Business context and reporting period
Stratasys Ltd. filed this Form 20-F for the fiscal year ended December 31, 2014. It is a global additive-manufacturing company selling 3D printers, materials, software and services, including custom-printed parts. The filing is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide clear standalone Q4 financial results. Comparisons are also affected by acquisitions and by the 2012 reverse merger’s accounting treatment.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $750.1 million | $484.4 million |
| Gross profit / margin | $362.4 million / 48.3% | $226.2 million / 46.7% |
| Operating income (loss) | $(148.2) million | $(28.9) million |
| Net income (loss) attributable to Stratasys | $(119.4) million | $(27.0) million |
| Diluted loss per share | $(2.39) | $(0.68) |
| Cash from operations | $13.8 million | $32.0 million |
Product revenue was $612.1 million, up 47.6%; services revenue was $138.0 million, up 98.4%, substantially reflecting the Solid Concepts and Harvest acquisitions. Management reported organic sales growth of 31.7%. Gross margin improved, with management citing a mix shift toward higher-margin production and high-end systems and consumables. R&D expense rose to $82.3 million from $52.3 million; selling, general and administrative expense increased to $352.0 million from $202.0 million.
The 2014 operating loss included a $102.5 million non-cash, non-tax-deductible MakerBot goodwill impairment and $14.6 million of other intangible-asset impairment charges. A $26.2 million gain from remeasurement of acquisition obligations partly offset expenses. The company recorded an income tax benefit of $35.2 million.
At year-end, cash and cash equivalents were $442.1 million, short-term bank deposits $0.6 million, working capital $546.1 million (versus $714.4 million in 2013), and total assets $2.90 billion. Current liabilities were $250.6 million. The company had $50.0 million drawn under its $250 million revolving facility, due in 2018, and reported compliance with its covenants. Total liabilities were $363.9 million. Capital expenditures were $62.3 million in 2014. Operating cash flow declined as receivables and inventories grew, partly due to order growth.
Material changes versus the prior period
- Sales rose 54.9% year over year, including a full year of MakerBot revenue and partial-year contributions from 2014 acquisitions; system shipments increased to 45,843 from 19,317.
- Services growth reflected Solid Concepts and Harvest, acquired in July and August 2014. Stratasys also acquired GrabCAD and other businesses.
- Net loss widened, principally reflecting higher operating expenses and impairment charges. The reported loss includes substantial acquisition-related amortization and other items; the company’s non-GAAP reconciliation reports adjusted net income of $103.6 million, which is not a GAAP measure.
- Cash from operations fell by $18.2 million, while cash and equivalents increased by $28.1 million, supported in part by $50.0 million of facility borrowings.
Outlook, commentary, risks and contingencies
Management said MakerBot experienced slower growth in Q4 2014, citing challenges launching and scaling its fifth-generation platform and changing distribution model. It reduced internal MakerBot projections for 2015 and recorded the impairment; management said the write-down itself would not affect ongoing operations or future financial performance. The filing does not provide clear standalone Q4 revenue or earnings figures.
A February 2015 investment plan targets aerospace, automotive, healthcare and education; expands Stratasys Direct Manufacturing and professional services; and increases investment in products, software, sales and infrastructure. Management expected incremental annual operating expenditures of 2% of anticipated revenue for two to three years, 2015 operating expenses of 46%–47% of anticipated revenue, 2015 capital expenditures of $160–$200 million, and an effective tax rate of 5%–10%. No specific revenue or earnings guidance is stated here. Management said cash and operating cash generation should fund operations and planned capital expenditures for the next 12 months.
Key risks include execution and integration of acquisitions, MakerBot demand and product launches, intense competition (including HP’s announced plans), product mix and service margins, dependence on proprietary consumables and a sole-source PolyJet print-head supplier, impairment of substantial goodwill and intangibles, and foreign-exchange exposure. The company cited a net euro balance-sheet exposure of approximately €88.2 million and hedging contracts. Israeli political and security conditions, tax incentives, environmental regulation, cybersecurity, and credit-agreement covenants are additional risks.
Contingencies include an appeal by a former employee seeking equity and other compensation; Israeli shareholder litigation seeking changes to the capitalization table; and three U.S. shareholder class actions filed in February 2015 alleging misleading statements about business and prospects. The U.S. actions were at an early stage. The filing gives no clear estimate of potential loss. Management reported effective disclosure controls and internal control over financial reporting; Solid Concepts was excluded from the internal-control assessment because it was acquired midyear. The auditor gave an unqualified opinion.
Important facts for investors to verify
- How much 2014 growth was organic versus acquisition-driven, and whether the acquired service businesses can sustain growth and margins.
- MakerBot’s subsequent sales, product-platform execution and distribution performance relative to revised expectations.
- The cash-conversion trend: receivables, inventory, working capital and operating cash flow against planned 2015 capital spending.
- The accounting and cash implications of the $117.1 million impairment charges, ongoing amortization, and Solid Concepts deferred and retention payments.
- Current revolving-facility borrowings, covenant headroom, and the effect of currency movements and Israeli tax incentives.
- Developments and potential financial exposure from the disclosed litigation and other contingencies.