Stratasys(SSYS) - 2021 Q3 - Quarterly Report

Consolidated Balance Sheets The company's financial position strengthened with notable growth in total assets and equity Balance Sheet Highlights (September 30, 2021 vs. December 31, 2020) | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $332,871 | $272,092 | $60,779 | 22.34% | | Short-term deposits | $187,000 | $27,000 | $160,000 | 592.59% | | Total current assets | $797,595 | $560,492 | $237,103 | 42.30% | | Total assets | $1,228,012 | $990,002 | $238,010 | 24.04% | | Accounts payable | $48,292 | $16,987 | $31,305 | 184.29% | | Total current liabilities | $172,768 | $132,154 | $40,614 | 30.73% | | Total liabilities | $277,559 | $230,407 | $47,152 | 20.46% | | Total equity | $950,453 | $759,368 | $191,085 | 25.16% | Consolidated Statements of Operations and Comprehensive Loss Revenue grew while operating and net losses significantly narrowed for the three and nine months ended September 30, 2021 Key Financial Performance (Three Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $159,009 | $127,892 | $31,117 | 24.33% | | Gross profit | $68,188 | $49,769 | $18,419 | 37.01% | | Operating loss | $(21,919) | $(404,290) | $382,371 | -94.58% | | Net loss | $(18,076) | $(405,066) | $386,990 | -95.54% | | Net loss per ordinary share (basic and diluted) | $(0.28) | $(7.35) | $7.07 | -96.19% | Key Financial Performance (Nine Months Ended Sep 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $440,203 | $378,422 | $61,781 | 16.33% | | Gross profit | $187,035 | $153,375 | $33,660 | 21.95% | | Operating loss | $(63,001) | $(453,468) | $390,467 | -86.11% | | Net loss | $(57,146) | $(454,805) | $397,659 | -87.43% | | Net loss per ordinary share (basic and diluted) | $(0.91) | $(8.29) | $7.38 | -89.02% | Consolidated Statements of Changes in Equity Total equity increased substantially, primarily driven by a public share offering and stock-based compensation Equity Changes (December 31, 2020 to September 30, 2021) | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2021 (in thousands) | Change (Absolute) | | :--- | :--- | :--- | :--- | | Ordinary Shares | $155 | $182 | $27 | | Additional Paid-In Capital | $2,753,955 | $3,001,685 | $247,730 | | Accumulated Deficit | $(1,985,896) | $(2,043,042) | $(57,146) | | Accumulated Other Comprehensive Loss | $(8,846) | $(8,372) | $474 | | Total Equity | $759,368 | $950,453 | $191,085 | - Key drivers of equity increase for the nine months ended September 30, 2021, include a public offering of ordinary shares, net ($218,875 thousand), and significant stock-based compensation ($7,205 thousand in Q1, $7,977 thousand in Q2, $7,958 thousand in Q3)[7][8] Consolidated Statements of Cash Flows Cash flow from operations and financing activities increased, while investing activities saw significant cash outflow Cash Flow Summary (Nine Months Ended Sep 30) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $31,396 | $4,104 | $27,292 | | Net cash used in investing activities | $(191,166) | $(44,246) | $(146,920) | | Net cash provided by financing activities | $222,955 | $53 | $222,902 | | Net change in cash, cash equivalents and restricted cash | $60,772 | $(40,573) | $101,345 | | Cash, cash equivalents and restricted cash, end of period | $332,988 | $253,024 | $79,964 | - Key investing activities for the nine months ended September 30, 2021, included investments in short-term bank deposits ($249,000 thousand), cash paid for acquisitions, net of cash acquired ($6,669 thousand), and purchase of property and equipment ($16,193 thousand)[12] - The primary financing activity for the nine months ended September 30, 2021, was $218,850 thousand in proceeds from a public offering, net of issuance costs[12] Notes to Condensed Consolidated Interim Financial Statements These notes detail accounting policies, acquisitions, revenue, and other key financial statement components 1. Business Description and Basis of Presentation Stratasys Ltd is a global leader in polymer-based 3D printing solutions for manufacturing across various industries - Stratasys is a global leader in connected, polymer-based 3D printing solutions, leveraging approximately 1,600 granted and pending additive technology patents, with a focus on manufacturing for industries including aerospace, automotive, healthcare, and dental[14] - The financial statements are unaudited and prepared in conformity with U.S. GAAP, requiring estimates based on current and, for some estimates, future economic and market conditions[14] - Accounting estimates and assumptions may change over time in response to the uncertain and rapidly changing COVID-19 pandemic, potentially impacting asset valuation, inventory valuation, tax rate, and credit loss allowances[14] 2. New Accounting Pronouncements The Company adopted new FASB guidance on income tax accounting with no material impact on its financial statements - Stratasys adopted new FASB guidance to simplify income tax accounting effective January 1, 2021[15] - The adoption of this new guidance had no material impact on the Company's consolidated financial statements[15] 3. Certain Transactions Stratasys completed several strategic acquisitions to expand its leadership in 3D printing technologies Origin Acquisition - On December 31, 2020, Stratasys acquired 3D printing start-up Origin Laboratories Inc for an aggregate purchase price of $97.1 million to expand its leadership in the mass production parts market with next-generation photopolymer (P3) technology[16][17] Origin Acquisition Consideration | Component | Amount (U.S. $ in thousands) | | :--- | :--- | | Cash payments | $33,025 | | Issuance of ordinary shares | $26,636 | | Contingent consideration (estimated fair value) | $37,400 | | Total Consideration | $97,061 | - Contingent consideration could reach a maximum of $40 million, with approximately 50% settled in cash and 50% in ordinary shares, based on performance-based earn-outs over 3 years[19] - An additional $6 million payment, subject to founders' retention, is recorded as compensation expense over 3 years, with $1.1 million and $3.3 million recognized for the three and nine months ended September 30, 2021, respectively[20] - The preliminary allocation of the purchase price resulted in the recognition of $38.1 million in goodwill and $71.1 million in developed technology intangible assets with a 10-year useful life[22] XAAR Acquisition - On November 1, 2021, Stratasys acquired the remaining 55% share of XAAR 3D for an aggregate purchase price of $33.8 million, including cash and additional earn-out payments and royalties for up to 15 years[23] RPS Acquisition - On February 16, 2021, Stratasys acquired RP Support Limited (RPS), a provider of industrial stereolithography 3D printers, with consideration including cash upon closing and performance-based earn-out payments over two years[24] Marketable Equity Investment - The Company recognized revaluation losses of $2.0 million and $1.2 million for the three and nine months ended September 30, 2021, respectively, after an equity investment became public and was reclassified[24] 4. Revenues Stratasys' revenues increased across all geographical regions for both products and services Disaggregation of Revenues Revenues by Geographical Region (Three Months Ended Sep 30) | Region | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Americas | $103,572 | $86,597 | $16,975 | 19.60% | | EMEA | $34,061 | $23,248 | $10,813 | 46.51% | | Asia Pacific | $21,376 | $18,047 | $3,329 | 18.45% | | Total | $159,009 | $127,892 | $31,117 | 24.33% | Revenues by Geographical Region (Nine Months Ended Sep 30) | Region | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Americas | $278,634 | $251,871 | $26,763 | 10.63% | | EMEA | $95,502 | $71,083 | $24,419 | 34.35% | | Asia Pacific | $66,067 | $55,468 | $10,599 | 19.11% | | Total | $440,203 | $378,422 | $61,781 | 16.33% | Revenues by Timing of Recognition (Nine Months Ended Sep 30) | Recognition Type | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Point in time (Products) | $299,517 | $240,597 | $58,920 | 24.49% | | Point in time (Services) | $33,781 | $29,809 | $3,972 | 13.32% | | Over time (Services) | $106,905 | $108,016 | $(1,111) | -1.03% | | Total | $440,203 | $378,422 | $61,781 | 16.33% | Contract Assets and Contract Liabilities Deferred Revenues | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Deferred revenue | $67,084 | $63,392 | $3,692 | 5.83% | - Revenue recognized in 2021 that was included in the deferred revenue balance as of December 31, 2020, amounted to $9.7 million for the three months and $41.8 million for the nine months ended September 30, 2021[32] Remaining Performance Obligations - As of September 30, 2021, total Remaining Performance Obligations (RPO) amounted to $121.4 million[33] - The Company expects to recognize $102.1 million of this RPO during the next 12 months, $10.8 million over the subsequent 12 months, and the remaining $8.6 million thereafter[33] Incremental Costs of Obtaining a Contract - Sales commissions for initial service type warranty contracts are deferred and amortized over the expected customer relationship period, with deferred commissions amounting to $6.6 million as of September 30, 2021[34] 5. Inventories Total inventories decreased, primarily due to a reduction in finished goods and raw materials Inventory Composition | Component | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Finished goods | $53,576 | $61,297 | $(7,721) | -12.60% | | Work-in-process | $3,734 | $3,163 | $571 | 18.05% | | Raw materials | $62,615 | $67,212 | $(4,597) | -6.84% | | Total | $119,925 | $131,672 | $(11,747) | -8.92% | 6. Goodwill and Other Intangible Assets Goodwill increased due to acquisitions, while other intangible assets decreased due to amortization Goodwill Goodwill Changes (Nine Months Ended Sep 30, 2021) | Metric | Amount (U.S. $ in thousands) | | :--- | :--- | | Goodwill as of January 1, 2021 | $35,694 | | Goodwill acquired (RPS acquisition) | $1,716 | | Measurement period adjustments | $2,400 | | Foreign currency translation adjustments | $(60) | | Goodwill as of September 30, 2021 | $39,750 | - In the third quarter of 2020, a goodwill impairment charge of $386.2 million was recorded for the Stratasys-Objet reporting unit, driven by business reduction and market capitalization decline due to COVID-19 impacts[40][41][42] Other Intangible Assets Other Intangible Assets (September 30, 2021 vs. December 31, 2020) | Asset Type | Sep 30, 2021 Net Book Value (in thousands) | Dec 31, 2020 Net Book Value (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Developed technology | $88,942 | $97,740 | $(8,798) | -9.00% | | Patents | $9,174 | $9,212 | $(38) | -0.41% | | Trademarks and trade names | $4,094 | $4,922 | $(828) | -16.82% | | Customer relationships | $14,800 | $19,694 | $(4,894) | -24.85% | | Capitalized software development costs | $0 | $0 | $0 | 0.00% | | Total | $117,010 | $131,568 | $(14,558) | -11.06%| Estimated Amortization Expense | Period | Estimated Amortization Expense (U.S. $ in thousands) | | :--- | :--- | | Remaining 3 months of 2021 | $8,213 | | 2022 | $30,765 | | 2023 | $16,166 | | 2024 | $12,251 | | 2025 and thereafter | $49,615 | | Total | $117,010 | 7. Net Loss Per Share Net loss per share significantly improved compared to the prior year due to a reduced net loss Net Loss Per Share (Basic and Diluted) | Period | 2021 EPS | 2020 EPS | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $(0.28)$ | $(7.35)$ | $7.07 | -96.19% | | Nine Months Ended Sep 30 | $(0.91)$ | $(8.29)$ | $7.38 | -89.02% | - The weighted average ordinary shares outstanding for basic and diluted net loss per share for the nine months ended September 30, 2021, was 62,888 thousand, compared to 54,851 thousand in 2020[46] 8. Income Taxes The Company recognized income tax benefits influenced by Israel's tax regime and geographic mix of earnings - Stratasys reported an income tax benefit of $0.7 million for the three months ended September 30, 2021 (vs $0.3 million in 2020) and $6.0 million for the nine months ended September 30, 2021 (vs $2.3 million in 2020)[49] - The effective tax rate was primarily impacted by the transition to the new Israeli "Preferred Technology Enterprise" tax regime (12% tax rate), different geographic mixes of earnings and losses, and a valuation allowance on losses of the Company's US subsidiaries[49] 9. Fair Value Measurements Stratasys measures certain financial instruments at fair value, including derivatives and contingent consideration Fair Value Measurements (September 30, 2021) | Instrument | Classification | Fair Value (U.S. $ in thousands) | | :--- | :--- | :--- | | Foreign exchange forward contracts (not designated as hedging) | Level 2 | $67 | | Foreign exchange forward contracts (designated as hedging) | Level 2 | $634 | | Contingent consideration | Level 3 | $40,589 | - Foreign exchange forward contracts are classified as Level 2, valued using observable market inputs, while contingent consideration is classified as Level 3, based on significant unobservable inputs[50] 10. Derivative Instruments and Hedging Activities Stratasys uses foreign currency derivatives to manage global market risks and reduce earnings volatility Foreign Exchange Contracts Not Designated as Hedging Instruments - As of September 30, 2021, the notional amounts of outstanding foreign exchange forward contracts not designated as hedging instruments were $44.2 million[54] - A gain of $0.9 million was recognized under financial income (expenses), net, for the three months ended September 30, 2021, partially offsetting foreign currency revaluation changes[54] Cash Flow Hedging - Payroll and Operating Expenses - As of September 30, 2021, foreign exchange forward contracts for the conversion of $6.4 million into NIS were in effect as cash flow hedges to reduce exposure to variability in NIS-denominated expenses[55] Cash Flow Hedging - Revenue - As of September 30, 2021, foreign exchange forward contracts for the conversion of 12.0 million Euro into U.S. dollars were in effect as cash flow hedges for forecasted foreign currency revenue[56] 11. Equity Equity changes were driven by stock-based compensation, a public offering, and foreign currency adjustments Stock-Based Compensation Plans Stock-Based Compensation Expenses (Nine Months Ended Sep 30) | Category | 2021 (in thousands) | 2020 (in thousands) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | $2,227 | $1,370 | $857 | 62.55% | | Research and development, net | $5,058 | $3,764 | $1,294 | 34.38% | | Selling, general and administrative | $15,855 | $10,623 | $5,232 | 49.25% | | Total | $23,140 | $15,757 | $7,383 | 46.86% | Stock Options Activity (Nine Months Ended Sep 30, 2021) | Metric | Number of Options | Weighted Average Exercise Price | | :--- | :--- | :--- | | Options outstanding as of Jan 1, 2021 | 2,102,529 | $28.06 | | Granted | 46,366 | $3.15 | | Exercised | (209,819) | $20.05 | | Forfeited | (40,548) | $41.82 | | Options outstanding as of Sep 30, 2021 | 1,898,528 | $28.04 | RSUs and PSUs Activity (Nine Months Ended Sep 30, 2021) | Metric | Number of RSUs and PSUs | Weighted Average Grant Date Fair Value | | :--- | :--- | :--- | | Unvested as of Jan 1, 2021 | 2,801,116 | $21.08 | | Granted | 1,272,386 | $33.91 | | Vested | (709,434) | $21.88 | | Forfeited | (284,276) | $21.98 | | Unvested as of Sep 30, 2021 | 3,079,792 | $26.11 | - As of September 30, 2021, unrecognized compensation cost for unvested equity-classified stock options was $2.5 million (expected over 3.2 years), and for RSUs and PSUs was $60 million (expected over 2.34 years)[60][63] Accumulated Other Comprehensive Loss Changes in AOCI (Nine Months Ended Sep 30, 2021) | Component | Jan 1, 2021 Balance (in thousands) | Other Comprehensive Income (Loss) (in thousands) | Sep 30, 2021 Balance (in thousands) | | :--- | :--- | :--- | :--- | | Unrealized Gain (Loss) on Cash Flow Hedges | $(1,673) | $2,579 | $906 | | Foreign Currency Translation Adjustments | $(7,173) | $(2,105) | $(9,278) | | Total | $(8,846) | $474 | $(8,372) | Public Offering of Ordinary Shares - In March 2021, Stratasys completed a public offering of 7,931,034 ordinary shares, raising $218.9 million net of underwriting discounts and offering expenses[69] 12. Contingencies Stratasys has provisioned for a preliminary settlement and faces other legal proceedings not expected to be significant - Subsequent to September 30, 2021, the Company reached a preliminary settlement on an employee-related matter in the US, for which a provision has been included in the third-quarter financial statements[70] - Management believes that the outcome of various other legal proceedings the Company is party to will not have a significant effect on its financial position, profitability, or cash flows[70]