SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
|☐||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the fiscal year ended December 31, 2017|
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☐||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Date of event requiring this shell company report ........................................
Commission file number: 001-35751
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or Organization)
|c/o Stratasys, Inc.||1 Holtzman Street,|
|7665 Commerce Way||Science Park|
|Eden Prairie,||P.O. Box 2496|
|Minnesota 55344||Rehovot, Israel|
(Address of Principal Executive Offices)
S. Scott Crump, Chairman
of Executive Committee
Tel: (952) 937-3000
7665 Commerce Way
Eden Prairie, Minnesota 55344
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|Title of each class||Name of each exchange on which registered|
|Ordinary Shares, nominal value NIS 0.01 per share||NASDAQ Global Select Market|
Securities registered or to be registered pursuant to Section 12(g) of the Act.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
53,630,699 Ordinary Shares, NIS 0.01 nominal value, at December 31, 2017.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
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 ☒ 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-accelerated filer or an emerging growth company. See definition of “accelerated filer,” large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer ☒||Accelerated filer ☐|
|Non-accelerated filer ☐||Emerging Growth Company ☐|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|International Financial Reporting|
|US GAAP ☒||Standards as issued||Other ☐|
|by the International Accounting Standards|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
|TABLE OF CONTENTS|
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS||1|
|USE OF TRADE NAMES||2|
|CERTAIN TERMS AND CONVENTIONS||2|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.||3|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE.||3|
|ITEM 3.||KEY INFORMATION.||3|
|ITEM 4.||INFORMATION ON THE COMPANY.||20|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS.||42|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS.||42|
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.||63|
|ITEM 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.||79|
|ITEM 8.||FINANCIAL INFORMATION.||81|
|ITEM 9.||THE OFFER AND LISTING.||83|
|ITEM 10.||ADDITIONAL INFORMATION.||83|
|ITEM 11.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.||95|
|ITEM 12.||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.||95|
|ITEM 13.||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.||95|
|ITEM 14.||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.||95|
|ITEM 15.||CONTROLS AND PROCEDURES.||96|
|ITEM 16A.||AUDIT COMMITTEE FINANCIAL EXPERT.||96|
|ITEM 16B.||CODE OF ETHICS.||96|
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES.||97|
|ITEM 16D.||EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.||97|
|ITEM 16E.||PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.||97|
|ITEM 16F.||CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.||97|
|ITEM 16G.||CORPORATE GOVERNANCE.||97|
|ITEM 16H.||MINE SAFETY DISCLOSURE.||98|
|ITEM 17.||FINANCIAL STATEMENTS.||98|
|ITEM 18.||FINANCIAL STATEMENTS.||98|
Certain information included or incorporated by reference in this annual report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are identified.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
the extent of our success at introducing new or improved products and solutions that gain market share;
the extent of growth of the 3D printing market generally;
impairments of goodwill or other intangible assets in respect of companies that we acquire;
changes in our overall strategy, including as related to any reorganization activities and our capital expenditures;
the impact of shifts in prices or margins of the products that we sell or services we provide;
the extent of our success at efficiently and successfully integrating the operations of various companies that we have acquired or may acquire;
the impact of competition and new technologies;
global market, political and economic conditions, and in the countries in which we operate in particular;
government regulations and approvals;
litigation and regulatory proceedings;
infringement of our intellectual property rights by others (including for replication and sale of consumables for use in our systems), or infringement of others’ intellectual property rights by us;
the extent of our success at maintaining our liquidity and financing our operations and capital needs;
impact of tax regulations on our results of operations and financial condition; and
any additional factors referred to in Item 3.D “Key Information - Risk Factors”, Item 4 “Information on the Company”, and Item 5 “Operating and Financial Review and Prospects”, as well as in this annual report generally.
Readers are urged to carefully review and consider the various disclosures made throughout this annual report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Any forward-looking statements in this annual report are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Unless the context otherwise indicates or requires, “Stratasys,” “Objet,” “PolyJet,” “Connex,” “J750,” “FDM,” “Fortus,” “Fortus 900mc,” “Fortus 450mc,” “Fortus 380mc,” “F123 Series,” “F370,” “Stratasys Direct Manufacturing,” “SDM,” “Solidscape,” “SolidJet,” “SCP,” “GrabCAD,” “GrabCAD Print,” “GrabCAD Community,” “Robotic Composite,” “Infinite-Build,” “MakerBot,” “Thingiverse,” “Replicator,” and all product names and trade names used by us in this annual report are our trademarks and service marks, which may be registered in certain jurisdictions. Although we have omitted the “®” and “TM” trademark designations for such marks in this annual report, all rights to such trademarks and service marks are nevertheless reserved. Furthermore, the Stratasys Signet design logo is our property. This annual report contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
In this annual report, unless the context otherwise requires:
references to “Stratasys,” “our company,” “the Company,” “the combined company,” “the registrant,” “we,” “us,” and “our” refer to Stratasys Ltd. (formerly known as Objet Ltd.), and its consolidated subsidiaries;
references to “Objet” generally refer to Objet Ltd. and its consolidated subsidiaries prior to the effective time of the Stratasys- Objet merger on December 1, 2012. We may also use “Objet” to refer to the line of products previously sold by Objet Ltd. and the related current, ongoing operations that have continued following the Stratasys-Objet merger.
references to “Stratasys, Inc.” generally refer to Stratasys, Inc., a Delaware corporation, and its consolidated subsidiaries prior to the effective time of the Stratasys-Objet merger, but sometimes (as the context requires) refer to the current, ongoing operations of our Stratasys, Inc. subsidiary;
references to the “Stratasys-Objet merger”, or the “merger”, refer to the merger consummated on December 1, 2012 whereby Stratasys, Inc., a Delaware corporation, merged with and into an indirect, wholly-owned Delaware subsidiary of Objet Ltd. (now known as Stratasys Ltd.), an Israeli company, with Stratasys, Inc. surviving the merger and becoming an indirect, wholly-owned subsidiary of Objet (which changed its name to Stratasys Ltd. at that time);
references to the “Stratasys-Objet merger agreement” refer to the Agreement and Plan of Merger, dated as of April 13, 2012, as amended, by and among Stratasys, Inc.; Objet Ltd.; Seurat Holdings Inc., a Delaware corporation and an indirect, wholly- owned subsidiary of Objet (“Holdco”); and Oaktree Merger Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Holdco, pursuant to which the merger was consummated;
references to “ordinary shares”, “our shares” and similar expressions refer to our Ordinary Shares, nominal value NIS 0.01 per share;
references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;
references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
references to the “articles” or “amended articles” are to our Amended and Restated Articles of Association, which became effective upon the closing of the merger, as subsequently amended;
references to the “Companies Law” are to Israel’s Companies Law, 5759-1999, as amended;
references to the “Securities Act” are to the Securities Act of 1933, as amended;
references to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
references to “NASDAQ” are to the Nasdaq Stock Market; and
references to the “SEC” are to the United States Securities and Exchange Commission.
A. Selected Financial Data.
The below historical selected consolidated statement of operations data for the years 2017, 2016, and 2015, and the selected consolidated balance sheet data at December 31, 2017 and 2016 have been derived from our audited consolidated financial statements set forth elsewhere in this annual report. The below selected consolidated statements of operations data for 2014 and 2013, and the selected consolidated balance sheet data as of December 31, 2015, 2014 and 2013, have been derived from our previously reported audited consolidated financial statements, which are not included in this annual report. The selected financial data should be read in conjunction with our consolidated financial statements and accompanying notes and “Operating and Financial Review and Prospects” appearing in Item 5 of this annual report, and are qualified entirely by reference to such consolidated financial statements. Our historical results set forth herein are not necessarily indicative of our future results.
|Year Ended December 31,|
|(U.S. $ in thousands, except per share data)|
|Statement of Operations Data:|
|Research and development expense, net||96,237||97,778||122,360||82,270||52,310|
|Selling, general and administrative expense||255,685||307,114||434,619||351,993||202,040|
|Change in fair value of obligations in connection with acquisitions||1,378||(872||)||(23,671||)||(26,150||)||754|
|Net loss attributable to Stratasys Ltd.||(39,981||)||(77,219||)||(1,372,835||)||(119,420||)||(26,954||)|
|Net loss per basic share attributable to Stratasys Ltd.||(0.75||)||(1.48||)||(26.64||)||(2.39||)||(0.64||)|
|Weighted average basic shares outstanding||52,959||52,330||51,592||50,019||42,079|
|Net loss per diluted share attributable to Stratasys Ltd.||(0.75||)||(1.48||)||(26.64||)||(2.39||)||(0.68||)|
|Weighted average diluted shares outstanding||52,959||52,582||51,592||50,019||42,099|
|Balance Sheet Data:|
*We adopted a new accounting guidance which requires classification of deferred tax assets and liabilities as noncurrent on the balance sheet on a prospective basis. All deferred taxes are classified as non-current on our balance sheets commencing December 31, 2015. Prior periods were not retrospectively adjusted.
B. Capitalization and Indebtedness.
C. Reasons for the Offer and Use of Proceeds.
D. Risk Factors.
You should carefully consider the risks described below, together with all of the other information in this annual report on Form 20-F. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of these risks actually materializes, our business, financial condition and results of operations could suffer and the price of our shares could decline.
Risks related to our business and financial condition
We may not be able to introduce new 3D printers, high-performance systems and consumables acceptable to customers or to improve the technology, software or consumables used in our current systems in response to changing technology and end-user needs.
We derive most of our revenues from the sale of additive manufacturing systems and related consumables. The markets in which we operate are subject to rapid and substantial innovation and technological change, mainly driven by technological advances and end-user requirements and preferences, as well as the emergence of new standards and practices. Our ability to compete in these markets depends, in large part, on our success in enhancing our existing products and developing new additive manufacturing systems and new consumables that will address the increasingly sophisticated and varied needs of prospective end-users, and respond to technological advances and industry standards and practices on a cost-effective and timely basis or otherwise gain market acceptance.
Even if we successfully enhance our existing systems or create new systems, it is likely that new systems and technologies that we develop will eventually supplant our existing systems or that our competitors will create systems that will replace our systems. As a result, any of our products may be rendered obsolete or uneconomical by our or others’ technological advances.
Our operating results and financial condition may fluctuate.
The operating results and financial condition of our company may fluctuate from quarter to quarter and year to year and are likely to continue to vary due to a number of factors, many of which will not be within our control. If our operating results do not meet the guidance that we provide to the market place or the expectations of securities analysts or investors, the market price of our ordinary shares will likely decline. Fluctuations in our operating results and financial condition may be due to a number of factors, including those listed below and those identified throughout this “Risk Factors” section:
the degree of market acceptance of our products and services;
the mix of products and services that we sell during any period;
long sales cycles;
changes in our overall strategy, such as related to our cost reduction and reorganization activities and our capital expenditures;
unforeseen liabilities or difficulties in integrating our acquisitions;
changes in the amount that we spend to develop, acquire or license new products, consumables, technologies or businesses;
changes in the amounts that we spend to promote our products and services;
changes in the cost of satisfying our warranty obligations and servicing our installed base of systems;
delays between our expenditures to develop and market new or enhanced systems and consumables and the generation of sales from those products;
development of new competitive products and services by others;
difficulty in predicting sales patterns and reorder rates that may result from multi-tier distribution strategy associated with new product categories such as entry level desktop 3D printers;
impairment charges that we may be required to record in respect of our goodwill and/or other long-lived assets;
Potential cyber attacks against, or other breaches to, our information technologies systems;
litigation or threats of litigation, including intellectual property claims by third parties;
changes in accounting rules and tax laws;
tax benefit that we may record due to partial or full release of valuation allowances against our deferred tax assets;
|●||the geographic distribution of our sales;|
our responses to price competition;
general economic and industry conditions that affect end-user demand and end-user levels of product design and manufacturing;
changes in dollar-shekel and dollar-Euro exchange rates that affect the value of our net assets, revenues and expenditures from and/or relating to our activities carried out in those currencies; and
the level of research and development activities by our company.
Due to all of the foregoing factors, and the other risks discussed in this annual report, you should not rely on quarter-over-quarter and year-over-year comparisons of our operating results as an indicator of our future performance.
If demand for our products and services does not grow as expected, our revenues may stagnate or decline and our profitability may be adversely affected.
The commercial marketplace for additive manufacturing, which was once dominated by conventional methods that do not involve 3D printing technology, has been undergoing a shift towards 3D printing. This is true with respect to prototype development, and to a growing extent, with respect to direct digital manufacturing, or DDM, as an alternative to traditional manufacturing. If the commercial marketplace does not continue to transform towards the broader acceptance of 3D printing and DDM as alternatives for prototype development and traditional manufacturing, or if it adopts 3D printing based on technologies other than the technologies that we use, we may not be able to increase or sustain current or future levels of sales of our products and related materials and services, and our results of operations may be adversely affected as a result.
If additional goodwill or other intangible assets that we have recorded become impaired, we could have to take further significant charges against earnings.
As of December 31, 2017, the carrying value of all of our goodwill and other intangible assets was approximately $529.2 million compared to a carrying value of $563.1 million as of December 31, 2016 and $636.3 million as of December 31, 2015. As of December 31, 2014, however, that carrying value was $1.9 billion. The significant decrease in the carrying value of our goodwill and other intangible assets over the course of 2015 was primarily due to impairment charges of $1.2 billion.
Under accounting principles generally accepted in the United States of America, or GAAP, we are required to review goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. During 2015, we determined that certain indicators of potential impairment existed that required interim goodwill impairment analysis. These indicators included a further significant decline in our market capitalization for a sustained period and weaker than expected operating results of our reporting units for 2015. During 2015, we also tested the recoverability of our purchased intangible assets due to certain indicators of impairment including weaker than expected operating results of our reporting units for 2015, reorganization initiatives for our operations, lower forecasted profitability due to technological and other trends as well as the increased uncertainty in the 3D printing environment.
These tests and analyses, performed in 2015, led to non-cash goodwill impairment charges of $942.4 million and non-cash impairment charges of $278.5 million to our intangible assets. For further information, please see notes 7 and 8 to our consolidated financial statements included elsewhere in this annual report.
We currently have approximately $387 million of goodwill allocated to our Stratasys-Objet reporting unit, which could be subject to impairment in the future, which impairment could result in further significant charges against our earnings and could have a material adverse effect on our results of operations. For further information, please see Note 7 to our consolidated financial statements included elsewhere in this annual report.
Declines in the prices of our products and services, or in our volume of sales, together with our relatively inflexible cost structure, may adversely affect our financial results.
Our business is subject to price competition. Such price competition may adversely affect our ability to maintain the same degree of profitability, especially during periods of decreased demand. Decreased demand also adversely impacts the volume of our systems sales. If our business is not able to offset price reductions resulting from these pressures, or decreased volume of sales due to contractions in the market, by improved operating efficiencies and reduced expenditures, then our operating results will be adversely affected.
Certain of our operating costs are fixed and cannot readily be reduced, which diminishes the positive impact of our reorganization programs on our operating results. To the extent the market for our products slows, or the 3D printing market contracts, we may be faced with excess manufacturing capacity and excess related costs that cannot readily be reduced, which will adversely impact our results of operations.
To the extent that other companies are successful in developing or marketing consumables for use in our systems, our revenues and profits would likely be adversely affected.
We sell a substantial portion of the consumables used in our systems. We attempt to protect against replication of our proprietary consumables through patents and trade secrets and provide that warranties on those systems may be invalid if customers use non-genuine consumables that cause damage to the printer. Other companies have developed and sold, and may continue to develop and sell, consumables that are used with our systems, which may reduce our consumables sales and impair our overall revenues and profitability.
If our product mix shifts too far into lower margin products or our revenues mix shifts significantly towards our AM services business, our profitability could be reduced.
Sales of certain of our existing products have higher margins than others. For instance, our high-end systems and related consumables yield a greater gross margin than our entry-level systems. As some of the sales of our entry-level systems may displace sales of our other systems. If sales of our entry-level desktop 3D printers have the effect of reducing sales of our higher margin products, or if for any other reason, our product mix shifts too far into lower margin products, and we are not able to sufficiently reduce the engineering, production and other costs associated with those products or substantially increase the sales of those products, our profitability could be reduced. A similar negative impact on our gross margins could result due to a significant shift towards revenues generated by our AM parts service business, Stratasys Direct Manufacturing, and which are characterized by lower margins relative to our products.
Until fairly recently, we experienced rapid and significant growth in our operations and intend to continue to grow over the long term, and if we cannot adequately adapt our infrastructure and properly integrate the internal or external sources of our growth in order to generate the intended benefits from it, our results of operations will suffer.
Until 2015, we had experienced rapid and significant growth in our operations, and we intend to continue to grow over the long term. The continued adaptation of our infrastructure to our growth will require, among other things, development of our financial and management controls and management information systems, management of our sales channel, increased capital expenditures, the ability to attract and retain qualified management personnel and the training of new personnel. We cannot be sure that our infrastructure, systems, procedures, business processes and managerial controls will be adequate to support the expected long-term growth in our operations. Any delays in, or problems associated with, implementing, or transitioning to, new or enhanced systems, procedures, or controls to accommodate and support the requirements of our business and operations and to effectively and efficiently integrate acquired operations may adversely affect our ability to meet customer requirements, manage our product inventory, and record and report financial and management information on a timely and accurate basis.
Additional unforeseen difficulties and expenditures that may result from the integration of a new business or technology include:
difficulty transitioning customers and other business relationships to our company;
problems unifying management following a transaction;
the loss of key employees from our existing or acquired businesses;
diversion of management’s attention to the assimilation of the technology and personnel of acquired businesses or new product or service lines; and
difficulties in coordinating geographically disparate organizations and corporate cultures and integrating management personnel with different business backgrounds.
These potential negative effects could prevent us from realizing the benefits of an acquisition transaction or other growth opportunity. In that event, our competitive position, revenues, revenue growth, financial condition, results of operations and liquidity could be adversely affected, which could, in turn, adversely affect our share price and shareholder value.
The markets in which we participate (especially the lower-end market) are competitive. Our failure to compete successfully could cause our revenues and the demand for our products to decline.
We compete for end-users with a wide variety of producers of systems that create models, prototypes, other 3D objects and end-use parts as well as producers of materials and services for these systems, including both additive and subtractive manufacturing methodologies, such as metal extrusion, computer-controlled machining and manual modeling techniques. Our principal competition currently consists of other manufacturers of systems for prototype development and customized manufacturing processes, including 3D Systems Corporation, EOS GmbH, HP, Carbon and EnvisionTEC GmbH, Markforged and, with respect to our entry-level desktop 3D printers, a multitude of companies such as Ultimaker, Formlabs, XYZprinting, and others. Competition with our entry-level desktop 3D printers and our other lower-end products has intensified and is an important factor in the decrease in sales. For our broadened AM parts and services business, our chief competitors consist of 3D Systems Corporation, Materialise, Protolabs and many other smaller service providers. We may face additional competition in the future from other new entrants into the marketplace, including companies that may have significantly greater resources than we have that may become new market entrants or may enter through acquisition or strategic or marketing partnerships with current competitors.
Some of our current and potential competitors have longer operating histories and more extensive name recognition than we have and may also have greater financial, marketing, manufacturing, distribution and other resources than we have. Current and future competitors may be able to respond more quickly to new or emerging technologies and changes in end-user demands and to devote greater resources to the development, promotion and sale of their products than we can. Our current and potential competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less competitive (whether from a price perspective or otherwise). We cannot assure you that we will be able to maintain or enhance our current competitive position or continue to compete successfully against current and future sources of competition.
As part of our growth strategy, we have sought, and will continue to seek, to acquire or to make investments in other businesses, patents, technologies, products or services. Our failure to do so successfully (including, if applicable, to finance such acquisitions or investments on favorable terms and to avoid adverse financial consequences) may adversely affect our financial results.
As part of our growth strategy, we expect to continue to regularly evaluate acquisitions or investments to expand our suite of products and services. Even if we are able to identify a suitable acquisition or investment, we may not be able to consummate any such transaction if we cannot reach an agreement on favorable terms or if we lack sufficient resources to finance the transaction on our own and cannot obtain financing at a reasonable cost or if regulatory authorities prevent such transaction from being consummated. If we proceed with a particular acquisition, we may have to use cash, issue new equity securities with dilutive effects on existing shareholders, incur indebtedness, assume contingent liabilities or amortize assets or expenses in a manner that might have a material adverse effect on our financial condition, results of operations or liquidity. Acquisitions will also require us to record certain acquisition-related costs and other items as current period expenses, which would have the effect of reducing our reported earnings in the period in which an acquisition is consummated. In addition, we could also face unknown liabilities or write-offs due to our acquisitions, which could result in a significant charge to our earnings in the period in which they occur. We will also be required to record goodwill or other long-lived asset impairment charges (if any) in the periods in which they occur, which could result in a significant charge to our earnings in any such period. Further to that risk, during the years ended December 31, 2017, 2016 and 2015, we recorded intangible assets impairment charges of $2.2 million, $17.9 million and $278.5 million, respectively. In addition, during the year ended December 31, 2015, we recorded goodwill impairment charges of $942.4 million, related to our goodwill assigned to companies that we have acquired. For further information on our quantitative assessment for goodwill impairment we performed in 2017, please see Note 7 to our consolidated financial statements included elsewhere in this annual report.
If we are not successful in completing the integration of our constituent companies from our recent acquisitions, the benefits of these later transactions may not be fully realized and the market price of our ordinary shares may be negatively affected.
Since the consummation of the Objet-Stratasys merger in December 2012, we have acquired: Baccio Corporation, or MakerBot, which is the direct parent company of MakerBot Industries, LLC, in August 2013; Solid Concepts Inc., or Solid Concepts, in July 2014; Harvest Technologies Inc., or Harvest Technologies, in August 2014; GrabCAD in September 2014; and other companies. Further integration activities may encounter ongoing difficulties of coordinating our operations, which may include:
coordinating geographically separate organizations;
coordinating sales, distribution and marketing functions, including integration and management of our constituent companies’ sales channels;
consolidating the financial reporting systems and ERP systems of our constituent companies;
management of a substantially larger organization, with an increased number of employees over large geographic distances; and
addressing inconsistencies among the companies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with suppliers, distributors, customers and employees.
As a result of these and other factors, we may not successfully complete the integration of our acquired entities. Furthermore, we may not realize all of the benefits and synergies of the acquired entities in the timeframe anticipated. It is also possible that such continuing integration and coordination arrangements could lead to the loss of members of our senior executive team, diversion of the attention of management, or the disruption or interruption of, or the loss of momentum in, our ongoing business, which could adversely affect our business and financial results. The occurrence of such negative results could adversely affect the market price of our ordinary shares.
Our operations, particularly in integrating the operations of our constituent companies, could suffer if we are unable to attract and retain key management or other key employees.
Our success depends upon the continued service and performance of our senior management and other key personnel. Our executive team is critical to the management of our business and operations, as well as to the development of our strategy. The loss of the services of any members of our senior executive team could delay or prevent the successful implementation of our strategy, or our commercialization of new applications for our systems or other products, or could otherwise adversely affect our ability to manage our company effectively and carry out our business plan. Members of our senior management team may resign at any time. High demand exists for senior management and other key personnel (including scientific, technical and sales personnel) in the additive manufacturing, or AM, industry, and there can be no assurance that we will be able to retain our current key personnel. We experience intense competition for qualified personnel. While we intend to continue to provide competitive compensation packages to attract and retain key personnel, some of our competitors for these employees have greater resources and more experience, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees for our research and development and manufacturing operations, we may be unable to achieve the synergies expected from mergers and acquisitions that we may effect from time to time, or to develop and commercialize new products or new applications for existing products. Furthermore, possible shortages of key personnel, including engineers, in the regions surrounding our Minnesota, New York, California, Texas, Boston or Israeli facilities could require us to pay more to hire and retain key personnel, thereby increasing our costs.
Defects in new products or in enhancements to our existing products could give rise to product returns or product liability, warranty or other claims that could result in material expenses, diversion of management time and attention, and damage to our reputation.
Our products are complex and may contain defects or experience failures or unsatisfactory performance due to any number of issues in design, fabrication, packaging, materials, and/or use within a system. These defects or errors could result in significant warranty, support and repair or replacement costs, cause us to lose market share and divert the attention of our engineering personnel from our product development efforts to find and correct the issue.
This risk of product liability claims may also be greater due to the use of certain hazardous chemicals used in the manufacture of certain of our products. Those hazardous chemicals fall within three different categories (with several of the chemicals falling within multiple categories): irritants, harmful chemicals and chemicals dangerous for the environment. In addition, we may be subject to claims that our 3D printers have been, or may be, used to create parts that are not in compliance with legal requirements or that intellectual property posted by third parties on our Thingiverse and GrabCAD websites infringes the intellectual property rights of others.
Any claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, and damage to our reputation, and could cause us to fail to retain existing end-users or to attract new end-users. Although we maintain product liability insurance, such insurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims, or we may elect to self-insure with respect to certain matters. Costs or payments made in connection with warranty and product liability claims and product recalls or other claims could materially affect our financial condition and results of operations.
Our AM services business, offering parts used as prototypes, benchmarks and end-use parts in general, and in the case of end-use parts, our sales to customers in the aerospace, medical and automotive industries, in particular, makes us more susceptible to product and other liability claims, which characterize operations in those industries. Sales of our 3D printing systems to customers in the aerospace industry similarly carry with them potential liability claims if the parts produced by those systems do not function properly. Any such claims that are not adequately covered by insurance or for which insurance is not available may adversely affect our results of operations and financial condition.
Our digital manufacturing business, Stratasys Direct Manufacturing, produces AM parts, which are used by our customers as prototypes, benchmarks and end-use parts. In particular, we provide these additive manufacturing parts and related services to customers in the aerospace, medical and automotive industries. The sale of end-use parts and the provision of related services in general, and to customers in the foregoing industries in particular, exposes us to possible claims for property damage and personal injury or death, which may result from the use of these end-use parts. We may be potentially liable, in significant amounts, if an aircraft, automotive or medical part, component, or accessory or any other aviation, automotive or medical product that we have sold, produced or repaired fails, or if an aircraft or automobile for which our subsidiaries have provided services or in which their parts are installed crashes, and the cause can be linked to those parts or cannot be determined. A similar risk arises in connection with sales of our 3D printing systems to customers in the aerospace industry to the extent that the parts produced by those printers do not function properly and are responsible for damages. Our SDM service and our company in general carry liability insurance in amounts that we believe are adequate for their risk exposure and commensurate with industry norms. While we intend to monitor our insurance coverage as our additive manufacturing services business and our overall business continue to grow, claims may arise in the future, and that insurance coverage may not be adequate or available to protect our consolidated company in all circumstances. Additionally, we might not be able to maintain adequate insurance coverage for our AM services business and our overall business in the future at an acceptable cost. Any liability claim against our AM services business or our overall business that is not covered by adequate insurance could adversely affect our consolidated results of operations and financial condition.
If our relationships with suppliers for our products and services, especially with single source suppliers of components of our products, were to terminate or our manufacturing arrangements were to be disrupted, our business could be interrupted.
We purchase components and sub-assemblies for our systems, raw materials that are used in our consumables, and AM systems, component parts and raw materials for our Stratasys Direct Manufacturing services business, from third-party suppliers, some of whom may compete with us. While there are several potential suppliers of most of these component parts, sub-assemblies and raw materials that we use, we currently choose to use only one or a limited number of suppliers for several of these components and materials. Furthermore, the suppliers of AM systems and materials used in our SDM parts service may refuse to sell us additional AM systems or component parts and materials for AM systems that our SDM service uses. Our reliance on a single or limited number of vendors involves a number of risks, including:
potential shortages of some key components;
product performance shortfalls, if traceable to particular product components, since the supplier of the faulty component cannot readily be replaced;
discontinuation of a product or certain materials on which we rely;
potential insolvency of these vendors; and
reduced control over delivery schedules, manufacturing capabilities, quality and costs.
In addition, we require any new supplier to become “qualified” pursuant to our internal procedures. The qualification process involves evaluations of varying durations, which may cause production delays if we were required to qualify a new supplier unexpectedly. We generally assemble our systems and parts based on our internal forecasts and the availability of raw materials, assemblies, components and finished goods that are supplied to us by third parties, which are subject to various lead times. If certain suppliers were to decide to discontinue production of an assembly, component or raw material that we use, the unanticipated change in the availability of supplies, or unanticipated supply limitations, could cause delays in, or loss of, sales, increased production or related costs and consequently reduced margins, and damage to our reputation. If we were unable to find a suitable supplier for a particular component, material or compound, we could be required to modify our existing products or the end-parts that we offer to accommodate substitute components, material or compounds.
In particular, we rely on a sole supplier, Ricoh Printing Systems America, Inc., or Ricoh, for the printer heads for our PolyJet 3D printers. Under the terms of our agreement with Ricoh, we purchase printer heads and associated electronic components, and receive a non-transferable, non-exclusive right to assemble, use and sell these purchased products under Ricoh’s patent rights and trade secrets. Due to the risk of a discontinuation of the supply of Ricoh printer heads and other key components of our products, we maintain excess inventory of those printer heads and other components. However, if our forecasts exceed actual orders, we may hold large inventories of slow-moving or unusable parts or raw materials, which could result in inventory write offs or write downs and have an adverse effect on our cash flow, profitability and results of operations. See “Item 4. Information on the Company—Business Overview—Manufacturing and Suppliers—Inventory and Suppliers—Ricoh Agreement” for further discussion of this agreement.
Discontinuation of operations at our manufacturing sites could prevent us from timely filling customer orders and could lead to unforeseen costs for us.
We assemble and test the systems that we sell, and, in many cases, produce consumables for our systems, at single facilities in various locations that are specifically dedicated to separate categories of systems and consumables. We similarly rely on a single facility for assembly of the component parts and materials for AM systems that our SDM service uses. Because of our reliance on all of these production facilities, a disruption at any of those facilities could materially damage our ability to supply 3D printers, other systems or consumable materials to the marketplace in a timely manner. Depending on the cause of the disruption, we could also incur significant costs to remedy the disruption and resume product shipments. Such disruptions may be caused by, among other factors, earthquakes, fire, flood and other natural disasters. Accordingly, any such disruption could result in a material adverse effect on our revenue, results of operations and earnings, and could also potentially damage our reputation.
A loss of, or reduction in revenues from, a significant number of our resellers and our independent sales agents would impair our ability to sell our products and services and could reduce our revenues and adversely impact our operating results.
We rely heavily on our network of resellers and independent sales agents to sell and (in the case of resellers) to service our products for end-users in their respective geographic regions. These resellers and sales agents may not be as effective in selling our products or servicing our end-users as we are. Further, if our relationships with a significant number of these resellers and sales agents were to be terminated or if a significant number of these resellers and sales agents would otherwise fail or refuse to sell our products, we may not be able to find replacements that are as qualified or as successful in a timely manner, if at all. If these resellers and independent sales agents do not perform as anticipated or if we are unable to find qualified and successful replacements, our sales will suffer, which would have an adverse effect on our revenues and operating results. Additionally, a default by one or more resellers that have a significant receivables balance could have an adverse financial impact on our financial results.
Our business model is predicated in part on building an end-user base that will generate a recurring stream of revenues through the sale of our consumables. If that recurring stream of revenues does not develop as expected, or if our business model changes as the industry evolves, our operating results may be adversely affected.
Our business model is dependent in part on our ability to maintain and increase sales of our proprietary consumables as they generate recurring revenues. Existing and future end-users of our systems may not purchase our consumables at the same rate at which end-users currently purchase those consumables. In addition, our entry-level systems generally use a lower volume of consumables relative to our higher end systems. If our current and future end-users purchase a lower volume of our consumables, or if our entry level systems represent an increasing percentage of our future installed base mix uses less consumables than our current installed base, our recurring revenue stream relative to our total revenues would be reduced, and our operating results would be adversely affected.
Global economic, political and social conditions may adversely impact our sales.
Uncertainty with respect to the global economy, difficulties in the financial services sector and credit markets, geopolitical uncertainties and other macroeconomic factors all affect spending behavior of potential end-users of our products and services. The uncertain prospects for economic growth in some of the regions in which we sell our products may cause end-users to delay or reduce technology purchases. We also face risks that may arise from financial difficulties experienced by our end-users, suppliers and distributors, which may be exacerbated by continued uncertainty in the global economy, including:
reduced end-user demand for products and reduced manufacturing activity levels;
distributors and end-users may be unable to obtain credit financing to finance purchases of our products;
suppliers may be unable to obtain credit financing to finance purchases of sub-assemblies used to build components of products or purchases of raw materials to produce consumables;
end-users or distributors may face financial difficulties or may become insolvent, which could lead to our inability to obtain payment for our products; and
key suppliers of raw materials, finished products or components used in our products and consumables may face financial difficulties or may become insolvent, which could lead to disruption in the supply of systems, consumables or spare parts to our end-users.
Our existing and planned international operations currently expose us and will continue to expose us to additional market and operational risks, and failure to manage these risks may adversely affect our business and operating results.
We expect to derive a substantial percentage of our sales from international markets. We derived 40% of our sales in 2017 from countries outside of North America. Accordingly, we face significant operational risks from doing business internationally, including:
fluctuations in foreign currency exchange rates;
potentially longer sales and payment cycles;
potentially greater difficulties in collecting accounts receivable;
potentially adverse tax consequences;
reduced protection of intellectual property rights in certain countries, particularly in Asia and South America;
difficulties in staffing and managing foreign operations;
|●||laws and business practices favoring local competition;|
costs and difficulties of customizing products for foreign countries;
compliance with a wide variety of complex foreign laws, treaties and regulations;
tariffs, trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets; and
being subject to the laws, regulations and the court systems of many jurisdictions.
Our failure to manage the market and operational risks associated with our international operations effectively could limit the future growth of our business and adversely affect our operating results.
We are subject to environmental laws due to the import and export of our products, as well as environmental, health and safety laws and regulations related to our operations and the use of our systems, which could subject us to compliance costs and/or potential liability in the event of non-compliance.
The export of our products internationally from our production facilities subjects us to environmental laws and regulations concerning the import and export of chemicals and hazardous substances such as the United States Toxic Substances Control Act, or TSCA, and the Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH. These laws and regulations require the testing and registration of some chemicals that we ship along with, or that form a part of, our systems and other products. If we fail to comply with these or similar laws and regulations, we may be required to make significant expenditures to reformulate the chemicals that we use in our products and materials or incur costs to register such chemicals to gain and/or regain compliance. Additionally, we could be subject to significant fines or other civil and criminal penalties should we not achieve such compliance.
We are furthermore subject to extensive environmental, health and safety laws, regulations and permitting requirements in multiple jurisdictions due to our use of chemicals and production of waste materials as part of our operations and in connection with the operation of our systems by our customers. These laws, regulations and requirements (which include the Directive on Waste Electrical and Electronic Equipment of the European Union (EU) and the EU Directive on Restriction of Use of Certain Hazardous Substances) govern, among other things, the generation, use, storage, registration, handling and disposal of chemicals and waste materials, the presence of specified substances in electrical products, the emission and discharge of hazardous materials into the ground, air or water, the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals and other waste materials and the health and safety of our employees. Under these laws, regulations and requirements, we could also be subject to liability for improper disposal of chemicals and waste materials, including those resulting from the use of our systems and accompanying materials by end-users. These or future laws and regulations could potentially require the expenditure of significant amounts for compliance and/or remediation. If our operations fail to comply with such laws or regulations, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to hazardous substances that we generate, use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental laws allow for strict, joint and several liabilities for remediation costs, regardless of fault. We may be identified as a potentially responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theft and/or reputational damage from cyber attacks, which may compromise our systems and lead to data leakage either internally or at our third party providers. Both data that has been inputted into our main IT platform, which covers records of transactions, financial data and other data reflected in our results of operations, as well as data related to our proprietary rights (such as research and development, and other intellectual property- related data), are subject to material cyber security risks. Our IT systems have been, and are expected to continue to be, the target of malware and other cyber attacks. To date, we are not aware that we have experienced any loss of, or disruption to, material information as a result of any such malware or cyber attack.
We have invested in advanced protective systems to reduce these risks, some of which have been installed and others that are still in the process of installation. Based on information provided to us by the suppliers of our protective systems, we believe that our level of protection is in keeping with the customary practices of peer technology companies. We also maintain back-up files for much of our information, as a means of assuring that a breach or cyber attack does not necessarily cause the loss of that information. We furthermore review our protections and remedial measures periodically in order to ensure that they are adequate.
Despite these protective systems and remedial measures, techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate these techniques or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful in preventing compromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain that our remedial measures will fully mitigate the adverse financial consequences of any cyber attack or incident.
Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We generally enter into non-competition agreements with our employees. These agreements prohibit our employees from competing directly with us or working for our competitors or clients for a limited period after they cease working for us. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished. In addition in California, where many employees of our SDM parts service are located, non-competition agreements with employees are generally unenforceable after termination of employment.
As a public company with significant operations in several countries, we are subject to regulation and must comply with reporting and other requirements in a number of jurisdictions and, to the extent that regulatory authorities assert that we are not in compliance, we could be subject to sanctions which, if material, could materially and adversely affect our business.
As a public company with significant operations in Israel, the United States, Europe and many other countries, we are subject to regulation and must comply with reporting and other requirements in a number of jurisdictions. In particular, we are subject to the rules and regulations of the SEC and FINRA, which may elect from time to time to review or investigate our operations, various aspects of our financial statements, our disclosure practices and other matters. As such reviews progress, the regulating agencies may determine that we are and have been in compliance with applicable rules, or they may determine to pursue enforcement actions or other sanctions against us for alleged noncompliance. As an example, on March 3, 2016, the enforcement division of the U.S. Securities and Exchange Commission, or SEC, issued a subpoena to us requesting a number of documents as part of an investigation of the valuations and other calculations we used to assess the impairment of goodwill and/or intangible assets included in the balance sheet in our SEC filings. We cooperated with the SEC and produced documents in the summer of 2016. On September 25, 2017, the SEC notified us that it was closing its investigation of our company and did not intend on recommending an enforcement action by the SEC.
In addition to U.S.-based regulations on our operations, our European activities will be subject to the new European Union General Data Protection Regulation, or GDPR, which will create additional compliance requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data can be used. GDPR will become enforceable on May 25, 2018 and non-compliance may expose entities such as our company to significant fines or other regulatory claims. While we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with these new standards, to the extent that we fail to adequately comply, that failure could have an adverse effect on our business, financial conditions, results of operations and cash flows.
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on our business.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our affiliated entities or our and our affiliates’ respective officers, directors, employees and agents (including distributors of our products) may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Any violation by any of these persons could result in substantial fines, sanctions, civil and/or criminal penalties, or curtailment of operations in certain jurisdictions, and might adversely affect our results of operations. In addition, actual or alleged violations could damage our reputation and ability to do business.
We own a number of our manufacturing and office facilities, which may limit our ability to move those operations. If we were to move some or all of those operations, we could incur unforeseen charges.
We own buildings in Eden Prairie, Minnesota, which we use to conduct our FDM manufacturing and assembly operations, as well as our office facility in Rehovot, Israel and manufacturing facility in Kiryat Gat, Israel. Ownership of these buildings and facilities may adversely affect our ability to move some or all of those operations to other locations that may be more favorable. If we were to move any of those operations to other locations, we may have difficulty selling or leasing the property that we vacate. This risk also applies to the facilities that we lease under non-cancellable lease agreements, where we cannot freely vacate the facilities. These limitations on our ability to move could result in an impairment charge, as occurred in 2015 in respect of some of our leased facilities, which negatively impacted our results of operations, and could, in future periods, once again have an adverse effect on our results of operations.
Default in payment by one or more resellers or customers from which we have large account receivable balances could adversely impact our results of operations and financial condition.
From time to time, our accounts receivable balances have been concentrated with certain resellers or customers. Default by one or more of these resellers 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. In addition, we try to reduce the credit exposures of our accounts receivable by credit limits and credit insurance for many of our customers. However, there can be no assurance that our efforts to identify potential credit risks will be successful. Our inability to timely identify resellers and customers that are credit risks could result in defaults at a time when such resellers or customers have high accounts receivable balances with us. Any such default would result in a significant charge against our earnings and adversely affect our results of operations and financial condition.
We are, and have been in the recent past, subject to litigation. Any current or future lawsuits to which we are subject may have a significant adverse effect on our financial condition or profitability.
We are currently, and have been in the recent past, subject to litigation, and could be subject to further litigation in the future. Most recently, in November 2017, a former employee, whose employment had been terminated by our company in 2008 and who had previously unsuccessfully filed a suit against our company, brought an additional proceeding against us under Section 134 of the Israeli Patent Law seeking compensation and royalties for service inventions he invented while he served as an employee of our company. See “Item 8. Financial Information— Legal Proceedings” for further information concerning this proceeding.
We were furthermore recently subject to four lawsuits, styled as class actions of our shareholders, which were initiated in the United States District Courts for the District of Minnesota, the Southern District of New York, and the Eastern District of New York in February and March, 2015, and which named the Company and certain of our officers as defendants. The lawsuits alleged violations of the Exchange Act in connection with allegedly false and misleading statements concerning our business and prospects. The plaintiffs sought damages and an award of reasonable costs and expenses, including attorneys’ fees. The cases were consolidated for all purposes. On June 30, 2016, the court granted defendants’ motion to dismiss with prejudice and entered judgment in favor of defendants. Following plaintiffs’ appeal, on July 25, 2017, the United States Court of Appeals for the Eighth Circuit entered an order and judgment affirming the court’s dismissal with prejudice.
While we intend to mount vigorous defenses to the above-described proceeding under the Israeli Patent Law and any additional lawsuits brought against us, we can provide no assurance as to the outcome of any such lawsuits, and any such actions may result in judgments against us for significant damages. Resolution of any such matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigation and other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements. Regardless of the outcome, litigation has resulted in the past, and may result in the future, in significant legal expenses and require significant attention and resources of management. As a result, any present or future litigation could result in losses, damages and expenses that have a significant adverse effect on our financial condition or profitability.
We rely on our management information systems for inventory management, distribution, and other key functions. If our information systems fail to adequately perform these functions, or if we experience an interruption in their operation, our business and operating results could be adversely affected.
The efficient operation of our business is dependent on our management information systems. We rely on our management information systems: to, among other things, effectively manage our accounting and financial functions, including maintaining our internal controls; to manage our manufacturing and supply chain processes; and to maintain our research and development data. The failure of our management information systems to perform properly could disrupt our business and product development, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business and operating results to suffer. Although we take steps to secure our management information systems, including our computer systems, intranet and internet sites, email and other telecommunications and data networks, the security measures we have implemented may not be effective and our systems may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including unauthorized access or security breaches, natural or man-made disasters (such as floods or earthquakes), cyber-attacks, computer viruses, power loss, or other disruptive events. Our reputation, brand, and financial condition could be adversely affected if, as a result of a significant cyber event or otherwise, our operations are disrupted or shut down; our confidential, proprietary information is stolen or disclosed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we must dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.
Risks related to our intellectual property
If we are unable to obtain patent protection for our products or otherwise protect our intellectual property rights, our business could suffer.
We rely on a combination of patent and trademark laws in the United States and other countries, trade secret protection, confidentiality agreements and other contractual arrangements with our employees, end-users and others to maintain our competitive position. In particular, our success depends, in part, on our ability, and the ability of our licensors, to obtain patent protection for our and their products, technologies and inventions, maintain the confidentiality of our and their trade secrets and know-how, operate without infringing upon the proprietary rights of others and prevent others from infringing upon our and their proprietary rights.
Despite our efforts to protect our proprietary rights, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies, inventions, processes or improvements. We cannot assure you that any of our existing or future patents or other intellectual property rights will not be challenged, invalidated or circumvented, or will otherwise provide us with meaningful protection. Our pending patent applications may not be granted, and we may not be able to obtain foreign patents or pending applications corresponding to our U.S. patents. The laws of certain countries, such as China, may not provide the same level of patent protection and intellectual property right enforcement as in the United States, so even if we enforce our intellectual property rights or obtain additional patents in China or elsewhere outside of the United States, effective enforcement of such rights may not be effective. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer additive manufacturing systems, consumables or other products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents, and we may not be able to detect the unauthorized use of our proprietary technology or take appropriate steps to prevent such use.
If we attempt enforcement of our intellectual property rights, we may be (as we have been in the past) subject or party to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation, regardless of merit, can be costly and disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business. Any of the foregoing could adversely affect our operating results.
We may be subject to claims that we are infringing, misappropriating or otherwise violating the intellectual property rights of others.
Our products and technology, including the technology that we license from others, may infringe, misappropriate or otherwise violate the intellectual property rights of third parties. Patent applications in the United States and most other countries are confidential for a period of time until they are published, and the publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, the nature of claims contained in unpublished patent filings around the world is unknown to us, and we cannot be certain that we were the first to conceive inventions covered by our patents or patent applications or that we were the first to file patent applications covering such inventions. Furthermore, it is not possible to know in which countries patent holders may choose to extend their filings under the Patent Cooperation Treaty or other mechanisms. In addition, we may be subject to intellectual property infringement claims from individuals, vendors and other companies, including those that have acquired patents in the fields of 3D printing or consumable production for the sole purpose of asserting claims against us.
Under the Israeli Patent Law, 5727-1967, or the Patent Law, we may also be subject to royalty claims for “service inventions” conceived by employees in the course and as a result of or arising from their employment with us. Section 134 of the Patent Law provides that if there is no agreement between an employer and an employee as to whether the employee is entitled to consideration for service inventions, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine these issues. We believe that virtually all of our employees have executed invention assignment agreements in which they have assigned to us their rights to potential inventions and acknowledged that they will not be entitled to additional compensation or royalties from commercialization of inventions. We may, nevertheless, face claims demanding remuneration in consideration for assigned inventions.
In addition to patent infringement and patent-related claims, we may be subject to other intellectual property claims, such as claims that we are infringing trademarks or misappropriating trade secrets. We may also be subject to claims relating to the content on our websites, including third-party content posted on our Thingiverse.com or GrabCAD.com websites. Any intellectual property claims, regardless of the merit or resolution of such claims could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new or existing products. Resolution of such claims may, among other things, require us to redesign infringing technology, enter into costly settlement or license agreements on terms that are unfavorable to us, pay royalties to employees or former employees, or indemnify our distributors and end-users. Any infringement by us or our licensors of the intellectual property rights of third parties may have a material adverse effect on our business, financial condition and results of operations.
If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us, in particular in developing consumables that could be used with our printing systems in place of our proprietary consumables.
We have devoted substantial resources to the development of our technology, trade secrets, know-how and other unregistered proprietary rights. While we enter into confidentiality and invention assignment agreements intended to protect such rights, such agreements can be difficult and costly to enforce or may not provide adequate remedies if violated, and we may not have entered into such agreements with all relevant parties. Such agreements may be breached and confidential information may be willfully or unintentionally disclosed, including by employees who may leave our company and join our competitors, or our competitors or other parties may learn of the information in some other way. The disclosure to, or independent development by, a competitor of any of our trade secrets, know-how or other technology not protected by a patent or other intellectual property system could materially reduce or eliminate any competitive advantage that we may have over such competitor.
This concern could manifest itself in particular with respect to our proprietary consumables that are used with our systems. Portions of our proprietary consumables may not be afforded patent protection. Chemical companies or other producers of raw materials used in our consumables may be able to develop consumables that are compatible to a large extent with our systems, whether independently or in contravention of our trade secret rights and related proprietary and contractual rights. If such consumables are made available to owners of our systems, and are purchased in place of our proprietary consumables, our revenues and profitability would be reduced and we could be forced to reduce prices for our proprietary consumables.
As our patents expire, additional competitors using our technology could enter the market, which could offer competitive printers and consumables, require us to reduce our prices for our products and result in lost sales.
Some of our patents have expired and others will expire in coming years. Upon expiration of those patents, our competitors have introduced, and are likely to continue to introduce, products using the technology previously protected by the expired patents, which products may have lower prices than those of our products. To compete, we may need to reduce our prices for those products, which would adversely affect our revenues, margins and profitability. Additionally, the expiration of our patents could reduce barriers to entry into AM systems, which could result in the reduction of our sales and earnings potential.
Risks related to operations in Israel
Our Israeli headquarters and manufacturing and other significant operations may be adversely affected by political, economic and military instability in Israel.
One of our dual corporate headquarters, as well as our PolyJet system manufacturing facility, all of our PolyJet research and development facilities, one of our two PolyJet consumables manufacturing facilities, one of our FDM manufacturing facilities, and some of our suppliers, are located in central and southern Israel. In addition, many of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. During the winter of 2008-2009, in November 2012 and once again in the summer of 2014, Israel has been engaged in armed conflict with Hamas, a militia group and political party that controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas where some of our manufacturing facilities are located, and negatively affected business conditions in Israel. Any armed conflicts, terrorist activities or political instability in the region, including those related to the unrest in Syria, could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, parties with whom we have agreements involving performance in Israel may claim that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements due to the political or security situation in Israel.
Furthermore, many of our male employees in Israel, including members of our senior management, are obligated to perform one month, and in some cases longer periods, of annual military reserve duty until they reach the age of 45 (or older, for citizens who hold certain positions in the Israeli armed forces reserves), and, in the event of a military conflict (such as the last conflict with Hamas), may be called to active duty. In response to increases in terrorist activity from time to time and as a result of the last conflict with Hamas, there have been periods of significant call-ups of military reservists, and some of our Israeli employees have been called up in connection with armed conflicts. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of Israeli employees or of one or more of our key Israeli employees. Such disruption could materially adversely affect our business and operations.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by our Israeli operations could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions generally and could harm our results of operations.
Your rights and responsibilities as a shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
We are organized under Israeli law. The rights and responsibilities of the holders of our ordinary shares are governed by our amended and restated articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the implications of these provisions that govern shareholders’ actions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions.
Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
These and other similar provisions could delay, prevent or impede an acquisition of our company or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel, the Euro, the Yen and other non-U.S. currencies may negatively affect the earnings of our operations.
We report our financial results and most of our revenues are recorded in U.S. dollars. However, substantially all of the manufacturing, research and development expenses of our Israeli operations, as well as a portion of the cost of revenues, selling and marketing, and general and administrative expenses of our Israeli operations, are incurred in New Israeli Shekels. As a result, we are exposed to exchange rate risks that may adversely affect our financial results. If the New Israeli Shekel appreciates against the U.S. dollar or if the value of the New Israeli Shekel declines against the U.S. dollar at a time when the rate of inflation in the cost of Israeli goods and services exceeds the rate of decline in the relative value of the New Israeli Shekel, then the U.S. dollar cost of our operations in Israel would increase and our results of operations would be adversely affected Our Israeli operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future. We cannot predict any future trends in the rate of inflation or deflation in Israel or the rate of appreciation or devaluation of the New Israeli Shekel against the U.S. dollar. The Israeli annual rate of inflation (deflation) amounted to 0.4%, (0.2%), and (1.0%) for the years ended December 31, 2017, 2016 and 2015, respectively. The annual appreciation (devaluation) of the New Israeli Shekel in relation to the U.S. dollar amounted to 9.8%, 1.5% and (0.3%) for the years ended December 31, 2017, 2016 and 2015, respectively.
We also have substantial revenues and expenses that are denominated in non-US currencies other than the New Israeli Shekel, particularly the Euro. Therefore, our operating results and cash flows are also subject to fluctuations due to changes in the relative values of the U.S. dollar and those foreign currencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter to quarter. Furthermore, to the extent that our revenues increase in regions such as Asia Pacific, where our sales are denominated in U.S. dollars, a strengthening of the dollar against other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.
From time to time we engage in currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel or from fluctuations in the relative values of the U.S. dollar and other foreign currencies in which we transact business, and may result in a financial loss. For further information, please see “Item 11. Quantitative And Qualitative Disclosures About Market Risk” in this annual report.
Calculating our income tax rate is complex and subject to uncertainty. We currently receive Israeli government tax benefits in respect of our Israeli operations. If we do not meet several conditions for receipt of those benefits, or if the Israeli government otherwise decides to eliminate those benefits, they may be terminated or reduced, which would impact our income tax rate and increase our costs.
The computation of income taxes is complex because it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under GAAP. Income taxes for interim quarters are based on a forecast of our effective tax rate for the year, which includes forward-looking financial projections. Such financial projections are based on numerous assumptions, including the expectations of profit and loss by jurisdiction. It is difficult to accurately forecast various items that make up the projections, and such items may be treated as discrete accounting. Examples of items that could cause variability in our income tax rate include our mix of income by jurisdiction, changes in our uncertain tax positions, the application of transfer pricing rules, and tax audits. Future events, such as changes in our business and the tax law in the jurisdictions where we do business, could also affect our rate.
One important assumption that goes into calculation of our tax rate is the tax benefit that we receive in respect of some of our operations in Israel, referred to as “Approved Enterprise” and “Beneficiary Enterprise”, under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. Based on an evaluation of the relevant factors under the Investment Law, including the level of foreign (that is, non-Israeli) investment in our company, we have estimated that our effective tax rate to be paid with respect to all Israeli operations under these benefit programs is 7% to 12%, based on the current balance of activity between our Rehovot, Israel and Kiryat Gat, Israel facilities and the available level of benefits under the law. If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which in 2018 and onwards is set at 23% (the corporate tax rate was 25% and 24% in 2016 and 2017, respectively). In addition to being subject to the standard corporate tax rate, we would be required to refund any tax benefits that we have already received as adjusted by the Israeli consumer price index, plus interest or other monetary penalties. Even if we continue to meet the relevant requirements, the tax benefits that our current “Approved Enterprise” and “Beneficiary Enterprise” receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which may cause our effective tax rate to be materially different than our estimates and could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, via acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs, and that could also adversely affect our effective tax rate and our results of operations.
The Israeli government may furthermore independently determine to reduce, phase out or eliminate entirely the benefit programs under the Investment Law, regardless of whether we then qualify for benefits under those programs at the time, which would also adversely affect our effective tax rate and our results of operations.
Certain Israeli governmental grants that we received for certain of our research and development activities in Israel may restrict our ability to transfer manufacturing operations or technology outside of Israel without obtaining a pre-approval from the relevant authorities and, in certain circumstances, payment of significant amounts to the authorities.
Our Israeli-based research and development efforts were and are financed in part, through grants that we received from the National Technological Innovation Authority, or the Authority (formerly operating as Office of the Chief Scientist of the Ministry of Economy of the State of Israel, or the OCS). Through 2006, Objet received grants from the OCS of approximately $1.5 million, which it repaid in its entirety (including interest thereon) by the end of 2007. More recently, we have received additional funding from the Authority of approximately $5.5 million, in the aggregate (as of December 31, 2017), under several R&D programs to support certain research and development projects in Israel. Such funding is not subject to royalty obligations on our part.
We must comply with the requirements of the Israeli Encouragement of Research, Development and Technological Innovation Law, 5744-1984, or the Innovation Law (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law), and related regulations, with respect to those current and past grants.
When a company develops know-how, technology or products using grants provided by the Authority, the terms of these grants and the Innovation Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel. Even after the repayment of such grants in full, we will remain subject to the restrictions set forth under the Innovation Law, including:
Transfer of know-how outside of Israel. Any transfer of the know-how that was developed with the funding of the Authority, outside of Israel, requires prior approval of the Authority, and the payment of a redemption fee.
Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from Authority-funded programs be carried out in Israel, unless a prior written approval of the Authority is obtained (except for a transfer of up to 10% of the production rights, for which a notification to the Authority is sufficient).
Certain reporting obligations. We, as any recipient of a grant or a benefit under the Innovation Law, are required to file reports on the progress of activities for which the grant was provided as well as on our revenues from know-how and products funded by the Authority. In addition, we are required to notify the Authority of certain events detailed in the Innovation Law.
Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.
The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.
We received grants from the OCS prior to an extensive amendment to the Research Law that came into effect as of January 1, 2016, or the Amendment, which may also affect the terms of existing grants. The Amendment provides for an interim transition period (which has not yet expired), after which time our grants will be subject to terms of the Amendment. Under the Research Law, as amended by the Amendment, the Authority is provided with a power to modify the terms of existing grants. Such changes, if introduced by the Authority in the future, may impact the terms governing our grants.
It may be difficult to enforce a U.S. judgment against us and our officers and directors in Israel or the United States, or to serve process on our officers and directors.
We are organized in Israel. Most of our officers and most of our directors (as of December 31, 2017) reside outside of the United States, and a majority of our assets are located outside of the United States. Therefore, a judgment obtained against us or any of our executive officers and directors in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel.
Risks related to an investment in our ordinary shares
The market price of our ordinary shares may be subject to fluctuation, regardless of our operating results and financial condition. As a result, our shareholders could incur substantial losses.
The market price of our ordinary shares since the Stratasys-Objet merger has been subject to substantial fluctuation. From the start of 2015 through the early part of 2018 (through February 16, 2018), our ordinary shares have traded with closing prices that have ranged from $15.24 to $81.05. The price of our ordinary shares may continue to be subject to substantial fluctuation regardless of our operating results or financial condition due to a number of factors, including:
whether we achieve the perceived benefits of the mergers or acquisitions that we consummate as rapidly or to the extent anticipated by financial or industry analysts;
whether the effects on our business and prospects of the mergers or acquisitions that we consummate are consistent with the expectations of financial or industry analysts;
variations in our and our competitors’ results of operations and financial condition;
market acceptance of our products;
the mix of products that we sell, and related services that we provide, during any period;
changes in earnings estimates or recommendations by securities analysts;
development of new competitive systems and services by others;
our announcements of technological innovations or new products;
delays between our expenditures to develop and market new or enhanced systems and consumables and the generation of sales from those products;
developments concerning intellectual property rights;
changes in the amount that we spend to develop, acquire or license new products, technologies or businesses;
changes in our expenditures to promote our products and services;
changes in the cost of satisfying our warranty obligations and servicing our installed base of systems;
success or failure of research and development projects of the combined company or its competitors;
the general tendency towards volatility in the market prices of shares of technology companies; and
general market conditions and other factors, including factors unrelated to our operating performance.
These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being incurred by our shareholders.
Market prices for securities of technology companies historically have been very volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons unrelated to the operating performance of any one company. In the past, following periods of market volatility, public company shareholders have often instituted securities class action litigation. Such securities litigation could result in substantial costs and divert the resources and attention of our management from our business.
Raising additional capital by issuing securities may cause dilution to our shareholders, and may furthermore be difficult in the current market environment.
We may need or desire to raise substantial capital in the future. Our future capital requirements will depend on many factors, including, among others:
the extent to which we acquire or invest in businesses, products or technologies and other strategic relationships;
our degree of success in capturing a larger portion of additive manufacturing demand;
the costs of establishing or acquiring sales, marketing and distribution capabilities for our products;
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our issued patents and defending intellectual property-related claims; and
the costs of financing unanticipated working capital requirements and responding to competitive pressures.
If we raise funds by issuing equity or convertible debt securities, it will reduce the percentage ownership of our then-existing shareholders, and the holders of such new securities may have rights, preferences or privileges senior to those possessed by our then-existing shareholders.
The current market price for our ordinary shares, which has declined significantly since its all-time high in periods following the Stratasys-Objet merger, also adversely impacts our ability to raise funds in the capital markets.
We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders may not recognize a return, and could potentially suffer a loss, on their investment in our ordinary shares.
We intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of a return on their investment for the foreseeable future.
Even if we decide to pay dividends on our ordinary shares, we may be restricted from doing so or payment of such dividends may have adverse consequences for our company.
Under the Companies Law, dividends may only be paid out of our profits and other surplus funds (as defined in the Companies Law) as of the end of the most recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event that we do not meet the profit and surplus funds criteria, we can seek the approval of an Israeli court in order to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Due to the acquisition method of accounting utilized for the Stratasys-Objet merger and the MakerBot transaction under GAAP, pursuant to which we were deemed to have acquired Objet’s assets, we have incurred and will continue to incur significant annual amounts of depreciation and amortization expense in respect of those assets (see note 2 to our consolidated financial statements appearing in this annual report for more information on the method of accounting for the MakerBot transaction). We are also subject to the risk of impairment charges from time to time to our acquired assets, as occurred in 2015, when we incurred over $1.2 billion in impairment charges. These significant annual expenses under GAAP have reduced, and may continue to reduce or eliminate, our profits and surplus funds as determined under the Companies Law, and, hence, may restrict our ability to pay dividends (absent court approval).
In general, the payment of dividends may also be subject to Israeli withholding taxes. In addition, because we receive certain benefits under the Israeli law relating to “Approved Enterprise” and “Beneficiary Enterprise”, our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes to which we would not otherwise be subject. See “Risks related to our operations in Israel—The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.”
We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which will reduce the level and amount of disclosure that you receive.
As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. Accordingly, you receive less information about our company and trading in our shares by our affiliates than you would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than you would be afforded in holding securities of a domestic U.S. company.
As a foreign private issuer, we are also permitted, and have begun, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed NASDAQ that we follow home country practice in Israel with regard to, among other things, director nomination procedure and approval of compensation of officers. In addition, we have opted to follow home country law instead of the Listing Rules of the NASDAQ Stock Market that require that a listed company obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on The NASDAQ Global Select Market may provide our shareholders with less protection than they would have as shareholders of a domestic U.S. company.
Our status as a foreign private issuer is subject to an annual review and test, and will be tested again as of June 30, 2018 (the last business day of our second fiscal quarter of 2018). If we lose our status as a foreign private issuer, we will no longer be exempt from such rules. Among other things, beginning on January 1, 2019, we would be required to file periodic reports and financial statements on a periodic basis (including both an annual report in respect of 2018 and quarterly reports in respect of each of the quarters of 2019) as if we were a company incorporated in the U.S., which, among other things, could result in increased compliance and reporting costs to us.
If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as they apply to a foreign private issuer, or if our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our share price may suffer.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, which requires a company that is subject to the reporting requirements of the U.S. securities laws to conduct a comprehensive evaluation of its and its subsidiaries’ internal controls over financial reporting. To comply with this statute, we are required to document and test our internal control procedures, and our management is required to assess and issue a report concerning our internal controls over financial reporting, in each case on an annual basis. In addition, our independent registered public accounting firm is required to issue an opinion on the effectiveness on our internal control over financial reporting pursuant to Section 404.
We have prepared for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our management’s report. The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. If our business continues to grow internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure that they remain effective overall. Over the course of testing our internal controls, our management may identify material weaknesses, which may not be remedied in a timely manner on an ongoing basis. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, or if our independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financial results may weaken, and our share price may suffer.
If we are classified as a passive foreign investment company, or PFIC, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of the value of our assets are held for the production of, or produce, passive income, we may be characterized as a PFIC for U.S. federal income tax purposes. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. If we are a PFIC, gain realized by a U.S. shareholder on the sale of our ordinary shares may be taxed as ordinary income (rather than as capital gain income), and an interest charge added to the tax. Rules similar to those applicable to the taxation of gains realized on the disposition of our stock would apply to distributions exceeding certain thresholds.
Although we do not believe that we were a PFIC in 2017, we cannot assure you that the IRS will agree with that conclusion or that we will not become a PFIC in 2018 or in a subsequent year. The tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of our future income and the future value of our assets. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E, “Additional Information—Taxation—U.S. Federal Income Tax Considerations—Tax Consequences if We Are a Passive Foreign Investment Company”.
A. History and Development of the Company
Our legal and commercial name is Stratasys Ltd., and we are the product of the 2012 merger of two leading additive manufacturing companies, Stratasys, Inc. and Objet Ltd. Stratasys, Inc. was incorporated in Delaware in 1989, and Objet Ltd. was incorporated in Israel in 1998, under the name Objet Geometries Ltd., which was changed in 2011 to Objet Ltd. On December 1, 2012, the two companies completed the Stratasys-Objet merger, pursuant to which Stratasys, Inc. became an indirect, wholly-owned subsidiary of Objet Ltd., and Objet Ltd. changed its name to Stratasys Ltd. Also, as part of that transaction, the ordinary shares of Stratasys Ltd. were listed on the NASDAQ Global Select Market under the trading symbol “SSYS”, in place of the listing of the common stock of Stratasys, Inc., which had also traded under that symbol. On August 15, 2013 we acquired Cooperation Technology Corporation, or MakerBot, which was the direct parent company of MakerBot Industries, LLC, a leader in desktop 3D printing, and which owned and operated Thingiverse.com, a website dedicated to the sharing of user-created digital design files. The business of MakerBot (including Thingiverse.com) is now operated by a subsidiary of our company. In July 2014 and August 2014, we completed the acquisitions of Solid Concepts and Harvest Technologies, respectively, two leading providers of additive manufacturing services. Following those last two acquisitions, in 2015, we introduced our branded Stratasys Direct Manufacturing, or SDM, service, which significantly broadened and increased our production and offering of AM parts, which are used by our customers as prototypes, benchmarks and end-use parts.
We have dual headquarters. Our registered office and one of our two principal places of business is located at 1 Holtzman Street, Science Park, P.O. Box 2496, Rehovot 76124, Israel, and our telephone number at that office is (+972)-74-745-4314. Our other principal place of business is located at 7665 Commerce Way, Eden Prairie, Minnesota, and our telephone number there is (952) 937-3000. Our agent in the United States is S. Scott Crump, our Chairman of the Executive Committee, whose address is c/o Stratasys Inc. at the address of our Eden Prairie, Minnesota headquarters. Our World Wide Web address is www.stratasys.com. The information contained on that web site (or on our other web sites, including www.objet.com) is not a part of this annual report. As an Israeli company, we operate under the provisions of Israel’s Companies Law, 5759-1999.
In 2017, 2016 and 2015, our capital expenditures amounted to $23.8 million, $47.1, million and $87.0 million, respectively, of which $22.3 million, $45.1 million and $84.3 million, respectively, was principally related to the purchase (or construction) of property, plant and equipment.
During 2017 and 2016, our principal property and equipment investment was the construction of our new facility at our new property in Rehovot, Israel, which we own, and where we moved our Israeli headquarters during January 2017. This new facility, towards which we paid $9.8 and $18.2 million during 2017 and 2016, respectively, also houses research and development facilities. As of December 31, 2017, we had invested an aggregate of $68.2 million in our new facility in Israel and its related equipment.
During 2015, we made other purchases of property and equipment, mainly for facilities expansion, manufacturing equipment and information technology, primarily for our facilities in the United States, Israel and Germany.
B. Business overview
We are a leading global provider of applied additive technology solutions for industries including aerospace, automotive, healthcare, consumer products and education. For nearly 30 years, we have focused on customers’ business requirements and have sought to create new value for our customers across their product lifecycle processes, from design prototypes to manufacturing tools and final production parts. That customer-centric focus is reflected in our innovation, which is exemplified by our 1,200 granted and pending additive technology patents to date. We operate a 3D printing ecosystem of solutions and expertise, comprised of advanced materials; software with voxel level control; precise, repeatable and reliable fused deposition modeling (FDM) and PolyJet 3D printers; application-based services; on-demand parts and key partnerships. We strive to ensure that our solutions are integrated seamlessly into each customer’s evolving workflow. Our applications are industry-specific and geared towards accelerating business processes, optimizing value chains and driving business performance improvements. Our customers range from individuals and smaller businesses to large, global enterprises, and we include a number of Fortune 100 companies among our customers.
We believe that the range of 3D printing consumable materials that we offer, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-based materials, 158 non-color digital materials, and over 360,000 color variations, is the widest in the industry. Our services offerings include Stratasys Direct Manufacturing printed parts service as well as our professional services.
3D printing, which is also referred to as additive manufacturing, is transforming prototype development manufacturing processes and is displacing (or, in certain cases, complementing) certain segments of traditional, or subtractive, manufacturing methodologies such as metal extrusion, computer-controlled machining and manual modeling techniques. With respect to product design and prototype development, 3D printing significantly improves the design process, reduces the time required for product development and facilitates creativity, while keeping most or all of the design process in-house. 3D printing also enables the direct manufacture of parts that are subsequently incorporated into a user’s end product. In addition, manufacturers are increasingly using 3D printing systems to produce manufacturing tools such as jigs and fixtures, that aid in their production and assembly processes. While 3D printing has historically been focused on design applications, 3D printing is beginning to show signs of adoption for manufacturing applications.
We offer a broad range of systems, consumables and services for 3D printing and additive manufacturing. Our wide range of solutions, based on our proprietary 3D printing technologies and materials, enhance the ability of designers, engineers and manufacturers to:
visualize and communicate product ideas and designs;
verify the form, fit and function of prototypes;
manufacture tools, jigs, fixtures, casts and injection molds used in the process of manufacturing end-products;
manufacture customized and short-run end-products more efficiently and with greater agility; and
produce objects that could not otherwise be manufactured through subtractive manufacturing methodologies.
The primary focus of our 3D printing solutions has been for use in prototyping, tooling and manufacturing, and within the vertical markets of automotive, aerospace, medical, dental, jewelry and education. Our portfolio offers a variety of performance options for our customers, depending on their desired application, as well as on the nature and size of the designs, prototypes or end-products they seek to produce. Our wide range of systems allows us to offer our customers systems at a number of different price points, depending on the features that our customers desire.
We benefit from recurring revenues from the sale of resin and plastic consumables and related services. We provide products and services to our global customer base throughout our offices in North America and internationally, including: Baden-Baden, Germany; Shanghai, China; and Tokyo, Japan, as well as through our worldwide network of approximately 200 agents and resellers. Additionally, through our MakerBot subsidiary, we deploy an online sales channel. We have approximately 2,300 employees and hold more than 1,200 granted patents or pending patent applications worldwide.
Historically, prototype development and customized manufacturing have been performed by traditional methods using metal extrusion, computer-controlled machining, and manual modeling techniques, in which blocks of material are carved or milled into specific objects. These subtractive manufacturing methodologies have numerous limitations. They often require specialist technicians and can be time- and labor-intensive. The time intensity of traditional modeling can leave little room for design error or subsequent redesign without meaningfully impacting a product’s time-to-market and development cost. As a result, prototypes have traditionally been created only at selected milestones late in the design process, which prevents designers from truly visualizing and verifying the design of an object in the preliminary design stage. The inability to iterate a design rapidly hinders collaboration among design team members and other stakeholders and reduces the ability to optimize a design, as time-to-market and optimization become necessary trade-offs in the design process.
3D printing addresses the inherent limitations of traditional modeling technologies through its combination of functionality, quality, ease of use, speed and cost. 3D printing can be significantly more efficient and effective than traditional model-making techniques for use across the design process, from concept modeling and design review and validation, to fit and function prototyping, pattern making and tooling, to direct manufacturing of repeatable, cost-effective parts, short-run parts and customized end products. Introducing 3D modeling earlier in the design process to evaluate fit, form and function can result in faster time-to-market and lower product development costs.
For customized manufacturing, 3D printers eliminate the need for complex manufacturing set-ups and reduce the cost and lead-time associated with conventional tooling. DDM involves the use of 3D production systems for the direct manufacture of parts that are subsequently incorporated into the user’s end product or manufacturing process. DDM is particularly attractive in applications that require short-run or low-volume parts or rapid turn-around, and for which tooling would not be appropriate due to small volumes. DDM also enables the production of objects that have been topologically designed, or designed on the basis of a computerized determination of where to place the key components of the object and how to connect them, a process that is generally unavailable using conventional subtractive manufacturing methodologies.
The first commercial 3D printers were introduced in the early 1990s, and since the early 2000s, 3D printing technology has evolved significantly in terms of price, variety and quality of materials, accuracy, ability to create complex objects, ease of use and suitability for office environments. 3D printing is already replacing traditional prototype development methodologies across various industries such as architecture, automotive, aerospace and defense, electronics, medical, footwear, toys, educational institutions, government and entertainment, underscoring its potential suitability for an even broader range of industries. Additionally, 3D printing has created new applications for model-making in certain new market categories, such as: education, where institutions are increasingly incorporating 3D printing into their engineering and design course programs; dental and orthodontic applications, where 3D printed models are being used as replacements for traditional stone models, implants and surgical guides and for crowns and bridges for casting; and jewelry, where 3D printers are being used to produce custom-designed pieces of jewelry. Furthermore, 3D printing is being used in many industries for the direct digital manufacturing of end-use parts.
Desktop 3D printer usage has shown rapid growth, with the introduction and adoption of affordable entry-level 3D printers and increased availability and content. These entry-level desktop printers have increased market adoption by professional designers and education institutes. We expect that the adoption of 3D printing will continue to increase in the future, in terms of design applications, on the one hand, and DDM applications, on the other. We believe that the expansion of the market will be spurred by increased proliferation of 3D content and 3D authoring tools (3D computer-aided-design, or CAD, and other simplified 3D authoring tools), as well as increased availability of 3D scanners. We also believe that increased adoption of 3D printing will be facilitated by continued improvements in 3D printing technology and greater affordability of entry-level systems. We are active in facilitating the growth of the 3D printing market by bringing intuitive, design-to-3D print solutions to the market. We also believe that the increasing adoption of 3D printing in manufacturing processes serves as an important source of growth in the 3D printing industry.
Range of solutions
We provide an integrated solutions offering for different vertical markets focusing on aerospace, automotive, healthcare and education that includes compatible products and services that are designed for our customers’ use cases and effectively solve their specific applicative needs. Our solutions consist of a broad range of 3D printing systems, consumables, software, paid parts, and strategic consulting and professional services.
Our solutions allow our end-users to print 3D models and parts that enhance their ability to visualize, verify and communicate product designs, thereby improving the design, development and validation processes and reducing time-to-market. Our systems create visual aids for concept modeling and functional prototyping to test fit, form and function, permitting rapid evaluation of product designs. Using presentation models developed with our systems, designers and engineers can typically conduct design reviews and identify potential design flaws earlier in the process and make improvements before incurring significant costs due to re-tooling and rework, allowing them to optimize a design rapidly and cost-effectively.
Our systems also aid in the communication of ideas otherwise communicated in abstract or 2D media. For example, a model produced with our systems may be used as a sales tool, as a model or part display or simply for use in conducting a focus group. It may also be used for collaboration in the product design and manufacturing cycles at multiple locations more quickly, enabling visualization, touch and feel, which can be critical to the product evaluation or sales process.
Our solutions also empower our end-users to quickly and efficiently manufacture parts that are subsequently incorporated into the user’s manufacturing processes and improve its effectiveness. For instance, our solutions enable the production of manufacturing tools such as jigs, fixtures, casts and injection molds that aid in the production and assembly process.
Additive Manufacturing of end-use-parts, using our solutions, is also particularly attractive in applications that require short-run or low-volume parts that require rapid turn-around, and for which tooling would not be cost-efficient due to small volumes, such as various applications in the aerospace, automotive, medical, dental and jewelry industries. Our solutions also enable the production of objects that generally could not otherwise be manufactured through subtractive manufacturing methodologies.
Our solutions offering is characterized by the following distinguishing qualities:
material properties of printed objects, such as heat resistance, toughness, brittleness, elongation-to-break, color and flexibility;
quality of printed objects measured by, among other things, resolution, accuracy and surface quality;
multiple production-grade modeling materials;
reliability of printing systems;
speed of printing, including a one-step automated modeling process;
ability to be used in an office environment;
ease of use; and
automatic, hands-free support removal.
Range of technologies and differentiating factors
Our solutions are driven by our proprietary technologies, brought together through the combination of our constituent companies, each of which was a leader in the 3D printing industry. We hold more than 1,200 granted or pending patents internationally, and our 3D printing systems utilize our patented FDM® and inkjet-based PolyJet™ technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. We believe that our broad range of product and service offerings is a function of our 3D printing technology leadership.
A key attribute of our FDM® 3D printing technology is its ability to use a variety of production grade thermoplastic building materials that feature surface resolution, chemical and heat resistance, color, and mechanical properties necessary for production of functional prototypes and parts for a variety of industries with specific demands and requirements. Use of these materials also enables the production of highly durable end parts as well as objects with soluble cores for the manufacture of hollow parts, the manufacture of which were previously dependent on slower and more expensive subtractive manufacturing technologies.
We believe that this technology is differentiated by a number of factors that make it appropriate for 3D printing and additive manufacturing. These factors include:
the ability to use FDM® systems in an office environment due to the absence of hazardous emissions;
the relative absence of post-production processing;
minimal material waste;
better processing and build repeatability;
ease of use, with minimal system set up requirements;
no need for costly replacement lasers and laser parts; and
a high degree of precision and reliability.
We believe that our inkjet-based 3D printing technology is primarily differentiated from other competing technologies in its ability to scale and deliver high-resolution and multi-material, full-color 3D printing. Our easy-to-use, PolyJet™ 3D printers create high-resolution, smooth surface finish models that have the look, feel and functionality of the final designed product. We offer a wide variety of office-friendly resin consumables, including rigid and flexible (rubber-like) materials and bio-compatible materials for medical applications. Using our PolyJet™ digital materials technology, our solutions also offer the only 3D printing systems that deposit multiple materials simultaneously. This enables users, in a single build process, to print parts and assemblies made of multiple materials that each retain their distinct mechanical and physical properties. For example, users can print objects with both rigid and flexible portions in a single build, or mix different base colors in order to achieve desired color tone. The PolyJet™ technology also enables on-demand mixing of a wide variety of resins to create a wide range of pre-defined digital materials, which are composite materials with modified physical or mechanical and color properties that result from the combination of multiple materials. The wide range of colors in which objects can be printed (over 1,500, as noted below) is another one of the key differentiating attributes for our 3D printers.
Our PolyJet inkjet-based 3D printing technology is also currently distinguished by its ability to offer a wide variety of materials including multi-material printing within a single part, in an office environment system.
We believe that the range of 3D printing consumable materials that we offer, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-based materials, 158 non-color digital materials, and over 360,000 color variations, is the widest in the industry.
We have a diverse set of customers worldwide, with no single customer or group of affiliated customers nor any individual sales agent or group of affiliated sales agents accounting for more than 10% of our sales in 2017, 2016 or 2015. Our solutions are used across a wide array of applications in a variety of different industries.
Our competitive strengths
We believe that the following are our key competitive strengths:
Differentiated product offerings with superior model quality. Our portfolio of 3D printing systems is differentiated through a combination of superior printing qualities, accuracy, print speed, the ability to print a range of materials with varying levels of strength, chemical and heat resistance, color and mechanical properties, the ability to print multiple materials simultaneously and suitability for office environments. Our offering spans the spectrum from entry-level desktop printers to high-end solutions for complex operations. Our FDM-based systems enable highly precise printing of engineering and high-performance thermoplastic materials, enabling a wide range of manufacturing applications with little or no post-production processing. Our PolyJet inkjet-based systems jet ultra-thin layers of material and enables voxel level control of the deposited materials, part realism (multi materials and colors), high accuracy and resolution and smooth finish to printed models. For use with these systems we offer a wide variety of office-friendly resin consumables, including rigid, flexible (rubber-like), transparent and color materials. We believe that we offer the only printing system that utilizes the simultaneous jetting of up to six materials to enable end-users to print models with rigid, flexible and color materials, in virtually unlimited combinations, in a single build.
Integrated solutions offering/ecosystem. We provide an integrated solutions offering that includes compatible products and services that are designed to meet the full gamut of our clients’ needs in an efficient manner, consisting of a broad range of systems, consumables and services, including:
Parts on demand
Partnerships and alliances
Engineering product data management
|●||Enhanced collaboration among industry professionals, via our GrabCAD Community, which provides engineers and designers a resource for CAD models and helps them communicate ideas and share designs.|
Proprietary technology platforms with multidisciplinary technological expertise. We believe that our proprietary 3D FDM and 3D inkjet-based PolyJet printing engines offer end users the versatility and differentiated features necessary for a wide variety of current and potential applications. We combine our proprietary hardware platforms, featuring widely-deployed inkjet printer heads or easy-to-use extrusion heads with integrated software and a wide range of proprietary materials to develop and produce leading 3D printing systems. This allows us to offer a spectrum of 3D printers and printing systems of varying features, capacities and price points, and to migrate the advanced features of our high-end products to our entry-level products with greater efficiency. Our 3D printing solutions integrate innovations in a wide range of scientific disciplines, such as physics, chemistry, and mechanical and electrical engineering, as well as software development. We have made significant investments in developing and integrating technologies into our hardware platform, software and proprietary consumables. We believe that we have a strong base of technology know-how. Our patent portfolio consists of more than 1,200 granted or pending patents internationally. We believe that we have a culture of innovation, and we expect to continue to enhance our solutions both to further drive market adoption of 3D printing and to broaden our market reach.
Leading Direct Manufacturing Business. Our Stratasys Direct Manufacturing service business is one of the largest and leading AM parts service providers globally. This unit’s knowledge of and experience in AM, including materials and systems knowhow, and AM end-use parts production is expected to enhance our DDM offering suite. This unit offers a wide array of underlying printing technologies and materials. Furthermore, Stratasys Direct Manufacturing enables us to offer a broader solution to our customers, catering to more of their 3D printing needs, whether by supply of 3D printers or of 3D printed parts. We believe this offering creates better customer intimacy and a competitive advantage for Stratasys.
Large and growing installed base. Our differentiated offerings have led to a large and growing installed base. The significant installed base has resulted in greater distribution reach and enhanced opportunities for cross selling, given the significantly broadened and complementary product offerings. It furthermore presents us with an opportunity to generate recurring revenues from sales of consumables to the installed base.
Leading position in desktop 3D printing. Our MakerBot Desktop 3D printers provide accessible desktop 3D printers and materials and leading content creation and sharing solutions. We believe that the desktop 3D printing category is poised for future growth driven by broader adoption of 3D printing and an increase the in number of applications where 3D printing is used. We believe our installed base, brand awareness and portfolio of solutions in this category positions us to capitalize on the continued growth of this category.
Diverse, global customer base. We have a broad customer base, ranging from global market leading brands to small businesses and professionals and individuals. Our end-users include companies across a wide range of industries and applications, including automotive, aerospace, architecture, consumer products, educational institutions, defense, medical analysis, medical systems, electronics, and heavy equipment.
Extensive global reach. With approximately 200 channel partners around the world, we are well positioned to leverage the extensive geographic reach of our marketing and sales organization to serve customers and grow awareness of 3D printing for RP and DDM. In addition, through our MakerBot subsidiary we deploy an online sales channel.
Increased accessibility and ease of use for customers. Our newly launched GrabCAD Print software provides easy and accessible 3D printing workflow. Some of our 3D printing systems may be accessed through Solidworks, PTC and Adobe computerized design solutions, which enable wider adoption of our 3D printing solutions by designers and manufacturers in a simplified and more accessible manner. We are collaborating with the above and other leading Computer Aided Design and Product Lifecycle Management solution providers to further enable greater ease of use across the design to production work-flow.
Our growth strategy
The key elements of our strategy for growth include the following:
Identifying new vertical applications for our proprietary 3D printing technologies. We believe that the proliferation of 3D content, advancements in AM technology platforms and the introduction of improved materials will continue to drive growth in 3D printing. We intend to invest in the identification of new applications (especially DDM applications) for which our proprietary printing technologies and materials are appropriate. In addition, we seek relevant niche applications where AM can provide substantial value, and develop a comprehensive solution to address these opportunities. We also intend to encourage existing and potential customers to identify new applications in part by increasing awareness of the features of our technology and product offerings.
Increasing adoption of AM manufacturing solutions. We believe that the adoption of 3D printing for tooling and manufacturing applications can be accelerated through working intimately with our customers and the 3D printing ecosystem, to reduce the complexity of using our solutions. We are investing in developing professional services capabilities to enhance our customers’ ability to use our solutions. In addition, we collaborate with strategic partners in our ecosystem to streamline the integration of 3D printing solutions into the business processes of our customers.
Leveraging our global reach to expand the customer base and further penetrate existing customers. We have a network of approximately 200 resellers and selling agents around the world and various online channels. We intend to reach new customers and increase sales to existing customers by providing access to new solutions that address customers’ specific needs. These solutions include those offered by our Stratasys Direct Manufacturing service. As part of this strategy we intend to grow awareness of 3D printing solutions for RP and DDM and to develop industry specific sales channels as part of our effort to commercialize a broader range of new DDM applications. Additionally, we expect to significantly expand our online presence and leverage our sales channel to the broader public.
Driving further adoption through desktop systems. We expect to drive market adoption through increased sales of our desktop systems. These systems are expected to penetrate a broad and largely untapped addressable market, targeting small design teams within large organizations, small and medium-sized businesses, educational institutes and individuals. We expect to leverage our growing Thingiverse community to accelerate adoption. We expect to incorporate certain additional features of our high-end series of printers into our entry-level series over time.
Maintaining and extending our technology lead. Our multidisciplinary technological leadership, as evidenced by our more than 1,200 granted or pending patents internationally, underpins our proprietary hardware, integrated software and range of 3D printing materials. We will seek to extend our technological capabilities by continuing to invest in our R&D efforts, which focus on enhancing our 3D PolyJet and FDM printing technologies as well as developing new innovative solutions for 3D printing. In addition, we will continue developing consumables that offer an even broader array of physical, mechanical and aesthetic properties, thereby broadening user applications. We believe that by enhancing our AM technological capabilities and by developing and introducing new materials for our 3D printing and production systems, we will be able to increase both the size of, and our share of, the 3D printing marketplace.
Continuing servicing our installed base. Today our company has the largest AM solutions installed base in the industry. We consider the relationship with our customers to be a valuable asset, as reflected in our customer satisfaction surveys. We plan to continue nurturing these relationships to enhance the intimacy with our customers, which will allow us to address their needs better through innovative and holistic prototyping and manufacturing solutions of printers and materials, AM printed parts service and advanced professional services.
Integrated solutions offering. Due in major part to a series of acquisitions, we have in place an offering of solutions that includes a complete gamut of compatible systems, consumables and services (parts on-demand, professional and expert consulting services) that are designed to meet our clients’ needs in an integrated, complete manner. We intend to leverage that as a basis for generating additional sales and revenues from existing customers and attracting new customers.
Expert services – We intend to help companies to increase their adoption of 3D printing by helping them to identify new applications for our technology and by developing robust business cases for investment by them in our technology.
Enhanced collaboration. Our GrabCAD Community, which fosters collaboration among engineers and designers and helps them to communicate ideas and share designs, enhances the likelihood that we can draw from these new collaborations and enhance awareness, and, as a result, sales, of our integrated solutions.
Growing through partnerships, investments and complementary acquisitions. We may selectively pursue partnerships, which may include equity investments and/or acquisitions, to accelerate our growth strategy, and expand our product offerings, go-to-market and overall growth and market penetration.
Products and services
We offer a dedicated range of products for applications such as rapid prototyping (RP), tooling, as well as manufacturing parts. Our products include 3D printing systems, consumable materials, software and services.
Collectively, this portfolio of products offers a broad range of performance options for users, depending on their desired application, as well as on the nature and size of the designs, prototypes or final parts they seek to produce. Our products are available at a variety of different price points and include entry-level desktop 3D printers, a range of systems for RP, and large production systems for additive manufacturing. We also offer a range of 3D printing materials (as described under “Consumable materials” below). The performance of our different systems varies in terms of capabilities, which are related to the following features:
resin cartridge capacity / filament spool size;
maximum model (or tray) size; and
duty cycle, or the number of parts that a printer can produce over a given period of time without requiring maintenance.
Our systems also integrate our software and are supported by services that we provide to our customers, both directly and through our reseller channel.
Our 3D printing systems, which are based on our proprietary FDM and PolyJet technologies, are described below:
We offer a series of printing systems suitable for RP, from design validation, visualization and communication to form, fit and functional performance testing. These systems are targeted at work groups and offer a variety of products that provide customers with a broad range of choices of features such as printing capacity, production speed and price. The Objet systems offer high accuracy and print quality using a variety of PolyJet materials. The new F123 Series product line allows users to create parts in PLA, ABS plus, ASA and PC-ABS materials. These materials enable production of parts with the strength required for true form, fit and functional testing. The F123 Series printers are designed to enable ease of use and ease of maintenance and offers an easy-to-use yet functionality-rich user experience by using the GrabCAD Print software.
We also offer printing systems typically used for Additive Manufacturing – production tooling and end parts applications - and high performance Prototyping applications.
Our FDM technology based systems produce durable, production-grade thermoplastic heated parts suitable for RP manufacturing, tooling and end-used parts use cases.
Our PolyJet technology based high-end printing systems offer the ability to print multiple materials including color printing in a single part build.
Our MakerBot Replicator series represents our desktop 3D printers, compact, and professional-grade 3D printers. Our desktop and compact 3D printers are affordable, and designed for easy, desktop use and are typically used by individuals operating alone or within an enterprise. Our larger, professional 3D printer has a large build volume ideal for industrial prototypes, models and products.
We sell a broad range of 3D printing materials, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-based materials, 158 non-color digital materials, and over 360,000 color variations, for use in our 3D printers and production systems. The sale of these materials provides us with a recurring revenue stream from users of our 3D printers and production systems.
The materials we sell are described below:
The modeling and support filament used in the FDM-based 3D printers and production systems features a wide variety of production grade thermoplastic materials. We continue to develop filament modeling materials that meet our customers’ needs for increased speed, strength, accuracy, surface resolution, chemical and heat resistance, color, and mechanical properties. These materials are processed into our proprietary filament form, which is then utilized by our FDM systems. Our spool-based system has proven to be a significant advantage for our products, because it allows the user to quickly change material by simply mounting the lightweight spool and feeding the desired filament into the FDM devices that are office friendly. Currently, we have a variety of build materials in multiple colors commercially available for use with our FDM technology.
Each material has specific characteristics that make it appropriate for various applications. The ability to use different materials allows the user to match the material to the end use application, whether it is a pattern for tooling, a concept model, a functional prototype, a manufacturing tool, or a DDM end use part.
Our FDM-based printing materials are also environmentally friendly, as the packaging in which they are sold is returned to us for re-use after the contents are consumed.
Our resin consumables, which consist of our PolyJet family of proprietary acrylic-based photopolymer materials as well as our other inkjet-based systems, enable users of those products to create highly accurate, finely detailed 3D models and parts for a wide range of prototype development and customized manufacturing applications. The wide variety of resins within the PolyJet family is characterized by transparent, colored, or opaque visual properties and flexible, rigid or other physical properties. Support materials that are used together with the model materials enable the 3D printing of models with a wide array of complex geometries. Our resin-based materials are produced in-house and are specially designed for our printing systems.
We have invested significant research and development efforts in optimizing our PolyJet materials for use with inkjet technology. These efforts are reflected in the properties of these materials, which enable them to be packaged, stored, combined and readily cured upon printing. Our PolyJet materials are packaged in cartridges for safe handling and are suitable for use in office environments. The polymerized materials can also be machined, drilled, chrome-plated or painted in most cases.
We offer downloadable and cloud-based professional 3D printing workflow software as well as suites of software with our various 3D printing systems; each is designed to make the process of creating high-quality, highly detailed and accurate models more efficient. Our software supports commonly used 3D file formats and converts three-dimensional CAD databases into the appropriate code to operate our 3D printing systems. Our software also provides a wide range of features, including automatic support generation, part scaling, positioning and nesting, as well as geometric editing capabilities.
Our different software suites are specifically designed for our different 3D printing systems and their applications. Accordingly, certain software focuses on increasing build speed and improving the design engineer’s control and efficiency over the entire build process. Other software suites offer simple “click & build” preparation and print tray editing, and provide easy, accurate job timing estimation and full job control, including queue management. Similarly, we offer software that allows users to make adjustments to 3D printing parameters.
Jobs enter the queue either according to our software parameters configured by the system administrator, or in chronological order. The queue is therefore easily managed, as each user has access to his or her jobs and the administrator can set and adjust parameters and access permissions. In configurations of multiple printing systems on the network, each user automatically receives the parameters of the selected system, such as tray size, loaded materials, and queue status, helping ensure easy, error-free tray setup.
Thingiverse is our online community for sharing downloadable, digital 3D designs. The Thingiverse platform enables users to share and customize their digital designs. We believe that Thingiverse is the largest repository of free 3D printable content available to consumers. Thingiverse includes approximately one million public designs available for downloading. We have had more than two million uploads and more than 250 million downloads of designs via this platform.
We operate the GrabCAD Community for mechanical engineers and designers, where members can upload and download free CAD models, download our GrabCAD Print and Workbench software, post and answer mechanical engineering questions, and participate in design challenges. This community had more than 4.3 million members and more than 2.5 million CAD files available for free download at the end of 2017. The GrabCAD Community provides engineers and designers a resource for CAD models helping them communicate ideas and share designs.
Support services and warranty
Our customer support department provides on-site system installation, basic and advanced operation training, a full range of maintenance and repair services and remote technical support to users of our products. We provide support to our customers directly and through our resellers, ensuring that support and parts may be readily obtained worldwide. We also offer training to our customers, particularly on our high-performance systems. Our support network consists of the following:
Stratasys-certified engineers providing worldwide, on-site installation, training and support.
Direct support engineers through our company.
Indirect support engineers through certified partners, including third-party service organizations or selected resellers who provide support for our systems.
Phone and direct on-site company support in eight languages, and resellers indirect support in local languages.
Service logistics in key regional centers.
Training facilities and resources in regional centers.
Computerized management system and knowledge distribution platform to ensure high-quality support for our customers, including secure remote access to a customer service database containing service history and technical documentation to aid in troubleshooting and repairing systems.
|●||Support, tools and up-to-date information to our direct customer and distribution channels from our product support engineering team.|
Our goal is to ensure maximum uptime and productivity for our AM systems. In order to do so, we regularly update the technical documentation related to our systems, offer extensive training courses for operators and promote proactive knowledge sharing designed to help users maximize the value of their equipment and to expand the applications for which they employ our 3D printing and production systems.
We offer services on a time and materials basis as well as through a number of post-warranty maintenance contracts with varying levels of support and pricing, as described below under “Extended support programs.” Customer support is represented on cross-functional product development teams within our company to ensure that products are designed for serviceability and to provide our internal design and engineering departments with feedback on field issues. Failure analysis, corrective action, and continuation engineering efforts are driven by data collected in the field. Ongoing customer support initiatives include development of advanced diagnostic and troubleshooting techniques and comprehensive preventative maintenance programs, an expanded training and certification program for Stratasys and Stratasys partners’ technical personnel, and improved communication between the field and the factory.
Our printing systems are sold with warranties that range from 90 days to three years from installation, depending upon the product line and geographic location. Warranties are generally accompanied by on-site maintenance support. Receipt of maintenance and repair services after the warranty period is subject to the terms of our extended support programs, to the extent purchased by the end-user, as described below.
Extended support programs
Recognizing that our end-users have varying support needs, we offer a range of support programs that enable our end-users to continue to receive maintenance services beyond the initial warranty period. These support programs contain varying degrees of the support services described above and are priced accordingly.
We offer our customers the option to lease or rent 3D printers and 3D production systems. We also offer a ‘Try Before You Buy’ program, which provides businesses the ability to try out a 3D printer prior to deciding whether or not it’s the right fit for their company. The potential purchasers of a 3D printer receive customer support from our company during the trial period.
Stratasys Expert Services is an industry-leading strategy, operations and engineering consultancy focused on helping customers adopt 3D printing capabilities.
In today’s rapidly advancing 3D printing industry, customers find they desire guidance and advice on where to identify, apply and justify potential 3D printing investments. Expert Services fills a key value proposition for how more customers are buying by building plans before they are ready to buy equipment or parts.
Expert Services delivers paid consulting projects leveraging 3D printing capabilities from strategy - driving product innovation to operational - productivity and cost improving on a factory floor. Expert Services also delivers engineering consulting and training services from application design optimization for 3D printed parts to operators and design for additive manufacturing training. Expert Services harnesses the Stratasys expertise from strategic consultants, application engineers, equipment, software and materials experts to provide unmatched 3D printing advisory to customers.
Stratasys Direct Manufacturing paid-parts service
Stratasys Direct Manufacturing was formed on January 1, 2015 from our three AM service companies – RedEye (formerly a business unit of Stratasys, Inc.) and the acquired businesses known as Harvest Technologies and Solid Concepts – and is a provider of 3D printing and custom AM services. Stratasys Direct Manufacturing offers AM capabilities encompassing a wide range of technologies allowing for plastic and metal parts for rapid prototyping and production processes. Our Stratasys Direct Manufacturing paid-parts service produces prototypes and end-use parts for customers from a customer-provided CAD file. This allows the customer to benefit from our process-related knowhow, capitalize on the variety of materials and machine types available through our service center, and take advantage of additional capacity using the latest in proven RP and DDM technologies and processes. Our Stratasys Direct Manufacturing business operates a website service, www.stratasysdirect.com, which enables our customers to obtain quotes and order parts around the clock, seven days a week. Stratasys Direct Manufacturing also provides companies with access to an Expert Services team, which helps companies to identify and evaluate new applications for 3D printing.
Recent Key Portfolio Additions & Innovations
To further strengthen our leadership position and following our strategy to deepen the focus on additive manufacturing, tooling and rapid prototyping for specific vertical markets, we have announced a variety of recent innovations across multiple applications for various key vertical markets, such as automotive, aerospace, consumer products and healthcare.
The Stratasys F123 Series – Smarter Prototyping for Workgroups
In February 2017, we introduced the F123 Series, a new comprehensive rapid prototyping solution that answers the specific needs of professional designers and engineers in the workgroup and office setting. For the first time, the F123 Series enables end-to-end rapid prototyping for every stage of the prototyping process: Rapid, economically-effective concept verification models in PLA material and fast-draft mode; advanced design validation prototypes using a 0.005 in. slice resolution and soluble support for unmatched precision, repeatability and aesthetics. Functional performance testing is enabled with a wide range of functional FDM materials including ABS, ASA, and PC-ABS.
Utilizing over 30 patented inventions selected from the entire Stratasys FDM range together with several new patents pending, the F123 Series systems offer wide-ranging engineering and interface usability enhancements to answer the needs of design workgroups: Engineering grade quality prototyping results - but easy enough for anyone to learn and operate. Professional levels of productivity - but quiet and unobtrusive enough to work in the office environment. The system incorporates GrabCAD Print software that enables printing straight from native CAD files, as well as the ability to manage jobs in real-time and from remote. The F123 Series systems come in a range of three versatile platform sizes.
Stratasys J 750 first true color 3D printer
In April 2016, we introduced what we believe to be an industry-first with our market-disruptive 3D printer, the J750. The new solution breaks restrictive technology barriers, enabling customers for the first time to mix-and-match full color gradients alongside a wide range of materials to achieve one-stop realism without post-processing. This, together with the system's superior versatility, makes the J750 printer a choice 3D printing solution for product designers, engineers and manufacturers, as well as service bureaus.
As the premier addition to the Objet Connex multi-color, multi-material series of 3D printers, the Stratasys J 750 3D printer allows customers to choose from more than 360,000 different color shades plus multiple material properties - ranging from rigid to flexible and opaque to transparent. Prototypes can include a vast array of colors, materials and material properties in the same part, speeding production of realistic models, prototypes and parts for virtually any application need - as well as delivering incomparable 3D printing versatility to produce tooling, molds, jigs and fixtures and more.
Next Generation Production line enhancement for Fortus 900mc
The Stratasys Fortus 900mc next Generation offers a streamlined workflow and easier job-monitoring with an internal camera and GrabCAD Print Software. Standard certifications are included, eliminating the effort and cost to qualify the 3D printer for the user's production floor.
New FDM Material Nylon 6
Stratasys Nylon 6 combines the strength of ULTEM 9085™ with the toughness of Nylon 12. It affords a higher strength and stiffness as well as a better 3D printed appearance than Nylon 12. Nylon 6 is one of the most widely used thermoplastics applied in traditional manufacturing. For FDM 3D printing, Stratasys Nylon 6 is specially formulated to control the right balance between mature Nylon 6 properties and controlled shrinkage effects during the FDM 3D printing process.
Tough PC-ABS Material Now Available on More Stratasys 3D Printers
With its high durability and smooth matte finish, PC-ABS is a natural choice for challenging applications, such as power-tool prototyping and industrial equipment manufacturing. Owners of the F370, Fortus 380mc and 450mc 3D Printers will now have the ability to leverage PC-ABS, reducing time-to-market and high tooling costs for low-volume and custom production builds. 3D printing in real engineering thermoplastics results in stronger parts, more confident testing and prototypes that mimic the material properties of the final product.
Easier to Manufacture Complex Hollow Composite Parts with New Sacrificial Tooling Solution
Sacrificial tooling, a process in which 3D printed molds are wrapped in composite material and then removed after part curing, enables manufacturers to rapidly and cost-effectively create complex, hollow composite parts. We are improving this process with a new sacrificial tooling solution, consisting of our new ST-130 material and new fill patterns. Together, the new material and fill patterns provide faster dissolution, rapid build speed, better autoclave performance and greatly improved tool quality.
In May 2016, we announced a software strategy designed to make 3D printing significantly easier, more intuitive, and highly-accessible to more applications and users. The approach is powered by the popular GrabCAD Software as a Service (SaaS) platform and supported by a nearly 3.5 million-professional design, engineering, manufacturing and student community members.
GrabCAD Print is the first application released under this new investment underscoring the critical nature of software as an essential ingredient of our solutions based go-to-market strategy. A cloud-based environment for job preparation, scheduling, and monitoring, GrabCAD Print also includes innovative business intelligence capabilities to provide users with actionable, end-to-end print job visibility and reports.
Launched in November 2016 after a five-month beta trial period, GrabCAD Print offers compatibility with a broad range of Stratasys 3D printers. In addition, because the GrabCAD platform is open architected, industry-leading CAD solution providers such as PTC, Dassault Systèmes’ SOLIDWORKS, and Siemens PLM Software are collaborating with us to further simplify key functions in CAD-to-3D print workflow and improve quality of 3D printed parts.
Stratasys Manufacturing Aids Package
Our Manufacturing Aids Package offers assistance to manufacturers seeking to create custom manufacturing tools. The materials-and-services package includes 40 hours of design work from Stratasys Professional Services to help make producing the first tool easy.
To create strong, lightweight tools, the kit includes canisters of thermoplastic build material and support material. Build material includes Nylon 6 - our newest engineering-grade material - as well as PC and ASA plastic. ASA is available in a choice of ten colors. The Manufacturing Aids Package includes our new SR-35 advanced soluble support material which offers faster dissolve time and extended bath life compared to our previous SR-30 soluble support material.
In November 2017, we introduced the Stratasys H2000, which utilizes horizontal FDM 3D printing to create strong, custom parts and tooling at unlimited lengths. From an automobile armrest to an entire aircraft interior panel, the Stratasys H2000 delivers large, lightweight thermoplastic parts with repeatable mechanical properties. It is characterized by the following innovations:
3D print custom tooling faster and bigger than ever before.
Rapidly production of strong parts for custom OEM and on-demand aftermarket applications.
Builds very large, custom production parts with accuracy, repeatability and speed.
The Stratasys H2000 is designed to meet the advancing demands in the aerospace and automotive industries and other industries for large lightweight, thermoplastic parts with repeatable mechanical properties. It eliminates the barriers to the production of large custom parts or panels, manufacturing aids such as large trim and drill guides and holding fixtures, and development-level or small-run layup tooling. These applications are in high demand with FDM systems because of the combination of strong thermoplastic materials and the freedom of design that additive manufacturing offers.
The Stratasys H2000 supports new production part applications for custom vehicle interior components such as personalized custom panels, decorative elements and large environmental control system ducts with all of the advantages of FDM, but with increased size and reduced speed limitations. That same scale and speed enables production of significantly larger prototypes without the need for bonding or assembly of multiple smaller parts.
Next generation manufacturing technologies: Robotic Composite 3D Demonstrator
At IMTS 2016, we previewed demonstrations of next-generation manufacturing technologies as part of our vision for additive manufacturing specifically dedicated to verticals like automotive and aerospace. The new technology demonstrations build on our industrial FDM® 3D printing expertise to respond to the needs of customers' most challenging applications, addressing manufacturers' needs to rapidly produce strong parts ranging in size from an automobile armrest to an entire aircraft interior panel.
The Stratasys Robotic Composite 3D Demonstrator delivers true 3D printing by using an 8-axis motion system that enables precise, directional material placement for strength while also dramatically reducing the need for speed-hindering support strategies. This redefines how future lightweight parts will be built, and provides a glimpse into how this technology could be used to accelerate the production of parts made from a wide variety of materials.
We developed the Robotic Composite 3D Demonstrator integrating our core additive manufacturing technologies with industrial motion control hardware and design-to-3D printing software capabilities provided by Siemens.
New Additive Manufacturing Technology for Metal
We are developing a new technology platform that will directly address the short run needs of customers' whose requirements include the production of pilot-series parts, small batch manufacturing during product ramp-up and end-of-life, and customized, lightweight parts. Our new, innovative Stratasys platform was developed internally over the past several years, incorporating the Company's proprietary jetting technology. The platform was designed from inception to provide the values of additive manufacturing for short run production, offering geometric freedom of manufacture, simplified supply chains and superior economics through the elimination of costly tooling, while overcoming material limitations of currently available metal-based additive manufacturing systems, and is designed for use with commonly used powder metallurgy, starting with aluminum. The platform will initially target short run metal production applications in the aerospace, automotive, defense, industrial machining and metal foundry industries, meaningfully expanding our addressable markets for the long term, and providing our customers with dramatically reduced cost-per-part, improved print speeds and reduced post-processing time and effort.
Marketing, sales and distribution
Our marketing strategies are focused on increasing awareness and thought leadership for our product and solution areas, strengthening our leadership brand position in the market, and in key vertical industries such as automotive, aerospace, healthcare, education and consumer goods, accelerating and supporting sales growth, and increasing customer loyalty and customer lifetime value. We initiate thought-leadership, public and industry analyst relations and product launch programs as well as integrated campaigns targeted to extend and deepen the relationship with our existing customers and win new customers, driving demand and lead generation throughout our strategic markets in which we and our resellers and agents operate.
We use a variety of inbound and outbound marketing methods to reach potential customers. Examples of inbound methods include digital marketing demand and lead generation programs including blogs, social media, search marketing (Search Engine Optimization and Pay-Per-Click advertising), lead nurturing with webinars, white papers etc. Outbound channel examples include digital and print communication programs, public relations, direct mail and e-mail campaigns, tradeshows, thought leadership events, newsletters, industry associations and referrals. In addition, we have built and maintain on-site product and technology demonstration capabilities in certain regional offices across the world.
We measure and analyze the success of various marketing initiatives and strive to identify current and future customer needs. Based on our analysis, we create and update our product roadmaps and individual marketing plans to help optimize distribution while helping ensure a smooth process of release, ramp-up and sales of our products.
Sales distribution methods
Our sales organization sells, distributes and provides follow-up support services with respect to our AM systems and related consumables, through a worldwide sales and marketing infrastructure. We generally use three methods for distribution and support: (i) sales to resellers who purchase and resell our products and through whom follow-up support and maintenance services and replacement parts are provided to end-users; (ii) sales of systems that are arranged by a network of independent sales agents worldwide, pursuant to which we sell directly to end-users, pay commissions to such agents, and directly handle the sale of consumables and provision of follow-up support services; and (iii) direct sales of systems or services to end-users without the involvement of any intermediaries, for which all aspects of our sales and follow-up services are handled exclusively by our company. In certain instances, the same individual or company can serve as a reseller with respect to certain of our products while acting as an independent sales agent for other products. Our resellers and independent sales agents are overseen by regional managers and operate on a non-exclusive basis, although we believe that most do not sell competing AM systems.
Almost all of the reseller and independent sales agent locations that distribute our products have our AM systems available for tradeshows, product demonstrations, and other promotional activities. Additionally, many of them enjoy a long-term presence and offer third-party 3D CAD software packages in their respective territories, enabling them to cross-sell our systems to customers who purchase those other products.
In addition to our direct and indirect seller network, we also offer our MakerBot Replicator series and related consumables and services through our online and retail channels.
Geographical structure of sales organization
The primary sales organization for our 3D printers and production systems including related consumables, materials and services is divided into groups based on the following geographical regions: Americas; Europe and Middle East; and Asia Pacific. This structure allows us to align our sales and marketing resources with our diverse customer base. Our sales organization in each region provides sales support to the network of independent reseller and sales agent locations throughout the particular region. We also operate sales and service centers in various locations throughout North America and internationally, including: Baden-Baden, Germany; Shanghai, China; and Tokyo, Japan.
Manufacturing and suppliers
The manufacturing process for our 3D printing and production FDM and PolyJet systems consists of assembling those systems using both off-the-shelf and customized components manufactured specifically for us, and producing and packaging the consumables products to be used by those systems. Our core competencies include FDM and PolyJet printing systems assembly, systems integration, software installation and resin and filament manufacturing, all of which are done internally at our facilities. We currently operate on a build-to-forecast basis and obtain all parts used in the FDM and PolyJet systems manufacturing process from either distributors of standard electrical or mechanical parts or custom fabricators of our proprietary designs. Our manufacturers and suppliers are periodically assessed by us based on their on-time performance and quality.
We purchase major component parts for our FDM and PolyJet systems from various suppliers, subcontractors and other sources, and assemble them in our U.S. and Israeli facilities. Our production floors have been organized using demand-flow techniques, or DFT, in order to achieve efficiency, quality and balance of our production lines. As capacity constraints arise, because of our use of DFT, we can avoid the requirements of reconfiguring our production floor.
Computer-based Material Requirements Planning, or MRP, is used for reordering to better ensure on-time delivery of parts and raw materials. Operators and assemblers are trained on assembly and test procedures including Assembly Requirement Documents, which originate in engineering. In the manufacturing processes for our FDM and PolyJet systems, we employ a Quality Management System, or QMS, that meets international quality standards including ISO 9001:2008 and ISO 13485:2003, which relates to medical devices. We also outsource the manufacture of main subassemblies up to fully assembled systems ready for integration.
The system assembly process for our FDM and PolyJet systems includes semi-automated functional tests of key subassemblies. Key functional characteristics are verified through these tests, and the results are stored in a statistical database.
Upon completion of the assembly of our 3D printing and production FDM and PolyJet systems, we perform a complete power up and final quality tests to help ensure the quality of those products before shipment to customers. The final quality tests must be run error-free before the FDM and PolyJet systems can be cleared for shipment. We maintain a history log of all FDM and PolyJet products that shows revision level configuration and a complete history during the manufacturing and test process. All identified issues on the FDM and PolyJet systems during the manufacturing process are logged, tracked and used to make continuous production process improvements. The commonality of designs among our different FDM and PolyJet product families eases the transition to manufacturing new designs.
Our filament production uses Factory Physics® techniques to manage critical buffers of time, capacity and inventory to ensure product availability. We also use the “5S” method (Sort, Set-in-order, Shine, Standardize and Sustain) as part of our lean manufacturing initiatives to improve organization and efficiency.
Inventory and suppliers
We maintain an inventory of parts to facilitate the timely assembly of products required by our production plan. While most components are available from multiple suppliers, certain components used in our systems and consumables are only available from single or limited sources. In particular, the printer heads for our PolyJet 3D printing systems are supplied by a sole supplier, Ricoh. We consider our single and limited-source suppliers (including Ricoh) to be reliable, but the loss of one of these suppliers could result in the delay of the manufacture and delivery of the relevant components (and, ultimately, of our products). This type of delay could require us to find and re-qualify the component supplied by one or more new vendors. Although we consider our relationships with our suppliers to be good, we continue to develop risk management plans for these critical suppliers. In order to hedge against the risk of a discontinuation of the supply of our inkjet printer heads in particular, we maintain a reasonable supply of excess inventory of printer heads.
We purchase the printer heads for our inkjet 3D printing systems from Ricoh pursuant to an OEM Purchase and License Agreement with Ricoh, or the Ricoh Agreement.
Under the Ricoh Agreement, we place orders for print heads and associated electronic components, or the Ricoh Products. Together with provision of these items, Ricoh provides us with a non-transferable, non-exclusive right to assemble, use and sell the Ricoh Products under Ricoh’s patent rights and trade secrets.
Pricing under the Ricoh Agreement depends on the quantity of Ricoh Products that we purchase during any given month, and to the extent that we commit to a certain annual minimum prior to an upcoming year, we receive a set, discounted price for all Ricoh Products ordered during that upcoming year.
The Ricoh Agreement runs for an initial term of five years (which, as most recently renewed, began in September 2016) and automatically renews for additional one-year periods thereafter unless either party provides the other six months’ advance written notice of termination prior to the end of the then-current term. The Ricoh Agreement may be cancelled by either party if (i) the other party substantially breaches any material provision of the agreement and has not cured such breach within 30 days of receipt of written notice thereof, or (ii) upon the occurrence of certain bankruptcy events, and may furthermore be cancelled by Ricoh if we fail to cure a breach of an undisputed payment obligation within thirty (30) days of the breach.
At any time during the term of the Ricoh Agreement, Ricoh may discontinue the manufacture and supply of a print head model, so long as it provides us with at least eighteen (18) months’ prior written notice of such discontinuance and honors all of our purchase orders for the subject print head model within the notice period. During the period of five years from the earlier of either the termination of the Ricoh Agreement or the date of discontinuance of the manufacture of Ricoh Products (that is, following the 18-month notice period described in the previous sentence), we are entitled to purchase additional Ricoh Products for the sole purpose of providing replacements for the installed base of Ricoh Products, including one final purchase order that we may place in the final year of such five-year period and that must be filled by Ricoh within twelve months of when it is placed.
The Ricoh Agreement may not be assigned by either party without the other party’s prior written consent, which may not be unreasonably withheld.
Research and development
We maintain an ongoing program of research and development, or R&D, to develop new systems and materials and to enhance our existing product lines, as well as to improve and expand the capabilities of our systems and related software and materials. This includes significant technology platform developments for our FDM, PolyJet and SCP technologies, our AM systems, including our integrated software, and our family of proprietary acrylic-based photopolymer materials for PolyJet printing and family of proprietary thermoplastic materials for FDM printing. Our research aims to develop incremental and disruptive improvements, as well as more affordable products. Our engineering development efforts also focus on customer requested enhancements, and development of new modeling processes, software and user applications. In particular, we have devoted significant time and resources to the development of a universally compatible and user-friendly software system.
Our R&D department is divided into groups based on scientific disciplines and product lines. We continue to standardize our product platforms, leveraging each new design so that it will result in multiple product offerings that are developed faster and at reduced expense.
We invest a significant amount of our resources in R&D, because we believe that superior technology is a key to maintaining a leading market position. Our net R&D expenses were approximately $96.2 million, $97.8 million and $122.4 million in the years ended December 31, 2017, 2016 and 2015, respectively.
Our consumable materials development and production operations for our FDM and PolyJet systems are located at our facilities in Eden Prairie, MN, and Kiryat Gat, Israel. The development and production facility for our Solidscape operations are located in Merrimack, New Hampshire. We regard the consumable materials formulation and manufacturing process as a trade secret and hold patent claims related to these products. We purchase and formulate raw materials for our consumables production from various polymer resin and thermoplastic materials suppliers with different levels of processing and value-add applied to the raw materials.
We consider our proprietary technology to be important to the development, manufacture, and sale of our products and seek to protect such technology through a combination of patents, trade secrets, and confidentiality agreements and other contractual arrangements with our employees, consultants, customers and others. All patents and patent applications for additive manufacturing processes and apparatuses associated with our technology were assigned to us by those inventors. The principal granted patents relate to our FDM systems, our PolyJet technologies, our 3D printing processes and our consumables, certain of which have already expired and certain of which have expiration dates ranging from 2018 to 2037.
We are also a party to various licenses and other arrangements that allow us to practice and improve our technology under a broad range of patents, patent applications and other intellectual property, including a cross-license agreement with 3D Systems Corporation under which each party licensed certain patents of the other party, an assignment of rights to us related to UV polymer-based U.S. patents, which underlie certain technologies that compete with ours, and a patent license agreement with Cornell University providing access to certain tool changer patents.
In addition, we own certain registered trademarks and make use of a number of additional registered and unregistered trademarks, including “Stratasys,” “Objet,” “PolyJet,” “Connex,” “J750,” “Vero,” “Tango,” “FDM,” “Fortus,” “F123 Series,” “F370,” “Dimension,” “uPrint,” “Mojo,” “Insight,” “Stratasys Direct Manufacturing,” “SDM,” “Solidscape,” SolidJet,” “SCP,” “GrabCAD,” “GrabCAD Print,” “GrabCAD Community,” “GrabCAD Workbench,” “MakerBot,” “Thingiverse,” “Replicator,” the Stratasys Signet logo, and “Shaping Things.”
We believe that, while our patents provide us with a competitive advantage, our success depends on our marketing, business development, applications know-how and ongoing research and development efforts, in addition to our rights under granted and pending patents. Accordingly, we believe that the expiration of any single patent, or the failure of any of single patent application to result in an issued patent, would not be material to our business or financial position. In any event, there can be no assurance that our patents or other intellectual property rights will afford us a meaningful competitive advantage. Please see the risk factor related to the expiration of our patents in “Item 3.D Risk Factors—Risks related to our intellectual property.”
Our principal competitors consist of other developers of additive manufacturing systems as well as other companies that use fused deposition modeling and inkjet-based technologies to compete in additive manufacturing. A variety of additive manufacturing technologies compete with our proprietary technologies, including:
Selective Laser Sintering;
Digital Light Projection; and
Selective Heat Sintering.
The companies that use these technologies to compete with us include, inter alia, 3D Systems Corporation, EOS GmbH, HP, Carbon, EnvisionTEC GmbH and Markforged.
These technologies, which compete for additive manufacturing users, possess various competitive advantages and disadvantages relative to one another within the key categories upon which competition centers, including resolution, accuracy, surface quality, variety and properties of the materials they use and produce, capacity, speed, color, transparency, the ability to print multiple materials and others. Due to these multiple categories, end-users usually make purchasing decisions as to which technology to choose based on the characteristics that they value most. This decision is often application specific. The competitive environment that has developed is therefore intense and dynamic, as players often position their technologies to capture demand in various verticals simultaneously.
For our entry-level and lower-end systems and materials, we face competition from a variety of sources, including companies using material extrusion and Vat polymerization systems, such as Ultimaker, XYZ Printing and Formlabs. The competing offerings in the lower-end categories vary based on cost, printer and part quality, support materials, speed, ease of use, software ecosystem and reliability.
We are positioned to compete in our industry mainly on the following bases, which we view as competitive strengths:
material properties of printed objects, such as heat resistance, toughness, brittleness, elongation-to-break, color and flexibility;
quality of printed objects measured by, among other things, resolution, accuracy and surface quality;
multiple production-grade modeling materials;
our offering of the only multi-color, multi-material 3D printing systems in the market;
reliability of printing systems;
speed of printing, including a one-step automated modeling process;
ability to be used in an office environment;
ease of use;
automatic, hands-free support removal;
high level of customer service; and
deep application and domain knowhow and expert services.
We offer a wide range of systems with varying features, capacities and price points. We believe that this enables us to compete with the other additive manufacturing technologies for a wide range of customers with a variety of applications and goals for their additive manufacturing.
We also compete with companies that use traditional prototype development and customized manufacturing technologies, and expect future competition to arise from the development of new technologies or techniques.
Historically, our results of operations have been subject to seasonal factors. Stronger demand for our products has historically occurred in our fourth quarter primarily due to our customers’ capital expenditure budget cycles and our sales compensation incentive programs. Our first and third quarters have historically been our weakest quarters for overall unit demand. Although the first quarter has had higher volumes in recent years from the successful introduction of new products, it is typically a slow quarter for capital expenditures in general. The third quarter is typically when we see our largest volume of educational related sales, which normally qualify for special discounts as part of our long-term penetration strategy.
We furthermore experience seasonality within individual fiscal quarters, as a substantial percentage of our system sales often occur within the last month of each fiscal quarter. This trend has the potential to expose our quarterly or annual operating results to the risk of unexpected, decreased revenues in the case of our inability to build systems, consummate sales and recognize the accompanying revenues prior to the end of a given quarter.
We have offices in Brazil, China, Germany, Hong Kong, Israel, Japan, Korea, India, Mexico, Switzerland, the United Kingdom and the United States, and organize our operations by geographic region, focusing upon the following key regions: the Americas; Europe and Asia Pacific. Our products are distributed in each of these regions, as well as in other parts of the world. Our customers are dispersed geographically, and we are not reliant on any single country or region for most of our product sales and services revenues, although 60% of our 2017 sales were made in North America and our SDM printed parts services are based in the United States and therefore reliant on United States customers. A breakdown of our consolidated revenues by geographic markets and by categories of operations (that is, products and services) for the years ended December 31, 2017, 2016 and 2015 is provided in “Item 5.A Operating and Financial Review and Prospects—Operating Results.” In maintaining global operations, our business is exposed to risks inherent in such operations, including currency fluctuations, market conditions, and inflation in the primary locations in which our operating expenditures are incurred. Information on currency exchange risk, market risk, and inflationary risk appears elsewhere in this annual report in “Item 3.D Risk Factors” and in “Item 11. Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Exchange Risk.”
The total number of our full-time equivalent employees, and the distribution of our employees (i) geographically and (ii) within the divisions of our company, in each case as of December 31, 2017, 2016 and 2015, are set forth in this annual report in “Item 6.D Directors, Senior Management and Employees—Employees”.
We are subject to various local, state and federal laws, regulations and agencies that affect businesses generally. These include:
regulations promulgated by federal and state environmental and health agencies;
foreign environmental regulations, as described under “Environmental matters” immediately below;
the federal Occupational Safety and Health Administration;
the U.S. Foreign Corrupt Practices Act;
laws pertaining to the hiring, treatment, safety and discharge of employees;
export control regulations for U.S. made products; and
CE regulations for the European market.
We are subject to various environmental, health and safety laws, regulations and permitting requirements, including (but not limited to) those governing the emission and discharge of hazardous materials into ground, air or water; noise emissions; the generation, storage, use, management and disposal of hazardous and other waste; the import, export and registration of chemicals; the cleanup of contaminated sites; and the health and safety of our employees. Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on our operations. The operation of our facilities, however, entails risks in these areas. Significant expenditures could be required in the future to comply with environmental or health and safety laws, regulations or requirements.
Under such laws and regulations, we are required to obtain environmental permits from governmental authorities for certain operations. In particular, in Israel, where we assemble our inkjet-based PolyJet 3D printing systems and manufacture our resin consumables, businesses storing or using certain hazardous materials, including materials necessary for our Israeli manufacturing process, are required, pursuant to the Israeli Dangerous Substances Law 5753-1993, to obtain a toxin permit from the Ministry of Environmental Protection. Our two Israeli toxin permits will remain in effect until November 2019 and February 2019, respectively.
In the European marketplace, amongst others, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and Electronic Equipment of the European Union (EU), which aims to prevent waste by encouraging reuse and recycling, and the EU Directive on Restriction of Use of Certain Hazardous Substances, which restricts the use of various hazardous substances in electrical and electronic products. Our products and certain components of such products “put on the market” in the EU (whether or not manufactured in the EU) are subject to these directives. Additionally, we are required to comply with certain laws, regulations and directives, including TSCA in the United States, as well as REACH and CLP in the EU, governing chemicals. These and similar laws and regulations require, amongst others, the registration, evaluation, authorization and labeling of certain chemicals that we use and ship.
Israeli Tax Considerations and Government Programs
Tax regulations also have a material impact on our business, particularly in Israel where we are organized and have one of our headquarters. The following is a summary of certain aspects of the current tax structure applicable to companies in Israel, with special reference to its effect on us (and our operations, in particular). The following also contains a discussion of the Israeli government programs benefiting us. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or the courts will accept the views expressed in this discussion. This discussion does not address all of the Israeli tax provisions that may be relevant to our Company. For a discussion of the Israeli tax consequences related to ownership of our capital stock, please see “Israeli Taxation Considerations” in Item 10.E below.
General Corporate Tax Structure in Israel
Generally, Israeli companies are subject to corporate tax on their taxable income. In 2017, the corporate tax rate was 24% (as of 2018, the corporate tax rate is 23%). However, the effective tax rate payable by a company that derives income from an “Approved Enterprise”, a “Beneficiary Enterprise” or a “Preferred Enterprise”, as further discussed below, may be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item below. Capital gains derived by an Israeli company are generally subject to the prevailing regular corporate tax rate.
Besides being subject to the general corporate tax rules in Israel, we have also, from time to time, applied for and received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, described below.
Law for the Encouragement of Capital Investments
The Law for the Encouragement of Capital Investments, 5719-1959, to which we refer as the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, which may be either an “Approved Enterprise”, a “Beneficiary Enterprise” or a “Preferred Enterprise”, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment and manufacture activity are made. In order to qualify for these incentives, an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005, to which we refer as the 2005 Amendment, as of January 1, 2011, to which we refer as the 2011 Amendment, and as of January 1, 2017, to which we refer as the 2017 Amendment. Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment, remain in force, but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment, yet companies entitled to benefits under the Investment Law as in effect up to January 1, 2011, were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect for the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
The following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislations.
Tax benefits for Approved Enterprises approved before April 1, 2005.
Under the Investment Law prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in accordance with the provisions of the Investment Law, to which we refer as an “Approved Enterprise”, had to receive an approval from the Israeli Authority for Investments and Development of the Industry and Economy, to which we refer as the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility or other assets.
An Approved Enterprise may elect to forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program. We have chosen to receive the benefits through the alternative benefits program. Under the alternative benefits program, a company’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location within Israel of the Approved Enterprise, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed below. The benefits commence on the date in which that taxable income is first earned. The benefits period under Approved Enterprise status is limited to 12 years from the year in which the production commenced (as determined by the Investment Center), or 14 years from the year of receipt of the approval as an Approved Enterprise, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits. Our entitlement to the above benefits is subject to fulfillment of certain conditions, according to the law and related regulations.
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, to which we refer as an FIC. An FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether or not a company qualifies as a FIC is made on an annual basis according to the lowest level of foreign investment during the year. An FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefits period may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investments is determined based on the percentage of foreign investment in the parent company.
The corporate tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following table:
|Percentage of non-Israeli ownership||Tax Rate|
|Over 25% but less than 49%||25%|
|49% or more but less than 74%||20%|
|74% or more but less than 90%||15%|
|90% or more||10%|
A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to tax in respect of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the company in each year, as explained above.
In addition, dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program in the first five years of using the equipment. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.
The benefits available to an Approved Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest, or other monetary penalty.
We have received the requisite approval, including a final approval, for our Approved Enterprise investment programs, in accordance with the Investment Law. The above-described benefits that accompany these investment programs and our Beneficiary Enterprise investment programs (for which accompanying benefits are described below) have had the effect, both historically and in 2014, 2015 and 2016, of reducing our (and before the Stratasys-Objet merger, Objet’s) effective consolidated tax rates considerably lower than the statutory Israeli corporate tax rate which in 2018 and onwards is set at 23% (the corporate tax rate was 25% and 24% in 2016 and 2017, respectively).
Tax benefits under the 2005 Amendment that became effective on April 1, 2005.
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. However, the 2005 Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise.
An enterprise that qualifies under the new provisions is referred to as a “Beneficiary Enterprise”, rather than “Approved Enterprise”. The 2005 Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a Beneficiary Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required to derive 25% or more of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further be increased in the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets certain conditions set forth in the amendment for tax benefits and which exceeds a minimum amount specified in the Investment Law. Such investment entitles a company to receive a Beneficiary Enterprise status with respect to the investment, and may be made over a period of no more than three years ending in the year in which the company chose to have the tax benefits apply to the Beneficiary Enterprise. The benefits period under the Beneficiary Enterprise status is limited to 12 years from the year the company chose to have its tax benefits apply. Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Beneficiary Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as a Beneficiary Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depends on, among other things, the geographic location within Israel of the Beneficiary Enterprise. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above.
Dividends paid out of income attributed to a Beneficiary Enterprise will be treated similarly to payment of dividends by an Approved Enterprise under the alternative benefits program. Therefore, dividends paid out of income attributed to a Beneficiary Enterprise (or out of dividends received from a company whose income is attributed to a Beneficiary Enterprise) are generally subject to withholding tax at the rate of 15% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The reduced rate of 15% is limited to dividends and distributions out of income attributed to a Beneficiary Enterprise during the benefits period and actually paid at any time up to 12 years thereafter except with respect to an FIC, in which case the 12-year limit does not apply.
Furthermore, a company qualifying for tax benefits under the 2005 Amendment, which pays a dividend out of income attributed to its Beneficiary Enterprise during the tax exemption period, will be subject to tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable.
As of December 31, 2017, we had accumulated tax-exempt income of approximately $229.4 million that is attributable to our various Approved and Beneficiary Enterprise programs. If such tax exempt income were to be distributed, it would be taxed at the reduced corporate tax rate applicable to such income, which would have amounted to approximately $22.9 million of tax liability as of December 31, 2017.
The benefits available to a Beneficiary Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index and interest, or other monetary penalty.
Tax benefits under the 2011 Amendment that became effective on January 1, 2011.
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity, or (ii) a limited partnership that: (a) was registered under the Israeli Partnerships Ordinance and; (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company was entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise was located in a certain development zone, in which case the rate was 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for Preferred Enterprise which is located in a certain development zone was decreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for “Special Preferred Enterprise” includes less stringent conditions.
Dividends paid out of preferred income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). In 2017-2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of 5% (temporary provisions).
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions;. (ii) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, that had participated in an alternative benefits program, before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
We have examined the possible effect, if any, of these provisions of the 2011 Amendment on our financial statements and have decided, at this time, not to opt to apply the new benefits under the 2011 Amendment.
New Tax benefits under the 2017 Amendment that became effective on January 1, 2017.
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and was effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income,” as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation, to which we refer as NATI.
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.
We are examining the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise or Special Preferred Technology Enterprise, and the amount of Preferred Technology Income or other benefits that we may receive from the 2017 Amendment.
C. Organizational Structure.
Our corporate structure includes Stratasys Ltd., our Israeli parent company, and the following main active wholly-owned subsidiary entities: Stratasys, Inc., a Delaware corporation, which was formerly a publicly held company and which became our indirect, wholly-owned subsidiary as a result of the Stratasys-Objet merger; Baccio Corporation (formerly known as Cooperation Technology Corporation), to which we refer as MakerBot, a Delaware corporation which is the direct parent company of MakerBot Industries, LLC, which we acquired in August 2013; Stratasys Direct, Inc. (our parts service business unit), a California corporation; Stratasys AP Limited, a Hong Kong limited company, which together with several other subsidiaries (including Stratasys Japan Co. Ltd., our Japanese subsidiary, and Stratasys Shanghai Ltd., our Chinese subsidiary), carries out most of our operations in the Asia Pacific region; and Stratasys GMBH, a German limited liability company, which together with other subsidiaries (including Stratasys Schweiz AG (Stratasys Switzerland Ltd.), our Swiss subsidiary) carries out our European operations. We also formed Stratasys Latin America Representacao De Equipamentos Ltd., a Brazilian subsidiary, which has commenced our Brazilian operations. Please see the list of subsidiaries appended to this annual report as Exhibit 8 for a complete list of our subsidiaries as of the date of this annual report.
D. Property, Plants and Equipment.
We have dual headquarters, in Eden Prairie, Minnesota and Rehovot, Israel. Our Eden Prairie, Minnesota headquarters (near Minneapolis) comprises executive offices and production facilities that encompassed, as of December 31, 2017, approximately 377,090 square feet, of which we owned 295,544 square feet, in four buildings. Those buildings served the following purposes: system assembly, inventory storage, operations and sales support; manufacturing for one of our Stratasys Direct Manufacturing paid parts service locations; research and development, filament manufacturing, administrative, marketing and sales activities; and expansion of our production capacity for systems and consumables. In early 2018, we sold one of those buildings, thereby reducing our total space at our Eden Prairie headquarters to 304,616 square feet, of which 223,070 square feet is owned by us. Our Rehovot, Israel headquarters, which we moved into at the beginning of 2017, are newly constructed facilities with approximately 230,355 square feet, situated on a property that we purchased in 2015. It houses our Israeli administrative headquarters, our research and development facilities and certain manufacturing activities. These facilities have replaced the majority of our previous leased facilities in Rehovot, Israel. We are currently constructing a second building at our Rehovot headquarters, which, when occupied by us, will increase the capacity of our Rehovot facilities substantially.
As of December 31, 2017, we leased office space (except with respect to our Eden Prairie headquarters facilities and our Rehovot, Israel and Kiryat Gat, Israel facilities, where we own the property) for various purposes, as set forth in the table below. Unless otherwise stated, all of our facilities are fully utilized. Our material tangible fixed assets include, among other things, the properties listed below.
|Location:||Primary Usage:||Area (Sq. Feet)|
|Eden Prairie, Minnesota||U.S. headquarters||377,090||(1)|
|Valencia, California||Offices and warehouses||71,286|
|Brooklyn, New York||Offices and warehouses||56,689|
|San Diego, California||Facilities||56,383|
|River Falls, Wisconsin||Office space||40,998|
|Belton, Texas||Offices and warehouses||40,000|
|Merrimack, New Hampshire||Facilities, including manufacturing||35,643|
|Other facilities in North America:||Office space and warehouses||112,379|
|Europe and the Middle East:|
|Rehovot, Israel||Israeli headquarters||273,089||(2)|
|Kiryat Gat, Israel||Factory and laboratories||285,070|
|Rheinmünster, Germany||Europe main office||55,027|
|Swiss office||Office space||205|
|Other facilities in EMEA:||Office space||18,046|
|Hong Kong||Asia Pacific main office||9,564|
|Other facilities in Asia Pacific:||Office space||51,183|
|(1)||This square footage amount does not reflect the sale of one of our Eden Prairie, Minnesota facilities in early 2018, which reduced our space at our Eden Prairie location to 304,616 square feet.|
|(2)||This square footage constitutes the area in the first building of our new Rehovot, Israel headquarters, which we occupied during January 2017. The second building of our Rehovot headquarters is currently under construction and will increase the capacity of our Rehovot facilities substantially once we occupy it. Please see Note 2 to our consolidated financial statements included in Item 18 of this annual report for further information.|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in this annual report. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” and in Item 3.D “Key Information – Risk Factors”, above.
A. Operating Results.
We are a leading global provider of applied additive technology solutions for industries including aerospace, automotive, healthcare, consumer products and education. We focus on customers’ business requirements and seek to create new value for our customers across their product lifecycle processes, from design prototypes to manufacturing tools and final production parts. We operate a 3D printing ecosystem of solutions and expertise, comprised of advanced materials; software with voxel level control; precise, repeatable and reliable fused deposition modeling (FDM) and PolyJet 3D printers; application-based services; on-demand parts and key partnerships. We strive to ensure that our solutions are integrated seamlessly into each customer’s evolving workflow. Our applications are industry-specific and geared towards accelerating business processes, optimizing value chains and driving business performance improvements. Our customers range from individuals and smaller businesses to large, global enterprises, and we include a number of Fortune 100 companies among our customers.
Our 3D printers include systems ranging from entry-level desktop 3D printers to systems for rapid prototyping, or RP, and large production systems for direct digital manufacturing, or DDM. We also develop, manufacture and sell materials for use with our systems and provide related services offerings. We offer a powerful range of additive manufacturing materials, including clear, rubberlike and biocompatible photopolymers, and tough high-performance thermoplastics. We believe that the range of 3D printing consumable materials that we offer, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-based materials, 158 non-color digital materials, and over 360,000 color variations is the widest in the industry. Our service offerings include Stratasys Direct Manufacturing, or SDM, printed parts services which offers AM capabilities encompassing a wide range of technologies allowing for plastic and metal parts for rapid prototyping and production processes, as well as related professional services.
We conduct our business globally and provide products and services to our global customer base through our main operational facilities which are located in Israel, the United States, Germany and Hong Kong as well through our offices in China, Italy, Brazil, India, Japan and Korea. Our extensive global reach is well-positioned through a network of approximately 200 resellers and selling agents around the world and an online channel. We have approximately 2,300 employees and hold more than 1,200 granted or pending additive manufacturing patents globally.
Key measures of our performance
Our consolidated revenues result primarily from sales of (i) our products, which include both our AM systems and related consumable materials, (ii) provision of related services and (iii) our direct manufacturing service. We generate revenues and deliver services principally through the following channels:
sales to resellers, who purchase and resell our products and who provide support services for our printing systems;
sales of systems that are marketed by independent sales agents, pursuant to which we sell directly to end-users, pay commissions to such agents, and directly handle the sale of consumables and provision of support services; and
sales of systems (and all related products and services) as well as our direct manufacturing solutions service that we effect and/or provide to our customers directly.
There is overlap among the channels as some independent sales agents for our higher-end products also serve as resellers of our other products.
Product revenues are influenced by a number of factors, including, among other things, (i) the adoption rate of our products, (ii) end-user product design application and manufacturing activity, and (iii) the capital expenditure budgets of end-users and potential end-users, all of which may be significantly influenced by macroeconomic factors. Product revenues are also impacted by the mix of 3D printers that we sell. Purchases of our 3D printing and production systems, especially our higher-end, higher-priced systems, typically involve longer sales cycles.
Product revenues also depend upon the volume of consumables that we sell. Sales of our consumable materials are linked to the number of AM systems that are installed and active worldwide. Sales of consumables are also driven by system usage, which is generally a function of the size of the particular system and the level of design and/or manufacturing activity and budget of the particular end-user. Larger systems generally use greater amounts of consumables due to their greater capacity and the higher levels of design and production.
Services revenues derive from (i) maintenance and warranty; (ii) direct manufacturing paid-parts services; and (iii) other professional service contracts. In addition, in connection with direct sales, we generally charge separately for installation and training. Additional services revenues are generated from services contracts most often entered into directly with end-users subsequent to the expiration of the initial warranty period.
Costs of revenues
Our costs of revenues consist of costs of products and costs of services. Costs of products consist primarily of components and subassemblies purchased for the manufacture of our AM systems and raw materials, such as thermoplastic and photopolymer materials, for the manufacture of our consumables, as well as any royalties paid with respect to sales of certain of those consumables. Costs of products also include manufacturing and manufacturing-related labor costs, indirect production costs and depreciation, as well as, amortization expense related mainly to developed technology assets acquired as part of our business combinations.
Our costs of services revenues consist primarily of costs of our service personnel, material and other production costs of our direct manufacturing service business and installation costs which include engineers dedicated to on-site training and support and travel costs of these engineers. Both costs of products and costs of services include related facilities costs.
Our most significant components of cost of revenues are costs of materials used for our products, wages and related benefits costs, which together accounted for approximately 87% of our total direct cost of sales. An additional significant item of our cost of revenues is the amortization expense that we primarily incur in connection with developed technology assets acquired as part of our business combinations. These amortization expenses vary based on the timing and type of acquisitions and estimated useful lives of the respective intangible assets. These amortization expenses were $24 million, $43 million and $51 million for the years ended December 31, 2017, 2016 and 2015, respectively.
For the year ended December 31, 2017, a hypothetical 10% rise in commodity prices for raw materials would have caused an approximate $15 million increase in cost of revenues in our Consolidated Statement of Income and Comprehensive Income. As to wages and related benefits, a 10% increase in wages due to wage inflation would cause an approximate $2 million increase in cost of revenues in our Consolidated Statement of Operations and Comprehensive Loss. During 2017, we did not notice particular trends that changed, or were expected to change in the near future, the absolute or relative significance of the components of our costs of revenues in a material manner. We also believe that inflation has not had a material effect on our operations or on our financial condition during the three most recent fiscal years.
Currently, we do not foresee a significant change in either the raw materials used for production or wage inflation that would materially impact our business. For further information, please see “Item 11. Quantitative And Qualitative Disclosures About Market Risk” in this annual report.
The gross profit and gross margin for our products are influenced by a number of factors. The most important of these is the mix of our products sold. Specifically, the gross margins on our higher-end AM systems, as well as on our consumables, are typically higher than the gross margins on our entry-level products, MakerBot desktop printers and certain models in our Design series. Accordingly, an increase in the share of revenues of our entry-level products out of total revenues could cause our profit margins to decrease. Furthermore, we believe that as our worldwide installed base of AM systems increases, subsequent sales of our proprietary consumables will also increase. We also seek to reduce our costs of revenues by improving our ability to use less costly components and increasing manufacturing efficiencies in the production of our systems. In addition, we will also seek to achieve lower material costs and leverage our overall capabilities in our direct manufacturing service business.
Products gross margins are also impacted by the mix of revenues generated from sales to resellers based in different geographical areas as opposed to sales that are facilitated by independent sales agents or directly by us.
Service gross margins are influenced mainly by the volume of revenues generated from our direct manufacturing service business as well as the ratio of service engineers to our installed base in a given geographic area.
Our operating expenses for 2017 consist of (i) research and development expenses, (ii) selling, general and administrative expenses and (iii) changes in fair value of obligations in connection with acquisitions.
Research and development expenses
Our research and development activities consist of projects aimed at developing new printing systems and materials and projects aimed at enhancing the capabilities of our existing product lines, as well as significant technology platform and applications, developments for our current technologies, including our integrated software. We also seek to develop disruptive technologies and other process improvement solutions in the additive manufacturing ecosystem. Our research and development expenses consist primarily of employee compensation and employee-related personnel expenses, materials, laboratory supplies, costs for related software and costs for facilities. Expenditures for research, development and engineering of products are expensed as incurred. Our research and development efforts are essential to our future growth and our ability to remain competitive in the AM market. We work closely with existing and potential customers, distribution channels and major resellers, who provide significant feedback for products development and innovation.
We are also entitled to reimbursements from certain government funding plans. These reimbursements are recognized as a reduction of expenses as the related cost is incurred. We are not required to pay royalties on sales of products developed using our government funding.
Selling, general and administrative expenses
Our selling, general and administrative expenses include employee compensation and employee-related expenses for marketing, sales and other sales-operation employees, and for managerial and administrative personnel, including executive officers, accounting, legal, information technology and human resources. This category of expenses also covers commissions, advertising and promotions expenses, professional service fees, respective depreciation, amortization expenses related to certain intangible assets, as well as associated overhead.
Commissions consist of sales-based commissions to independent sales agents and internal sales personnel. Commission rates vary, depending on the geographic location of the agent, type of products sold, and on the achievement of certain performance targets. Our advertising and promotion expenses consist primarily of media advertising costs, trade and consumer marketing expenses and public relations expenses which aims to strengthen our leadership brand position in key vertical markets.
Facilities costs that are included in our selling, general and administrative expenses include a portion of the occupancy costs for our facilities in countries where sales, marketing and administrative personnel are located. Professional service fees for accounting and legal services are also included in selling, general and administrative expenses.
2017 Financial Highlights
Significant business activities and financial performance in 2017 included:
|●||Revenues decreased by $4.1 million, or 0.6%, compared to 2016. The decrease primarily reflects a decrease in systems revenues, which was partially offset by an increase in consumables revenues.|
|●||Operating expenses decreased by $50.7 million, or 12.6% compared to 2016. The decrease primarily reflects our focus on achieving greater operating efficiencies in our selling, general and administrative expenses.|
|●||Net loss attributable to Stratasys amounted to $40.0 million in 2017 or diluted loss per share of $0.75 compared to net loss attributable to Stratasys of $77.2 million or diluted loss per share of $1.48 in 2016.|
|●||Continued strong cash flows provided by operating activities, which amounted to $61.9 million, flat compared to 2016.|
Results of Operations
We are providing within this section a supplemental discussion that compares historical statement of operations data in accordance with accounting principles generally accepted in the United State of America, or GAAP, for the years ended December 31, 2017, 2016 and 2015.
The following table sets forth certain financial data derived from our consolidated statements of income presented as percentages of our net sales for the periods indicated:
|Year ended December 31,|
|Cost of sales||51.7||%||52.8||%||85.3||%|
|Research and development, net||14.4||%||14.5||%||17.6||%|
|Selling, general and administrative||38.3||%||45.7||%||62.4||%|
|Change in fair value of obligations in connection with acquisitions||0.2||%||-0.1||%||-3.4||%|
|Financial income (expense), net||0.2||%||0.1||%||-1.5||%|
|Loss before income taxes||-4.4||%||-12.8||%||-198.8||%|
|Income taxes expense (benefit)||1.4||%||-1.4||%||-1.5||%|
|Share in losses of associated company||-0.3||%||-0.1||%||0.0||%|
|Net loss attributable to non-controlling interests||-0.1||%||-0.1||%||-0.1||%|
|Net loss attributable to Stratasys Ltd.||-6.0||%||-11.5||%||-197.2||%|
Discussion of Results of Operations
Our products and services revenues for the last three years, as well as the percentage change from year to year, were as follows:
|Year Ended December 31,|
|% Change||% Change|
|U.S. $ in thousands|
Our total consolidated revenues in 2017 were $668.4 million, a decrease of $4.1 million, or 0.6%, compared to 2016. The decrease primarily reflects a decrease in products revenues, partially offset by a slight increase in services revenues, as further discussed below.
2017 Compared to 2016
Revenues derived from products (including AM systems and consumable materials) decreased by $4.7 million in 2017, or 1.0%, as compared to 2016. The decrease in products revenues was driven by a decrease in our systems revenues that was partially offset by an increase in our consumables revenues.
The decrease in systems revenues reflects an increase of lower-end systems ratio within our product mix, following the launch of our F123 offering during 2017, as compared to higher ratio of high-end systems within our product mix in 2016.
Consumables revenues increased in 2017 by 4.1% compared to 2016. The increase in consumables revenues, was primarily due to the favorable effect of our growing installed base of systems as well as favorable trends around the utilization of our systems.
2016 Compared to 2015
Revenues derived from products decreased by $24.9 million in 2016, or 4.9%, as compared to 2015. The decrease in products revenues primarily reflected a decrease in unit volumes. Products revenues were partially offset by an increase in our sales of consumables offerings which increased by 9.8% compared to 2015, which reflected our growing installed base of systems.
2017 Compared to 2016
Services revenues (including SDM, maintenance and other services) increased by $0.6 million in 2017, or 0.3%, as compared to 2016. Within services revenues, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems, increased by 6.3%, reflecting our growing installed base of systems and our effective support solutions suitable for end-users’ needs.
2016 Compared to 2015
Services revenues increased by $1.4 million in 2016, or 0.7%, as compared to 2015, reflected our growing installed base of systems and was partially offset by a decrease in SDM revenues.
Revenues by Region
Revenues and the percentage of net sales by region for the last three years, as well as the percentage change, were as follows:
|Year Ended December 31,|
|U.S. $ in||% of net||U.S. $ in||% of net||U.S. $ in||% of net|
|thousands||sales||thousands||sales||thousands||sales||Change in %||Change in %|
2017 Compared to 2016
Revenues in the Americas region increased by $1.8 million, or 0.4% to $413.3 million in 2017 compared to $411.5 million in 2016. The increase was driven primarily by higher consumables revenues, partially offset by lower services revenues.
Revenues in the EMEA region increased by $10.4 million, or 7.5%, to $148.3 million in 2017 compared to $137.9 million in 2016. The increase reflects higher products and services revenues. In local currencies terms, revenues in the EMEA region during 2017 increased by 5.5% as compared to 2016. Revenues in the EMEA region were favorably impacted by approximately $2.8 million, on a constant currency basis when using prior period’s exchange rates.
Revenues in the Asia Pacific region decreased by $16.2 million, or 13.2%, to $106.8 million in 2017 compared to $123.0 million in 2016. The decrease was primarily due to lower products revenues, partially offset by slightly higher services revenues.
2016 Compared to 2015
Revenues in the Americas region decreased by $14.0 million, or 3.3% to $411.5 million in 2016 compared to $425.6 million in 2015.
Revenues in the EMEA region decreased by $10.2 million, or 6.9%, to $137.9 million in 2016 compared to $148.2 million in 2015. The decrease was primarily due to lower systems revenues. In local currencies terms, net sales of the EMEA region in 2016 decreased by 5.1% as compared to 2015.
Revenues in the Asia Pacific region increased by $0.7 million, or 0.6%, to $123.0 million in 2016 compared to $122.3 million in 2015.
Gross profit for our products and services for the last three years, as well as the percentage change from year to year, was as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Gross profit attributable to:|
Gross profit as a percentage of net sales for our products and services for the last three years, as well as the percentage change from year to year, was as follows:
|Year Ended December 31,|
|Change in %||Change in %|
|Gross profit as a percentage of revenues from:|
|Total gross profit||48.3||%||47.2||%||14.7||%||2.3||%||221.4||%|
2017 Compared to 2016
Gross profit attributable to products sales increased by $10.9 million, or 4.5%, to $255.3 million in 2017 compared to $244.4 million in 2016. Gross profit attributable to products sales as a percentage of revenues increased to 53.8% in 2017 compared to 51.0% in 2016. The increase in gross profit attributable to products sales was primarily due to decrease in amortization expenses of $19.2 million mainly due to changes in the estimated useful lives of certain intangible assets, partially offset by an increase in our lower-end systems ratio within our product revenues mix.
Gross profit attributable to services revenues decreased by $5.4 million, or 7.4%, to $67.5 million in 2017 compared to $72.9 million in 2016. Gross profit from services as a percentage of services revenues in 2017 decreased to 34.8% compared to 37.7% in 2016. The decrease in gross profit from services revenues was driven by the mix between our customer service business, and our direct manufacturing paid-parts business whose gross margin was impacted by the different technologies that make up the product mix.
2016 Compared to 2015
Gross profit attributable to products sales increased by $206.7 million, or 547.8%, to $244.4 million in 2016 compared to $37.7 million in 2015. Gross profit attributable to products sales as a percentage of revenues increased to 51.0% in 2016 compared to 7.5% in 2015. The increase in gross profit attributable to products sales was primarily due to impairment charges of $191.4 million related to certain of our developed technology intangible assets that were recorded in 2015 compared to $1.8 million in 2016, as well as favorable changes in product mix, partially offset by lower systems revenues.
Gross profit attributable to services revenues increased by $8.5 million, or 13.2%, to $72.9 million in 2016 compared to $64.4 million in 2015. Gross profit from services as a percentage of services revenues in 2016 increased to 37.7% compared to 33.6% in 2015. The increase in gross profit from services primarily reflects increased volume of our maintenance and warranty contracts as well as improved margins attributable to our cost reduction initiatives.
The amount of each type of operating expense for the last three years, as well as the percentage change between such annual periods, and total operating expenses as a percentage of our total sales in each such annual period, was as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Research and development, net||$||96,237||$||97,778||$||122,360||-1.6||%||-20.1||%|
|Selling, general & administrative||255,685||307,113||434,619||-16.7||%||-29.3||%|
|Change in fair value of obligations in connection with acquisitions||1,378||(872||)||(23,671||)||-258.1||%||-96.3||%|
2017 Compared to 2016
Research and development expenses, net decreased by $1.5 million, or 1.6% in 2017 compared to 2016. Research and development expense, net as a percentage of revenues were flat at 14.4% in 2017 compared to 14.5% in 2016.
Our research and development expenses were impacted by timing of projects' spending and products launches, as well as a moderate decrease in payroll and stock-based compensation expenses which are the most significant component in our research and development expenses.
We invest a significant amount of our resources in research and development, because we believe that superior technology is a key to maintaining a leading market position. We maintain an ongoing program of research and development, to develop new systems and materials and to enhance our existing product lines. Our research aims to develop incremental and disruptive improvements, as well as more affordable products. We continue to standardize our product platforms, leveraging each new design so that it will result in multiple product offerings that are developed faster and at reduced expense. In addition, we continue with our portfolio prioritization of our strategic projects with further focus and realignment of our resources.
Selling, general and administrative expenses in 2017 decreased by $51.4 million, or 16.7%, to $255.7 million, compared to $307.1 million in 2016. Selling, general and administrative expenses in 2017 as a percentage of revenues were 38.3% as compared to 45.7% in 2016. The decrease in our selling, general and administrative expenses was primarily due to a decrease in intangible assets amortization and long-lived assets impairment expenses of $21.8 million, as well as lower commissions and lower depreciation expense. In addition, the decrease in our selling, general and administrative expenses was also driven by certain cost-reduction efforts which reduced our facilities and information systems related expenses, as well as employees' compensation related expenses (mainly resulting from reduction in global workforce).
During the year ended December 31, 2017, we recorded a loss of $1.3 million, compared to a gain of $0.9 million for the year ended December 31, 2016, due to the revaluation of obligations in connection with acquisitions. The loss recorded in 2017 reflected the revaluation of the deferred payments liability in connection with the Solid Concepts transaction which was finally settled during the third quarter of 2017. We do not expect an impact on our consolidated statements of operations in 2018 due to revaluation of obligations in connection with acquisitions.
2016 Compared to 2015
Research and development expenses, net decreased by $24.6 million, or 20.1%, in 2016 compared to 2015. Research and development expense, net as a percentage of revenues decreased to 14.5% in 2016 compared to 17.6% in 2015.
The decrease was primarily due to impairment charges of $18.2 million related to certain of our in-process research and development projects that were recorded in 2015 as well as our costs-savings initiatives which include portfolio prioritization and realignment of our projects that further focus our resources. The decrease was partially offset by increase in our GrabCad operations reflecting our increased efforts to develop our software solutions.
Selling, general and administrative expenses in 2016 decreased by $127.5 million, or 29.3%, to $307.1 million, compared to $434.6 million in 2015. Selling, general and administrative expenses in 2016 as a percentage of revenues were 45.7% as compared to 62.4% in 2015. The decrease in our selling, general and administrative expenses was primarily due to higher intangible assets impairment charges recorded in 2015, as well as non-recurring post-merger integration expenses related to SDM formation and certain reorganization related charges that were recorded during 2015. In addition, the decrease in our selling, general and administrative expenses was also driven by the effective implementation of our costs reduction initiatives which reduced certain of our variable and fixed expenses.
During the year ended December 31, 2016, we recorded a gain of $0.9 million, compared to a gain of $23.7 million for the year ended December 31, 2015, due to the revaluation of obligations in connection with acquisitions. The gain recorded in 2016 reflects the revaluation of the deferred payments liability in connection with the Solid Concepts transaction which was mainly attributable to changes in our share price.
Operating loss and operating loss as a percentage of our total net sales for the last three years, as well as the percentage change in operating loss between those years, were as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Percentage of sales||-4.6||%||-12.9||%||-197.3||%|
2017 Compared to 2016
Operating loss for the year ended December 31, 2017 was $30.5 million as compared to an operating loss of $86.7 million for the year ended December 31, 2016. The decrease in operating loss was primarily attributable to the decrease in our operating expenses as discussed above.
2016 Compared to 2015
Operating loss for the year ended December 31, 2016 was $86.7 million as compared to an operating loss of $1,373.5 million for the year ended December 31, 2015. The decrease in operating loss was primarily attributable to the non-recurring, non-cash goodwill and intangible assets impairment charges of $1,220.8 million recorded in 2015 as well as other factors as discussed above.
Financial income (expense), net
2017 Compared to 2016
Financial expense, net, which were primarily comprised of foreign currencies effects, interest income and interest expense, amounted to $1.0 million for the year ended December 31, 2017, compared to $0.4 million for the year ended December 31, 2016.
The increase in financial expense, net was primarily due to increase in interest expenses related to outstanding loan balances associated with amounts borrowed in December 2016, compared to immaterial interest expenses incurred in 2016.
In addition, our financial income (expense), net was impacted by translation of foreign currencies transactions resulting from changes in the rate of exchange between the U.S. dollar and the local currencies in the markets in which we operate (primarily the Euro). These effects were partially offset by our derivatives and hedging activity in 2017.
2016 Compared to 2015
Financial income (expense), net, amounted to $0.4 million for the year ended December 31, 2016, compared to a financial expense, net of $10.3 million for the year ended December 31, 2015. The decrease in financial expense, net was primarily due to immaterial interest expenses incurred in 2016 compared to interest expenses related to the outstanding debt balance borrowed under our credit facility in 2015 and additional costs related to the termination of our revolving credit facility during September 2015 in an amount of $2.7 million. In addition, our financial income increased due to lower foreign currency translation losses.
Income taxes and income taxes as a percentage of net income before taxes for the last three years, as well as the percentage change in income taxes between those years, were as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|As a percent of loss before income taxes||-31.5||%||10.9||%||0.7||%|
2017 Compared to 2016
We had a negative effective tax rate of 31.5% for the year ended December 31, 2017 as compared to 10.9% tax rate for the year ended December 31, 2016. Our effective tax rate is primarily impacted by the geographic mix of our earnings and losses, specifically by no tax benefit being recorded for the tax losses of our U.S. subsidiaries for the years ended December 31, 2017 and 2016. We will continue to monitor whether the realization of our remaining deferred tax assets is more likely than not.
During 2016, we recorded an income tax benefit of $6.8 million attributable to one of our foreign subsidiaries which received a favorable tax ruling from the tax authorities. In addition, during 2016, we adjusted our estimate of long-term tax rates in Israel. As a result, we recorded $5.2 million of income taxes benefit against deferred tax liabilities associated with the amortization of the respective intangible assets.
For a full reconciliation of our effective tax rate to the Israeli statutory rate of 24% and for further explanation of our provision for income taxes, refer to Note 9 to our consolidated financial statements included in Item 18 of this annual report.
2016 Compared to 2015
Our effective tax rate for the year ended December 31, 2016 was 10.9% as compared to 0.7% tax rate for the year ended December 31, 2015.
Net Loss and Net Loss Per Share Attributable to Stratasys Ltd.
Net loss and net loss as a percentage of our total revenues for the last three years, as well as the percentage change in net loss between those years, were as follows:
|Year Ended December 31,|
|U.S. $ in thousands||Change in %||Change in %|
|Net loss attributable to Stratasys Ltd.||$||(39,981||)||$||(77,219||)||$||(1,372,835||)||-48.2||%||-94.4||%|
|Percentage of Sales||-6.0||%||-11.5||%||-197.2||%|
|Diluted net loss per share||$||(0.75||)||$||(1.48||)||$||(26.64||)||-49.1||%||-94.4||%|
2017 Compared to 2016
Net loss attributable to Stratasys Ltd. for the year ended December 31, 2017 was $40.0 million as compared to $77.2 million for the year ended December 31, 2016. The decrease in net loss attributable to Stratasys Ltd was primarily attributable to a decrease in our operating expenses, partially offset by higher income taxes expense.
Diluted loss per share for the years ended December 31, 2017 and 2016 was $0.75 and $1.48, respectively. The weighted average fully diluted share count for the year ended December 31, 2017 was 53.0 million, compared to 52.6 million for the year ended December 31, 2016.
2016 Compared to 2015
Net loss attributable to Stratasys Ltd. for the year ended December 31, 2016 was $77.2 million as compared to $1,372.8 million for the year ended December 31, 2015. The decrease in net loss attributable to Stratasys Ltd was primarily attributable to the non-recurring, non-cash goodwill and intangible assets impairment charges of $1,220.8 million recorded in 2015.
Diluted loss per share for the years ended December 31, 2016 and 2015 was $1.48 and $26.64, respectively. The weighted average fully diluted share count for the year ended December 31, 2016 was 52.6 million, compared to 51.6 million for the year ended December 31, 2015.
Goodwill Assessment as of December 31, 2017
During the fourth quarter of 2017, we performed a quantitative assessment for goodwill impairment for our Stratasys-Objet reporting unit.
Following our quantitative assessment, we concluded that the fair value of Stratasys-Objet reporting unit exceeds its carrying amount by approximately 7%, with a carrying amount of goodwill assigned to this reporting unit in the amount of $387 million. When evaluating the fair value of Stratasys-Objet reporting unit we used a discounted cash flow model which utilized Level 3 measures that represent unobservable inputs into our valuation method.
Key assumptions used to determine the estimated fair value include: (a) expected cash flow for 5 years following the assessment date which (including expected revenue growth, costs to produce, operating profit margins and estimated capital needs); (b) an estimated terminal value using a terminal year growth rate of 3.1% determined based on the growth prospects of the reporting unit; and (c) a discount rate of 14.0% based on management’s best estimate of the after-tax weighted average cost of capital. If any of these were to vary materially from our plans, we could face impairment of goodwill allocated to this reporting unit in the future.
A hypothetical decrease in the growth rate of 1% or an increase of 1% to the discount rate would reduce the fair value of the Stratasys-Objet reporting unit by approximately $48 million and $88 million.
Based on our assessment as of December 31, 2017, no goodwill was determined to be impaired.
Determining the fair value of our Stratasys-Objet reporting unit requires significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. We will continue to monitor the fair value of Stratasys-Objet reporting unit and intangible assets to determine whether events and changes in circumstances such as further deterioration in the business climate or operating results, further significant decline in our share price, changes in management’s business strategy or downward changes of our cash flows projections, warrant further interim impairment testing. For further information, refer to note 7 to our consolidated financial statements included in Item 18 of this annual report.
Non-GAAP Financial Measures
The following non-GAAP data, which excludes certain items as described below, are non-GAAP financial measures. Our management believes that these non-GAAP financial measures are useful information for investors and shareholders of our company in gauging our results of operations (x) on an ongoing basis after excluding merger and acquisition related expense and reorganization-related charges, and (y) excluding non-cash items such as stock-based compensation expenses, acquired intangible assets amortization, impairment of goodwill and other long-lived assets, changes in fair value of obligations in connection with acquisitions and the corresponding tax effect of those items. We also exclude, when applicable, non-recurring changes of non-cash valuation allowance on deferred tax assets, as well as, non-recurring significant tax charges or benefits that relate to prior periods which we do not believe are reflective of ongoing business and operating results. These non-GAAP adjustments either do not reflect actual cash outlays that impact our liquidity and our financial condition or have a non-recurring impact on the statement of operations, as assessed by management. These non-GAAP financial measures are presented to permit investors to more fully understand how management assesses our performance for internal planning and forecasting purposes. The limitations of using these non-GAAP financial measures as performance measures are that they provide a view of our results of operations without including all items indicated above during a period, which may not provide a comparable view of our performance to other companies in our industry. Investors and other readers should consider non-GAAP measures only as supplements to, not as substitutes for or as superior measures to, the measures of financial performance prepared in accordance with GAAP. Reconciliation between results on a GAAP and non-GAAP basis is provided in a table below.
Reconciliation of GAAP and Non-GAAP Results of Operations
|Year ended December 31,|
|(U.S. dollars and shares in thousands,|
|except per share amounts)|
|Gross profit (1)||$||322,777||$||26,860||$||349,637|
|Operating income (loss) (1,2)||(30,523||)||67,226||36,703|
|Net income (loss) attributable to Stratasys Ltd. (1,2,3)||(39,981||)||64,158||24,177|
|Net income (loss) per diluted share attributable to Stratasys Ltd. (4)||$||(0.75||)||$||1.20||$||0.45|
|(1)||Acquired intangible assets amortization expense||22,768|
|Non-cash stock-based compensation expense||2,581|
|Impairment charges of other intangible assets||646|
|Reorganization and other related costs||337|
|Merger and acquisition related expense||528|
|(2)||Acquired intangible assets amortization expense||10,319|
|Non-cash stock-based compensation expense||15,141|
|Impairment charges of intangible assets and other long-lived assets||3,742|
|Change in fair value of obligations in connection with acquisitions||1,378|
|Reorganization and other related costs||5,803|
|Merger and acquisition related expense||3,983|
|(3)||Corresponding tax effect||(3,866||)|
|Amortization expense of associated company||798|
|(4)||Weighted average number of ordinary shares outstanding- Diluted||52,959||53,536|
|Year ended December 31,|
|(U.S. dollars and shares in thousands,|
|except per share amounts)|
|Gross profit (1)||$||317,306||$||50,334||$||367,640|
|Operating income (loss) (1,2)||(86,713||)||115,729||29,016|
|Net income (loss) attributable to Stratasys Ltd. (1,2,3)||(77,219||)||91,989||14,770|
|Net income (loss) per diluted share attributable to Stratasys Ltd. (4)||$||(1.48||)||$||1.76||$||0.28|
|(1)||Acquired intangible assets amortization expense||41,712|
|Non-cash stock-based compensation expense||2,780|
|Impairment charges of other intangible assets||1,779|
|Reorganization and other related costs||3,846|
|Merger and acquisition related expense||217|
|(2)||Acquired intangible assets amortization expense||14,901|
|Non-cash stock-based compensation expense||17,993|
|Impairment charges of intangible assets and other long-lived assets||21,774|
|Change in fair value of obligations in connection with acquisitions||(872||)|
|Reorganization and other related costs||3,671|
|Merger and acquisition related expense||7,928|
|(3)||Corresponding tax effect and other tax adjustments||(24,233||)|
|Intangible assets amortization expense of associated company||493|
|(4)||Weighted average number of ordinary shares outstanding- Diluted||52,582||53,201|
|Year ended December 31, 2015|
|(U.S. dollars and shares in thousands,|
|except per share amounts)|
|Gross profit (1)||$||102,172||$||259,545||$||361,717|
|Operating income (loss) (1,2)||(1,373,544||)||1,357,577||(15,967||)|
|Net income (loss) attributable to Stratasys Ltd. (1,2,3)||(1,372,835||)||1,382,789||9,954|
|Net income (loss) per diluted share attributable to Stratasys Ltd. (4)||$||(26.64||)||$||26.83||$||0.19|
|(1)||Acquired intangible assets amortization expense||50,353|
|Impairment charges of other intangible assets||191,534|
|Non-cash stock-based compensation expense||5,381|
|Reorganization and other related costs||10,949|
|Merger and acquisition related expense||1,328|
|Acquired intangible assets amortization expense||22,436|
|Non-cash stock-based compensation expense||24,629|
|Impairment charges of intangible assets and other long-lived assets||86,937|
|Change in fair value of obligations in connection with acquisitions||(23,671||)|
|Reorganization and other related costs||16,955|
|Merger and acquisition related expense||28,338|
|(3)||Credit facility termination related costs||2,705|
|Corresponding tax effect and other tax adjustments||22,507|
|(4)||Weighted average number of ordinary shares outstanding- Diluted||51,592||52,824|
Forward-looking Statements and Factors That May Affect Future Results of Operation
See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this annual report (following the table of contents).
Variability of Operating Results
Our revenues and profitability may vary in any given year, and from quarter to quarter, depending on the number and mix of products sold and the average selling price of the products, and are also affected by the seasonality of our business. In addition, due to competition, uncertain market acceptance and other factors, we may be required to reduce prices for our products in the future.
Our future results will be affected by a number of factors, including our ability to: increase the number of units sold; develop, introduce and deliver new products on a timely basis; accurately anticipate customer demand patterns; and manage future inventory levels in line with anticipated demand. Our results may also be affected by competitive factors, the extent to which our cost reduction program succeeds, the availability of working capital, results of litigation, the enforcement of intellectual property rights, currency exchange rate fluctuations, commodity prices and economic conditions in the geographic areas in which we operate. Macro factors, such as the extent of growth of the 3D printing market generally, may also impact our operating results. There can be no assurance that our historical performance in sales, gross profit and net income (loss) will improve, or that sales, gross profit and net income (loss) in any particular quarter will improve over those of preceding quarters, including comparable quarters of previous years. See Item 3.D - “Risk Factors” above.
Effective Corporate Tax Rate
See “Israeli Tax Considerations and Government Programs — General Corporate Tax Structure in Israel” in Item 4.B above for a discussion of the general tax structure in Israel and applicable corporate tax rates.
In 2017, we derived a significant portion of our income from facilities granted Approved or Beneficiary Enterprise status, offset by losses of our U.S. subsidiaries with no tax benefit being recorded for those losses, as the near-term realization of these assets is uncertain. See “Israeli Tax Considerations and Government Programs — The Law for the Encouragement of Capital Investments” in Item 4.B above.
In the event we have taxable income in Israel, derived from sources other than Approved or Beneficiary Enterprises, such income would be taxable at the regular Israeli corporate tax rates described above.
As part of the process of preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examinations and reviews.
Effects of Government Regulations and Location on our Business
For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see “Israeli Tax Considerations and Government Programs” in Item 4.B above and the “Risks related to operations in Israel” in Item 3.D above.
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
See “Foreign Currency Exchange Risk” in Item 11 below for a discussion of foreign currency transactions.
B. Liquidity and Capital Resources
A summary of our statement of cash flows for the three years ended December 31, 2017 is as follows:
|Year ended December 31,|
|U.S. $ in thousands|
|Goodwill and other long-lived assets impairment charges||6,759||24,924||1,231,385|
|Depreciation and amortization||66,635||92,877||108,395|
|Deferred income taxes||2,404||(10,378||)||(19,129||)|
|Change in fair value of obligations in connection with acquisitions||1,378||(872||)||(23,671||)|
|Foreign currency transactions loss and other non-cash items||(6,909||)||3,367||8,629|
|Change in working capital and other items||14,377||8,903||15,982|
|Net cash provided by (used in) operating activities||61,907||61,973||(21,910||)|
|Net cash used in investing activities||(28,254||)||(63,989||)||(93,102||)|
|Net cash provided by (used in) financing activities||10,698||25,799||(67,004||)|
|Effect of exchange rate changes on cash and cash equivalents||4,082||(1,047||)||(2,533||)|
|Net change in cash and cash equivalents||48,433||22,736||(184,549||)|
|Cash and cash equivalents, beginning of year||280,328||257,592||442,141|
|Cash and cash equivalents, end of year||$||328,761||$||280,328||$||257,592|
Our cash and cash equivalents balance increased to $328.8 million at December 31, 2017 compared to $280.3 million at December 31, 2016. The increase in cash and cash equivalents in 2017 was due to cash flows provided by operating activities and financing activities of $61.9 million and $10.7 million, respectively, partially offset by cash flows used in investing activities in an amount of $28.3 million.
Our cash and cash equivalents balance increased to $280.3 million at December 31, 2016 compared to $257.6 million at December 31, 2015.
Cash flow from operating activities
Year ended December 31, 2017
We generated $61.9 million of cash from our operating activities during 2017. The net loss of $40.5 million was adjusted primarily due to non-cash items including depreciation, amortization and impairment charges of long-lived assets in an aggregate amount of $73.4 million and stock-based compensation of $17.7 million, partially offset by foreign currency transactions gains. Changes in working capital and other items contributed $14.5 million for our cash flow provided by operating activities. This favorable impact reflects our close monitoring of our operating working capital.
Year ended December 31, 2016
We generated $62.0 million of cash from our operating activities during 2016. The net loss of $77.6 million was primarily adjusted due to non-cash items including depreciation, amortization and non-cash impairment charges of long-lived assets of $117.8 million and stock-based compensation in the amount of $20.8 million, partially offset by changes in the deferred income taxes of $10.4 million. Changes in working capital and other items of $8.9 million increased our cash flow provided by operating activities.
Year ended December 31, 2015
We used $21.9 million of cash for our operating activities during 2015. The net loss of $1,374 million was primarily adjusted due to non-cash impairment charges of goodwill and other long-lived assets of $1,231.4 million and depreciation and amortization of $108.4 million, partially offset by the changes in the deferred income taxes of $19.1 million. Changes in working capital and other items favorably impacted our cash flow used in operating activities by $16.0 million.
Cash flow from investing activities
Year ended December 31, 2017
We used $28.3 million of cash in our investing activities during 2017. Cash was primarily used to purchase property and equipment in an amount of $22.3 million as well as for certain strategic investments in unconsolidated entities.
Our principal property and equipment purchases were for our new building complex under construction in Rehovot, Israel, for which we paid approximately $9.8 million during 2017. The new facility in Rehovot, Israel, which will contain two buildings, houses our Israeli headquarters, research and development facilities and certain marketing activities. We entered the first building in January 2017. Other equipment purchases were primarily for the enhancements of our manufacturing capabilities of our facilities and other building improvements in the United States and Israel, as well as certain investments in our IT infrastructure.
Other cash used in our investing activities included $3.6 million of cash used for certain strategic investments in unconsolidated entities.
Year ended December 31, 2016
We used $64.0 million of cash in our investing activities during 2016. Cash was primarily used to purchase property and equipment in an amount of $45.1 million as well as for certain strategic investments in unconsolidated entities.
Our principal property and equipment purchases were for our new building complex that was under construction in Rehovot, Israel, for which we paid approximately $18.1 million during 2016.
Other cash used in our investing activities included $23.1 million of cash used for certain strategic investments in unconsolidated entities, partially offset by $6.7 million of cash provided by net changes in short-term bank and other restricted deposits.
Year ended December 31, 2015
We used $93.1 million of cash in our investing activities during 2015. Cash was primarily used to purchase property and equipment in an amount of $84.3 million as well as $9.9 million of cash used for acquisitions.
Our principal property and equipment purchases were for our new buildings complex that was under construction in Rehovot, Israel, for which we paid approximately $39.1 million during 2015.
Cash flow from financing activities
Year ended December 31, 2017
Net cash provided by financing activities was $10.7 million during 2017. Cash provided by financing activities was mainly attributable to proceeds from the Bank Loan of $10.0 million, partially offset by the Bank Loan's quarterly principal repayments of $3.7 million. In addition, cash proceeds of $5.9 million from the exercises of stock options contributed to the cash provided by financing activities.
Year ended December 31, 2016
Net cash provided by financing activities was $25.8 million during 2016. Cash provided by financing activities was mainly attributable to proceeds from the Bank Loan of $26.0 million.
Year ended December 31, 2015
Net cash used in our financing activities was $67.0 million during 2015. Cash used in financing activities was mainly attributed to net repayment of $50.0 million in connection of the termination of our credit facility. In addition, $19.9 million of cash were used to finance our payments for obligations in connection with acquisitions and was partially offset by proceeds of $2.9 million from the exercise of stock options.
Capital resources and capital expenditures
Our total current assets amounted to $614.9 million as of December 31, 2017, of which $328.8 million consisted of cash and cash equivalents. Total current liabilities amounted to $163.3 million as of December 31, 2017.
Most of our cash and cash equivalents are held in banks in Israel, Switzerland and the U.S.
Our credit risk of our accounts receivable is limited due to the relatively large number of customers and their wide geographic distribution. In addition, we seek to reduce the credit exposures of our accounts receivable by credit limits, credit insurance for many of our customers, ongoing credit evaluation and account monitoring procedures.
We believe that we will have adequate cash and cash equivalents to fund our ongoing operations and that these sources of liquidity will be sufficient to satisfy our capital expenditure and debt requirements for the next twelve months.
Long-term bank loan and credit line
In December 2016, our company entered into a secured loan agreement with Bank Hapoalim Ltd. in connection with our new office facility in Israel, which agreement we refer to as the Bank Loan Agreement. Pursuant to the Bank Loan Agreement, our company borrowed $26 million initially in December 2016, which we refer to as the Bank Loan, and secured a credit line for an additional $24 million, or the Credit Line. Any loans drawn upon the Credit Line will be under similar terms as the Bank Loan. The Bank Loan will mature in December 2023 and is payable in equal consecutive quarterly principal installments of principal and accrued interest. Any early repayment of the Bank Loan is subject to, within the initial three year term of the Bank Loan, a maximum 1% penalty of the amount prepaid. The repayment of the Bank Loan is secured by a first-priority lien on all of our company’s rights in the property of our new office facility in Israel. The Bank Loan bears interest at the rate of LIBOR plus 3.35%. The Bank Loan Agreement contains customary representations and warranties, affirmative covenants and negative covenants, which include, without limitation, restrictions on indebtedness, liens, investments, and certain dispositions with respect to the property secured by the lien. The Bank Loan Agreement also contains customary events of default that entitle the lender to cause any or all of our company's indebtedness to become immediately due and payable and to foreclose on the lien, and includes customary grace periods before certain events are deemed events of default. Borrowings under the Bank Loan Agreement are available mainly for the financing of our new facility in Israel. As of December 31, 2017, we had borrowed $10 million under the Credit Line.
We believe that we were in compliance with all of the covenants under the Bank Loan Agreement related to the Bank Loan and Credit Line as of December 31, 2017.
For information concerning our material commitments as of December 31, 2017, see Item 5.F below (“Tabular Disclosure of Contractual Obligations”).
Critical Accounting Policies and Estimates
We have prepared our consolidated 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 to our consolidated financial statements included in Item 18 of this annual report contains the significant accounting policies and methods that we used to prepare our consolidated financial statements.
The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include:
Long Lived Assets
We base our estimates on historical experience and on various other assumptions which we believes to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results could differ materially from the estimates we use in applying these policies.
We derive revenue from sales of AM systems, consumables, and services. Our AM systems include software and hardware that function together to provide the essential functionality of the tangible system. We recognizes 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.
Revenues from sales to resellers are generally recognized on sell-in basis, upon shipment and when title and risk of loss have been transferred to the resellers. When products and services are sold to a reseller, the reseller is responsible for the installation of the system and for other support services and therefore considered the primary obligor in the arrangement with the end-customers. Products and services sold directly by us or marketed by independent sales agents are recognized based on the gross amount charged to the end-customer as we are considered the primary obligor in the arrangement, retains general inventory risk, establishes the price for our products and assumes the credit risk for amounts billed to our end-customers.
For multiple-element arrangements we allocate revenue to all deliverables based on their relative selling prices and recognize revenue when each element’s revenue recognition criteria are met. In such circumstances, we use the following hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of selling price (“BESP”).
Judgment is required to properly identify the accounting units of multiple element arrangements and to determine the manner in which revenue should be allocated among the units. We account for each element separately and allocate revenue based on our best estimate of the selling price (BESP).
Judgment is required to properly identify the accounting units of multiple element arrangements and to determine the manner in which revenue should be allocated among the units. We account for each element separately and allocate revenue based on our best estimate of the selling price (BESP). Our process for determining BESP considers multiple factors including: the level of support provided to customers, estimated costs to provide our support, and market trends in the pricing for similar offerings. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue ultimately recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could have a material effect on our financial condition and results of operations.
We assess collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of the creditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot be reasonably assured, we will defer recognition of revenue until collectability is assured.
We plan to adopt the Financial Accounting Standards Board's new revenue standard, ASC 606, Revenue from Contracts with Customers, beginning January 1, 2018 which is not expected to change the amount and timing of revenue recognized. Refer to Note 1 to our audited financial statements included in Item 18 of this annual report for further information.
Our effective tax rate is impacted by the geographical mix of taxable income and loss. We record a tax provision for the anticipated tax consequences of our reported operating results. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws and tax rates in the jurisdictions in which we operate. We are subject to income taxes in Israel, the U.S. and other foreign jurisdictions. A significant portion of our income after the Stratasys-Objet December 1, 2012 merger date is taxed in Israel. We have realized and expect to continue to realize significant tax savings based on the determination that some of our industrial projects that have been granted “Approved Enterprise” and “Beneficiary Enterprise” status, which provides certain benefits, including tax exemptions for undistributed income and reduced tax rates. Income not eligible for Approved Enterprise and Beneficiary Enterprise benefits is taxed at the regular corporate rates, which were 26.5% in 2015, 25% in 2016, 24% in 2017 and 23% in 2018 and thereafter. We are also a Foreign Investors Company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in the tax rate normally applicable to Approved Enterprises and Beneficiary Enterprises, depending on the level of foreign ownership. In addition, we are an “Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969, and, as such, are entitled to certain tax benefits.
Our entitlement to the above benefits is subject to our fulfilling the conditions stipulated by the Investment Law and regulations. Should we fail to meet such requirements in the future, income attributable to our Approved Enterprise and Beneficiary Enterprise programs could be subject to the statutory Israeli corporate tax rate and we could be required to refund a portion of the tax benefits already received with respect to such programs, as adjusted by the Israeli consumer price index and interest, or other monetary penalty.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In evaluating the exposure associated with our various tax filing positions, we record reserves for uncertain tax positions in accordance with US GAAP, based on the technical support for the positions and, our past audit experience with similar situations. Although we believe our tax positions comply with applicable tax laws and we intend to defend our positions, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax reserves and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related estimated interest and penalties.
Deferred taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporary differences between the carrying amount and tax bases of assets and liabilities under the applicable tax laws, and on effective tax rates in effect when the deferred taxes are expected to be settled or realized. Deferred taxes for each jurisdiction are presented as a net asset or liability, net of any valuation allowances. Significant judgment required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered all available evidence, including past operating results, the most recent projections for taxable income, and prudent and feasible tax planning strategies. We reassess our valuation allowance periodically and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
We are subject to various legal proceedings, lawsuits, government investigations and claims involving employment-related, patents, commercial, securities, and environmental matters that may arise from time to time in the ordinary course of business. The outcomes of the legal proceedings that are pending as of the date the financial statements are issued are subject to significant uncertainty. We record a liability when we believe that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. We review these matters at least quarterly and adjust these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events, pertaining to a particular case. As such accruals are based on management’s judgment as to the probability of losses, accruals may materially differ from actual verdicts, settlements or other agreements made with regards to such contingencies.
Our inventories are stated at the lower of cost or net realizable value. Cost is determined mainly using standard cost, which approximates actual cost, on a first-in, first-out basis. Inventory costs consist of materials, direct labor and overhead. Net realizable value is determined based on estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We assess periodically our inventories for obsolescence and excess balances, or when certain events or changes in circumstances occur that trigger such assessment. The net realizable value of our inventory is based on certain factors including, but not limited to: forecasted selling prices and future demand for our products and services, historical sales patterns, technological changes, estimated service period, product end-of-life dates, alternative uses for the inventory, new products launches and other market conditions as applicable. If required, we reduce the carrying value of our inventories by an amount equal to the difference between its cost and the net realizable value. Once such inventory is written down, a new lower cost basis for that inventory is established. Our provisions for inventory write-downs for obsolescence and excess balances requires us to utilize significant judgment. Although we make every effort to ensure the accuracy of the net realizable value of our inventories, any significant unanticipated deteriorating factor could have a material impact on the carrying value of our inventories and reported operating results.
Long Lived Assets
Our long-lived assets, other than goodwill, comprised mainly of definite life identifiable intangible assets and property, plant and equipment. Most of our identifiable intangible assets were recognized as part business combinations we have executed in prior periods. Our identifiable intangible assets are primarily comprised of developed technology, trademarks and trade names, customer relationships and patents.
We review the carrying amounts of our long-lived assets for potential impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators may include any significant changes in the manner of our use of the assets or the strategy of our overall business, certain reorganization initiatives, significant negative industry or economic trends and significant decline in our share price for a sustained period. In evaluating recoverability we compare the carrying amounts of the asset or assets groups with their respective estimated undiscounted future cash flows. If the asset or assets group are determined to be impaired, an impairment charge is recorded as the amount by which the carrying amount of the asset or assets group exceed their fair value.
During the year ended December 31, 2017, 2016 and 2015 we recorded impairment of $6.8 million, $24.9 million and $289.0 million related to our long-lived assets.
Goodwill reflects the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is not amortized but rather is tested for impairment annually at the reporting unit level, or whenever events or circumstances present an indication of impairment. We apply the Financial Accounting Standards Board, or FASB, guidance of testing goodwill for impairment. During 2015, we determined that certain indicators of potential impairment that required goodwill impairment analysis for all of our reporting units existed. Accordingly, we performed a quantitative two-step assessment for goodwill impairment for each of our reporting units. As a result, we recorded a non-cash impairment charge of $942.4 million during 2015. The non-cash impairment charges were recorded in order to reduce the carrying amount of goodwill to its estimated fair value. No goodwill impairment was recorded during the year ended December 31, 2017 and 2016.
Determining the fair value of our reporting units requires significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. Projected future cash flows are based on our most recent budget, forecasts and strategic plans as well as certain growth rate assumptions. Potential changes in our costs and operating structure, the expected timing of utilization of synergies strategic opportunities, negative effect of exchange rate differences and overall weakness in the 3D printing marketplace, could negatively impact our near-term cash-flow projections and could trigger a potential impairment of our goodwill. In addition, failure to execute our strategic plans for our reporting units could negatively impact the fair value of our reporting units, and increase the risk of an additional goodwill impairment in the future. We will continue to monitor the fair value our Stratasys-Objet reporting unit to determine whether events and changes in circumstances such as further deterioration in the business climate or operating results, further significant decline in our share price, changes in management’s business strategy or downward changes of our cash flows projections, warrant further interim impairment testing. Refer to Note 7 to our audited financial statements included in Item 18 of this annual report for further information.
On March 3, 2016, the enforcement division of the U.S. Securities and Exchange Commission issued a subpoena to us requesting a number of documents as part of an investigation of the valuations and other calculations we used to assess the impairment of goodwill and/or intangible assets included in the balance sheet in our SEC filings. We have cooperated with the SEC and produced documents in the summer of 2016. On September 25, 2017, the SEC notified us that it was closing its investigation of our company and did not intend on recommending an enforcement action by the SEC.
C. Research and Development, Patents and Licenses, Etc.
For a discussion of our research and development policies, see “Research and Development” and “Regulation— Israeli Tax Considerations and Government Programs – Law for the Encouragement of Capital Investments” in Item 4.B above and the “Risks related to operations in Israel” in Item 3.D above.
D. Trend Information.
For trend information, see the Risk Factors described in Item 3.D above, the “Overview” and “Operating Results” sections of this Item 5 - “Operating and Financial Review and Prospects” and Item 4 - “Information on the Company” above.
E. Off-Balance Sheet Arrangements.
Except for standard operating leases, we have not engaged in any off-balance sheet arrangements, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
We do not believe that our off-balance sheet arrangements and commitments have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
F. Tabular Disclosure of Contractual Obligations.
The following table summarizes our material known contractual obligations and commitments as of December 31, 2017 that we expect to require significant cash outlays in future periods:
|Payments Due by Period|
|Less Than||1-3||3-5||More Than|
|Total||1 Year||Years||Years||5 Years|
U.S. $ in thousands
|Operating lease obligations||29,273||9,243||12,741||6,492||797|
Long-term debt (including estimated interest)
The total amount of unrecognized tax benefits for uncertain tax positions was $27.3 million as of December 31, 2017. Payment of these obligations would result from settlements with taxing authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations are not included in the above table.
A. Directors and Senior Management.
The following table lists the names and ages of our current directors, as well as the names, ages and positions of the current members of our senior management, as of the filing date of this annual report:
|Elchanan Jaglom||76||Chairman of the Board of Directors|
|S. Scott Crump||64||Chairman of the Executive Committee and Chief Innovation Officer|
|Ilan Levin||52||Chief Executive Officer and Director|
|Edward J. Fierko||76||Director|
|John J. McEleney||55||Director|
|David Reis||57||Vice Chairman of the Board of Directors and Executive Director|
|Lilach Payorski||44||Chief Financial Officer|
Elchanan Jaglom has served as Chairman of the Board of Directors since February 2015. From the Stratasys-Objet merger until February 2015, Mr. Jaglom served as the Chairman of the Executive Committee of our company. Prior to the Stratasys-Objet merger, he served as Chairman of Object’s board of directors from 2001 until the Stratasys-Objet merger. Mr. Jaglom also served as the Chairman of Diamond Capital Management Ltd., the investment manager of the Diamond Group of investment funds, until January 2, 2014. In parallel to his involvement with these entities, Mr. Jaglom has been involved in investment management of funds, private equity and venture capital investment since the early 1980s, focusing primarily on early-stage technology companies. He is currently a member of the Board of Trustees of the Tel Aviv Museum of Art and the Ben Gurion University of the Negev. He holds a bachelor’s degree in economics and statistics from the Hebrew University in Jerusalem and an M.B.A. from New York University.
S. Scott Crump has served as Chairman of the Executive Committee of the Board of Directors since February 2015 and as our Chief Innovation Officer since February 2013. Mr. Crump previously served as Chairman of the Board of Directors from the Stratasys-Objet merger until February 2015, as Chief Executive Officer, President, Treasurer and a director of Stratasys, Inc. from its inception in 1988 until the Stratasys-Objet merger, and as Chief Financial Officer of Stratasys from February 1990 to May 1997. Mr. Crump was, with Lisa H. Crump, his wife, a co-founder of Stratasys, Inc., and he is the inventor of our FDM technology. During the period from 1982 to 1988, Mr. Crump was a co-founder and Vice President of Sales of IDEA, Inc., which later changed its name to SI Technologies, Inc., a leading manufacturer of force, load and pressure transducers. Mr. Crump continued to be a director and shareholder of that company until its sale to Vishay Intertechnologies, Inc. (NYSE: VSH) in April 2005. Mr. Crump holds a B.S. in mechanical engineering from Washington State University.
Ilan Levin has served as our Chief Executive Officer since July 1, 2016 and as a director of our company since 2000. Mr. Levin was appointed as President and Vice Chairman of the Objet board in February 2011, in which position he remained until the Stratasys-Objet merger. He has been involved in venture capital and private equity investment activity since 1997, acting as a member of the board of directors and as an advisor for a wide variety of technology-related companies, as well as a director for Vision Sigma Ltd. (TLV: VISN:IT). From 2003 through 2009, he served as Chief Executive Officer of CellGuide Ltd. He holds a B.A.Sc. from the University of Toronto and an LL.B. from Tel Aviv University.
Edward J. Fierko, who has served as a director of our company since the Stratasys-Objet merger, also served in that capacity for Stratasys, Inc. from February 2002 until the merger. Since May 2003, Mr. Fierko has been President of EJF Associates, a consulting firm. From March 2003 to May 2003, Mr. Fierko was Vice President of GE Osmonics, Inc., a manufacturer of reverse osmosis water filtration devices. From November 1999 through February 2003, he served as President and Chief Operating Officer of Osmonics, and from November 1998 to September 1999 he served as Executive Vice President of Osmonics. From September 1987 to August 1998, Mr. Fierko was President and CEO of Ecowater International, a holding company with operating companies in the water, waste and special process treatment industry. Prior to that, Mr. Fierko held several management positions over a 23-year career at General Electric Company (NYSE: GE). He holds a B.S. in Accounting from La Salle University.
Victor Leventhal has served as a director of our company (until May 2016, as an external director) since the closing of the Stratasys-Objet merger on December 1, 2012. Mr. Leventhal has served as a consultant to SolidWorks Corporation, a 3D CAD software company, since 2006. From 2001 to 2006, he was a Group Executive for Dassault Systemes S.A. (NASDAQ: DASTY), the parent company of SolidWorks, where he served on the Global Management Committee. From 1995 to 2001, Mr. Leventhal was the Chief Operating Officer of SolidWorks, where he was responsible for growing the business from its inception. From 1990 to 1995, Mr. Leventhal was the Chief Executive Officer of CAD Solutions, LLC, a leading reseller of 2D and 3D CAD products, which he helped grow from a $5 million company to a $32 million company. From 1985 to 1990, he held numerous executive positions, including serving as the Executive Vice President of Computerland, the largest computer retailer at the time, where he was responsible for franchise development, major account sales, marketing, training, purchasing and vendor relations. Prior to that time, he held various administrative, operations, marketing and financial positions at IBM for 18 years. He has also served on the boards of directors of Solido, a 3D printing company, Graphisoft, an architectural software company, and 3D Express, a startup company in the rapid prototyping industry. Mr. Leventhal received a B.B.A. from the University of Texas.
John J. McEleney, who has served as a director of our company since the Stratasys-Objet merger, served as a director of Stratasys, Inc. from 2007 until the Stratasys-Objet merger. He is the Chief Executive Officer of Onshape Inc. a venture backed start-up company focused on applying modern computing to the 3D product design market. Prior to Onshape he was the Chief Executive of Cloud Switch, which was acquired by Verizon. He served as a director of SolidWorks Corporation, a wholly owned subsidiary of Dassault Systemes S.A. (NASDAQ: DASTY), from June 2000 to May 2008, and also served as its Chief Executive Officer from 2001 until June 2007. Mr. McEleney joined SolidWorks in 1996, serving in several capacities, including Chief Operating Officer and Vice President, Americas Sales. Prior to joining SolidWorks, Mr. McEleney held several key management positions at CAD software pioneer Computervision and at defense contractor Raytheon. Mr. McEleney also serves as a director of Newforma, a privately held software company. He holds a B.S. in Mechanical Engineering from the University of Rochester, an M.S. in Manufacturing Engineering from Boston University and an M.B.A. from Northeastern University.
Dov Ofer has served as our director since July 2017. Mr. Ofer serves as the Chief Executive Officer of Lumenis Computerized Systems Ltd. From 2007 to 2013, Mr. Ofer served as Chief Executive Officer of Lumenis Ltd. (NASDAQ: LMNS), a medical laser device company. From 2005 to 2007, he served as Corporate Vice President and General Manager of HP Scitex (formerly a subsidiary of Scailex Corporation Ltd. (TASE: SCIX)), a producer of large format printing equipment. From 2002 to 2005, Mr. Ofer served as President and Chief Executive Officer of Scitex Vision Ltd. Prior to joining Scitex, Mr. Ofer held various managerial positions in the emerging Israeli high tech sector and participated in different mergers and acquisitions within the industry. Currently, Mr. Ofer serves as chairman of Hanita Coatings RCA Ltd., chairman of Plastopil Hazorea Company Ltd. (TASE: PPIL), vice chairman of Scodix Ltd. and director of Kornit Digital Ltd. and Orbix Medical Ltd. He holds a B.A. in Economics from the Hebrew University in Israel as well as an M.B.A. from the University of California Berkeley in California.
Ziva Patir has served as our director since June 2013, when she was elected as an unclassified director pursuant to an amendment to our amended articles that was adopted in June 2013. Ms Patir serves on the board of directors of Babylon, a public company active in online advertisement, venture capital investments and financial investments. She also serves on the board of directors of Netz Hotels, an investing and financing real-estate company. Until lately she served on the board of directors of ELTA Systems Ltd, an Israeli provider of defense products and services and of UTS, the Israeli AVIS car rental licensee. Since February 2014, she also serves as a member of the board of Lahav at Tel-Aviv University, the leading provider of executive education in Israel, a position that she has held since 2003. Ms. Patir served as the Vice President of Standards, Policy and Sustainability for Better Place, an infrastructure electrical vehicles company providing technology design and service for switchable battery cars, a position that she held from 2008 until May 2013. From 2008 to 2010, she served as Chair of the Board of the Road Safety Authority (RSA) in Israel. From 1996 to 2008, Ms. Patir held the position of Director General of the Standard Institution of Israel (SII). From 2004 to 2008, Ms. Patir served as Vice President of the International Organization for Standardization (ISO), as well as chair of the Technical Management Board, leading overall management of ISO technical work. ISO is the world's largest developer and publisher of international standards. From 1998 to 2000, Ms. Patir was a member of the International Electrotechnical Commission Council Board. Ms. Patir is a Certified Quality Engineer and holds a B.Sc. in Chemistry from Tel-Aviv University and a M.Sc. in Chemistry/Polymer Science from the Weizmann Institute of Science.
David Reis has served as our director since June 2013. He also served as a director of Objet from 2003 until the closing of the Stratasys-Objet merger. Mr. Reis served as our (and, prior to the Stratasys-Objet merger, as Objet’s) Chief Executive Officer from March 2009 until June 30, 2016. Previously, he served as Chief Executive Officer and President of NUR Macroprinters Ltd. (NURMF.PK), a wide format printer manufacturer that was acquired by HP, from February 2006 to March 2008. Prior to joining NUR, Mr. Reis served as the Chief Executive Officer and President of ImageID, an automatic identification and data capture solution provider, and of Scitex Vision (NASDAQ & TASE: SCIX), a developer and manufacturer of wide-format printers. Mr. Reis holds a B.A. in Economics and Management from the Technion-Israel Institute of Technology and an M.B.A. from the University of Denver.
Yair Seroussi has served as our director since July 2017. Mr. Seroussi has served as an Independent Director at DSP Group, Inc. (NASDAQ: DSPG) since February 2002. He serves as a Member of the Advisory Team at SkyFund, a leading mid-market Israeli private equity fund. He is a member of the Board of Governors of the Hebrew University, and Chairman of the Eli Hurvitz Strategic Management Institute at the Tel Aviv University. Mr. Seroussi served as chairman of the board of Bank Hapoalim from 2009 through 2016. Mr. Seroussi also served as the president of the Israeli Bank Association for four years. He served as a board member and as chairman of the audit committee of Bank HaPoalim from 1997 through 2002. Mr. Seroussi was the founder and head or Morgan Stanley Israel for 16 years. He was the founder and chairman of the Mustang Mezzanine Fund. He served as the chairman of the Investment Committee of Mivtachim, Israel’s largest pension fund, and was a member of various investments committees of private equity funds. Mr. Seroussi served as a director of Israel Corp and Frutarom Industries. Mr. Seroussi also served for over a decade in Israel’s Ministry of Finance, where he held several senior positions. Between the years 1988-199, he served as Head of the Office of the Ministry of Finance in the U.S. and Head of the Commodities Division in NY. In 1991-1992, Mr. Seroussi was a member of the team that created the Yozma Program that initiated the Venture Capital industry in Israel. He holds a Bachelor’s degree in Economics and Political Science from the Hebrew University.
Lilach Payorski has served as our Chief Financial Officer since January 1, 2017. She joined Stratasys Ltd. in January 2013 and thereafter served as our Vice President, Corporate Finance, until August 2015, and as our Senior Vice President, Corporate Finance, from August 2015 through December 31, 2016. Prior to joining our company, from December 2009 to December 2012, Ms. Payorski served as Head of Finance at PMC-Sierra, a company operating in the Semiconductors industry, which was subsequently acquired by Microsemi Corporation. Prior to that time, she served as Compliance Controller at Check Point Software Technologies Ltd. (NASDAQ: CHKP), an IT security company, from 2005 to 2009, and in a finance leadership role at Wind River Systems (NASDAQ: WIND), a software company, which was subsequently acquired by Intel Corporation, from 2003 to 2005. Earlier in her career, she served as a CPA with Ernst & Young LLP both in Israel and later in Palo Alto, CA. Ms. Payorski earned a Bachelor of Arts in Accounting and Economics from the Tel Aviv University.
Arrangements for Election of Directors and Members of Management; Family Relationships
There are no arrangements or understandings pursuant to which any of our directors or members of senior management were selected for their roles. There are also no family relationships among any directors or members of our senior management.
The following table presents all compensation that we paid, or accrued, during the year ended December 31, 2017 to all persons who served as a director or as a member of senior management of our company at any time during the year. The table does not include any amounts that we paid to reimburse any of these persons for costs incurred in providing us with services during that period.
|Salaries, Fees, Bonuses||Pension,|
|Related Benefits Paid||and Other Similar|
|or Accrued(1)||Benefits Accrued|
|All directors and members of senior management as a group, (2)||$||2,087,042||(3)||$||151,999|
Does not include the value attributable to stock option grants. For a discussion of stock option grants to our directors and members of senior management, see below.
Comprised of the current directors and senior management members listed in the table under “Directors and Senior Management” in Item 6.A above, as well as Haim Shani, who served as a director for part of 2017 but whose term expired and was not nominated for reelection at our 2017 annual general meeting of shareholders.
This compensation amount for the year ended December 31, 2017 excludes an aggregate of $0.1 million of bonuses that were paid in 2017 in respect of services that had been performed during the previous year.
Pursuant to the Companies Law, the fees payable to our directors and our chief executive officer require approval by (i) the compensation committee of our board, (ii) the board of directors and (iii) our shareholders (in that order). Please see “Compensation Policy and Committee” in Item 6.C (“Board Practices”) below for further information regarding the requirements under the Companies Law in connection with the compensation of directors.
The following table sets forth the directors’ fees, salary or other compensation (excluding value attributable to stock option grants and excluding reimbursement for reasonable expenses incurred in connection with services) that are payable to each of our current directors:
|Name of Director||Annual
|Per Meeting Fee|
Telephonic/ Written Consent)
|S. Scott Crump||$||286,889||(3)||-|
|Edward J. Fierko||$||50,000||$1,500/ $375/$325|
|Victor Leventhal||$||50,000||$1,500/ $375/$325|
|John J. McEleney||$||50,000||$1,500/ $375/$325|
|Ziva Patir||$||50,000||(5)||$1,500/ $375/$325|
|Dov Ofer||$||50,000||$1,500/ $375/$325|
|Yair Seroussi||$||50,000||$1,500/ $375/$325|
The amounts reflected in the “Annual Fee/Salary” column do not include per-meeting fees payable to those directors for whom the above table lists per meeting fees in the right-hand column of the table. The above table does not include an annual fee of US$2,500 for service on each committee of our board of directors on which any of the above directors serves (as described under Item 6.C below).
Constitutes salary payable in respect of the consulting and director services provided by an entity affiliated with Mr. Jaglom. Does not include Israeli value added tax, or VAT, that is due on the salary payable to Mr. Jaglom.
Constitutes the aggregate salary payable to Mr. Crump for all of the services that he provides to our company, including in respect of his roles as Chairman of the Executive Committee and Chief Innovation Officer of our company.
Approximately NIS1,548,000. This amount constitutes the aggregate base salary payable to Mr. Levin his services as Chief Executive Officer and member of the board of the Company. This amount excludes other benefits that are provided for by Israeli law or that are customary for senior executives in Israel, including our contribution of amounts equal to 5%, 8.33%, 2.5%, and 7.5% of Mr. Levin’s gross monthly salary towards certain pension, severance, disability and tax-advantaged savings funds, and Mr. Levin’s right to use (and all related fixed and variable costs in respect of) a leased car that we provide to him. This amount also does not include VAT that is due on the salary payable to Mr. Levin. In the event of the termination of Mr. Levin’s employment (by either Mr. Levin or our Company), he will be entitled to six months’ notice, during which time he will receive his monthly base salary (other than in the event of termination by our company for cause). At our 2017 annual general meeting of shareholders, our shareholders approved a bonus of $100,000 for Mr. Levin in respect of the 2016 year, as well as a one-time grant of options to purchase 200,000 ordinary shares of our company pursuant to our 2012 Omnibus Equity Incentive Plan.
Does not include VAT that is due on the fees payable to Ms. Patir.
This constitutes the amount (not including VAT, which is due on fees payable to Mr. Reis) for Mr. Reis’ services as a board member, including in his role as Vice Chairman of the Board. In addition to this amount (which was approved by our shareholders), our shareholders also approved annual cash compensation for Mr. Reis of NIS 324,000 (approximately $91,368) for his services as our Executive Director, plus other benefits that are provided for by Israeli law or that are customary for senior executives in Israel, including the right to use (and all related fixed and variable costs in respect of) a leased car.
Director/Officer Equity Compensation
Grants to directors who are also senior management members
During the year ended December 31, 2017, we granted stock options to purchase an aggregate of 300,000 of our ordinary shares to members of our senior management who also serve as our directors, Messrs. Levin (200,000 ordinary shares) and Crump. (100,000 ordinary shares). Those option grants are subject to the following terms:
Exercise Price: $19.96 per ordinary share (constituting the fair market value of our ordinary shares, as determined based on the average closing price of the ordinary shares on the trading days during the 30-day period following the date of the approval of the grants by the compensation committee of our board of directors on March 6, 2017).
Grant Date: April 6, 2017 (the day following the foregoing 30-day period utilized for determining the exercise price, as described above).
Vesting Schedule: Subject to Mr. Levin’s and Mr. Crump’s respective continued employment as our Chief Executive Officer and Chief Innovation Officer, respectively, the options will vest over the course of a four-year period, commencing on July 1, 2016 and June 21, 2017, respectively, with 25% of the grant vesting on the first anniversary of the vesting commencement date, followed by quarterly vesting thereafter of 6.25% of the grant at the end of each quarter of continuous employment over the following 12 quarters.
Exercise Period: The options will remain exercisable for a period of 10 years from the grant date.
Grants to independent/non-employee directors
At our 2016 annual general meeting of shareholders, our shareholders approved the following equity package for each of our independent and non-executive directors, which package was approved once again at our 2017 annual general meeting of shareholders for Messrs. Ofer and Seroussi specifically, who were initially elected as directors at that 2017 meeting:
Initial grant: Initial grant of options to purchase 10,000 ordinary shares of our company.
Exercise Price: Equal to the fair market value of the average of the closing prices of an ordinary share of our company on the trading days during the 30-day period following the date of the approval of a grant by our shareholders.
Vesting Schedule: The options shall vest equally on a monthly basis until the earlier of (i) the first anniversary of the grant date and subject to continuous service of the applicable independent director, or (ii) at the end of the term of the applicable independent director at the next annual general meeting of the shareholders of our company after the grant at which such director’s directorship may be extended or terminated (which we refer to as the Full Vesting Date), provided that all such options shall be fully vested at the Full Vesting Date.
Automatic Additional Grants: Automatic additional grants shall be approved at the commencement of the term of each independent director, such that an additional 10,000 options shall be granted to each such continuing director on the first and second anniversaries of the commencement of such director’s term, contingent on the continued service of such director. Such additional grants shall have an exercise price equal to the fair market value of the average of the closing prices of an ordinary share of our company on the trading days during the 30-day period following the first and second anniversaries, respectively, of the commencement of such director’s term, and shall vest in the same manner as specified under “Vesting Schedule” above.
For a description of the terms of our stock option and share incentive plans, see “Share Ownership - Stock Option and Share Incentive Plans” in Item 6.E below.
Office Holder Compensation
The table below outlines the compensation actually paid to our five most highly compensated senior office holders during or with respect to the year ended December 31, 2017, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, and in accordance with the above mentioned securities regulations, “compensation” includes base salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation.
Summary Compensation Table
Information Regarding the Covered Executive(1)
|Name and Principal||Base||Variable||Benefit and||Equity-Based||Equity-Based||Total|
|Chief Executive Officer|
|CEO of SDM|
|CEO of MakerBot||$||538,000||$||135,000||$||43,935||$||—||$||716,935||$||526,072||$||1,243,007|
|Chief Innovation Officer||$||262,854||$||178,741(6)||$||24,035||—||$||465,629||$||690,554||$||1,156,183|
All amounts reported in the table are in terms of cost to the Company, as recorded in our financial statements.
All current executive officers listed in the table are full-time employees or consultants of our company. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for 2017.
Amounts reported in this column refer to commission, incentive and the maximum contractual bonus payments potentially payable for 2017.
Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines.
Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2017 with respect to equity-based compensation. Equity-based compensation is determined based on the awards' fair value on their grant date. Assumptions and key variables used in the calculation of such amounts are described in Note 11 to our audited consolidated financial statements, which are included in Item 18 of this annual report.
|(6)||This amount represents a potential bonus in respect of 2017 that is subject to approval by our shareholders.|
Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting objectives and targets that are set annually by our Chief Executive Officer and approved by our compensation committee and our board of directors, in that order. These same corporate bodies also set the bonus targets for our Chief Executive Officer. In accordance with a December 2012 amendment to the Companies Law, we have adopted a compensation policy that governs the compensation of our directors and senior management and which has been approved by (i) the compensation committee of our board, (ii) the board of directors and (iii) our shareholders (in that order). Please see “Compensation Policy and Committee” in Item 6.C (“Board Practices”) below for further information.
C. Board Practices.
Board of Directors
Under the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our board of directors serves as the primary corporate body responsible for risk management for our company, including cybersecurity risks, and periodically consults with the management of our company to obtain updates concerning, and internally discusses, the most material risks currently facing our company, and how those risks are being mitigated. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are also appointed by our board of directors, subject to the terms of any applicable employment agreements that we may enter into with them.
Under our amended articles, our board of directors must consist of at least seven and not more than 11 directors, including, to the extent applicable, at least two external directors required to be elected under the Companies Law.
In May 2016, we elected to be governed by a newly-adopted exemption under the Companies Law regulations that exempts us from appointing external directors and from complying with the Companies Law requirements related to the composition of the audit committee and compensation committee of our board of directors. Our eligibility for that exemption is conditioned upon: (i) the continued listing of our ordinary shares on the NASDAQ Stock Market (or one of a few select other non-Israeli stock exchanges); (ii) there not being a controlling shareholder (generally understood to be a 25% or greater shareholder) of our company under the Companies Law; and (iii) our compliance with the NASDAQ Listing Rules requirements as to the composition of (a) our board of directors—which requires that we maintain a majority of independent directors (as defined under the NASDAQ Listing Rules) on our board of directors and (b) the audit and compensation committees of our board of directors (which require that such committees consist solely of independent directors (at least three and two members, respectively), as described under the NASDAQ Listing Rules). At the time that it determined to exempt our company from the external director requirement, our board affirmatively determined that we meet the conditions for exemption from the external director requirement, including that a majority of the members of our board, along with each of the members of the audit and compensation committees of the board, are independent under the NASDAQ Listing Rules.
As a result of our election to be exempt from the external director requirement under the Companies Law, each of our directors is elected annually, at our annual general meeting of shareholders. The vote required for the election of each director is a majority of the voting power represented at the meeting and voting on the election proposal. Following certain changes to our board of directors based on the election at our 2017 annual general meeting of shareholders that took place in July 2017, the current members of our board consist of the Chairman— Elchanan Jaglom, the Chairman of the Executive Committee—S. Scott Crump, Ilan Levin (our Chief Executive Officer), Edward J. Fierko, Victor Leventhal, John J. McEleney, Dov Ofer, Ziva Patir, David Reis (an Executive Director and Vice Chairman of the Board) and Yair Seroussi. For more information, please see Election of Directors in Item 10.B (Memorandum and Articles of Association) below.
Our board of directors may appoint directors to fill vacancies on the board, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated.
In accordance with the exemption available to foreign private issuers under the NASDAQ Listing Rules, we do not follow the requirements of the NASDAQ rules with regard to the process of nominating directors. Instead, we follow Israeli law and practice, in accordance with which our board of directors (based on the recommendation of the executive committee thereof) is authorized to recommend to our shareholders director nominees for election. Under the Companies Law and our amended articles, nominations for directors may also be made by any shareholder holding at least one percent (1%) of our outstanding voting power. However, any such shareholder may make such a nomination only if a written notice of such shareholder’s intent to make such nomination (together with certain documentation required under the Companies Law) has been delivered to our registered Israeli office within seven days after we publish notice of our upcoming annual general meeting (or within 14 days after we publish a preliminary notification of an upcoming annual general meeting).
In addition to its role in making director nominations, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. Under applicable regulations, a director with accounting and financial expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. See “—External Directors” in this Item 6.C below. He or she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of our company and the scope and complexity of its operations. Our board of directors has determined that our company requires one director with such expertise.
Under the Companies Law, the boards of directors of companies whose shares are publicly traded, including companies with shares traded in the United States, are generally required to include at least two members who qualify as external directors.
Our election to exempt our company from compliance with the external director requirement can be reversed at any time by our board of directors, in which case we would need to hold a shareholder meeting to once again appoint external directors, whose election would be for a three-year term. The election of each external director would require a majority vote of the shares present and voting at a shareholders meeting, provided that either:
the majority voted in favor of election includes a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, which we refer to as a disinterested majority; or
the total number of shares held by non-controlling, disinterested shareholders (as described in the previous bullet-point) voted against the election of the director does not exceed two percent (2%) of the aggregate voting rights in the company.
The term “controlling shareholder” is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager.
For further information concerning the Companies Law provisions related to external directors, please see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board of Directors—External Directors” in our annual report on Form 20-F for the year ended December 31, 2015, which we filed with the SEC on March 21, 2016.
Under the Companies Law, the board of directors of a public company must appoint an audit committee. The audit committee must consist of at least three directors. To the extent a company is required to appoint external directors, this committee must include all of the external directors, one of whom must serve as chairman of the committee. There are additional requirements as to the composition of the audit committee under the Companies Law. However, when we elected to exempt our company from the external director requirement, we concurrently elected to exempt our company from all of such requirements (which exemption is conditioned on our fulfillment of all NASDAQ listing requirements related to the composition of the audit committee).
The members of our audit committee consist of Victor Leventhal, Yair Seroussi and Edward J. Fierko. Mr. Fierko serves as chairman of the committee. Our board of directors has determined that each of Messrs. Leventhal, Seroussi and Fierko meets the independence requirements set forth in the Listing Rules of the NASDAQ Stock Market and in Rule 10A-3 under the Exchange Act.
Our board of directors has determined that Mr. Fierko qualifies as an audit committee financial expert, as defined under Item 16A of the SEC’s Form 20-F, and has the requisite financial sophistication set forth in the NASDAQ rules and regulations.
Our board of directors has adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules of the SEC and the Listing Rules of the NASDAQ Stock Market, as well as the requirements for such committee under the Companies Law, including the following:
oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors in accordance with Israeli law;
recommending the engagement or termination of the person filling the office of our internal auditor; and
recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors.
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
Under the Companies Law, our audit committee is responsible for (i) determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices, (ii) determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary) (see “—Approval of related party transactions under Israeli Law” below in this Item 6.C), (iii) determining standards and policies for determining whether a transaction with a controlling shareholder or a transaction in which a controlling shareholder has a personal interest is deemed insignificant or not and the approval requirements (including, potentially, the approval of the audit committee) for transactions that are not insignificant including the types of transactions that are not insignificant, (iv) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to the board and propose amendments thereto, (v) examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities, (vi) examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor and (vii) establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees. Our audit committee may not approve an action or a related party transaction, or take any other action required under the Companies Law, unless at the time of approval a majority of the committee’s members are present, which majority consists of unaffiliated directors including at least one external director.
Upon the closing of the Stratasys-Objet merger, our board of directors appointed an executive committee. The roles of this committee are (i) to oversee the implementation of the business strategy of our company, subject to board approval for matters outside of the ordinary course of business (as is required under the Companies Law), and (ii) to exercise such other duties as the board may resolve from time to time. The members of the executive committee consist of Messrs. S. Scott Crump, who serves as chairman of the executive committee, Elchanan Jaglom, John McEleney and Ilan Levin.
Compensation Committee and Compensation Policy
Under a December 2012 amendment to the Companies Law, we have appointed a compensation committee and established a policy regarding the terms of engagement of office holders, or a compensation policy. Such compensation policy was set by our board, after considering the recommendations of our newly-appointed compensation committee, and was approved by our shareholders in September 2013. In February 2015, following approval by our compensation committee and board, our shareholders approved an amended and restated version of our compensation policy at an extraordinary general meeting of shareholders.
The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of our office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy also relates to certain factors, including advancement of our objectives, our business and our long-term strategy, and creation of appropriate incentives for executives. It also considers, among other things, our risk management, size and the nature of our operations. The compensation policy furthermore considers the following additional factors:
the knowledge, skills, expertise and accomplishments of the relevant director or executive;
the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her;
the relationship between the terms offered and the average compensation of the other employees of our company, including those (if any) employed through manpower companies;
the impact of disparities in salary upon work relationships in our company;
the possibility of reducing variable compensation at the discretion of the board of directors; and the possibility of setting a limit on the exercise value of non-cash variable compensation; and
as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, our company’s performance during that period of service, the person’s contribution towards our company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving our company.
The compensation policy also includes the following principles:
the link between variable compensation and long-term performance and measurable criteria;
the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;
the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in our financial statements; and
the minimum holding or vesting period for variable, equity-based compensation.
The compensation policy must also consider appropriate incentives from a long-term perspective and maximum limits for severance compensation.
Under the December 2012 amendment to the Companies Law, our compensation committee is responsible for recommending the compensation policy to our board of directors for its approval (and subsequent approval by our shareholders) and is charged with duties related to the compensation policy and to the compensation of our office holders as well as functions related to approval of the terms of engagement of office holders, including:
recommending whether our compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years (approval of the continuation of an existing compensation policy for a company such as ours must in any case occur every three years);
recommending to our board periodic updates to the compensation policy;
assessing implementation of the compensation policy; and
determining whether the compensation terms of the chief executive officer of our company need not be brought to approval of the shareholders (under special circumstances).
As to the composition of the compensation committee, under the Companies Law, if a company is required to appoint external directors, the committee must consist of at least three (3) members, including all of the external directors, one of whom must serve as chairman of the committee. There are additional requirements as to the composition of the audit committee under the Companies Law. However, when we elected to exempt our company from the external director requirement, we concurrently elected to exempt our company from all of such requirements (including the three-member minimum). Our exemption under the Companies Law is conditioned on our fulfillment of all NASDAQ listing requirements related to the composition of the compensation committee.
The compensation committee is subject to the same Companies Law restrictions as the audit committee as to who may not be present during committee deliberations (as described under “—Approval of Related Party Transactions Under Israeli Law—Fiduciary Duties of Directors and Executive Officers—Disclosure of Personal Interests of an Office Holder” below).
The NASDAQ Listing Rules also require that the compensation of the chief executive officer and all other executive officers of our company be determined, or be recommended to the board for determination, either by a majority of the independent directors, or by a compensation committee consisting solely of independent directors (subject to a minimum of two committee members).
We appointed our compensation committee in mid-2013. The committee currently consists of Victor Leventhal, Ziva Patir and John McEleney. Victor Leventhal serves as chairman of the committee. Our board of directors has determined that each of Messrs. Leventhal and McEleney, and Ms. Patir, meets the independence requirements set forth in the Listing Rules of the NASDAQ Stock Market and in Rule 10C-1 under the Exchange Act.
Our board of directors does not currently have a nominating committee, as director nominations are made in accordance with the terms of our articles, as described in “—Board of Directors” above. We rely upon the exemption available to foreign private issuers under the Listing Rules of the NASDAQ Stock Market from the NASDAQ listing requirements related to independent director oversight of nominations to our board of directors and the adoption of a formal written charter or board resolution addressing the nominations process. Also see Item 16.G Corporate Governance below.
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee and nominated by the board of directors. An internal auditor may not be:
a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights;
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
an office holder (including a director) of the company (or a relative thereof); or
a member of the company’s independent accounting firm, or anyone on his or her behalf.
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. Moshe Cohen of Chaikin Cohen Rubin & Co. has served as our internal auditor since his appointment effective upon the Stratasys-Objet merger.
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Directors and Executive Officers
The Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under Item 6.A “Directors and Senior Management” is an office holder under the Companies Law.
An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office holder act in good faith and in the best interests of the company. The duty of care includes a duty to use reasonable means to obtain:
information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
all other important information pertaining to these actions.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs;
refrain from any activity that is competitive with the company;
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.
Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she may have and all related material information known to him or her and any documents concerning any existing or proposed transaction with the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A “personal interest” includes an interest of any person in an act or transaction of a company, including a personal interest of one’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest stemming from one’s ownership of shares in the company. A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction. Under the Companies Law, an “extraordinary transaction” is defined as any of the following:
a transaction other than in the ordinary course of business;
a transaction that is not on market terms; or
a transaction that may have a material impact on a company’s profitability, assets or liabilities.
If it is determined that an office holder has a personal interest in a transaction, approval by the board of directors is required for the transaction, unless the company’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may not approve a transaction or action that is adverse to the company’s interest or that is not performed by the office holder in good faith. Approval first by the company’s audit committee and subsequently by the board of directors is required for an extraordinary transaction with an office holder. Compensation of, or an undertaking to indemnify or insure, an office holder, requires approval by the compensation committee, the board of directors and, in certain cases (for directors, the chief executive officer, and any executive officer whose compensation terms do not conform to the then-existing compensation policy) the shareholders, in that order. Compensation of an individual office holder, including the chief executive officer (but excluding a director), that does not conform to the company’s compensation policy may be adopted under special circumstances despite failure to obtain shareholder approval if, following the relevant shareholder vote, the compensation committee followed by the board once again approves the compensation, based on renewed and specific analysis of relevant factors.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors, the audit committee or compensation committee may not be present at such a meeting or vote on that matter unless a majority of the board, audit committee or compensation committee (as appropriate) has a personal interest in the matter, or unless the chairman of the board, audit committee or compensation committee (as appropriate) determines that he or she should be present in order to present the transaction that is subject to approval. If a majority of the members of the board, audit committee or compensation committee has a personal interest in the approval of a transaction, then all directors may participate in discussions of the board of directors, audit committee or compensation committee on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Disclosure of Personal Interests of Controlling Shareholders
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes any shareholder who holds 25% or more of the voting rights if no other shareholder holds more than 50% of the voting rights. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be a single shareholder and may be deemed a controlling shareholder for the purpose of approving such transaction. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or a transaction with a controlling shareholder or his or her relative, directly or indirectly, require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. In addition, the shareholder approval must fulfill one of the following requirements:
a disinterested majority; or
the votes of shareholders who have no personal interest in the transaction and who are present and voting, in person, by proxy or by voting deed at the meeting, and who vote against the transaction may not represent more than two percent (2%) of the voting rights of the company.
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
The engagement of a controlling shareholder as an office holder or employee requires the same approvals as are described immediately above, except that the approval of the compensation committee, rather than the audit committee, is required.
Pursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders and at class shareholder meetings with respect to the following matters:
an amendment to the company’s articles of association;
an increase of the company’s authorized share capital;
a merger; or
the approval of interested party transactions and acts of office holders that require shareholder approval.
In addition, a shareholder also has a general duty to refrain from discriminating against other shareholders.
In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it has the power to determine the outcome of a shareholder vote or a shareholder class vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or other power towards the company. The Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is inserted in its articles of association. Our amended articles include such a provision. The company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
financial liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent.
Under the Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder; and
a financial liability imposed on the office holder in favor of a third party.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
a breach of fiduciary duty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
an act or omission committed with intent to derive illegal personal benefit; or
a fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our compensation committee and our board of directors and, with respect to directors or controlling shareholders, their relatives and third parties in which such controlling shareholders have a personal interest, also by the shareholders. See “—Approval of Related Party Transactions Under Israeli Law—Fiduciary Duties of Directors and Executive Officers” above in this Item 6.C.
Our amended articles permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we have entered into agreements with each of our office holders undertaking to indemnify them to the fullest extent permitted by Israeli law. Furthermore, until the sixth anniversary of the effective time of the Stratasys-Objet merger, we are covering the directors and officers of Stratasys, Inc. and its subsidiaries with respect to acts or omissions occurring prior to the effective time of the merger. The limits, terms and conditions of this coverage are at least as favorable as the limits, terms and conditions in the policy that Stratasys, Inc. maintained up to the effective time of the Stratasys-Objet merger.
Directors’ Service Contracts
For a description of service contracts that we have entered into with our directors that provide for benefits upon termination of employment or other service, please see Item 7.B, “Related Party Transactions— Employment and Consulting Agreements with Directors and Executive Officers” below.
The number of our full-time equivalent employees, and the distribution of employees (i) geographically and (ii) within the divisions of our company, in each case as of December 31, 2017, 2016 and 2015 are set forth in the two tables below.
|Number of full-time equivalent employees|
|by region as of December 31,|
|Number of full-time equivalent employees|
|by function as of December 31,|
|Operations and support||836||788||929|
|Research and development||398||551||543|
|Sales and marketing||331||441||558|
|General and administrative||416||373||403|
* Includes employees in Latin America.
During the years covered by the above tables, we did not employ a significant number of temporary employees.
The moderate decrease in the size of our workforce in each of 2017 and 2016 relative to the previous year was due to our implementation of operational efficiencies, which included elimination of excess employees in certain divisions of our company.
While none of our employees is party to a collective bargaining agreement, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees in Israel by order of the Israel Ministry of Labor. These provisions primarily concern the length of the workday, minimum daily wages for professional workers, pension fund benefits for all employees, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
We have never experienced any employment-related work stoppages. We believe that our relationship with our employees is good.
The employees of our subsidiaries are subject to local labor laws and regulations that vary from country to country.
E. Share Ownership.
The following table lists, as of February 14, 2018, the number of our ordinary shares owned, and stock options held, by each of the directors and members of our senior management who served as such during the year (including for part of the year) ended December 31, 2017:
|Shares of Stratasys(1)||Stratasys stock options(2)|
|Percent of||Number held(4)|
|Name||owned(3)||owned(3)||within 60 days||within 60 days||share||date|
|Elchanan Jaglom||See table in|
|Chairman of the Board||Item 7. A|
|S. Scott Crump||381,324||(5)||*||18,000||—||$||46.87||June 18, 2018|
|Chairman of the Executive Committee||100,000||$||82.15||June 21, 2023|
|—||100,000||$||19.96||April 6, 2027|
|Ilan Levin||209,257||*||87,500||112,500||$||19.96||April 6, 2027|
|Chief Executive Officer and Director|
|Edward J. Fierko||118,041||(6)||*||18,000||—||$||46.87||June 18, 2018|
|Director||22,000||—||$||82.15||June 21, 2023|
|20,625||1,375||$||103.30||August 8, 2020|
|10,000||—||$||21.44||June 4, 2026|
|6,666||3,334||$||23.41||July 18, 2027|
|Victor Leventhal||33,845||*||19,179||—||$||74.95||December 1, 2022|
|Director||5,000||—||$||21.44||June 4, 2026|
|6,666||3,334||$||23.41||July 18, 2027|
|John J. McEleney||64,591||*||10,800||—||$||46.87||June 18, 2018|
|Director||16,500||—||$||82.15||June 21, 2023|
|20,625||1,375||$||103.30||August 8, 2020|
|10,000||—||$||21.44||June 4, 2026|
|6,666||3,334||$||23.41||July 18, 2027|
|Ziva Patir||46,248||*||29,582||—||$||82.15||June 21, 2023|
|Director||10,000||—||$||21.44||June 4, 2026|
|6,666||3,334||$||23.41||July 18, 2027|
|Vice Chairman of the Board and Executive Director|
|Haim Shani||(7) (8)||*|
|Chief Financial Officer|
|*||Constitutes less than 1% of our outstanding shares.|
All of our shares (including shares held by directors and members of senior management) have identical voting rights.
For a description of Stratasys’ stock option plans, please see “Stock Option and Share Incentive Plans” in this Item below. All options granted under such plans have been granted without payment of any cash consideration therefor by the grantees thereof.
In accordance with Rule 13d-3 under the Exchange Act, the number of shares and the percentages shown for individual persons or groups include any ordinary shares underlying stock options held by such person or group that were exercisable within 60 days of February 14, 2018 and that are also reflected in the column titled “Stratasys stock options — Number held — Exercisable within 60 days.” Further in keeping with such Rule 13d-3, the computation of percentage ownership is based upon 53,644,037 ordinary shares outstanding at February 14, 2018, plus such number of ordinary shares as such person (but not any other person or group) had the right to receive upon the exercise of stock options within 60 days thereof.
Each stock option is exercisable for one ordinary share.
Includes 176,294 ordinary shares owned of record by Mr. Crump’s wife.
Includes 20,375 ordinary shares held by Mr. Fierko’s wife.
Because each of Messrs. Ofer, Seroussi and Shani, and Ms. Payorski, beneficially owns less than 1% of our outstanding ordinary shares and his or her beneficial ownership has not previously been disclosed to our shareholders or otherwise made public, it is being omitted from this annual report pursuant to an allowance provided by the SEC’s Form 20-F.
Mr. Shani served as a director until our 2017 annual general meeting of shareholders in July 2017, and elected not to be nominated for re-election at that meeting.
Stock Option and Share Incentive Plans
The following sets forth certain information with respect to our current stock option and share incentive plan. The following description is only a summary of the plan and is qualified in its entirety by reference to the full text of the plan, which serves as an exhibit to this annual report.
Upon the expiration of our stock option and share incentive plan, no further grants may be made thereunder, although any existing awards will continue in full force in accordance with the terms under which they were granted.
2012 Omnibus Equity Incentive Plan
Our 2012 Omnibus Equity Incentive Plan, which became effective at the effective time of the Stratasys-Objet merger, provides for the grant of options, restricted shares, restricted share units and other share-based awards to our and our subsidiaries’ respective directors, employees, officers, consultants, and advisors and to any other person whose services are considered valuable to our company or any of our affiliates. Following the approval of the 2012 Plan by the Israeli tax authorities, we have only granted options or other equity incentive awards under the 2012 Plan. All previously-granted options and awards under our Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan have expired. Under the 2012 Plan, there were 2,500,000 ordinary shares originally reserved for issuance, none of which was granted prior to the effectiveness of the merger. Upon the adoption of an amendment to the 2012 Plan at our extraordinary general meeting of shareholders in February 2013, the reserved pool under the plan consisted of 4,000,000 shares, which was to be automatically increased annually on January 1 (beginning on January 1, 2014) by a number of ordinary shares equal to the lower of (i) 500,000 shares, subject to adjustment due to certain changes as provided under the 2012 Plan, and (ii) a number of shares determined by our board of directors, if so determined prior to the January 1 on which the increase will occur. Pursuant to that provision, on each of January 1, 2015, 2016, 2017 and 2018, the pool of shares under the 2012 Plan was automatically increased by 500,000 shares, to 5,000,000 shares, 5,500,000, 6,000,000 and 6,500,000 shares total, respectively.
The 2012 Plan is administered by our board of directors or by a committee designated by the board, which determines, subject to Israeli law, the grantees of awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the 2012 Plan. The 2012 Plan enables our company to issue awards under various tax regimes including, without limitation, pursuant to Sections 102 and 3(9) of the Tax Ordinance and Section 422 of U.S. Internal Revenue Code of 1986, to which we refer as the Code.
Section 102 of the Tax Ordinance allows employees, directors and officers who are not controlling shareholders and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. Our Israeli non-employee service providers and controlling shareholders may only be granted options under Section 3(9) of the Tax Ordinance, which does not provide for similar tax benefits. Section 102 of the Tax Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Tax Ordinance, the most favorable tax treatment for grantees, permits the issuance to a trustee under the “capital gains track.” However, under this track we will not be allowed to deduct an expense with respect to the issuance of the options or shares. Options granted under the 2012 Plan to U.S. residents may qualify as “incentive stock options” within the meaning of Section 422 of the Code. The exercise price for “incentive stock options” must not be less than the fair market value on the date on which an option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
Under the 2012 Plan, we are expected to grant options to our employees, directors and officers who are not controlling shareholders and are considered Israeli residents, under the capital gains track. In order to comply with the terms of the capital gains track, all options granted under the 2012 Plan pursuant and subject to the provisions of Section 102 of the Tax Ordinance, as well as the ordinary shares to be issued upon exercise of these options and other shares received subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be granted to a trustee for the benefit of the relevant employee, director or officer and should be held by the trustee for at least two years after the date of the grant.
Awards under the 2012 Plan may be granted until September 16, 2022, ten years from the date on which the 2012 Plan was approved by our shareholders.
Options granted under the 2012 Plan generally vest over four years commencing on the date of grant such that 25% vest after one year and an additional 6.25% vest at the end of each subsequent three-month period thereafter for 36 months. Options, other than certain incentive share options, that are not exercised within ten years from the grant date expire, unless otherwise determined by the board or its designated committee, as applicable. Incentive share options granted to a person holding more than 10% of the combined company’s voting power expire within five years from the date of the grant. In case of termination for reasons of death, disability, or retirement, the grantee or his legal successor may exercise options that have vested prior to termination within a period of one year from the date of disability or death, or within three months following retirement. If we terminate a grantee’s employment or service for cause, all of the grantee’s vested and unvested options will expire on the date of termination. If a grantee’s employment or service is terminated for any other reason, the grantee may exercise his or her vested options within 90 days of the date of termination. Any expired or unvested options return to the pool for reissuance.
In the event of a merger or consolidation of our company, or a sale of all, or substantially all, of our shares or assets or other transaction having a similar effect, then without the consent of the option holder, the board or its designated committee, as applicable, may but is not required to (i) cause any outstanding award to be assumed or an equivalent award to be substituted by such successor corporation or (ii) in case the successor corporation refuses to assume or substitute the award (a) provide the grantee with the option to exercise the award as to all or part of the shares or (b) cancel the options against payment in cash in an amount determined by the board or the committee as fair in the circumstances. Notwithstanding the foregoing, the board or its designated committee may upon such event amend or terminate the terms of any award, including conferring the right to purchase any other security or asset that the board shall deem, in good faith, appropriate.
Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan
Our Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan, or the 2004 Plan, which was adopted by our board of directors on August 15, 2004 and amended and restated by the board of directors on July 9, 2007 and again on May 30, 2011, has expired, and all outstanding awards under the 2004 Plan have also since expired.
Stratasys, Inc. Plans
Pursuant to the Stratasys-Objet merger agreement, upon the consummation of the Stratasys-Objet merger, each option exercisable for one share of Stratasys, Inc. common stock converted into an option to purchase one ordinary share of Stratasys Ltd. Furthermore, we assumed the obligations of Stratasys, Inc. related to the issuance of shares underlying those options under its then-existing option plans, consisting of the Stratasys, Inc. 1998 Incentive Stock Option Plan, Stratasys, Inc. 2000 Incentive Stock Option Plan, Stratasys, Inc. 2002 Long-Term Performance and Incentive Plan, and Stratasys, Inc. 2008 Long-Term Performance and Incentive Plan, which we refer to collectively as the Stratasys, Inc. plans. Each option so assumed pursuant to the Stratasys-Objet merger agreement remains governed by the terms and conditions of the relevant grant instrument as well as the Stratasys Inc. plan under which it was granted (with appropriate changes to reflect Stratasys Ltd. as the company whose shares are issuable upon exercise of the option). As of December 31, 2017, a total of 130,500 ordinary shares were issuable upon exercise of options that were vested and exercisable under the Stratasys, Inc. plans.
The following table presents certain option data information for the above-described stock option and share incentive plans as at February 14, 2018:
|Reserved||Number of||Number of||Price of|
|Plan||Grants||Granted out of Reserve||for Future Grants||Outstanding||Options|
|Stratasys, Inc. Plans||—||—||None||130,500||$||46.87|
On December 3, 2012, we filed a registration statement on Form S-8 to register the issuance of ordinary shares in respect of then-outstanding options to directors, officers, employees and eligible consultants under the 2004 Plan and the Stratasys, Inc. plans. On September 3, 2013, we filed a registration statement on Form S-8 to register the issuance of ordinary shares underlying options granted or to be granted under the 2012 Plan.
A. Major Shareholders
Ownership by Major Shareholders
The following table presents the beneficial ownership of our ordinary shares by each person who is known by us to be the beneficial owner of 5% or more of our outstanding ordinary shares (to whom we refer as our major shareholders), based on the most recent beneficial ownership reports filed with the SEC by such persons on or before February 14, 2018. The data presented is based on information provided to us, or disclosed in public filings with the SEC, by the major shareholders.
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares for which a person exercises sole or shared voting or investment power, or for which a person has or shares the right to receive the economic benefit of ownership of the shares. The table below includes the number of shares underlying options that are exercisable within 60 days after February 14, 2018. Shares issuable upon the exercise of such options are deemed to be outstanding for the purpose of computing the ownership percentage of the person, entity or group holding such options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person, entity or group. The ownership percentages reflected below are based on 53,644,037 ordinary shares outstanding as of February 14, 2018.
Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners of the shares listed below have sole investment and voting power with respect to, and the sole right to receive the economic benefit of ownership of, such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We know of no arrangements that would, at a subsequent date, result in a change of control of our company.
|Beneficial Owner||Shares||within 60 Days||Ownership||Ownership|
|ArrowMark Colorado Holdings LLC||4,285,964||(2)||—||4,285,964||8.0%|
|PRIMECAP Management Company||6,291,000||(3)||—||6,291,000||11.7%|
Represents shares beneficially owned as of December 31, 2017, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed by Elchanan Jaglom on February 14, 2018. Consists of (i) 2,434,787 ordinary shares held by Samson Capital, LLC, with respect to which Mr. Jaglom may be deemed to share beneficial ownership, and (ii) 520,838 ordinary shares held by Hancock LLC, a California limited liability company of which 99.9% of the membership interests are held by a company of which Mr. Jaglom is a director. Mr. Jaglom is party to an agreement with respect to the ordinary shares held by Samson Capital, LLC that provides him with the right to independently make decisions as to voting and disposition of 969,138 of those ordinary shares, without having to consult with any other person. Mr. Jaglom disclaims beneficial ownership of the ordinary shares held by each of Samson Capital, LLC and Hancock LLC except to the extent of his pecuniary interest therein.
Represents shares beneficially owned as of December 31, 2017, as indicated in a statement of beneficial ownership on Schedule 13G filed by this shareholder on February 9, 2018.
Represents shares beneficially owned as of March 31, 2017, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed by PRIMECAP Management Company on April 6, 2017. As indicated in that amended statement, PRIMECAP Management Company possesses sole dispositive power with respect to all such 6,291,000 ordinary shares, but sole voting power with respect to only 5,941,000 of such ordinary shares.
Represents shares beneficially owned as of December 31, 2017, as indicated in the amended statement of beneficial ownership on Schedule 13G filed by Fisher Investments on January 24, 2018. As indicated in that statement, Fisher Investments possesses sole dispositive power with respect to all such 3,065,498 ordinary shares, but sole voting power with respect to only 1,414,892 of such ordinary shares.
Changes in Percentage Ownership by Major Shareholders
In 2015, the percentage ownership of Samson Capital, LLC, Roy J. Zuckerberg and Elchanan Jaglom increased, due to market purchases of additional ordinary shares by Samson Capital, LLC (which increased the percentage ownership of all three of those shareholders). In 2016, the percentage ownership of those shareholders declined, due to sales by Samson Capital, LLC and Hancock LLC (and Samson Capital LLC ceased to be a 5% or greater shareholder as a result). In 2017, Roy J. Zuckerberg ceased to be a 5% or greater shareholder (due to sales of ordinary shares by Samson Capital LLC and a reduction in Mr. Zuckerberg’s ownership interest in Hancock LLC to 0.01% such that ordinary shares held by Hancock LLC are no longer deemed beneficially owned by Mr. Zuckerberg). At the same time, in 2017, the number of ordinary shares held by Elchanan Jaglom increased, due to purchases by Hancock LLC.
The percentage ownership of those shareholders changed during the years 2015, 2016 and 2017 as follows: (i) Samson Capital, LLC—from 4.8% up to 5.2%, back down to 4.8%, and further down to 4.5%, respectively; (ii) Roy J. Zuckerberg—from 5.9% up to 6.2%, back down to 5.5%, and further down to 4.5%, respectively; and (iii) Elchanan Jaglom—from 5.8% up to 6.2%, back down to 5.5%, and remained at 5.5%, respectively.
During 2015, Morgan Stanley, Baillie Gifford & Co. and Edgewood Management LLC ceased to be major shareholders, as their percentage ownership dropped to 1.5%, 4.6% and 0%, respectively. During 2015, a new major shareholder, PRIMECAP Management Company, acquired 6.3% of our outstanding ordinary shares, during 2016, its percentage ownership increased, to 9.5%, and during 2017, its percentage ownership further rose to 11.7%.
T. Row Price Associates, Inc. acquired over 5% of our outstanding ordinary shares in 2015 (5.3%), but then ceased to be a major shareholder during 2016, dropping to 1.6% as of the end of 2016. Fisher Investments became a 5% or greater shareholder for the first time as of the end of 2016, having acquired 5.9%, and then decreased to 5.7% in 2017. ArrowMark Colorado Holdings LLC became a 5% or greater shareholder of ours for the first time as of the end of 2017, having acquired 8.0%.
Based upon a review of the information provided to us by our transfer agent, as of February 14, 2018, there were 76 holders of record of our shares, of which 51 record holders holding approximately 99.99% of our outstanding ordinary shares, had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many of these shares were held of record by brokers or other nominees. As of the said date, CEDE & Co, the nominee company of the Depository Trust Company (with a registered address in the United States), held of record approximately 99% of our outstanding ordinary shares on behalf of hundreds firms of brokers and banks in the United States, who in turn held such shares on behalf of several thousand clients and customers.
B. Related Party Transactions.
Except as described below or elsewhere in this annual report, since January 1, 2017, we have had no transaction or loan, nor do we have any presently proposed transaction or loan, involving any related party described in Item 7.B of Form 20-F promulgated by the SEC.
Our amended articles permit us to exculpate, indemnify and insure each of our directors and office holders to the fullest extent permitted by the Companies Law. Effective upon the effective time of the merger, we entered into indemnification agreements with each of our current directors and other office holders, under which we undertook to indemnify them to the fullest extent permitted by Israeli law, including with respect to liabilities resulting from the merger to the extent that these liabilities are not covered by insurance. We also put into place Directors and Officers liability insurance for each of our directors and other office holders upon the effectiveness of the Stratasys-Objet merger.
Employment and Consulting Agreements with Directors and Executive Officers
Employment agreement with Ilan Levin
Pursuant to an employment agreement between the Company and Ilan Levin, our Chief Executive Officer, dated June 27, 2011, and amended as of January 1, 2017 (based on our shareholders' approval, received following the approval of our compensation committee and board, at our 2017 annual general meeting of shareholders, which took place on July 18, 2017. Mr. Levin receives a gross monthly salary of NIS 129,000 (approximately US$36,380). That amount does not include our company’s contribution of amounts equal to 5%, 8.33%, 2.5%, and 7.5% of Mr. Levin’s gross monthly salary towards certain pension, severance, disability and tax-advantaged savings funds (known as a manager’s insurance policy, severance compensation fund, disability insurance, and a study fund, respectively). The foregoing amount also does not include the right to use, and all related fixed and variable costs in respect of, a leased car that we provide for Mr. Levin.
The employment engagement is terminable by either party upon six months’ prior written notice, and contains customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. During the notice period for termination, Mr. Levin will receive his monthly base salary (other than in the event of termination by our company for cause).
Mr. Levin was granted a one-time option grant to purchase 200,000 ordinary shares pursuant to the 2012 Plan, at an exercise price of $19.96 per ordinary share. The grant vests over the course of a four-year period commencing on July 1, 2016 (the first day of Mr. Levin’s employment as our Chief Executive Officer, or CEO), with 25% of the grant vesting on the first anniversary of Mr. Levin’s continuous employment as CEO, followed by quarterly vesting thereafter of 6.25% of the grant at the end of each quarter of continuous employment as CEO over the following 12 quarters. The grant is otherwise subject to the terms of the 2012 Plan.
Consulting arrangement with an entity affiliated with Elchanan Jaglom
An entity affiliated with Elchanan Jaglom, the Chairman of the board of directors, has provided consulting and director services to us pursuant to an oral arrangement that was approved by our board of directors and shareholders. The monthly amount payable to that entity under this arrangement is $35,000, plus VAT, currently. The consulting arrangement, which is not recorded in a written agreement, has no set term and may be terminated by either party at will upon written notice.
C. Interests of Experts and Counsel.
A. Consolidated Statements and Other Financial Information.
The consolidated financial statements and other financial information for our company required by SEC are included in this annual report beginning on page F-1.
The following table presents total export sales by Stratasys, Ltd for each of the fiscal years indicated (in thousands):
|Total Export Sales*||$||260,645||$||269,449||$||280,021|
|as a percentage of Total Sales||39.0||%||40.1||%||40.2||%|
Export sales, as presented, are defined as sales to customers located outside of North America and Israel (where our dual headquarters are located).
We are a party to various legal proceedings incident to our business. Based upon the status of such cases, as determined with the advice of counsel, we have recorded provisions in our financial statements for amounts (if any) judged to be both quantifiable and probable to be paid. Except as noted below, there are no legal proceedings pending or threatened against us that we believe may have a significant effect on our financial condition or profitability.
Claims Related to Company Equity
On March 4, 2013, five current or former minority shareholders and former directors of our company filed two lawsuits against our company in an Israeli central district court. The lawsuits demand that we amend the capitalization table of our company such that certain shares previously issued to Objet shareholders named as defendants would be recognized as being owned by the plaintiffs with a consequent reduction of the share ownership of the named defendants. The lawsuits also name as defendants Elchanan Jaglom, the Chairman of the board of directors, David Reis, our Chief Executive Officer, various shareholders of ours who were also shareholders of Objet, and, in one of the lawsuits, Ilan Levin, one of our directors. The lawsuits allege in particular that a series of investments in Objet during 2002 and 2003 was effected at a price per share that was below fair market value, thereby illegally diluting those shareholders that did not participate in the investments. The plaintiffs also allege that a portion of the amount invested in those transactions was actually invested by an investor who was already a shareholder of Objet and allegedly acting in concert with Mr. Jaglom, and that the interest of these two shareholders in these transactions was not properly disclosed to the minority shareholders at the time. The lawsuits furthermore claim that we effectively engaged in backdating the issuance of certain shares, in that shares that Objet reported as having been issued in 2006 and 2007 were actually issued at a subsequent date—as late as 2009.
We filed our statement of defense in response to these claims in May 2013, denying the claims. In 2015, the court dismissed the lawsuit of one of the former directors due to lack of cause. In February 2017, the parties reached an agreement pursuant to which all claims were settled at no material cost to our company. Notice of the settlement was provided to the court with a motion for the dismissal of the suits.
Securities Law Class Actions
On February 5, 2015, a lawsuit styled as a class action was commenced in the United States District Courts for the District of Minnesota, naming the Company and certain of our officers and directors as defendants. Similar actions were filed on February 9 and 20, 2015, and on March 25, 2015, in the Southern District of New York, the Eastern District of New York, and the District of Minnesota, respectively. The lawsuits allege violations of the Exchange Act in connection with allegedly false and misleading statements concerning our business and prospects. The plaintiffs seek damages and awards of reasonable costs and expenses, including attorneys’ fees. On April 15, 2015, the cases were consolidated for all purposes, and on April 24, 2015, the court entered an order appointing lead plaintiffs and approving their selection of lead counsel for the putative class. On July 1, 2015, the lead plaintiffs filed their consolidated complaint. On August 31, 2015, the defendants moved to dismiss the consolidated complaint for failure to state a claim. The Court heard the motion on December 11, 2015. On June 30, 2016, the Court granted defendants’ motion to dismiss with prejudice and entered judgment in favor of defendants. On July 29, 2016, lead plaintiffs filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit from the Court’s judgment. Following plaintiffs’ appeal, on July 25, 2017, the United States Court of Appeals for the Eighth Circuit entered an order and judgment affirming the court’s dismissal with prejudice.
Patent Law-Based Claim
On November 23, 2017, a former employee, whose employment had been terminated by our company in 2008 and who had previously unsuccessfully filed a suit against our company, brought an additional proceeding against us under Section 134 of the Israeli Patent Law seeking compensation and royalties for service inventions he invented while he served as an employee of our company. In this new proceeding, the former employee claims to be entitled to receive royalties in an amount equal to: (a) 20% of the benefits, revenues and /or savings generated by our company in the past and in the future, including the rise in the value of our company, as determined in the merger with Stratasys Inc., which took place in December 2012; (b) 20% of the gross profit generated by our company in the past and 9% of the gross profit produced and that will be produced by our company; (c) 20% of the gross profit generated by our company in the past and the relative share of the former Objet entity of our company in the total gross profit produced and that will be produced by our company; or (d) 20% of the value of the service inventions at issue. The former employee further sought an order of accounts. Our company rejects the claims that serve as a basis for the proceeding and intends to defend against them vigorously.
We have never paid cash dividends on our ordinary shares and do not anticipate that we will pay any cash dividends on our ordinary shares in the foreseeable future.
We intend to retain our earnings to finance the development of our business. Any future dividend policy will be determined by our board of directors based upon conditions then existing, including our earnings, financial condition, tax position and capital requirements, as well as such economic and other conditions as our board of directors may deem relevant. Pursuant to our articles of association, dividends may be declared by our board of directors. Dividends must be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, because we have received certain benefits under Israeli law relating to Approved Enterprises and Beneficiary Enterprises, our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes to which we would not otherwise be subject. We are also restricted under our credit agreement with Bank of America from paying dividends. Please see the risk factors captioned “We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders may not recognize a return, and could potentially suffer a loss, on their investment in our ordinary shares,” and “Even if we decide to pay dividends on our ordinary shares, we may be restricted from doing so or payment of such dividends may have adverse consequences for our company” in Item 3.D “Risk Factors—Risks related to an investment in our ordinary shares” above.
For a discussion of the applicable rates of withholding tax on dividends paid out of income derived from an Approved Enterprise or a Beneficiary Enterprise, see “Israeli Tax Considerations and Government Programs — The Law for the Encouragement of Capital Investments” in Item 4.B above.
B. Significant Changes.
Other than as otherwise described in this annual report, no significant change has occurred in our operations since the date of our consolidated financial statements included in this annual report.
A. Listing Details.
Since December 3, 2012 (the first trading day after the effective time of