ||||||
2014 | 412 | - | 412 | ||||||
2015 | 416 | - | 416 | ||||||
2016 | 227 | - | 227 | ||||||
$ | 2,403 | $ | 23,700 | $ | 26,103 |
We have no contractual obligations beyond 2016. In addition to the above disclosed contractual obligations, the reserve for tax contingencies was $1.6 million at December 31, 2011. Based on the uncertainties associated with the settlement of these items, we are unable to make reasonably reliable estimates of the period of potential settlements, if any, with taxing authorities.
Inflation
We believe that inflation has not had a material effect on our operations or on our financial condition during the three most recent fiscal years.
36
Foreign Currency Transactions
We invoice sales to certain European distributors in Euros and reported results are therefore subject to fluctuations in the exchange rates of that currency in relation to the United States dollar. Our strategy is to hedge most of our Euro-denominated accounts receivable positions by entering into 30-day foreign currency forward contracts on a month-to-month basis to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. In addition, we held an unhedged Euro cash balance as of December 31, 2011 that was subject to fluctuations in foreign currency exchange rates. Subsequently, we have included this Euro cash balance in our hedging strategy to manage risks that our earnings will be adversely affected by changes in currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. We enter into 30-day foreign currency forward contracts on the last day of each month and therefore the notional value of the contract equals the fair value at the end of the reporting period. As such, there is no related asset or liability or unrealized gains or losses recorded on the Balance Sheet as of the end of the period. All realized gains and losses related to hedging activities are recorded in current period earnings under the Statement of Operations caption Foreign currency transaction losses, net.
We hedged between €4.0 million and €5.6 million monthly during the year ended December 31, 2011, between €2.3 million and €4.5 million monthly during the year ended December 31, 2010 and between €2.8 million and €5.0 million monthly during the year ended December 31, 2009. The foreign currency forward contracts resulted in a currency translation gain of approximately $70,000 and $340,000 for the years ended December 31, 2011 and 2010, respectively, and a loss of approximately $115,000 for the year ended December 31, 2009. The resulting gain or loss from foreign currency forward contracts only partially offset the total foreign currency transactions gains or losses that we recorded.
We will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge future risks may include foreign currency forward, swap, and option contracts. These instruments may be used to selectively manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations.
Critical Accounting Policies
We have prepared our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America. This has required us to make estimates, judgments, and assumptions that affected the amounts we reported. Note 1 of the Notes to Consolidated Financial Statements contains the significant accounting principles that we used to prepare our consolidated financial statements.
We have identified several critical accounting policies that required us to make assumptions about matters that were uncertain at the time of our estimates. Had we used different estimates and assumptions, the amounts we recorded could have been significantly different. Additionally, if we had used different assumptions or different conditions existed, our financial condition or results of operations could have been materially different. The critical accounting policies that were affected by the estimates, assumptions, and judgments used in the preparation of our consolidated financial statements are listed below.
Revenue Recognition
We derive revenue from sales of 3D printing, rapid prototyping (RP) and direct digital manufacturing (DDM) systems, consumables, and services. We recognize revenue when (1) persuasive evidence of a final agreement exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or determinable, and (4) collectability is reasonably assured. Our standard terms are FOB shipping point, and, as such, most of the revenue from the sale of 3D printers, production systems and consumables is recognized when shipped. Exceptions to this policy occur if a customers purchase order indicates an alternative term or provides that the equipment sold would be subject to certain contingencies, such as formal acceptance. In these instances, revenues would be recognized only upon satisfying the conditions established by the customer as contained in its purchase order to us. Revenue from sales-type leases for the our high-performance systems is recognized at the time of lessee acceptance, which follows installation. Revenue from sales-type leases for our Dimension systems is recognized at the time of shipment, since either the customer or the reseller performs the installation. We recognize revenue from sales-type leases at the net present value of future lease payments. Revenue from operating leases is recognized ratably over the lease period.
37
Service revenue is derived from sales of maintenance contracts, installation services, and training. Service revenue from maintenance contracts is recognized ratably over the period of coverage ranging from one to three years. We offer warranty periods ranging from 90 days to 15 months. On certain sales that require a one-year warranty, the extended warranty is treated for revenue recognition purposes as a maintenance agreement. The fair value of this maintenance agreement is deferred and recognized ratably over the period of the extended warranty as an implied maintenance contract. Installation service revenues are recognized upon completion of the installation. Training revenues are recognized upon completion of the training.
In accordance with ASC 605, Revenue Recognition, when two or more product offerings with varying delivery dates are contained in a single arrangement, revenue is allocated between the items based on their relative selling price, provided that each item meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the selling price of the items. We determine the selling price by reference to the prices we charge when the items are sold separately. If we do not sell the item separately, the selling price is determined by reference to comparable third-party evidence. If neither of these methods provides an appropriate basis for determining a selling price, then one is estimated based on the price at which we would sell the item if it was sold regularly on a standalone basis.
Revenues from training and installation are unbundled and are recognized after the services have been performed. Most of our products are sold through distribution channels, with training and installation services offered by the resellers. For the Dimension products neither installation nor training is offered. The equipment manufactured and sold by us is subject to factory testing that replicates the conditions under which the customers intend to use the equipment. All of the systems are sold subject to published specifications, and all systems sales involve standard models.
We assess collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of the creditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot be reasonably assured, we will decline shipment, request a down payment, or defer recognition of revenue until ultimate collectability is reasonably assured.
Stock-Based Compensation
We calculate the fair value of stock-based option awards on the date of grant using the Black-Scholes option pricing model. The computation of expected volatility is based on historical volatility from traded options on our stock. The expected option term is calculated in accordance with ASC 718, Compensation Stock Compensation. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Each of the three factors requires us to use judgment and make estimates in determining the percentages and time periods used for the calculation. If we were to use different percentages or time periods, the fair value of stock-based option awards could be materially different.
Allowance for Doubtful Accounts
While we evaluate the collectability of a sale as part of our revenue recognition process, we must also make judgments regarding the ultimate realization of our accounts receivable. A considerable amount of judgment is required in assessing the realization of these receivables, including the aging of the receivables and the creditworthiness of each customer. We may not be able to accurately and timely predict changes to a customers financial condition. If a customers financial condition should suddenly deteriorate, calling into question our ability to collect the receivable, our estimates of the realization of our receivables could be adversely affected. We might then have to record additional allowances for doubtful accounts, which could have an adverse effect on our results of operations in the period affected.
Our allowance for doubtful accounts is adjusted quarterly using two methods. First, our overall reserves are based on a percentage applied to certain aged receivable categories that are predominately based on historical bad debt write-off experience. Then, we make an additional evaluation of overdue customer accounts, for which we specifically reserve. In our evaluation we use a variety of factors, such as past payment history, the current financial condition of the customer, and current economic conditions. We also evaluate our overall concentration risk, which assesses the total amount owed by each customer, regardless of its current status. As of both December 31, 2011 and December 31, 2010, our allowance for doubtful accounts amounted to $1.1 million.
38
Inventories
Our inventories are recorded at the lower of cost or market, with cost based on a first-in, first-out basis. We periodically assess this inventory for obsolescence and potential excess by reducing the difference between our cost and the estimated market value of the inventory based on assumptions about future demand and historical sales patterns. Our inventories consist of materials and products that are subject to technological obsolescence and competitive market conditions. If market conditions or future demand are less favorable than our current expectations, additional inventory write downs or reserves may be required, which could have an adverse effect on our reported results in the period the adjustments are made. Additionally, engineering or field change orders (ECO and FCO, respectively) introduced by our engineering group could suddenly create extensive obsolete and/or excess inventory. Although our engineering group considers the estimated effect that an ECO or FCO would have on our inventories, a mandated ECO or FCO could have an immediate adverse affect on our reported financial condition if it required the use of different materials in either new production or our service inventory.
Some of our inventory is returned to us by our customers and refurbished. This refurbished inventory, once fully repaired and tested, is functionally equivalent to new production and is utilized to satisfy many of our requirements under our warranty and service contracts. Upon receipt of the returned material, this inventory is recorded at a discount from original cost, and further reduced by estimated future refurbishment expense. While we evaluate this service material in the same way as our stock inventory (i.e., we periodically test for obsolescence and excess), this inventory is subject to changing demand that may not be immediately apparent. Adjustments to this service inventory, following an obsolescence or excess review, could have an adverse effect on our reported financial condition in the period when the adjustments are made. We review the requirements for service inventory for discontinued products using the number of active maintenance contracts per product line as the key determinant for inventory levels and composition. A sudden decline in the number of customers renewing service agreements in a particular period could lead to an unanticipated write down of this service inventory for a particular product line.
Intangible Assets
Intangible assets are capitalized and amortized over their estimated useful or economic lives using the straight-line method in conformity with ASC 350, Intangibles Goodwill and Other, as follows:
Years | ||
Capitalized software development costs | 3 | |
Trademarks | 5-15 | |
Patents | 10 | |
RP technology | 6-11 | |
Solidscape customer base | 15 | |
Solidscape non-compete agreement | 3 | |
In-process research and development | Indefinite |
The costs of software development, including significant product enhancements, incurred subsequent to establishing technological feasibility have been capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed. Costs incurred prior to establishment of technological feasibility are charged to research and development expense.
We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible assets carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.
39
We evaluate the carrying value of goodwill at December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting units carrying amount, including goodwill. The fair value of the reporting unit is estimated using the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. If the carrying value of the reporting unit exceeds its fair value, an additional calculation is done to determine if the goodwill has been impaired. In making that determination, the implied fair value of the reporting unit is allocated to all of the other assets and liabilities including items that may not be recorded on the balance sheet but which have some fair value. An impairment loss would be recognized if the remaining implied fair value after allocation to all other assets and liabilities exceeds the carrying value of the goodwill.
The evaluation of intangible asset and goodwill impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.
Income Taxes
We comply with ASC 740, Income Taxes, which requires an asset and liability approach to financial reporting of income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized.
In accordance with ASC 740, Income Taxes, we take a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We reevaluate these tax positions quarterly and make adjustments as required.
Impairment of Long-Lived Assets
We adhere to ASC 360, Property, Plant, and Equipment, and annually assess the recoverability of the carrying amounts of long-lived assets, including intangible assets, at year-end. An impairment loss would be recognized if expected undiscounted future cash flows are less than the carrying amount of the asset. This loss would be determined by calculating the difference by which the carrying amount of the asset exceeds its fair value. Based on our assessment as of December 31, 2011 and 2010, no long-lived assets were determined to be impaired.
Forward-looking Statements and Factors That May Affect Future Results of Operations
All statements herein that are not historical facts or that include such words as expects, anticipates, projects, estimates, vision, planning, could, potential, plan, believes, desires, intends, assume or similar words constitute forward-looking statements that we deem to be covered by and to qualify for the safe harbor protection covered by the Private Securities Litigation Reform Act of 1995 (the 1995 Act). Investors and prospective investors in our Company should understand that several factors govern whether any forward-looking statement herein will be or can be achieved. Any one of these factors could cause actual results to differ materially from those projected herein.
40
These forward-looking statements include statements regarding projected revenue and income in future quarters; the size of the 3D printing market; our objectives for the marketing and sale of our Dimension and uPrint 3D Printers; our support removal systems; and our Fortus 3D production systems, particularly for use in direct digital manufacturing (DDM); the demand for our proprietary consumables; the expansion of our paid parts service; and our beliefs with respect to the growth in the demand for our products. Other risks and uncertainties that may affect our business include our ability to penetrate the 3D printing market; the success of our distribution agreement with HP; our ability to achieve the growth rates experienced in preceding quarters; our ability to introduce, produce and market consumable materials, and the market acceptance of these materials; the impact of competitive products and pricing; our timely development of new products and materials and market acceptance of those products and materials; the success of our recent R&D initiative to expand the DDM capabilities of our core FDM technology; and the success of our RedEyeOnDemandTM and other paid parts services. They also include statements about future financial and operating results of our company after the acquisition of Solidscape and anticipated benefits of the acquisition. Actual results may differ from those expressed or implied in our forward-looking statements. Such forward-looking statements involve and are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those discussed in a forward-looking statement. Such risk factors include our ability to successfully integrate and market Solidscape products, our ability to attract and retain management and our ability to protect and defend intellectual property. These statements represent beliefs and expectations only as of the date they were made. We may elect to update forward-looking statements, but we expressly disclaim any obligation to do so, even if our beliefs and expectations change. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, some of which are described in Item 1A, Risk Factors above. These forward-looking statements are based on assumptions, among others, that we will be able to:
- continue to introduce new high-performance and 3D
printing systems and materials acceptable to the market, and to continue to
improve our existing technology and software in our current product
offerings;
- successfully develop the 3D printing market with
our Dimension BST, Dimension SST, Dimension Elite, and uPrint systems, and
that the market will accept these systems;
- successfully develop the DDM market with our
Fortus 360mc, 400mc and 900mc, and that the market will accept these
systems;
- successfully integrate acquired
businesses;
- control our operating expenses;
- expand our manufacturing capabilities to meet the
expected demand generated by our uPrint, Dimension BST, Dimension SST and
Dimension Elite systems, our consumable products and our Paid Parts service
and sales under our OEM Agreement with HP;
- successfully commercialize new materials and gain
market acceptance for these new materials; and
- recruit, retain, and develop employees with the necessary skills to produce, create, commercialize, market, and sell our products.
Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, geo-political, competitive, market and technological conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate, and therefore there is and can be no assurance that the results contemplated in any such forward-looking statement will be realized. The impact of actual experience and business developments may cause us to alter our marketing plans, our capital expenditure budgets, or our engineering, selling, manufacturing or other budgets, which may in turn affect our results of operations or the success of our new product development and introduction. We may not be able to alter our plans or budgets in a timely manner, resulting in reduced profitability or losses.
Due to the factors noted above and elsewhere in this Managements Discussion and Analysis of Financial Condition and Results of Operations, our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Additionally, we may not learn of revenue or earnings shortfalls until late in a fiscal quarter, since we frequently receive a significant number of orders very late in a quarter. This could result in an immediate and adverse effect on the trading price of our common stock. Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our cash and cash equivalent investments are held exclusively in short-term money market and sweep instruments with maturities of less than 90 days. These are subject to limited interest rate risk. A 10% change in interest rates would not have a material effect on our financial condition or results of operations. Our short- and long-term investments are invested in auction rate securities, corporate and municipal bonds and certificates of deposit that bear interest at rates of 0.4% to 6.4%. An immediate 10% change in interest rates would have no material effect on our financial condition or results of operations.
Foreign Currency Exchange Rate Risk
We have not historically hedged sales from or expenses incurred by our European operations that have a functional currency in Euros. A hypothetical 10% change in the exchange rates between the U.S. dollar and the Euro could increase or decrease our income before taxes by less than $0.4 million for the continued maintenance of our European facility. We hedged between €4.0 million and €5.6 million monthly during the year ended December 31, 2011, between €2.3 million and €4.5 million during the year ended December 31, 2010 and between €2.8 million and €5.0 million during the year ended December 31, 2009. We believe that a hypothetical 10% change in the exchange rates between the US dollar and the Euro could increase or decrease income before taxes by $4.0 million
Item 8. Financial Statements and Supplementary Data.
This information appears following Item 15 of this report and is incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report (the Evaluation Date). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls and procedures require that the information relating to us required to be disclosed in our Securities and Exchange Commission (SEC) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our evaluation did not include the internal controls related to the acquisition of Solidscape, Inc. that occurred on May 3, 2011. Total assets and net sales related to this acquisition represent 21.4% and 5.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.
Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we are responsible for establishing and maintaining an effective system of internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Our management has conducted an assessment of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework. Our management has prepared an annual report on internal control over financial reporting. Managements report is included in this Annual Report on Form 10-K on page F-3. In addition, Grant Thornton, LLP, our independent registered public accounting firm, has prepared its report on the effectiveness of our internal control over financial reporting and such report is included on pages F-5 to F-6 of the consolidated financial statements.
42
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting identified in connection with the assessment that occurred during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics for all directors, officers and employees, which is filed as Exhibit 14.1 to our Annual Report on Form 10-K for the year ended December 31, 2008. The Code of Business Conduct and Ethics is available on the SECs website at http://www.sec.gov. We intend to disclose on our website, http://www.stratasys.com, any amendment to, or waiver of, the Code of Business Conduct and Ethics related to our senior officers.
The additional required information is incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of Stockholders.
Item 11. Executive Compensation.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of Stockholders.
43
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents
1. Financial Statements -- | ||||
Managements Report on Internal Control Over Financial Reporting | F-3 | |||
Reports of Independent Registered Public Accounting Firm | F-4 to F-6 | |||
Consolidated Balance Sheets at December 31, 2011 and 2010 | F-7 | |||
Consolidated Statements of Operations and
Comprehensive Income for Years Ended December 31, 2011, 2010 and 2009 |
F-8 | |||
Consolidated Statements of
Changes in Stockholders Equity for Years Ended December 31, 2011, 2010 and 2009 |
F-9 | |||
Consolidated Statements of Cash Flows for Years Ended December 31, 2011, 2010 and 2009 | F-10 | |||
Notes to Consolidated Financial Statements | F-11 to F-33 | |||
2. Financial Statement Schedule -- | ||||
Schedule II -- Valuation and Qualifying Accounts and Reserves | F-34 |
44
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORTS OF INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2011, 2010 AND 2009
F-1
CONTENTS | ||
Managements Report on Internal Controls over Financial Reporting | F-3 | |
Reports of Independent Registered Public Accounting Firm | F-4-F-6 | |
Consolidated Financial Statements | ||
Consolidated Balance Sheets | F-7 | |
Consolidated Statements of Operations and Comprehensive Income | F-8 | |
Consolidated Statements of Changes in Stockholders' Equity | F-9 | |
Consolidated Statements of Cash Flows | F-10 | |
Notes to Consolidated Financial Statements | F-11-F-33 | |
Schedule II - Valuation and Qualifying Accounts and Reserves | F-34 |
F-2
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). The Companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes self-monitoring mechanisms and actions taken to correct deficiencies as they are identified. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
MANAGEMENTS REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management conducted an evaluation of the effectiveness of the Companys system of internal control over financial reporting as of December 31, 2011 based on the framework set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that, as of December 31, 2011, the Companys internal control over financial reporting was effective. Our evaluation did not include the internal controls related to the acquisition of Solidscape, Inc. that occurred on May 3, 2011. Total assets and net sales related to this acquisition represent 21.4% and 5.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011. Companies are allowed to exclude acquisitions from their evaluation of internal control over financial reporting during the year of acquisition under guidelines established by the SEC.
/s/ S. SCOTT CRUMP | |
S. Scott Crump | |
Chief Executive Officer |
/s/ ROBERT F. GALLAGHER |
Robert F. Gallagher |
Chief Financial Officer |
Date: March 12, 2012
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Stratasys, Inc.
We have audited the accompanying consolidated balance sheets of Stratasys, Inc. (a Delaware Corporation) and subsidiaries (collectively, the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stratasys, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stratasys, Inc.s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2012 expressed an unqualified opinion.
GRANT THORNTON LLP |
Minneapolis, Minnesota
March 12, 2012
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Stratasys, Inc.
We have audited Stratasys, Inc. (a Delaware Corporation) and subsidiaries (collectively, the Company) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
As indicated in the accompanying Managements Report on Internal Controls Over Financial Reporting, managements evaluation of and the conclusion on the effectiveness of internal control over financial reporting did not include the internal controls related to the acquisition of Solidscape, Inc. included in the December 31, 2011 financial statements of Stratasys Inc. and constituted 21.4% of total and net assets as of December 31, 2011 and 5.3% of total net sales for the year then ended. Our audit of internal controls over financial reporting of Stratasys Inc. also did not include an evaluation of the internal control over financial reporting of Solidscape, Inc.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Stratasys, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control Integrated Framework issued by COSO.
F-5
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Stratasys, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2011, and our report dated March 12, 2012 expressed an unqualified opinion.
GRANT THORNTON LLP |
Minneapolis, Minnesota
March 12, 2012
F-6
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets | ||||||||
December 31, | 2011 | 2010 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 20,092,200 | $ | 27,554,411 | ||||
Short-term investments - held to maturity | 14,602,408 | 8,797,878 | ||||||
Accounts receivable, less allowance for doubtful | ||||||||
accounts of $1,089,000 at December 31, 2011 | ||||||||
and $1,095,000 at December 31, 2010 | 26,230,289 | 20,051,451 | ||||||
Inventories | 22,771,460 | 17,880,714 | ||||||
Net investment in sales-type leases, less allowance | ||||||||
for doubtful accounts of $230,000 at December 31, | ||||||||
2011 and $189,000 at December 31, 2010 | 3,295,039 | 3,096,911 | ||||||
Prepaid expenses and other current assets | 3,259,012 | 3,384,394 | ||||||
Deferred income taxes | 2,973,000 | 3,447,000 | ||||||
Total current assets | 93,223,408 | 84,212,759 | ||||||
Property and equipment, net | 39,669,433 | 29,872,945 | ||||||
Other assets | ||||||||
Goodwill | 25,393,967 | 867,700 | ||||||
Other intangible assets, net | 25,295,032 | 5,538,014 | ||||||
Net investment in sales-type leases | 5,494,753 | 3,067,446 | ||||||
Long-term investments - available for sale | - | 1,185,250 | ||||||
Long-term investments - held to maturity | 32,581,472 | 52,504,650 | ||||||
Other non-current assets | 112,300 | 1,210,867 | ||||||
Total other assets | 88,877,524 | 64,373,927 | ||||||
Total assets | $ | 221,770,365 | $ | 178,459,631 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and other current liabilities | $ | 19,368,197 | $ | 14,408,628 | ||||
Unearned revenues | 9,768,610 | 9,608,521 | ||||||
Total current liabilities | 29,136,807 | 24,017,149 | ||||||
Non-current liabilities | ||||||||
Deferred tax liabilities | 6,760,000 | 207,000 | ||||||
Unearned revenues - long-term | 2,562,195 | 1,953,000 | ||||||
Total liabilities | 38,459,002 | 26,177,149 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity | ||||||||
Common stock, $.01 par value, authorized 30,000,000 shares; | ||||||||
26,933,301 and 26,509,518 shares issued at December 31, | ||||||||
2011 and 2010, respectively | 269,333 | 265,095 | ||||||
Additional paid-in capital | 118,134,006 | 107,781,990 | ||||||
Retained earnings | 104,011,848 | 83,385,484 | ||||||
Accumulated other comprehensive loss | (99,399 | ) | (145,662 | ) | ||||
Treasury stock at cost, 5,687,631 shares at | ||||||||
December 31, 2011 and 2010 | (39,004,425 | ) | (39,004,425 | ) | ||||
Total stockholders' equity | 183,311,363 | 152,282,482 | ||||||
Total liabilities and stockholders' equity | $ | 221,770,365 | $ | 178,459,631 |
See accompanying notes to consolidated financial statements.
F-7
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations and Comprehensive Income | ||||||||||||
Years Ended December 31, | 2011 | 2010 | 2009 | |||||||||
Net sales | ||||||||||||
Products | $ | 127,476,277 | $ | 97,467,028 | $ | 73,829,221 | ||||||
Services | 28,418,086 | 25,364,673 | 25,145,682 | |||||||||
Fair value of warrant related to OEM agreement | - | (4,987,806 | ) | - | ||||||||
155,894,363 | 117,843,895 | 98,974,903 | ||||||||||
Cost of sales | ||||||||||||
Products | 61,544,632 | 50,358,570 | 41,544,114 | |||||||||
Services | 11,945,621 | 11,399,356 | 11,047,217 | |||||||||
73,490,253 | 61,757,926 | 52,591,331 | ||||||||||
Gross profit | 82,404,110 | 56,085,969 | 46,383,572 | |||||||||
Operating expenses | ||||||||||||
Research and development | 14,359,828 | 9,755,169 | 7,737,125 | |||||||||
Selling, general and administrative | 39,038,315 | 32,863,462 | 32,822,727 | |||||||||
53,398,143 | 42,618,631 | 40,559,852 | ||||||||||
Operating income | 29,005,967 | 13,467,338 | 5,823,720 | |||||||||
Other income (expense) | ||||||||||||
Interest income, net | 923,210 | 921,088 | 989,922 | |||||||||
Foreign currency transaction losses, net | (888,076 | ) | (617,174 | ) | (232,767 | ) | ||||||
Other | 2,311,263 | 64,086 | (398,603 | ) | ||||||||
2,346,397 | 368,000 | 358,552 | ||||||||||
Income before income taxes | 31,352,364 | 13,835,338 | 6,182,272 | |||||||||
Income taxes | 10,726,000 | 4,465,794 | 2,066,001 | |||||||||
Net income | $ | 20,626,364 | $ | 9,369,544 | $ | 4,116,271 | ||||||
Net income per common share | ||||||||||||
Basic | $ | 0.98 | $ | 0.46 | $ | 0.20 | ||||||
Diluted | 0.95 | 0.44 | 0.20 | |||||||||
Weighted average commons shares outstanding | ||||||||||||
Basic | 21,132,580 | 20,579,412 | 20,235,747 | |||||||||
Diluted | 21,653,185 | 21,129,533 | 20,267,999 | |||||||||
Comprehensive Income | ||||||||||||
Net income | $ | 20,626,364 | $ | 9,369,544 | $ | 4,116,271 | ||||||
Other comprehensive income (loss): | ||||||||||||
Unrealized gain on securities adjustment, net of tax | - | 101,500 | 26,500 | |||||||||
Foreign currency translation adjustment | 46,263 | (229,003 | ) | 158,360 | ||||||||
Comprehensive income | $ | 20,672,627 | $ | 9,242,041 | $ | 4,301,131 |
See accompanying notes to consolidated financial statements.
F-8
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2011, 2010, and 2009 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Stock | Equity | ||||||||||||||||||
Balances, January 1, 2009 | 25,909,603 | $ | 259,096 | $ | 91,611,078 | $ | 69,899,669 | $ | (203,019 | ) | $ | (39,004,425 | ) | $ | 122,562,399 | |||||||||
Exercise of stock options and warrants | 143,715 | 1,437 | 1,664,061 | 1,665,498 | ||||||||||||||||||||
Tax benefit shortfall relating to | ||||||||||||||||||||||||
exercise of stock options | (82,811 | ) | (82,811 | ) | ||||||||||||||||||||
Stock based compensation | 1,137,070 | 1,137,070 | ||||||||||||||||||||||
Comprehensive income | 4,116,271 | 184,860 | 4,301,131 | |||||||||||||||||||||
Balances, December 31, 2009 | 26,053,318 | 260,533 | 94,329,398 | 74,015,940 | (18,159 | ) | (39,004,425 | ) | 129,583,287 | |||||||||||||||
Exercise of stock options | 456,200 | 4,562 | 6,397,803 | 6,402,365 | ||||||||||||||||||||
Income tax reductions relating to | ||||||||||||||||||||||||
exercise of stock options | 2,961,412 | 2,961,412 | ||||||||||||||||||||||
Vested stock option repurchase | (2,136,605 | ) | (2,136,605 | ) | ||||||||||||||||||||
Stock based compensation | 1,242,176 | 1,242,176 | ||||||||||||||||||||||
Fair value of warrant related to OEM agreement | 4,987,806 | 4,987,806 | ||||||||||||||||||||||
Comprehensive income (loss) | 9,369,544 | (127,503 | ) | 9,242,041 | ||||||||||||||||||||
Balances, December 31, 2010 | 26,509,518 | 265,095 | 107,781,990 | 83,385,484 | (145,662 | ) | (39,004,425 | ) | 152,282,482 | |||||||||||||||
Exercise of stock options | 423,783 | 4,238 | 6,144,546 | 6,148,784 | ||||||||||||||||||||
Income tax reductions relating to | ||||||||||||||||||||||||
exercise of stock options | 2,620,001 | 2,620,001 | ||||||||||||||||||||||
Stock based compensation | 1,587,469 | 1,587,469 | ||||||||||||||||||||||
Comprehensive income | 20,626,364 | 46,263 | 20,672,627 | |||||||||||||||||||||
Balances, December 31, 2011 | 26,933,301 | $ | 269,333 | $ | 118,134,006 | $ | 104,011,848 | $ | (99,399 | ) | $ | (39,004,425 | ) | $ | 183,311,363 |
See accompanying notes to consolidated financial statements.
F-9
STRATASYS, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Statements of Cash Flows | ||||||||||||
Years ended December 31, | 2011 | 2010 | 2009 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 20,626,364 | $ | 9,369,544 | $ | 4,116,271 | ||||||
Adjustments to reconcile net income to | ||||||||||||
net cash provided by operating activities: | ||||||||||||
Depreciation | 5,863,409 | 6,360,290 | 5,827,113 | |||||||||
Amortization | 4,484,314 | 2,982,100 | 2,428,540 | |||||||||
Deferred income taxes | (112,910 | ) | (328,000 | ) | (1,431,000 | ) | ||||||
Stock-based compensation | 1,587,469 | 1,242,176 | 1,137,070 | |||||||||
Excess tax benefit from stock options | (2,620,002 | ) | (2,514,551 | ) | - | |||||||
Fair value of warrant related to OEM agreement | - | 4,987,806 | - | |||||||||
Loss (gain) on disposal of property and equipment | (155,608 | ) | - | 314,414 | ||||||||
Loss on impairment of investment | - | - | 444,000 | |||||||||
Gain on sale of investment | (1,830,595 | ) | - | - | ||||||||
Increase (decrease) in cash attributable to changes in | ||||||||||||
operating assets and liabilities, net of the impact | ||||||||||||
of acquisition: | ||||||||||||
Accounts receivable, net | (5,739,554 | ) | (801,638 | ) | 7,289,920 | |||||||
Inventories | (5,846,807 | ) | (5,367,062 | ) | 4,810,441 | |||||||
Net investment in sales-type leases | (2,625,435 | ) | 931,558 | 1,320,534 | ||||||||
Prepaid expenses | 1,437,504 | (1,136,782 | ) | 360,468 | ||||||||
Other assets | 290,278 | 867,298 | (119,951 | ) | ||||||||
Accounts payable and other current liabilities | 6,537,888 | 4,495,241 | 1,079,560 | |||||||||
Unearned revenues | 615,253 | 883,094 | (2,086,969 | ) | ||||||||
Net cash provided by operating activities | 22,511,568 | 21,971,074 | 25,490,411 | |||||||||
Cash flows from investing activities | ||||||||||||
Proceeds from the maturity of investments | 19,927,063 | 27,728,403 | 7,022,607 | |||||||||
Proceeds from the sale of investments | 15,748,196 | - | - | |||||||||
Purchase of investments | (18,754,748 | ) | (67,911,812 | ) | (9,920,000 | ) | ||||||
Proceeds from sale of property and equipment | 100 | - | 38,445 | |||||||||
Acquisition of property and equipment | (12,849,521 | ) | (7,822,873 | ) | (2,284,676 | ) | ||||||
Acquisition of intangible and other assets | (4,318,103 | ) | (1,287,627 | ) | (1,687,126 | ) | ||||||
Acquisition of Solidscape, Inc., net of cash acquired | (38,559,085 | ) | - | - | ||||||||
Net cash used in investing activities | (38,806,098 | ) | (49,293,909 | ) | (6,830,750 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Proceeds from exercise of stock options and warrants | 6,148,784 | 6,402,365 | 1,582,687 | |||||||||
Cash paid for vested stock option repurchases | - | (2,136,605 | ) | - | ||||||||
Excess tax benefit from stock options | 2,620,002 | 2,514,551 | - | |||||||||
Net cash provided by financing activities | 8,768,786 | 6,780,311 | 1,582,687 | |||||||||
Effect of exchange rate changes on cash | 63,533 | (218,991 | ) | 127,779 | ||||||||
Net increase (decrease) in cash and cash equivalents | (7,462,211 | ) | (20,761,515 | ) | 20,370,127 | |||||||
Cash and cash equivalents, beginning of year | 27,554,411 | 48,315,926 | 27,945,799 | |||||||||
Cash and cash equivalents, end of year | $ | 20,092,200 | $ | 27,554,411 | $ | 48,315,926 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for taxes | $ | 6,043,223 | $ | 5,026,953 | $ | 626,407 | ||||||
Transfer of fixed assets to inventory | 212,613 | 242,111 | 245,329 | |||||||||
Transfer of inventory to fixed assets | 2,746,644 | 2,336,473 | 716,225 | |||||||||
Fair value of assets acquired | 47,818,196 | |||||||||||
Less liabilities assumed | (8,718,622 | ) | ||||||||||
Net acquired assets | 39,099,574 | |||||||||||
Less cash acquired | (540,489 | ) | ||||||||||
Acquisition of Solidscape, Inc., net of cash acquired | $ | 38,559,085 |
See accompanying notes to consolidated financial statements.
F-10
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Stratasys, Inc. and subsidiaries (collectively the "Company") is a worldwide leading manufacturer of three-dimensional (3D) printers and high-performance rapid prototyping (RP) systems for the office-based RP and direct digital manufacturing (DDM) markets. The Companys 3D printers and high-performance RP systems provide 3D computer-aided design (CAD) users a fast, office-friendly, and low-cost alternative for building functional 3D parts. The Company develops, manufactures and sells a broad product line of 3D printers and DDM systems (and related proprietary consumable materials) that create physical models from CAD files. It also offers rapid prototyping and production part manufacturing services through its centers located in North America, Europe and Australia.
On May 3, 2011, Stratasys, Inc. acquired Solidscape, Inc., a Delaware corporation (Solidscape). Solidscape is a manufacturer of high precision 3D printers and is a leader for investment casting applications that require ultra-fine feature detail. This addition provides the Company with access to markets currently not served by Stratasys, including the jewelry, dental and precision industrial casting markets. All of the assets acquired and liabilities assumed were recorded at their respective fair values and the Companys consolidated results of operations include Solidscapes operating results from May 3, 2011 through December 31, 2011. See additional disclosure provided in Note 2 Business Combinations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Stratasys, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Stratasys, Inc. and Solidscape, Inc. have been aggregated into one reportable segment based on the aggregation criteria outlined in the authoritative accounting guidance.
Reclassifications
Certain reclassifications have been made to the prior years financial statements to conform to the current year presentation. These reclassifications had no net effect on previously reported results of operations.
Use of Estimates
Preparing the Companys financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid debt instruments purchased with maturities of three months or less when acquired to be cash equivalents. At December 31, 2011 and 2010, cash equivalents consisted of money market accounts aggregating approximately $9.2 million and $25.9 million, respectively. As of December 31, 2011 and 2010, and at various times during those years, balances of cash at financial institutions exceeded the federally insured limit. The Company has not experienced any losses in such accounts and believes cash and cash equivalents are not subject to any significant credit risk. At December 31, 2011 and 2010, cash balances held in foreign bank accounts were approximately $2.7 million and $0.2 million, respectively. Cash balances held in foreign accounts are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States.
Short-term and Long-term Investments
Classification of investments as current or non-current is dependent upon managements intended holding period, the investments maturity date, and liquidity considerations based on market conditions. These investments are then evaluated and classified as available-for-sale or held-to-maturity in accordance with the provisions of ASC 320, Investments - Debt and Equity Securities. This evaluation takes into consideration the Companys past history of holding investments until maturity, projected cash flow estimates, future capital requirements, the existence of credit deterioration of the issuer and the Companys overall investment strategy as established by management and approved by the Companys Board of Directors.
F-11
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
If management has the positive intent and ability to hold its debt securities until maturity, they are classified as held-to-maturity and accounted for using the amortized-cost method. All other securities are classified as available-for-sale and accounted for at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. While the Company does not generally hold any investments for trading purposes, the Company did liquidate certain investments during 2011 to fund the acquisition of Solidscape. The Company believes that the liquidation of these investments was an isolated event that is unusual and nonrecurring in nature and was not reasonably anticipated. The net carrying value of liquidated investments was $14.0 million and the sale resulted in a gain of approximately $64,000. The Company does not currently hold any investments for trading purposes and had no unrecognized gains or losses related to held-to-maturity investments at December 31, 2011 or December 31, 2010, as the fair value of those investments approximated amortized cost.
Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available under the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
During the year ended December 31, 2011, the Company had no significant measurements of assets or liabilities at fair value on a recurring or nonrecurring basis subsequent to their initial recognition.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for doubtful accounts. A trade receivable is considered to be past due if the receivable balance is outstanding beyond terms identified on the customers purchase order and accepted by the Company. A sales-type lease receivable is considered to be past due if the receivable balance is outstanding beyond terms identified in the lease. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on past write-offs and collections and current credit conditions. The Company evaluates a number of factors to assess collectability, including an evaluation of the creditworthiness of the customer, past due amounts, payment history, and current economic conditions. It is reasonably possible that the Companys estimate of the allowance for doubtful accounts will change. Accounts are written-off against the reserve when management deems the accounts are no longer collectible.
F-12
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventory costs consist of material, direct labor and overhead. The Company periodically assesses inventory for obsolescence and excess and reduces the carrying value by an amount equal to the difference between its cost and the estimated market value based on assumptions about future demand and historical sales patterns.
Impairment of Long-Lived Assets
The Company annually assesses the recoverability of the carrying amounts of long-lived assets, including intangible assets, at year-end. An impairment loss would be recognized if expected undiscounted future cash flows are less than the carrying amount of the asset. This loss would be determined by calculating the difference by which the carrying amount of the asset exceeds its fair value. Based on the Companys assessment as of December 31, 2011 and 2010, no long-lived assets were determined to be impaired.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets ranging from two to 30 years. The Company recorded depreciation expense not included in cost of sales of approximately $2.3 million, $2.7 million, and $2.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. Maintenance and repairs are charged to operations, while betterments and improvements are capitalized.
Intangible Assets
Intangible assets are capitalized and amortized over their estimated useful or economic lives using the straight-line method in conformity with ASC 350, Intangibles Goodwill and Other, as follows:
Years | |
Capitalized software development costs | 3 |
Trademarks | 5-15 |
Patents | 10 |
RP technology | 6-11 |
Solidscape customer base | 15 |
Solidscape non-compete agreement | 3 |
In-process research and development | Indefinite |
The costs of software development, including significant product enhancements, incurred subsequent to establishing technological feasibility have been capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed. The Company recorded amortization expense related to capitalized software costs of $1.6 million, $1.9 million, and $1.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. Costs incurred prior to establishment of technological feasibility are charged to research and development expense.
The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible assets carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.
The Company evaluates the carrying value of goodwill at December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting units carrying amount, including goodwill. The fair value of the reporting unit is estimated using the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. If the carrying value of the reporting unit exceeds its fair value, an additional calculation is done to determine if the goodwill has been impaired. In making that determination, the implied fair value of the reporting unit is allocated to all of the other assets and liabilities including items that may not be recorded on the balance sheet but which have some fair value. An impairment loss would be recognized if the remaining implied fair value after allocation to all other assets and liabilities exceeds the carrying value of the goodwill.
F-13
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The evaluation of intangible asset and goodwill impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.
Unearned Revenues
The Company services and supports customers by providing warranties and selling maintenance agreements for its products. Unearned revenues are comprised of purchased and implied maintenance agreements covering future periods. Implied maintenance is the portion of revenue received at the time of a system sale that represents maintenance coverage commitments that were included in the sale that extend beyond the stated warranty period. Maintenance revenue is recognized in equal installments over the period of the agreement. Purchased maintenance is deferred in whole and amortized over the period of coverage ranging from one to three years. The Company classifies the portion of unearned revenue not expected to be earned in the subsequent 12 months as long-term and made a reclassification for 2011 of $2.0 million for amounts previously reported in 2010 to reflect the long-term portion as of December 31, 2010.
Revenue Recognition
The Company derives revenue from sales of 3D printing, rapid prototyping (RP) and direct digital manufacturing (DDM) systems, consumables, and services. The Company recognizes revenue when (1) persuasive evidence of a final agreement exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or determinable, and (4) collectability is reasonably assured. The Companys standard terms are FOB shipping point, and, as such, most of the revenue from the sale of 3D printers, production systems and consumables is recognized when shipped. Exceptions to this policy occur if a customers purchase order indicates an alternative term or provides that the equipment sold would be subject to certain contingencies, such as formal acceptance. In these instances, revenues would be recognized only upon satisfying the conditions established by the customer as contained in its purchase order to the Company. Revenue from sales-type leases for the Companys high-performance systems is recognized at the time of lessee acceptance, which follows installation. Revenue from sales-type leases for the Companys Dimension systems is recognized at the time of shipment, since either the customer or the reseller performs the installation. The Company recognizes revenue from sales-type leases at the net present value of future lease payments. Revenue from operating leases is recognized ratably over the lease period.
Service revenue is derived from sales of maintenance contracts, installation services, and training. Service revenue from maintenance contracts is recognized ratably over the period of coverage ranging from one to three years. The Company offers warranty periods ranging from 90 days to 15 months. On certain sales that require a one-year warranty, the extended warranty is treated for revenue recognition purposes as a maintenance agreement. The fair value of this maintenance agreement is deferred and recognized ratably over the period of the extended warranty as an implied maintenance contract. Installation service revenues are recognized upon completion of the installation. Training revenues are recognized upon completion of the training.
In accordance with ASC 605, Revenue Recognition, when two or more product offerings with varying delivery dates are contained in a single arrangement, revenue is allocated between the items based on their relative selling price, provided that each item meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the selling price of the items. The Company determines the selling price by reference to the prices it charges when the items are sold separately. If the Company does not sell the item separately, the selling price is determined by reference to comparable third-party evidence. If neither of these methods provides an appropriate basis for determining a selling price, then one is estimated based on the price at which the Company would sell the item if it was sold regularly on a standalone basis.
F-14
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Revenues from training and installation are unbundled and are recognized after the services have been performed. Most of the Companys products are sold through distribution channels, with training and installation services offered by the resellers. For the Dimension products neither installation nor training is offered by the Company. The equipment manufactured and sold by the Company is subject to factory testing that replicates the conditions under which the customers intend to use the equipment. All of the systems are sold subject to published specifications, and all systems sales involve standard models.
The Company assesses collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of the creditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot be reasonably assured, the Company will decline shipment, request a down payment, or defer recognition of revenue until ultimate collectability is reasonably assured.
Shipping Revenue
The Company classifies shipping and handling costs charged to customers in connection with the sale of products and services as revenue. The related shipping and handling costs incurred by the Company are classified as costs of sales. Certain reclassifications have been made to the prior years financial statements to conform to the current year presentation. These reclassifications had no net effect on previously reported results of operations.
Foreign Currency Hedge
The Company invoices sales to certain European distributors in Euros and such receivable balances are subject to fluctuations in the exchange rates of that currency in relation to the United States dollar. The Companys strategy is to hedge most of its Euro-denominated accounts receivable positions by entering into 30-day foreign currency forward contracts on a month-to-month basis to reduce the risk that its earnings will be adversely affected by changes in currency exchange rates. In addition, the Company held an unhedged Euro cash balance as of December 31, 2011 that was subject to fluctuations in foreign currency exchange rates. Subsequently, the Company has included this Euro cash balance in our hedging strategy to manage risks that our earnings will be adversely affected by changes in currency exchange rates. The Company does not use derivative financial instruments for speculative or trading purposes. The Company enters into 30-day foreign currency forward contracts on the last day of each month and therefore the notional value of the contract equals the fair value at the end of each reporting period. As such, there is no related asset or liability or unrealized gain or loss recorded on the Balance Sheet as of the end of the period. All realized gains and losses related to hedging activities are recorded in current period earnings under the Consolidated Statements of Operations and Comprehensive Income caption Foreign currency transaction losses, net.
Advertising
Advertising costs are charged to operations as incurred and were approximately $3.6 million, $2.8 million, and $3.4 million, for 2011, 2010 and 2009, respectively.
Research and Development Costs
Expenditures for research, development and engineering of products and manufacturing processes are expensed as incurred, in accordance with ASC 730, Research and Development.
Sales Tax
Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenues) in the Companys Consolidated Statement of Operations.
F-15
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Income Taxes
The Company complies with ASC 740, Income Taxes (ASC 740), which requires an asset and liability approach to financial reporting of income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized.
In accordance with ASC 740, the Company takes a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these tax positions quarterly and makes adjustments as required.
Earnings Per Share
The Company complies with ASC 260, Earnings Per Share, which requires dual presentation of basic and diluted income per common share for all periods presented. Basic net income per share excludes dilution and is computed by dividing net income by the weighted average number of shares outstanding for the periods that have net income. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the income of the Company. The difference between the number of common shares used to compute basic net income per share and diluted net income per share relates to additional common shares that would be issued upon the assumed exercise of stock options and warrants, net of the common shares that would hypothetically be repurchased using the proceeds received from the original exercise. The additional common shares amounted to 520,605 in 2011, 550,121 in 2010 and 32,252 in 2009. There were no options excluded from the dilution calculation for 2011, since the market price of our common stock at December 31, 2011, exceeded the exercise price of all outstanding options. A total of 400 and 812,000 options were excluded from the dilution calculation for 2010 and 2009, respectively, since their inclusion would have an anti-dilutive effect.
Stock-Based Compensation
The Company calculates the fair value of stock-based option awards on the date of grant using the Black-Scholes option pricing model. The computation of expected volatility is based on historical volatility from traded options on our stock. The expected option term is calculated in accordance with ASC 718, Compensation Stock Compensation. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Each of the three factors requires the Company to use judgment and make estimates in determining the percentages and time periods used for the calculation. If the Company were to use different percentages or time periods, the fair value of stock-based option awards could be materially different.
Accrued Product Warranties
The Companys products are covered by a warranty with periods ranging from ninety days to fifteen months from the date of sale to the end customer. A liability is recorded for future warranty costs in the same period in which related revenue is recognized. The liability is based on anticipated parts and labor costs utilizing historical experience. The Company periodically assesses the adequacy of the warranty reserves based on changes in these factors and records any necessary adjustments if actual experience indicates that adjustments are necessary. Future claims experience could be materially different from prior results because of the introduction of new, more complex products, a change in the Companys warranty policy in response to industry trends, competition or other external forces, or manufacturing changes that could impact product quality. In the event that the Company determines that its current or future product repair and replacement costs exceed estimates, an adjustment to these reserves would be charged to earnings in the period such a determination is made. As of December 31, 2011 and 2010, the Company had $1.5 million and $1.2 million, respectively, accrued for future estimated warranty claims.
F-16
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Comprehensive Income
The Company complies with ASC 220, Comprehensive Income, which establishes rules for the reporting and display of comprehensive income (loss) and its components. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income. This ASU (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The Company has elected early adoption of this ASU and since it impacts disclosure requirements only, the adoption of this standard did not have an impact on the Companys consolidated results of operations or financial condition.
The Company reports the financial impact of translating its foreign subsidiaries financial statements from local currency to reporting currency as a component of comprehensive income (loss). The Company also holds securities classified as available-for-sale that are accounted for at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income (loss).
Note 2. Business Combinations
On May 3, 2011, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Solidscape, Inc., a Delaware corporation (Solidscape); Granite Acquisition Corporation, a Delaware corporation and the Companys wholly-owned subsidiary (Merger Sub); and the Controlling Stockholders identified in the Merger Agreement, pursuant to which the Company acquired all the outstanding shares of capital stock of Solidscape in a cash-for-stock transaction where all the outstanding shares of capital stock and all in-the-money options to purchase shares of common stock of Solidscape were exchanged for an aggregate purchase price of $39.1 million. Under the terms of the Merger Agreement, Merger Sub merged with and into Solidscape, with Solidscape surviving as the Companys wholly-owned subsidiary (the Merger). The Merger Agreement was unanimously approved by the Companys board of directors.
In the second quarter of 2011, the Company incurred acquisition-related costs of approximately $615,000, which are recorded as selling, general and administrative expenses in the Consolidated Statements of Operations.
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets of Solidscape acquired in connection with the acquisition, based on their estimated fair values. At June, 30, 2011, the Company preliminarily estimated the value of net tangible and intangible assets of Solidscape acquired in connection with the acquisition. At December 31, 2011, the Company has updated this preliminary estimate as required under purchase accounting rules. The final allocation of the purchase price to assets acquired and liabilities assumed is as follows:
F-17
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Allocation of | |||
Purchase Price | |||
Cash and cash equivalents | $ | 540,489 | |
Accounts receivable | 439,284 | ||
Inventories | 1,577,970 | ||
Other current assets | 771,441 | ||
Deferred income taxes | 383,000 | ||
Property and equipment, net | 364,443 | ||
Goodwill | 24,615,757 | ||
Intangible assets | 19,500,000 | ||
Accounts payable & other liabilities | (1,041,681 | ) | |
Unearned revenue | (154,031 | ) | |
Deferred tax liabilities | (7,897,098 | ) | |
Total purchase price | $ | 39,099,574 |
The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:
Weighted Average | ||||
Amount | Life - Years | |||
Developed technology | $ | 11,750,000 | 6.7 | |
Customer base | 5,100,000 | 15 | ||
Trademarks | 1,150,000 | 15 | ||
In-process R&D | 1,150,000 | Indefinite | ||
Non-compete agreement | 350,000 | 3 | ||
Total intangible assets | $ | 19,500,000 |
The fair values of the identified intangible assets were estimated using an income approach. Under the income approach, an intangible assets fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The goodwill recognized as a result of the Solidscape acquisition is primarily attributable to the value of the workforce and corporate synergies. None of the goodwill recognized is expected to be deductible for income tax purposes. The useful life of the intangible assets for amortization purposes was determined with the help of outside consultants considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive economic or other factors that may limit the useful life of intangible assets.
The actual Solidscape net sales and net income included in the Companys Consolidated Statements of Operations for the year ended December 31, 2011 and the supplemental unaudited pro forma net sales and net income of the combined entity had the acquisition been completed on the first day of the earliest period presented are as follows:
F-18
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Years Ended December 31, | ||||||||
2011 | 2010 | 2009 | ||||||
Actual Solidscape results of operations included in the | ||||||||
Consolidated Results of Operations: | ||||||||
Net sales | $ | 8,239,690 | $ | - | $ | - | ||
Net income | 134,705 | - | - | |||||
Net income per common share - diluted | 0.01 | - | - | |||||
(Unaudited) | ||||||||
Supplemental pro forma combined results of operations: | ||||||||
Net sales | 160,380,132 | 131,254,082 | 109,655,253 | |||||
Net income | 22,800,160 | 9,540,286 | 4,732,824 | |||||
Net income per common share - diluted | $ | 1.05 | $ | 0.45 | $ | 0.23 |
Adjustments to the supplemental pro forma combined results of operations are as follows:
(Unaudited) | Years Ended December 31, | |||||||||
2011 | 2010 | 2009 | ||||||||
Non-recurring expense related to fair market value adjustment | $ | 561,094 | $ | - | $ | - | ||||
to acquisition-date inventory | ||||||||||
Net impact of the change in amortization of intangibles | 104,650 | 313,949 | 313,949 | |||||||
Add interest on loans and preferred stock no longer incurred | ||||||||||
post-merger | 384,860 | 1,542,826 | 1,740,361 | |||||||
Add management fees no longer incurred post-merger | 71,450 | 214,350 | 262,624 | |||||||
Remove expenses related to business combination | ||||||||||
(deal fees, bonus and option payments) | 3,127,980 | - | - | |||||||
Adjust taxes to the blended rate after business combination | (2,235,415 | ) | (617,338 | ) | 163,568 | |||||
$ | 1,453,525 | $ | 1,453,787 | $ | 2,480,502 |
These unaudited pro forma condensed consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of future results of the consolidated entities. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.
Note 3. Investments
The Company invests in certificates of deposit, corporate bonds, tax-free government bonds, and auction rate securities (ARS), all of which are insured. The following is a summary of amounts recorded on the Consolidated Balance Sheet for investments (current and non-current) at December 31, 2011 and 2010:
F-19
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
2011 | 2010 | ||||
Bonds | $ | 14,602,408 | $ | 6,837,521 | |
Other securities | - | 357 | |||
Certificates of deposit | - | 1,960,000 | |||
Short-term investments - held to maturity | 14,602,408 | 8,797,878 | |||
Auction rate securities | - | 1,185,250 | |||
Long-term investments - available for sale securities | - | 1,185,250 | |||
Auction rate securities | 2,000,000 | 2,200,000 | |||
Bonds | 30,581,472 | 50,304,650 | |||
Long-term investments - held to maturity | 32,581,472 | 52,504,650 | |||
Total investments | $ | 47,183,880 | $ | 62,487,778 |
At December 31, 2011, the Companys investments included:
- approximately $45.2
million in bonds maturing between February 2012 and November 2016, all of
which had ratings between AAA and BAA1 at December 31, 2011;
and
- approximately $2.0 million of a tax-free ARS, which re-prices approximately every 35 days. The ARS had a rating of A1 at December 31, 2011.
During 2011, the Company sold its investment in a tax-free ARS issued by Jefferson County, Alabama. During the economic downturn in 2008, with the assistance of outside consultants, the Company had determined that the ARS had incurred both a temporary and other-than-temporary impairment to its fair value and recognized such write-down in value. Due to negotiations between Jefferson County and bondholders, the market for these bonds improved and in the quarter ended September 30, 2011 the Company was able to sell its investment for $1.8 million resulting in the Company recognizing a gain of $626,000. The following table summarizes the activity of this investment from December 31, 2008 to December 31, 2011:
Net carrying value at December 31, 2008 | $ | 1,109,250 | |
Temporary impairment transferred to other-than-temporary impairment | 40,500 | ||
Other-than-temporary impairment - recognized in other income | (94,000 | ) | |
Net carrying value at December 31, 2009 | 1,055,750 | ||
Principal payment received | (25,000 | ) | |
Adjustment to temporary impairment - recognized in other comprehensive income | 154,500 | ||
Net carrying value at December 31, 2010 | 1,185,250 | ||
Principal payment received | (25,000 | ) | |
Proceeds from sale | (1,786,438 | ) | |
Gain on sale of ARS - recognized in other income | 626,188 | ||
Net carrying value at December 31, 2011 | $ | - |
Note 4. Inventories
Inventories consisted of the following at December 31:
2011 | 2010 | ||||
Finished goods | $ | 9,805,319 | $ | 7,045,840 | |
Raw materials | 12,966,141 | 10,834,874 | |||
$ | 22,771,460 | $ | 17,880,714 |
F-20
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 5. Net Investment in Sales-type Leases
Certain system sales made under lease arrangements are recorded as sales-type leases. Included in revenues for the years ended December 31, 2011, 2010 and 2009 are approximately $3.8 million, $1.9 million and $1.7 million, respectively, related to sales-type leases.
The Companys net investment in sales-type leases consisted of the following at of December 31, 2011 and 2010:
2011 | 2010 | ||||||
Future minimum lease payments receivable | $ | 9,678,412 | $ | 6,691,118 | |||
Less allowance for doubtful accounts | (230,108 | ) | (189,338 | ) | |||
Net future minimum lease payment receivable | 9,448,304 | 6,501,780 | |||||
Less unearned interest income | (658,512 | ) | (337,423 | ) | |||
Net investment in sales-type leases | $ | 8,789,792 | $ | 6,164,357 |
Future minimum lease payments due from customers under sales-type leases as of December 31, 2011 were as follows:
Year ending December 31, | |||
2012 | $ | 3,824,961 | |
2013 | 2,477,592 | ||
2014 | 1,765,759 | ||
2015 | 1,206,867 | ||
2016 | 403,233 | ||
$ | 9,678,412 |
The interest income for sales-type leases amounted to approximately $260,000, $277,000, and $405,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
Additional credit risk disclosures required by ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, only apply to the Companys lease receivables, which account for less than 4% of the Companys total assets. The Company did not include additional disclosures based on the following factors:
- The objective is to
provide additional information on the credit risk exposure; however, in
addition to the minimal amount of receivables at risk, the nature of the
credit risk associated with the Companys lease receivables is reduced by the
credit process, which requires a review of the lessees financial statements
and current financial standing prior to the commencement of a lease
agreement.
- Segmenting the lease portfolio by level of credit
risk or class, which is required by ASU 2010-20, would not be practical due to
the consistent nature of the lease receivables.
- A rollforward of the allowance would provide minimal value as the allowance for doubtful accounts is less than 3% of lease receivables and has not materially increased or decreased between 2010 and 2011.
F-21
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 6. Property and Equipment
Property and equipment consisted of the following at December 31:
2011 | 2010 | ||||||
Machinery and equipment | $ | 29,807,166 | $ | 26,333,224 | |||
Building and improvements | 14,504,480 | 13,987,226 | |||||
Computer equipment and software | 11,885,268 | 10,868,317 | |||||
Office equipment | 2,609,602 | 2,581,119 | |||||
Furniture and fixtures | 2,400,842 | 2,282,460 | |||||
61,207,358 | 56,052,346 | ||||||
Accumulated depreciation and amortization | (38,951,100 | ) | (34,588,157 | ) | |||
22,256,258 | 21,464,189 | ||||||
Capital work-in-progess | 12,983,556 | 3,979,137 | |||||
Land and improvements | 4,429,619 | 4,429,619 | |||||
$ | 39,669,433 | $ | 29,872,945 |
Note 7. Goodwill and Other Intangible Assets
In May 2011, the Company acquired Solidscape, Inc. for $39.1 million in cash and recognized $24.6 million of goodwill for the year ended December 31, 2011 as a result of the Solidscape acquisition. The goodwill recognized as a result of the Solidscape acquisition is primarily attributable to the value of the workforce and corporate synergies.
Intangible assets consisted of the following at December 31:
2011 | 2010 | ||||||||||
Gross | Gross | ||||||||||
Carrying | Accumulated | Carrying | Accumulated | ||||||||
Amount | Amortization | Amount | Amortization | ||||||||
RP technology | $ | 10,622,532 | $ | 4,807,455 | $ | 5,548,064 | $ | 4,024,802 | |||
Capitalized software development costs | 14,574,787 | 12,060,089 | 13,431,570 | 10,500,398 | |||||||
Patents | 12,916,906 | 3,421,082 | 3,413,062 | 2,352,205 | |||||||
Trademarks | 1,510,527 | 336,649 | 298,969 | 276,246 | |||||||
Customer base | 5,100,000 | 226,667 | - | - | |||||||
Non-compete agreement | 350,000 | 77,778 | - | - | |||||||
In-process research and development | 1,150,000 | - | - | - | |||||||
46,224,752 | $ | 20,929,720 | 22,691,665 | $ | 17,153,651 | ||||||
Accumulated amortization | 20,929,720 | 17,153,651 | |||||||||
Net book value of amortizable intangible assets | 25,295,032 | 5,538,014 | |||||||||
Goodwill | 25,393,967 | 867,700 | |||||||||
Net book value of intangible assets | $ | 50,688,999 | $ | 6,405,714 |
For the years ended December 31, 2011, 2010 and 2009, amortization of intangible assets charged to operations was approximately $3.8 million, $2.6 million and $2.4 million, respectively. The weighted average remaining amortization period for intangible assets as of December 31, 2011 and 2010 was approximately 6.7 and 2.2 years, respectively.
F-22
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Estimated amortization expense, for all intangible assets, for the five years subsequent to December 31, 2011 is as follows:
Year ending December 31, | |||
2012 | $ | 3,733,000 | |
2013 | 3,383,000 | ||
2014 | 3,018,000 | ||
2015 | 2,823,000 | ||
2016 | 2,666,000 |
Note 8. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consisted of the following at December 31:
2011 | 2010 | ||||
Trade | $ | 8,541,187 | $ | 7,406,429 | |
Compensation, commissions and related benefits | 5,795,018 | 3,891,146 | |||
Reserve for warranty expenses | 1,542,754 | 1,204,450 | |||
Taxes | 1,384,959 | - | |||
Other | 2,104,279 | 1,906,603 | |||
$ | 19,368,197 | $ | 14,408,628 |
A summary of warranty activity for the years ended December 31, 2011 and 2010 is as follows:
2011 | 2010 | ||||||
Beginning balance | $ | 1,204,450 | $ | 677,757 | |||
Accruals for warranties issued during the period | 2,247,883 | 1,991,014 | |||||
Warranty costs incurred during the period | (1,909,579 | ) | (1,464,321 | ) | |||
Ending balance | $ | 1,542,754 | $ | 1,204,450 |
Note 9. Unearned Revenues
Unearned revenues consisted of the following at December 31:
2011 | 2010 | ||||
Maintenance contracts - current | $ | 9,117,917 | $ | 8,214,918 | |
Maintenance contracts - long-term | 2,562,195 | 1,953,000 | |||
Implied maintenance contracts | 511,045 | 573,197 | |||
Other | 139,648 | 820,406 | |||
$ | 12,330,805 | $ | 11,561,521 |
F-23
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 10. Income Taxes
The components of the Company's deferred tax assets (liabilities) at December 31, 2011 and 2010 were as follows:
2011 | 2010 | |||||||
Current deferred tax assets: | ||||||||
Inventory reserves | $ | 679,000 | $ | 776,000 | ||||
Deferred maintenance revenue | 537,000 | 525,000 | ||||||
Allowance for doubtful accounts | 402,000 | 393,000 | ||||||
State research and development | ||||||||
credit carryforward | 158,000 | 203,000 | ||||||
Reserve for warranty expenses | 573,000 | 449,000 | ||||||
Vacation accrual | 408,000 | 313,000 | ||||||
Sales tax reserve accrual | 75,000 | - | ||||||
Warrant cost accrual | - | 795,000 | ||||||
Unrealized gain on foreign currency | 141,000 | - | ||||||
Current deferred tax assets | 2,973,000 | 3,454,000 | ||||||
Current deferred tax liabilities: | ||||||||
Unrealized loss on foreign currency | - | (7,000 | ) | |||||
Net current deferred tax assets | $ | 2,973,000 | $ | 3,447,000 | ||||
Long-term deferred tax assets: | ||||||||
Stock compensation expense | $ | 391,000 | $ | 487,000 | ||||
Investment reserves | - | 639,000 | ||||||
Amortization | - | 973,000 | ||||||
Long-term deferred tax assets | 391,000 | 2,099,000 | ||||||
Long-term deferred tax liabilities: | ||||||||
Amortization | (5,576,000 | ) | - | |||||
Depreciation | (1,249,000 | ) | (1,980,000 | ) | ||||
Software capitalization | (326,000 | ) | (326,000 | ) | ||||
Net long-term deferred tax liabilities | $ | (6,760,000 | ) | $ | (207,000 | ) |
Income before income taxes for the years ended December 31, 2011, 2010 and 2009 was as follows:
2011 | 2010 | 2009 | |||||||
United States | $ | 30,464,368 | $ | 13,506,311 | $ | 5,994,420 | |||
Foreign | 887,994 | 329,027 | 187,852 | ||||||
$ | 31,352,362 | $ | 13,835,338 | $ | 6,182,272 |
F-24
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The components of income tax expense for the years ended December 31, 2011, 2010 and 2009 were as follows:
2011 | 2010 | 2009 | ||||||||||
Current | ||||||||||||
Federal | $ | 9,906,477 | $ | 4,336,929 | $ | 3,143,001 | ||||||
State | 760,741 | 247,570 | 416,000 | |||||||||
Foreign | 292,782 | 103,295 | 130,000 | |||||||||
10,960,000 | 4,687,794 | 3,689,001 | ||||||||||
Deferred | ||||||||||||
Federal | (251,000 | ) | (160,000 | ) | (1,604,000 | ) | ||||||
State | 17,000 | (62,000 | ) | (19,000 | ) | |||||||
(234,000 | ) | (222,000 | ) | (1,623,000 | ) | |||||||
Total Income taxes | $ | 10,726,000 | $ | 4,465,794 | $ | 2,066,001 |
A reconciliation of the statutory federal income tax rate and the effective tax rate for the years ended December 31, 2011, 2010, and 2009 is set forth below:
2011 | 2010 | 2009 | ||||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of | ||||||||||||
federal benefit | 2.1 | 2.1 | 2.6 | |||||||||
Tax exempt interest income | - | (0.8 | ) | (2.6 | ) | |||||||
Stock compensation expense | 0.6 | 0.2 | 2.0 | |||||||||
Manufacturing deduction | (2.7 | ) | (3.5 | ) | (2.0 | ) | ||||||
Federal research and | ||||||||||||
development tax credit | (1.6 | ) | (1.9 | ) | (4.9 | ) | ||||||
Tax contingencies | 0.4 | 1.3 | 2.4 | |||||||||
Non-deductible acquisition expenses | 0.3 | - | - | |||||||||
Other | 0.1 | (0.1 | ) | 0.9 | ||||||||
Effective income tax rate | 34.2 | % | 32.3 | % | 33.4 | % |
At December 31, 2011 the Company had Minnesota tax credit carry-forwards of approximately $158,000. The Company expects to utilize its state research and development tax credit carry-forwards that would otherwise expire from 2018 through 2025.
Significant judgment is required in evaluating the Companys tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or changes in the tax law. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the requirements of ASC 740.
The Company is subject to income taxes in the U.S., various states and certain foreign jurisdictions. It may be subject to examination by the Internal Revenue Service (IRS) for calendar years 2008 through 2011. Its federal income tax returns are closed for all tax years up to and including 2007. The expiration of the statute of limitations related to the various state income tax returns that the Company and subsidiaries file varies by state and foreign jurisdiction.
F-25
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
At December 31, 2011 and 2010, the Company had unrecognized tax benefits of $1.6 million and $1.4 million, respectively. If recognized, these benefits would favorably impact the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2011 | 2010 | |||||||
Balance at beginning of year | $ | 1,405,000 | $ | 1,232,000 | ||||
Additions for tax positions related to the current year | 253,000 | 118,000 | ||||||
Additions for tax positions related to previous years | 83,000 | 255,000 | ||||||
Reduction of reserve for statute expirations | (143,000 | ) | (200,000 | ) | ||||
Balance at end of year | $ | 1,598,000 | $ | 1,405,000 |
The increase in tax liabilities is primarily due to potential U.S. federal and state adjustments related to positions taken in the Companys 2011 income tax provision. The balance of the reserve for tax uncertainties includes $120,000 for estimated interest and penalties at December 31, 2011 and 2010. The Company currently estimates that unrecognized tax benefits will not change materially in the next twelve months.
The Company regularly assesses the likelihood of tax adjustments in each of the tax jurisdictions in which the Company has operations and accounts for the related financial statement implications. Tax reserves have been established which the Company believes to be appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires the Company to exercise judgment regarding the uncertain application of tax law. The amount of reserves is adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Future changes in tax reserve requirements could have a material impact on results of operations.
The Company is continually under examination by tax authorities in jurisdictions in which the Company has operations. The years under examination vary by jurisdiction. The Company has received a notice of proposed adjustments to filed Minnesota returns for tax years 2007 and 2008 in relation to the claimed research and development credit. The Company has filed an appeal with the State of Minnesota. Tax reserves have been established for a portion of this proposed change in tax, which the Company believes to be appropriate given the possibility of tax adjustments. The Company is also currently under IRS examination for tax years 2010 and 2009.
Undistributed earnings of the Companys Germany subsidiary amounted to approximately $309,000 and $262,000 as of December 31, 2011 and 2010. The Company has not provided any additional U.S. federal or state income taxes or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the business as defined in the provisions of ASC 740. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
Note 11. Material Commitments
The Company estimates that at December 31, 2011 and 2010, it had approximately $23.7 million and $22.5 million, respectively, of purchase commitments for inventory from vendors. The Company also rents certain of its facilities under non-cancellable operating leases, which expire through 2016. The Company intends to finance its future purchase commitments from existing cash and investments or from cash flows from operations.
F-26
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Minimum annual operating lease payments as of December 31, 2011 are approximately as follows:
Year ending December 31, | |||
2012 | $ | 762,000 | |
2013 | 586,000 | ||
2014 | 412,000 | ||
2015 | 416,000 | ||
2016 | 227,000 | ||
Thereafter | - | ||
$ | 2,403,000 |
Rent expense for the years ended December 31, 2011, 2010 and 2009 was approximately $846,000, $669,000 and $589,000, respectively.
Note 12. Restructuring Activities
Beginning January 1, 2009, in North America the Company began selling its Fortus 3D production systems through a select group of resellers from its established reseller channel, which formerly distributed only the Dimension 3D Printer line. This restructuring of the Companys sales organization included costs related to workforce reductions, closure of certain leased facilities, rebranding expenses, and other contract termination charges that were recognized in 2008 and were settled during the first quarter of 2009.
In addition, the Company took certain cost-saving measures in the first quarter of 2009 that lowered fixed costs and curtailed some discretionary spending while maintaining a focus on the key goals and objectives of the Companys long-term strategy. These cost-saving measures resulted in a charge of $779,000 in the first quarter of 2009, consisting primarily of severance costs related to a reduction in force. Final severance payments were completed during the third quarter of 2009 and the unused portion of the provision, noted as adjustments in the table below, was recorded in income for the current period.
A summary of the activity of these restructuring and other costs recognized in the Statement of Operations caption Selling, general and administrative is as follows:
Employee- | Contract | |||||||||||
Related Items and | Terminations and | |||||||||||
Benefits | Other | Total | ||||||||||
Accrued balance as of December 31, 2008 | $ | 306,014 | $ | 66,881 | $ | 372,895 | ||||||
Expenses incurred | 779,000 | - | 779,000 | |||||||||
Cash payments | (810,707 | ) | (66,881 | ) | (877,588 | ) | ||||||
Adjustments | (274,307 | ) | - | (274,307 | ) | |||||||
Accrued balance as of December 31, 2009 | $ | - | $ | - | $ | - |
Note 13. Accounting for Collaborative Arrangements
In 2008, the Company fulfilled its responsibilities under a three-year, $3.6 million agreement with a Fortune 500 global manufacturing company to jointly advance its proprietary FDM (Fused Deposition Modeling) technology for rapid manufacturing applications. This agreement entitled the Company to receive reimbursement payments as it achieved specific milestones stated in the agreement. This effort was focused around the Companys high-performance systems and resulted in the commercial release of the Fortus 900mc. Because receipt of these payments represented reimbursements of costs actually incurred under this joint development project, all payments received were recorded as offsets to the research and development expenditures and are therefore not recognized as revenue.
F-27
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Due to the success of this initial arrangement, the Company has continued this relationship under similar terms and objectives. During the years ended December 31, 2011, 2010 and 2009, approximately $0.7 million, $1.2 million and $2.2 million, respectively, of research and development expenses were offset by payments that were received from that company.
Note 14. Foreign Currency Hedge
The Company hedged between €4.0 million and €5.6 million monthly during the year ended December 31, 2011, between €2.3 million and €4.5 million monthly during the year ended December 31, 2010 and between €2.8 million and €5.0 million monthly during the year ended December 31, 2009. The foreign currency forward contracts resulted in a currency translation gain of approximately $70,000 and $340,000 for the years ended December 31, 2011 and 2010, respectively, and a loss of approximately $115,000 for the year ended December 31, 2009. The resulting gain or loss from foreign currency forward contracts only partially offset the total foreign currency transactions gains or losses that the Company recorded.
The Company will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge future risks may include foreign currency forward, swap, and option contracts. These instruments may be used to selectively manage risks, but there can be no assurance that the Company will be fully protected against material foreign currency fluctuations.
Note 15. Common Stock
The Company has an approved common stock repurchase program, but did not repurchase any shares during the years ended December 31, 2011 and 2010. As of December 31, 2011, the Company had authorization to repurchase approximately $10.9 million of common stock under the stock repurchase program.
Note 16. Fair Value of Warrant Related to OEM Agreement
During the first quarter of 2010, the Company signed a Master OEM Agreement (the OEM Agreement) with Hewlett-Packard Company (HP) to develop and manufacture an HP-branded 3D printer. In connection with the OEM Agreement, the Company issued a warrant to HP during the first quarter of 2010 to purchase 500,000 shares of common stock at an exercise price of $17.78 per share. The exercise price was determined by the 20-day average market closing price of the Companys common stock immediately prior to the issuance of the warrant. The warrant vested immediately and has a seven-year term. The fair value of the warrant was properly classified as a reduction of revenue on the Consolidated Statement of Operations for the period ended March 31, 2010. The warrant has not been exercised.
F-28
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company used the Black-Scholes option-pricing model to determine the fair value of the warrant granted to HP. The following assumptions were applied in determining the value:
Risk-free interest rate | 3.1 | % | |
Expected term | 4.5 years | ||
Expected price volitility | 47 | % | |
Dividend yield | - | ||
Weighted average grant date fair value | $ | 9.98 |
The Companys computation of expected volatility is based on a combination of historical and market-based implied volatility from traded options on the Companys stock. The expected term was calculated in accordance with ASC 718. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
F-29
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 17. Stock Options and Warrants
The Company has various stock option plans that have been approved by stockholders. The plans provide for the granting of options to purchase up to 4,825,000 shares of the Companys common stock to qualified employees of the Company, independent contractors, consultants, and other persons of which 4,342,634 had been granted and 482,366 shares remained available to be granted by the Company as of December 31, 2011. Options principally vest ratably over five years and are exercisable over a period ranging from five years to six years and one-month.
Weighted | ||||||||||||
Number | Average | |||||||||||
of Options | Per Share | Exercise | ||||||||||
Outstanding | Exercise Price | Price | ||||||||||
Shares under option | ||||||||||||
at January 1, 2009 | 1,735,378 | $ | 2.54 | - | $ | 26.15 | $ | 14.42 | ||||
Granted in 2009 | 283,750 | 8.27 | - | 9.90 | 9.82 | |||||||
Exercised in 2009 | (294,400 | ) | 4.35 | - | 14.53 | 12.90 | ||||||
Expired in 2009 | (122,800 | ) | 3.81 | - | 14.43 | 14.30 | ||||||
Forfeited in 2009 | (82,300 | ) | 9.30 | - | 23.04 | 14.68 | ||||||
Shares under option | ||||||||||||
at December 31, 2009 | 1,519,628 | 8.27 | - | 26.15 | 14.08 | |||||||
Granted in 2010 | 305,000 | 18.26 | - | 33.06 | 18.50 | |||||||
Exercised in 2010 | (456,200 | ) | 9.30 | - | 26.15 | 13.97 | ||||||
Forfeited in 2010 | (46,900 | ) | 9.30 | - | 23.04 | 14.68 | ||||||
Repurchased in 2010 | (138,878 | ) | 9.30 | - | 26.15 | 14.04 | ||||||
Shares under option | ||||||||||||
at December 31, 2010 | 1,182,650 | 8.27 | - | 33.06 | 15.16 | |||||||
Granted in 2011 | 325,000 | 21.08 | - | 25.95 | 25.42 | |||||||
Exercised in 2011 | (423,783 | ) | 8.27 | - | 24.65 | 14.61 | ||||||
Expired in 2011 | (3,000 | ) | 12.49 | - | 12.49 | 12.49 | ||||||
Forfeited in 2011 | (43,600 | ) | 9.30 | - | 25.50 | 16.08 | ||||||
Shares under option | ||||||||||||
at December 31, 2011 | 1,037,267 | $ | 9.30 | - | $ | 33.06 | $ | 18.59 |
F-30
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
A summary of stock options exercisable at December 31, 2011, 2010 and 2009 is as follows:
Weighted | |||||||||||
Number | Average | ||||||||||
of | Per Share | Exercise | |||||||||
Shares | Exercise Price | Price | |||||||||
Options exercisable at | |||||||||||
December 31, 2011 | 210,520 | $ | 9.30 | - | $ | 26.15 | $ | 16.44 | |||
Options exercisable at | |||||||||||
December 31, 2010 | 441,850 | $ | 8.27 | - | $ | 26.15 | $ | 14.95 | |||
Options exercisable at | |||||||||||
December 31, 2009 | 735,478 | $ | 8.27 | - | $ | 26.15 | $ | 14.49 |
The following table summarizes information about stock options outstanding at December 31, 2011:
Options Outstanding | Options Exercisable | |||||||||||||||||
Number | Weighted- | Number | ||||||||||||||||
Outstanding | Average | Weighted- | Exercisable | Weighted- | ||||||||||||||
at | Remaining | Average | at | Average | ||||||||||||||
Exercise | December 31, | Contractual | Exercise | December 31, | Exercise | |||||||||||||
Prices | 2011 | Life in Years | Price | 2011 | Price | |||||||||||||
$ | 9.30 | - | $ | 9.90 | 255,825 | 3.3 | $ | 9.73 | 66,275 | $ | 9.65 | |||||||
13.22 | - | 18.26 | 332,980 | 3.8 | 16.98 | 64,180 | 15.18 | |||||||||||
18.78 | - | 24.65 | 131,062 | 2.1 | 22.96 | 79,865 | 23.06 | |||||||||||
25.50 | - | 33.06 | 317,400 | 5.6 | 25.62 | 200 | 26.15 | |||||||||||
1,037,267 | 18.59 | 210,520 | 16.44 | |||||||||||||||
Aggregate | ||||||||||||||||||
intrinsic value | $ | 12,259,930 | $ | 2,938,704 |
The weighted average life remaining on vested options is 2.8 years. The weighted average grant date fair value based on the Black-Scholes model was $10.67 for options granted in 2011 and $5.60 for options forfeited in 2011. The Company issues new shares of common stock upon exercise of stock options. The total intrinsic value of options exercised was approximately $9.5 million in 2011, $8.2 million in 2010 and $3.1 million in 2009. During the first quarter of 2010, the Company repurchased 138,878 vested stock options from 42 employees and directors.
F-31
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company used the Black-Scholes option-pricing model to determine the fair value of grants made in 2011, 2010 and 2009. The following assumptions were applied in determining the compensation cost:
2011 | 2010 | 2009 | ||||||||||
Risk-free interest rate | 0.9% - 1.5 | % | 2.3 | % | 2.0 | % | ||||||
Expected option term | 4.5 years | 4.5 years | 4.5 years | |||||||||
Expected price volitility | 55 | % | 39 | % | 40 | % | ||||||
Dividend yield | - | - | - | |||||||||
Weighted average grant date fair value | $ | 10.67 | $ | 6.13 | $ | 3.59 |
The Companys computation of expected volatility is based on a combination of historical and market-based implied volatility from traded options on the Companys stock. The expected option term was calculated in accordance with ASC 718. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
As of January 1, 2011, there were 735,800 unvested options with a weighted average grant date fair value of $5.52 based on the Black-Scholes model. As of December 31, 2011, there were 826,747 unvested options with a weighted average grant date fair value of $7.46 based on the Black-Scholes model. As of December 31, 2011, approximately $5.6 million of total unrecognized compensation expense related to unvested share-based compensation granted under the Companys plans. That cost is expected to be recognized over a weighted-average period of 2.3 years. The fair value of option shares vested during the year 2011 was approximately $0.8 million.
In the first quarter of 2010, the Company issued a warrant to HP to purchase 500,000 shares of common stock at an exercise price of $17.78 per share, which vested immediately and has a seven-year term. The warrant was not exercised during 2011. See additional disclosure provided in Note 16 Fair Value of Warrant Related to OEM Agreement. There were no outstanding warrants to purchase the Companys common stock as of December 31, 2009 and no warrants were exercised during 2009.
Note 18. Litigation
The Company is a party to various legal proceedings, the outcome of which, in the opinion of management, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Note 19. Export Sales
Export sales were as follows for the years ended December 31:
2011 | 2010 | 2009 | |||||||
Europe | $ | 49,885,101 | $ | 34,572,008 | $ | 26,474,026 | |||
Asia Pacific | 21,506,414 | 20,661,570 | 15,913,879 | ||||||
Other | 2,130,231 | 2,062,263 | 1,083,601 | ||||||
$ | 73,521,746 | $ | 57,295,840 | $ | 43,471,507 |
At December 31, 2011, 2010 and 2009, accounts receivable included balances due from foreign customers of approximately $11.9 million, $11.6 million and $11.7 million, respectively. Net sales attributable to customers located in any individual foreign country did not exceed 10% of consolidated net sales for the years ended December 31, 2011, 2010 and 2009. In addition, the Company did not hold significant long-lived assets in any individual foreign country as of December 31, 2011 and 2010.
F-32
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 20. Retirement Plan
The Company has a defined contribution retirement plan (the Plan) under the provisions of Section 401(k) of the Internal Revenue Code (IRC) that covers all eligible employees as defined in the Plan. Participants may elect to contribute up to 50% of pre-tax annual compensation, as defined by the Plan, up to a maximum amount prescribed by the IRC. The Company, at its discretion, makes matching contributions equal to the lesser of $3,000 or 3% of the participants annual compensation. The Company, at its discretion, may make additional contributions, also subject to IRC limitations. Due to the weak economy, the Company suspended making discretionary matching contributions in February 2009, but reinstated matching contributions in September of 2010. For the years ended December 31, 2011, 2010 and 2009 the Company made 401(k) Plan contributions of approximately $519,000, $219,000 and $112,000, respectively.
Note 21. Quarterly Results (unaudited)
First | Second | Third | Fourth | ||||||||||
Quarter | Quarter | Quarter | Quarter | ||||||||||
2011 | |||||||||||||
Net sales | $ | 34,578,129 | $ | 37,790,806 | $ | 39,953,014 | $ | 43,572,414 | |||||
Gross profit | 18,250,452 | 19,735,406 | 21,553,946 | 22,864,306 | |||||||||
Net income | 4,989,495 | 3,993,649 | 5,857,169 | 5,786,049 | |||||||||
Net income per common share: | |||||||||||||
Basic | $ | 0.24 | $ | 0.19 | $ | 0.28 | $ | 0.27 | |||||
Diluted | 0.23 | 0.18 | 0.27 | 0.27 | |||||||||
2010 | |||||||||||||
Net sales | $ | 23,159,472 | $ | 30,255,933 | $ | 30,459,137 | $ | 33,969,353 | |||||
Gross profit | 9,420,075 | 14,762,004 | 14,708,988 | 17,194,901 | |||||||||
Net income (loss) | (443,101 | ) | 2,332,155 | 3,175,550 | 4,304,936 | ||||||||
Net income (loss) per common share: | |||||||||||||
Basic | $ | (0.02 | ) | $ | 0.11 | $ | 0.15 | $ | 0.21 | ||||
Diluted | (0.02 | ) | 0.11 | 0.15 | 0.20 |
F-33
SCHEDULE II |
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES |
Years ended December 31, 2011, 2010, and 2009
COLUMN A | Column B | Column C - Additions | Column D | Column E | |||||||||||
Balances at | Charged to | Balances | |||||||||||||
beginning | costs and | Charged to | at end | ||||||||||||
Description | of period | expenses | other accounts | Deductions | of period | ||||||||||
2011 | |||||||||||||||
Reserve for bad debts and allowances | $ | 1,283,925 | $ | 140,457 | $ | - | $ | 105,668 | $ | 1,318,714 | |||||
2010 | |||||||||||||||
Reserve for bad debts and allowances | 1,125,112 | 332,363 | - | 173,550 | 1,283,925 | ||||||||||
Reserve for sales returns and other allowances | - | 372,811 | - | 372,811 | - | ||||||||||
2009 | |||||||||||||||
Reserve for bad debts and allowances | 1,225,606 | 672,241 | - | 772,735 | 1,125,112 | ||||||||||
Reserve for sales returns and other allowances | 121,556 | - | - | 121,556 | - |
F-34
Exhibits
EXHIBIT | ||||
NO. | DESCRIPTION | |||
3.1 | Restated Certificate of Incorporation of the Company.(8) | |||
3.2 | Amended and Restated By-Laws of the Company.(7) | |||
4.1 | Warrant to purchase 500,000 Shares of Common Stock dated January 18, 2010.(10) | |||
10.1 | Non-Competition Agreement between the Company and S. Scott Crump, dated October 15, 1990.(1) | |||
10.2 | Employee Confidentiality Agreement between the Company and S. Scott Crump, dated October 15, 1990.(1) | |||
10.3 | Stratasys, Inc. 1998 Incentive Stock Option Plan.(4)* | |||
10.4 | Stratasys, Inc. 2000 Incentive Stock Option Plan.(5)* | |||
10.5 | Stratasys, Inc. 2002 Long-Term Performance and Incentive Plan.(6)* | |||
10.6 | Stratasys, Inc. 2008 Long-Term Performance and Incentive Plan.(9)* | |||
10.7 | Assignment, dated October 23, 1989, from S. Scott Crump to the Company with respect to a patent application for an apparatus and method for creating three-dimensional objects.(3) | |||
10.8 | Assignment, dated June 5, 1992, from S. Scott Crump to the Company with respect to a patent application for a modeling apparatus for three dimensional objects.(3) | |||
10.9 | Assignment, dated June 1, 1994, from S. Scott Crump, James W. Comb, William R. Priedeman, Jr., and Robert Zinniel to the Company with respect to a patent application for a process and apparatus of support removal for three-dimensional modeling.(3) | |||
10.10 | Asset Purchase Agreement between the Company and IBM dated January 1, 1995.(2) | |||
10.11 | Master OEM Agreement between Hewlett-Packard Company and Stratasys, Inc. dated as of January 18, 2010.(11)** | |||
10.12 | Protective Rights Agreement between Stratasys, Inc. and Hewlett-Packard Company dated as of January 18, 2010.(11) | |||
10.13 | Amendment to Master OEM Agreement between Hewlett-Packard Company and Stratasys, Inc., dated as of October 1st, 2011.(12)** |
EXHIBIT | ||||
NO. | DESCRIPTION | |||
14.1 | Code of Business Conduct and Ethics.(9) | |||
21.1 | Subsidiaries of the Company.(13) | |||
23.1 | Consent of Grant Thornton LLP.(13) | |||
31.1 | Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(13) | |||
31.2 | Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(13) | |||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(13) | |||
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(13) | |||
101.INS | XBRL Instance Document*** | |||
101.SCH | XBRL Taxonomy Extension Schema Document*** | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document*** | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document*** | |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document*** | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*** |
(1) | Incorporated by reference from the Companys Registration Statement on Form SB-2 (File No. 33-83638-C) filed September 2, 1994. | ||
(2) | Incorporated by reference from the Companys Form 8-K, Amendment No. 2, dated January 1, 1995. | ||
(3) | Incorporated by reference from Amendment No. 1 to the Registration Statement on Form SB-2 (File No. 33-99108) filed December 20, 1995. | ||
(4) | Incorporated by reference from the Companys definitive Proxy Statement on Schedule 14A with respect to the Companys 1998 Annual Meeting of Stockholders. | ||
(5) | Incorporated by reference from the Companys Registration Statement on Form S-8 (File No. 333-32782) filed March 17, 2000. | ||
(6) | Incorporated by reference from the Companys definitive Proxy Statement on Schedule 14A with respect to the Companys 2002 Annual Meeting of Stockholders. |
(7) | Incorporated by reference from the Companys Form 8-K filed July 31, 2007. | ||
(8) | Incorporated by reference from the Companys Form 10-K for the year ended December 31, 2007. | ||
(9) | Incorporated by reference from the Companys Form 10-K for the year ended December 31, 2008. | ||
(10) | Incorporated by reference from the Companys Form 8-K filed January 19, 2010. | ||
(11) | Incorporated by reference from the Companys Form 10-Q for the quarter ended March 31, 2010. | ||
(12) | Incorporated by reference from the Companys Form 10-Q/A for the quarter ended June 30, 2011, filed January 4, 2012. | ||
(13) | Filed herewith. |
* Compensatory plan or arrangement.
** Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to the Companys application regarding confidential treatment under Rule 406 of the Securities Act of 1933, as amended, or Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
*** The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
(c) Other required financial statements
All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.
Separate financial statements of the Registrant have been omitted because the Registrant is primarily an operating company. All subsidiaries included in the consolidated financial statements are majority owned, and none of the subsidiaries have indebtedness that is not guaranteed by the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STRATASYS, INC. | |
By: /s/ S. SCOTT CRUMP | |
S. Scott Crump President | |
Dated: | March 12, 2012 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Chairman of the Board of Directors, | ||||
/s/ S. SCOTT CRUMP | President, Chief Executive Officer, | March 12, 2012 | ||
S. Scott Crump | Treasurer (Principal Executive | |||
Officer) | ||||
/s/ ROBERT F. GALLAGHER | Chief Financial Officer (Principal | March 12, 2012 | ||
Robert F. Gallagher | Financial and Accounting Officer) | |||
/s/ RALPH E. CRUMP | Director | March 12, 2012 | ||
Ralph E. Crump | ||||
/s/ EDWARD J. FIERKO | Director | March 12, 2012 | ||
Edward J. Fierko | ||||
/s/ JOHN J. MCELENEY | Director | March 12, 2012 | ||
John J. McEleney | ||||
/s/ CLIFFORD H. SCHWIETER | Director | March 12, 2012 | ||
Clifford H. Schwieter | ||||
/s/ GREGORY L. WILSON | Director | March 12, 2012 | ||
Gregory L. Wilson |