Stratasys Ltd. — 2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; separate Q4 results are not clearly provided. Financial statements are prepared under U.S. GAAP.
Business context and key financial metrics
Stratasys provides 3D printers, materials, software, parts-on-demand and related services for additive manufacturing. Its products range from desktop printers to production systems; services include Stratasys Direct Manufacturing (SDM). The company reported one operating segment.
| Metric (US$ millions, except per-share data) | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net sales | 672.5 | 696.0 | Down 3.4%; 2015 was down 7.2% from 2014 |
| Product sales | 479.0 | 503.9 | Down 4.9%; systems revenue fell, while consumables revenue rose 9.8% |
| Services sales | 193.4 | 192.0 | Up 0.7%; SDM revenue declined 6.8% |
| Gross profit / margin | 317.3 / 47.2% | 102.2 / 14.7% | 2015 margin was heavily affected by impairment charges |
| Operating loss | (86.7) | (1,373.5) | Improved substantially, largely because 2015 included major impairments |
| Net loss attributable to Stratasys | (77.2) | (1,372.8) | Diluted loss per share: $1.48 vs. $26.64 |
| Operating cash flow | 62.0 | (21.9) | Improved by $83.9 million |
| Cash and cash equivalents | 280.3 | 257.6 | Year-end balances |
| Working capital | 388.4 | 374.3 | Year-end balances |
| Total assets / equity | 1,366.0 / 1,136.0 | 1,414.4 / 1,188.8 | Year-end balances |
Research and development expense was $97.8 million, down from $122.4 million. Selling, general and administrative expense was $307.1 million, down from $434.6 million. The effective tax rate was 10.9%; Stratasys reported a $9.4 million income tax benefit. No cash dividends were paid.
Liquidity, debt and cash flows
- Cash from operations was $62.0 million; investing activities used $64.0 million, including $45.1 million for property and equipment and $23.1 million for strategic investments in unconsolidated entities. Financing activities provided $25.8 million.
- In December 2016, Stratasys borrowed $26 million under a secured Bank Hapoalim loan maturing in December 2023, bearing interest at LIBOR plus 3.35%. The loan is secured by the company’s rights in its new Rehovot facility. A further $24 million credit line was available but undrawn at year-end.
- Management said available liquidity was expected to fund operations, capital expenditures and debt requirements for the next 12 months. It also expected significant 2017 capital expenditure on the Israel buildings complex.
- Contractual obligations totaled $96.2 million, including operating leases, purchase obligations and long-term debt with estimated interest. The filing reports no material off-balance-sheet arrangements other than standard operating leases.
Material changes versus prior periods
- Revenue declined for a second consecutive year, with systems sales weakness across regions. Consumables growth, supported by the installed base, partly offset the decline.
- North America revenue fell 3.2%, EMEA fell 6.9%, and Asia Pacific rose 0.6% in 2016.
- Gross margin recovered to 47.2% from 14.7%. The 2015 comparison included $191.4 million of developed-technology impairment charges in cost of sales; 2016 included $1.8 million of such charges.
- 2015 included $942.4 million of goodwill impairment and $289.0 million of other long-lived-asset impairment. In 2016, the company recorded no goodwill impairment and $24.9 million of long-lived-asset impairment charges.
- Cost-reduction and reorganization actions continued in 2016; the company reported $6.6 million of related charges. Headcount declined to 2,469 from 2,721.
- Capital expenditure fell to $47.1 million from $87.0 million. The new Rehovot facility, with approximately $58.4 million invested by year-end, began operating in January 2017.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no numerical revenue or earnings guidance. Management said it intended to continue investing in R&D, prioritizing projects and pursuing operating efficiencies. It described market growth as uncertain and identified weak customer capital-equipment spending, macroeconomic conditions and excess capacity as pressures on results.
- Goodwill sensitivity: The Stratasys-Objet reporting unit had approximately $386 million of goodwill. Its estimated fair value exceeded carrying value by about 5%. Management said a 1 percentage-point reduction in growth assumptions or a 1 percentage-point increase in the discount rate could reduce estimated fair value by approximately $46 million or $83 million, respectively, potentially triggering impairment.
- Market and execution risks: Competition intensified, particularly in lower-end printers; Carbon began selling systems in 2016, and HP was expected to begin commercial sales in 2017. Other key risks include product obsolescence, pricing and product-mix pressure, supplier concentration (including a sole-source PolyJet print-head supplier), integration, and reliance on recurring consumables sales.
- Legal and regulatory matters: The SEC issued a 2016 subpoena concerning prior goodwill and intangible-asset impairment valuations; Stratasys said it cooperated. U.S. securities class actions were dismissed with prejudice in June 2016, but plaintiffs appealed, with oral argument scheduled for March 2017. Separate Israeli shareholder claims were settled in February 2017 at no material cost.
- Tax and contingency exposure: U.S. deferred tax assets remained subject to a substantial valuation allowance; unrecognized tax benefits were $18.0 million. Israeli tax benefits depend on continuing qualification. The company also faces environmental, product-liability, intellectual-property, foreign-exchange and Israel-related operating risks.
- Management and controls: Ilan Levin became CEO effective July 1, 2016; Lilach Payorski became CFO on January 1, 2017. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2016; the auditor issued an unqualified opinion on the financial statements.
- Product developments: Stratasys introduced the J750 in 2016 and announced the F123 series in February 2017. GrabCAD Print launched in November 2016; adoption and commercial contribution were not quantified in the filing.
Important facts for investors to verify
- How much of the 2016 improvement in operating results reflects sustainable cost and margin gains versus the unusually impaired 2015 comparison.
- Whether systems revenue stabilizes and whether consumables growth continues to offset weaker printer sales; separately assess SDM performance and margins.
- The assumptions and headroom in the Stratasys-Objet goodwill valuation, including the potential for further impairment.
- 2017 capital spending, cash generation and debt-service requirements for the Rehovot facility, including any use of the undrawn credit line.
- Developments in the SEC inquiry and securities-class-action appeal, and any resulting financial or disclosure consequences.
- Eligibility for Israeli tax incentives and the realizability of deferred tax assets, including the $18.0 million of unrecognized tax benefits.