STRATASYS LTD. annual report, Q4 FY2013

Stratasys Ltd. — FY 2013 Form 20-F

Reporting period: Year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report; the supplied filing does not provide a clear set of Q4-only financial results. Stratasys provides additive-manufacturing systems, consumables and services. The 2013 results include a full year of Stratasys and Objet operations and MakerBot only from its August 15 acquisition. Because the 2012 reported results include Objet only from December 1, year-over-year comparisons below use the company’s unaudited 2012 pro forma combined figures where available.

Key financial metrics

MetricFY 2013Comparable basis / context
Revenue$484.4 million$359.1 million 2012 pro forma combined; up 34.9%. Reported 2012 revenue was $215.2 million and is not directly comparable.
Gross profit / margin$226.2 million / 46.7%2012 pro forma: $163.9 million / 45.7%.
Operating income (loss)$(28.9) million2012 pro forma operating loss: $(14.2) million. 2013 included $73.9 million of acquired-intangible amortization and $9.9 million related to MakerBot earn-out/performance-plan expense.
Net income (loss) attributable to Stratasys$(27.0) million; $(0.64) basic EPS2012 pro forma net loss: $(21.6) million; $(0.58) per basic share.
Non-GAAP results$97.7 million operating income; $82.0 million net income2012 pro forma: $74.2 million operating income; $59.6 million net income. Company-defined non-GAAP measures exclude specified items, including acquired-intangible amortization and share-based compensation; they are not substitutes for GAAP results.
Operating cash flow$32.0 millionCompared with $1.5 million in reported 2012; cash generation was affected by working-capital investment.
Cash and short-term bank deposits$614.5 millionCash and equivalents $414.1 million; short-term deposits $200.4 million at year-end.
Liquidity and debtWorking capital $714.4 million; no facility borrowings$250 million five-year revolving credit facility established in November 2013; unused at year-end.
Assets and equityTotal assets $2.782 billion; equity $2.500 billionIncludes goodwill of $1.196 billion and net intangible assets of $622.3 million.

Material changes and notable items

  • Revenue growth on the pro forma combined basis reflected growth across product lines and MakerBot contributions. Product revenue was $414.9 million and service revenue $69.6 million. Consumables revenue rose 27.8% versus 2012 pro forma, which management attributed to higher system utilization and a growing installed base.
  • Systems shipped increased to 19,317 from 4,549 on the 2012 pro forma basis, largely reflecting MakerBot desktop-printer sales and growth across Stratasys product lines. Management cautioned that entry-level and desktop products generally carry lower margins than higher-end systems.
  • GAAP profitability declined despite revenue growth, principally due to acquisition-related amortization, integration and growth costs, and MakerBot earn-out and performance-plan charges. On the company’s non-GAAP basis, operating income increased, while operating margin was 20.1% versus 20.7% pro forma in 2012.
  • MakerBot was acquired for an aggregate purchase price of $493.7 million, primarily in shares. It contributed $35.6 million in revenue and a $5.3 million loss from acquisition through year-end. At December 31, the recorded earn-out obligation was about $29.0 million. Potential 2014 earn-out and performance-plan amounts each ranged from zero to approximately $108.2 million, based on the year-end share price and specified performance outcomes.
  • The September 2013 share offering raised net proceeds of $462.9 million. Cash and deposits increased substantially, while investing cash outflow was $226.8 million, including $180.3 million invested in short-term bank deposits and $33.3 million of property and equipment purchases.

Outlook, risks and contingencies

  • Management expected adequate cash and operating cash generation to fund 2014 operations and estimated 2014 property-and-equipment spending of approximately $50–$70 million. The filing does not provide numeric revenue or earnings guidance.
  • Management expects continued growth in desktop 3D printing, new applications and consumables, while noting unit volumes may grow faster than revenue and lower-priced product mix may pressure margins. Growth also depends on successful integration of Stratasys, Objet and MakerBot and timely product development.
  • Material risks include intense competition and technology change; integration and execution challenges; reliance on proprietary consumables and a sole supplier for PolyJet printer heads; customer, reseller and supplier credit risk; international and foreign-exchange exposure; and potential impairment of substantial goodwill and acquired intangible assets.
  • The company reported ongoing Israeli litigation involving former employees/minority shareholders and an appealed supplier judgment. It stated that management did not expect the minority-shareholder cases to materially harm operations or financial condition. The filing also describes a former-employee appeal and a blocked deposit of approximately $951,000 pending the supplier-case appeal.
  • Israeli tax benefits reduce tax on qualifying income but depend on continued compliance; their loss could raise the tax burden and may require repayment of benefits. The company reported $157.1 million of accumulated tax-exempt income and estimated approximately $15.7 million of tax if distributed as of year-end.
  • Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2013; MakerBot was excluded from the control assessment under the acquisition exemption. The independent auditor also excluded MakerBot from its internal-control audit.

Most important facts for investors to verify

  • Use the audited financial statements and the unaudited pro forma 2012 comparison—not reported 2012 alone—to assess underlying growth and margins.
  • Review the reconciliation and exclusions behind non-GAAP earnings, especially acquisition amortization, stock compensation, integration costs and earn-out expenses.
  • Track MakerBot’s performance, the 2014 earn-out/performance-plan outcomes, and any resulting cash needs or share dilution.
  • Assess cash conversion and working-capital trends alongside cash and deposits; confirm the terms, covenants and availability of the unused $250 million facility.
  • Monitor product mix, consumables growth, integration progress, goodwill/intangible impairment assumptions, material litigation developments and continued eligibility for Israeli tax benefits.