Stratasys Ltd. — FY 2012 Form 20-F
Reporting period: Year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter report. Stratasys, Inc. was treated as the accounting acquirer in the December 1, 2012 merger; therefore, reported 2012 results include the legacy Stratasys, Inc. business for the first 11 months and the combined company for December only. Comparisons with 2011 are not like-for-like.
Business context and merger
The combined company provides additive-manufacturing systems, consumables and related services, including FDM, PolyJet and Solidscape products. The merger was completed as an all-stock transaction. Former Stratasys, Inc. shareholders held approximately 55% and former Objet shareholders approximately 45% of the combined company on a fully diluted basis. The company recorded preliminary merger-related goodwill of $797.1 million and intangible assets of $490.2 million; the purchase-price allocation remained subject to change.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $215.2 million | $155.9 million |
| Gross profit / margin | $109.9 million / 51.1% | $82.4 million / 52.9% |
| Operating income / margin | $17.1 million / 8.0% | $29.0 million / 18.6% |
| Net income attributable to Stratasys Ltd. | $8.5 million | $20.6 million |
| Diluted earnings per share | $0.36 | $0.95 |
| Net cash provided by operating activities | $1.5 million | $22.5 million |
Amounts are in U.S. dollars. Actual reported revenue rose 38.1%, but includes only one month of Objet activity. The filing also provides unaudited pro forma combined sales of $359.1 million for 2012 and $277.0 million for 2011, with pro forma operating losses of $14.2 million and $23.8 million, respectively. Pro forma figures are illustrative, not audited historical results; the filing presents additional pro forma schedules with differing adjustment bases.
At December 31, 2012, cash and cash equivalents were $133.8 million, short-term bank deposits were $20.1 million, working capital was $228.9 million, and total assets were $1.732 billion. Current assets were $323.3 million and current liabilities $94.4 million. The balance sheet reported no long-term debt. Total liabilities were $159.4 million and total equity was $1.572 billion.
Changes versus the prior comparable period
- Reported sales increased, led by systems and consumables; product revenue rose 41.0% and service revenue rose 24.9%. System shipments increased 33.4% to 3,470, with growth in Fortus systems and a full year of Solidscape results contributing. December Objet consolidation added $19.1 million of sales.
- Operating income fell 41.0% and attributable net income fell 58.8%. Management cited merger transaction, advisory and integration costs; accelerated option vesting; acquisition-related amortization and stock compensation; and the one-month consolidation of Objet.
- Gross margin declined by 1.8 percentage points. Product margin was flat year over year, while service margin weakened, including from RedEye costs, maintenance-contract costs and new product introductions.
- Operating cash flow fell to $1.5 million, reflecting working-capital demands, including higher receivables and inventory, and the accounting treatment of stock-option tax benefits.
Outlook, risks and unusual items
- Management expected adequate cash and operating cash generation to fund 2013 operations and estimated 2013 property-and-equipment spending of approximately $35–45 million. The filing gives no specific revenue or earnings guidance.
- Management expects continued market adoption of 3D printing, growth in entry-level systems and development of new materials and direct-digital-manufacturing applications. It cautioned that entry-level products can increase unit shipments faster than revenue and dilute margins; there is no assurance that revenue growth will offset that pressure.
- Management expects future tax rates to reflect a blend of the two legacy businesses’ tax profiles and anticipates benefits from qualifying Israeli tax programs. Eligibility is conditional, and loss of benefits could increase taxes or require repayment. The reported 2012 effective tax rate was 52.3%, elevated in part by nondeductible acquisition expenses.
- Expected annual amortization of acquired intangible assets was approximately $52.5 million for 2013. Goodwill and intangible impairments could materially affect future earnings; no impairment was recorded at year-end.
- Key risks include integration execution, competition and technology change, customer acceptance and product mix, reliance on resellers and recurring consumables, and dependence on Ricoh as the sole supplier of PolyJet printer heads. Manufacturing-site disruptions, foreign exchange movements and Israeli geopolitical conditions are also identified risks.
- Contingencies include unresolved former-employee and distributor disputes, a supplier appeal with approximately $0.9 million deposited in a blocked account, and merger-related class actions subject to a proposed settlement and court approval. Two additional shareholder lawsuits were reported in March 2013. Management disputed the claims; outcomes remain uncertain.
- The company reported effective disclosure controls at year-end, but did not include management’s assessment or auditor attestation of internal control over financial reporting because of the newly public company transition period. Integration of legacy financial reporting and controls was ongoing.
Important facts for investors to verify
- Use the audited financial statements and Article 11 pro forma schedules carefully: the 2012 actual results include only one month of Objet, and the filing includes more than one pro forma presentation.
- Track post-merger sales, margins and cash conversion against the 2012 pro forma baseline, separating recurring growth from acquisition effects and integration costs.
- Verify progress on integration, expected synergies, the $35–45 million 2013 capital-spending estimate and the company’s ability to generate operating cash.
- Monitor the final purchase-price allocation, acquired-intangible amortization and subsequent impairment assessments.
- Review developments in the disclosed litigation, Israeli tax-benefit eligibility, and the Ricoh printer-head supply arrangement.