UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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.
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(Exact name of registrant as specified in its charter)
Delaware 36-3658792
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14950 Martin Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
(952) 937-3000
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(Registrant's telephone number, including area code)
Not Applicable
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(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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
As of May 7, 2004, the Registrant had 10,310,466 shares of common stock, $.01
par value, outstanding.
Stratasys, Inc.
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003......................... 1
Consolidated Statements of Operations and Comprehensive Income for the
three months ended March 31, 2004 and 2003..................................................... 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003........................................................................ 3
Notes to Financial Statements.................................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 14
Item 4. Controls and Procedures........................................................................ 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................... 16
Signatures.............................................................................................. 17
Item 1. Financial Statements
STRATASYS, INC.
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------
March 31, December 31,
2004 2003
(unaudited)
------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 46,587,394 $ 44,544,341
Short-term investments 950,000 950,000
Accounts receivable, less allowance for returns and
doubtful accounts of $804,106 in 2004 and $767,367 in 2003 15,680,356 15,788,095
Inventories 7,266,595 6,423,658
Net investment in sales-type leases 445,910 398,207
Prepaid expenses 1,266,592 2,809,541
Deferred income taxes 146,000 146,000
----------------------------------
Total current assets 72,342,847 71,059,842
----------------------------------
Property and equipment, net 8,223,692 6,544,663
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Other assets
Intangible assets, net 2,398,883 2,496,593
Net investment in sales-type leases 1,082,987 888,367
Deferred income taxes 2,124,000 2,124,000
Long-term investments 625,000 625,000
Other 591,505 361,761
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Total other assets 6,822,375 6,495,721
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$ 87,388,914 $ 84,100,226
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 5,565,670 $ 4,940,055
Unearned maintenance revenue 5,529,678 5,263,962
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Total current liabilities 11,095,348 10,204,017
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Stockholders' equity
Common Stock, $.01 par value, authorized 15,000,000
shares, issued 12,078,721 shares in 2004 and
12,028,320 shares in 2003 120,787 120,283
Capital in excess of par value 70,442,146 69,924,093
Retained earnings 12,969,011 11,063,902
Accumulated other comprehensive loss (67,583) (41,274)
Less cost of treasury stock, 1,768,856 shares in 2004
and 2003 (7,170,795) (7,170,795)
----------------------------------
Total stockholders' equity 76,293,566 73,896,209
----------------------------------
$ 87,388,914 $ 84,100,226
==================================
See notes to consolidated financial statements
1
STRATASYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
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Three Months Ended March 31,
2004 2003
(unaudited) (unaudited)
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Sales $ 15,846,175 $ 10,677,641
Cost of goods sold 6,140,040 3,820,070
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Gross profit 9,706,135 6,857,571
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Costs and expenses
Research and development 1,346,329 1,158,157
Selling, general and administrative 5,592,073 4,230,252
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6,938,402 5,388,409
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Operating income 2,767,733 1,469,162
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Other income (expense)
Interest income 111,747 36,529
Interest expense (41,312)
Other (36,033) 60,386
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75,714 55,603
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Income (loss) before income taxes 2,843,447 1,524,765
Income taxes 938,338 381,192
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Net income $ 1,905,109 $ 1,143,573
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Earnings per common share
Basic $ 0.19 $ 0.14
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Diluted $ 0.18 $ 0.13
----------------------------------
Weighted average number of common
shares outstanding
Basic 10,271,153 8,090,816
----------------------------------
Diluted 10,702,014 8,716,331
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COMPREHENSIVE INCOME
Net income $ 1,905,109 $ 1,143,573
Other comprehensive loss
Foreign currency translation adjustment (26,309) (21,526)
----------------------------------
Comprehensive income $ 1,878,800 $ 1,122,047
==================================
See notes to consolidated financial statements
2
STRATASYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31,
2004 2003
(unaudited) (unaudited)
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Cash flows from operating activities
Net income $ 1,905,109 $ 1,143,573
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes 198,407
Depreciation 423,128 392,567
Amortization 224,173 242,844
Loss on disposal of assets 16,011
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
Accounts receivable 107,739 1,166,488
Inventories (814,255) (222,007)
Net investments in sales-type leases (242,323)
Prepaid expenses 1,542,949 135,682
Other assets (229,744) 2,889
Accounts payable and other current liabilities 625,615 86,952
Unearned maintenance revenue 265,716 203,318
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Net cash provided by operating activities 4,022,525 3,152,306
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Cash flows from investing activities
Acquisition of property and equipment (2,146,850) (380,773)
Payments for intangible assets (126,463) (83,041)
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Net cash used in investing activities (2,273,313) (463,814)
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Cash flows from financing activities
Payments of mortgage payable (14,333)
Net proceeds from exercise of stock options 320,150 604,179
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Net cash provided by (used in) financing activities 320,150 (14,333)
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Effect of exchange rate changes on cash (26,309) (21,526)
----------------------------------
Net increase in cash and cash equivalents 2,043,053 2,652,633
Cash and cash equivalents, beginning of period 44,544,341 14,193,590
----------------------------------
Cash and cash equivalents, end of period $ 46,587,394 $ 16,846,223
==================================
See notes to consolidated financial statements
3
Notes to Financial Statements
Note 1 -- Basis of Presentation
The 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, 2004, are not necessarily indicative of the results to be expected for the
full year. Certain financial information and footnote disclosure normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The reader is referred to the audited financial statements
and notes thereto for the year ended December 31, 2003, filed as part of the
Company's Annual Report on Form 10-K for such year.
Note 2--- Inventory
Inventories consisted of the following at March 31 and December 31,
respectively:
2004 2003
---------- ----------
Finished Goods $4,493,963 $2,991,198
Raw materials 2,772,632 3,432,460
---------- ----------
Totals $7,266,595 $6,423,658
========== ==========
Note 3--Material Commitments
The Company has signed material commitments with several vendors for fixed
delivery of selected inventory expected to be supplied in the ensuing
twelve-month period. These commitments amount to approximately $7,900,000, some
of which contain non-cancellation clauses.
Note 4--Income per common share
The difference between the number of shares used to compute basic income
per share and diluted income per share relates to additional shares to be issued
upon the assumed exercise of stock options and warrants, net of shares
hypothetically repurchased at the average market price with the proceeds of
exercise. For the three months ended March 31, 2004 and 2003, the additional
shares amounted to 430,861 and 625,515, respectively.
Note 5
The Company has various stock option plans that have been approved by the
shareholders. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board No 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations. No
stock-based employee compensation is reflected in the net income for the three-
month periods ended March 31, 2004 and 2003, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation", to stock-based employee compensation:
4
Three Months Ended March 31,
2004 2003
------------- -------------
Net income as reported $ 1,905,109 $ 1,143,573
Effect of stock based compensation
accounted for under the fair value
recognition provisions, net of tax (326,750) (50,250)
------------- -------------
Pro forma net income 1,578,359 1,093,323
============= =============
Earnings per share:
Basic, as reported $ .19 $ .14
Basic, pro forma .15 .14
Diluted, as reported .18 .13
Diluted, pro forma .15 .13
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We develop, manufacture, and market a family of rapid prototyping ("RP")
devices, which include our 3D printing systems, that enable engineers and
designers to create physical models, tooling and prototypes out of plastic and
other materials directly from a computer aided design ("CAD") workstation. In
the quarter ended March 31, 2004, our revenues increased to $15,846,175, a 48.4%
increase over the $10,677,641 that we reported in the first quarter of 2003. The
number of units that we shipped in the quarter increased by approximately 117%
to 291 units as compared with 134 units shipped in the first quarter of 2003. We
believe that we shipped more total RP systems than any other company in the
world in the first quarter of 2004 and since 2002. Revenues derived from our
consumable products increased significantly in the quarter ended March 31, 2004,
as compared with the quarter ended March 31, 2003. We believe that the growth
rate of our consumables should increase in future quarters due to the
significant expansion of our active installed base over the past several years.
We have continued to successfully implement our strategy to address the
needs of both the high-performance and 3D printing ends of the market. Our
growth in the first quarter of 2004 was derived from a number of industries,
including consumer products, government agencies, educational institutions,
electronics, general manufacturing, medical, automotive, and aerospace. Our
strategy in 2004 will be to continue to expand our position in the 3D printing
market through increased sales of Dimension and Dimension SST, our low-cost 3D
printers. We introduced the Dimension SST in February 2004 at $34,900 and
concurrently reduced the list price on Dimension from $29,900 to $24,900. We
believe that Dimension, at $24,900, is among the lowest priced systems in the RP
market. We believe that the 3D printing market represents a significant growth
area and that Dimension and Dimension SST will continue to have a significant
positive impact on our results in 2004 and beyond. In 2003, the unit growth rate
of Dimension was 68%, which contributed to a 67% increase in revenues from that
product as compared with 2002. In the first quarter of 2004, our unit growth
rate for Dimension and Dimension SST systems expanded to over 172% as compared
with the first quarter of 2003, which contributed to a 148% increase of revenues
in the first quarter of 2004 as compared with the first quarter of 2003. The
highly successful growth of the Dimension and Dimension SST systems in the first
quarter of 2004 was aided by the introduction of a new distributor program, a
central element of which involves the purchase of systems for demonstration
purposes. As part of this program, we are offering resellers extended payment
terms for the purchase of both Dimension as well as Dimension SST systems.
Our strategy also includes the expansion of our position in the RP market
through the growth of our high performance systems, represented principally by
our Titan, Vantage, and Maxum systems. In January 2004 we introduced Triplets,
which offers three variations of the Vantage system. In the first quarter of
2004, the unit and revenue growth rates of our Titan and Vantage products
amounted to 70% and 42.9%, respectively. However, older products, such as our
Maxum and Prodigy Plus systems, declined in the first quarter of 2004 and are
expected to decline further in 2004, negatively impacting the total growth of
our high performance systems.
As our installed base has increased, we have derived an increasing amount of
revenue from the sales of consumables, maintenance contracts, and other
services. These represent recurring revenue for us. We expect that this trend
will continue.
Our 2004 strategy also is based on the expectation that we expand
revenues faster than our operating expenses, with the intent to improve our
operating margins as compared with those recorded in 2003. While our total
revenues in the first quarter of 2004 increased by 48.4% to $15,846,175 from
$10,677,641 in 2003, our operating expenses grew by only 28.8%, or $1,549,993.
This had the effect of increasing operating margins by 88% over those recorded
in 2003. We will continue to focus on our operating expenses in 2004, with the
intent to improve our operating profits beyond those reported in 2003. We
cannot, however, ensure that we will be successful.
In 2004, we expect that our research and development ("R&D") expenses will
track somewhat higher than comparative 2003 quarters, but should decline as a
percentage of revenue. R&D projects primarily involve development of new systems
and materials, better throughput, and software enhancements. The R&D group and a
cross-functional team of other disciplines were responsible for also reducing
the material and labor costs of the Dimension and Dimension SST in 2003, with
further cost reductions on this platform expected in the later part of 2004. R&D
expense in the first quarter of 2004 increased by $188,172, or 16.2%, to
$1,346,329, but declined to 8.5% of sales from 10.8% in the first quarter of
2003.
6
Our balance sheet continues to be strong. As of March 31, 2004, our cash
position was approximately $46,600,000, with no debt. In the first quarter of
2004, our cash flow from operations amounted to more than $4,000,000. In short,
we continue to have a very strong balance sheet and cash position to fund our
2004 growth strategy.
Our current and future growth is largely dependent upon our ability to
penetrate new markets, and develop and market new rapid prototyping and 3D
printing 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 implement our strategy for 2004 is subject to
numerous uncertainties, many of which are described in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
the section below captioned "Forward Looking Statements and Factors That May
Affect Future Results of Operations." We cannot ensure that our efforts will be
successful.
Results of Operations
Three months ended March 31, 2004 compared with three months ended March 31,
2003
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated. All items are included in or
derived from our statement of operations.
For the three months
ended March 31,
2004 2003
---- ----
Net sales 100.0% 100.0%
Cost of sales 38.7% 35.8%
Gross margin 61.3% 64.2%
Selling, general, and administrative expenses 35.3% 39.6%
Research & development expense 8.5% 10.8%
Operating income 17.5% 13.8%
Other income .5% 0.5%
Income before taxes 17.9% 14.3%
Income taxes 5.9% 3.6%
Net income 12.0% 10.7%
Net Sales
Net sales for the three months ended March 31, 2004, were $15,846,175,
compared with net sales of $10,677,641 for the three months ended March 31,
2003. This represents an increase of $5,168,534, or 48.4%. Dimension, Dimension
SST, and our T-Class systems, represented by our Titan and Vantage systems, were
very strong in the first quarter of 2004, and recorded a total unit growth rates
of 117.2% as compared with the first quarter of 2003. We also commenced multiple
shipments of the Eden333 system, a product that we distribute in the United
States for Objet Geometries. Revenues from consumables and services, principally
our paid parts business, also increased significantly in the three months ended
March 31, 2004 as compared with the same 2003 period. Consumable revenue was
enhanced by the larger installed base of systems.
North American sales, which include Canada and Mexico, accounted for
approximately 57% of total revenue in the three months ended March 31, 2004, as
compared with approximately 53% in the three months ended March 31, 2003. Total
North American sales, which include systems, services, and consumables, grew by
approximately 59% as compared with international sales growth of approximately
37%. The North American sales growth was aided by sales of Eden333 systems and
paid parts revenue. In 2004, we consolidated our two North American regions
under one national manager and thus no longer report on regional sales
performance. Internationally, our Asia Pacific region, which comprises Japan,
China, the Far East and India, recorded revenues that amounted to approximately
22% of total sales. Europe accounted for approximately 21% of total revenue for
the three months ended March 31, 2004, and demonstrated improvement as compared
with previous quarters. Whereas we expect to report higher revenues and profits
in 2004 over the results achieved in 2003, declining economic conditions in any
of these regions could adversely impact our future sales and profitability.
7
Gross Profit
Gross profit improved to $9,706,135, or 61.3% of sales, in the three months
ended March 31, 2004, compared with $6,857,571 or 64.2% of sales, in the
comparable period of 2003. This represents an increase of $2,848,564, or 41.5%.
Gross profit increased due to higher revenues and control over our manufacturing
overhead expenses. As a percentage of revenues, the decline to 61.3% was
principally due to the mix of products that we sold, which was heavily weighted
to Dimension and Eden333 systems that have lower margins than many of our other
systems. Additionally, inventory adjustments amounted to approximately $230,000,
much of which was due to write-downs of our spare parts inventory. This was
prompted by declines in the number of customers that renewed maintenance
contracts on older or discontinued systems.
Operating Expenses
SG&A expenses increased to $5,592,073 for the three months ended March 31,
2004, from $4,230,252 for the comparable period of 2003. This represents an
increase of $1,361,821, or 32.2%. We incurred significant expenses in the first
quarter of 2004 for promotional, marketing, and channel development activities
related to new or continuing product launches of the Dimension SST, Eden333, and
Triplets systems. Variable commissions, incentives, and travel expenses were
higher in the 2004 period as a result of significantly higher revenues. Higher
expenses were also incurred for additional investor relations and customer
support activities.
R&D expenses increased to $1,346,329 for the three months ended March 31,
2004 from $1,158,157 for the three months ended March 31, 2003. This amounted to
an increase of $188,172, or 16.2%. On higher revenues, R&D expenses declined as
a percentage of sales to 8.5% in the three months ended March 31, 2004, from
10.8% in the 2003 period. Higher contract labor and salary and benefit expenses
accounted for much of the increase. While we remain committed to maintaining R&D
to design new products and materials, to reduce costs on existing products, and
to improve the quality and reliability of all of our platforms, we have had an
on-going objective to control spending levels. As such, R&D expenses in 2004
should increase at a considerably lower rate than that of our revenue growth,
which should have the effect of reducing R&D expenses as a percentage of
revenue.
Operating Income
For the reasons cited above, our operating income for the three months
ended March 31, 2004, amounted to $2,767,733, or 17.5% of sales, compared with
operating income of $1,469,162, or 13.8% of sales, for the three months ended
March 31, 2003. This represents an increase of $1,298,571, or approximately 88%.
Other Income
Other income netted to $75,714 in the three months ended March 31, 2004
compared with other income of $55,603 in the comparable 2003 period. Interest
income increased to $111,747 in the current three-month period, compared with
$36,529 in the three-month period of 2003. The increase in interest income was
primarily due to significantly higher average cash balances, but negatively
impacted by declining interest rates. Interest expense, primarily due to the
mortgage on our manufacturing facility, amounted to $41,312 in the period ended
March 31, 2003. We paid off the mortgage in late 2003. In the three months ended
March 31, 2004, we recognized a loss from foreign currency transactions related
to the euro of approximately $87,000, which compared with income on foreign
currency transactions related to the euro of $77,000 in the same period of 2003.
8
Income Taxes
Income tax expense amounted to $938,338, or 5.9% of sales, in the three
months ended March 31, 2004, compared with $381,192, or 3.6% of sales, for the
three months ended March 31, 2003. The effective tax rate for the first quarter
of 2004 amounted to 33%. We believe that our effective tax rate should range
between 32% and 34% in 2004, depending principally on volume and the levels of
foreign sales.
Net Income
For the reasons cited above, our net income for the three months ended
March 31, 2004, amounted to $1,905,109, or 12.0% of sales, compared with net
income of $1,143,573, or 10.7% of sales, in the comparable 2003 period. This
resulted in earnings per diluted common share of $.18 on 10,702,012 weighted
shares outstanding in the three months ended March 31, 2004, compared with
earnings per diluted common share of $.13 on 8,716,331 weighted shares
outstanding for the comparable period ended March 31, 2003. The earnings per
share and weighted average shares outstanding have been adjusted in all periods
to give effect to the 3:2 stock split that occurred in December 2003.
Liquidity and Capital Resources
We increased our cash and cash equivalents balances to $46,587,394 at March
31, 2004, from $44,544,341 at December 31, 2003, and $17,450,402 at March 31,
2003. The net cash provided by our operating activities over the past two years
has amounted to approximately $7,100,000, principally derived from net income
and working capital management.
In the three months ended March 31, 2004, net cash provided by our
operating activities amounted to $4,022,525, compared with $3,152,306 in the
comparable 2003 period. The principal source of cash from our operating
activities has been our net income, as adjusted to exclude the effects of
non-cash charges, and changes in working capital, primarily inventories and
accounts receivable, and in the 2004 period, a large reduction in our prepaid
expenses. Our net accounts receivable balance declined slightly to $15,680,356
in the first quarter of 2004 from $15,788,095 as of December 31, 2003, which was
principally due to large first quarter revenue coupled with strong collections.
A larger number of orders than we had anticipated shipped in the last part of
the fourth quarter of 2003, which resulted in the strong first quarter
collections. Our accounts receivable balance as of March 31, 2003, was
$9,473,963, which was considerably lower than the balance as of March 31, 2004,
due to significantly lower sales in the 2003 period. Throughout 2003 and
continuing in 2004, we introduced tighter controls in our credit and collections
areas. Some of our international distributors, however, have continued to carry
high balances, some of which have exceeded our normal terms. Whereas several of
these international distributors have significantly improved their position with
us since 2003, others have improved more slowly, thus resulting in DSO's of
approximately 90 days, a slight improvement over the DSO's of 91 days reported
as of December 31, 2003.
For the quarters ended March 31, 2004 and 2003, our inventory balances have
increased to $7,266,595 from $6,759,453, respectively. We have instituted better
inventory management, but recognize that we have opportunities to make
considerably more improvement to reduce overall inventory and improve turns.
Over the two-year period, inventory turns have improved to 2.8 times in the
quarter ended March 31, 2004, from about 2.0 times in the comparable 2003
period. The increase in inventory in the current period is principally due
expected higher future sales volume. A significant portion of our inventory is
dedicated to fulfill our service contract and warranty obligations. As we have
introduced several new products over the last several quarters, there are many
more platforms and models to service than in the past, which increases the
requirements to maintain spare parts inventory. With the introduction of these
new products, older products have been discontinued. However, inventory for
these discontinued products is still required to fulfill our service contracts.
Our procedures for dealing with this inventory are more fully explained in the
section below captioned "Critical Accounting Policies."
Investments in sales-type leases used cash of $242,323 in the quarter ended
March 31, 2004 and none in the preceding year. In mid-2003 we introduced a
leasing program that was principally designed for the Dimension product. The
program has enabled us to offer an attractive leasing solution to approximately
40 customers in 2003 and approximately 10 new customers in 2004. We will
continue to offer this program, and intend to broaden it in 2004 to include
accounts interested in our high-performance systems.
9
Prepaid expenses provided cash of $1,542,949 in the first quarter of 2004
as compared with $135,682 in the comparable 2003 period. Much of the change in
the first quarter of 2004 was due to our success in selling Eden333 systems that
involved advance payments associated with our Objet distributor agreement that
off-set inventory purchases in the first quarter of 2004.
Our investing activities used cash of $2,273,313 and $463,814 in the three
months ended March 31, 2004 and 2003, respectively. In the first quarter of 2004
we acquired a 40,000 sq. ft. manufacturing facility and land near our current
manufacturing facility to accommodate expansion of our consumable and paid parts
businesses. We paid approximately $1,230,000 for the building and land.
Additional costs for improvements and modifications of this facility should
amount to approximately $300,000 in the second and third quarters of 2004.
Machinery and equipment acquisitions, including the transfer of systems used in
our paid parts business, amounted to approximately $917,000 in the quarter ended
March 31, 2004, as compared with $380,773 in the quarter ended March 31, 2003.
Much of the increase in capital expenditures in 2004 were for equipment required
by the fastest growing components of our business, including consumable
manufacturing and paid parts. Net cash used for payments of intangible assets,
including patents and capitalized software, amounted to $126,463 and $83,041 for
the periods ended March 31, 2004 and 2003, respectively
Our financing activities provided cash of $320,150 and $589,846 in the three
months ended March 31, 2004 and 2003, respectively. This was primarily due to
the proceeds from the exercise of stock options.
For 2004, we expect to use our cash for the following purposes:
o the purchase and improvement of our new manufacturing facility;
o the continuation of our leasing program;
o the expansion of our paid parts business;
o working capital purposes;
o improvements and upgrades to our existing manufacturing facility;
o new product and materials development;
o sustaining engineering;
o the acquisition of equipment, including production equipment, tooling,
and computers;
o the purchase or development of intangible assets, including patents;
increased selling and marketing activities, especially as they relate to
the continued Dimension market and channel development as well as the
Eden333 market development;
o acquisitions and/or strategic alliances; and for our common stock
buyback program.
While we believe that the primary source of liquidity during 2004 will be
derived from current cash balances and cash flows from operations, we have
maintained a line of credit for the lesser of $4,000,000 or a defined borrowing
base. To date, we have not borrowed against this credit facility.
The Company has a stock repurchase plan with an authorization from its
Board of Directors to use up to $10 million for the repurchase of its shares.
The shares may be purchased from time to time at prevailing prices in the open
market or by block purchases. The Company did not repurchase any shares for the
three months ended March 31, 2004. The Company may, however, repurchase its
shares under the existing authorization, depending on market conditions and cash
availability. The Company believes that funds from future operating cash flows
and cash on hand are adequate to allow it to repurchase its shares under the
stock repurchase plan.
As of March 31, 2004, we had gross accounts receivable of $16,484,462, less
an allowance of $804,106 for returns and doubtful accounts. Historically, our
bad debt expense has been minimal. However, at March 31, 2004, large balances
were concentrated with certain international distributors, and some of these
balances exceed our payment terms. Default by one or more of these distributors
or customers could result in a significant charge against our current reported
earnings. We have reviewed our policies that govern credit and collections, and
will continue to monitor them in light of current payment status and economic
conditions. While we can give no assurances, we believe that most, if not all,
of the accounts receivable balances will ultimately be collected. For further
information, see the section below captioned "Critical Accounting Policies."
Our total current assets amounted to $72,342,847 at March 31, 2004, the
majority of which consisted of cash and cash equivalents, inventories and
accounts receivable. Total current liabilities amounted to $11,095,348. We have
no debt. We estimate that we will spend approximately $4,000,000 in 2004 for
property and equipment, which includes the purchase of our manufacturing
facility mentioned above. As of March 31, 2004, we estimate that material
commitments for inventory purchases from selected vendors for the ensuing
twelve-month period ending March 31, 2005, amounts to approximately $7,900,000.
We intend to finance these purchases from existing cash or from cash flows from
operations.
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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.
Foreign Currency Transactions
We invoice sales to certain European distributors in euros. Our
reported results are therefore subject to fluctuations based upon changes in the
exchange rates of that currency in relation to the United States dollar. In the
quarter ended March 31, 2004, the loss on foreign currency translations related
to the euro amounted to approximately $102,000, whereas in the comparable 2003
period we reported income from foreign currency translations of approximately
$77,000. In the quarter ended March 31, 2004, we hedged approximately
(euro)1,000,000 of our accounts receivable that were denominated in euros. The
hedge resulted in a currency translation gain of approximately $15,000 for this
period. We intend to continue to hedge some of our accounts receivable balances
that are denominated in euros throughout 2004, and will continue to monitor our
exposure to currency fluctuations. Instruments to hedge our risks may include
foreign currency forward, swap, and option contracts. These instruments will be
used to selectively manage risks, but there can be no assurances that we will be
fully protected against material foreign currency fluctuations. We expect to
continue to derive most of our revenue from regions where the transactions are
negotiated, invoiced, and paid in US dollars. Fluctuations in the currency
exchange rates in these other countries may therefore reduce the demand for our
products by increasing the price of our products in the currency of countries in
which the local currency has declined in value.
Critical Accounting Policies
We have prepared our 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. Note 1 of Notes to Consolidated Financial
Statements contains the significant accounting principles that we used to
prepare our consolidated financial statements.
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 different conditions existed, our financial condition or results
of operations could have been materially different. The critical accounting
policies that were affected by the estimates, assumptions, and judgments used in
the preparation of our financial statements are listed below.
Revenue Recognition
We recognize revenue when 1) persuasive evidence of a final agreement
exists, 2) delivery has occurred or services have been rendered, 3) the selling
price is fixed or determinable, and 4) collectability is reasonably assured.
Revenue from system sales is primarily recognized at time of shipment if the
shipment conforms to the terms and conditions of the purchase agreement. Revenue
from sales-type leases is recognized at the time of lessee acceptance, which
follows installation. Revenue from maintenance contracts is recognized ratably
over the term of the contract, usually one year. On certain sales that require a
one-year warranty rather than our standard 90-day warranty, a percentage of the
selling price that represents the extended warranty is deferred and recognized
ratably over the period of the extended warranty as an implied maintenance
contract. This has had the effect of deferring, as of March 31, 2004,
approximately $263,000 of revenue that will be recognized in future periods.
We assess collectability as part of the revenue recognition process. We
evaluate a number of factors to assess collectability, including an evaluation
of the credit worthiness of the customer, past payment history, and current
economic conditions. If it is determined that collectability cannot be
reasonably assured, we would decline shipment, request a down payment, or defer
recognition of revenue until ultimate collectability is more determinable.
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We also record a provision for estimated product returns and allowances in
the period in which the related revenue is recorded. This provision against
current gross revenue is based principally on historical rates of sales returns,
but also factors in changes in the customer base, geographic economic
conditions, and changes in the financial conditions of our customers. If past
trends were to change, we would potentially have to increase or decrease the
amount of the provision for these returns. We have no history as to potential
returns under our lease programs. We will monitor our lease sales in the future,
and if necessary will record a provision for returns on leased systems. As of
March 31, 2004, our allowance for returns was $183,283, as compared with
$198,481 as of December 31, 2003.
Allowance for Doubtful Accounts
While we evaluate the collectability of a sale as part of our revenue
recognition process, we must also make judgments regarding the ultimate
realization of our accounts receivable and notes receivable balances. A
considerable amount of judgment is required in assessing the realization of
these receivables, including the aging of the receivables and the
creditworthiness of each customer. We may not be able to accurately and timely
predict changes to our customer's financial condition. For example, in 2002, a
customer's unanticipated bankruptcy resulted in our recording additional bad
debt expense of approximately $200,000. In 2003, we did not experience a large
write-off, and directly wrote-off smaller balances that in the aggregate
amounted to under $95,000. In the first quarter of 2004, a reseller filed for
bankruptcy that resulted in a direct write-off of approximately $75,000. If a
customer's financial condition should suddenly deteriorate, calling into
question our ability to collect the receivable, our estimates of the realization
of our receivables could be adversely affected. We might then have to record
additional allowances for doubtful accounts, which could have an adverse effect
on our results of operations in the period affected.
Our allowance for doubtful accounts is adjusted quarterly using two
methods. First, our overall reserves are based on a percentage applied to
certain aged receivable categories that are predominately based on historical
bad debt write-off experience. Then, we make an additional evaluation of overdue
customer accounts, for which we specifically reserve. In our evaluation we use a
variety of factors, such as past payment history, the current financial
condition of the customer, and current economic conditions. We also evaluate our
overall concentration risk, which assesses the total amount owed by each
customer, regardless of its current status. Certain of our international
distributors have carried large balances that have become overdue. While these
distributors have paid down their balances and are still considered performing,
we have either converted certain of these accounts receivable to notes
receivables (some of which are collateralized), or placed distributors on
payment plans that strictly limit the amount of new business that we will honor
unless they adhere to the payment plans. A default by one or more of these
distributors could have a material effect, ranging from $300,000 to $800,000, on
our reported operating results in the period affected. As of March 31, 2004, our
allowance for doubtful accounts amounted to $620,822, an increase from the
December 31, 2003 balance of $568,886.
Inventories
Our inventories are recorded at the lower of cost or market, with cost
based on a first-in, first-out basis. We periodically assess this inventory for
obsolescence and potential excess by reducing the difference between our cost
and the estimated market value of the inventory based on assumptions about
future demand and historical sales patterns. Our inventories consist of
materials and products that are subject to technological obsolescence and
competitive market conditions. If market conditions or future demand are less
favorable than our current expectations, additional inventory write downs or
reserves may be required, which could have an adverse effect on our reported
results in the period the adjustments are made. Additionally, engineering or
field change orders ("ECO" and "FCO", respectively) introduced by our
engineering group could suddenly create extensive obsolete and/or excess
inventory. Although our engineering group considers the estimated effect that an
ECO or FCO would have on our inventories, a mandated ECO or FCO could have an
immediate adverse affect on our reported financial condition if they required
the use of different materials in either new production or our service
inventory.
Some of our inventory is returned to us by our customers and refurbished.
This refurbished inventory, once fully repaired and tested, is functionally
equivalent to new production and is utilized to satisfy many of our requirements
under our warranty and service contracts. Upon receipt of the returned material,
this inventory is recorded at a discount from original cost, and further reduced
by estimated future refurbishment expense. While we evaluate this service
material in the same way as our stock inventory (i.e., we periodically test for
obsolescence and excess), this inventory is subject to changing demand that may
not be immediately apparent. Adjustments to this service inventory, following an
obsolescence or excess review, could have an adverse effect on our reported
financial condition in the period when the adjustments are made. In 2003, we
began to review the requirements for service inventory for discontinued products
using the number of active maintenance contracts per product line as the key
determinant for inventory levels and composition. A sudden decline in the number
of customers renewing service agreements in a particular period could lead to an
unanticipated write down of this service inventory for a particular product
line. In the first quarter of 2004, service inventory was reduced by
approximately $90,000 as a result of a 7% decline in the number of maintenance
contracts that were not renewed, principally on older, discontinued products.
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Income Taxes
We comply with SFAS No. 109, "Accounting for Income Taxes," which requires
that deferred tax assets and liabilities be recognized using enacted tax rates
for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. SFAS 109 also requires a valuation allowance if
it is more likely than not that a portion of the deferred tax asset will not be
realized. We have determined that it is more likely than not that our future
taxable income will be sufficient to realize our deferred tax assets.
Our provision for income taxes is based on our effective income tax rate.
The effective rate is highly dependent upon a number of factors, including our
total earnings, the geographic location of sales, the availability of tax
credits, and the effectiveness of our tax planning strategies. We monitor the
effects of these variables throughout the year and adjust our income tax rate
accordingly. However, if our actual results differ from our estimates, we could
be required to adjust our effective tax rate or record a valuation adjustment on
our deferred tax assets. This could have an adverse effect on our financial
condition and results of operations.
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 "expect", "anticipate", "project", "estimate" or "believe" or other
similar words are 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 and 3D printing systems, services and consumables, and our ability
to maintain our gross margins on these sales. The forward-looking statements
include our assumptions about the size of the RP and 3D printing markets, and
our ability to penetrate, compete, and successfully sell our products in these
markets. 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. These forward-looking
statements are based on assumptions, among others, that we will be able to:
o continue to introduce new RP 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;
o successfully develop the 3D printing market with our Dimension and
Dimension SST products, and that the market will accept these products;
o maintain our revenues and gross margins on our present products;
o control our operating expenses;
o expand our manufacturing capabilities to meet the expected demand
generated by our Dimension and Dimension SST systems, our paid parts
business, and our consumable products;
o successfully and profitably distribute and service the Eden333 product
line that is governed by our distributor agreement with Objet
Geometries;
o successfully commercialize polyphenylsulfone ("PPSF") and other new
materials, and that the market will accept these new materials; and
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o will be able to retain and recruit employees with the necessary skills
to produce, develop, 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.
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, auction rate certificates, and sweep instruments with maturities
of less than 90 days. These 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 certificates of deposit that bear interest at fixed rates of 1.35%
to 3.25%. An immediate 10% change in interest 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 are conducted in euros. Therefore, a hypothetical 10%
change in the exchange rates between the U.S. dollar and the euro could increase
or decrease our earnings before taxes by less than $150,000 for the continued
maintenance of our European facility. Throughout 2003 and in the first quarter
of 2004, we hedged (euro)1,000,000 of our accounts receivable balances that were
denominated in euros. A hypothetical 10% change in the exchange rates between
the US dollar and the euro could increase or decrease earnings before taxes by
between $100,000 and $300,000.
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Item 4. Controls and Procedures
Based on their evaluation required by Rule 13a-15(b) or 15a-15(b) under
the Securities Exchange Act of 1934 (the "Exchange Act"), management, including
our Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) were effective as of the end of the period covered by
this report.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
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.
(b) Reports on Form 8-K.
Current Report on Form 8-K, dated February 23, 2004, reporting under Item
12 that the Registrant issued a press release announcing its fourth
quarter and fiscal year 2003 earnings.
Current Report on Form 8-K, dated February 25, 2004, reporting under Item
12 that the Registrant issued a press release announcing its fiscal year
2004 financial guidance.
Current Report on Form 8-K, dated March 31, 2004, reporting under Item 5
that the Registrant issued a press release announcing that its Board of
Directors had authorized the Registrant to repurchase up to $10 million of
its common stock.
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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, 2004 Stratasys, Inc.
By: /s/ Thomas W. Stenoien
-----------------------------------------
Thomas W. Stenoien
Executive Vice President, Secretary and
Chief Financial Officer
(Principal Financial Officer)
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