SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
|o||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|x||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the fiscal year ended December 31, 2014|
|o||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|o||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 Registrant’s name into English)
(Jurisdiction of incorporation or Organization)
c/o Stratasys, Inc.
7665 Commerce Way
2 Holtzman Street,
P.O. Box 2496
(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:
50,922,737 Ordinary Shares, NIS 0.01 nominal value, at December 31, 2014.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x 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 x
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 x 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer x||Accelerated filer ¨||Non-accelerated filer ¨|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|US GAAP x||
International Financial Reporting
Standards as issued
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 x
This annual report on Form 20-F, or this annual report, is being filed by the registrant, Stratasys Ltd., an Israeli company. As described in its previous filings with the Securities and Exchange Commission, or the SEC, the registrant (formerly known as Objet Geometries Ltd. and then Objet Ltd.) was party to a merger with Stratasys, Inc., a Delaware corporation, that was completed on December 1, 2012, referred to as the Stratasys-Objet merger or the merger. The Stratasys-Objet merger was structured as a reverse merger of Stratasys, Inc. with and into an indirect, wholly owned subsidiary of Objet Ltd., in which Objet Ltd. served as the legal acquirer. For accounting purposes, however, Stratasys, Inc. was treated as the acquiring company, and the Stratasys-Objet merger is accounted for as a reverse acquisition under the acquisition method of accounting for business combinations. As a result, the historical financial statements of Stratasys, Inc. for all periods up until the effective time of the Stratasys-Objet merger on December 1, 2012 are our historical financial statements. The consolidated financial statements of the registrant included in this annual report include the operations of Stratasys Ltd. (formerly Objet Ltd.) only since December 1, 2012, the date on which the Stratasys-Objet merger was consummated.
Given the significance of the Stratasys-Objet merger, we encourage you to review the separate historical financial statements of Objet Ltd. for information related to the historical results of operations and financial condition of Objet Ltd. Those separate financial statements were included in the proxy statement/prospectus included in the registrant’s Registration Statement on Form F-4, initially filed by the registrant with the SEC on June 8, 2012, and in Exhibit 99.1 to the Report of Foreign Private Issuer on Form 6-K filed by the registrant on September 3, 2013.
Unless otherwise indicated or 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. The historical financial information set forth in this annual report, unless otherwise indicated or the context otherwise requires, reflects the consolidated results of operations and financial position of: (i) Stratasys, Inc. prior to the merger; and (ii) Stratasys Ltd. since the merger.
Unless otherwise indicated herein, all numbers and prices in this annual report related to ordinary shares and options of our company that predated the effectiveness of the Stratasys-Objet merger have been adjusted to reflect the 1-for-8.691 reverse stock split that was effected with respect to all of Objet’s outstanding ordinary shares immediately prior to the effective time of the Stratasys-Objet merger.
TABLE OF CONTENTS
|TABLE OF CONTENTS|
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS||1|
|USE OF TRADE NAMES||2|
|CERTAIN ADDITIONAL TERMS AND CONVENTIONS||3|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.||4|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE.||4|
|ITEM 3.||KEY INFORMATION.||4|
|ITEM 4.||INFORMATION ON THE COMPANY.||28|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS.||48|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS.||48|
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.||73|
|ITEM 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.||93|
|ITEM 8.||FINANCIAL INFORMATION.||96|
|ITEM 9.||THE OFFER AND LISTING.||98|
|ITEM 10.||ADDITIONAL INFORMATION.||99|
|ITEM 11.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.||112|
|ITEM 12.||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.||113|
|ITEM 13.||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.||113|
|ITEM 14.||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.||113|
|ITEM 15.||CONTROLS AND PROCEDURES.||113|
|ITEM 16A.||AUDIT COMMITTEE FINANCIAL EXPERT.||114|
|ITEM 16B.||CODE OF ETHICS.||114|
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES.||115|
|ITEM 16D.||EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.||115|
|ITEM 16E.||PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.||115|
|ITEM 16F.||CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.||115|
|ITEM 16G.||CORPORATE GOVERNANCE.||115|
|ITEM 16H.||MINE SAFETY DISCLOSURE.||116|
|ITEM 17.||FINANCIAL STATEMENTS.||117|
|ITEM 18.||FINANCIAL STATEMENTS.||117|
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 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;|
|·||general market, political and economic conditions in the countries in which we operate;|
|·||projected capital expenditures and liquidity;|
|·||changes in our strategy;|
|·||government regulations and approvals;|
|·||changes in customers’ budgeting priorities;|
|·||the overall global economic environment;|
|·||litigation and regulatory proceedings; and|
|·||those 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.
USE OF TRADE NAMES
Unless the context otherwise indicates or requires, “Stratasys,” “For a 3D World,” “Objet,” “PolyJet,” “Connex,” “Eden,” “FDM”, “Fortus,” “Dimension,” “Uprint,” “Mojo,” “FullCure,” “Stratasys Direct Manufacturing,” “Solidscape,” “Solid Concepts,” “GrabCAD,” “MakerBot,” “Thingiverse,” “Replicator,” “RedEyE,” “Harvest Technologies” 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” and “Objet” design logos are 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.
CERTAIN ADDITIONAL TERMS AND CONVENTIONS
In this annual report, unless the context otherwise requires:
|·||references to the “Stratasys-Objet 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 the “MakerBot transaction” refer to the merger consummated on August 15, 2013 whereby Cooperation Technology Corporation, a Delaware corporation (now known as Baccio Corporation), or MakerBot, which is the direct parent company of MakerBot Industries, LLC, merged with and into an indirect, wholly-owned subsidiary of Stratasys Ltd., with MakerBot becoming an indirect, wholly-owned subsidiary of Stratasys Ltd.;|
|·||references to the “Solid Concepts acquisition” or “Solid Concepts transaction” refer to the acquisition consummated on July 14, 2014 whereby Stratasys Ltd. acquired Solid Concepts Inc.;|
|·||references to the “Harvest Technologies acquisition” refer to the acquisition consummated on August 1, 2014 whereby Stratasys Ltd. acquired Harvest Technologies Inc.|
|·||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.|
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
ITEM 3. KEY INFORMATION.
A. Selected Financial Data.
Stratasys, Inc. was treated as the acquiring company in the Stratasys-Objet merger for accounting purposes and the Stratasys-Objet merger was accounted for as a reverse acquisition under the acquisition method of accounting for business combinations. As a result, the historical financial statements of Stratasys, Inc. prior to the effective time of the merger on December 1, 2012 became our historical financial statements. The consolidated financial statements included in this annual report include the operations of Stratasys Ltd. (formerly Objet Ltd.) for the years ended December 31, 2014 and 2013 and for the month ended December 31, 2012 (as the Stratasys-Objet merger was consummated on December 1, 2012). Therefore, while the balance sheet data presented below reflects the financial position of Stratasys Ltd. as of December 31, 2014, 2013 and 2012, respectively, the consolidated statement of operations data reflects the results of operations of Stratasys Ltd. for the years ended December 31, 2014 and 2013 and from December 1 through December 31, 2012, and the results of operations of Stratasys, Inc. from January 1 through November 30, 2012. The below selected consolidated financial data reflects the consolidated results of operations and financial position of Stratasys, Inc. as of, and for the years ended, December 31, 2011 and 2010.
The historical selected consolidated statement of operations data for the years 2014, 2013 and 2012, and the selected consolidated balance sheet data at December 31, 2014 and 2013 have been derived from our audited consolidated financial statements set forth elsewhere in this annual report. The selected consolidated statements of operations data for the years 2011 and 2010, and the selected consolidated balance sheet data as of December 31, 2012, 2011 and 2010, 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.
|(in thousands, except per share data)||Year Ended December 31,|
|Statement of Operations Data:|
|Research and development expense||82,270||52,310||19,659||14,360||9,755|
|Selling, general and administrative expense||351,993||202,040||73,130||39,038||32,863|
|Change in fair value of obligations in connection with acquisitions||(26,150||)||754||—||—||—|
|Operating income (loss)||(148,189||)||(28,931||)||17,122||29,006||13,468|
|Net income (loss)||(119,470||)||(26,907||)||8,823||20,626||9,370|
|Net income (loss) attributable to Stratasys Ltd.||(119,420||)||(26,954||)||8,491||20,626||9,370|
|Net income (loss) per basic share||(2.39||)||(0.64||)||0.39||0.98||0.46|
|Net income (loss) per basic share attributable to Stratasys Ltd.||(2.39||)||(0.64||)||0.37||0.98||0.46|
|Weighted average basic shares outstanding||50,019||42,079||22,812||21,133||20,579|
|Net income (loss) per diluted share||(2.39||)||(0.68||)||0.37||0.95||0.44|
|Net income (loss) per diluted share attributable to Stratasys Ltd.||(2.39||)||(0.68||)||0.36||0.95||0.44|
|Weighted average diluted shares outstanding||50,019||42,099||23,776||21,653||21,130|
|Balance Sheet Data:|
In addition to the audited consolidated financial data presented above, we also present below unaudited pro forma combined statement of operations data for our company for the year ended December 31, 2012 that give effect to the Stratasys-Objet merger as if it had been completed on January 1, 2012. This data has been prepared consistent with SEC Regulation S-X, Article 11. For a more complete presentation of this data and an explanation of the underlying assumptions used in deriving it, please see the unaudited pro forma condensed combined statements of operations that are included in the “Operating Results” section of “Operating and Financial Review and Prospects” in Item 5 below.
|(in thousands, except per share data)||Year Ended December 31,|
|Statement of Operations Data:|
|Research and development expense||36,923|
|Selling, general and administrative expense||141,232|
|Net loss attributable to Stratasys Ltd.||(21,577||)|
|Net loss per basic share||(0.58||)|
|Net loss per basic share attributable to Stratasys Ltd.||(0.58||)|
|Weighted average basic shares outstanding||36,987|
|Net loss per diluted share||(0.58||)|
|Net loss per diluted share attributable to Stratasys Ltd.||(0.58||)|
|Weighted average diluted shares outstanding||36,987|
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 occurs, 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;|
|•||unforeseen liabilities or difficulties in integrating our acquisitions;|
|•||changes in the amount that 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;|
|•||litigation or threats of litigation, including intellectual property claims by third parties;|
|•||changes in accounting rules and tax laws;|
|•||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 interest rates that affect returns on our cash balances and short-term investments;|
|•||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;|
|•||failure of a development partner to continue supporting certain product development efforts it is funding; 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-to-quarter comparisons of our operating results as an indicator of our future performance.
If demand for our products and services does not continue to grow as expected, our revenues may stagnate or decline.
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 some 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.
To the extent that other companies are successful in developing or marketing consumables for use in our Idea, Design and Production Series systems, our revenues and profits would likely be adversely affected.
We sell a substantial portion of the consumables used in our Idea, Design and Production Series 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 we continue to ship entry-level systems including desktop 3D printers, our sales of those systems have grown. Furthermore, some of those sales 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 if we experience a substantial shift towards revenues generated by our AM parts service business, which we expect to significantly broaden as a result of our recent acquisitions of Solid Concepts and Harvest Technologies, and which are characterized by lower margins relative to our products.
We have experienced rapid and significant growth in our operations and intend to continue to grow, 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.
We have experienced rapid and significant growth in our operations and intend to continue to grow, both organically and from acquisitions, such as the MakerBot transaction, the Solid Concepts acquisition, the Harvest Technologies acquisition and the GrabCAD acquisition. The adaptation of our infrastructure to our growth will require, among other things, continued development of our financial and management controls and management information systems, including our ongoing implementation of a unified enterprise resource planning system, 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 rapid and significant 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.
Declines in the prices of our products and services may adversely affect our financial results.
Our business is subject to price competition. Such price competition may adversely affect our ability to maintain profitability, especially during periods of decreased demand. If our business is not able to offset price reductions resulting from these pressures by improved operating efficiencies, reduced expenditures and increased sales, then those price reductions would adversely affect our operating results.
The markets in which we participate 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 and EnvisionTEC GmbH, and, with respect to our entry-level desktop 3D printers, a multitude of companies such as 3D Systems Corporation, Delta Micro Factory, Affinia, Ultimaker, Printrbot, Leapfrog, Solidoodle and others. For our recently-broadened AM parts and services business, our chief competitors consist of 3D Systems Corporation, Materialise and many other smaller service providers. In late 2014 HP announced its intention to offer 3D printers targeting similar end-users to ours. If these printers become commercially available they may compete directly with some of our product lines. 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. We will also be required to record any post-closing goodwill or other long-lived asset impairment charges in the period in which they occur, which could result in a significant charge to our earnings in that period. We could also face unknown liabilities or write-offs.
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 MakerBot, Solid Concepts, Harvest Technologies, GrabCAD and other companies. While we believe that integration activities have progressed well to date, the ongoing difficulties of coordinating our operations 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 senior 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 growth 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 such 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, New Hampshire 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 systems may contain undetected defects or errors when first introduced or as enhancements are released that, despite testing, are not discovered until after a product has been used. This could result in delayed market acceptance of those products, claims from distributors, end-users or others, increased end-user service and support costs and warranty claims, damage to our reputation and business, or significant costs to correct the defect or error. We may
from time to time become subject to warranty or product liability claims that could lead to significant expenses as we need to compensate affected end-users for costs incurred related to product quality issues. This risk may be heightened when we sell products into certain markets, such as healthcare-related applications.
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. These activities and our
accompanying exposure to claims will increase significantly as a result of our recent acquisitions of Solid Concepts and Harvest
Technologies. 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.
As a result of our recent acquisitions of Solid Concepts and Harvest Technologies, and together with RedEye, our preexisting digital manufacturing service business, we expect to significantly broaden and increase our production and offering of AM parts, which are used by our customers as prototypes, benchmarks and end-use parts, as part of our newly branded Stratasys Direct Manufacturing, or SDM, service. In particular, we expect to provide these additive manufacturing services to customers in the aerospace, medical and automotive industries. The sale of end use parts 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. Our SDM service carries liability insurance in amounts that we believe are adequate for its risk exposure and commensurate with industry norms. While we intend to monitor our insurance coverage as our additive manufacturing services business continues 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 in the future at an acceptable cost. Any liability claim against our AM services 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 syatems, 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 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.
If goodwill or other intangible assets that we have recorded become impaired, we could have to take significant charges against earnings.
As of December 31, 2014, the book value of all of our goodwill and other intangible assets, which was primarily attributable to the Stratasys-Objet merger, the MakerBot transaction and the Solid Concepts acquisition, was approximately $1.9 billion. Under accounting principles generally accepted in the United States of America, or GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets has been impaired. During the year ended December 31, 2014 we recorded an impairment charge of $102.5 million related to our MakerBot reporting unit. Please see Note 1 to our audited financial statements included in Item 18 of this annual report for further information. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Such impairment may result from one of a number of possible causes, including invalidation of acquired patents, trademarks or other intellectual property, or the impairment of other intangible assets due to litigation, obsolescence, competitive factors, lower than expected revenue and operating results or other reasons. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adversely affect our results of operations and shareholders’ equity in future periods. We will continue to monitor other intangible assets in an effort to determine whether events and circumstances
warrant further impairment charges. Please see Note 7 to our audited financial statements included in Item 18 of this annual report for further information.
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 produce consumables for our systems, at single facilities in various locations that are specifically dedicated to separate categories of systems and consumables. 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 a significant number of these resellers and sales agents were to terminate their relationship with us or 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 have adversely impacted sales of our constituent companies, and may once again affect us in the future.
The uncertain direction and relative strength of the global economy, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors all affect spending behavior of potential end-users of our products and services. The prospects for economic growth in some of the regions in which we sell our products remain uncertain, and may cause end-users to further delay or reduce technology purchases. In particular, a portion of our sales are made to customers in countries in Europe, which have been and may continue to be affected by significant economic difficulties. These and other macroeconomic factors had an adverse impact on the sales of the products and services of our constituent companies following the global financial downturn in late 2008, leading to reduced revenues from sales and longer sales cycles. While Objet and Stratasys, Inc. saw an improvement in revenues from sales of their systems and consumables in 2010, 2011 and 2012, and our combined company has continued that positive trend beginning after the completion of the Stratasys-Objet merger on December 1, 2012 through the present time, there can be no assurance that such improvement is sustainable, particularly if global economic conditions suffer another setback or if European economies experience further disruptions.
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 46% of our sales in 2014 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.
Covenants in our credit agreement may restrict our business in many ways.
The credit agreement and related agreements that we and our wholly-owned subsidiary (the borrower) entered into in November 2013 with Bank of America, N.A., as administrative agent and the other lenders party thereto, contain various covenants that limit our ability to, among other things:
|•||incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;|
|•||make any investments, except certain investments as specified therein;|
|•||engage in any material line of business substantially different from those lines of business conducted by us and our subsidiaries or any business substantially related or incidental thereto;|
|•||create, incur, assume or suffer to exist any indebtedness except certain indebtedness as specified therein.|
|•||issue redeemable stock and preferred equity;|
|•||pay dividends or distributions or redeem or repurchase capital stock;|
|•||prepay, redeem or repurchase debt;|
|•||make loans, investments and capital expenditures;|
|•||enter into agreements that restrict distributions from our subsidiaries;|
|•||sell assets and capital stock of our subsidiaries;|
|•||enter into certain transactions with affiliates;|
|•||consolidate or merge with or into, or sell substantially all of our assets to, another person, or dispose of all or substantially all of our IP rights or other assets to or in favor of any person;|
|•||make any disposition except certain dispositions permitted under the credit agreement;|
|•||declare or make, directly or indirectly, any restricted payment, or incur any obligation (contingent or otherwise) to do so, except as defined therein; and|
|•||enter into certain contractual obligations.|
A breach of any of these covenants could result in a default or event of default. Upon the occurrence of an event of default under the credit agreement, the lenders could elect to declare all amounts outstanding under the agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could accelerate the repayment of borrowings. If that were to occur, we may not have sufficient assets to repay the amounts owed under the credit agreement or be able to obtain financing from other sources on favorable terms, if at all. For more information, please see Item 5.B “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital resources and capital expenditures—Revolving credit facility” and note 9 to our consolidated financial statements included in Item 18 of this annual report.
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 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. Our systems have been, and are expected to continue to be, the target of malware and other cyber attacks. Although we have invested in measures to reduce these risks, we cannot assure you that these measures will be successful in preventing compromise and/or disruption of our information technology systems and related data.
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.
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 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 could result in an impairment charge, which could have a material adverse effect on our results of operations in one or more periods.
If we do not generate sufficient future taxable income, we may be required to recognize deferred tax asset valuation allowances.
The value of our deferred tax assets depends, in part, on our ability to use them to offset taxable income in future years. If we are unable to generate sufficient future taxable income in the U.S. and certain other jurisdictions, or if there are significant changes in tax laws or the tax rates or the period within which the underlying temporary differences become taxable or deductible, we could be required to record valuation allowances against our deferred tax assets. Such allowances would result in an increase in our effective tax rate and have a negative impact on our operating results. If our estimated future taxable income is increased, the valuation allowances for deferred tax assets may be reduced. These changes may also contribute to the volatility of our consolidated financial results.
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. 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 subject to extensive environmental, health and safety laws and regulations that could have a material adverse effect on our business, financial condition and results of operations.
Our operations use chemicals and produce waste materials. We are subject to extensive environmental, health and safety laws, regulations and permitting requirements in multiple jurisdictions governing, 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.
We are subject to environmental laws due to the import and export of our products, 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 currently subject to a number of lawsuits. These and any future lawsuits to which we become subject may have a material adverse impact on our capitalization, business and results of operations.
We are currently party to one significant action by a former employee who seeks the issuance of options exercisable for our ordinary shares. The former employee has demanded, based on an alleged undertaking we had made prior to the Stratasys-Objet merger, that we issue him an option that would allow him to maintain an equity interest of 1.45% in our company and reimburse salary reductions he had suffered. This plaintiff has further demanded compensation on account of alleged wrongful termination. While the initial court ruling on this matter dismissed the case and awarded us legal expenses, the plaintiff has appealed the case, which appeal is currently ongoing and is being litigated in the Israeli national labor court.
We have furthermore been sued by four current or former minority shareholders and former directors of our company who demand that we amend the capitalization table of our company such that certain share issuances prior to the Stratasys-Objet merger to certain of our shareholders named as defendants would be cancelled, with a consequent issuance of additional shares to the plaintiffs to account for the subsequent dilution to which they have been subject. The lawsuits, which were brought in an Israeli district court in March 2013, also name as defendants certain of our directors, officers and shareholders who previously held those positions prior to the Stratasys-Objet merger.
We are also subject to three additional 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 on February 5, 9, and 20, 2015, respectively, and which name the Company and certain of our officers as defendants. 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 an award of reasonable costs and expenses, including attorneys’ fees. These lawsuits are in their initial stages, and no substantive proceedings have occurred to date.
We can provide no assurance as to the outcome of these or any future matters or actions, and any such matters or actions may result in judgments against us for significant damages and/or the issuance of options to acquire shares of our capital stock, the exercise of which would result in dilution to our shareholders. Resolution of these 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, current and any future litigation could result in losses, damages and expenses that have a material adverse effect on our business.
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, 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.
Compliance with disclosure rules regarding “conflict minerals” may require us to incur expenses or modify our products or operations and may also adversely affect the demand for some of our products and our operating results.
As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012 the SEC promulgated final rules regarding disclosure of the use of certain minerals (tin, tantalum, tungsten, and gold), and certain of their derivatives, known as “conflict minerals,” which are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. As required by these new rules, in 2013, we commenced due diligence efforts to determine our use of conflict minerals, and we made our first conflict mineral filing with the SEC on June 2, 2014. The rules require us to make subsequent disclosures no later than May 31 of each following year. We expect that we will incur additional costs and expenses, which may be significant, in order to comply with these rules. Since our supply chain is complex, ultimately we may not be able to sufficiently verify the origins for any conflict minerals and metals used in our products through the due diligence procedures that we implement, which may adversely affect our reputation with our customers, shareholders, and other stakeholders. In such event, we may also face difficulties in satisfying customers who require that all of our products are certified as conflict mineral free. If we are not able to meet such requirements, customers may choose not to purchase our products, which could adversely affect our sales and the value of portions of our inventory. Further, there may be only a limited number of suppliers
offering conflict free minerals and, as a result, we cannot be sure that we will be able to obtain metals, if necessary, from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm our business, reduce market demand for our products, and adversely affect our profit margins, net sales, and overall financial results.
Risks related to our intellectual property
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. Competitors’ introduction of lower quality products using our technology could also negatively affect the reputation and image of our products in the marketplace.
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. If competitors using technology previously protected by our expired patents were to introduce products of inferior quality, our potential customers may view our products negatively, which would have an adverse effect on our image and reputation and on our ability to compete with systems using other AM technologies.
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, do not provide the same level of patent protection as in the United States, so even if we assert our patents or obtain additional patents in China or elsewhere outside of the United States, effective enforcement of such patents may not be available. If our patents 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. In addition to patent infringement 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, or require us to 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, 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 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.
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 all of our PolyJet-related system manufacturing and research and development facilities, one of our two PolyJet consumables 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 recent 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 in Israel or the rate of devaluation (if any) of the New Israeli Shekel against the U.S. dollar. The Israeli rate of inflation (deflation) amounted to (0.2%), 1.8%, and 1.6% for the years ended December 31, 2014, 2013 and 2012, respectively. The appreciation (devaluation) of the New Israeli Shekel in relation to the U.S. dollar amounted to (12. 0%), 6.5% and 2.1% for the years ended December 31, 2014, 2013 and 2012, 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 is based on a forecast of our global 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, tax deductions for share option expense, 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 Enterprises,” 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 10%, 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 is currently set at 26.5%. In addition to being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. 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 global 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 global 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 global tax rate and our results of operations.
Certain Israeli government 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, and failure to satisfy the conditions of those grants with respect to such transfers may require us to obtain a pre-approval from the relevant authorities and pay penalties.
Our Israeli-based research and development efforts were and are financed in part, through grants that we received from Israel’s Office of the Chief Scientist of the Ministry of Economy, or OCS. Through 2006, Objet received approximately $1.5 million, which it repaid in its entirety (including interest thereon) by the end of 2007. . . . In 2014 we received funding of approximately $430 Thousands under the Generic R&D program to support certain research and development projects in Israel.
We must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984, and related regulations, or the Research Law, with respect to those current and past grants. When a company develops know-how, technology or products using OCS grants, the terms of these grants and the Research 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, without the prior approval of the OCS. 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.
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 directors 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
If certain of our shareholders sell a substantial number of our ordinary shares, the market price of our ordinary shares could decline.
Former MakerBot stockholders and certain MakerBot employees, former Solid Concepts stockholders and option holders, and certain Solid Concepts employees, and certain Harvest Technologies employees and former stockholders, may resell the ordinary shares that we issued or may issue to them pursuant to the MakerBot transaction, Solid Concepts acquisition or Harvest Technologies acquisition, as applicable, under our Form F-3 registration statement that we filed, which covers the resale of the foregoing groups of shares. Under the terms of the MakerBot and Solid Concepts merger agreements, and the Harvest Technologies stock purchase agreement, we issued at the closing of the transactions on August 15, 2013, July 14, 2014 and August 1, 2014, respectively, 3,921,660 ordinary shares, 978,601 ordinary shares and 175,456 ordinary shares (after withholding certain shares for taxes, where applicable), which may be sold or may have already been sold, in whole or part, to the public following the closings. Those shares together constitute approximately 10% of our issued and outstanding shares, in the aggregate, as of the closing date of the Harvest Technologies acquisition (following the issuance of the shares in the Harvest Technologies acquisition). We may also issue up to an additional 650 thousands ordinary shares, approximately 1,000,000 ordinary shares and approximately 111,000 (based on our share price as of the closing) ordinary shares to the selling shareholders and/or employees in respect of periods through early 2015 , mid-2017 and early 2018 pursuant to the terms of the MakerBot merger agreement, Solid Concepts merger agreement and Harvest Technologies stock purchase agreement, respectively, which may be subsequently resold without restriction (assuming that the related registration statement that we have filed remains in effect). Sales of a significant number of the foregoing shares in a short period of time could have the effect of depressing the market price of 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. During 2014 and the early part of 2015 (through February 14, 2015), our ordinary shares have traded with closing prices that have ranged from $57.36 to $136.46. It is likely that the price of our ordinary shares will 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
|•||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.
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.
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 will 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 Stratasys-Objet merger and the MakerBot transaction). These significant annual expenses under GAAP might 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).
We are furthermore restricted from distributing dividends under the terms of our credit agreement and related agreements that we entered into in November 2013 with Bank of America and the other lenders party thereto. See “Risks related to our business and financial condition—Covenants in our credit agreement may restrict our business in many ways” for more information.
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, composition of our board of directors (whereby a majority of the members of our board of
directors need not be “independent directors,” as is generally required for domestic U.S. issuers), 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, 2015 (the last business day of our second fiscal quarter of 2015). 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, 2016, we would be required to file periodic reports and financial statements 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. As 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 2014, we cannot assure you that the IRS will agree with that conclusion or that we will not become a PFIC in 2015 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”.
ITEM 4. INFORMATION ON THE 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.
We have dual headquarters. One of our two principal places of business is located at 7665 Commerce Way, Eden Prairie, Minnesota, and our telephone number there is (952) 937-3000. Our registered office and our other principal place of business is located at 2 Holtzman Street, Science Park, P.O. Box 2496, Rehovot 76124, Israel, and our telephone number at that office is (+972)-74-745-4314. 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 2014, 2013 and 2012, our capital expenditures amounted to $62.3million, $39.7 million and $15.1 million, respectively, of which $60.5 million, $33.3 million and $12.1 million, respectively, related to the purchase of fixed assets for manufacturing or engineering development equipment, tooling, leasehold improvements and the acquisition of computer systems and software applications.
Our principal capital expenditures currently in progress are for facility expansion, research and development, manufacturing equipment and information technology, for both our Rehovot, Israel and Eden Prairie, Minnesota headquarters as well as our new facility in Germany. These expenditures are being financed internally from working capital.
B. Business overview
We are a leading global provider of additive manufacturing, or AM, solutions for the creation of parts used in the processes of designing and manufacturing products and for the direct manufacture of end parts. Our solutions include products 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 believe that the range of 3D printing consumable materials that we offer, consisting of 38 Polyjet/Fused Deposition Modeling, or FDM, cartridge-based materials, five Smooth Curvature Printing, or SCP, inkjet-based materials and 138 non-color digital materials, and over 1,000 color variations, is the widest in the industry. Our services offerings include Stratasys Direct Manufacturing printed parts service as well as our professional services.
AM, which is also referred to as 3D printing, is transforming prototype development manufacturing processes and is displacing 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 the entire 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 and fixtures that aid in their production and
assembly processes. While 3D printing has historically been focused on design and manufacturing applications, 3D printing is beginning to show signs of broader adoption with the growth of entry-level desktop 3D printers.
Our products and services are used in different applications by customers in a broad array of industries, including aerospace, automotive, consumer electronics, dental, jewelry and more. 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 offer a broad range of systems, consumables and services for additive manufacturing. Our wide range of solutions, based on our proprietary AM technologies and production 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.|
Our product portfolio consists of five series of AM systems and the consumables used in those systems. These series are the MakerBot desktop series, the Idea Series, the Design Series, the Production Series and the Dental Series. Collectively, this 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.
As of December 31, 2014, we have sold approximately 121,661 systems globally, including approximately 79,906 sold by MakerBot. 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: Shanghai, China; Frankfurt, Germany; Genoa, Italy; São Paulo, Brazil; Bangalore, India; Tokyo, Japan, and Hong Kong, as well as through our worldwide network of more than 280 agents and resellers. Additionally, through the MakerBot transaction, we have added an online sales channel. We have more than 2,900 employees and hold more than 800 granted or pending patents internationally.
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.
AM addresses the inherent limitations of traditional modeling technologies through its combination of functionality, quality, ease of use, speed and cost. AM 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 of content. These entry-level desktop printers are driving substantially increased market adoption. We expect that the adoption of 3D printing will continue to increase over the next several years, in terms of design applications, on the one hand, and DDM applications, on the other hand. 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.
Range of solutions
We offer a broad range of systems, consumables and services for additive manufacturing. Our solutions address our customers’ needs for 3D printing, including printing systems, a compatible scanner, consumables, software, paid parts and professional services, and 3D content.
Our solutions allow our end-users to print 3D objects that enhance their ability to visualize, verify and communicate product designs, thereby improving the design process 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 and improvements before incurring significant costs due to re-tooling and re-work, 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 engage in DDM via the use of our systems for the quick and efficient direct manufacture of parts that are subsequently incorporated into the user’s manufacturing processes or end product. For instance, our solutions enable the production of manufacturing tools, jigs, fixtures, casts and injection molds that aid in the customer’s production and assembly process. DDM 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 appropriate due to small volumes, such as dental and jewelry applications. Our solutions also enable the production of objects that generally could not otherwise be manufactured through subtractive manufacturing methodologies.
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 AM industry. We hold more than 800 granted or pending patents internationally, and our AM 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 AM technology leadership.
A key attribute of our FDM® 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 DDM. 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 3D inkjet-based printing technology is primarily differentiated from other competing technologies in its ability to scale and deliver high-resolution and multi-material printing, in color. Our easy-to-use, high-speed 3D PolyJet™ 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™ Matrix 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™ Matrix 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.
Our PolyJet inkjet-based technology is also currently distinguished by its ability to offer transparent material printing in an office environment system. Transparency is a desired feature in the design and engineering phases of product development and is applicable in automotive, consumer products and consumer electronics. The main applications are lighting components, tubing and piping, package optimization, and fluid analysis.
We also offer Smooth Curvature Printing, or SCP, thermoplastic ink-jetting technology through our SolidScape brand to produce wax-like patterns for lost-wax casting, investment casting and mold making applications. The SCP printer creates solid 3D parts through an additive, layer-by-layer process, using our SCP thermoplastic ink-jetting technology and high-precision milling of each layer. The parts produced are extremely high resolution with very precise details and fine surface finish, making our SCP systems well-suited for DDM.
We offer 38 Polyjet/FDM cartridge-based materials, five SCP inkjet-based materials and 138 non-color digital materials, and over 1,000 color variations for our 3D printers, which we believe is the widest range of materials 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 2014, 2013 or 2012. 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 13 different durable thermoplastic materials, enabling a wide range of DDM applications with little or no post-production processing. Our PolyJet inkjet-based systems jet ultra-thin layers of material that enable significant accuracy, high 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 three materials to enable end-users to print models with rigid, flexible and color materials, in virtually unlimited combinations, in a single build. Our SolidScape SCP thermoplastic ink-jetting technology offers high-precision milling of each printed layer, enabling extremely high resolution with precise details and fine surface finish.
|•||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 38 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 800 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 newly branded Stratasys Direct Manufacturing service business, which comprises our legacy RedEye parts business combined with the recently acquired Solid Concepts and Harvest Technologies, 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 know-how, 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. As of December 31, 2014, we have sold approximately 121,661 systems globally, including approximately 79,906 sold by MakerBot. 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. With the acquisition of MakerBot, we have expanded our solutions for 3D printing, encompassing accessible desktop 3D printers and materials and leading content creation and sharing solutions. We believe that this category is poised for significant 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 well 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 more than 280 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. The merger between Stratasys and Objet has already resulted in greater distribution reach and enhanced opportunities for cross selling into our combined company’s installed base, given the significantly broadened and complementary product offerings the merger produced. In addition, through the MakerBot transaction we have added an online sales channel.|
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 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.|
|•||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 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.|
|•||Leveraging our global reach to expand the customer base and further penetrate existing customers. We have a network of more than 280 resellers and selling agents around the world and various online channels. We will seek to increase the penetration of our existing customer base by enabling customers to streamline purchasing processes and by increasing cross-selling into our installed base. 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 retail channel.|
|•||Maintaining and extending our technology lead. Our multidisciplinary technological leadership, as evidenced by our more than 800 granted or pending patents internationally, underpins our proprietary hardware, integrated software and range of 3D printing materials, which consist of range of 38 Polyjet/FDM cartridge-based materials, five SCP inkjet-based materials and 138 non-color digital materials, and over 1,000 color variations. 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.|
|•||Growing through complementary acquisitions. We intend to selectively pursue acquisitions to expand our product offerings, go to market and overall growth and market penetration. Accordingly, we may consider acquisitions and investments in order to effect and accelerate our other growth strategies.|
Products and services
Our product portfolio consists of five series of AM systems and the consumables used by those systems. Our product series comprise the MakerBot desktop series, the Idea Series, the Design Series, the Production Series and the Dental Series. 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 end-products 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 DDM. We also offer a range of printing materials consisting of 38 Polyjet/FDM cartridge-based materials, five SCP inkjet-based materials and 138 non-color digital materials and over 1,000 color variations. The performance of our different systems varies in terms of capabilities, which are related to the following features:
|•||resin cartridge capacity and filament spool size;|
|•||maximum model (or tray) size; and|
|•||duty cycle, or the number of objects 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 AM systems are described below:
Design Series: Our Design Series includes the Dimension and Objet brands. The Dimension brand features our FDM technology and the Objet brand features our PolyJet technology. The technology available in this series makes it well suited for all aspects of RP, from design visualization and communication to form and fit verification to model building for functional testing. This series also offers a variety of products that provide customers with a broad range of choices of features such as printing capacity, production speed and price. The Dimension product line allows users to create parts in ABSplus plastic. This material enables production of parts with the strength required for true form, fit and functional testing. The Connex Systems are our most advanced PolyJet-based printer line featuring the highest capacity and offering the broadest set of features, including the ability to jet three materials simultaneously, with rigid, flexible and color characteristics, in virtually unlimited combinations, in a single build.
Production Series: The Production Series includes our Fortus, Polyjet and SolidScape brands, all of which are typically used for DDM applications. 3D Production Systems driven by PolyJetTM technology work by jetting state-of-the-art photopolymer materials in ultra-thin layers onto a build tray, layer by layer, until the part is complete. The intuitive Objet Studio™ software manages the process. And, with multi-material 3D production systems, you can combine different material properties in the same part, in a single print – gaining ultimate versatility. Our proven FDM® technology is the foundation for the Fortus® 3D Production Systems. Durable, production-grade thermoplastic is heated in an extrusion head and deposited in thin layers on a modeling base. The part is built, layer upon layer, with exactness from the bottom up. InsightTM software provides advanced control over build parameters. When the part is complete, the soluble or breakaway support material is removed, leaving an accurate, durable part that’s environmentally stable. We also offer our SolidScape line of 3D printers for DDM applications. This line of products combines patent-protected, SCP thermoplastic ink-jetting technology and high-precision milling of each layer, with our proprietary graphical front-end ModelWorks software. Objects created with these systems feature extremely high pattern resolution and accuracy and are used primarily for jewelry products and dental applications.
MakerBot Replicator series: Our MakerBot Replicator series represents our 3D desktop printers, compact, and professional-grade printers. Our desktop and compact printers are affordable, and designed for easy, desktop use and are typically used by individuals operating alone or within an enterprise. Our larger, professional printer has a large build volume ideal for industrial prototypes, models and products. We acquired MakerBot in August 2013 to enhance our desktop offerings. In addition to the Replicator printer series, our MakerBot portfolio includes the Digitzer, which is a 3D scanner that allows customers to scan an object and convert it into a digital file that can subsequently be printed.
Idea Series: The Idea Series includes our lower capacity, affordable set of 3D printers for professional use. This series comprises the MoJo and uPrint product families, both of which are FDM-based. These products are designed for easy use in an office environment and produce professional grade parts using our ABS line of thermoplastics.
Dental Series: Each Dental Series 3D printer runs on one of two patented, industry-leading technologies to build models, dental appliances and casting wax-ups in-house, directly from digital files. Our PolyJet technology enables the production of
surgical guides, fitting models, veneer try-ins and orthodontic appliances from materials specially engineered for dental applications. Our wax-deposition-modeling, or WDM, technology drives 3D printers that enable the production of crowns, bridges and partial dentures.
We sell a broad range of 3D printing materials, consisting of 38 Polyjet/FDM cartridge-based materials, five SCP inkjet-based materials and 138 non-color digital materials, and over 1,000 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 DDM manufacturing tool, or a DDM end use part.
Our resin consumables, which consist of our PolyJet family of proprietary acrylic-based photopolymer materials, are designed for use with our PolyJet printing systems and 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. The FullCure support materials that are used together with the model materials enable the 3D printing of models with a wide array of complex geometries. Our PolyJet 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.
SCP inkjet-based materials
Our SolidScape 3D materials are non-toxic thermoplastic materials featuring excellent lost wax casting qualities, including fast melt out, no ash or residue, and no thermal expansion. Currently, we have three modeling materials commercially available for use with our SolidScape technology. These include materials formulated specifically for particular industries, such as a thermalpolyester formula developed to help retail jewelers and manufacturers meet the demand for finished goods using less precious materials and a thermalpolyester material formulated to deliver high casting yields for dental applications.
We offer suites of integrated software with our various AM 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 AM 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 AM systems and their different 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 properties. For example, for our Connex line of 3D printers, our software enables users to change the color and material mix in the printing process, allowing users to quickly modify the properties of the model being printed.
The software designed for our PolyJet inkjet-based 3D printers enables users to work in parallel and send jobs from any network computer to the server. Jobs enter the queue either according to the 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 more than 250,000 public designs available for downloading.
We furthermore operate the MakerBot Digital Store online in which we sell high quality, printable and paintable digital 3D models, now offered on a streaming platform. The content is presented in one of three categories and supplemented with licensed content from strategic partners. All models are designed to be printed on the MakerBot desktop 3D printers.
We host the GrabCAD Community for mechanical engineers and designers, where members can upload and download free CAD models, post and answer mechanical engineering questions, and participate in design challenges. This community had more than 1.6 million members at the end of 2014. 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 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:
|•||More than 500 trained, 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 six 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 one year 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.
In the United States, we offer our customers the option to lease or rent 3D printers and 3D production systems.
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 newly acquired 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.
Marketing, sales and distribution
Our marketing strategies are focused on increasing awareness of our key solutions and services, strengthening our leadership brand positions, accelerating and supporting sales growth, and increasing customer loyalty. We initiate marketing programs and campaigns to drive lead generation throughout the countries in which we
and our resellers and agents operate. We are also investing in programs to support our strategic account and select vertical industry sales efforts.
We use a variety of inbound and outbound marketing methods to reach potential customers. Examples of inbound methods include search marketing (Search Engine Optimization and Pay-Per-Click advertising), social media, blogs, syndication, webinars and white papers. Outbound channel examples include digital and print communication programs, press relations, direct mail and e-mail campaigns, tradeshows, 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: North America; Europe and Middle East; Asia Pacific; and Latin America. 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: Shanghai, China; Frankfurt, Germany; Genoa, Italy; São Paulo, Brazil; Bangalore, India; Tokyo, Japan; and Hong Kong.
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, effective as of May 5, 2011, or the Ricoh Agreement. The current Ricoh Agreement replaced our original agreement with Ricoh that had been entered into in June 2000 and amended on various occasions subsequently, and which expired upon the effectiveness of the new 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 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 improved and 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 are committed to designing products using the principles of Six Sigma. 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 $82.3 million, $52.3 million, and $19.7 million in the years ended December 31, 2014, 2013 and 2012, respectively, and, on a pro-forma basis for our combined company, were approximately $36.9 million in 2012, representing 10.3% of our revenues on a pro-forma basis in 2012.
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, whereas the facilities for our MakerBot operations are located in various locations. 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 rapid prototyping processes and apparatuses associated with our technology were assigned to us by their inventors. The principal granted patents relate to our FDM systems, our PolyJet and PolyJet Matrix technologies, our 3D printing processes and our consumables, with expiration dates ranging from 2015 to 2033.
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, and an assignment of rights to us related to UV polymer-based U.S. patents, which underlie certain technologies that compete with ours.
In addition, we own the registered trademarks “Stratasys,” “Objet,” “FDM,” “Fortus,” “Dimension,” “uPrint,” “Mojo,” “Catalyst,” “WaveWash,” “Ecoworks,” “FullCure,” “Xpress3D,” “Solidscape,” “SCP” “MakerBot,” “Thingiverse” “Replicator,” “Solid Concepts”, “Harvest” and the nautilus design coporate logo and make use of a number of additional registered and unregistered trademarks, including “Connex,” “Eden,” “PolyJet,” “PolyJet Matrix,” “FDM Technology,” “For a 3D World,” “Tango” and “Vero.” However, we do not believe that any of our trademarks are material to our competitive position..
We believe that, while our patents provide us with a competitive advantage, our success depends primarily on our marketing, business development, applications know-how and ongoing research and development efforts. 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 “Risk factors.”
Our principal competitors consist of other developers of additive manufacturing systems as well as other companies that use FDM and inkjet-based technologies to compete in additive manufacturing. A variety of additive manufacturing technologies compete with our proprietary technologies, including:
|•||Selective Laser Sintering;|
|•||Powder Binding; and|
|•||Digital Light Projection.|
The companies that use these technologies to compete with us include 3D Systems Corporation, EOS GmbH and EnvisionTEC GmbH.
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.
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;|
|•||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.|
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 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 the United States, Israel, Germany, Italy, China, Hong Kong, Brazil, Italy, Japan and India, and organize our operations by geographic region, focusing upon the following key regions: North America; Europe; Asia Pacific; and Latin America. 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 54% of our 2014 sales were made in North America. 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, 2014, 2013 and 2012 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 “Risk factors” and in Item 11 of this annual report, “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, 2014, 2013 and 2012, are set forth in Item 6.D of this annual report (“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 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 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 toxin permits will remain in effect until November 2016 and February 2015, respectively.
In the European marketplace, electrical and electronic equipment is required to comply with the Directive on Waste Electrical and Electronic Equipment, which aims to prevent waste by encouraging reuse and recycling, and the Directive on Restriction of Use of Certain Hazardous Substances, which restricts the use of six hazardous substances in electrical and electronic products. Our products and certain components of such products “put on the market” in the European Union (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 and REACH in the EU, governing chemicals. These and similar laws and regulations require the testing and registration 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
The regular rate of corporate tax to which Israeli companies were subject in 2014 was 26.5%. 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. In addition, commencing in 2010, Israeli companies have been subject to regular corporate tax rate on their capital gains.
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.
The Investment Law has been amended several times over the recent years, with the two most significant changes effective as of April 1, 2005, to which we refer as the 2005 Amendment, and as of January 1, 2011, to which we refer as the 2011 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 forgo such benefits and elect for the benefits of the 2011 Amendment.
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 Investment Center of the Israeli Ministry of Economy (formerly known as the Ministry of Industry, Trade and Labor), 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 and by the physical characteristics of the facility or the asset.
An Approved Enterprise may elect to forgo any entitlement to the 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 upon the geographic location in 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 the program commences its operations, or 14 years from the year 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 from any certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. 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 an FIC is made on an annual basis. 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 benefit periods 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||Corporate|
|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 benefit program. This rate generally ranges from 10% to 25%, depending on the extent to which non-Israeli shareholders hold such company’s shares.
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 the lower rate provided under an applicable tax treaty. 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. 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. 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.
We have received the requisite approval, including a final approval, for all of 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 2013 and 2014, of reducing our (and before the Stratassy- Objet merger, Objet’s) effective consolidated tax rates considerably lower than the statutory Israeli corporate tax rate of 26.5% in 2014. We expect that our effective consolidated tax rate for 2015 and thereafter will also be reduced due to these investment programs.
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 came into effect 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 Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income is derived from export.
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 Israeli 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) that derive more than 25% 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 all the 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 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 requested to have the tax benefits apply to the Beneficiary Enterprise. 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 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 in 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. 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, 2014, we had accumulated tax-exempt income of approximately $148 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 $14.8 million of tax liability as of December 31, 2014.
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 Partnerships Ordinance; (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 flat 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 and thereafter. 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.
Dividends paid out of income attributed to a 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. 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).
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.
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 service beureau business unit), a California corporation; GrabCAD, Inc., a Delaware corporation; Stratasys AP Limited, a Hong Kong limited company, which together with several other subsidiaries (including Stratasys Japan Co. Ltd., our Japanese 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 presently encompassing approximately 341,799 square feet, of which we own 286,743 square feet, in four buildings. These four buildings serve the following respective 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, and administrative, marketing and sales activities; and expansion of our production capacity for systems and consumables. Our Rehovot, Israel headquarters, which we lease pursuant to a lease agreement with a term of five years that expires on December 31, 2016, comprise approximately 111,421 square feet of space. Our lease payments, inclusive of management fees, for these facilities are approximately $2.3 million annually. These facilities house our Israeli administrative headquarters, our research and development facilities, and certain manufacturing activities.
As of December 31, 2014, we leased office space (except with respect to our Eden Prairie headquarters facilities and our 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. We have no material tangible fixed assets apart from the properties described below.
|Location:||Primary Usage:||Area (Sq. Feet)|
|Brooklyn, New York||Local headquarters and warehouses||375,495|
|Eden Prairie, Minnesota||U.S. headquarters||341,799|
|Valencia, California||Local headquarters and warehouses||71,432|
|River Falls, Wisconsin||Office space||40,998|
|Belton, Texas||Local headquarters and warehouses||40,000|
|Merrimack, New Hampshire||Facilities, including manufacturing||28,590|
|San Diego, CA||Facilities||28,191|
|Billerica, Massachusetts||Office space||22,353|
|Other facilities in North America:||Office space, stores and warehouses||130,465|
|Europe and the Middle East:|
|Kiryat Gat, Israel||Factory and laboratories||281,755|
|Rehovot, Israel||Israeli headquarters||111,421|
|Other facilities in EMEA:||EMEA headquarters and office space||32,652|
|Hong Kong||Office space||23,475|
|Other facilities in Asia Pacific:||Office space||52,877|
|Other countries||Office space||2,454|
While, as described above in the “Risk Factors” in Item 3.D, we utilize hazardous chemicals in some of the production processes for products sold by us, we believe that there are no environmental issues that encumber our use of our facilities.
ITEM 4A. UNRESOLVED STAFF COMMENTS.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
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 additive manufacturing, or AM, solutions for the creation of parts used in the processes of designing and manufacturing products and for the direct manufacture of end parts. Our solutions include products 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 believe that the range of 3D printing consumable materials that we offer, consisting of 38 Polyjet/FDM cartridge-based materials, five SCP inkjet-based materials and 138 non-color digital materials, and over 1,000 color variations, is the widest in the industry. Our service offerings include Stratasys Direct Manufacturing printed parts services as well as our professional services. We conduct our business globally, and our main operational facilities are located in the United States, Israel, Germany and Hong Kong. Our extensive global reach is well-positioned through a network of
more than 280 resellers and selling agents around the world and a growing online channel. We have more than 2,900 employees and hold more than 800 granted or pending additive manufacturing patents globally.
Our Company is the result of the 2012 merger of two leading additive manufacturing companies, Stratasys, Inc. and Objet Ltd., which we refer to as the Stratasys-Objet merger. Pursuant to this merger, which closed on December 1, 2012, Stratasys, Inc. became an indirect, wholly-owned subsidiary of Objet Ltd., and Objet Ltd. changed its name to Stratasys Ltd. Stratasys, Inc. was treated as the acquiring company in the Stratasys-Objet merger for accounting purposes, and the Stratasys-Objet merger was accounted for as a reverse acquisition under the acquisition method of accounting for business combinations. As a result, the consolidated financial statements of Stratasys, Inc. became our consolidated financial statements. The consolidated financial statements included in this report on Form 20-F include the operations of Stratasys Ltd. (formerly Objet Ltd.) for the years ended December 31, 2014 and 2013, and only for the month of December 2012, because the Stratasys-Objet merger was consummated on December 1, 2012. Therefore, unless otherwise indicated or as the context otherwise requires, the historical financial information included in this annual report on Form 20-F for periods preceding the Stratasys-Objet merger is that of Stratasys, Inc.
We believe that AM is poised to enter a new phase of increased adoption by manufacturers in a broad range of industries, including global manufacturing enterprises, by disrupting traditional design and manufacturing processes. Accordingly, in February 2015 we announced a new investment plan with the goal of enabling our company to offer a broader range of products and solutions with increased global and industry-specific coverage, especially within areas related to manufacturing, and create stronger customer relationships. The investment plan is designed to implement broad product development and infrastructure. For additional details regarding the investment plan please see below under “- Investment Plan”.
We continue to observe strong demand for our design and manufacturing enterprise solutions. There are an increasing number of customer implementations of our solutions in manufacturing-related applications where, after their qualification, the adoption of our solutions is expected to increase significantly. These implementations typically require a broad range of solutions, including systems, materials and manufacturing services. An additional opportunity for expansion of our customer base for manufacturing-related applications is our newly initiated professional services, where we identify applications and educate our customers on best practices for AM workflows.
We also believe that the proliferation of 3D content, advancements in AM technology platforms and the introduction of improved materials will continue to drive market growth. Accordingly, we will continue to focus on enhancing our 3D printing technologies and developing consumables that offer an even broader array of physical, mechanical and aesthetic properties, thereby broadening user applications.
We believe that desktop 3D printers are becoming a mainstream tool across many market segments and that the adoption of 3D printing will continue to increase over the next several years, both in terms of RP and DDM applications. We believe that market adoption will be spurred by increased proliferation of 3D content and 3D authoring tools (3D CAD and other simplified 3D authoring tools) and by continued improvements in 3D printing technology and greater affordability of entry-level systems.
We have recently made acquisitions that we believe will help us pursue our product and solutions strategies. We may make other investments in strategic acquisitions, strategic alliances, property, plant and equipment, new technologies, process improvements, information technology, research and development projects, and human resource activities that will be required for future growth.
On July 14, 2014, or the Solid Concepts transaction date, we completed the acquisition of 100% of the outstanding shares of Solid Concepts Inc., or Solid Concepts, an independent additive manufacturing service bureau, for a total consideration of approximately $185.4 million.
In exchange for 100% of the outstanding shares of Solid Concepts we issued 978,601 ordinary shares, paid cash upon closing in the amount of $40.1 million and were obligated to make an additional holdback cash payment in the amount of $3.8 million that was deferred for six months and was paid in January 2015. In addition, we are obligated to pay additional deferred payments in three separate annual installments after the Solid Concepts transaction date, or the deferred payments. The deferred payments were evaluated and recorded at a fair value of $43.6 million as of Solid Concepts transaction date.
Under the terms of the definitive agreement, certain of Solid Concepts’ employees may also qualify for retention-related and other payments of $77.0 million, based on our share price as of the Solid Concepts transaction date, of which, $19.6 million was paid in cash upon closing and were expensed as incurred. The remaining retention payments will be paid in three separate annual installments, which we refer to as the deferred retention payments.
Based on our share price as of December 31, 2014, the total deferred retention payments will amount to approximately $45.9 million.
Subject to certain requirements for cash payments, we retain the discretion to settle any of the amounts payable to Solid Concepts shareholders and employees in our shares, cash or any combination of the two. These amounts are also subject to certain adjustments based on our share price and other adjustments.
On August 1, 2014, we acquired 100% of the outstanding shares of Harvest Technologies Inc., or Harvest, a specialty additive manufacturing service bureau. Under the terms of the definitive agreement with Harvest, certain of Harvest’s employees may also qualify for certain retention-related payments.
We believe that the acquisition of Solid Concepts and Harvest, combined with our RedEye Service, will create a leading strategic platform to meet a broad range of customers’ additive manufacturing needs and provides opportunities to leverage our direct manufacturing services capabilities. The acquisition of the two companies will also enable us to enhance our expertise in parts production, as well as materials and systems knowhow. We believe that the integration with our existing RedEye Service will enable us to provide our customers with full service offerings that provide a variety of technologies and custom manufacturing solutions, and will support our expansion into end-use-parts production and vertical market applications.
On September 22, 2014, we acquired 100% of the outstanding shares of GrabCAD Inc., or GrabCAD, which operates GrabCAD Workbench, a cloud-based, 3D computer-aided-design, or CAD, collaboration platform enabling engineering teams to manage, share and view CAD files as well as enhancing collaboration tools and improving accessibility relating to 3D CAD content.
This acquisition is expected to enable us to provide our customers with enhanced collaboration tools and improved accessibility relating to 3D CAD content. The addition of GrabCAD Workbench enables us to offer customers a solution to drive communication and ease of use throughout the design and 3D printing process. With GrabCAD we expect to have the opportunity to further partner with CAD vendors and other ecosystem partners while offering innovative collaboration tools related to 3D CAD. GrabCAD also brings us an industry leading team of software professionals with a deep understanding of the needs of designers and engineers as well as a global, leading and fast growing community of mechanical engineers.
On August 1, 2014, we acquired certain assets of HAFNER’S BÜRO, which is the reseller of our MakerBot subsidiary in Germany. This acquisition will enable us to expand our desktop 3D printing operations throughout the European market.
In April 2014, we acquired certain assets of Interfacial Solutions LLC, or Interfacial Solutions, a privately held provider of thermoplastics research and development and production services. This transaction is designed to strengthen our materials research and development skills and enable us to become vertically integrated in material development and manufacturing and also increase our materials production space and capacity.
On August 15, 2013, we completed the acquisition of privately-held Cooperation Technology Corporation, which was the direct parent company of MakerBot Industries, LLC, or MakerBot, a leader in desktop 3D printing, and which owned and operated Thingiverse.com, a website dedicated to the sharing of user-created digital files. The aggregate purchase price was $493.7 million and the consideration that we paid consisted primarily of ordinary shares that we issued. For additional details regarding the financial terms of this transaction, see Item 18 of this annual report. During 2014, we continued to globally expand our 3D desktop solutions’ sales channels in the United States through new collaborations with top resellers and, by leveraging our strong presence of our local subsidiary in Japan. We also expect to expand our penetration in the European market through the acquisition of HAFNER’S BÜRO, as described above.
|·||Net sales increased by $265.7 million in 2014, or 54.9% as compared to 2013, which represents organic growth of 31.7%.|
|·||Completed the acquisitions of Solid Concepts and Harvest Technologies, and began the integration process to create a leading strategic platform for our direct manufacturing service.|
|·||Completed the acquisition GrabCAD which is expected to drive improved communication and ease of use throughout the 3D printing process, enhancing accessibility to the company’s 3D printing solutions|
|·||Net loss attributable to Stratasys amounted to $119.4 million in 2014 or $2.39 per diluted share as compared to net loss of $27.0 million or 0.68 per diluted share in 2013.|
|·||Cash flows provided from operating activities amounted to $13.8 million in 2014 as compared to $32.0 million in 2013.|
|·||We announced a new investment plan to help enable growth, maintain market leadership and meet future opportunities. See “Investment Plan” below for further information.|
|·||Recorded a non-cash, non-tax deductible goodwill impairment charge of $102.5 million due to updated projections of the MakerBot reporting unit.|
Our financial performance for the year ended December 31, 2014 was impacted by slower growth of MakerBot product and services revenue during the fourth quarter of 2014.
Throughout 2014, MakerBot invested significantly in the introduction of its 5th Generation Replicator 3D printers and 3D printing ecosystem, and in the development of a multi-tier distribution strategy enabling broader distribution. These continuing investments are intended to provide MakerBot with the ability to further scale and build superior product platforms positioned for long-term growth as well as maintain and expand brand leadership as the adoption of 3D printing expands. However, during the fourth quarter, MakerBot was affected by challenges associated with the introduction and scaling of its new product platform and our rapidly evolving distribution model.
As a result, we revised downward our internal projections for MakerBot performance in 2015 and during December 2014 we updated the goodwill impairment analysis of our MakerBot reporting unit, as discussed below in “Operating Expenses – Goodwill Impairment”. We do not expect this accounting write down to affect our ongoing business or future financial performance.
The specific areas of focus and goals for our new investment plan include the following:
|·||Accelerated efforts around vertical applications and solutions focused on areas of business that we have identified as having high potential in the AM field, such as aerospace and automotive, healthcare and education.|
|·||Expansion of our newly branded Stratasys Direct Manufacturing, or SDM, services (following the integration of RedEye, Solid Concepts and Harvest Technologies) to provide our customers with a broader range of AM technologies and solutions coupled with our in-depth process-specific expertise.|
|·||Expansion of our SDM platform into additional geographies.|
|·||Expansion of our professional services offering to allow customers to benefit from our knowledge base and expertise related to AM and its implementation for design and manufacturing applications.|
|·||Increased focus on long-term innovation and development projects based on proprietary technology platforms, including acceleration of the on-going development of platforms in collaboration with industry-leading manufacturing enterprises.|
|·||Increased focus on software development to drive collaboration and accessibility, thereby enhancing the ease-of-use with respect to the 3D printing process.|
|·||Accelerated product introductions, including the introduction of new systems and additional proprietary materials.|
Sales and marketing infrastructure
|·||Enhanced channel programs designed to increase capacity, productivity and coverage.|
|·||Expansion of our account management efforts to further serve our customers.|
|·||Enhanced brand recognition.|
Additionally, we intend to continue building the appropriate infrastructure and scale in order to meet our long-term growth opportunities, including in IT and executive management bandwidth and depth.
As a result of our new investment plan, we expect incremental annual operating expenditures of 2% of anticipated revenues for coming two to three years, with total operating expenses in 2015 to be in the range of 46% to 47% of anticipated revenues. Additionally, we expect to incur capital expenditures in the range of $160 to $200 million in 2015 and an effective tax rate of 5% to 10%.
Our ability to implement our strategy for 2015 is subject to numerous uncertainties, many of which are described under Item 3.D, “Risk Factors,” above, in this Item 5, “Operating and Financial Review and Prospects” and in the section above (immediately following the Table of Contents) captioned “Cautionary Note Regarding Forward-Looking Statements.” We cannot ensure that our efforts will be successful.
Key measures of our performance
Our consolidated revenues result primarily from sales of our products, which include both our AM systems and related consumable materials, from the provision of related services as well as from our direct manufacturing service. We effect sales 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 distributors of our other products. Besides the above methods of product distribution, we also sell products directly through an online store, at our retail stores in the United States, and through additional retail sales channels.
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 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. 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 activity by, and larger operating budget of, a typical end-user who uses a larger system.
Services revenues derive from (i) our direct manufacturing printed parts services that provide a variety of technologies and custom manufacturing solutions; (ii) installation, training, maintenance and warranty; and (iii) other service contracts. System sales prices include the value of the warranty. 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 acrylic-based photopolymer materials, for 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 amortization expense related mainly to certain acquired MakerBot and Objet assets.
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 printers, wages and related benefits costs, which together accounted for approximately 70% our total direct cost of sales in each of the years ended December 31, 2014, 2013 and 2012. Our other significant cost of revenues is the amortization expense that we incur in connection with developed technology acquired as part of our business combinations. This amortization expense varies based on the timing and type of acquisitions, and was $56 million, $55 million and $6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2014, a hypothetical 10% rise in commodity prices for raw materials would cause an approximate $10 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 $1 million increase in cost of revenues in our Consolidated Statement of Income and Comprehensive Income. During 2014, 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 significant 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.
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 high-end Production series and Design series of AM systems, as well as on our consumables, are typically higher than the gross margins on our Idea series and MakerBot desktop printers. Accordingly, an increase in the percentage of sales of our entry-level products 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 will also seek to reduce our costs of revenues by improving our ability to use less costly components and increasing engineering efficiencies in the production of our lower-priced 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 as opposed to sales that are facilitated by independent sales agents. We rely principally upon a reseller network that is divided based
on geographical areas. In addition to our reseller network, we have a significant number of independent selling agents who focus exclusively on selling our lower priced systems.
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, as that ratio impacts travel costs and efficiency of our service engineers.
Our operating expenses consist of research and development expenses, and selling, general and administrative expenses, goodwill impairment charges and 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 enhancing our existing product lines. 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 employees and employee-related personnel expenses, materials, laboratory supplies, costs for related software, and costs for facilities and equipment. Expenditures for research, development and engineering of products and manufacturing processes are expensed as incurred. Our investments in research and development are essential to our future growth and our ability to remain competitive in the additive manufacturing market. We work closely with existing and potential customers, distribution channels and major resellers, who provide significant feedback for products development and innovation.
We have agreements with three manufacturing companies under which we jointly advance certain of our proprietary technology. The agreements entitle us to receive reimbursement payments of costs actually incurred under joint development projects, and such reimbursements offset research and development expense.
Selling, general and administrative expenses
Our selling, general and administrative expenses include employees and employee-related expenses for marketing, sales and other sales-support 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, related facilities costs, integration and other post-merger related costs, professional service fees, as well as the amortization expenses related to certain acquired assets of Solid Concepts, MakerBot, Objet and other business combinations.
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 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. We intend to invest in our sales and marketing infrastructure, and, therefore, expect selling expenses in general, and advertising and promotion expenses in particular, to increase in absolute terms.
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 administrative personnel are located. Professional service fees for accounting and legal services and reserves for specific legal proceedings referred to elsewhere in this annual report are also included in selling, general and administrative expenses. As our operations continue to grow, we expect our administrative expenses to increase in absolute terms.
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. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The primary items that generate goodwill include the value of the synergies between the acquired companies and us and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.
We apply the Financial Accounting Standards Board, or FASB, guidance of testing goodwill for impairment. During December 2014, we determined that certain indicators of potential impairment existed and that those indicators required an additional goodwill impairment analysis for our MakerBot reporting unit. These indicators included a slower growth of MakerBot product and service revenues, challenges associated with the introduction and scaling of its new product platform, changes in timing of implementation of certain initiatives and changes in MakerBot’s distribution model. For additional information regarding those indicators, see above under “2014 Highlights”.
The updated MakerBot reporting unit’s impairment analysis determined that the carrying amount of goodwill assigned to the MakerBot reporting unit exceeded its fair value. As a result, we recorded a non-tax deductible impairment charge of $102.5 million, in order to reduce the carrying amount of goodwill to its estimated fair value. Please see Note 1 to our audited financial statements included in Item 18 of this annual report for further information.
We will continue to monitor our reporting units in an effort to determine whether events and circumstances warrant further interim impairment testing.
Change in fair value of obligations in connection with acquisitions
As part of the MakerBot and Solid Concepts transactions we recognized an earn-out obligation and a deferred payments obligation, respectively. These obligations were recognized as part of the consideration transferred and are re-measured at fair-value in each reporting period. The fair values of these two obligations were measured using specific valuation models, which were based on unobservable inputs. Changes in fair value of these obligations are presented in our operating expenses in a separate line item.
A significant portion of our income after the 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 2014 and 25% in 2013 and 2012. We are also a Foreign Investors Company, or FIC, as defined by the Israeli 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.
In addition, our effective tax rate is also impacted from the geographical mix of income and non-taxable items.
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 principles that we used to prepare our consolidated financial statements.
We have identified critical accounting policies that required us to make assumptions about matters that were uncertain at the time of our estimates. Had we used different estimates and assumptions, the amounts we recorded could have been significantly different. Additionally, if we had used different assumptions or different conditions existed, our financial condition or results of operations could have been materially different. The critical accounting
policies that were affected by the estimates, assumptions, and judgments used in the preparation of our consolidated financial statements are discussed below.
Valuation allowances are provided unless it is more likely than not that all or a portion of the deferred tax asset will be realized. In the determination of the appropriate valuation allowances, we have considered future reversals of existing taxable temporary differences, the most recent projections of future business results, prior earnings history, carryback and carryforward and prudent tax strategies that may enhance the likelihood of realization of a deferred tax asset. Assessments for the realization of deferred tax assets made at a given balance sheet date are subject to change in the future, particularly if earnings of a subsidiary are significantly higher or lower than expected, or if the company takes operational or tax positions that could impact the future taxable earnings of a subsidiary.
Therefore, we may record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
Deferred Payments in connection with Solid Concepts transaction
The deferred payments for the Solid Concepts transaction are recognized as liabilities at fair value in our consolidated balance sheets and are classified under short-term and long-term obligations in connection with acquisitions. The fair value is determined based on the closing market price of our ordinary shares at the applicable date, adjusted to reflect a discount for lack of marketability for the applicable periods. The discount for lack of marketability was calculated based on the historical volatility of our share price and thus represents a Level 3 measurement within the fair value hierarchy.
The fair value of the deferred payment as of December 31, 2014 was $35.7 million. The total amount of the deferred payments, which does not reflect a discount for lack of marketability, was approximately $40.6 million, based on our share price as of December 31, 2014.
A change in our inputs could result in a material impact on our results of operations. For example, since the deferred payments are primarily linked to our share price, an increase of 10% of our share price as of December 31, 2014 will increase the fair value of the deferred payments liability by $3.6 million.
For additional information regarding our accounting policies and estimates please refer to Note 1 to our consolidated financial statements included in Item 18 of this annual report.
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, 2014, 2013 and 2012 as well as to the results for the year ended December 31, 2012 on a pro forma combined including Objet basis, as if the Stratasys-Objet merger had closed on January 1, 2012. Objet’s sales in the year ended December 31, 2012 were similar in amount to those of Stratasys, and therefore we believe that the 2012 pro forma information combined including Objet provides useful supplemental information. Refer to note 2 to our consolidated financial statements included in Item 18 of this annual report for certain pro forma information for the Solid Concepts transaction and MakerBot transaction.
The table and footnotes at the end of this section set forth the preparation of the unaudited pro forma condensed combined for Objet statements of operations information for the year ended December 31, 2012 as if the Stratasys-Objet merger had occurred on January 1, 2012. The pro forma combined financial information has been prepared consistent with SEC Regulation S-X, Article 11. The pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the combined operating results or financial position that would have occurred if the Stratasys-Objet merger had been consummated on January 1, 2012 and in accordance with the assumptions described herein.
The following table sets forth, certain financial data derived from our U.S. GAAP financial statements, presented as percentages of net sales, for the periods indicated, as well as on a pro forma combined including Objet basis for the year ended December 31, 2012:
|Year ended December 31,|
|2014||2013||2012||Pro forma combined|
|Cost of sales||51.7||%||53.3||%||48.9||%||54.3||%|
|Research and development||11.0||%||10.9||%||9.1||%||10.3||%|
|Selling, general and administrative||46.9||%||41.7||%||34.0||%||39.3||%|
|Change in fair value of obligations in connection with acquisitions||-3.5||%||0.2||%||0.0||%||0.0||%|
|Operating income (loss)||-19.8||%||-6.0||%||8.0||%||-4.0||%|
|Financial income (expense), net||-0.9||%||-0.1||%||0.6||%||0.6||%|
|Income (loss) before income taxes||-20.7||%||-6.1||%||8.6||%||-3.4||%|
|Net income (loss) attributable to Stratasys Ltd.||-15.9||%||-5.6||%||3.9||%||-6.0||%|
Discussion of Results of Operations (Note: The below “Pro Forma Combined” column includes Objet as if the December 1, 2012 merger occurred on January 1, 2012)
Net sales of our products and services for the last three years, as well as the percentage change from year to year, were as follows:
|Year Ended December 31,||Year Ended December 31,|
|2014||2013||% Change 2014-2013||2012||Pro Forma Combined |
|% Change 2013-2012||% Change |
Pro Forma Combined
|U.S. $ in thousands||U.S. $ in thousands|
Revenues derived from products (including AM systems, consumable materials and other products) increased by $197.3 million in 2014, or 47.6%, as compared to 2013. The increase in products sales was driven by an organic growth in our products sales of $130.8 million in 2014, or 31.5% as compared to 2013. The inclusion of a full year of MakerBot revenues contributed $66.5 million to the increase of our product revenues. MakerBot has continued to experience growth in sales of our desktop 3D printers, increasing by 56.1% as compared to pro forma revenue that MakerBot generated during 2013.
The number of systems shipped increased to 45,843 units as compared to 19,317 units shipped in 2013. Unit sales for the year ended December 31, 2014 increased at a higher rate than revenues due to the increased percentage of MakerBot units shipped as those units generally carry a lower average price per unit. As discussed in the “2014 Highlights” section above, we expect a slower increase in MakerBot business in 2015 and as a result we do not expect the above trend to continue.
The increase in systems and other products revenue reflects strong sales growth across all product lines. This growth has been driven by the continued adoption of our Connex Production series and Fortus high-end Design series systems for new complex DDM and prototyping applications using a wide range of materials with diverse mechanical and physical properties. During 2014 we launched new systems, which contributed to the increase in our net sales in 2014.
Consumables revenues in 2014 increased by 32.5% as compared to 2013. The increase was driven by acceleration in customer usage and our growing installed base of systems. In particular, the strong sales of our Production series and high-end Design series systems in prior periods contributed to strong consumables sales growth given their relatively higher consumable utilization rates. We believe that our growing installed base, particularly that of the Production series and high-end Design series systems, are positive indicators of consumables revenues growth in future periods. The increase in consumables revenues was also driven by the launches of new high performance consumable materials for the use in various applications during 2014.
Revenues derived from products increased by $235.1 million in 2013, or 130.8%, as compared to 2012. The number of systems shipped increased to 19,317 units as compared to 3,470 units shipped in 2012. The increase in both revenue and number of units shipped primarily reflects the results of a full year in 2013 of combined operations of Stratasys, Inc. and Objet compared to only one month of combined operations in 2012 after the Stratasys-Objet merger and the inclusion of MakerBot revenue and units shipped after the closing of the MakerBot transaction. Systems and other products revenue for 2013 increased as compared to pro forma combined including Objet revenue for 2012. The number of systems shipped in 2013 increased to 19,317 units as compared to pro forma combined 4,549 units shipped in 2012. The shipment of MakerBot units after the MakerBot transaction contributed to the significant increase in unit sales as compared to pro forma combined prior periods, which only include the combined operations of Stratasys, Inc. and Objet Ltd.
Consumables revenue in 2013 increased by 156.0%. The increase in consumables revenue primarily reflects the results of a full year in 2013 of combined operations of Stratasys, Inc. and Objet compared to only one month of combined operations in 2012 after the Stratasys-Objet merger as well as the inclusion of MakerBot revenue after the MakerBot transaction. Consumables revenue in 2013 increased by 27.8% as compared to consumables revenues, on a pro forma combined basis including Objet, for 2012. The increase was driven by an acceleration in customer usage and our growing installed base of systems.
Services revenues (including direct manufacturing services, maintenance and other services) increased by $68.4 million in 2014, or 98.4%, as compared to 2013. The increase in services revenues was primarily attributable to the increase in our direct manufacturing services revenues, which increased by $41.0 or 250.2% as compared to 2013. Revenues from our direct manufacturing services increased significantly due to the inclusion of Solid Concepts and Harvest revenues after their respective transaction dates. Service revenues also increased organically from maintenance contracts and service parts, reflecting our growing installed base of systems.
Services revenues increased by $34.1 million in 2013, or 96.0%, as compared to 2012. The increase in service revenue primarily reflects the results of a full year in 2013 of combined operations of Stratasys, Inc. and Objet compared to only one month of combined operations in 2012. Services revenues for 2013 increased by $16.5 million, or 31.2%, as compared to service revenues, on a pro forma combined basis including Objet, for 2012.
Service revenues are expected to continue to increase during 2015 due to inclusion of Solid Concepts and Harvest revenues for the full year.
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,||Year Ended December 31,|
|2014||2013||2014-2013||2012||Pro Forma Combined 2012||2013-2012||Pro Forma|
|U.S. $ in|
|% of net|
|U.S. $ in|
|% of net|
|U.S. $ in|
|% of net|
|U.S. $ in|
|% of net|
Revenues in all regions increased in 2014 and reflects strong sales growth across all product lines as well as the inclusion of a full year of MakerBot revenues in 2014 and Solid Concepts and Harvest revenues commencing on their respective transaction dates.
Revenues in the North America region increased by $143.3 million, or 54.6%, to $ 405.9 million in 2014 as compared to 2013. This increase was due primarily to strong demand for our products and services and due to the factors as described above. In 2014, 54% of our net sales were generated in the North America region, flat compared to 2013.
Revenues in the EMEA region increased by $57.2 million, or 45.4%, to $183.5 million in 2014 as compared to 2013. This increase was due primarily to organic growth in all of our product lines. The growth in net sales in the EMEA region was slightly offset by foreign currencies fluctuations primarily due to the devaluation of the Euro against the U.S dollar.
Revenues in the Asia Pacific region increased by $60.5 million, or 67.2%, to $ 150.5 million in 2014 as compared to 2013. This strong growth was primarily due to an organic growth in all of our product lines as well expanding our products and solutions to additional territories of the Asia Pacific region.
Revenues in all regions increased in 2013, primarily as a result of a full year in 2013 of combined operations of Stratasys, Inc. and Objet compared to only one month of combined operations in 2012 and the inclusion of MakerBot revenue after the MakerBot transaction. The increase in revenue for 2013 as compared to pro forma combined including Objet revenue for 2012, reflects strong sales growth across all product lines as well as MakerBot revenue after the completion of the MakerBot transaction. The North America region was our fastest growing region during 2013.
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,||Year Ended December 31,|
|U.S. $ in thousands||Change in %||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,||Year Ended December 31,|
|Change in %||Change in %|
|Gross profit as a percentage of revenues from:|
|Total gross profit||48.3||%||46.7||%||3.5%||51.1||%||45.7||%||-8.6||%||2.3||%|
Gross profit attributable to products sales increased by $107.9 million, or 53.6%, to $309.3 million in 2014 as compared with $201.4 million in 2013. The increase was attributable to sales growth discussed above. Gross profit attributable to products sales as a percentage of revenues increased to 50.5% in 2014 as compared to 48.6% in 2013, mainly due to product mix sales that favored our higher-margin Production series and high-end Design series systems. The favorable change in our product mix sales was led by newly launched products and strong growth in our high-margin consumables sales as well as flat intangible asset amortization expenses.
Gross profit attributable to services revenues increased by $28.3 million, or 114.5%, to $53.1 million in 2014 as compared with $24.7 million in 2013. The increase was attributable primarily to sales growth discussed above. Our direct manufacturing service contributed $23.1 million to our gross profit primarily due to the inclusion of Solid Concepts and Harvest Technologies operations. Gross profit from services as a percentage of services revenues in 2014 increased to 38.5% from 35.6% in 2013 mainly due to mix of services and economies of scale.
Gross profit attributable to products sales increased by $108.4 million, or 116.5%, to $201.4 million in 2013 as compared with $93.0 million in 2012. As a percentage of revenues attributable to product sales, gross profit decreased as compared with 2012. The changes in gross profit from products and gross profit as a percentage of related sales primarily reflected the results of the Objet and MakerBot transactions. Gross profit from product sales for 2013 increased by $54.2 million, or 36.8%, as compared to gross profit from product sales, on a pro forma combined basis for Objet, for 2012, due to the increase in sales discussed above.
Gross profit from services increased by 46.5% in 2013 as compared to the prior year due primarily to the increase in service revenues discussed above. Gross profit from services for 2013 increased as compared to gross profit from services, on a pro forma combined basis for Objet, for 2012. The changes in gross profit from services and gross profit as a percentage of related sales also reflected strong growth in our customer service maintenance contracts and spare parts sales.
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,||Year Ended December 31,|
|U.S. $ in thousands||Change in %||U.S. $ in thousands||Change in %||Change in %|
|Research and development, net||$||82,270||$||52,310||57.3||%||$||19,659||$||36,923||166.1||%||41.7||%|
|Selling, general & administrative||351,993||202,040||74.2||%||73,130||141,232||176.3||%||43.1||%|
|Change in fair value of obligations in connection with acquisitions||(26,150||)||754||-3,568.2||%||—||—||N/A||N/A|
Research and development expenses, net increased by $30.0 million, or 57.3%, during 2014 as compared to 2013. The increase was primarily due to the inclusion of a full year of MakerBot operations, which resulted in an increase of $15.2 million in our research and development expenses and due to an increase in headcount to support new research and development initiatives. The headcount increase is partially attributable to our acquisitions and reflects our continued investments in research and development projects, focusing on enhancing our AM technologies and developing consumables that offer an even broader array of physical, mechanical and aesthetic properties, aimed at broadening user applications.
Research and development expense as a percentage of sales increased to 11.0% in 2014 as compared to 10.8% and 9.1% in 2013 and 2012, respectively. This increase reflects our intention to continue to invest in research and development in order to bring a broad range of hardware and materials solutions as well as software solutions to create a leading 3D printing ecosystem. We are dedicated to effectively introduce our innovative technologies to the market in a timely manner.
Research and development expenses, net increased by $32.7 million, or 166.1%, during 2013 as compared to 2012. The increase was driven primarily by the results of a full year in 2013 of combined operations of Stratasys, Inc. and Objet compared to only one month of combined operations in 2012 and the inclusion of MakerBot operations in 2013. Research and development expenses, net increased by $15.4 million, or 41.7%, during 2013 as compared to research and development expenses, on a pro forma combined basis for Objet, for 2012.
Research and development expense as a percentage of sales increased to 10.8% in 2013 as compared to 9.1% in 2012.
We have agreements with three manufacturing companies under which we jointly advance certain of our proprietary technology with each of those two companies. The agreements entitle us to receive reimbursement payments of costs actually incurred under joint development projects. During the years ended December 31, 2014, 2013 and 2012, approximately $4.6 million, $3.6 million and $3.2 million, respectively, of research and development expenses were offset by payments that we received from these companies.
Selling, general and administrative expenses increased by 74.2% in 2014 as compared to 2013. The inclusion of Solid Concepts operating results together with related merger, retention and other integration expense added $38.9 million to our selling, general and administrative expenses. In addition, the inclusion of a full year of MakerBot operations resulted in an increase of $30.0 million to our selling, general and administrative expenses. The additional increase of our selling, general and administrative expenses was attributed to higher expenses for strategic and marketing initiatives, costs of expanding our sales and marketing infrastructure, other acquisitions related expenses, a headcount increase to support our continuing growth and an increase in amortization of acquired intangible assets of $7.9 million.
Selling, general and administrative expenses increased by 176.3% in 2013 as compared to the prior year. The increase was driven primarily by the results of a full year in 2013 of combined operations of Stratasys, Inc. and Objet compared to only one month of combined operations in 2012, which added $83.8 million of selling, general and administrative expenses, and the inclusion of MakerBot operations after the MakerBot transaction which added $9.4 million of selling, general and administrative expenses. These two transactions added $14.2 million in stock compensation expense and $16.4 million in amortization expense related to acquired intangible assets in 2013 as compared to 2012.
Selling, general and administrative expenses for the year ended December 31, 2013 increased as compared to selling, general and administrative expenses, on a pro forma combined basis for Objet, for the year ended December 31, 2012. The increase was primarily due to significant integration expenses related to the mergers, changes in our product distribution strategy, an increase in administrative expenses and headcount to support our growth, and the MakerBot transaction related expenses.
During the year ended December 31, 2014, we recorded a goodwill impairment charge of $102.5 million related to our MakerBot reporting unit. The main factors for this non-cash and non-tax deductible expense were a slower growth of MakerBot product and service revenues, challenges associated with the introduction and scaling of its new product platform, changes in timing of implementation of certain initiatives and changes in MakerBot’s distribution model.
We will continue to monitor our reporting units to determine whether events and circumstances warrant further interim impairment testing. For further information, see note 1 to our consolidated financial statements included in Item 18 of this annual report.
During the year ended December 31, 2014, we recorded gain of $26.2 million due to the revaluation of obligations in connection with acquisitions of MakerBot and Solid Concepts. Since MakerBot did not achieve the earn-out targets for 2014, the entire earn-out liability was cancelled as of December 31, 2014 and resulting in gain of $18.3 million. Additional gain of $7.9 million was recorded due to a decrease of our deferred payments obligations in connection with the Solid Concepts acquisition, which was mainly attributable to changes in our share price. For further information, see note 2 to our consolidated financial statements included in Item 18 of this annual report.
As discussed above under “Investment Plan”, we expect an additional increase in our operating expenditures in the next two to three years as a result of our new investment plan.
Operating Income (Loss)
Operating income (loss) and operating income (loss) as a percentage of our total net sales for the last three years, as well as the percentage change in operating income between those years, were as follows:
|Year Ended December 31,||Year Ended December 31,|
|U.S. $ in thousands||Change in %||U.S. $ in thousands||Change in %||Change in %|
|Operating income (loss)||$||(148,189||)||$||(28,931||)||412||%||$||17,122||$||(14,232||)||-269.0||%||103.3||%|
|Percentage of sales||-19.8||%||-6.0||%||8.0||%||-4.0||%|
Operating loss for the year ended December 31, 2014 was $148.2 million as compared to an operating loss of $28.9 million for the year ended December 31, 2013. The increase in operating loss was primarily attributable to goodwill and other intangible assets impairment charges of $117.1 million and higher merger, retention and integration expenses, mainly due to the Solid Concepts transaction. The increase in operating loss was partially offset by gain due to revaluation of obligations in connection with acquisitions as described above.
We recognized an operating loss for 2013 of $28.9 million as compared to operating income of $17.1 million in 2012. The increase in operating loss was primarily attributable to expenses of $73.9 million from amortization of intangible assets attributable to the Stratasys-Objet merger and the MakerBot transaction and expense of $9.1 million for the MakerBot performance bonus plan for the 2013 as compared to amortization expense of $10.1 million from intangible assets for 2012, which was partially offset by the increased gross margin as described above.
Operating loss for 2013 increased as compared to operating loss, on a pro forma combined basis for Objet, for 2012. The increase in operating loss was primarily attributable to expense of $73.9 million from amortization of intangible assets and expense of $9.1 million for the MakerBot performance bonus plan as compared to amortization expense of $48.3 million from intangible assets in the pro forma combined operating loss for 2012. The effect of the increase in amortization expense and MakerBot performance bonus plan operating income was partially offset by the increased gross margin as described above.
Financial Income (expense), net
Financial expenses, net, which is comprised of mainly foreign currencies effects and interest expense, net, amounted to $6.5 million for the year ended December 31, 2014, compared to a financial expense, net of $0.5 million for the year ended December 31, 2013. The increase is mainly due to foreign currency translation losses due to
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), principally related to intercompany receivables and payables denominated in a foreign currency, partially offset by revaluation of forward contracts that hedged the corresponding currency exposure.
Financial expenses, net in 2013 increased as compared to financial income, net in 2012. The expense in 2013 is primarily due to net foreign currency transaction 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,||Year Ended December 31,|
|U.S. $ in thousands||U.S. $ in thousands||Change in %||Change in %|
|As a percent of income (loss) before income taxes||22.8||%||8.4||%||52.3||%||-77.7||%||-83.9||%||-110.8||%|
Our effective tax rate for the year ended December 31, 2014 was 22.8% as compared to 8.4% tax rate for the year ended December 31, 2013. Our effective tax rate has varied significantly due to the changes in the mix of income (loss) between the U.S. and Israel.
Favorable factors that impacted our effective tax rate for the year ended December 31, 2014 included income of $18.3 million attributable to the change in fair value of the Company’s earn-out and by an unfavorable goodwill impairment charge of approximately $102.5 million, which are both non-tax deductible, and therefore had a significant impact on the effective tax rate for the year ended December 31, 2014.
In addition, during the third quarter of 2014, we adjusted our estimate of long-term tax rates in Israel. As a result, we recorded an approximately $3.2 million in our income tax expense and an increase in our deferred tax liabilities associated with the amortization of the intangible assets.
In the future, the effective tax rate is expected to fluctuate as a result of various factors, including changes in the products and geographical distribution of our income, the effect of any mergers and acquisitions, and the effects of statutes of limitations and provisions for uncertain tax positions. We expect that the tax rate in future years will be higher than this year’s, as a result of the product mix projected for these years and the changes of the Israeli incentives regime we currently benefit from.
Net Income (Loss) and Net Income (Loss) Per Share Attributable to Stratasys Ltd.
Net income (loss) and net income (loss) as a percentage of our total revenues for the last three years, as well as the percentage change in net income between those years, were as follows:
|Year Ended December 31,||Year Ended December 31,|
|U.S. $ in thousands||Change in %||U.S. $ in thousands||Change in %||Change in %|
|Net income (loss) attributable to Stratasys Ltd.||$||(119,420||)||$||(26,954||)||343.1||%||$||8,491||$||(21,577||)||-417.4||%||24.9||%|
|Percentage of Sales||-15.9||%||-5.6||%||3.9||%||-6.0||%|
|Diluted net income (loss) per share||$||(2.39||)||$||(0.68||)||251.1||%||$||0.36||$||(0.58||)||-288.9||%||17.2||%|
Net loss attributable to Stratasys Ltd. for the year ended December 31, 2014 was $119.4 million as compared to $27.0 million for the year ended December 31, 2013. Diluted loss per share for the years ended December 31, 2014 and 2013 was $2.39 and $0.68, respectively.
This increase of the net loss attributable to Stratasys Ltd was due to the factors that were previously discussed, primarily the increase in our selling, general and administrative expenses, and goodwill impairment, which were partially offset by higher gross profit and gain due to revaluation of obligations in connection with acquisitions.
The weighted average fully diluted share count for the year ended December 31, 2014 was 50.0 million, compared to 42.1 million for the year ended December 31, 2013. The increase is primarily due to the public offering of 5.2 million shares and the issuance of 3.9 million shares in connection with the MakerBot transaction during the third quarter of 2013 which had a full effect on the weighted average number of shares outstanding in the year ended December 31, 2014, as well as shares issued during the three months ended September 30, 2014 in connection with the acquisitions of Solid Concepts and Harvest, which increased the weighted average share count by 0.5 million. In computing the loss per share for the years ended December 31, 2014 and 2013, no adjustments were made to take into account any possible dilution of stock options, RSUs and shares held back in connection with the MakerBot transaction to the basic loss per share because their inclusion would have had an anti-dilutive effect on the diluted net loss per share.
Net loss attributable to Stratasys Ltd. for the year ended December 31, 2013 was $27.0 million as compared to net income of $8.5 million and net loss of $21.6 million, on pro forma combined basis for Objet, for the year ended December 31, 2012. The main reasons for the change from 2012 net income to 2013 net loss and for the changes between the net loss of 2013 on pro forma combined basis for Objet, for 2012 are cited previously in this operating and financial review and prospects section. The weighted average fully diluted share count for the year ended December 31, 2013 was 42.1 million, compared to 23.8 million for December 31, 2012. The increase is primarily due to a full effect in the year ended December 31, 2013 on the weighted average number of shares issued in connection with the Stratasys-Objet merger during December 2012 and the public offering and issuance of shares in connection with the MakerBot transaction during the third quarter of 2013.
Table of Operations on a Pro Forma Combined Including Objet Basis
The following table sets forth unaudited pro forma condensed combined for Objet statements of operations information for the year ended December 31, 2012, which combine the historical consolidated statements of operations of Stratasys, Inc. and Objet, giving effect to the Stratasys-Objet merger as if it had been consummated on January 1, 2012. This information has been derived from and should be read in conjunction with the audited consolidated financial statements of Stratasys Ltd. included in this Form 20-F.
|Year ended December 31, 2012|
|Cost of sales||160,023||35,108||(a)(b)(c)(d)(e)||195,131|
|Research and development||34,286||2,637||(b) (c)||36,923|
|Selling, general and administrative||147,035||(5,803||)||(a)(b)(c)(d)(e)||141,232|
|Operating income (loss)||16,642||(30,874||)||(14,232||)|
|Income (loss) before taxes||18,766||(30,874||)||(12,108||)|
|Net income (loss) attributable to Stratasys Ltd.||7,015||(28,592||)||(21,577||)|
The specific pro forma adjustments are as follows:
|a)||Elimination of one-time expense as arising from the Stratasys-Objet merger related to the amortization of purchase price adjustments for acquired deferred revenues, inventory and order backlog. Such amounts are not reflected above as these are considered nonrecurring charges that are to be included in the statement of operations within twelve months following the transaction.|
Accordingly, pro forma adjustments for one-time expenses have been included as follows:
|(in thousands)||Year ended|
December 31, 2012
|Cost of sales—Products||(2,824||)|
|Selling, general and administrative||(3,264||)|
|b)||To reflect the amortization of intangible assets arising from the Stratasys-Objet merger. Accordingly, pro forma adjustments for amortization expense have been included as follows:|
|(in thousands)||December 31, 2012|
|Cost of sales—Products||$||36,019|
|Selling, general and administrative||8,220|
|c)||To reflect stock-based compensation expense. Objet stock options vest over a four-year period and were only exercisable upon the consummation of a liquidity event. Objet treated the stock options as performance-based awards and concluded that such performance condition was not probable. As a result, no stock-based compensation expense had been recognized on outstanding Objet stock options. The Stratasys-Objet merger was a liquidity event and vested options became exercisable at the date of the Stratasys-Objet merger. Under reverse acquisition accounting, Objet stock options were deemed (for accounting purposes only) to be replaced by Stratasys options. The fair value of these replacement options is determined by using the current Stratasys stock price as an input to the Black-Scholes valuation model. The total fair value of these options of $227.7 million was allocated $183 million to services rendered prior to the merger date based upon vesting and included as part of the purchase price and $44.7 million to services to be rendered after the merger date, and is being included in future stock-based compensation expense. Accordingly, pro forma adjustments to increase stock-based compensation expense have been included as follows:|
|(in thousands)||December 31, 2012|
|Cost of sales—Products||$||1,029|
|Cost of sales—Services||1,218|
|Research and development||3,205|
|Selling, general and administrative||17,190|
|d)||Elimination of one-time stock-based expense. Under the terms of the option awards, certain Stratasys, Inc. stock options granted prior to the date of the Stratasys-Objet merger agreement were fully exercisable automatically upon the consummation of the Stratasys-Objet merger. Stratasys, Inc. recognized a one-time stock-based|
compensation expense of $3.8 million on the merger. Such amount is not reflected above as it is considered a nonrecurring charge that is be included in the statement of operations within twelve months following the transaction.
Accordingly, pro forma adjustments for stock-based compensation expense have been included to reduce stock-based compensation expense as follows:
|(in thousands)||December 31, 2012|
|Cost of sales—Products||$||(295||)|
|Cost of sales—Services||(39||)|
|Research and development||(568||)|
|Selling, general and administrative||(2,909||)|
|e)||Elimination of transaction costs. Total transaction costs related to the merger of $25 million were recorded as an expense in combined selling, general and administrative expenses for the year ended December 31, 2012. These costs have been removed from selling, general and administrative expenses with a pro forma adjustment for the year ended December 31, 2012 as these costs do not have an ongoing impact.|
|f)||Income tax expense. To reflect the effect of the Stratasys-Objet merger on the (provision) benefit for income taxes (with the exception of non-tax-deductible stock-based compensation expense and transaction costs) for the year ended December 31, 2012.|
Non-GAAP Financial Measures
The following non-GAAP data, which excludes the categories of expenses 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 (y) excluding non-cash charges such as, share-based compensation, amortization of intangible assets, and impairment charges that either do not reflect actual cash outlays that impact our liquidity and our financial condition or have a non-recurring impact on the income statement, as assessed by management. These non-GAAP financial measures are presented to permit investors to more fully understand how management assesses our performance. 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 events during a period, such as the effects of merger-related, non-cash compensation and other charges, and may not provide a comparable view of our performance to other companies in our industry. The presentation of these non-GAAP measures is not meant to be considered in isolation or as an alternative to any measure of financial performance calculated in accordance with GAAP.
Reconciliation of GAAP and Non-GAAP Results of Operations
|Year ended December 31, 2014|
|U.S. dollars and shares in thousands (except per share amounts)|
|Gross profit (1)||$||362,394||$||76,877||$||439,271||$||226,173||$||62,717||$||288,890|
|Operating loss (1,2)||(148,191||)||256,453||108,262||(28,931||)||126,613||97,682|
|Net loss attributable to Stratasys Ltd. (1,2,3)||(119,420||)||223,049||103,629||(26,954||)||108,913||81,959|
|Diluted net income (loss) per share attributable to Stratasys Ltd. (4)||(2.39||)||4.39||2.00||(0.68||)||2.52||1.84|
|(1)||Acquired intangible assets amortization expense||56,235||57,027|
|Other intangible assets impairment||11,636||—|
|Deferred revenue purchase price adjustments||235||2,316|
|Non-cash stock-based compensation expense||4,493||2,980|
|Merger and acquisition related expense||4,278||394|
|(2)||Acquired intangible assets amortization expense||24,952||17,066|
|Other intangible assets impairment||3,000||—|
|Non-cash stock-based compensation expense||25,714||21,282|
|Change in fair value of obligations in connection with acquisitions||(26,150||)||9,867|
|Merger and acquisition related expense||49,589||15,681|
|(3)||Tax expense related to adjustments||(33,403||)||(17,575||)|
|Depreciation and amortization expense attributable to non-controlling interest||—||(125||)|
|(4)||Weighted average number of ordinary shares outstanding- Diluted||50,019||51,805||42,099||44,511|
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 sales 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. There can be no assurance that our historical performance in sales, gross profit and net income (loss) will improve or even continue, 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 2014, we derived a significant portion of our income from facilities granted Approved or Beneficiary Enterprise status, and therefore our effective tax rate was significantly reduced from the historic rate of Stratasys, Inc. See “Israeli Tax Considerations and Government Programs — The Law for the Encouragement of Capital Investments” in Item 4.B above. Income tax expense in our historical financial statements prior to 2013 related primarily to the income taxes of non-Israeli subsidiaries, as income from Objet Ltd. was included only for the month of December, 2012, subsequent to the Stratasys-Objet merger.
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 our 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, 2014 is as follows:
|Year ended December 31,|
|U.S. $ in thousands|
|Net income (loss)||$||(119,470||)||$||(26,907||)||$||8,823|
|Goodwill and other intangible assets impairment charges||117,106||—||—|
|Depreciation and amortization||109,429||92,436||19,497|
|Deferred income taxes||(53,887||)||(19,449||)||(3,450||)|
|Excess tax benefit from stock options||—||(2,817||)||(15,192||)|
|Change in fair value of obligations in connection with acquisitions||(26,150||)||754||—|
|Translation loss (gain) and other non-cash items||10,602||(1,523||)||(461||)|
|Change in working capital and other items||(54,021||)||(34,727||)||(16,598||)|
|Net cash provided by operating and other activities||13,816||32,029||1,494|
|Net cash provided by (used in) investing activities||(27,439||)||(226,751||)||81,518|
|Net cash provided by financing activities||44,941||474,915||30,489|
|Effect of exchange rate changes on cash and cash equivalents||(3,265||)||69||233|
|Net change in cash and cash equivalents||28,053||280,262||113,734|
|Cash and cash equivalents, beginning of year||414,088||133,826||20,092|
|Cash and cash equivalents, end of year||$||442,141||$||414,088||$||133,826|
Our cash and cash equivalents balance increased to $442.1 million at December 31, 2014 from $414.1 million at December 31, 2013. The increase in cash and cash equivalents in 2014 was primarily due to cash flows provided from operating activities in an amount of $13.8 million and cash flows from financing activities in the amount of $44.9 million primarily due to the proceeds from borrowing under our credit facility. The increase in cash and cash equivalents was offset by net cash flows used in investing activities of $27.4 million to fund our acquisitions and to purchase property, plant and equipment to support our growing business.
Our cash and cash equivalents balance increased to $414.1 million at December 31, 2013 from $133.8 million at December 31, 2012. The increase was primarily due to the net proceeds of $462.9 million from the sale of our ordinary shares, which closed in September, 2013. These increases were offset by the $226.8 million used in investing activities, which primarily reflected the increase in short-term bank deposits and purchases of property and equipment.
Cash flow from operating activities
We generated cash in operating activities of $13.8 million during 2014. The net loss of $119.5 million was favorably adjusted by non-cash charges for goodwill and other intangible assets impairment of $117.1 million, depreciation and amortization of $109.4 million and stock-based compensation expense of $30.2 million offset mainly by the changes in the deferred income taxes and in working capital items. The changes in the deferred income taxes of $53.9 million and the changes in working capital and other items of $54.0 million unfavorably affected cash from operating activities. The increase in the working capital consisted mainly of an increase in accounts receivable of $46.7 million and inventories of $39.4 million, offset by an increase in accrued expenses and other current liabilities and accrued compensation and related benefits of $31.0 million as well as $12.7 million increase in deferred revenue. The change in working capital was mainly driven by strong order flow reflecting increasing demand for our products and services in the marketplace.
We generated cash from operating activities of $32.0 million during 2013. The net loss of $27.0 million was favorably adjusted due to noncash charges for depreciation and amortization of $92.4 million and stock-based
compensation expense of $24.3 million offset mainly by the changes in the deferred income taxes of $19.4 million and in working capital items of $34.7 million.
We generated $1.5 million in cash from operating activities during 2012. Net income of $8.8 million was favorably adjusted for non-cash charges of $19.5 million in depreciation and amortization and stock-based compensation expense of $8.9 million offset mainly by excess tax benefit from stock option exercises of $15.2 million and in working capital items of $16.6 million.
Cash flow from investing activities
We used cash of $27.4 million in our investing activities during 2014. Cash used to fund our acquisitions and to purchase property and equipment amounted to $211.6 million, which was partially offset by cash provided due to the change in short-term bank deposits of $189.8 million.
We used cash of $151.1 million to fund our acquisitions. In addition, we also used non-cash consideration to fund our acquisitions. For further details, see our supplemental disclosure of cash flow information of our consolidated statement of cash flow and note 2 to our consolidated financial statements included in Item 18 of this annual report.
Property, plant and equipment purchases totaled $60.5 million. Our principal property, plant and equipment purchases were for the enhancement of our manufacturing capabilities of our facilities in Israel and the United States and for our new facility in Germany. We also paid for machinery and other equipment to support our growing direct manufacturing business, purchased engineering development equipment and invested in our computer systems.
We used cash of $226.8 million in our investing activities during 2013. The cash used for investing activities in 2013 primarily related to the purchase of short-term bank deposits, which used cash of $180.3 million, and the purchase of property, plant and equipment of $33.3 million.
Our investing activities generated $81.5 million during 2012. The cash generated from our investing activities in 2012 primarily related to proceeds from maturities and sales of marketable securities of $53.4 million and cash acquired of $41.5 million through Stratasys-Objet merger.
Cash flow from financing activities
Net cash provided by financing activities in 2014 was $44.9 million. Cash provided by financing activities was mainly attributed to our borrowing of $50.0 million under our credit facility during 2014.
In addition to the borrowing under the credit facility, items that favorably affected financing activities were the proceeds of $7.9 million from the exercise of stock options, partially offset by the cash payment of the first earn-out period obligation in connection with MakerBot transaction in the amount of $10.8 million.
Net cash provided by financing activities in 2013 was $474.9 million. Cash provided by financing activities was mainly attributed to net proceeds of $462.9 million from public offering of 5,175,000 of our ordinary shares. Proceed from the exercise of stock options provided cash of $12.5 million to our financing activities.
Net cash provided by financing activities in 2012 was $30.5 million. Proceeds from the exercise of stock options and the excess tax benefit from the exercise of stock options and warrant provided $15.3 million and $15.2 million, respectively.
Capital resources and capital expenditures
Our total current assets amounted to $796.6 million as of December 31, 2014, of which $442.7 million consisted of cash and cash equivalents and short-term bank deposits. Total current liabilities amounted to $250.6 million as of December 31, 2014, including $50.0 million relating to short-term debt. Most of our cash and cash equivalents and short-term bank deposits are held in banks in Israel, Switzerland and the U.S., with only minor amounts subject to any restrictions on movement of balances within our company and our subsidiaries.
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 try to reduce the credit exposures of our accounts receivable by credit limits, credit insurance for most of our customers, ongoing credit evaluation and account monitoring procedures.
In February 2015, we announced our new investment plan to help enable growth, maintain market leadership and meet future opportunities. We may make investments in fixed assets, expansion of our operations into additional geographies, information technology, or IT, human resources and sales and marketing infrastructure that will be
required for future growth. We estimate that we will spend between approximately $160 million to $200 million in 2015 for capital expenditure. We believe that we will have adequate cash and cash generated from operating activities to fund our ongoing operations and that these sources of liquidity will be sufficient to satisfy our capital expenditure requirements for the next twelve months.
As discussed in note 2 to our consolidated financial statements included in Item 18 of this annual report, we acquired Solid Concepts on July 14, 2014. At the closing, we paid approximately $162 million as part of the purchase price and other related expenses, of which $60 million was paid in cash and $98 million was paid in our shares; the $4 million balance of the initial purchase price was deferred for six months and was paid in cash during January 2015. The remaining related payments, including deferred payments consideration and retention bonus, are subject to certain adjustments based on our share price. Based on our share price as of December 31, 2014, the total undiscounted amount of the deferred payments consideration and retention bonus is approximately $86.6 million. Subject to certain requirements for cash payments, we retain the discretion to settle any of the amounts payable under the Solid Concepts transaction in our shares, cash or any combination of the two. We believe that our existing cash reserves and our revolving credit facility will be adequate to permit us to make the cash payments if we choose to pay the remaining amount in cash.
As part of our business strategy, we plan to consider and, as appropriate, make acquisitions of other businesses, products, product rights or technologies. Our cash reserves, revolving credit facility and other liquid assets may be inadequate to consummate such acquisitions and it may be necessary for us to issue shares or raise substantial additional funds in the future to complete future transactions. In addition, as a result of our acquisition efforts, we are likely to experience significant charges to earnings and significant cash outflows for mergers and related expenses (whether or not our efforts are successful) that may include transaction costs, closing costs or costs of restructuring activities.
Revolving credit facility
On November 8, 2013, our company and Stratasys International Ltd., our wholly-owned subsidiary, which served as borrower, entered into a credit agreement with Bank of America, N.A., or BofA, as administrative agent and swing line lender, and the other lenders party thereto. Under the credit agreement, Citibank, N.A. and HSBC Bank USA, National Association, serve as co-syndication agents and Silicon Valley Bank serves as documentation agent.
The credit agreement provides for a five year revolving credit facility in an aggregate principal amount of up to $250 million. The revolving credit facility permits swing line loans of up to the lesser of: (1) $25 million and (2) the aggregate commitments of all the lenders. The borrower has the right to make up to three requests to increase the aggregate commitments under the revolving credit facility by an aggregate amount for all such requests of up to $75 million, provided that, in each case, the lenders (including new lenders who are eligible assignees under the credit agreement) are willing to provide such new or increased commitments and certain other conditions are met.
All of the obligations under the credit agreement are unconditionally guaranteed by our company and by our (and the borrower’s) active U.S. and Israeli subsidiaries (excluding, through the end of 2014, MakerBot and its subsidiaries).
At the borrower’s option, revolving loans under the credit agreement (other than swing line loans) will accrue interest based on either (i) the Eurodollar Rate (the London Interbank Offered Rate, or LIBOR) plus a margin based on our Consolidated Leverage Ratio (defined as consolidated funded indebtedness over consolidated EBITDA (as defined in the credit agreement) for the previous rolling four quarters (to which we refer as the leverage ratio); or (ii) a base rate of (a) the federal funds rate plus a margin, (b) BofA’s announced prime rate, or (c) the Eurodollar Rate plus a margin, whichever is highest, plus a margin that is dependent on the leverage ratio (we refer to the foregoing interest rate under the credit agreement as the base rate). Swing line loans will accrue interest at the base rate plus the then-applicable margin for base rate loans.
Payments of the principal amounts of (i) revolving loans are due on the fifth anniversary of the closing of the facility, which we refer to as the maturity date, and (ii) swing line loans are due on the earlier of (a) 10 business days after such loan is made, or (b) the maturity date. Interest on Eurodollar Rate Loans is payable on the last day of each interest period (provided that if an interest period exceeds three months, such interest payments are also due on the
dates falling every three months after the beginning of such interest period) and, for any base rate loan, is payable on the last business day of each calendar quarter.
Borrowings under the credit agreement are available for general corporate purposes (including, without limitation, permitted acquisitions and investments) and for other permitted purposes set forth in the credit agreement.
The borrower must also pay a commitment fee on the unused portion of the revolving credit facility at a rate of 0.375% to 0.425% based on the leverage ratio.
The borrower may prepay, reduce or terminate the commitments, in whole or in part, in minimum amounts without premium or penalty, other than customary breakage costs with respect to Eurodollar Rate borrowings.
The credit agreement contains customary representations and warranties, and affirmative and negative covenants. The negative covenants include, without limitation, restrictions on indebtedness, liens, investments, and certain dispositions. The negative covenants are each subject to a number of specific exceptions, as well as broader exceptions which are a function of our consolidated financial status. These broader exceptions include, among other things, the ability of our company, the borrower, or any of their subsidiaries to make investments, consummate acquisitions (as such terms are defined in the credit agreement), and incur additional unsecured indebtedness in the form of convertible unsecured bonds or similar convertible securities, as long as certain conditions are met.
The credit agreement also contains customary events of default that entitle the lenders to cause any or all of the borrower’s indebtedness to become immediately due and payable, including, among other things: (i) failure to pay any principal when due and payable; (ii) failure to pay interest within five days after it is due; (iii) failure to comply with certain covenants and representations; (iv) a change of control (as defined in the credit agreement); (v) cross-defaults based on defaults under certain other agreements; (vi) the maintenance by us of material monetary judgments that remain unstayed; (vii) insolvency and bankruptcy defaults. There are also customary grace periods provided before certain events are deemed events of default under the credit agreement.
During the third quarter of 2014 we borrowed $50.0 million under the credit facility to support the funding of our growing business. We believe that we were in compliance with the all covenants under the credit agreement as of December 31, 2014.
For information concerning our material commitments as of December 31, 2014, see Item 5.F below (“Tabular Disclosure of Contractual Obligations”).
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, 2014 that we expect to require significant cash outlays in future periods:
|1 Year||Years||Years||5 Years|
|U.S. $ in thousands|
|Operating lease obligations (1)||$||68,081||$||12,723||$||18,099||$||12,652||$||24,607|
|Purchase obligations (including purchase orders)||24,275||24,275||—||—||—|
|Short-term debt (2)||50,233||50,233|
|(1)||Includes lease obligations for facilities.|
|(2)||Includes estimated interest.|
The total amount of unrecognized tax benefits for uncertain tax positions was $8.6 million as of December 31, 2014. 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.
In addition, the Company has obligations in connection with acquisitions, mainly due to the Solid Concepts transaction. For further information refer to Note 2 to our consolidated financial statements included in Item 18 of this annual report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
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||73||Chairman of the Board of Directors|
|S. Scott Crump||61||Chairman of the Executive Committee and Chief Innovation Officer|
|David Reis||54||Chief Executive Officer and Director|
|Edward J. Fierko||73||Director|
|John J. McEleney||52||Director|
|Clifford H. Schwieter||67||Director|
|Eyal Desheh||62||External Director|
|Victor Leventhal||70||External Director|
|Erez Simha||52||Chief Financial Officer and Chief Operating Officer|
Elchanan Jaglom has served as Chairman of the Board of Directors since February 19, 2015 and since the Stratasys-Objet merger, 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 19, 2015 and as our Chief Innovation Officer since February 2013. Mr. Crump previously served as Chairman of the Board of Directors since the Stratasys-Objet merger, 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.
David Reis has served as our (and, prior to the Stratasys-Objet merger, as Objet’s) Chief Executive Officer since March 2009 and as a director since June 2013. He also served as a director of Objet from 2003 until the closing of the Stratasys-Objet merger. 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.
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.
Ilan Levin has served 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.
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.
Clifford H. Schwieter has been a director of our company since the Stratasys-Objet merger, after having served in that same capacity for Stratasys, Inc. from 1994 until the merger. Since 2009, Mr. Schwieter has been the President and a Managing Director of C.H. Schwieter and Associates, LLC, a management and financial consulting firm; he also served in that capacity from 1994 to 2002. From 2002 to 2009, Mr. Schwieter was the President and Chief Executive Officer of Concise Logic, Inc., a software development company focused on semiconductor design tools. From July 1992 to March 1994, he served as President, Chief Executive Officer and a director of Centric Engineering Systems, Inc., which was engaged in the development of mechanical design and analysis software for computing systems ranging from workstations to mainframes and massively parallel networked computing environments. Mr. Schwieter was Vice President and General Manager of the Electronic Imaging Systems Division of the DuPont Company (NYSE: DD) from 1986 to 1991. From 1971 to 1986, Mr. Schwieter was with the General Electric Company (NYSE: GE), where he served as Vice President of GE’s Calma Company from 1985 to 1986 and was responsible for that subsidiary’s worldwide business in the mechanical design and factory automation arena. He was President and
Representative Director of GE Industrial Automation, Ltd., a joint venture between GE and C. Itoh & Company located in Tokyo, from 1982 to 1985. He holds a B.S. in Industrial Management from the University of Cincinnati.
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. Since February 2014, Ms. Patir serves on the board of directors of ELTA Systems Ltd., an Israeli provider of defense products and services. 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, and as member of the board of Kardan Vehicle Ltd., the Israeli licensee of Avis. 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 1985 to 1996, Ms. Patir served as the Director of the Quality and Certification Division of SII and held various managerial positions in the Industry and Standardization Divisions from 1976 to 1985. 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.
Eyal Desheh serves as an external director of our company. His appointment to that position was effective upon the closing of the Stratasys-Objet merger, on December 1, 2012, and was ratified by our shareholders in February 2013. Mr. Desheh currently serves as Chief Financial Officer of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA), a global pharmaceutical and drug company, and also served in that capacity from July 2008 to October 2013 (with the additional title of Group Executive Vice President since 2012). From October 2013 to February 2014, Mr. Desheh served as Acting President and Chief Executive Officer of Teva. From 2000 until 2008, he served as Executive Vice President and Chief Financial Officer of Check Point Software Technologies Ltd. (NASDAQ:CHKP), a global leading provider of network security solutions. From 1996 until 2000 he served as CFO of Scitex Corporation Ltd. (NASDAQ & TASE: SCIX), and from 1989 until 1996, he served as deputy CFO of Teva Pharmaceuticals Ltd. Mr. Desheh holds a B.A. in Economics and an M.B.A. in Finance, both from the Hebrew University in Jerusalem.
Victor Leventhal serves as an external director of our company. His appointment to that position was effective upon the closing of the Stratasys-Objet merger, on December 1, 2012, and was ratified by our shareholders in February 2013. 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.
Erez Simha, who joined Objet in November 2011 as its Chief Operations Officer and Chief Financial Officer, has served as our Chief Financial Officer and as our Chief Operating Officer (Israel) (and, since January 2014, the Chief Operating Officer of our entire company) since the Stratasys-Objet merger. Previously, he served as Corporate Vice President and Chief Financial Officer of Orbotech Ltd. (NASDAQ GS: ORBK), a developer of automated optical inspection systems and imaging solutions, from July 2009 to March 2011, prior to which he had served in several other capacities at Orbotech and its affiliates, including as Corporate Vice President for Finance from September 2008 to June 2009, Vice President of Finance and Operations at Orbotech Pacific Ltd. from April 2007 to August 2008 and Vice President of Finance, Operations and Customer Support at Orbotech S.A. from May 2004 to March 2007. Prior to joining Orbotech, Mr. Simha served as Chief Financial Officer of Wiseband Communications Ltd., a developer of digital multi carrier power amplifiers for the wireless communications industry, from 2000 to 2004; as the general manager of a private company engaged in the import and distribution of professional and technical equipment for the building and metal industries, from 1994 to 2000; and as the controller of Mishkan—Hapoalim Mortgage Bank, from
1990 to 1994. Mr. Simha is a certified public accountant and holds a B.A. in economics and accounting and an M.B.A. from Tel Aviv University.
Arrangements for Election of Directors and Members of Management; Family Relationships
Upon the expiration of the initial two year term following the Stratasys-Objet merger on December 1, 2014 and the election of our board of directors at an extraordinary general meeting of shareholders that was held on February 3, 2015, there are no longer any classifications or arrangements related to the election of our board of directors. Under the amendments to our articles of association that were adopted at that February 2015 shareholders meeting, our board members are elected at each annual general meeting of shareholders for a one year term (other than our external directors, who are elected every three years for a three year term, in accordance with the Companies Law). For additional information, please see “Election of Directors” in Item 10.B (“Memorandum and Articles of Association”) below. 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, 2014 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|
Related Benefits Paid
or Accrued (1)
and Other Similar
directors and members of senior management as a group,|
consisting of 11 persons (2)
|(1)||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.|
|(2)||Comprised of the 11 directors and senior management members listed in the table under “Directors and Senior Management” in Item 6.A above.|
|(3)||This compensation amount for the year ended December 31, 2014 excludes an aggregate of $0.8 million of bonuses that were paid in 2014 in respect of services that had been performed during the previous year.|
Pursuant to the Companies Law, the fees payable to our directors and our chief executive officer require approval by (i) the compensation committee of our board, (ii) the board of directors and (iii) our shareholders (in that order). Please see “Compensation Policy and Committee” in Item 6.C (“Board Practices”) below for further information regarding the requirements under the Companies Law in connection with the compensation of directors.
The following table sets forth the directors’ fees, salary or other compensation (excluding value attributable to stock option grants and excluding reimbursement for reasonable expenses incurred in connection with services) that is paid to each of our directors on an annual basis:
|Name of Director||Annual Fee/Salary||Per Meeting Fee|
|S. Scott Crump||$||441,594||(1)|
|Edward J. Fierko||$||71,000||$1,500/ $250|
|John J. McEleney||$||71,500||$1,500/ $250|
|Clifford H. Schweiter||$||60,750||$1,500/ $250|
|Ziva Patir||$||43,908||(5)||NIS3,750/ NIS2,250|
|Victor Leventhal||$||49,732||NIS3,750/ NIS2,250|
|Eyal Desheh||$||57,363||NIS3,750/ NIS2,250|
|(1)||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 previously as the Chairman of the Board) and Chief Innovation Officer of our company. Our shareholders have also approved a bonus target of $178,740 for Mr. Crump.|
|(2)||Constitutes salary payable in respect of the consulting and director services provided by an entity affiliated with Mr. Jaglom. Does not include Israeli value added tax, or VAT, that is due on the salary payable to Mr. Jaglom.|
|(3)||Constitutes the aggregate salary (excluding VAT) payable to Mr. Reis for all of the services that he provides to our company, including in respect of his role as Chief Executive Officer, as well as an estimated bonus that may be paid to Mr. Reis in respect of 2014. This total compensation amount includes an estimated bonus that may be paid to Mr. Reis in respect of 2014. The foregoing bonus is subject to further approval by our shareholders, in accordance with the requirements of the Companies Law.|
|(4)||These amounts exclude other benefits that are provided for by Israeli law or that are customary for senior executives in Israel, including the right to use (and all related fixed and variable costs in respect of) a leased car that we provide to Mr. Levin.|
|(5)||Does not include VAT that is due on the fees payable to Ms. Patir.|
During the year ended December 31, 2014, we granted stock options to purchase an aggregate of 66,000 of our ordinary shares to certain of our directors and members of our senior management. Information concerning those options that were granted to our directors during 2014 is set forth in the table below:
|Name of Director||Number of Shares|
|Expiration Date |
|Edward J. Fierko||22,000||$||103.30||August 8, 2020|
|John J. McEleney||22,000||$||103.30||August 8, 2020|
|Clifford H. Schweiter||22,000||$||103.30||August 8, 2020|
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.
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, 2014, 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 Salary||Variable compensation(3)||Benefit and Perquisites(4)||Equity-Based Compensation(5)||Other||Total|
|Joe Allison, CEO of SDM||$||97,000||$||84,000||$||—||$||—||$||23,530,871||(6)||$||23,711,871|
|Erez Simha, CFO & COO||$||328,030||$||144,675||$||129,759||$||1,432,059||$||—||$||2,034,523|
|Dan Yalon, EVP Strategy, Marketing & BD||$||246,207||$||114,794||$||62,017||$||1,167,737||$||—||$||1,590,755|
|David Reis, CEO||$||426,543||$||480,645||(7)||$||44,555||$||—||$||85,494||$||1,037,237|
|Tal Dilian, EVP Global Product & Technology||$||248,451||$||120,563||$||37,658||$||541,407||$||—||$||948,079|
|(1)||All amounts reported in the table are in terms of cost to the Company, as recorded in our financial statements.|
|(2)||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 2014.|
|(3)||Amounts reported in this column refer to commission, incentive and bonus payments which were paid with respect to 2014.|
|(4)||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.|
|(5)||Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2014 with respect to equity-based compensation. Assumptions and key variables used in the calculation of such amounts are described in Note 10 to our audited consolidated financial statements, which are included in Item 18 of this annual report.|
|(6)||Consists of (i) $15 million, constituting a signing bonus for Mr. Allison, and (ii) $8,530,871, constituting a pro-rated portion of a retention payment to Mr. Allison that we recognized in our financial statements during the year ended December 31, 2014, each of which is payable to Mr. Allison pursuant to the Solid Concepts acquisition.|
|(7)||This amount represents a bonus in respect of 2014 that is subject to approval by our shareholders in accordance with the requirements of the Companies Law.|
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 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 at least two external directors required to be elected under the Companies Law. Upon the expiration of the initial two year term following the Stratasys-Objet merger on December 1, 2014 and the adoption by our shareholders of amendments to our articles at the extraordinary general meeting of shareholders that was held in February 2015, each of our directors is elected annually, at our annual general meeting of shareholders (other than our external directors, who are elected for three year terms every three years in accordance with the requirements of the Companies Law). The vote required for the election of each director (other than external directors) is a majority of the voting power represented at the meeting and voting on the election proposal The current members of our board consist of the Chairman— Elchanan Jaglom (as of Febraury 19, 2015), the Chairman of the Executive Committee—S. Scott Crump (as of Febraury 19, 2015), Edward J. Fierko, Ilan Levin, John J. McEleney, Ziva Patir, David Reis, Clifford H. Schwieter and our external directors—Eyal Desheh and Victor Leventhal. 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. Following their initial three-year term, our external directors may be elected for up to two additional three-year terms under the circumstances described below and potentially for additional incremental three-year terms if additional requirements are met. External directors may be removed from office only under the limited circumstances set forth in the Companies Law. See “—External Directors” in this Item 6.C below.
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 listed on the NASDAQ Global Select Market, are required to include at least two members who qualify as external directors. Eyal Desheh and Victor Leventhal serve as our external directors.
The Companies Law provides that external directors must be elected by 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.
After an initial term of three years, external directors may be reelected to serve in that capacity for up to two additional three-year terms, provided that either (i) his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the company’s voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such reelection exceeds two percent (2%) of the aggregate voting rights in the company; or (ii) his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same disinterested majority required for the initial election of an external director (as described above). The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Global Select Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for the first time (as described above). Prior to the approval of the reelection of the external director at a general shareholders’ meeting, the company’s shareholders must be informed of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of his or her term.
If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board of directors is required under the Companies Law to call a shareholders’ meeting immediately to appoint a replacement external director.
Each committee of the board of directors that exercises the powers of the board of directors must include at least one external director, except that the audit committee and compensation committee must include all external directors then serving on the board of directors. Under the Companies Law, external directors of a company are prohibited from receiving, directly or indirectly, any compensation from the company other than for their services as external directors pursuant to applicable regulations. Compensation of an external director is determined prior to his or her appointment and may not be changed during his or her term subject to certain exceptions.
The Companies Law provides that a person is not qualified to serve as an external director if (i) the person is a relative of the controlling shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subject, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation or other prohibited relationship with the company or, with any person or entity controlling the company of a relative of such person, with any entity controlled by or under common control with the company; or (b) in the case of a company with no controlling shareholder, any affiliation or other prohibited relationship with a person serving as chairman of the board, chief executive officer, a substantial shareholder or the most senior office holder in the company’s finance department.
The term “relative” is defined as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons. The term affiliation and the similar types of prohibited relationships include (subject to certain exemptions):
|·||an employment relationship;|
|·||a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships);|
|·||service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the public offering.|
The term “office holder” is defined under the Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions, regardless of that person’s title.
In addition, no person may serve as an external director if that person’s position or professional or other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation from the company for his or her role as a director. This prohibition does not apply to compensation paid or given in accordance with Companies Law regulations or amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance coverage. Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control. This includes engagement as an executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or provision of services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director. This restriction extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other relatives of the former external director.
If at the time at which an external director is appointed all members of the board of directors not otherwise affiliated with the company are of the same gender, the external director must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
According to regulations promulgated under the Companies Law, a person may be appointed as an external director only if he or she has professional qualifications or if he or she has accounting and financial expertise (each, as defined below). In addition, at least one of the external directors must be determined by our board of directors to have accounting and financial expertise. However, if at least one of our other directors (i) meets the independence requirements under the Exchange Act, (ii) meets the standards of the NASDAQ Listing Rules for membership on the audit committee and (iii) has accounting and financial expertise as defined under Israeli law, then neither of our external directors is required to possess accounting and financial expertise as long as both possess other requisite professional qualifications.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and an understanding of, financial and accounting matters and financial statements, in such a manner which allows him or her to understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have professional qualifications if he or she has any of (i) an academic degree in economics, business management, accounting, law or public service, (ii) an academic or other degree or has completed other higher education, all in the field of business of the company or relevant for his/her position, or (iii) at least five years of experience as either a senior managing officer in the company’s line of business with a significant volume of business, a public office or a senior position in the company’s main line of business.
Our board of directors has determined that Eyal Desheh has accounting and financial expertise and Victor Leventhal possesses professional qualifications as required under the Companies Law.
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, including all of the external directors, one of whom must serve as chairman of the committee. The audit committee may not include the chairman of the board, or any director employed by or otherwise providing services to the company or to a controlling shareholder or any entity controlled by a controlling shareholder.
Under the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. An “unaffiliated director” is defined as either an external director or as a director who meets the following criteria:
|·||he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and|
|·||he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.|
The members of our audit committee consist of Edward J. Fierko, along with our two external directors, Messrs. Desheh (who serves as chairman of the audit committee) and Leventhal. Our board of directors has determined that each of Messrs. Fierko, Desheh and Leventhal meets the independence requirements set forth in the Listing Rules of the NASDAQ Stock Market and in Rule 10A-3 under the Exchange Act, as well as the independence criteria under the Companies Law.
Our board of directors has determined that Mr. Desheh 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 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, Eyal Desheh and Ilan Levin. Mr. David Reis, by virtue of his role as our Chief Executive Officer, serves in an observer capacity on the committee.
Compensation Policy and Committee
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.
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 either a new compensation policy or the continuation of an existing compensation policy 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).|
The compensation committee must consist of at least three (3) members, including all of our external directors. Each remaining compensation committee member must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the same Companies Law restrictions as the audit committee as to (a) committee membership and (b) 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. We have opted to follow home country practice (in keeping with the Companies Law requirements described above) for our compensation committee in lieu of these NASDAQ requirements, given that the two sets of requirements are not identical. See Item 16.G of this annual report (“Corporate Governance”) below.
We appointed our compensation committee in mid-2013. The committee consists of Victor Leventhal, as chairman, Eyal Desheh and Ziva Patir. After the compensation committee recommended approval of our compensation policy, our board of directors approved it in August 2013 and our shareholders approved it on September 12, 2013.
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.