stratasys_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [
ü ] |
|
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| |
|
EXCHANGE ACT OF
1934 |
For the quarterly period ended March 31, 2010
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) |
(952) 937-3000
(Registrant’s telephone number, including area code)
Not Applicable
(Former
name, former address and former fiscal year, if changed since last report)
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 the past
90 days. Yes [ ü ] 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 (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
[ ] No [
]
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerate filer, or a smaller reporting company. See the definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
| Large
accelerated filer [ ] |
Accelerated
filer [ ü ] |
| Non-accelerated filer [ ] |
Smaller
reporting company [ ] |
| (Do not
check if a 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 [ ü ]
As of May 3, 2010 the Registrant had
20,510,787 shares of common stock, $.01 par value, issued and
outstanding.
Stratasys, Inc.
Table of Contents
|
|
|
|
Page |
| Part I. |
|
Financial Information |
|
| Item 1. |
|
Financial Statements (unaudited) |
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of March
31, 2010 and December 31, 2009 |
1 |
|
|
|
|
|
|
|
|
Consolidated Statements of Operations
and Comprehensive Loss for the three months ended
March 31, 2010 and
2009 |
2 |
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
for the three months ended March 31, 2010 and 2009 |
3 |
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements |
4 |
|
|
|
|
|
| Item 2. |
|
Management’s Discussion and Analysis of
Financial Condition and Results of Operations |
10 |
|
|
|
|
|
| Item 3. |
|
Quantitative and Qualitative Disclosures
About Market Risk |
20 |
|
|
|
|
|
| Item 4. |
|
Controls and Procedures |
20 |
|
|
|
|
|
| Part II. |
|
Other Information |
|
|
|
|
|
|
| Item 6. |
|
Exhibits |
21 |
|
|
|
|
|
| Signatures |
|
|
22 |
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
| Consolidated Balance
Sheets |
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
(unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
| |
| Current assets |
|
|
|
|
|
|
|
| Cash and cash
equivalents |
$ |
50,563,841 |
|
|
$ |
48,315,926 |
|
| Short-term
investments - held to maturity |
|
17,025,763 |
|
|
|
16,073,718 |
|
| Accounts
receivable, less allowance for returns and |
|
|
|
|
|
|
|
|
doubtful accounts of $1,411,331 at March
31, |
|
|
|
|
|
|
|
|
2010 and $903,101 at December 31,
2009 |
|
19,671,215 |
|
|
|
19,249,813 |
|
| Inventories |
|
16,854,971 |
|
|
|
14,608,014 |
|
| Net investment in sales-type leases, less
allowance |
|
|
|
|
|
|
|
|
for doubtful accounts of $131,202 at
March 31, |
|
|
|
|
|
|
|
|
2010 and $222,011 at December 31,
2009 |
|
3,920,267 |
|
|
|
3,618,876 |
|
| Prepaid expenses and other current
assets |
|
1,903,545 |
|
|
|
2,247,612 |
|
| Deferred income taxes |
|
2,277,000 |
|
|
|
2,277,000 |
|
| Total current assets |
|
112,216,602 |
|
|
|
106,390,959 |
|
| Property and equipment,
net |
|
26,576,484 |
|
|
|
26,326,012 |
|
| |
|
|
|
|
|
|
|
| Other assets |
|
|
|
|
|
|
|
| Intangible assets, net |
|
7,381,454 |
|
|
|
7,653,269 |
|
| Net investment in sales-type
leases |
|
3,255,499 |
|
|
|
3,477,039 |
|
| Deferred income taxes |
|
688,000 |
|
|
|
688,000 |
|
| Long-term investments - available for
sale |
|
1,030,750 |
|
|
|
1,055,750 |
|
| Long-term investments - held to
maturity |
|
3,501,802 |
|
|
|
5,467,318 |
|
| Other non-current assets |
|
1,958,708 |
|
|
|
2,078,165 |
|
| Total other assets |
|
17,816,213 |
|
|
|
20,419,541 |
|
| Total assets |
$ |
156,609,299 |
|
|
$ |
153,136,512 |
|
| |
| LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
|
| Current liabilities |
|
|
|
|
|
|
|
| Accounts payable and other current
liabilities |
$ |
10,728,717 |
|
|
$ |
12,874,798 |
|
| Unearned revenues |
|
11,262,898 |
|
|
|
10,678,427 |
|
| Total current liabilities |
|
21,991,615 |
|
|
|
23,553,225 |
|
| |
| Commitments and
contingencies |
|
|
|
|
|
|
|
| |
| Stockholders' equity |
|
|
|
|
|
|
|
| Common stock, $.01 par value, authorized
30,000,000 shares; |
|
|
|
|
|
|
|
|
26,198,418 and 26,053,318 issued as of
March 31, |
|
|
|
|
|
|
|
|
2010 and December 31, 2009,
respectively |
|
261,984 |
|
|
|
260,533 |
|
| Capital in excess of par value |
|
99,939,823 |
|
|
|
94,329,398 |
|
| Retained earnings |
|
73,572,839 |
|
|
|
74,015,940 |
|
| Accumulated other comprehensive
loss |
|
(152,537 |
) |
|
|
(18,159 |
) |
| Less cost of treasury stock, 5,687,631 shares
as of |
|
|
|
|
|
|
|
|
March 31, 2010 and December 31,
2009 |
|
(39,004,425 |
) |
|
|
(39,004,425 |
) |
| Total stockholders' equity |
|
134,617,684 |
|
|
|
129,583,287 |
|
| Total liabilities and stockholders'
equity |
$ |
156,609,299 |
|
|
$ |
153,136,512 |
|
| |
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
1
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
| Consolidated Statements of Operations
and Comprehensive Loss (Unaudited) |
|
|
|
|
Three Months Ended March
31, |
|
|
2010 |
|
2009 |
| Net sales |
|
|
|
|
|
|
|
| Products |
$ |
21,761,618 |
|
|
$ |
16,951,502 |
|
| Services |
|
6,232,507 |
|
|
|
6,193,299 |
|
| Fair value of warrant related to OEM
agreement |
|
(4,987,806 |
) |
|
|
- |
|
| |
|
23,006,319 |
|
|
|
23,144,801 |
|
| |
| Cost of sales |
|
|
|
|
|
|
|
| Products |
|
10,678,018 |
|
|
|
10,686,156 |
|
| Services |
|
2,908,226 |
|
|
|
2,886,293 |
|
| |
|
13,586,244 |
|
|
|
13,572,449 |
|
| |
| Gross profit |
|
9,420,075 |
|
|
|
9,572,352 |
|
| |
| Operating expenses |
|
|
|
|
|
|
|
| Research and development |
|
2,398,498 |
|
|
|
1,871,760 |
|
| Selling, general and
administrative |
|
7,783,720 |
|
|
|
9,308,209 |
|
| |
|
10,182,218 |
|
|
|
11,179,969 |
|
| |
| Operating loss |
|
(762,143 |
) |
|
|
(1,607,617 |
) |
| |
| Other income (expense) |
|
|
|
|
|
|
|
| Interest income, net |
|
215,199 |
|
|
|
286,353 |
|
| Foreign currency transaction gains
(losses), net |
|
(359,255 |
) |
|
|
236,601 |
|
| Other |
|
18,240 |
|
|
|
13,726 |
|
| |
|
(125,816 |
) |
|
|
536,680 |
|
| |
| Loss before income
taxes |
|
(887,959 |
) |
|
|
(1,070,937 |
) |
| Income tax benefit |
|
(444,858 |
) |
|
|
(367,008 |
) |
| |
| Net Loss |
$ |
(443,101 |
) |
|
$ |
(703,929 |
) |
| |
| Net loss per common
share |
|
|
|
|
|
|
|
|
Basic |
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
Diluted |
|
(0.02 |
) |
|
|
(0.03 |
) |
| |
| Weighted average common shares
outstanding |
|
|
|
|
|
|
|
|
Basic |
|
20,441,217 |
|
|
|
20,222,127 |
|
|
Diluted |
|
20,441,217 |
|
|
|
20,222,127 |
|
| |
| Comprehensive
Loss |
|
|
|
|
|
|
|
| Net loss |
$ |
(443,101 |
) |
|
$ |
(703,929 |
) |
| Other comprehensive loss: |
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment |
|
(134,378 |
) |
|
$ |
(165,692 |
) |
| Comprehensive loss |
$ |
(577,479 |
) |
|
$ |
(869,621 |
) |
| |
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
2
STRATASYS,
INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
| Consolidated Statements of Cash Flows
(Unaudited) |
|
|
|
|
|
|
|
| |
Three Months Ended March
31, |
| |
2010 |
|
2009 |
| Cash flows from operating
activities |
|
|
|
|
|
|
|
| Net loss |
$ |
(443,101 |
) |
|
$ |
(703,929 |
) |
|
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
1,470,731 |
|
|
|
1,484,844 |
|
|
Amortization |
|
615,379 |
|
|
|
719,886 |
|
|
Stock-based compensation |
|
310,544 |
|
|
|
486,769 |
|
|
Fair value of warrant related to OEM
agreement |
|
4,987,806 |
|
|
|
- |
|
|
Loss on disposal of property and
equipment |
|
- |
|
|
|
356 |
|
| |
|
Increase (decrease) in cash attributable
to changes in |
|
|
|
|
|
|
|
| operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
(421,402 |
) |
|
|
2,853,098 |
|
|
Inventories |
|
(3,150,614 |
) |
|
|
(351,132 |
) |
|
Net investment in sales-type
leases |
|
(79,851 |
) |
|
|
1,220,892 |
|
|
Prepaid expenses |
|
344,067 |
|
|
|
1,187,560 |
|
|
Other assets |
|
119,457 |
|
|
|
(12,471 |
) |
|
Accounts payable and other current
liabilities |
|
(1,665,587 |
) |
|
|
(2,672,834 |
) |
|
Unearned revenues |
|
584,471 |
|
|
|
(1,255,707 |
) |
| Net cash provided by operating
activities |
|
2,671,900 |
|
|
|
2,957,332 |
|
| |
| Cash flows from investing
activities |
|
|
|
|
|
|
|
|
Proceeds from sale of
investments |
|
1,005,000 |
|
|
|
1,025,795 |
|
|
Proceeds from sale of property and
equipment |
|
- |
|
|
|
1,000 |
|
|
Acquisition of property and
equipment |
|
(825,236 |
) |
|
|
(677,111 |
) |
|
Acquisition of intangible and other
assets |
|
(310,093 |
) |
|
|
(473,345 |
) |
| Net cash used in investing
activities |
|
(130,329 |
) |
|
|
(123,661 |
) |
| |
| Cash flows from financing
activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
and warrants |
|
1,969,637 |
|
|
|
2,610 |
|
|
Cash paid for vested stock option
repurchases |
|
(2,136,605 |
) |
|
|
- |
|
| Net cash provided by (used in) financing
activities |
|
(166,968 |
) |
|
|
2,610 |
|
| |
| Effect of exchange rate changes on
cash |
|
(126,688 |
) |
|
|
(117,310 |
) |
| |
| Net increase in cash and cash
equivalents |
|
2,247,915 |
|
|
|
2,718,972 |
|
| Cash and cash equivalents,
beginning of year |
|
48,315,926 |
|
|
|
27,945,799 |
|
| |
| Cash and cash equivalents,
end of year |
$ |
50,563,841 |
|
|
$ |
30,664,771 |
|
| |
|
Supplemental
Disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for taxes |
$ |
1,850,437 |
|
|
$ |
202,627 |
|
|
Transfer of fixed assets to
inventory |
|
133,705 |
|
|
|
44,950 |
|
|
Transfer of inventory to fixed
assets |
|
1,037,361 |
|
|
|
55,771 |
|
See accompanying notes to consolidated
financial statements.
3
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation and
Consolidation
The consolidated interim
financial statements include the accounts of Stratasys, Inc. and its
wholly-owned subsidiaries (collectively, the “Company”). All intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated interim financial information herein is unaudited; however, such
information reflects all adjustments (consisting of normal, recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of results for the interim period. The results of operations for the
three months ended March 31, 2010 are not necessarily indicative of the results
to be expected for the full year. Certain financial information and footnote
disclosures normally included in the annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) have been condensed or omitted. The reader is
referred to the audited consolidated financial statements and notes thereto for
the year ended December 31, 2009, filed as part of the Company’s Annual Report
on Form 10-K for such year.
Note 2 Recently Issued
Accounting Pronouncements
In
January 2010, the Financial Accounting
Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
FASB Accounting Standards Codification™ (“ASC”) 820 by adding required
disclosures about items transferring into and out of levels 1 and 2 in the fair
value hierarchy; adding separate disclosures about purchases, sales, issuances,
and settlements relative to level 3 measurements; and clarifying, among other
things, the existing fair value disclosures about the level of
disaggregation. This ASU is effective for interim and annual
reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for interim and annual periods
beginning after December 15, 2010. Additional disclosures required by
this standard for 2010 are included in Note 10 – Fair Value
Measurements. Since this standard impacts disclosure requirements
only, the adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
Note 3 Warrant Charge to
Revenue
In connection with an
Master OEM Agreement (the “Agreement”) and a Protective Rights Agreement with
Hewlett-Packard Company (“HP”), the Company issued a warrant to HP to purchase
500,000 shares of common stock at an exercise price of $17.78 per share (the
“Warrant”), which vested immediately. The Company used the Black-Scholes pricing
model to calculate the fair value of the Warrant, which is the same methodology
used to calculate the fair value of stock-based compensation grants. The Company
accounted for the fair value of this Warrant under the guidance of ASC 605,
Revenue Recognition,
and recognized the fair value as a reduction of revenues at the date of the
grant.
Note 4
Investments
Classification of
investments as current or non-current is dependent upon management’s intended
holding period, the investment’s 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
Company’s past history of holding investments until maturity, projected cash
flow estimates, future capital requirements, the existence of credit
deterioration of the issuer and the Company’s overall investment strategy as
established by management and approved by the Company’s Board of
Directors.
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. The Company does not hold any
investments for trading purposes and had no unrecognized gains or losses related
to held-to-maturity investments at March 31, 2010 or December 31, 2009, as the
fair value of those investments approximated cost.
The Company invests in
certificates of deposit, tax-free auction rate securities, government bonds, and
municipal notes, all of which are insured. The following is a summary of amounts
recorded on the Consolidated Balance Sheet for marketable securities (current
and non-current) at March 31, 2010 and December 31, 2009.
4
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
March 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
(unaudited) |
|
|
|
| Government bonds |
$ |
8,085,406 |
|
$ |
8,113,361 |
| Other securities |
|
357 |
|
|
357 |
| Certificates of deposit |
|
8,940,000 |
|
|
7,960,000 |
| Short-term investments - held to maturity |
|
17,025,763 |
|
|
16,073,718 |
| |
| Auction rate securities |
|
1,030,750 |
|
|
1,055,750 |
| Long-term investments - available for sale securities |
|
1,030,750 |
|
|
1,055,750 |
| |
| Auction rate securities |
|
2,400,000 |
|
|
2,400,000 |
| Government bonds |
|
1,101,802 |
|
|
1,107,318 |
| Certificates of deposit |
|
- |
|
|
1,960,000 |
| Long-term investments - held to maturity |
|
3,501,802 |
|
|
5,467,318 |
| |
| Total investments |
$ |
21,558,315 |
|
$ |
22,596,786 |
| |
|
|
|
|
|
Short-term and long-term
investments consist of certificates of deposit, tax-free government bonds, and
Auction Rate Securities (“ARS”). At March 31, 2010, the Company’s investments
included:
-
approximately $9.2
million in municipal government bonds maturing between April 2010 and May
2026, all of which have ratings between Aa2 and Baa1 at March 31,
2010;
-
approximately $8.9
million in certificates of deposit maturing between April 2010 and February
2011.
-
approximately $2.4
million of a tax-free ARS, which re-prices approximately every 35 days. The
ARS had a rating of A1 at March 31, 2010; and
-
approximately $1.0
million of a tax-free ARS, which does not currently have an active trading
market and matures in February 2042. This ARS had a rating of Caa3 at March
31, 2010 and is further explained below.
The balance sheet
caption titled “Long-term investments – available for sale securities” consisted
of approximately $1.0 million of a tax-free ARS. This balance represents the
current estimated fair value of an ARS issued by Jefferson County, Alabama with
a face value of $2.6 million. The investment is part of a multi-billion series
of bonds issued by Jefferson County to build its sewer and water treatment
system (“system”). The County entered into interest rate swaps to protect itself
from rising interest rates, but the swaps proved ineffective and the revenue
from the system will not adequately support the higher interest rates. The bond
is insured by Financial Guaranty Insurance Company (“FGIC”) and matures in 2042.
However, with the collapse of the ARS market, the weakened financial condition
of FGIC, and the County’s financial condition, the rating of this ARS has gone
from Aaa to Caa3. The Company has received $50,000 in principal payments on this
ARS and no additional principal payments have become due. The Company has
received all scheduled interest payments on this ARS through March 31, 2010. Due
to the current financial condition of the County and the absence of an active
market for this security, the Company only records interest income as cash
payments are received.
With the assistance of
outside consultants, the Company has reviewed this ARS, including expected cash
flows, assessed the credit risk, analyzed and extrapolated yield information on
comparable composites, and reviewed independent research from various public
sources concerning the ARS market. From that assessment, the Company concluded
that during 2008 it had incurred both a temporary and other-than-temporary
impairment and recognized impairments of $195,000 and $1,270,750, respectively.
Based upon a reevaluation that occurred in late 2009, a portion of the
previously recognized temporary impairment was considered other-than-temporary
and an additional portion of the net carrying amount was considered as impaired
on an other-than-temporary basis. The following table summarizes the activity of
this investment from December 31, 2007 to March 31, 2010.
5
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Face value of investment as of December
31, 2007 |
|
$ |
2,600,000 |
|
| Principal payment |
|
|
(25,000 |
) |
| Temporary impairment - recognized in
other comprehensive income |
|
|
(195,000 |
) |
| Other-than-temporary impairment - recognized in other
income |
|
|
(1,270,750 |
) |
| 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 |
|
|
(25,000 |
) |
| Net carrying value at March 31, 2010 |
|
$ |
1,030,750 |
|
| |
|
|
|
|
Note 5
Inventories
Inventories consisted of
the following at March 31, 2010 and December 31, 2009 respectively:
|
|
|
2010 |
|
2009 |
| Finished goods |
|
$ |
7,477,615 |
|
$
|
6,288,314 |
| Raw materials |
|
$ |
9,377,356 |
|
|
8,319,700 |
| Total Inventory |
|
$ |
16,854,971 |
|
$ |
14,608,014 |
| |
|
|
|
|
|
|
Note 6 Material
Commitments
The Company estimates
that as of March 31, 2010, it had approximately $17.7 million of purchase
commitments for inventory from selected vendors. In addition to purchase
commitments for inventory, the Company also has future commitments for leased
facilities of approximately $1.0 million. The Company intends to finance its
purchase commitments from existing cash and investments or from cash flows from
operations.
Note 7 Earnings per Common
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. For
the periods ended March 31, 2010 and March 31, 2009, the Company excluded shares
of 581,916 and 9,442, respectively, from the diluted weighted average common
shares outstanding as the impact would be anti-dilutive in periods with net
losses.
6
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table
provides information relative to stock options that were exercised in the
respective periods:
|
|
|
Periods Ended March
31, |
|
|
|
2010 |
|
2009 |
| Proceeds from exercise of stock
options |
|
$ |
1,969,637 |
|
$ |
2,610 |
| Number of options exercised |
|
|
145,100 |
|
|
600 |
| Weighted average exercise
price |
|
$ |
13.57 |
|
$ |
4.35 |
| |
| Tax benefit recognized in
stockholders' |
|
|
|
|
|
|
| equity from stock option
exercises |
|
$ |
(480,494 |
) |
$ |
- |
Note 8 Stock-Based
Compensation
The Company accounts for
stock-based compensation under the guidance of ASC 718, Compensation-Stock Compensation. ASC 718 establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services and transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity’s
equity instruments or that may be settled by the issuance of those equity
instruments. The stock-based compensation expense amount recorded and associated
future estimated income tax benefits were as follows for the respective
periods:
|
|
|
Periods Ended March
31, |
|
|
|
2010 |
|
2009 |
| Stock-based compensation
expense |
|
$ |
310,554 |
|
|
$ |
486,768 |
|
| Future income tax benefit |
|
|
(160,408 |
) |
|
|
(134,950 |
) |
|
|
|
$ |
150,146 |
|
|
$ |
351,818 |
|
| |
|
|
|
|
|
|
|
|
Options for 300,000
shares were granted in the three months ended March 31, 2010 and 14,000 options
were granted in the three months ended March 31, 2009. The income tax benefit
relates to stock-based compensation recorded on nonqualified stock options and
any tax benefit derived from disqualifying dispositions of incentive stock
options in the specific period.
Note 9 Income
Taxes
The effective tax rate
of 50.1% for the three months ended March 31, 2010 was higher than to the 34.3%
effective rate for the same period in 2009 due to a favorable tax liability
adjustment resulting from the disqualifying dispositions of incentive stock
options.
Effective January 1,
2007, the Company adopted the provisions of ASC 740, Income Taxes, and
began using 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. At March 31, 2010 and
2009, the Company had unrecognized tax benefits of $1.3 million and $1.2
million, respectively.
Note 10 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
Company’s assumptions about the factors market participants would use in valuing
the asset or liability developed based upon the best information available in
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.
Assets and Liabilities that are Measured at Fair Value on a Recurring
Basis:
For
financial assets held by the Company, fair value principally applies to
available-for-sale marketable securities. These items were previously, and will
continue to be, marked-to-market at each reporting period. The information in
the following paragraphs and tables primarily addresses matters relative to
these financial assets. The Company does not have any financial liabilities that
are subject to fair value measurements. Separately, there were no material fair value measurements with respect to
non-financial assets or liabilities that are recognized or disclosed at fair
value in the Company’s financial statements on a recurring basis subsequent to
the effective date of such accounting guidance.
7
STRATASYS,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses various
valuation techniques, which are primarily based upon the market approach, with
respect to its financial assets. As discussed in Note 4, a portion of the
auction rate securities held by the Company experienced a significant credit
rating reduction since their acquisition. As a result, investments in auction
rate securities are valued utilizing a quantitative and qualitative third-party
analysis. The Company therefore classifies these securities as Level
3.
The following table
provides a reconciliation of the beginning and ending balances of items measured
at fair value on a recurring basis that used significant unobservable
inputs:
|
|
|
Periods ended March
31, |
| Auction rate securities |
|
2010 |
|
2009 |
| Beginning balance |
|
$
|
3,455,750 |
|
|
$
|
3,509,250 |
|
| Total gains or
(losses): |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Included in
other comprehensive income
|
|
|
- |
|
|
|
- |
|
| Settlements |
|
|
(25,000 |
) |
|
|
- |
|
| Ending balance |
|
|
3,430,750 |
|
|
|
3,509,250 |
|
| Classified as long-term investments -
held to maturity |
|
|
(2,400,000 |
) |
|
|
(2,400,000 |
) |
| Classified as long-term investments - available for sale
securities |
|
$ |
1,030,750 |
|
|
$ |
1,109,250 |
|
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring
Basis:
During
the quarter ended March 31, 2010, the Company had no significant measurements of
assets or liabilities at fair value on a nonrecurring basis subsequent to their
initial recognition.
Note 11 Foreign Currency
Hedge
The Company invoices
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. The Company’s 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. 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 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”.
The Company hedged
between €3.1 million and €4.2 million during the three months ended March 31,
2010 and between €3.3 million and €5.0 million during the three months ended
March 31, 2009 related to accounts receivable that were denominated in Euros.
The foreign currency forward contracts resulted in a currency transaction gain
of approximately $0.3 million for the three months ended March 31, 2010 and a
gain of approximately $0.2 million for the three months ended March 31,
2009.
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 we will be fully protected against material
foreign currency fluctuations.
8
STRATASYS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 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
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 Company’s
high-performance systems and resulted in the commercial release of the Fortus
900mc. Because receipt of these payments represents reimbursement 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, the Company is continuing this relationship. During
the three months ended March 31, 2010 and March 31, 2009, approximately $263,000
and $515,000, respectively, of research and development expenses were offset by
payments that were received from this company.
Note 13 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 Company’s 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 Company’s 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 during the fourth quarter of 2009.
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 |
|
Terminations |
|
|
|
|
|
|
|
and
Benefits |
|
and
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 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
9
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Description of Business
We are 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. Our 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. We develop, manufacture and sell a broad product line of 3D
printers and DDM systems (and related proprietary consumable materials) that
create physical models from CAD designs. We also offer rapid prototyping and
production part manufacturing services through our centers located in North
America, Europe and Australia.
Summary of Financial Results
For the quarter ended March 31, 2010, we recorded a net loss of $443,000,
or $0.02 per diluted share, as compared to net loss of $704,000, or $0.03 per
diluted share, for the quarter ended March 31, 2009. Our results for the first
quarter of 2010 include a $5.0 million charge to revenue representing the fair
value of a warrant issued to the Hewlett-Packard Company (“HP”) in connection
with an OEM agreement that was signed in January. As a result of cost reduction
efforts that were made in the first quarter of 2009, our continued focus on
controlling discretionary spending and aggressively managing our working
capital, we have seen steady improvements in profitability and operating cash
flow. These actions have allowed us to continue our investment in product
development and fully support our sales channels.
Our revenues of $23.0 million in the first quarter of 2010 were flat
compared to revenues of $23.1 million that were reported in the first quarter of
2009. Revenue growth in product sales of $4.8 million was offset by the $5.0
million charge related to the warrant issued to HP. Gross profit of $9.4
million, which reflects the $5.0 million charge related to the warrant issued to
HP, was slightly lower than the $9.6 million gross profit reported in the prior
year.
Our balance sheet continues to be strong. As of March 31, 2010, our cash
and investments balance was approximately $72.1 million, up from $70.9 million
at December 31, 2009. We generated approximately $2.7 million of cash from
operations during the quarter, primarily driven by our net loss adjusted for
non-cash charges for depreciation, amortization, stock-based compensation and
warrant issued to HP. We also have no debt and believe that we have adequate
liquidity to fund our growth strategy throughout 2010.
Our Market Strategy and Description
of Current Conditions
It is our belief that we are successfully implementing our overall
marketing strategy by addressing the needs of both the high-performance and 3D
printing ends of the market.
3D Printers Over the last three years, we have been
the price leaders in the 3D printer market and have followed a strategy of
moving down the price elasticity curve; most recently evidenced by our
introduction of the uPrint and uPrint Plus systems and the expansion of our
distribution channel. We feel that this strategy is appropriate for the
long-term success of our company while at the same time, we recognize the
short-term challenges that it presents. Although our competitors have also
recently introduced low-cost 3D printers, we believe our strategy of offering
low-priced 3D printing systems combined with higher reliability and increased
functionality will continue to make our 3D printers an attractive alternative to
our competitors’ products.
We believe that the recent introduction of our lower priced uPrint and
uPrint Plus systems and the expansion of our distribution channel will increase
awareness of our products, but will reduce our margins from the levels we have
previously earned. We intend to compensate for these smaller margins by
expanding the market for our 3D printers (and related proprietary consumables),
thereby substantially increasing the number of 3D printers sold and our overall
revenues and profits. Although we believe that there is a large market for our
3D printers, there can be no assurance that we will be able to increase our
revenues sufficiently to maintain or increase our profitability.
We continue to offer a distributor program that allows resellers to
purchase demonstration systems with extended payment terms. While this program
negatively impacts our accounts receivable days sales outstanding (“DSO”), it has proven to be an effective tool
in promoting and selling our systems. Given the success of the program in the
past, we offered a similar program for the launch of the uPrint and uPrint Plus,
but these programs have shorter extended payment terms than in prior years.
Although this program has a negative effect on our DSO, we believe that it
remains an integral part of our strategy to expand our share of the market.
10
High-Performance 3D Production
Systems Our
strategy in the high-performance market is to expand our installed base of RP
systems, represented principally by our Fortus 360mc, 400mc, and 900mc models,
by offering improved system capabilities and new and improved material
properties. End-user prices for our Fortus systems range from $90,000 for the
base model 360mc to $400,000 for the fully equipped 900mc.
We also have opportunities for the Fortus line in DDM applications. DDM
involves the manufacture of parts fabricated directly from our systems that are
subsequently incorporated into the user’s end product or process. DDM is
particularly attractive in applications that require short-run or low-volume
parts that require rapid turnaround and for which tooling would not be
appropriate due to small volumes.
An emerging portion of the DDM market segment is the production of
fabrication and assembly tools that aid in the customer’s production and
assembly process. We believe this fabrication and assembly tool market is
substantially larger than the $1.1 billion rapid prototyping market we currently
serve. In addition, we have seen a growing number of applications for end-use
parts.
Recurring Revenues As our installed base has increased, we
expect an increasing amount of revenue from the sales of consumables,
maintenance contracts, and other services. Despite a history of growth in this
area, we saw this trend decline during the first part of 2009 as our existing
customers curtailed some discretionary or variable spending in response to the
economic slow down. During the most recent two quarters, we have seen an
increase in consumable sales and believe that this will continue for the
remainder of 2010.
Developments in Our Business During
the Period
During the quarter, we signed a Master OEM Agreement (the “OEM
Agreement”) with HP to develop and manufacture an HP-branded 3D printer. During
the initial term of the Agreement, which expires on September 30, 2011, we will
manufacture a line of FDM (“Fused Deposition Modeling”) 3D printers and related
accessories and consumables exclusively for HP for resale under the HP brand in
France, Germany, Italy, Spain and the United Kingdom. In March of 2010, we
delivered our first shipment of 3D printers to HP under this OEM Agreement.
HP has agreed not to sell any other
3D printers manufactured by other companies 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 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 3D printers globally.
Under this OEM Agreement, 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 smaller on our sales to
HP. We intend to compensate for these smaller margins by expanding the market
for our 3D printers (and related proprietary consumables), thereby substantially
increasing the number of 3D printers sold and our overall revenues and profits.
Although we believe that there is a large market for our 3D printers, there can
be no assurance that we will be able to increase our revenue sufficiently to
maintain or increase our profitability.
We have also entered into a
Protective Rights Agreement with HP in which we have agreed to notify HP if (i)
we decide to engage in negotiations in response to an acquisition offer, (ii) we
decide to investigate a potential acquisition of our company, or (iii) we become
aware of an offer to purchase securities that would result in our acquisition.
The Protective Rights Agreement will terminate on the earlier of three months
after termination of the OEM Agreement or our acquisition. In connection with
the OEM Agreement and the Protective Rights Agreement, we 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.
11
In the first quarter of 2010, we saw
a 140% growth in revenue from our Fortus line as compared to the first quarter
of 2009. This growth resulted primarily from the recent economic upturn and the
restructuring of our domestic Fortus distribution channel that took place in
early 2009. Throughout the 2009 economic downturn, most manufacturers were
focused on survival and preserving cash instead of taking a calculated risk on
the new technologies and new processes that our Fortus line offers. With the
recent economic upturn, we believe that our customers will be more willing to
make investments in innovative new processes that save them time and
money.
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. Concurrent with the launch of the
uPrint Plus, we also introduced two support-material enhancements. The first,
Smart Supports, is a software feature that can reduce support material usage by
40%. The second is a new soluble support material called SR-30, which can
dissolve 69% faster than the current soluble support material.
Concurrent with the launch of the uPrint in January 2009, we lowered the
price of our other Dimension systems and discontinued the production of our
SST768 and BST768 models, although we will continue to provide support and
service for these discontinued systems going forward. Our current 3D printing
line now consists of five system types that have an end-customer price range of
$14,900 to $32,900. Based upon data and estimates furnished in the Wohlers
Report released in May of 2009, we shipped approximately 43% of all RP systems
globally in 2008 and 50% of all 3D printers shipped globally in 2008.
Cautionary Note Concerning Factors
that May Affect Future Results
Our current and future growth is largely dependent upon our ability to
penetrate new markets and develop and market new rapid prototyping and
manufacturing systems, materials, applications, and services that meet the needs
of our current and prospective customers. Our expense levels are based in part
on our expectations of future revenues. While we have adjusted,
and will continue to adjust, our expense levels based on both actual and
anticipated revenues, fluctuations in revenues in a particular period could
adversely impact our operating results. Our ability to continue to implement our
strategy in 2010 is subject to numerous uncertainties and risks, many of which
are described in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations, in the section below captioned “Forward
Looking Statements and Factors That May Affect Future Results of Operations,”
and in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for 2009. We
cannot ensure that our efforts will be successful.
12
Results of Operations
(unaudited)
The following table sets forth certain consolidated statements of
operations data as a percentage of net sales for the periods indicated. All
items are included in or derived from our consolidated interim statements of
operations.
Three-Month Periods Ended March
31,
|
|
2010 |
|
2009 |
| Net sales |
100.0 |
% |
|
100.0 |
% |
| Cost of sales |
59.1 |
% |
|
58.6 |
% |
| Gross profit |
40.9 |
% |
|
41.4 |
% |
| Research and development |
10.4 |
% |
|
8.1 |
% |
| Selling, general, and
administrative |
33.8 |
% |
|
40.2 |
% |
| Operating income |
(3.3 |
%) |
|
(6.9 |
%) |
| Other income (expense) |
(0.5 |
%) |
|
2.3 |
% |
| Income before income taxes |
(3.9 |
%) |
|
(4.6 |
%) |
| Income taxes |
(1.9 |
%) |
|
(1.6 |
%) |
| Net income |
(1.9 |
%) |
|
(3.0 |
%) |
Net Sales
Our revenues of $23.0 million in the first quarter of 2010 were flat
compared to revenues of $23.1 million that we reported in the first quarter of
2009. The following is a breakdown of our revenues by products and services:
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
Period-over- |
|
|
2010 |
|
2009 |
|
period change |
| Products |
$
|
21,762 |
|
|
$
|
16,952 |
|
28.4 |
% |
| Services |
|
6,232 |
|
|
|
6,193 |
|
0.6 |
% |
| Fair value of warrant |
|
(4,988 |
) |
|
|
- |
|
- |
|
|
|
$ |
23,006 |
|
|
$ |
23,145 |
|
-0.6 |
% |
| |
|
|
|
|
|
|
|
|
|
Revenues derived from products increased $4.8 million in the quarter
ended March 31, 2010, as compared with the quarter ended March 31, 2009. System
revenue grew by $3.5 million as a result of a general economic upturn and
favorable product mix that that was weighted towards our higher priced Fortus
systems, coupled with slightly higher overall volume. The number of units that
we shipped in the quarter increased by approximately 3%, or 19 units, to 610 as
compared with 591 units shipped in the first quarter of 2009. Consumable revenue
increased $1.2 million, primarily driven by the recent economic upturn which has
increased the usage of our installed base of systems.
Revenues from our service offerings in the quarter ended March 31, 2010
were relatively flat as compared to revenue from services in the first quarter
of 2009. Growth in our RedEye service bureau business resulted from the general
economic upturn and our focus on larger customers. 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.
A $5.0 million charge to revenue was recorded in the first quarter of
2010 representing the fair value of a warrant issued to the Hewlett-Packard
Company (“HP”) in connection with an OEM Agreement that was signed in January
2010.
Revenues in the Americas region,
which includes North and South America, accounted for approximately 55.8% and
61.1% of total revenue for the quarters ended March 31, 2010 and 2009,
respectively. The decrease in sales percentage is primarily due to the launch of
the uPrint in the first quarter of 2009, which had an earlier domestic launch
than it did internationally.
13
Revenues outside the Americas region accounted for approximately 44.2%
and 38.9% of total revenues for the quarters ended March 31, 2010 and 2009,
respectively. The international increase was led by a strong recovery in system
volumes in both the high-performance systems as well as 3D Printers, as compared
to a weak first quarter 2009.
Gross Profit
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
| Products |
$
|
11,084 |
|
|
$
|
6,265 |
|
| Services |
|
3,324 |
|
|
|
3,307 |
|
| Fair value of warrant |
|
(4,988 |
) |
|
|
- |
|
| Total |
$ |
9,420 |
|
|
$ |
9,572 |
|
| |
| Gross Profit as a
Percentage of Related Sales |
|
|
|
|
|
|
|
|
| Products |
|
50.9 |
% |
|
|
37.0 |
% |
| Services |
|
53.3 |
% |
|
|
53.4 |
% |
| Total |
|
40.9 |
% |
|
|
41.4 |
% |
Gross profit decreased by $152,000, or
1.6%, to $9.4 million in the quarter ended March 31, 2010 as compared with $9.6
million in the same prior-year period. This decrease for the three-month period
was primarily attributable to a $5.0 million charge to revenue related to the
warrant issued to HP in connection with an OEM Agreement but was offset by an
increase in product gross margin.
Product gross profit increased by 76.9%
for the three months ended March 31, 2010 as compared to the same prior-year
period. This increase is primarily attributable to increased volume to cover
fixed overhead, a product mix that favored our higher priced Fortus systems,
lower material costs driven by product reengineering and purchasing efforts and
a focus on lower production overhead costs.
Gross profit from services increased by
0.5% for the three months ended March 31, 2010 as compared to the same
prior-year periods.
Operating Expenses
Operating expenses and operating expense
as a percentage of sales, as well as the percentage changes in operating
expenses were as follows:
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
|
Period-over- |
|
|
2010 |
|
2009 |
|
period change |
| Research & development |
$
|
2,398 |
|
|
$
|
1,872 |
|
|
28.1 |
% |
| Selling, general & administrative |
|
7,784 |
|
|
|
9,308 |
|
|
-16.4 |
% |
|
|
$ |
10,182 |
|
|
$ |
11,180 |
|
|
-8.9 |
% |
| Percentage of sales |
|
44.3 |
% |
|
|
48.3 |
% |
|
|
|
Research and development expense
increased by 28.1% for the three months ended March 31, 2010 compared to the
same prior-year period. The increase resulted primarily from increased
development activities in support of the HP OEM Agreement, development of the
uPrint Plus, and development of our new support removal system that will be
distributed by both us and HP under separate brands. Capitalized research and
development expenditures for the three months ended March 31, 2010 relating to
internally developed software was approximately $280,000 as compared to $330,000
for the same prior-year period.
14
In 2008, we satisfied 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. Due to the success of this initial arrangement, we are continuing our
working relationship. During the three months ended March 31, 2010 and March 31,
2009, approximately $263,000 and $515,000, respectively, of research and
development expenses were offset by payments that were received from this
company.
Selling, general and administrative
expenses decreased by 16.4% for the three months ended March 31, 2010 compared
to the same prior-year period. The decreases in the first quarter of 2010 were
primarily attributable to cost savings that have resulted from our continued
effort to lower discretionary spending, headcount reductions that took place in
the first quarter of 2009 and the elimination of our North American direct sales
force in the first quarter of 2009 as well as the timing of certain
discretionary expenses. Our first quarter 2009 results included a charge of
approximately $779,000, consisting primarily of severance costs related to these
headcount reductions.
Operating Loss
Operating loss and operating loss as a
percentage of sales, as well as the percentage changes in operating loss, were
as follows:
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
|
Period-over- |
| |
2010 |
|
2009 |
|
period change |
| Operating loss |
$
|
(762 |
) |
|
$
|
(1,608 |
) |
|
52.6 |
% |
| |
| Percentage of sales |
|
-3.3 |
% |
|
|
-6.9 |
% |
|
|
|
We recorded an operating loss of $762,000 for the three months ended
March 31, 2010 as compared to a loss of $1.6 million for the same prior-year
period. This favorable change was primarily due to increased product sales
resulting from the general economic upturn, which was mostly offset by a $5.0
million non-cash charge to revenue related to a warrant issued to HP in
connection with the OEM Agreement.
Other Income (Expense)
Other income (expense) as a percentage of
sales and changes in other income (expense) were as follows:
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
|
Period-over- |
|
|
2010 |
|
2009 |
|
period change |
| Interest income |
$
|
215 |
|
|
$
|
286 |
|
|
-24.8 |
% |
| Foreign currency transaction gains (losses) |
|
(359 |
) |
|
|
237 |
|
|
251.5 |
% |
| Other |
|
18 |
|
|
|
14 |
|
|
-28.6 |
% |
|
|
$ |
(126 |
) |
|
$ |
537 |
|
|
-123.5 |
% |
| |
| Percentage of sales |
|
-0.5 |
% |
|
|
2.3 |
% |
|
|
|
While cash and investment balances increased over the prior-year periods,
interest income decreased for the three months ended March 31, 2010 compared to
the same prior-year period due to the lower effective interest rate of our
investment portfolio. As of March 31, 2010, we had approximately $15.9 million
invested in US Treasury money market accounts with a current annualized yield of
approximately 1%.
Foreign currency losses for the first quarter of 2010 resulted primarily
from the strengthening US Dollar during the period. We invoice sales to certain
European distributors in Euros and our 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 to our Euro-denominated accounts receivable, we also
have Euro-denominated assets related to our foreign subsidiaries that are also
subject to fluctuations in exchange rates. We do not use derivative financial
instruments for speculative or trading purposes.
15
We will continue to monitor exposure to
currency fluctuations. 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.
Income Tax Benefit
Income taxes and income taxes as a percentage of net loss before income
taxes, as well as the percentage changes, were as follows:
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
|
Period-over- |
|
|
2010 |
|
2009 |
|
period change |
| Income tax benefit |
$
|
(445 |
) |
|
$
|
(367 |
) |
|
21.3 |
% |
| |
| Effective tax rate |
|
-50.1 |
% |
|
|
-34.3 |
% |
|
|
|
An income tax benefit was recorded for the three months ended March 31,
2010 with a higher effective tax rate as compared to the same prior year period
due to a tax benefit resulting from the disqualifying dispositions of incentive
stock options.
Net Loss
Net loss and net loss as a percentage of
sales, as well as the percentage changes in net loss, were as follows:
Three-Month Periods Ended March
31,
| (In Thousands) |
|
|
|
|
|
|
|
|
Period-over- |
|
|
2010 |
|
2009 |
|
period change |
| Net loss |
$
|
(443 |
) |
|
$
|
(704 |
) |
|
37.1 |
% |
| |
| Percentage of sales |
|
-1.9 |
% |
|
|
-3.0 |
% |
|
|
|
Net loss in the current period decreased
during the three months ended March 31, 2010 primarily from increased product
revenue and cost reductions that were mostly offset by a $5.0 million non-cash
charge to revenue related to a warrant issued to HP in connection with the OEM
Agreement.
16
Liquidity and Capital Resources
(unaudited)
A summary of our consolidated interim statements of cash flows for the
three months ended March 31, 2010 and 2009 are as follows:
| (In Thousands) |
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
| Net loss |
$
|
(443 |
) |
|
$
|
(704 |
) |
| Depreciation and amortization |
|
2,086 |
|
|
|
2,205 |
|
| Stock-based compensation |
|
311 |
|
|
|
487 |
|
| Fair value of warrant related to OEM agreement |
|
4,988 |
|
|
|
- |
|
| Changes in operating assets and
liabilities |
|
(4,270 |
) |
|
|
1,025 |
|
| Net cash provided by operating activities |
|
2,672 |
|
|
|
3,013 |
|
| |
| Net cash provided by investing
activities |
|
(130 |
) |
|
|
(179 |
) |
| Net cash provided by (used in) financing activities |
|
(167 |
) |
|
|
2 |
|
| Effect of exchange rate changes on
cash |
|
(127 |
) |
|
|
(117 |
) |
| Net increase in cash and cash equivalents |
|
2,248 |
|
|
|
2,719 |
|
| Cash and cash equivalents, beginning of
period |
|
48,316 |
|
|
|
27,946 |
|
| Cash and cash equivalents, end of period |
$ |
50,564 |
|
|
$ |
30,665 |
|
Our cash and cash equivalents balance increased by $2.2 million to $50.6
million at March 31, 2010, from $48.3 million at December 31, 2009. The increase
is primarily due to $2.7 million of cash flows from operations offset by
$130,000 spent for investments, property and equipment, and intangible assets.
In the three months ended March 31, 2010,
net cash provided by our operating activities was $2.7 million compared to cash
provided by operations of $3.0 million during the comparable 2009
period.
Our net accounts receivable balance
increased to $19.7 million at March 31, 2010 from $19.3 million as of December
31, 2009. This increase was principally due to sales growth but was offset by
increased collection efforts that reduced the number of days sales outstanding.
At March 31, 2010, our inventory balance
increased to $16.9 million compared to $14.6 million at December 31, 2009. This
increase was principally due to a product build up in preparation for the
release of the uPrint Plus, a new support removal system and our OEM products.
Our investing activities used cash of
$130,000 in the first three months of 2010 as compared to $179,000 in the first
three months of 2009. We used cash of approximately $825,000 for fixed asset
additions in the first three months of 2010 as compared to $677,000 in the first
three months of 2009. Net cash used for payments for intangible assets and other
investments, including patents and capitalized software was $310,000 as compared
to $473,000 for the same prior-year period. Much of the capital expenditures in
2010 have been for equipment required by the ongoing needs of our business,
including manufacturing fixtures for new products and consumable manufacturing.
In the three months ended March 31, 2010,
we had net cash used by financing activities of $167,000 that resulted from the
repurchase of vested and outstanding stock options which was mostly offset by
proceeds from the exercise of stock options.
For the remainder of 2010, we expect to
use our cash flows from operations and/or our cash and investments as follows:
- for the acquisition of equipment,
including production equipment, tooling, and computers;
- for the purchase or development of
intangible assets, including patents;
- for the continuation of our
leasing program;
- for working capital
purposes;
- for increased selling and
marketing activities, especially as they relate to the continued market and
channel development;
- for new product and materials
development;
- for sustaining engineering;
- for information systems (“I/S”)
and infrastructure enhancements;
- for improvements to our
facilities;
- for acquisitions and/or strategic
alliances; and
- for our common stock buyback
program, which has $10.9 million available for the purchase of
shares
17
Our total current assets amounted to approximately $112.2 million at
March 31, 2010, most of which consisted of cash and cash equivalents,
investments, inventories and accounts receivable. Total current liabilities
amounted to approximately $22.0 million and we have no debt. We believe that we
have adequate resources to fund our foreseeable future growth.
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 and during the current quarter.
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. 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. 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 transactions gains (losses), net.” We
hedged between €3.1 million and €4.2 million during the three months ended March
31, 2010 and between €3.3 million and €5.0 million during the three months ended
March 31, 2009 related to accounts receivable that were denominated in Euros.
The foreign currency forward contracts resulted in a currency translation gain
of approximately $0.3 million for the three months ended March 31, 2010 and a
gain of approximately $0.2 million for the three months ended March 31,
2009.
We will continue to monitor exposure to
currency fluctuations. 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.
Critical Accounting Policies
We have prepared our consolidated interim
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.
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 if different conditions
existed, our financial condition or results of operations could have been
materially different. Certain critical accounting policies that were affected by
the estimates, assumptions, and judgments used in the preparation of our
consolidated interim financial statements are described in our Annual Report on
Form 10-K for 2009.
18
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”, “could”,
“potential”, “planning” or “believes” 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.
These forward-looking statements include the expected increases in net
sales of RP, DDM, and 3D printing systems, services and consumables, and our
ability to maintain our gross margins on these sales. The forward-looking
statements include projected revenue and income in future quarters; the size of
the 3D printing market; our objectives for the marketing and sale of our
uPrintTM and DimensionTM 3D printers and our FortusTM 3D Production Systems, particularly for use
in direct digital manufacturing (DDM); the demand for our proprietary
consumables; the expansion of our RedEye paid parts service; and our beliefs
with respect to the growth in the demand for our products and the impact of our
OEM Agreement on sales of our products. They include our plans and objectives to
introduce new products, to control expenses, to improve the quality and
reliability of our systems, to respond to new or existing competitive products,
and to improve profitability. 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,” in our Annual Report on
Form 10-K for 2009. 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, uPrint
Plus, 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;
- maintain or improve our revenues
and gross margins on our present products;
- control our operating
expenses;
- expand our manufacturing
capabilities to meet the expected demand generated by our uPrint Plus, 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 Management’s 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.
19
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
Interest Rate Risk
Our cash and cash equivalent investments are exclusively in short-term
money market and sweep instruments with maturities of less than 90 days and 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,
municipal government bonds and certificates of deposit that bear interest at
rates of 0.4% to 5.5%. 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. Therefore, 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 €3.1 million and €4.2 million during the
three months ended March 31, 2010 and between €3.3 million and €5.0 million
during the three months ended March 31, 2009 related to accounts receivable that
were denominated in Euros. A hypothetical 10% change in the exchange rates
between the US dollar and the Euro could increase or decrease income before
taxes by between $0.6 million and $1.2 million.
Item 4. 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.
Internal Control over Financial Reporting
An evaluation was also performed under
the supervision and with the participation of management, including the CEO and
CFO, of any change in our internal controls over financial reporting that
occurred during the last fiscal quarter and that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. That evaluation did not identify any changes in our internal control
over financial reporting during our most recently completed fiscal quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934).
20
PART II OTHER INFORMATION
Item 6. Exhibits
| |
(a) |
|
Exhibits.
|
| |
|
|
|
|
|
|
|
10.1 |
|
Master OEM Agreement between Hewlett-Packard Company and Stratasys,
Inc. dated as of January 18, 2010.* |
| |
|
|
|
|
|
|
|
10.2 |
|
Protective Rights Agreement between Stratasys, Inc. and
Hewlett-Packard Company dated as of January 18, 2010. |
| |
|
|
|
|
|
|
|
31.1 |
|
Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a). |
| |
|
|
|
|
|
|
|
31.2 |
|
Certification of the Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a). |
| |
|
|
|
|
|
|
|
32.1 |
|
Certification of the Chief Executive Officer required by Rule
13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350. |
| |
|
|
|
|
|
|
|
32.2 |
|
Certification of the Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
1350. |
____________________
* Confidential treatment has been requested for portions of this exhibit.
These portions have been omitted from this quarterly report on Form 10-Q and
have been filed separately with the Securities and Exchange
Commission.
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SIGNATURES
Pursuant to the
requirements 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.
| Date: May 10, 2010 |
Stratasys, Inc. |
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By: |
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/s/ ROBERT F.
GALLAGHER |
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Robert F. Gallagher |
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Chief Financial
Officer |
22