UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[√ ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-13400
STRATASYS, INC.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
incorporation or organization
7665 Commerce Way, Eden Prairie, Minnesota
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
36-3658792
(I.R.S. Employer
Identification No.)
55344
(Zip Code)
(952) 937-3000
Title of each class
Common stock, $.01 par value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [√ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [√ ]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days. Yes [√ ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period than the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Accelerated filer [√ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [√ ]
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of June 30, 2010, the last
business day of the registrant’s most recently completed second quarter, was approximately $475,000,000. On such date, the closing
price of the Registrant’s Common Stock, as quoted on the Nasdaq Global Select Market was $24.56.
The registrant had 21,087,294 shares of common stock outstanding as of March 1, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission with respect to
the registrant’s Annual Meeting of Stockholders scheduled to be held on April 28, 2011 are incorporated by reference into Part III of
this Annual Report.
TABLE OF CONTENTS
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Properties
Legal Proceedings
Reserved
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operation
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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Item 1. Business.
General Development of Business
PART I
Stratasys, Inc. is a worldwide leading manufacturer of three-dimensional (“3D”) printers and high-performance
rapid prototyping (“RP”) systems for the office-based RP and direct digital manufacturing (“DDM”) markets. Our
3D printers and high-performance RP systems provide 3D computer-aided design (“CAD”) users a fast, office-
friendly, and low-cost alternative for building functional 3D parts. We develop, manufacture and sell a broad
product line of 3D printers and high-performance RP systems (and related proprietary consumable materials) that
create physical parts from CAD designs. We also offer rapid prototyping and production part manufacturing
services through our centers located in North America, Europe and Australia. We hold more than 245 granted or
pending additive fabrication patents globally. Stratasys’ products are used in the aerospace, defense, automotive,
medical, business and industrial equipment, education, architecture, and consumer-products markets.
We were incorporated in Delaware in 1989 and our executive offices are located in Eden Prairie, Minnesota.
Our systems are based on our core patented fused deposition modeling (“FDM®”) technology and on our patented
Genisys® technology, which we purchased from IBM in 1994. We sold our first commercial product in April 1992
and in February 2002, we introduced the first 3D printer in our Dimension® product line. The Dimension line offers
modeling capabilities in durable ABS plastic using a desktop 3D printer platform. In May 2007, we began offering
high-performance systems that were specifically designed for DDM, which is the production of end use parts and
tools used in fabrication and assembly. Other recent significant developments in our business are set forth below:
• During the first quarter of 2010, we signed a Master OEM Agreement (the “OEM Agreement”) with
Hewlett-Packard Company (“HP”) to develop and manufacture a line of HP-branded 3D printers. Our
current agreement with HP has an initial term that ends on September 30, 2011 and provides for
automatic one-year renewals unless either party terminates it upon advance written notice. The initial
term of the agreement provides for a territory that covers five European countries. Our intention is to
expand this territory worldwide; however, there can be no assurance that HP will want to expand the
territory in which they sell our 3D printers and other products. Furthermore, even though the
Agreement may be automatically renewed, there can be no assurance that the Agreement will continue
beyond its initial term or any renewal term. If HP does not expand the territory or the Agreement is
terminated, we will not achieve the anticipated benefits of entering into the Agreement, which include
substantial additional revenue and profits as well as validation of our products in the market place.
Under the OEM Agreement, HP will be selling our 3D printers and related products through its own
reseller network. Accordingly, the prices we charge to HP for those products will be less than the
prices we presently charge to our own reseller network. As a result, our margins will be smaller on our
sales to HP. We intend to compensate for these smaller margins by expanding the market for our 3D
printers and thereby substantially increasing the number of 3D printers sold and our overall revenues
and profits. However, there can be no assurance that we will be able to increase our revenue
sufficiently to maintain or increase our profitability.
•
•
In February 2011, we obtained ISO 9001:2008 certification. ISO 9001:2008 is a standard established
by the International Organization for Standardization that provides a set of standardized requirements
for a quality management system. We believe that ISO certification of our quality management
systems will help us expand our products’ applicability to RP and DDM in key markets such as
aerospace, defense, medical and automotive.
In July 2010, we extended our collaborative agreement with a Fortune 500 global manufacturing
company to develop new platforms for DDM applications. This extension has similar terms and
objectives as the previous agreements and entitled us to approximately $800,000 in reimbursement
payments as we achieved specific milestones. In 2010 and 2009, we offset approximately $1.2 million
and $2.2 million of R&D expenses with monies received from this customer. As a result of prior
collaborations with this Fortune 500 company, we had a commercial release of the Fortus 900mc in
August 2008, which has the largest build envelop in our current product line. It is capable of building
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•
•
•
•
parts up to 4.5 feet diagonally, nine times larger than parts built by the Fortus 400mc introduced in
2007. The Fortus 900mc uses ball-screw technology, which improves part accuracy and repeatability
and can hold tighter tolerances.
In January 2010, we expanded the Dimension uPrint product line by introducing the uPrint Plus. This
system offers the same small footprint as the previously introduced uPrint but offers a 33% larger build
envelope. It also allows the user to print in seven additional colors and offers two resolution settings.
Concurrent with the launch of the uPrint Plus, we also introduced two support-material enhancements.
The first, Smart Supports, is a software feature that reconfigures the way support material is structured
in the build process in order to reduce support material usage by as much as 40%. The second is a new
soluble support material called SR-30, which can dissolve 69% faster than the previous soluble support
material.
In February 2009, we announced the rebranding of our high-performance RP and DDM products as
Fortus 3D Production Systems. Since we introduced Dimension and RedEye as individual brands
several years before, there had been some confusion about the identity of our flag-ship product line.
Informally it had been called the FDM Group or the High-End Systems line. By branding this line as
Fortus, we have aimed to give it a distinct and powerful brand name.
In January 2009, we introduced the uPrint Personal 3D Printer priced at $14,900. Designed for the
desktop, uPrint requires only a 25 x 26 inch footprint and features an 8 x 6 x 6 inch build envelope.
Using our proven FDM technology, uPrint builds models with ABSplus — a material that on average
is 40 percent stronger than our standard ABS material, making it ideally suited for testing the form, fit
and function of models and prototypes. The uPrint also features a soluble support removal system,
allowing for hands-free removal of the model support material.
In January 2009, we began offering a new high-performance thermoplastic for direct digital
manufacturing and rapid prototyping called ULTEM 9085 (a trademark of SABIC Innovative Plastics
IP BV). ULTEM 9085 is a strong, lightweight, flame-retardant thermoplastic widely used in aircraft
interiors and was originally developed to help the aerospace industry boost fuel efficiency and safety.
It offers strength and flexibility while producing lighter interior parts than other flame retardant
thermoplastics used in the aerospace industry.
Description of Business
We develop, manufacture, market, and service a family of 3D printers and high-performance RP systems that
enable engineers and designers to create physical models, parts, tooling and prototypes out of plastic and other
materials directly from a CAD workstation. Our high-performance RP systems are used both to create prototype
models as well as produce parts for end-user, or DDM, applications. Our 3D printers and high-performance RP
systems can be used in office environments without expensive facility modification. In many industries, the models
and prototypes required for product development are produced laboriously by hand-sculpting or machining, a
traditional process that can take days or weeks. Our computerized modeling systems use our proprietary technology
to make models and prototypes as well as end-use parts directly from a designer’s 3D CAD file in a matter of hours.
This can eliminate machining and tooling costs and allows for inexpensive design changes. In addition to selling
high-performance RP systems and 3D printers, our RedEye paid parts service makes and sells physical models,
tooling, prototypes and parts for RP and DDM applications based on our customers’ CAD files.
The 3D printers and high-performance RP systems using our FDM technology to produce prototypes and parts
from industrial production-grade plastic do not rely on lasers. This affords our products a number of significant
advantages over other commercially available 3D rapid prototyping technologies that rely primarily on lasers to
create models. Such benefits include:
•
•
the ability to use the device in an office environment due to the absence of hazardous emissions
little or no post-processing
• minimal material waste
•
better processing and build repeatability
2
•
ease of use
• minimal system set up
•
the availability of a variety of plastic materials
• modeling in product-grade plastics for functional testing
•
•
no need for costly replacement lasers and laser parts
higher reliability
Our systems can also run virtually unattended, producing models while designers perform other tasks.
The process involved in the development of a 3D model using our systems begins with the creation of a 3D
geometric design on a CAD workstation. The design is then imported into our proprietary software program, which
mathematically slices the CAD design into horizontal layers that are automatically downloaded into the system. A
spool of thin thermoplastic modeling material feeds into a moving FDM extrusion head, which heats the material to
a semi-liquid state. This semi-liquid material is extruded, deposited and bonded, one ultra-thin layer at a time, on a
base (the “X-Y Stage”) in a thermally-controlled modeling chamber. As the material is directed into place by the
computer-controlled head, layer upon layer, the material bonds and solidifies, creating a precise and strong model.
Based upon data and estimates furnished in the 2010 Wohlers Report, through 2009 we shipped approximately
36% of all RP systems sold worldwide since 1996. The 2010 Wohlers Report also states that we sold 32% of all 3D
printers sold globally in 2009.
Applications for High-Performance Systems and 3D Printers
Both high-performance systems and 3D printers allow for the physical modeling of a design using a special
class of machine technology. These systems take data created from CAD files, CT and MRI scan data or 3D
digitized data to quickly produce models, using an additive approach. Traditionally, RP and 3D printing have been
used by organizations to accelerate product development. Many companies use RP and 3D printing models to test
form, fit and function to help improve the time to market.
Frequently, users report rapid pay-back times from using RP and 3D printing, as they accelerate their product
development cycle and reduce post-design flaws through more extensive design verification and testing.
DDM involves the use of our systems for the direct manufacture of parts that are subsequently incorporated into
the user’s end product or process. DDM is particularly attractive in applications that require short-run or low-
volume parts that require rapid turn-around, and for which tooling would not be appropriate due to small volumes.
For example, customers produce parts for high-end, specialized vehicles or parts that are subsequently used in the
assembly of their unique products. Our Fortus 360mc, 400mc, and 900mc systems are well suited for these types of
applications.
An emerging portion of the DDM market segment is the production of manufacturing tools that aid in the
customer’s production and assembly process. We believe this fabrication and assembly tool market is substantially
larger than the $1.1 billion additive fabrication market that we currently serve. In addition, we have seen a growing
number of applications for end-use parts.
During the past five years, the largest growth segment of the additive fabrication market has been 3D printers.
3D printers are low-cost RP systems (typically under $40,000) that reside in the design/engineering office
environment, allowing product development organizations quick access to a modeling system.
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We have shipped over 15,000 systems since our inception. A wide variety of design and manufacturing
organizations use our systems. Current markets and applications include:
• Aerospace
• Automotive
• Consumer Products
• Direct digital manufacturing of custom parts
• Electronics
• Heavy Equipment
• Medical Systems
• Tooling
• Architecture
• Business Machines
• Defense
• Educational Institutions
• Fixtures
• Medical Analysis
• Mold Making
Additional future applications may include:
• Aerospace and automotive spare parts
• Aerospace ground support equipment
• Free-form graphic design
• Gaming, art and animation
•
• Unmanned air and robotic systems
Secondary tooling
Among the medical applications, rapid prototyping is being used to produce accurate models of internal organs,
bones and skulls for pre-operative evaluations or modeling of prostheses. In such uses, our RP systems serve as a
peripheral device for CT and MRI devices.
Products
High-Performance Systems and 3D Printers
We have been developing, enhancing and expanding our high-performance systems and 3D printers since our
inception in 1989. We have improved both the speed and the accuracy of our high-performance Fortus systems,
expanded their build envelopes, introduced a number of new modeling materials and developed and introduced a
low-cost 3D printer. We have also enhanced and upgraded the software that our systems use to read CAD files and
build parts.
Each of our products is based upon our patented FDM process, and our 3D printers also employ technology
acquired from IBM. Our products are sold as integrated systems, consisting of an RP machine, the software to
convert the CAD designs into a machine compatible format and modeling and support materials. Each of our
products is compatible with an office environment and does not require an operator to be present while it is running.
Our family of 3D printers and high-performance systems affords a customer’s product development team,
including engineers, designers and managers, the ability to create prototypes through all stages of the development
cycle. Our products meet the needs of a demanding and diverse industrial base by offering a wide range of
capability and price from which to choose. The domestic end user list prices of our systems range from $14,900 for
the uPrint Personal 3D Printer to $379,900 for our high performance Fortus 900mc.
The Dimension line of 3D printers allows users to create parts in ABSplus plastic. ABS usually offers the part
strength required for true form, fit and functional testing. Dimension 3D printers operate in an office environment
and provide speed, ease of use and networking capabilities at a competitive price. They feature our Catalyst EX®
software, which offers a single push-button operation by automating all of the required build procedures. We
introduced the uPrint Personal 3D Printer in January 2009 at a list price of $14,900. In January 2010, we expanded
the Dimension uPrint product line by introducing the uPrint Plus. This system offers the same small footprint as the
previously introduced uPrint but offers a 33% larger build envelop. It also allows the user to print in seven
additional colors and offers two resolution settings. Using Dimension’s proven FDM technology, the uPrint and
uPrint Plus build models with Stratasys ABSplus — a material that is on average 40 percent stronger than our
standard ABS material, making it ideal for testing the form, fit and function of models and prototypes. The
Dimension 1200es SST, introduced in January 2008 and priced at a domestic end user list price of $32,900, offers
the ability to build larger parts and creates parts from our ABSplus material as well.
The Fortus 400mc was introduced in July 2007 and allowed for an increase in repeatability, part accuracy and
material strength. In addition, in January 2008, we introduced the Fortus 360mc, which offers similar part quality to
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the Fortus 400mc, but fewer material choices and slower build speeds. Both of these systems can be configured to
meet specific customer needs. The InSight software used by our Fortus systems offers the customer an array of
features that is more flexible than Catalyst EX, ranging from a fully automated build process to one that allows the
user to customize each step. Domestic end user prices for these systems range from of $89,900 to $215,000
depending on the configuration and needs of the customer.
In December 2007, we introduced the Fortus 900mc, which represents our largest system ever. It is capable of
building parts measuring 4.5 feet diagonally, nine times larger than parts built by the Fortus 400mc. The Fortus
900mc uses ball-screw technology, which improves part accuracy, positional repeatability and tolerances. This
product is the direct result of a $3.6 million development contract from a Fortune 500 global manufacturing
company entered into in September 2005 to advance our proprietary FDM® technology for direct digital
manufacturing applications.
Our 3D printers and high-performance systems incorporate our WaterWorks soluble support system. The
patented WaterWorks process allows for the easy removal of supports from a completed prototype by simple
immersion into a water-based solution. Because our support materials dissolve in a solution, many post-processing
steps required in our competitors’ systems are not required with our systems.
We periodically discontinue manufacturing older products. We discontinued the Prodigy Plus system in 2007,
the Vantage and Titan systems during 2008, and the BST 768, SST 768, Fortus 200mc and Maxum systems during
2009. Although we have discontinued the manufacture of these systems, we continue to provide service support in
the field.
Part Build Materials
The modeling and support filament used in the RP and DDM systems and 3D printers that we sell are
consumable products that generate recurring revenue. We believe that FDM technology allows the use of a greater
variety of production grade thermoplastic building materials than other RP technologies. 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
patented filament form, which is then fed into the FDM systems. Our spool-based system has proven to be a
significant advantage for our products over ultraviolet (“UV”) polymer systems or powder based systems, because
our system allows the user to quickly change material by simply mounting the lightweight spool and feeding the
desired filament into the FDM devices. The spool-based system also compares favorably with stereo lithography
(“SLA”) UV polymer systems, because the spool-based system allows the customer to use it in an office
environment and to purchase a single spool, as compared to an entire vat of SLA UV polymer with a limited vat life,
thereby reducing the customer’s up-front costs.
Currently, we have nine modeling materials commercially available for use with our FDM technology:
• ABS is an engineering thermoplastic material (named for its three initial monomers, acrylonitrile,
butadiene, and styrene), which offers a balance of strength, toughness and thermal resistance and is
used commercially to make products such as cell phones, computer cases and toys.
• Polycarbonate (“PC”) is an engineering thermoplastic material, which is used commercially for
demanding applications in a number of industries. PC offers superior impact strength coupled with
resistance to heat and corrosive agents.
• PC-ABS is a blend of PC and ABS plastic. The blend combines the strength of PC with the flexibility
of ABS.
• Polyphenylsufone (“PPSF”) is a specialty thermoplastic material that offers excellent mechanical
properties while being subjected to demanding thermal and chemical environments. PPSF is used to
make prototype parts for numerous industries, including automotive, fluid and chemical handling,
aerospace, and medical sterilization.
• PC-ISO is a derivative of PC that is translucent and can be sterilized for medical device or surgical jig
and fixture production or prototyping.
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• ABS-M30i is a biocompatible material ideal for direct digital manufacturing applications in the
medical, food and pharmaceutical equipment industries with ISO 10993 certification relating to
ethylene oxide sterilization requirements.
• ABSplus and M-30, like ABS, are thermoplastic materials with all the associated benefits. ABSplus
has the added benefit of creating additional part strength. Parts built with these materials are on
average 40% stronger than our standard ABS parts.
• ABSi is a higher grade translucent ABS, which features greater impact strength than our standard
ABS. It can also be used in medical applications, including gamma-ray sterilization.
• ULTEM 9085™ (our newest material) is a strong, light weight, flame and chemically resistant
thermoplastic material that is frequently used in aerospace, automotive and military applications.
In addition to the modeling materials, support material is used during the build process. Our proprietary water-
soluble support material, WaterWorks, is dissolved from the finished part after the build process in our automatic
WaveWash system, which was introduced in 2010. We also offer a soluble support material called SR-30, which
can dissolve 69% faster than the previous soluble support material. Other proprietary support materials that are
removed from the final model by hand are also available.
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. ABS and ABSplus are
offered in numerous colors, including white, black, red, blue, yellow, olive, nectarine and dark grey. We also offer a
service to create custom colors for unique customer needs.
Operating Software
Our high-performance systems and 3D printers use one of two software products that convert the three-
dimensional CAD databases into the appropriate code to operate our FDM system. The software products also
provide a wide range of features, including automatic support generation, part scaling, positioning and nesting, as
well as geometric editing capabilities. The software is integrated into the system and is not sold as a stand-alone
product.
Catalyst EX, our entry-level software product, enables users to build prototype parts at the push of a button. It
was introduced in 2000 and is used on Dimension 1200es SST and BST, Dimension Elite, uPrint, and uPrint Plus.
HP’s Designjet printers use a version of Catalyst EX, branded under the HP Designjet 3D Software Solution name.
Our InSight preprocessing software is used on our Fortus products – Fortus 360mc, 400mc, and 900mc. It
increases build speed and improves the design engineer’s control and efficiency over the entire build process. It has
a broad set of features that facilitate demanding applications ranging from a single “push button” for automatic
preprocessing to individual editing and manipulation tools for each process step.
We continuously improve both software products to meet the demands of our sophisticated customers. Our
latest software enhancement is Smart Supports, a software feature that reconfigures the way support material is
structured in the build process in order to reduce support material usage by as much as 40%. Throughput
enhancements, advanced build algorithms and features such as Smart Supports are intended to keep pace with
complex industrial geometric designs while saving valuable operator time.
Services
Maintenance, Leasing, Training and Contract Engineering
We also provide a number of services in relation to our rapid prototyping business. We provide maintenance to
our customers under standard warranty contracts and separate maintenance contracts. In the United States, we lease
or rent Fortus 3D Production Systems and Dimension 3D printers to customers that may not be interested in
purchasing a printer. We offer training to our customers, particularly on our high-performance systems. We also
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offer contract engineering services to third parties in connection with the strategic development and use of our
systems and services by incorporating our proprietary technology.
RedEye Paid Parts
Our RedEye 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 knowledge base, 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 RedEye on Demand website service,
www.redeyeondemand.com, enables our customers to obtain quotes and order parts around the clock, seven days a
week.
Foreign Service Bureaus
We have a relationship with two foreign service bureaus, RapidPro and the Materialise Group. These service
bureaus utilize Stratasys printers, along with other technologies, to produce prototypes. Stratasys collects a portion
of the revenue generated by these printers. RapidPro is an Australian-based rapid manufacturing bureau. The
Materialise Group is headquartered in Belgium and specializes in the field of rapid industrial and medical
prototyping.
Marketing, Distribution and Customers
Marketing and Customers
The focus of our marketing begins with the identification of customer needs. We feature a broad array of
products that allow us to meet the precise needs of engineers, designers, educators, marketers and manufacturers.
Our products range from uPrint, with a domestic end user price of $14,900, to a high productivity Fortus 900mc,
priced domestically up to $379,900. We currently offer eight systems, excluding the HP branded printers, between
these price points, that meet diverse material, size and performance criteria.
We have sold systems to the following representative customers:
• Boeing
• BMW
• Cessna Aircraft
• Dell
• Hyundai
•
Intel
• Lego
• Lever
• Pioneer Speaker
• St. Jude Medical
• Toro
• Toyota
• Ford Motor Company
• Lockheed Martin
• University of Texas
• Graco
• Medtronic-Sofamar Danek
• University of Wisconsin - Madison
• Harley Davidson
• Mitsubishi Electronics
• US Army Depots
• Hewlett Packard
• Honda
• NASA
• Nike
• US Navy Fleet Readiness Center
• Xerox
No customer accounted for more than 10% of sales in 2010, 2009, or 2008.
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We use a variety of tactical marketing methods to reach potential customers:
• Web-based marketing
• Print advertisements
• Trade magazine articles
• Direct mailings
• Brochures
• Websites
•
Internet blogs
• Press releases
• Trade show demonstrations
• Social media
• Broadcast e-mail
• Webinars
•
Industry associations
•
Internet search engines
In addition, we have developed domestic and international on-site demonstration capabilities.
Sales Field Structure
Our sales organization uses a reseller network and is divided into two groups based on geographical areas. The
Americas sales organization covers North, Central and South America and the International sales organization
covers all other areas of the world. This structure allows us to align our sales and marketing resources with our
diverse customer base and, specifically in the United States, provides more than three times the sales support for
high-end systems compared to a direct sales channel.
Americas Sales Organization
The Americas sales organization provides sales support to a network of more than 100 reseller locations in
North, Central and South America. On January 1, 2009, we began selling our Fortus 3D Production Systems
through a select group of North American resellers that had previously distributed only the Dimension 3D printer
product line. This sales strategy leverages our success with a network of independent regional resellers that we
believe is the strongest sales channel in the industry. By replacing our Fortus 3D Production Systems direct sales
channel with our existing reseller channel, we have converted a significant portion of our fixed selling costs to a
variable cost structure.
International Sales Organization
The International sales organization uses a worldwide network of more than 100 resellers to market, sell, and
service our 3D printers and Fortus 3D Production Systems. Our International sales organization supports all major
regions of the world outside of the Americas including Europe, the Middle East, Korea, Taiwan, Japan, and China.
We also operate international sales and service centers in Frankfurt, Germany; Bologna, Italy; Bangalore, India;
Hong Kong; and Shanghai, China.
Reseller Network
We use an extensive world-wide reseller network to market and sell our 3D printers, Fortus 3D Production
Systems, and consumable materials, and to provide maintenance service and replacement parts. Most of the reseller
outlets have 3D printers available for tradeshows, product demonstrations and other promotional activities. Many of
them also enjoy a long-term presence in their respective territories making this distribution model highly effective
relative to a direct sales model. In addition to our 3D Printers and 3D production systems, most resellers sell and
service a third-party 3D solid CAD software package.
During the first quarter of 2010, we signed a Master OEM Agreement (the “OEM Agreement”) with HP to
develop and manufacture an HP-branded 3D printer. During the initial term of the OEM Agreement, which expires
on September 30, 2011, we have developed and are manufacturing a line of FDM (“Fused Deposition Modeling”)
3D printers and related accessories and consumables exclusively for HP for resale under the HP brand in France,
Germany, Italy, Spain and the United Kingdom. In March of 2010, we delivered our first shipment of 3D printers to
8
HP under this OEM Agreement. In April of 2010, HP launched our support removal system and the WaveWash
system in those countries under the HP brand name, HP Designject 3D Removal System.
HP has agreed not to sell any 3D printers manufactured by any other companies, including HP, throughout the
world for the term of the OEM Agreement. The term of the OEM Agreement will be extended for additional one-
year periods unless the agreement is terminated on advance notice by either party. During the term of the OEM
Agreement, we have agreed not to sell comparable products covered by the Agreement directly or indirectly in the
territory covered by the OEM Agreement. The OEM Agreement does not require HP to purchase any minimum
quantity of products. After the initial term, or by mutual agreement, the territory in which HP will have the
exclusive right to sell the 3D printers covered by the OEM Agreement may be expanded to additional countries.
Ultimately, our mutual intention is for HP to sell our low-cost 3D printers globally.
RedEye Paid Parts
In 2006, we established a dedicated internal sales channel to offer our RedEye paid parts services through our
RedEye on Demand instant Internet quoting system. This team is responsible for growing our paid parts service and
nurturing customers who have RP and DDM part needs. Their objective is to insure that the customer has a
favorable experience when solving their internal part requirements. Besides a commitment to customer satisfaction,
an essential objective of this operation is to increase the number of quality FDM parts in the marketplace, which, in
turn, we believe will also support the expansion of our system sales. In 2007, we launched a software that enabled
instant part quoting via Redeye RPM, later rebranded as Redeye on Demand, in both Europe and Australia.
In December 2008, we announced that AutoCAD users can order digitally manufactured prototypes and
production parts quickly and easily through an on-demand 3D printing capability supported by our RedEye paid
parts service. AutoCAD 2009 subscription customers had access to this functionality via a bonus pack. Included in
the bonus pack was on-line ordering capability, giving designers and engineers the ability to get instant quotes and
place orders from our RedEye paid parts service. AutoCAD 2010 and 2011 subscription customers continue to have
access to this functionality.
Customer Support
Our Customer Support department provides on-site system installation and maintenance services and remote
technical support to users of our products. 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. Our domestic customers
can use a toll-free telephone number to request technical assistance, schedule service visits, order parts and supplies,
or directly contact a manager within the Customer Support department. Our help desk provides technical support
via phone, fax, and e-mail to international customers, resellers, and to our field service personnel.
The uPrint maintenance and servicing is performed by a third-party service organization or selected resellers in
certain international locations. For our high performance systems, we employ a field service organization that
performs system installation, basic operation and maintenance training, and a full range of maintenance and repair
services at customer sites. Field representatives have been trained and certified to service all of our products.
Representatives are strategically located in regional offices across North America. They have secure remote access
to a customer service database containing service history and technical documentation to aid in troubleshooting and
repairing systems.
Customer Support is represented on cross-functional product development teams within Stratasys 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 technical personnel, and improved communication between the field and the factory.
Warranty and Service
We offer a one-year warranty on Fortus 3D Production Systems and uPrint systems worldwide. In addition we
offer a one-year warranty on all systems sold internationally and systems sold into the education market
domestically. All other domestically sold systems have a 90-day warranty. We also offer annual and multiple-year
9
service and maintenance contracts for our systems. Service contracts for our systems have a domestic end user price
from approximately $2,000 to $49,000 per year.
Manufacturing
Our manufacturing process consists of assembling systems using purchased components from our proprietary
designs and producing consumable filament to be used by our systems. We currently operate on a build-to-forecast
basis and obtain all parts used in the manufacturing process either from distributors of standard electrical or
mechanical parts or from custom fabricators of our proprietary designs. Our suppliers are measured by on-time
performance and quality.
We purchase major component parts for our Fortus 3D Production Systems and 3D printing systems from
various outside suppliers, subcontractors and other sources and assemble them in our Minnesota facilities. Our
production floor has been organized using demand-flow techniques (“DFT”) in order to maximize efficiency and
quality. Using DFT, our production lines are balanced, and as capacity constraints arise, we can avoid the
requirements of reconfiguring our production floor.
Computer-based Material Requirements Planning (“MRP”) is used for reordering to ensure on-time delivery of
forecasted parts. All operators and assemblers are certified and trained on up-to-date assembly and test procedures,
including Assembly Requirement Documents, which originate in engineering. The assembly process 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. At the completion of assembly, we perform a complete power up and
final quality test to ensure the quality of our products before shipment to customers. The complete final quality tests
must be run error free before the system can be cleared for shipment. We maintain a history log on all products that
shows revision level configuration and a complete history during the manufacturing and test process. All issues on
the system during the manufacturing process are logged, tracked and used to make continuous process
improvements of our production processes. Other manufacturing strengths that are incorporated into our new
designs are the commonality of designs among our different products as well as the incorporation of Six Sigma
concepts. Our filament production utilizes Factory Physics® techniques to manage critical buffers of time, capacity
and inventory to ensure product availability. We also utilize the “5S” method (Sort, Set-in-order, Shine, Standardize
and Sustain) as part of our lean manufacturing initiatives to improve organization and efficiency.
To provide customers with assurance regarding the quality and consistency of our systems, we obtained ISO
9001: 2008 certification in February 2011. ISO 9001: 2008 provides a structure for a quality management system
that strives for customer satisfaction, consistent quality, and efficiency. In addition, there are internal benefits such
as improved customer satisfaction, interdepartmental communications, work processes, and customer-and-supplier
partnerships. The ISO 9000 family of standards relates to quality management systems and is designed to help
organizations ensure they meet the needs of customers and other stakeholders.
We maintain an inventory of parts to facilitate the timely assembly of products required by the 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. We consider these single-source suppliers to be very
reliable, but the loss of one of these suppliers could result in the delay of the manufacture and delivery of those
materials and compounds. This type of delay could require us to find and re-qualify the product 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.
Research, Development and Engineering
We believe that ongoing research, development and engineering efforts are essential to our continued success.
Accordingly, our engineering development efforts will continue to focus on customer requested enhancements,
improvements to the FDM technology and development of new modeling processes, materials, software, user
applications and products. We have devoted significant time and resources to the development of a universally
compatible and user-friendly software system. 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. The Fortus 360mc, 400mc, 900mc,
Dimension, and uPrint products as well as the Catalyst EX and InSight software products are examples of this
10
successful strategic initiative. For the years ended December 31, 2010, 2009 and 2008, our research, development
and engineering expenses were approximately $9.8 million, $7.7 million and $9.0 million, respectively.
Our relationship with HP has increased our focus on product reliability. HP requires a superior quality standard
and demands extensive testing prior to production to ensure consistency. This focus, combined with HP’s standards,
has created a positive effect on the overall quality of our systems.
Our filament development and production operation is located at our facilities in Eden Prairie, MN. We regard
the filament formulation and manufacturing process as a trade secret and hold patent claims on filament usage in our
products. We purchase and formulate raw materials for our consumable filament production from various polymer
resin suppliers with different levels of processing and value add applied to the raw materials.
Intellectual Property
We consider our proprietary technology to be material to the development, manufacturing, and sale of our
products and services and seek to protect our technology through a combination of patents and confidentiality
agreements with our employees and third parties. All patents and patent applications for rapid prototyping processes
and apparatuses associated with the Stratasys FDM technology have been assigned to us by their inventors. As part
of our purchase of rapid prototyping technology assets from IBM, we were also assigned the rights and title to
several patents developed by IBM. We recorded these patents domestically and in certain foreign countries. The
United States patents covering our proprietary FDM technology expire at various times between 2011 and 2030. In
total, we currently own over 245 FDM U.S. and international patents and patent applications, and we have been
assigned rights under an additional 45 UV polymer based U.S. patents.
Our registered trademarks include:
• Stratasys
• Dimension BST
• Dimension SST
• Stratasys, Inc.
•
uPrint
• Shell Design
• Build FDM
• Catalyst
• Dimension
• Redeye RPM
• Fortus
• Real & Design
• Fortus
• QuickSlice
• Xpress 3D
Other trademarks include:
• FDM Maxum
• FDM Titan
• BASS
•
InSight
• WaterWorks
• Touchworks
• Fortus 200mc
• Fortus 360mc
• Prodigy Plus
• WaveWash
• Prodigy
• Ecoworks
• SupportWorks
• FDM Quantum
• Fortus 900mc
• Fortus 400mc
• Genisys
• Dimension Elite
Each of the registered trademarks has a duration of 10 years and may be renewed every 10 years while it is in
use. Trademark applications have also been filed in Japan, the European Community, China, the Republic of Korea,
Canada, and Hong Kong.
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We have also registered a number of Internet domain names, including the following:
• Stratasys.com
• BuildFDM.com
•
3Dprinter.com
• Paidparts.com
•
•
•
•
Dimensionprinting.com
• RedEyeRPM.com
3D-fax.com
• DimensionDirect.com
Stratasysdimension.com
• Fortus.com
Xpress3D.com
• RedEyeonDemand.com
Backlog
Our total backlog of system orders at December 31, 2010 was approximately $8.6 million, as compared with
approximately $6.3 million at December 31, 2009. We estimate that most of our backlog will ship by the end of
first quarter of 2011.
Seasonality
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.
Although the first quarter has been 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
market penetration strategy.
Competition
We compete in a marketplace that is still primarily using conventional methods of model-making and prototype
development. We believe that there is currently no other producer of industrial 3D modeling devices that uses a
single-step, non-toxic technology similar to our FDM technology. Most of the 3D printing and other RP systems
manufactured by our competitors involve additional post-processing steps, such as curing the part after construction
of the model or prototype. In addition, our FDM technology does not rely on the laser or light technology used by
other commercial manufacturers in the RP industry.
Our competitors employ a number of different technologies in their RP devices. 3D Systems and CMET use
stereo lithography (“SLA”) in their products. 3D Systems and EOS GmbH produce machines that use selective
laser sintering (“SLS”) to harden powdered material. Z Corp. uses inkjet technology to bond powdered materials
such as starch. Solidscape, 3D Systems and Objet Geometries have developed prototyping systems that use inkjet
technology to deposit resin material layer by layer. A smoothing or milling process is often required between each
deposited layer to maintain accuracy in these processes, which reduces material yields. Envisiontec utilizes a
photopolymer mask and a light process to build models and Solido uses a plastic sheet lamination technique. We
believe that our FDM technology has important advantages over our competitors’ products. These advantages
include:
•
•
•
•
•
•
•
the ability to be used in an office environment
the availability of multiple production-grade modeling materials
a one-step modeling process
low acquisition price
ease of use
automatic hands free support removal
higher reliability
Based on data and estimates presented in the 2010 Wohlers Report, in 2009 we shipped more units globally
than any other company in the RP industry, and we were the second largest in terms of revenue. The 2010 Wohlers
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Report also states that we shipped 32% of all 3D printers shipped globally in 2009. We believe that this trend
continued in 2010 as well.
Employees
As of March 1, 2011, we had 414 full-time employees and contractors or temporary employees globally. While
we have separate internal departments, such as manufacturing, marketing, engineering and sales, many employees
perform overlapping functions within the organization. No employee is represented by a union, and we have not
experienced any work stoppages. We believe our employee relations are good.
Governmental Regulation
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
the federal Occupational Safety and Health Administration
laws pertaining to the hiring, treatment, safety and discharge of employees
export control regulations for U.S. made products
• CE regulations for the European market
Environmental Regulation
We offer innovative, high quality products and services that are environmentally friendly. We also offer a green
recycling program that ensures a lower impact on the environment by recycling used filament cartridges, canisters
and spools.
In the European marketplace, electrical and electronic equipment is required to comply with the Directive on
Waste Electrical and Electronic Equipment (“WEEE”) and the Directive on Restriction of Use of Certain Hazardous
Substances (“RoHS”). WEEE aims to prevent waste by encouraging reuse and recycling and RoHS 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 EU (whether or not manufactured in the EU) are potentially subject to WEEE
and RoHS. We monitor the development of such directives and comply with such directives in the required time
frames.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any document we file at the SEC’s public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public
reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including Stratasys) file electronically with the SEC. The SEC’s website is
www.sec.gov.
Our website is www.stratasys.com. We make available free of charge through our Internet site, via a link to the
SEC’s website at www.sec.gov, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports
on Form 8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive officers; and any amendments to those
reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after
such material is electronically filed with, or furnished to, the SEC.
We make available on www.stratasys.com our most recent annual report on Form 10-K, our quarterly reports on
Form 10-Q for the current fiscal year and our most recent proxy statement, although in some cases these documents
are not available on our site as soon as they are available on the SEC’s site. You will need to have on your computer
the Adobe Acrobat Reader software to view these documents, which are in PDF format. If you do not have Adobe
13
Acrobat, a link to Adobe’s Internet site, from which you can download the software, is provided. The information on
our website is not incorporated by reference into this report.
Financial Information About Operations In the United States and Other Countries
The information required by this item is incorporated by reference to our Financial Statements included
elsewhere in this report. (See Part IV, Item 15, Note 19.)
Item 1A. Risk Factors.
Many of the factors that affect our business and operations involve risk and uncertainty. The following
describes the principal risks affecting us and our business. Additional risks and uncertainties, not presently known to
us or currently deemed material, could negatively impact our results of operations or financial condition in the
future.
We may not be able to introduce new high-performance systems, 3D printing systems and materials
acceptable to the market or to improve the technology and software used in our current systems.
Our ability to compete in the high-performance and 3D printing market depends, in large part, on our success in
enhancing our existing product lines and in developing new products. Even if we successfully enhance existing
systems or create new systems, it is likely that new systems and technologies that we develop will eventually
supplant our existing systems or our competitors will create systems that will replace ours. The RP industry is
subject to rapid and substantial innovation and technological change. We may be unsuccessful at enhancing existing
systems or developing new systems or materials on a timely basis, and any of our products may be rendered obsolete
or uneconomical by our or others’ technological advances.
If the 3D printing market does not continue to accept our systems, or if our Fortus high-performance systems
do not meet the needs for DDM applications, our revenues may stagnate or decline.
We derive a substantial portion of our sales from the sale of 3D printers and Fortus 3D Production Systems. If
the market for 3D printers or high-performance systems declines or if competitors introduce products that compete
successfully against ours, we may not be able to sustain the sales of those products. If that happens, our revenues
may not increase and could decline.
If we are unable to maintain revenues and gross margins from sales of our existing products, our profitability
will be adversely affected.
Our current strategy is to attempt to manage the prices of our high-performance systems and 3D printers to
expand the market and increase sales. In conjunction with that strategy, we are constantly seeking to reduce our
direct manufacturing costs as well. Our engineering and selling, general and administrative expenses, however,
generally do not vary substantially in relation to our sales. Accordingly, if our strategy is successful and we increase
our revenues while maintaining our gross margins, our operating profits generally will increase faster as a
percentage of revenues than the percentage increase in revenues. Conversely, if our revenues or gross margins
decline, our operating profits generally will decline faster than the decline in revenues or gross margins. Therefore,
declines in our revenues may lead to disproportionate reductions in our operating profits.
Hewlett-Packard may not expand distribution under our OEM Agreement beyond its initial territory of five
European countries, and the OEM Agreement may not continue beyond its initial term ending on September
30, 2011.
Our Agreement with HP has an initial term that ends on September 30, 2011, and has an initial territory of five
European countries. There can be no assurance that HP will expand the territory in which they sell our 3D printers
and other products. Furthermore, even though the OEM Agreement will automatically be renewed for one-year
terms unless either party terminates it on advance written notice, there can be no assurance that the OEM Agreement
will continue beyond its initial term or any renewal term. If HP does not expand the territory or the Agreement is
14
terminated, we will not achieve the anticipated benefits of entering into the OEM Agreement, which include
substantial additional revenue and profits as well as validation of our products in the market place.
Since we will be selling our 3D printers and related products to HP on an OEM basis, our margins on those
products will be lower than those on the products that we presently sell, which may reduce our overall
profitability.
HP will be selling our 3D printers and related products through its own reseller network. Accordingly, the
prices we charge to HP for those products will be less than the prices we presently charge to our own reseller
network. As a result, our margins will be lower on our sales to HP. We intend to compensate for these lower
margins by expanding the market for our 3D printers, thereby substantially increasing the number of 3D printers
sold and our overall revenues and profits. However, there can be no assurance that we will be able to increase our
revenue sufficiently to maintain or increase our profitability over time.
If our present single or limited source suppliers become unavailable or inadequate, our customer
relationships, results of operations and financial condition may be adversely affected.
We maintain an inventory for most of our necessary supplies, which facilitates the assembly of our systems and
the manufacture of our consumables. While most components for our systems and materials and compounds for our
consumables are available from multiple suppliers, certain of those items are only available from single or limited
sources. Should any of our present single or limited source suppliers become unavailable or inadequate, we would
be required to spend a significant amount of time and expense to develop alternate sources of supply. It would also
require us to re-qualify any product supplied by one or more new vendors. Accordingly, the loss of a supplier with
vendor-specific components, materials or compounds could result in a delay in the manufacture and delivery of our
systems or consumables. In addition, 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 to accommodate substitute
components, material or compounds. As a result, the loss of a single or limited source supplier and resulting delays
in delivery could adversely affect our relationship with our customers and our results of operations and financial
condition.
If other manufacturers were to successfully develop and market consumables for use in our systems, our
revenues and profits could be adversely affected.
We presently sell substantially all of the consumables that our customers use in our systems. However, even
though we attempt to protect against replication of our consumables through patents and trade secrets and we
provide that our warranties are valid only if customers use consumables that we certify, it is possible that other
manufacturers could increase their development of consumables that could be used successfully in our systems. If
our customers were to purchase consumables from other manufacturers, we would lose some of our sales and could
be forced to reduce prices, which would impair our overall revenue and profitability.
If we fail to grow our RedEye paid parts service as anticipated, our net sales and profitability will be
adversely affected.
We are attempting to grow our RedEye paid parts service substantially. To this end, we have made significant
infrastructure, technological and sales and marketing investments. These investments include a dedicated facility,
increased staffing, use of a substantial number of our Fortus 3D Production Systems exclusively for Paid Parts, and
the development and launch of our RedEye on Demand service, which enables customers to obtain quotes for and
order parts over the Internet. If our RedEye paid parts service does not generate the level of sales required to
support our investment, our net sales and profitability will be adversely affected. Our competitors’ consolidation
efforts in the service bureau industry may also adversely affect RedEye’s efforts to grow.
If any of our manufacturing facilities is disrupted, sales of our products will be disrupted, and we could incur
unforeseen costs.
We perform the final assembly of our 3D printers and high-performance systems and we manufacture our
filament at our facilities in Eden Prairie, Minnesota. If the operations of any of those facilities is disrupted, we
would be unable to fulfill customer orders for the period of the disruption. We would not be able to recognize
revenue on orders that we could not ship, and we might need to modify our standard sales terms to secure the
commitment of new customers during the period of the disruption and perhaps longer. Depending on the cause of
15
the disruption, we could incur significant costs to remedy the disruption and resume product shipments. Such a
disruption could have a material adverse effect on our revenue, results of operations and earnings.
We own our manufacturing and office facilities, which may limit our ability to move our operations. If we
were to move some of all of our operations, we could incur unforeseen charges.
We own four buildings in Eden Prairie, Minnesota, which we use to conduct most of our manufacturing and
assembly operations. Ownership of these buildings may adversely affect our ability to move some or all of our
operations to other locations that may be more favorable. If we were to move any of our operations to other
locations, we may have difficulty selling or leasing the property that we have vacated. This could result in an
impairment charge, which could have a material adverse effect on our results of operations in one or more periods.
A loss of a significant number of our resellers or channel managers would impair our ability to sell and
service our products and could result in a reduction of sales and net income.
We sell all of our products through resellers. We rely heavily on these resellers to sell our products to end users
in their respective geographic regions and rely exclusively on resellers to service our products outside the United
States. If a significant number of those resellers were to terminate their relationship with us or otherwise fail or
refuse to sell or service our products, we may not be able to find replacements that are as qualified or as successful
in selling or servicing our products. If we are unable to find qualified and successful replacements, our sales will
suffer, which would have a material adverse affect on our net income.
Our failure to expand our intellectual property portfolio could adversely affect the growth of our business
and results of operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenues and our
profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents
and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes
in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of those
laws treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely
affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no assurance
that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors
operate or that we will be able to use or license that intellectual property.
We may not be able to adequately protect or enforce our intellectual property rights, which could impair our
competitive position.
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property.
We rely primarily on patents, trademarks and trade secrets, as well as non-disclosure agreements and other methods,
to protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary
technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use
or disclose our technologies and processes. We cannot assure you that any of our existing or future patents will not
be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with
meaningful protection. We may not be able to obtain foreign patents or pending applications corresponding to our
U.S. patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be
available. If our patents and other intellectual property do not adequately protect our technology, our competitors
may be able to offer products similar to ours. Our competitors may also be able to develop similar technology
independently or design around our patents. Any of the foregoing events would lead to increased competition and
lower revenue or gross margins, which would adversely affect our net income.
We may be subject to alleged infringement claims.
We may be subject to intellectual property infringement claims from individuals, vendors and other companies
who have acquired or developed patents in the fields of 3D printing or consumable production for purposes of
developing competing products or for the sole purpose of asserting claims against us. Any claims that our products
or processes infringe the intellectual property rights of others, 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
16
otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our
processes, our market share, sales and profitability could be adversely impacted.
As our patents expire, additional competitors using our technology could enter the market, which could
require us to reduce our prices and result in a reduction of our market share. Competitors’ introduction of
lower quality products using our technology could also negatively affect the reputation and image of our
products in the marketplace.
The initial patents for our technology will begin to expire in 2011. Upon expiration of those patents, our
competitors may introduce products using the same technology as ours that have lower prices than those for our
products. To compete, we may need to reduce our prices, which would adversely affect our revenues, margins and
profitability. Additionally, the expiration of our patents could reduce barriers to entry into the market for additive
fabrication systems, which could result in the reduction of our market share and earnings potential. If competitors
using our technology 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 additive fabrication technologies.
If our intangible assets become impaired, we may be required to record a significant charge to earnings.
As of December 31, 2010, the net book value of our intangible assets was approximately $6.4 million.
Accounting rules require us to take a charge against our earnings to the extent that any of these intangible assets are
impaired. Accordingly, invalidation of our patents, trademarks or other intellectual property or the impairment of
other intangible assets due to litigation, obsolescence, competitive factors or other reasons could result in a material
charge against our earnings and have a material adverse effect on our results of operations.
If our investments become impaired, we may be required to record a significant charge to earnings.
Our investments include tax-free Auction Rate Securities (ARS) and municipal government bonds, all of which
are insured. Given the current volatility in interest rates and the potential impact of higher interest rates on the
issuers of these securities, a significant increase in interest rates could impair the ability of one or more issuers to
pay interest on, or principal of, these obligations. Defaults by these issuers or their insurers could cause an
impairment of the value of our investments, resulting in a charge against our earnings. Any such charge could have
a material adverse effect on our results of operations.
Estimating our income tax rate is complex and subject to uncertainty.
The computation of income tax expense (benefit) 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 accounting principles generally accepted in the United States. Income tax expense (benefit) 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 stock option expense, the application of transfer pricing rules,
tax audits and changes to our valuation allowance for deferred tax assets. Future events, such as changes in our
business and the tax law in the jurisdictions where we do business, could also affect our rate. For these reasons, our
global tax rate may be materially different than our estimate.
If we do not generate sufficient future taxable income, we may be required to recognize additional 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 increase our valuation allowance against our
deferred tax assets. Such an increase would result in an increase in our effective tax rate and have a negative impact
17
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 financial results.
We operate a global business that exposes us to additional risks.
Our sales outside of the United States accounted for approximately 47% of our consolidated net sales in 2010.
We continue to expand into international markets. The future growth and profitability of our foreign market is
subject to a variety of risks and uncertainties. Any of the following factors could adversely affect our sales to
customers located outside of the United States:
• Fluctuations in foreign currency exchange rates.
• The inability to protect our intellectual property in foreign countries.
• Political or economic instability in regions where we sell our products.
• Changes in foreign regulatory requirements.
• Seasonal fluctuations in business activity in certain countries.
• Changes in export controls and tariffs.
• Energy costs.
• Public health issues.
• Unrest in the Middle East.
Our business depends on our customers’ demand for our products and services, the general economic health of
current and prospective customers, and their desire or ability to make investments in technology. A deterioration of
global, regional or local political, economic or social conditions could affect potential customers in ways that reduce
demand for our products and disrupt our manufacturing and sales plans and efforts. Acts of terrorism, wars, public
health issues and increased energy costs could disrupt commerce in ways that could impair our ability to get
products to our customers and increase our manufacturing and delivery costs. Changes in foreign currency
exchange rates may negatively impact reported revenue and expenses. In addition, our sales are typically made on
unsecured credit terms that are generally consistent with the prevailing business practices in the country in which the
customer is located. A deterioration of political, economic or social conditions in a given country or region could
reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our
results of operations could be materially and adversely affected.
Our operating results and financial condition may fluctuate.
Our operating results and financial condition 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 are not within our control. If our operating
results do not meet the expectations of securities analysts or investors, who may derive their expectations by
extrapolating data from recent historical operating results, the market price of our common stock will likely decline.
Fluctuations in our operating results and financial condition may be due to a number of factors, including, but not
limited to, those listed below and those identified throughout this “Risk Factors” section:
•
•
•
•
•
•
•
•
changes in the pricing of HP products sales;
changes in the volume of systems sold through HP and the impact on revenues and margins;
changes in the amount that we spend to develop, acquire or license new products, consumables,
technologies or businesses;
changes in the amount 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 systems by others;
changes in accounting rules and tax laws;
18
•
•
•
the mix of high-performance systems, 3D printers and consumables that we sell during any period;
the geographic distribution of our sales;
our responses to price competition;
• market acceptance of our products;
•
•
•
general economic and industry conditions that affect customer demand;
changes in interest rates that affect returns on our cash balances and short-term investments;
failure of a development partner to continue supporting certain product development efforts it is funding;
and
•
our level of research and development activities.
Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-
quarter comparisons of our operating results as an indicator of future performance.
Default in payment by one or more resellers that have large account receivable balances could adversely
impact our results of operations and financial condition.
From time to time, accounts receivable balances have been concentrated with certain resellers. 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. Default by one or more of these resellers would result in a significant
charge against our earnings and adversely affect our results of operations and financial condition.
If we are unable to retain our key operating personnel and attract additional skilled operating personnel, our
development of new products will be delayed and our personnel costs will increase.
Our growth plans require us to retain key employees in, and to hire additional skilled employees for, our
operating departments, such as engineering and software development, to enhance existing products and develop
new products. Our inability to retain and hire key engineers and other employees could delay our development and
introduction of new products, which would adversely affect our revenues. In addition, a possible shortage of such
personnel in the Minneapolis region could require us to pay more to retain and hire key employees, thereby
increasing our costs.
Our common stock price has been and may continue to be highly volatile.
During 2010, our common stock traded at prices ranging between $17.35 and $34.87, and has traded as high as
$49.62 in 2011. Factors that we believe have caused or may cause this volatility include, among other things:
•
•
•
•
•
•
•
•
•
investors’ expectations of the impact of our OEM agreement with HP and how the relationship with HP
could change over time;
the volatile global economy;
actual or anticipated variations in quarterly or annual operating results;
the issuance of patents or other technological innovations;
announcements of new products;
our competitors' announcements of new products;
changes in financial estimates or recommendations by securities analysts;
the employment and termination of key personnel; and
sales or repurchases of our common stock by our Company
Many of these factors are beyond our control. These factors may have a material adverse effect on the market
price of our common stock, regardless of our operating performance.
If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley
Act, our business and stock price could be adversely affected.
19
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls
over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of
our internal controls over financial reporting in all annual reports. Section 404 also requires our independent
registered public accounting firm to report on the effectiveness of our internal controls over financial reporting.
Our management, including our CEO and CFO, does not expect that our internal controls over financial
reporting will prevent all error and fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, involving Stratasys have
been, or will be detected. These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design
will succeed in achieving its stated goals under all potential future conditions. Over time, our controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Although our management has determined, and our independent registered public accounting firm has
concluded in its audit, that our internal controls over financial reporting were effective as of December 31, 2010, we
cannot assure you that we or our independent registered accounting firm will not identify a material weakness in our
internal controls in the future. A material weakness in our internal controls over financial reporting would require
management and our independent registered public accounting firm to evaluate our internal controls as ineffective.
If our internal controls over financial reporting are not considered adequate, we may experience a loss of public
confidence, which could have an adverse effect on our business and our stock price.
The foregoing list is not exhaustive. There can be no assurance that we have correctly identified and
appropriately assessed all factors affecting our business or that the publicly available and other information with
respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that
we currently believe to be immaterial also may adversely impact our business. Should any risks or uncertainties
develop into actual events, these developments could have material adverse effects on our business, financial
condition, and results of operations.
We assume no obligation (and specifically disclaim any such obligation) to update these Risk Factors or any
other forward-looking statements contained in this Annual Report to reflect actual results, changes in assumptions or
other factors affecting such forward-looking statements.
As part of our growth strategy, we may acquire or make investments in other businesses, patents,
technologies, products or services, and our failure to do so successfully may adversely affect our competitive
position or financial results.
We have made and expect to continue to make acquisitions or investments to expand our suite of products and
services. Our growth could be hampered if we are unable to identify suitable acquisitions and investments or agree
on the terms of any such acquisition or investment. We may not be able to consummate any such transaction if we
lack sufficient resources to finance the transaction on our own and cannot obtain financing at a reasonable cost. If
we are not able to complete such acquisitions and successfully integrate them, or to complete investments and
successfully realize the intended benefits of them, our competitive position may suffer, which could have adverse
impacts on our revenues, revenue growth and results of operations.
Our acquisition transactions may not succeed in generating the intended benefits and may, therefore,
adversely affect shareholder value or our financial results.
Integration of new businesses or technologies into our business may have any of the following adverse effects:
• We may have difficulty transitioning customers and other business relationships to Stratasys.
• We may have problems unifying management following a transaction.
20
• We may lose key employees from our existing or acquired businesses.
• We may experience intensified competition from other companies seeking to expand sales and market
share during the integration period.
• Our management’s attention may be diverted to the assimilation of the technology and personnel of
acquired businesses or new product or service lines.
• We may experience difficulties in coordinating geographically disparate organizations and corporate
cultures and integrating management personnel with different business backgrounds.
The inability of our management to successfully integrate acquired businesses, and any related diversion of
management’s attention, could have a material adverse effect on our business, operating results and financial
condition.
Business combinations and other acquisition transactions may have a direct adverse effect on our financial
condition, results of operations or liquidity, or on our stock price.
In order to complete such transactions, we may have to use cash, issue new equity securities with dilutive
effects on existing stockholders, take on new debt, assume contingent liabilities or amortize assets or expenses in a
manner that might have a material adverse effect on our balance sheet, results of operations or liquidity. We are
required 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 are also required
to record 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. These and other potential negative effects of
an acquisition transaction could prevent us from realizing the benefits of such transactions and have a material
adverse impact on our stock price, revenues, revenue growth, balance sheet, results of operations and liquidity.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our executive offices and production facilities presently comprise approximately 287,800 available square feet
in four buildings we own in Eden Prairie, Minnesota, near Minneapolis.
On August 1, 2001, we purchased our Eden Prairie manufacturing facility and land for approximately $3.0
million. The facility consists of 62,100 square feet, and is used for machine assembly, inventory storage, operations
and sales support.
In March 2004, we purchased an additional 43,900 square foot manufacturing facility for approximately $1.2
million. The facility is located near our manufacturing facility in Eden Prairie, Minnesota, and is used for our
RedEye paid parts service.
In November 2005, we purchased an additional 91,800 square foot manufacturing facility for approximately
$5.1 million. By the end of 2008, we had substantially completed the improvements needed to make this facility
suitable for our specific usage and had spent approximately $3.3 million. This facility is used for R&D, filament
manufacturing, administrative, marketing and sales activities and is adjacent to our system manufacturing facility in
Eden Prairie, Minnesota.
In December 2010, we purchased an additional 90,000 square foot manufacturing facility for approximately
$3.0 million. This facility is located in Eden Prairie, Minnesota.
We occupy a 40,835 square foot warehouse in Eden Prairie, Minnesota, for shipping and storage under a lease
that expires in March 2012. We also occupy a 9,070 square foot facility in Minneapolis, Minnesota, for research
and development under a lease that expires in September 2012. We are also responsible for real estate taxes,
insurance, utilities, trash removal, and maintenance expenses at these facilities.
21
We have two North American sales offices. We occupy a 2,500 square foot sales office under a lease that
expires in August 2011 and a 1,440 square foot service office under a lease that expires in August 2011, both of
which are located in Ontario, California. We are also responsible for real estate taxes, insurance, utilities, trash
removal, and maintenance expenses at these facilities.
We have four international sales and service offices under lease. Our German subsidiary leases 8,041 square
feet of space in Frankfurt, Germany under a lease that expires in June 2011. Our Italian subsidiary leases 6,857
square feet in Bologna, Italy, under a lease that expires in August 2013. We occupy a 500 square foot sales office
located in Hong Kong under a lease that expires in March 2011. We have approximately 1,500 square feet, which is
used for a sales office, in Bangalore, India, under a lease that expires in January 2014.
Item 3. Legal Proceedings.
We are party to various legal proceedings, the outcome of which, in the opinion of management, will not have a
material adverse effect on the Company’s financial position.
Item 4. Reserved.
22
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol SSYS.
The following table sets forth the high and low closing sale prices of our common stock for each quarter from
January 1, 2009 through the fiscal year ended December 31, 2010 reported on the Nasdaq Global Select Market.
High
Low
Closing Sale Prices
Fiscal Year Ended December 31, 2009
January 1, 2009 – March 31, 2009
April 1, 2009 – June 30, 2009
July 1, 2009 – September 30, 2009
October 1, 2009 – December 31, 2009
Fiscal Year Ended December 31, 2010
January 1, 2010 – March 31, 2010
April 1, 2010 – June 30, 2010
July 1, 2010 – September 30, 2010
October 1, 2010 – December 31, 2010
$12.70
13.94
17.21
18.98
$30.11
27.40
27.84
34.87
$7.70
8.60
10.32
14.85
$17.35
21.79
20.81
26.48
There were approximately 86 record and 10,741 beneficial owners of our common stock as of March 1, 2011.
Dividends
We have not paid or declared any cash dividends to date. We intend to retain earnings, if any, to support the
growth of our business.
Repurchases of Common Stock
We did not repurchase any shares of our common stock in the fourth quarter of 2010.
23
Performance Graph
The following graph compares on a cumulative basis the yearly percentage change, assuming dividend
reinvestment, over the last five fiscal years in (a) the total stockholder return on our Common Stock with (b) the
total return on the Nasdaq (US) Composite Index, and (c) the total return on the information technology sector of the
Standard & Poor’s SmallCap 600 Index (“S&P 600 Info Tech Index”). The S&P 600 Info Tech Index consists of
125 of the 600 stocks comprising the Standard & Poor’s SmallCap 600 Index, a capitalization-weighted index of
domestic stocks chosen for market size, liquidity and industry representation. We are a component company of the
S&P 600 Info Tech Index. The following graph assumes that $100 had been invested in each of Stratasys, the
Nasdaq (US) Composite Index, and the S&P 600 Info Tech Index on December 31, 2005.
Com parison of Cum ulative 5 Year Total Return
$220
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
SSYS
NASDAQ US INDEX
S&P 600 Information Technology
24
Item 6. Selected Financial Data.
The selected consolidated financial data as of and for the five-year period ended December 31, 2010, should be
read in conjunction with the Consolidated Financial Statements and related Notes for the year ended December 31,
2010, and the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statement of Operations Data:
Net sales
Gross profit
Research and development
Selling, general and administrative
expenses
Operating income
Net income
Net income per basic common share
Weighted average basic shares
outstanding
Net income per diluted common
share
Weighted average diluted shares
outstanding
Balance Sheet Data:
Working capital
Total assets
Long term debt
Stockholders’ equity
Years Ended December 31,
(In Thousands, Except Per Share Amounts)
2010
2009
2008
2007
2006
$117,099
56,086
9,755
32,863
13,467
9,370
0.46
$98,356
46,384
7,737
32,823
5,824
4,116
0.20
$124,495
66,412
8,973
$112,243
59,708
7,465
$103,809
51,441
6,699
36,843
20,596
13,615
0.66
33,770
18,473
14,324
0.69
29,105
15,637
11,164
0.55
20,579
20,236
20,676
20,772
20,240
$0.44
$0.20
$0.65
$0.66
$0.54
21,130
20,268
21,079
21,567
20,723
$58,243
178,460
---
152,282
$82,838
153,137
---
129,583
$63,296
147,743
---
122,562
$64,100
148,757
---
123,834
$55,311
118,004
---
97,792
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations are intended to
facilitate an understanding of our business and results of operations. It should be read in conjunction with our
Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included
elsewhere in this report. All amounts in the following discussions are stated in thousands, except employees, share
and per share data, prices for systems, or as otherwise indicated.
General
We develop, manufacture, and market a family of 3D printing, rapid prototyping (“RP”) and direct digital
manufacturing (“DDM”) systems, which enable engineers and designers to create physical models, tooling, jigs,
fixtures, prototypes, and end use parts out of production grade thermoplastic directly from a computer aided design
(“CAD”) workstation. Our systems and related consumable products are distributed mainly through a world-wide
network of value added resellers that sell and service our products to end users. We also operate a service business
that uses our systems to print parts from a customer’s CAD file, typically in situations where these customers have
not yet purchased a system or do not have enough capacity on their existing systems.
Our Market Strategy
We believe that the Fused Deposition Modeling (“FDM”) technology used by our systems has significant
advantages over other commercially available 3D printing technologies. When compared to other 3D printing
technologies, our systems are typically easier to use, are more acceptable in an office environment and can produce
durable models in a wide variety of production grade thermoplastics. Our overall business strategies are designed to
increase customer awareness of these advantages, provide our customers with high-quality new products and
services based on the capabilities of this technology, expand the distribution channel of our systems and lower the
overall cost of creating physical models, parts, tooling and prototypes from a CAD file.
Our current market strategy focuses on the following areas:
• Expanding the distribution channel for our Dimension products. In January 2010, we signed a Master
Original Equipment Manufacturer Agreement (the “OEM Agreement”) with Hewlett-Packard Company
(“HP”) to develop and manufacture an HP-branded 3D printer. During the initial term of the OEM
Agreement, which expires September 30, 2011, we are manufacturing a line of FDM (“Fused Deposition
Modeling”) 3D printers and related accessories and consumables exclusively for HP for resale under the
HP DesignJet brand in France, Germany, Italy, Spain and the United Kingdom. Shipments of the HP-
branded 3D printer and related products commenced in March 2010.
HP has agreed not to sell 3D printers manufactured by any other companies, including HP, throughout the
world for the term of the OEM Agreement. The term of the OEM Agreement will be extended for
additional one-year periods unless the agreement is terminated on advance notice by either party. During
the term of the OEM Agreement, we have agreed not to sell comparable products covered by the OEM
Agreement directly or indirectly in the territory covered by the OEM Agreement. The OEM Agreement
does not require HP to purchase any minimum quantity of products.
After the initial term, or by mutual agreement, the territory in which HP will have the exclusive right to sell
the 3D printers covered by the OEM Agreement may be expanded to additional countries worldwide.
Ultimately, our mutual intention is for HP to sell our 3D printers globally.
• Expand our market position in the 3D printing market by introducing new products. In January 2010, we
expanded the Dimension uPrint product line by introducing the uPrint Plus. This system offers the same
small footprint as the previously introduced uPrint but offers a 33% larger build envelop. It also allows the
user to print in seven additional colors and offers two resolution settings. Concurrent with the launch of the
uPrint Plus, we introduced two support-material enhancements. The first, Smart Supports, is a software
26
feature that can reduce support material usage by up to 40%. The second is a new soluble support material
called SR-30, which can dissolve 69% faster than the previous soluble support material.
• Expand our position in the RP and DDM markets by developing new and improved proprietary products.
We have built a leadership position in the RP and DDM markets by helping customers build stable, strong,
and durable parts for testing and end-use. Our Fortus 3D Production Systems are ideally suited for DDM
applications such as the production of manufacturing tools and low-volume end-use parts. We plan to
expand our presence in this area by offering improved system capabilities and new and improved material
properties.
We also continued to collaborate with a Fortune 500 global manufacturing company to advance our
proprietary FDM technology for direct digital manufacturing applications and will maintain this
collaboration into 2011 for the sixth consecutive year.
• Leverage our recent ISO 9001:2008 certification. During 2010, we worked to refine and improve our
internal processes and documentation in order to obtain ISO 9001:2008 certification, a standard published
by the International Organization for Standardization. In February 2011, we obtained the ISO 9001:2008
certification by maintaining a highly developed quality management system and continually improving its
effectiveness in accordance with the ISO requirements. We believe that ISO certification is a key
requirement in expanding our products’ applicability to the RP and DDM markets that we are focusing on
such as aerospace, defense, medical, and automotive. We will use this registration to demonstrate our
ability to consistently provide products that meet customer and applicable regulatory requirements and
enhance customer satisfaction through its effective application.
• Expand our RedEye paid parts service. We believe this is a fragmented global market dominated by a few
large and numerous small companies. Sales from our RedEye paid parts service have improved during
2010. This growth has been driven in part by customers that do not have an FDM system but has also
come from current system users that have had short-term capacity constraints on their own FDM systems.
We believe that another part of this sales growth has come from the rising demand for our technology in
DDM applications because of the production grade thermoplastics used. To take advantage of the growth
we see in our DDM customer base, we are adding staff to our existing sales force that will focus
exclusively on large strategic accounts.
Description of Current Conditions
Our revenue increased 19.1% in 2010 due primarily to growth in systems and consumables sales, with service
revenue being essentially flat. The increase in our revenue from systems as compared to 2009 was driven mainly by
higher unit volume in our high-performance RP production systems. We shipped 2,555 units in 2010, an increase of
637 units, or 33.2%, from 1,918 in 2009. Although we have recently introduced systems at lower price points, our
average system selling price increased slightly from 2009. This overall price increase was mainly due to significant
growth in our high-performance systems that offset the growth in 3D printing systems where average selling prices
have been reduced.
We have seen the professional design/engineering market environment for our products become more
competitive as other manufacturers introduce systems with new technologies and capabilities that are becoming
more comparable to our products. In the last 12 months, we have seen our traditional competitors lower their prices
to match our prices. In a new hobbyist market, we have also seen companies develop systems that are based on
basic, early-stage, open-source technology but which lack the sophisticated system controls needed for the
professional market.
Despite the recent growth in market competition, we believe that over the last three years, we have been the
market leader in the 3D printer commercial market and have followed a strategy of continuing to move down the
price elasticity curve as evidenced by our introduction of the uPrint and uPrint Plus. Although the high-performance
market is more competitive than the 3D printing market, we believe that the growth in sales of our high-performance
3D production systems has been driven mainly by the system and material performance capabilities of our systems
rather than price.
27
As our installed base of systems has increased, the capacity to derive an increasing amount of revenue from
sales of consumables, maintenance contracts, and other services has also increased. In 2010, total non-system
product revenue increased by 29.0% as compared to the prior year due principally to higher consumable usage by
our installed base of systems. Sales from our RedEye paid parts service increased 21.1% during 2010 as a result of
the economic recovery and increased demand for FDM technology in DDM applications. Revenue from
maintenance contracts declined by 8.1% in 2010 as this was the first full year of the warranty period extension that
we implemented in 2009.
During the first quarter of 2010, we signed the OEM Agreement with HP and began shipping HP-branded
DesignJet systems and related products. Shortly thereafter, HP began selling these systems through its own reseller
network in five European countries. Although our overall HP-branded system revenue in 2010 was not material, by
December 31, 2010, the number of units sold in the five-country territory was slightly more than three times the
comparable unit sales in the prior year period, when we were selling a similar Stratasys branded system. During that
same period, we saw revenue from the HP-branded 3D printers double as compared to revenue from Stratasys-
branded systems in the prior year.
We expect to see unit volume increase faster than revenue growth in the near future, which will result in lower
margins on the sale of these 3D printers. We intend to compensate for these smaller margins by the continued
growth of the market for 3D printers and thereby substantially increasing the number of 3D printers sold and our
overall revenues and profits. However, there can be no assurance that we will be able to increase our revenue
sufficiently to maintain or increase our current profitability.
Given our strong cash position and no debt, we believe that we have adequate liquidity to fund our growth
strategy in 2011. We may make investments in strategic acquisitions, fixed assets, process improvements,
information technology (“IT”), and human resource development activities that will be required for future growth.
Our expense levels are based in part on our expectations of future sales and we will make adjustments as we
consider appropriate. While we have adjusted, and will continue to adjust, our expense levels based on both actual
and anticipated sales, fluctuations in sales in a particular period could adversely impact our operating results.
We believe that our growth is largely dependent upon our ability to penetrate new markets and develop and
market new RP, DDM and 3D printing systems, materials, applications, and services that meet the needs of our
current and prospective customers. Our ability to implement our strategy for 2011 is subject to numerous
uncertainties, many of which are described under “Risk Factors,” above, in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations and in the section below captioned “Forward Looking
Statements and Factors That May Affect Future Results of Operations.” We cannot ensure that our efforts will be
successful.
Results of Operations
The following table sets forth certain statement of operations data as a percentage of net sales for the periods
indicated. All items are included in or derived from our consolidated statement of operations.
For the twelve months ended December 31,
2010
2009
2008
Net sales
Cost of sales
Gross profit
Research & development
Selling, general and administrative
Operating income
Other income (expense)
Income before taxes
Income taxes
Net income
100.0%
52.8%
47.2%
7.9%
33.4%
5.9%
0.4%
6.3%
2.1%
4.2%
100.0%
46.7%
53.3%
7.2%
29.6%
16.5%
0.1%
16.7%
5.7%
10.9%
100.0%
52.1%
47.9%
8.3%
28.1%
11.5%
0.3%
11.8%
3.8%
8.0%
28
Net Sales
Net sales of our products and services for the last three years, as well as the percentage change were as follows:
2010
Year-over-
Year Change
2009
Year-over-
Year Change
2008
Products
Services
Fair value of warrant
$
96,722
25,365
(4,988)
117,099
$
32.1%
0.9%
-
19.1%
$
$
73,210
25,146
-
98,356
-26.0%
-1.5%
-
-21.0%
$
98,969
25,526
-
124,495
$
Product Revenue
Revenues derived from products (including systems, consumable materials and other products) increased $23.5
million in 2010, or 32.1%, as compared to the prior year. The number of systems shipped increased by 33.2%, or
637 units, to 2,338 as compared to 1,918 units shipped in 2009. This increase in both revenue and number of
systems shipped reflects the positive impact of the economic recovery and strong sales of our Stratasys-brand 3D
printer products and the new HP Designjet line. Consumable revenue in 2010 increased 27.6%, which was driven
by the improvement in market conditions and growing installed base of systems.
During 2009, revenues derived from products decreased $25.8 million, or 26.0% as compared to the prior year.
The number of systems shipped decreased by 12.2%, or 266 units, to 1,918 as compared to 2,184 units shipped in
2008. This decrease in both revenue and number of systems shipped was primarily attributable to the worldwide
economic slowdown that constricted capital spending budgets across all industries. Revenue derived from products
decreased at a greater rate than system shipments due to a product mix that favored the lower-priced uPrint.
Consumable revenue in 2009 decreased 4.3%, which was a much lower decline as compared to the decline in our
system revenue. Consumable revenue is directly related to our installed base and is less susceptible to current
market conditions than our revenue from system sales.
Service Revenue
Revenues from our service offerings (including RedEye paid parts, maintenance and other services) for 2010
were relatively flat as compared to the prior year. Growth in our RedEye paid parts service revenue of 21.1% over
the prior year resulted from the general economic upturn and continued recovery from a period of highly
competitive pricing that occurred during the recession in 2009. This growth was offset by a decrease in maintenance
revenue, which resulted from our expansion of the warranty period for our domestic Fortus systems from three
months to one year. In 2009, we saw a 13% decrease in our RedEye paid parts service revenue from the prior year
that was partially offset by growth in our maintenance contract revenue.
Revenue by Region
Net sales, excluding the $5.0 million charge for the fair value of a warrant related to the OEM Agreement in
2010, and the percentage of net sales by region for the last three years, as well as the percentage change were as
follows:
2010
Year-over-Year
Change
2009
Year-over-Year
Change
2008
North America
Europe
Asia Pacific
Other
$
65,139
34,362
20,536
2,050
122,087
$
53%
28%
17%
2%
100%
18.1%
30.6%
29.9%
90.3%
24.1%
$
$
55,156
26,309
15,814
1,077
98,356
56%
27%
16%
1%
100%
-17.3%
-29.7%
-14.7%
-41.2%
-21.0%
$
66,698
37,430
18,534
1,833
124,495
54%
30%
15%
1%
100%
$
Sales in all regions increased in 2010 as a result of the economic recovery and continued improvement in
business conditions across our core markets. Revenues in the North America region, accounted for approximately
53% of total revenue in 2010. Revenues outside of North America accounted for approximately 47% of total
revenue in 2010. The international increase in sales percentage was led by higher system sales volumes in both
29
high-performance systems as well as 3D Printers, particularly the HP Designjet line in the five European markets
served by HP.
Sales in all regions declined in 2009 due to lower volumes as a result of the economic slow down combined
with an overall lower average selling price that resulted primarily from our introduction of the uPrint in January
2009 as part of our strategy of continuing to move down the price elasticity curve.
Revenues in the North America region, accounted for approximately 56% of total revenue in 2009. The slight
increase in sales percentage as compared to the prior year was primarily due to the launch of the uPrint, which had
an earlier domestic launch than it did internationally. Revenues outside of North America accounted for
approximately 44% of total revenue in 2009. The international decrease was led by lower system volumes in both
the high-performance systems as well as 3D Printers, particularly in the first half of 2009, was principally due to the
worldwide economic downturn.
Fair Value of Warrant
During the first quarter of 2010, we signed the OEM Agreement with HP to develop and manufacture a line of
HP-branded 3D printers. In connection with the OEM Agreement, we issued a warrant to HP during the first quarter
of 2010 to purchase 500,000 shares of common stock at an exercise price of $17.78 per share. The exercise price
was determined by the 20 day average market closing price of our common stock immediately prior to the issuance
of the warrant. The warrant vested immediately and has a seven-year term. The warrant was not exercised during
2010. The grant date fair value of the warrant was classified as a reduction of revenue on the Consolidated
Statement of Operation for the year ended December 31, 2010.
Gross Profit
Gross profit and gross profit as a percentage of sales for our products and services for 2010, 2009 and 2008, as
well as the percentage changes in gross profit were as follows:
2010
Year-over-
Year Change
2009
Year-over-
Year Change
2008
Products
Services
Fair value of warrant
$
$
47,109
13,965
(4,988)
56,086
45.9%
-1.0%
-
20.9%
$
$
32,285
14,099
-
46,384
-37.1%
-6.7%
-
-30.2%
$
$
51,297
15,116
-
66,413
Gross Profit as a Percentage of Related Sales
Products
Services
Total
48.7%
55.1%
47.9%
44.1%
56.1%
47.2%
51.8%
59.2%
53.3%
Product gross profit increased by $14.8 million, or 45.9%, to $47.1 million in 2010 as compared with $32.3
million in 2009. This increase is primarily attributable to higher system revenues. The increase was also
attributable to significant growth in our high-end RP systems that exceeded the rate of growth in revenue from our
lower priced 3D printing systems.
Product gross profit decreased by $19.0 million, or 37.1%, to $32.3 million in 2009 as compared with $51.3
million in 2008. This decrease is primarily attributable to lower system revenues. The decrease was also
attributable to the launch of our uPrint system, which has a lower direct margin than our other systems and added to
our fixed manufacturing overhead.
Gross profit from services decreased by 1.0% in 2010. This is primarily attributable to a decrease in
maintenance revenue, which resulted from our expansion of the warranty period for our domestic Fortus systems
from three months to one year. Gross profit from services decreased by 6.7% in 2009. This decrease is primarily
attributable to an aggressive pricing environment and worldwide economic slowdown experienced by our RedEye
paid parts service.
30
Operating Expenses
Operating expenses and operating expense as a percentage of sales for 2010, 2009 and 2008, as well as the
percentage change in operating expenses, were as follows:
2010
Year-over-
Year Change
2009
Year-over-
Year Change
2008
Research and development
Selling, general & administrative
$
9,755
32,863
42,618
$
26.1%
0.1%
5.1%
$
7,737
32,823
40,560
$
-13.8%
-10.9%
-11.5%
$
8,973
36,843
45,816
$
Percentage of Sales
36.4%
41.2%
36.8%
Research and development expenses increased by 26.1% during 2010 as we remained committed to designing
new products and materials, reducing costs on existing products, and improving the quality and reliability of all of
our platforms. This spending was focused on accelerating our development efforts to address both the 3D printer
and DDM market opportunities as well as improving the quality and reliability of our products. During 2009,
research and development expenses decreased by 13.8% as a result of lower spending due to economic concerns,
reduced headcount and higher joint development reimbursements. In 2010, 2009 and 2008, capitalized software
additions were approximately $1.2 million, $1.4 million and $2.1 million, respectively.
In 2008, we fulfilled our responsibilities under a three-year, $3.6 million agreement with a Fortune 500 global
manufacturing company to jointly advance our proprietary FDM technology for rapid manufacturing applications.
This agreement entitled us to receive reimbursement payments as we achieved specific milestones stated in the
agreement. This effort was focused around our high-performance systems and resulted in the commercial release of
the Fortus 900mc. Because receipt of these payments represent reimbursements of costs actually incurred under this
joint development project, all payments received were recorded as offsets to the research and development
expenditures and are therefore not recognized as revenue.
Due to the success of this initial arrangement, we are continuing this relationship under similar terms and
objectives. During the years ended December 31, 2010, 2009 and 2008, approximately $1.2 million, $2.2 million,
and $0.3 million, respectively, of research and development expenses were offset by payments that we received
from this company.
Selling, general and administrative expenses were relatively flat in 2010 as compared to the prior year. Selling,
general and administrative expenses decreased by 10.9% in 2009. This decrease was primarily attributable to: 1) a
reduction in our direct sales force in January of 2009, which converted some of our selling expenses to a variable
cost structure; 2) additional headcount reductions made in the first quarter of 2009; and 3) a continued effort to
lower discretionary spending.
In addition, we took certain cost-saving measures in the first quarter of 2009 that lowered fixed costs and
curtailed some discretionary spending while maintaining a focus on the key goals and objectives of our long-term
strategy. These cost-saving measures resulted in a charge of $779,000 in the first quarter of 2009, consisting
primarily of severance costs related to a reduction in workforce. Final severance payments were completed during
the third quarter of 2009 and the unused portion of the provision, noted as “adjustments” in the table below, was
recorded in income for the current period.
31
A summary of the activity of these restructuring and other costs recognized in the Statement of Operations
caption “Selling, general and administrative” are as follows:
Accrued balance as of December 31, 2008
Expenses incurred
Cash payments
Adjustments
Employee-
Related Items
and Benefits
$ 306,014
779,000
(810,707)
(274,307)
Contract
Terminations
and Other
$ 66,881
-
(66,881)
-
Total
$ 372,895
779,000
(877,588)
(274,307)
Accrued balance as of December 31, 2009
$
-
$
-
$
-
Operating Income
Operating income and operating income as a percentage of sales for 2010, 2009 and 2008, as well as the
percentage change in operating income were as follows:
2010
Year-over-
Year Change
2009
Year-over-
Year Change
2008
Operating income
$
13,467
131.2%
$
5,824
-71.7%
$
20,596
Percentage of Sales
11.5%
5.9%
16.5%
Operating income in 2010 increased by $7.6 million, primarily due to the significant increase in revenue,
partially offset by increased indirect spending. Operating income as a percentage of sales increased due to effective
control of indirect spending in 2010. Operating income in 2009 declined by $14.8 million, primarily due to the
significant drop in revenue, partially offset by reductions of indirect spending.
Other Income
Other income and other income as a percentage of sales for 2010, 2009 and 2008, as well as the percentage
change in operating income were as follows:
2010
Year-over-Year
Change
2009
Year-over-Year
Change
2008
Interest income
Foreign currency transaction losses, net
Other
$
921
(617)
64
368
$
-7.0%
164.8%
116.1%
2.5%
$
990
(233)
(398)
359
$
-51.4%
-72.1%
62.6%
162.0%
$
2,037
(835)
(1,065)
137
$
Percentage of Sales
0.3%
0.4%
0.1%
Interest income in 2010 decreased by $69,000 while investments increased over the prior year. This was
primarily due to $170,000 of interest earned in 2009 on two bonds that were redeemed by the issuer before maturity.
While the 2009 cash and investment balance increased over 2008, interest income was lower as a result of a higher
percentage of our holdings were invested in low-yield government securities.
We invoice sales to certain European distributors in Euros and reported results are therefore subject to
fluctuations in the exchange rates of that currency in relation to the United States dollar. Our strategy is to hedge
most of our Euro-denominated accounts receivable positions by entering into 30-day foreign currency forward
contracts on a month-to-month basis to reduce the risk that our earnings will be adversely affected by changes in
currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
32
We will continue to monitor exposure to currency fluctuations. Instruments to hedge risks may include foreign
currency forward, swap, and option contracts. These instruments will be used to selectively manage risks, but there
can be no assurance that we will be fully protected against material foreign currency fluctuations. At December 31,
2010 we had approximately €4.5 million, or $6.0 million, net in Euro-denominated receivables and a €4.5 million, or
$6.0 million, 30-day forward contract.
The decrease in other income estimated for 2010 as compared to the prior year results from a $350,000
reduction in the estimated fair value of an equity investment in 2009 that was considered to be other than temporary.
The 2008 amount includes an impairment charge of $1.3 million related to a $2.6 million investment in a Jefferson
County, Alabama municipal bond.
Income Taxes
Income taxes and income taxes as a percentage of net income before taxes for 2010, 2009 and 2008, as well as
the percentage change were as follows:
2010
Year-over-
Year Change
2009
Year-over-
Year Change
2008
Income taxes
$
4,466
116.2%
$
2,066
-71.0%
$
7,118
As a percent of
income before income taxes
32.3%
33.4%
34.3% #
The following is a reconciliation of the 2010 effective income tax rate compared with the 2009 effective rate
and the 2009 effective income tax rate compared with the 2008 effective rate:
2010 Effective income tax rate
2010 percentage decrease in research and development credits
2010 percentage decrease in tax contingency reserve
2010 percentage increase in manufacturing deduction
Other, net
2009 Effective income tax rate
2009 percentage increase in research and development credits
2009 percentage increase in tax contingency reserve
Other, net
2008 Effective income tax rate
32.3%
(3.0%)
1.1%
1.5%
1.5%
33.4%
2.8%
(1.5%)
(0.4%)
34.3%
Net Income
Net income and net income as a percentage of sales for 2010, 2009 and 2008, as well as the percentage change
in net income were as follows:
2010
Year-over-
Year Change
2009
Year-over-
Year Change
2008
Net income
$
9,370
127.6%
$
4,116
-69.8%
$
13,615
Percentage of Sales
8.0%
4.2%
10.9%
33
For the reasons cited previously in this management discussion and analysis section, our net income for the year
ended December 31, 2010 was higher than the prior year and net income for 2009 was lower than the prior year.
Liquidity and Capital Resources
A summary of our statement of cash flows for the three years ended December 31, 2010 is as follows:
Net income
Depreciation and amortization
Stock-based compensation
Fair value of warrant related to OEM agreement
Change in working capital and other
Net cash provided by operating and other activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
2010
9,370
9,342
1,242
4,988
(456)
24,486
(49,294)
4,266
(219)
(20,761)
48,316
27,555
$
$
2009
4,116
8,256
1,137
-
11,981
25,490
(6,831)
1,583
128
20,370
27,946
48,316
$
$
2008
13,615
7,004
1,322
-
(7,450)
14,491
13,290
(15,856)
(191)
11,734
16,212
27,946
$
Our cash and cash equivalents balance decreased by $20.8 million to $27.6 million at December 31, 2010, from
$48.3 million at December 31, 2009. The decrease is primarily due to $49.3 spent for the acquisition of
investments, property and equipment, and intangible assets partially offset by $22.0 million of cash flows from
operations.
The net cash provided by our operating activities over the past three years has amounted to approximately $62.0
million, principally derived from $27.1 million in net income, plus adjustments for non-cash charges of $24.6
million in depreciation and amortization, $3.7 million in stock-based compensation, $5.0 million related to the fair
value of a warrant issued to HP and $1.6 million attributable to changes in net working capital and other items.
In 2010, the principal source of cash from our operating activities was our net income, as adjusted to exclude
the effects of non-cash charges. Our 2010 net accounts receivable balance was relatively flat as compared with
2009. Although we continue to offer 180-day extended terms to our 3D printer resellers for demo units, we have
seen a continued reduction in our days sales outstanding (“DSO”) as a result of increased collection efforts and the
timing of sales within the quarter. DSO’s were 55 days in 2010, 68 days in 2009 and 78 days in 2008. We believe
that adequate allowances have been established for any collectibility issues in our accounts receivable balance.
For the years ended December 31, 2010, 2009, and 2008, our inventory balances were $17.9 million, $14.6
million, and $19.9 million, respectively. The increase in inventory from 2009 to 2010 was principally due to strong
order flow and forecasts for systems and consumables. The decrease in inventory from 2008 to 2009 was
principally due to increased focus on inventory management and lower overall demand for our products.
We have instituted better inventory management practices, but recognize that we have opportunities to make
considerably more improvements in order to reduce overall inventory levels and improve turns. A significant
portion of our inventory is dedicated to the fulfillment of our service contract and warranty obligations. As we have
introduced new products over the past few years, there are more platforms and models to service than in the past,
which increases the requirements to maintain spare parts inventory. With the introduction of these new products,
older products have been discontinued, but a certain level of inventory is still required to fulfill our ongoing service
contracts. Our procedures for dealing with this inventory are more fully explained in the section below captioned
“Critical Accounting Policies.”
Investments in sales-type leases provided cash of $0.9 million in 2010 and $1.3 million in 2009 and used cash
of $1.1 million in 2008. In mid-2003 we introduced a U.S. leasing program that was principally designed for the
34
Dimension systems. The program now includes customers in both our 3D printer and our Fortus high-performance
system product lines and we plan to continue this leasing program for the foreseeable future.
Accounts payable and other current accrued liabilities provided cash of $4.5 million in 2010 and $1.1million in
2009 and used cash of $2.1 million in 2008. In 2010, the increase was related to the timing of payments for
inventory purchases and employee compensation.
Unearned revenue, principally consisting of purchased maintenance contracts and implied maintenance
contracts, provided cash of $0.9 million in 2010, used cash of $2.1 million in 2009 and provided cash of $1.8 million
in 2008. The increase in the unearned revenue balance in 2010 was principally due to an increase in orders for
Fortus 900mc systems that were not installed as of year end.
Our investing activities used cash of $49.3 million in 2010 and $6.8 million in 2009 and provided cash of $13.3
million in 2008. In 2010 and 2009, the purchase of investments, net of proceeds from sales of investments, used
cash of $40.2 and $2.9 million, respectively. In 2008, the sale of investments provided approximately $23.9 million
in cash from investing activities.
At December 31, 2010, our investments included:
•
•
•
•
approximately $57.1 million in bonds maturing between June 2011 and November 2013, all of which had
ratings between AAA and A3 at December 31, 2010;
approximately $2.0 million in certificates of deposit maturing in February 2011.
approximately $2.2 million of a tax-free ARS, which re-prices approximately every 35 days. The ARS had
a rating of A1 at December 31, 2010; and
approximately $1.2 million of a tax-free ARS, which does not currently have an active trading market and
matures in February 2042. This ARS had a rating of Caa3 at December 31, 2010 and is further explained
below.
The balance sheet caption titled “Long-term investments – available for sale securities” consists of a tax-free
ARS. This balance represents the current estimated fair value of an ARS issued by Jefferson County, Alabama with
a face value of $2.6 million and matures in 2042. The investment is part of a multi-billion series of bonds issued by
Jefferson County to build its sewer and water treatment system (“system”). The County entered into interest rate
swaps to protect itself from rising interest rates, but the swaps proved ineffective and the revenue from the system
will not adequately support the higher interest rates. With the collapse of the ARS market and the County’s
financial condition, the rating of this ARS has gone from Aaa to Caa3. We have received $50,000 in principal
payments on this ARS and no additional principal payments have become due. We have received all scheduled
interest payments on this ARS through December 31, 2010. Due to the current financial condition of the County
and the absence of an active market for this security, we only record interest income as cash payments are received.
With the assistance of outside consultants, we periodically review the Jefferson County ARS, including
expected cash flows, assess the credit risk, analyze and extrapolate yield information on comparable composites, and
review independent research from various public sources concerning the ARS market. Based upon a reevaluation
that occurred in late 2010, we concluded that the fair value of this ARS had increased and we adjusted its carrying
value to eliminate the amount of previously recognized temporary impairment.
At December 31, 2009, we recorded a $350,000 impairment related to a $1.4 million equity investment that is
accounted for under the cost method as prescribed by ASC Topic 325-20 “Cost Method Investments”. During the
fourth quarter of 2009, we considered the entity’s current and projected decreases in revenue to be an impairment
indicator and consequently performed a fair value analysis. The resulting impairment of $350,000 was considered
to be other-than-temporary and was recognized as a charge to other income.
35
Property and equipment acquisitions totaled $7.8 million, $2.3 million, and $8.5 million in 2010, 2009 and
2008, respectively. Over the three-year period ended December 31, 2010, our principal property and equipment
acquisitions were for manufacturing or engineering development equipment, tooling, leasehold improvements and
the acquisition of computer systems and software applications. Payments for intangible assets, including patents and
capitalized software, amounted to $1.3 million, $1.7 million and $2.4 million in 2010, 2009, and 2008, respectively.
Proceeds from the exercise of stock options provided cash of $6.4 million, $1.6 million and $3.2 million in
2010, 2009 and 2008, respectively. During 2010, we used cash of $2.1 million for the repurchase of vested stock
options. The excess tax benefit from the exercise of stock options was $2.5 million for the year ended December 31,
2010. Financing activity included the repurchase of 1,089,575 shares of common stock for $19.1 million during the
year ended December 31, 2008. We did not repurchase any common stock during the years ended December 31,
2010 and 2009. As of December 31, 2010, we had authorization to repurchase approximately $10.9 million of
common stock.
For 2011, we expect to use our cash as follows;
•
•
•
•
•
•
•
•
•
•
•
for improvements to our facilities;
for the continuation of our leasing program;
for working capital purposes;
for information systems and infrastructure enhancements;
for new product and materials development;
for sustaining engineering;
for the acquisition of equipment, including production equipment, tooling, and computers;
for the purchase or development of intangible assets, including patents;
for increased selling and marketing activities, especially as they relate to the continued market and channel
development;
for acquisitions and/or strategic alliances; and
for our common stock buyback program.
Our total current assets amounted to $84.2 million at December 31, 2010, most of which consisted of cash and
cash equivalents, investments, accounts receivable, and inventories. Total current liabilities amounted to $26.0
million and we have no debt. We estimate that we will spend between approximately $9.0 million and $13.0 million
in 2011 for property and equipment. We also estimate that as of December 31, 2010, we had approximately $22.5
million of purchase commitments for inventory from selected vendors. In addition to purchase commitments for
inventory, we have future commitments for leased facilities. We intend to finance our purchase commitments from
existing cash or from cash flows from operations. The future contractual cash obligations related to these
commitments are as follows:
Year ending December 31,
2011
2012
2013
2014
Facilities
Inventory
Total
$
$
$
544
211
65
1
820
22,500
-
-
-
22,500
23,044
211
65
1
23,320
$
$
$
We have no contractual obligations beyond 2014. In addition to the above disclosed contractual obligations, the
reserve for tax contingencies was $1.4 million at December 31, 2010. Based on the uncertainties associated with the
settlement of these items, we are unable to make reasonably reliable estimates of the period of potential settlements,
if any, with taxing authorities.
36
Inflation
We believe that inflation has not had a material effect on our operations or on our financial condition during the
three most recent fiscal years.
Foreign Currency Transactions
We invoice sales to certain European distributors in Euros and reported results are therefore subject to
fluctuations in the exchange rates of that currency in relation to the United States dollar. Our strategy is to hedge
most of our Euro-denominated accounts receivable positions by entering into 30-day foreign currency forward
contracts on a month-to-month basis to reduce the risk that our earnings will be adversely affected by changes in
currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. We
enter into 30-day foreign currency forward contracts on the last day of each month and therefore the notional value
of the contract equals the fair value at the end of the reporting period. As such, there is no related asset or liability
or unrealized gains or losses recorded on the Balance Sheet as of the end of the period. All realized gains and losses
related to hedging activities are recorded in current period earnings under the Statement of Operations caption
“Foreign currency transaction losses, net”.
We hedged between €2.3 million and €4.5 million during the year ended December 31, 2010, between €2.8
million and €5.0 million during the year ended December 31, 2009 and between €2.5 million and €5.1 million
during the year ended December 31, 2008 related to accounts receivable that were denominated in Euros. The
foreign currency forward contracts resulted in a currency gain of approximately $340,000 for the year ended
December 31, 2010, a loss of $115,000 for the year ended December 31, 2009 and a gain of $235,000 for the year
ended December 31, 2008.
We will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge future
risks may include foreign currency forward, swap, and option contracts. These instruments may be used to
selectively manage risks, but there can be no assurance that we will be fully protected against material foreign
currency fluctuations.
Critical Accounting Policies
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 of the Notes to Consolidated Financial Statements
contains the significant accounting principles that we used to prepare our consolidated financial statements.
We have identified several critical accounting policies that required us to make assumptions about matters that
were uncertain at the time of our estimates. Had we used different estimates and assumptions, the amounts we
recorded could have been significantly different. Additionally, if we had used different assumptions or different
conditions existed, our financial condition or results of operations could have been materially different. The critical
accounting policies that were affected by the estimates, assumptions, and judgments used in the preparation of our
consolidated financial statements are listed below.
Revenue Recognition
We derive revenue from sales of 3D printing, rapid prototyping (“RP”) and direct digital manufacturing
(“DDM”) systems, consumables, and services. We recognize revenue when (1) persuasive evidence of a final
agreement exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or
determinable, and (4) collectibility is reasonably assured. Our standard terms are FOB shipping point, and, as such,
most of the revenue from the sale of RP machines and consumables is recognized when shipped. Exceptions to this
policy occur if a customer’s purchase order indicates an alternative term or provides that the equipment sold would
be subject to certain contingencies, such as formal acceptance. In these instances, revenues would be recognized
only upon satisfying the conditions established by the customer as contained in its purchase order to us. Revenue
from sales-type leases for our high-performance systems is recognized at the time of lessee acceptance, which
follows installation. Revenue from sales-type leases for our Dimension systems is recognized at the time of
shipment, since either the customer or the reseller performs the installation. We recognize revenue from sales-type
37
leases at the net present value of future lease payments. Revenue from operating leases is recognized ratably over
the lease period.
Service revenue is derived from sales of maintenance contracts, installation services, and training. Service
revenue from maintenance contracts is recognized ratably over the term of the contract, typically one to two years.
We offer warranty periods ranging from 90 days to one year. On certain sales that require a one-year warranty, the
extended warranty is treated for revenue recognition purposes as a maintenance agreement. The fair value of this
maintenance agreement is deferred and recognized ratably over the period of the extended warranty as an implied
maintenance contract. Installation service revenues are recognized upon completion of the installation. Training
revenues are recognized upon completion of the training.
In accordance with ASC 605, Revenue Recognition, when two or more product offerings are contained in a
single arrangement, revenue is allocated between the elements based on their relative fair value, provided that each
element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of
accounting if it has value to the customer on a stand-alone basis and there is objective and reliable evidence of the
fair value of the undelivered items. Fair value is generally determined based upon the price charged when the
element is sold separately. In the absence of fair value for a delivered element, revenue is allocated first to the fair
value of the undelivered elements and then the residual revenue is allocated to the delivered elements. In the absence
of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in
a delay of revenue recognition for the delivered elements until all undelivered elements have been fulfilled.
Revenues from training and installation are unbundled and are recognized after the services have been
performed. Most of our products are sold through distribution channels, with training and installation services
offered by the resellers. We do not offer installation or training for the Dimension product. The equipment
manufactured and sold by us is subject to factory testing that replicates the conditions under which the customers
intend to use the equipment. All of the systems are sold subject to published specifications, and all systems sales
involve standard models.
We assess collectibility as part of the revenue recognition process. This assessment includes a number of
factors such as an evaluation of the creditworthiness of the customer, past payment history, and current economic
conditions. If it is determined that collectibility cannot be reasonably assured, we will decline shipment, request a
down payment, or defer recognition of revenue until ultimate collectibility is reasonably assured.
We also record a provision for estimated product returns and allowances in the period in which the related
revenue is recorded. This provision against current gross revenue is based principally on historical rates of sales
returns, but also factors in changes in the customer base, geographic economic conditions, and changes in the
financial conditions of the Company’s customers. There was no provision for product returns and allowances at
December 31, 2010 or 2009.
Stock-Based Compensation
We calculate the fair value of stock-based option awards on the date of grant using the Black-Scholes option
pricing model. The computation of expected volatility is based on historical volatility from traded options on our
stock. The expected option term is calculated in accordance with ASC 718, Compensation – Stock Compensation.
The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in
effect at the time of grant. Each of the three factors requires us to use judgment and make estimates in determining
the percentages and time periods used for the calculation. If we were to use different percentages or time periods,
the fair value of stock-based option awards could be materially different.
Allowance for Doubtful Accounts
While we evaluate the collectibility of a sale as part of our revenue recognition process, we must also make
judgments regarding the ultimate realization of our accounts receivable. A considerable amount of judgment is
required in assessing the realization of these receivables, including the aging of the receivables and the
creditworthiness of each customer. We may not be able to accurately and timely predict changes to a customer’s
financial condition. If a customer’s financial condition should suddenly deteriorate, calling into question our ability
to collect the receivable, our estimates of the realization of our receivables could be adversely affected. We might
38
then have to record additional allowances for doubtful accounts, which could have an adverse effect on our results of
operations in the period affected.
Our allowance for doubtful accounts is adjusted quarterly using two methods. First, our overall reserves are
based on a percentage applied to certain aged receivable categories that are predominately based on historical bad
debt write-off experience. Then, we make an additional evaluation of overdue customer accounts, for which we
specifically reserve. In our evaluation we use a variety of factors, such as past payment history, the current
financial condition of the customer, and current economic conditions. We also evaluate our overall concentration
risk, which assesses the total amount owed by each customer, regardless of its current status. As of December 31,
2010 and 2009, our allowance for doubtful accounts amounted to $1.1 and $0.9 million, respectively.
Inventories
Our inventories are recorded at the lower of cost or market, with cost based on a first-in, first-out basis. We
periodically assess this inventory for obsolescence and potential excess by reducing the difference between our cost
and the estimated market value of the inventory based on assumptions about future demand and historical sales
patterns. Our inventories consist of materials and products that are subject to technological obsolescence and
competitive market conditions. If market conditions or future demand are less favorable than our current
expectations, additional inventory write downs or reserves may be required, which could have an adverse effect on
our reported results in the period the adjustments are made. Additionally, engineering or field change orders
(“ECO” and “FCO”, respectively) introduced by our engineering group could suddenly create extensive obsolete
and/or excess inventory. Although our engineering group considers the estimated effect that an ECO or FCO would
have on our inventories, a mandated ECO or FCO could have an immediate adverse affect on our reported financial
condition if it required the use of different materials in either new production or our service inventory.
Some of our inventory is returned to us by our customers and refurbished. This refurbished inventory, once
fully repaired and tested, is functionally equivalent to new production and is utilized to satisfy many of our
requirements under our warranty and service contracts. Upon receipt of the returned material, this inventory is
recorded at a discount from original cost, and further reduced by estimated future refurbishment expense. While we
evaluate this service material in the same way as our stock inventory (i.e., we periodically test for obsolescence and
excess), this inventory is subject to changing demand that may not be immediately apparent. Adjustments to this
service inventory, following an obsolescence or excess review, could have an adverse effect on our reported
financial condition in the period when the adjustments are made. We review the requirements for service inventory
for discontinued products using the number of active maintenance contracts per product line as the key determinant
for inventory levels and composition. A sudden decline in the number of customers renewing service agreements in
a particular period could lead to an unanticipated write down of this service inventory for a particular product line.
Intangible Assets
Intangible assets are capitalized and amortized over their estimated useful or economic lives using the straight-
line method in conformity with ASC 350, Intangibles – Goodwill and Other, as follows:
RP technology
Capitalized software development costs
Patents
Trademarks
11 years
3 years
10 years
5 years
The costs of software development, including significant product enhancements, incurred subsequent to
establishing technological feasibility have been capitalized in accordance with ASC 985-20, Costs of Software to be
Sold, Leased or Marketed. Costs incurred prior to establishment of technological feasibility are charged to research
and development expense.
Income Taxes
We comply with ASC 740, Income Taxes, which requires an asset and liability approach to financial reporting
of income taxes. Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based
on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable
39
income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the
amount expected to be realized.
In accordance with ASC 740, Income Taxes, we take a two-step approach to recognizing and measuring
uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We
reevaluate these tax positions quarterly and make adjustments as required.
Impairment of Long-Lived Assets
We adhere to ASC 360, Property, Plant, and Equipment, and annually assess the recoverability of the carrying
amounts of long-lived assets, including intangible assets, at year-end. An impairment loss would be recognized if
expected undiscounted future cash flows are less than the carrying amount of the asset. This loss would be
determined by calculating the difference by which the carrying amount of the asset exceeds its fair value. Based on
our assessment as of December 31, 2010 and 2009, no long-lived assets were determined to be impaired.
Recently Issued Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2010-6, Improving Disclosures About Fair Value Measurements, that amends existing disclosure
requirements under FASB Accounting Standards Codification™ (“ASC”) 820 by adding required disclosures about
items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the
existing fair value disclosures about the level of disaggregation. This ASU is effective for interim and annual
reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures, which are
effective for interim and annual periods beginning after December 15, 2010. Additional disclosures required by this
standard for 2010 are included in Note 10 of the Notes to Consolidated Financial Statements. Since this standard
impacts disclosure requirements only, the adoption of this standard did not have an impact on our consolidated
results of operations or financial condition.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses, which amends Accounting Standards Codification Topic 310,
Receivables. The purpose of the Update is to improve transparency by companies that hold financing receivables,
including loans, leases and other long-term receivables. The Update requires such companies to disclose more
information about the credit quality of their financing receivables and the credit reserves against them. ASU 2010-
20 requires further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature
of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of the risk in
estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The
new and amended disclosures as of the end of a reporting period were effective for interim and annual reporting
periods ending on or after December 15, 2010. This Update does not have a material impact on our consolidated
results of operations and financial condition.
Forward-looking Statements and Factors That May Affect Future Results of Operations
All statements herein that are not historical facts or that include such words as “expects”, “anticipates”,
“projects”, “estimates”, “vision”, “planning”, “could”, “potential”, “plan”, “believes”, “desires”, “intends” or similar
words constitute forward-looking statements that we deem to be covered by and to qualify for the safe harbor
protection covered by the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Investors and
prospective investors in our Company should understand that several factors govern whether any forward-looking
statement herein will be or can be achieved. Any one of these factors could cause actual results to differ materially
from those projected herein.
These forward-looking statements include the expected increases in net sales of RP, DDM, and 3D printing
systems, services and consumables, and our ability to maintain our gross margins on these sales. The forward-
looking statements include projected revenue and income in future quarters; the size of the 3D printing market; our
objectives for the marketing and sale of our DimensionTM 3D printers and our FortusTM 3D Production Systems,
40
particularly for use in direct digital manufacturing (DDM); the demand for our proprietary consumables; the
expansion of our RedEye paid parts service; and our beliefs with respect to the growth in the demand for our
products and the impact of our OEM Agreement on sales of our products. They include our plans and objectives to
introduce new products, to control expenses, to improve the quality and reliability of our systems, to respond to new
or existing competitive products, and to improve profitability. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties, some of which are described in Item
1A, “Risk Factors” above. These forward-looking statements are based on assumptions, among others, that we will
be able to:
•
•
•
continue to introduce new high-performance and 3D printing systems and materials acceptable to the
market, and to continue to improve our existing technology and software in our current product
offerings;
successfully develop the 3D printing market with our Dimension BST, Dimension SST, Dimension Elite,
and uPrint systems, and that the market will accept these systems;
successfully develop the DDM market with our Fortus 360mc, 400mc and 900mc, and that the market
will accept these systems;
• maintain our revenues and gross margins on our present products;
•
•
•
•
control our operating expenses;
expand our manufacturing capabilities to meet the expected demand generated by our uPrint, Dimension
BST, Dimension SST and Dimension Elite systems, our consumable products and our Paid Parts service
and sales under our OEM Agreement with HP;
successfully commercialize new materials and gain market acceptance for these new materials; and
recruit, retain, and develop employees with the necessary skills to produce, create, commercialize,
market, and sell our products.
Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic,
geo-political, competitive, market and technological conditions, and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the
assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions
could prove inaccurate, and therefore there is and can be no assurance that the results contemplated in any such
forward-looking statement will be realized. The impact of actual experience and business developments may cause
us to alter our marketing plans, our capital expenditure budgets, or our engineering, selling, manufacturing or other
budgets, which may in turn affect our results of operations or the success of our new product development and
introduction. We may not be able to alter our plans or budgets in a timely manner, resulting in reduced profitability
or losses.
Due to the factors noted above and elsewhere in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations, our future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Additionally, we may not learn of revenue or earnings shortfalls until late in a
fiscal quarter, since we frequently receive a significant number of orders very late in a quarter. This could result in
an immediate and adverse effect on the trading price of our common stock. Past financial performance should not
be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our cash and cash equivalent investments are held exclusively in short-term money market and sweep
instruments with maturities of less than 90 days. These are subject to limited interest rate risk. A 10% change in
interest rates would not have a material effect on our financial condition or results of operations. Our short- and
long-term investments are invested in auction rate securities, corporate and municipal bonds and certificates of
deposit that bear interest at rates of 0.5% to 6.4%. An immediate 10% change in interest rates would have no
material effect on our financial condition or results of operations.
41
Foreign Currency Exchange Rate Risk
We have not historically hedged sales from or expenses incurred by our European operations that have a
functional currency in Euros. Therefore, a hypothetical 10% change in the exchange rates between the U.S. dollar
and the Euro could increase or decrease our income before taxes by less than $0.4 million for the continued
maintenance of our European facility. We hedged between €2.3 million and €4.5 million during the year ended
December 31, 2010 and between €2.8 million and €5.0 million during the year ended December 31, 2009 of
accounts receivable denominated in Euros. A hypothetical 10% change in the exchange rates between the US dollar
and the Euro could increase or decrease income before taxes by between $0.5 million and $1.1 million.
Item 8. Financial Statements and Supplementary Data.
This information appears following Item 15 of this report and is incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls
and procedures were effective. Disclosure controls and procedures require that the information relating to us
required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we are responsible for establishing and maintaining an effective system of internal control
over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Our management has conducted an assessment of our internal control over financial reporting based on the
framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control – Integrated Framework. Our management has prepared an annual report on internal control over financial
reporting. Management’s report is included in this Annual Report on Form 10-K on page F-3. In addition, Grant
Thornton, LLP, our independent registered public accounting firm, has prepared its report on the effectiveness of our
internal control over financial reporting and such report is included on pages F-5 to F-6 of the consolidated financial
statements.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting identified in connection with
the assessment that occurred during the fourth quarter of 2010 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
42
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
We have adopted a Code of Business Conduct and Ethics for all directors, officers and employees, which is
filed as Exhibit 14.1 to our Annual Report on Form 10-K for the year ended December 31, 2008. The Code of
Business Conduct and Ethics is available on the SEC’s website at http://www.sec.gov. We intend to disclose on our
website, http://www.stratasys.com, any amendment to, or waiver of, the Code of Business Conduct and Ethics
related to our senior officers.
The additional required information is incorporated herein by reference to our Definitive Proxy Statement with
respect to our Annual Meeting of Stockholders scheduled to be held April 28, 2011.
Item 11. Executive Compensation.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of
Stockholders scheduled to be held April 28, 2011.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of
Stockholders scheduled to be held April 28, 2011.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of
Stockholders scheduled to be held April 28, 2011.
Item 14. Principal Accountant Fees and Services.
Incorporated herein by reference to our Definitive Proxy Statement with respect to our Annual Meeting of
Stockholders scheduled to be held April 28, 2011.
43
Item 15. Exhibits and Financial Statement Schedules.
PART IV
(a)
Documents
1. Financial Statements --
Management’s Report on Internal Control Over Financial Reporting ................................
F-3
Reports of Independent Registered Public Accounting Firm ..............................................
F-4 to F-6
Consolidated Balance Sheets December 31, 2010 and 2009...............................................
Consolidated Statements of Operations Years Ended December 31, 2010, 2009 and
2008.....................................................................................................................................
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive
Income Years Ended December 31, 2010, 2009 and 2008 .................................................
Consolidated Statements of Cash Flows Years Ended December 31, 2010, 2009 and
F-7
F-8
F-9
2008.....................................................................................................................................
F-10
Notes to Consolidated Financial Statements ....................................................................... F-11 to F-32
2. Financial Statement Schedule --
Schedule II-- Valuation and Qualifying Accounts and Reserves ........................................
F-33
44
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORTS OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2010, 2009 AND 2008
F-1
CONTENTS
Management’s Report on Internal Controls over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts and Reserves
F-3
F-4-F-6
F-7
F-8
F-9
F-10
F-11-F-32
F-33
F-2
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). The
Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally accepted in the United States,
and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect
on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance to the Company’s
management and board of directors regarding the preparation of reliable financial statements for external purposes in
accordance with accounting principles generally accepted in the United States. Internal control over financial
reporting includes self-monitoring mechanisms and actions taken to correct deficiencies as they are identified.
Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur
and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide
only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the
effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness
in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that
the degree of compliance with the policies and procedures may decline.
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management conducted an evaluation of the effectiveness of the Company’s system of internal control over
financial reporting as of December 31, 2010 based on the framework set forth in “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its
evaluation, management concluded that, as of December 31, 2010, the Company’s internal control over financial
reporting was effective.
/s/ S. SCOTT CRUMP
S. Scott Crump
Chief Executive Officer
/s/ ROBERT F. GALLAGHER
Robert F. Gallagher
Chief Financial Officer
Date: March 8, 2011
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Stratasys, Inc.
We have audited the accompanying consolidated balance sheets of Stratasys, Inc. (a Delaware Corporation) and
subsidiaries (collectively, the “Company”) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years
in the period ended December 31, 2010. Our audits of the basic financial statements included the financial
statement schedule listed in the index appearing under Item 15. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Stratasys, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Stratasys, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 8, 2011 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
March 8, 2011
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Stratasys, Inc.
We have audited Stratasys, Inc. (a Delaware Corporation) and subsidiaries’ (collectively, the “Company”) internal
control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on Stratasys, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Stratasys, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by
COSO.
F-5
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Stratasys, Inc. and subsidiaries as of December 31, 2010 and 2009, and
the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2010, and our report dated March 8, 2011
expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
March 8, 2011
F-6
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31,
ASSETS
Current assets
Cash and cash equivalents
Short-term investments - held to maturity
Accounts receivable, less allowance for doubtful
accounts of $1,094,588 at December 31, 2010
and $903,101 at December 31, 2009
Inventories
Net investment in sales-type leases, less allowance
for doubtful accounts of $189,338 at December 31,
2010 and $222,011 at December 31, 2009
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property and equipment, net
Other assets
Intangible assets, net
Net investment in sales-type leases
Deferred income taxes
Long-term investments - available for sale
Long-term investments - held to maturity
Other non-current assets
Total other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities
Unearned revenues
Total current liabilities
Non-current liabilities
Deferred tax liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity
2010
2009
$
27,554,411
8,797,878
$
48,315,926
16,073,718
20,051,451
17,880,714
19,249,813
14,608,014
3,096,911
3,384,394
3,447,000
84,212,759
29,872,945
6,405,714
3,067,446
-
1,185,250
52,504,650
1,210,867
64,373,927
3,618,876
2,247,612
2,277,000
106,390,959
26,326,012
7,653,269
3,477,039
688,000
1,055,750
5,467,318
2,078,165
20,419,541
$
178,459,631
$
153,136,512
$
14,408,628
11,561,521
$
12,874,798
10,678,427
25,970,149
23,553,225
207,000
26,177,149
-
23,553,225
Common stock, $.01 par value, authorized 30,000,000 shares;
26,509,518 and 26,053,318 shares issued as of December 31,
2010 and 2009, respectively
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost, 5,687,631 shares as of
December 31, 2010 and 2009
Total stockholders' equity
265,095
107,781,990
83,385,484
(145,662)
260,533
94,329,398
74,015,940
(18,159)
(39,004,425)
(39,004,425)
152,282,482
129,583,287
Total liabilities and stockholders' equity
$
178,459,631
$
153,136,512
See accompanying notes to consolidated financial statements.
F-7
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
Years Ended December 31,
2010
2009
2008
Net sales
Products
Services
Fair value of warrant related to OEM agreement
$
96,722,415
25,364,673
(4,987,806)
117,099,282
$
73,210,550
25,145,682
$
98,969,152
25,525,860
-
-
98,356,232
124,495,012
Cost of sales
Products
Services
Gross profit
Operating expenses
Research and development
Selling, general and administrative
49,613,957
11,399,356
61,013,313
40,925,443
11,047,217
51,972,660
47,672,443
10,410,249
58,082,692
56,085,969
46,383,572
66,412,320
9,755,169
32,863,462
42,618,631
7,737,125
32,822,727
40,559,852
8,973,203
36,842,665
45,815,868
Operating income
13,467,338
5,823,720
20,596,452
Other income (expense)
Interest income, net
Foreign currency transaction losses, net
Other, net
Income before income taxes
Income taxes
921,088
(617,174)
64,086
368,000
13,835,338
4,465,794
989,922
(232,767)
(398,603)
358,552
6,182,272
2,066,001
2,037,257
(834,762)
(1,065,460)
137,035
20,733,487
7,118,000
Net income
$
9,369,544
$
4,116,271
$
13,615,487
Net income per common share
Basic
Diluted
$
0.46
0.44
$
0.20
0.20
$
0.66
0.65
Weighted average commons shares outstanding
Basic
Diluted
20,579,412
21,129,533
20,235,747
20,267,999
20,676,436
21,079,265
See accompanying notes to consolidated financial statements.
F-8
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Stratasys, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2010, 2009, and 2008
Common Stock
Shares
Amount
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Total
Stockholders'
Equity
Comprehensive
Income
Balances, January 1, 2008
25,610,654
$
256,108
$
87,023,541
$
56,284,182
$
172,073
$
(19,902,375)
$
123,833,529
Exercise of stock options and warrants
298,949
2,988
3,224,060
13,615,487
13,615,487
$
13,615,487
(128,000)
(247,092)
(128,000)
(247,092)
(128,000)
(247,092)
$
13,240,395
25,909,603
259,096
91,611,078
69,899,669
(203,019)
(39,004,425)
122,562,399
Exercise of stock options and warrants
143,715
1,437
1,664,061
4,116,271
4,116,271
$
4,116,271
26,500
158,360
26,500
158,360
26,500
158,360
$
4,301,131
26,053,318
260,533
94,329,398
74,015,940
(18,159)
(39,004,425)
129,583,287
Exercise of stock options and warrants
456,200
4,562
6,397,803
3,227,048
41,881
(19,102,050)
(19,102,050)
1,321,596
1,665,498
(82,811)
1,137,070
6,402,365
2,961,412
(2,136,605)
1,242,176
4,987,806
Income tax reductions relating to
exercise of stock options
Purchase of 1,087,575 shares of treasury stock
Stock based compensation
Net income
Other comprehensive income (expense),
unrealized loss on securites
foreign currency translation adjustment
Total comprehensive income
Balances, December 31, 2008
Tax benefit shortfall relating to
exercise of stock options
Stock based compensation
Net income
Other comprehensive income,
unrealized loss on securites adjustment
foreign currency translation adjustment
Total comprehensive income
Balances, December 31, 2009
Income tax reductions relating to
exercise of stock options
Vested stock option repurchase
Stock based compensation
Fair value of warrant related to OEM agreement
Net income
Other comprehensive income (expense),
unrealized gain on securites adjustment
foreign currency translation adjustment
Total comprehensive income
Balances, December 31, 2010
9,369,544
9,369,544
$
9,369,544
101,500
(229,003)
101,500
(229,003)
101,500
(229,003)
$
9,242,041
26,509,518
$
265,095
$
107,781,990
$
83,385,484
$
(145,662)
$
(39,004,425)
$
152,282,482
See accompanying notes to consolidated financial statements.
F-9
41,881
1,321,596
(82,811)
1,137,070
2,961,412
(2,136,605)
1,242,176
4,987,806
STRATASYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
Years ended December 31,
2010
2009
2008
Cash flows from operating activities
Net income
Adjustments to reconcile net income to
net cash from operating activities:
Deferred income taxes
Depreciation
Amortization
Stock-based compensation
Fair value of warrant related to OEM agreement
Loss (gain) on disposal of property and equipment
Loss on impairment of investment
Increase (decrease) in cash attributable to changes in
operating assets and liabilities:
Accounts receivable, net
Inventories
Net investment in sales-type leases
Prepaid expenses
Other assets
Accounts payable and other current liabilities
Unearned revenues
Excess tax benefit from stock options
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from sale of investments
Purchase of investments
Proceeds from sale of property and equipment
Acquisition of property and equipment
Acquisition of intangible and other assets
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from exercise of stock options and warrants
Cash paid for vested stock option repurchases
Excess tax benefit from stock options
Purchase of treasury stock
Net cash provided by (used in) financing activities
$
9,369,544
$
4,116,271
$
13,615,487
(328,000)
6,360,290
2,982,100
1,242,176
4,987,806
-
-
(801,638)
(5,367,062)
931,558
(1,136,782)
867,298
4,495,241
883,094
(2,514,551)
21,971,074
27,728,403
(67,911,812)
-
(7,822,873)
(1,287,627)
(49,293,909)
6,402,365
(2,136,605)
2,514,551
-
6,780,311
(1,431,000)
5,827,113
2,428,540
1,137,070
314,414
444,000
7,289,920
4,810,441
1,320,534
360,468
(119,951)
1,079,560
(2,086,969)
-
25,490,411
7,022,607
(9,920,000)
38,445
(2,284,676)
(1,687,126)
(6,830,750)
1,582,687
-
-
-
1,582,687
(51,000)
4,810,237
2,193,609
1,321,597
(61,784)
1,270,750
(233,037)
(6,875,415)
(1,057,814)
(100,764)
(964)
(2,121,903)
1,800,925
(18,747)
14,491,177
23,875,909
-
315,726
(8,494,145)
(2,407,221)
13,290,269
3,229,259
-
18,747
(19,104,261)
(15,856,255)
Effect of exchange rate changes on cash
(218,991)
127,779
(191,163)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
(20,761,515)
48,315,926
20,370,127
27,945,799
11,734,028
16,211,771
Cash and cash equivalents, end of year
$
27,554,411
$
48,315,926
$
27,945,799
Cash paid for taxes
Transfer of fixed assets to inventory
Transfer of inventory to fixed assets
$
5,026,953
242,111
2,336,473
$
626,407
245,329
716,225
$
8,133,189
242,701
3,118,720
See accompanying notes to consolidated financial statements.
F-10
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Stratasys, Inc. and subsidiaries (collectively the "Company") is a worldwide leading manufacturer of three-
dimensional (“3D”) printers and high-performance rapid prototyping (“RP”) systems for the office-based RP and
direct digital manufacturing (“DDM”) markets. The Company’s 3D printers and high-performance RP systems
provide 3D computer-aided design (“CAD”) users a fast, office-friendly, and low-cost alternative for building
functional 3D parts. The Company develops, manufactures and sells a broad product line of 3D printers and DDM
systems (and related proprietary consumable materials) that create physical models from CAD designs. It also
offers rapid prototyping and production part manufacturing services through its centers located in North America,
Europe and Australia.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Stratasys, Inc. and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
Preparing the Company’s financial statements in conformity with accounting principles generally accepted in the
United States of America (‘‘GAAP’’) requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid debt instruments purchased with maturities of three months or less when
acquired to be cash equivalents. At December 31, 2010 and 2009, cash equivalents consisted of money market
accounts aggregating approximately $25.9 million and $46.1 million, respectively. As of December 31, 2010 and
2009, and at various times during those years, balances of cash at financial institutions exceeded the federally
insured limit. The Company has not experienced any losses in such accounts and believes cash and cash equivalents
are not subject to any significant credit risk. At December 31, 2010 and 2009, cash balances held in foreign bank
accounts were approximately $0.2 million and $0.3 million, respectively. Cash balances held in foreign accounts
are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States.
Short-term and Long-term Investments
Classification of investments as current or non-current is dependent upon management’s intended holding
period, the investment’s maturity date and liquidity considerations based on market conditions. These
investments are then evaluated and classified as available-for-sale or held-to-maturity in accordance with the
provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 320, Investments – Debt and Equity Securities. This evaluation takes into
consideration the Company’s past history of holding investments until maturity, projected cash flow
estimates, future capital requirements, the existence of credit deterioration of the issuer and the Company’s
overall investment strategy as established by management and approved by its Board of Directors.
If management has the positive intent and ability to hold its debt securities until maturity, they are classified
as “held-to-maturity” and accounted for using the amortized-cost method. All other securities are classified
as “available-for-sale” and accounted for at fair value with the realized gain or loss, net of tax, reported in
current period income and unrealized gain or loss, net of tax, reported in other comprehensive income. The
Company does not hold any investments for trading purposes and had no unrecognized gains or losses
related to held-to-maturity investments at December 31, 2010 or 2009, as the fair value of those investments
approximated cost.
F-11
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities, which qualify as financial instruments under ASC 820, Fair
Value Measurements and Disclosures, approximate the carrying amounts presented in the consolidated balance
sheets.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for returns and doubtful accounts. A trade
receivable is considered to be past due if the receivable balance is outstanding beyond terms identified on the
customer’s purchase order and accepted by the Company. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts based on past write-offs and collections and current
credit conditions. The Company evaluates a number of factors to assess collectibility, including an evaluation of the
creditworthiness of the customer, past due amounts, payment history, and current economic conditions. It is
reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Accounts are
written-off against the reserve when management deems the accounts are no longer collectible. The Company also
records a provision for estimated product returns and allowances in the period in which the related revenue is
recorded. This provision against current gross revenue is based principally on historical rates of sales returns, but
also factors in changes in the customer base, geographic economic conditions, and changes in the financial
conditions of the Company’s customers.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventory
costs consist of material, direct labor and overhead. The Company periodically assesses inventory for obsolescence
and excess and reduces the carrying value by an amount equal to the difference between its cost and the estimated
market value based on assumptions about future demand and historical sales patterns.
Impairment of Long-Lived Assets
The Company annually assesses the recoverability of the carrying amounts of long-lived assets, including intangible
assets, at year-end. An impairment loss would be recognized if expected undiscounted future cash flows are less
than the carrying amount of the asset. This loss would be determined by calculating the difference by which the
carrying amount of the asset exceeds its fair value. Based on the Company’s assessment as of December 31, 2010
and 2009, no long-lived assets were determined to be impaired.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated useful lives of the assets ranging from
two to 30 years. The Company recorded depreciation expense not included in cost of sales of approximately $2.7
million, $2.0 million, and $1.7 million for the years ended December 31, 2010, 2009, and 2008, respectively.
Maintenance and repairs are charged to operations, while betterments and improvements are capitalized.
Intangible Assets
Intangible assets are capitalized and amortized over their estimated useful or economic lives using the straight-line
method in conformity with ASC 350, Intangibles – Goodwill and Other, as follows:
RP technology
Capitalized software development costs
Patents
Trademarks
11 years
3 years
10 years
5 years
F-12
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The costs of software development, including significant product enhancements, incurred subsequent to establishing
technological feasibility have been capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased
or Marketed. Costs incurred prior to establishment of technological feasibility are charged to research and
development expense.
Unearned Revenues
The Company services and supports customers by providing warranties and selling maintenance agreements for its
products. Unearned revenues are comprised of purchased and implied maintenance agreements covering future
periods. Implied maintenance is the portion of revenue received at the time of a system sale that represents
maintenance coverage commitments that were included in the sale that extend beyond the stated warranty period.
Maintenance revenue is recognized in equal installments over the period of the agreement. Purchased maintenance
is deferred in whole and amortized over the period of coverage ranging from one to five years.
Revenue Recognition
The Company derives revenue from sales of 3D printing, rapid prototyping (“RP”) and direct digital manufacturing
(“DDM”) systems, consumables, and services. The Company recognizes revenue when (1) persuasive evidence of a
final agreement exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or
determinable, and (4) collectibility is reasonably assured. The Company’s standard terms are FOB shipping point,
and, as such, most of the revenue from the sale of RP machines and consumables is recognized when shipped.
Exceptions to this policy occur if a customer’s purchase order indicates an alternative term or provides that the
equipment sold would be subject to certain contingencies, such as formal acceptance. In these instances, revenues
would be recognized only upon satisfying the conditions established by the customer as contained in its purchase
order to the Company. Revenue from sales-type leases for the Company’s high-performance systems is recognized
at the time of lessee acceptance, which follows installation. Revenue from sales-type leases for the Company’s
Dimension systems is recognized at the time of shipment, since either the customer or the reseller performs the
installation. The Company recognizes revenue from sales-type leases at the net present value of future lease
payments. Revenue from operating leases is recognized ratably over the lease period.
Service revenue is derived from sales of maintenance contracts, installation services, and training. Service revenue
from maintenance contracts is recognized ratably over the term of the contract, typically one to two years. The
Company offers warranty periods ranging from 90 days to one year. On certain sales that require a one-year
warranty, the extended warranty is treated for revenue recognition purposes as a maintenance agreement. The fair
value of this maintenance agreement is deferred and recognized ratably over the period of the extended warranty as
an implied maintenance contract. Installation service revenues are recognized upon completion of the installation.
Training revenues are recognized upon completion of the training.
In accordance with ASC 605, Revenue Recognition, when two or more product offerings are contained in a single
arrangement, revenue is allocated between the elements based on their relative fair value, provided that each element
meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting
if it has value to the customer on a stand-alone basis and there is objective and reliable evidence of the fair value of
the undelivered items. Fair value is generally determined based upon the price charged when the element is sold
separately. In the absence of fair value for a delivered element, revenue is allocated first to the fair value of the
undelivered elements and then the residual revenue is allocated to the delivered elements. In the absence of fair
value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a
delay of revenue recognition for the delivered elements until all undelivered elements have been fulfilled.
Revenues from training and installation are unbundled and are recognized after the services have been performed.
Most of the Company’s products are sold through distribution channels, with training and installation services
offered by the resellers. For the Dimension products neither installation nor training is offered by the Company.
The equipment manufactured and sold by the Company is subject to factory testing that replicates the conditions
under which the customers intend to use the equipment. All of the systems are sold subject to published
specifications, and all systems sales involve standard models.
F-13
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company assesses collectibility as part of the revenue recognition process. This assessment includes a number
of factors such as an evaluation of the creditworthiness of the customer, past due amounts, past payment history, and
current economic conditions. If it is determined that collectibility cannot be reasonably assured, the Company will
decline shipment, request a down payment, or defer recognition of revenue until ultimate collectibility is reasonably
assured.
The Company also records a provision for estimated product returns and allowances in the period in which the
related revenue is recorded. This provision against current gross revenue is based principally on historical rates of
sales returns, but also factors in changes in the customer base, geographic economic conditions, and changes in the
financial conditions of the Company’s customers. There was no provision for product returns and allowances at
December 31, 2010 or 2009.
Foreign Currency Hedge
The Company invoices sales to certain European distributors in Euros and such receivable balances are subject to
fluctuations in the exchange rates of that currency in relation to the United States dollar. The Company’s strategy is
to hedge most of its Euro-denominated accounts receivable positions by entering into 30-day foreign currency
forward contracts on a month-to-month basis to reduce the risk that its earnings will be adversely affected by
changes in currency exchange rates. The Company does not use derivative financial instruments for speculative or
trading purposes. The Company enters into 30-day foreign currency forward contracts on the last day of each month
and therefore the notional value of the contract equals the fair value at the end of each reporting period. As such,
there is no related asset or liability or unrealized gains or losses recorded on the Balance Sheet as of the end of the
period. All realized gains and losses related to hedging activities are recorded in current period earnings under the
Statement of Operations caption “Foreign currency transaction losses, net”.
Advertising
Advertising costs are charged to operations as incurred and were approximately $2.8 million, $3.4 million, and $4.0
million, for 2010, 2009 and 2008, respectively.
Research and Development Costs
Expenditures for research, development and engineering of products and manufacturing processes are expensed as
incurred, in accordance with ASC 730, Research and Development.
Sales Tax
Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from
revenues) in the Company’s Consolidated Statement of Operations.
Income Taxes
The Company complies with ASC 740, Income Taxes, (“ASC 740”) which requires an asset and liability approach
to financial reporting of income taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts
in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax
assets to the amount expected to be realized.
In accordance with ASC 740, the Company takes a two-step approach to recognizing and measuring uncertain tax
positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the
largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates
these tax positions quarterly and makes adjustments as required.
F-14
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
The Company complies with ASC 260, Earnings Per Share, which requires dual presentation of basic and diluted
income per common share for all periods presented. Basic net income per share excludes dilution and is computed
by dividing net income by the weighted average number of shares outstanding for the periods that have net income.
Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then share in the income of the Company. The difference between the number of common shares used to compute
basic net income per share and diluted net income per share relates to additional common shares that would be
issued upon the assumed exercise of stock options and warrants, net of the common shares that would hypothetically
be repurchased using the proceeds received from the original exercise. The additional common shares amounted to
550,121 in 2010, 32,252 in 2009 and 402,829 in 2008. Total shares excluded from the dilution calculation, since
their inclusion would have an anti-dilutive effect, amounted to 400 in 2010, 812,000 in 2009 and 265,000 in 2008.
Stock-Based Compensation
The Company calculates the fair value of stock-based option awards on the date of grant using the Black-Scholes
option pricing model. The computation of expected volatility is based on historical volatility from traded options on
our stock. The expected option term is calculated in accordance with ASC 718, Compensation – Stock
Compensation. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant. Each of the three factors requires the Company to use judgment and make
estimates in determining the percentages and time periods used for the calculation. If the Company were to use
different percentages or time periods, the fair value of stock-based option awards could be materially different.
Accrued Product Warranties
The Company’s products are covered by a warranty with periods ranging from ninety days to fifteen months from
the date of sale to the end customer. A liability is recorded for future warranty costs in the same period in which
related revenue is recognized. The liability is based on anticipated parts and labor costs utilizing historical
experience. The Company periodically assesses the adequacy of the warranty reserves based on changes in these
factors and records any necessary adjustments if actual experience indicates that adjustments are necessary. Future
claims experience could be materially different from prior results because of the introduction of new, more complex
products, a change in the Company’s warranty policy in response to industry trends, competition or other external
forces, or manufacturing changes that could impact product quality. In the event that the Company determines that
its current or future product repair and replacement costs exceed estimates, an adjustment to these reserves would be
charged to earnings in the period such a determination is made. As of December 31, 2010 and 2009, the Company
had $1.2 million and $0.7 million, respectively, accrued for future estimated warranty claims.
Comprehensive Income
The Company complies with ASC 220, Comprehensive Income, which establishes rules for the reporting and display
of comprehensive income (loss) and its components. The Company reports the financial impact of translating its
foreign subsidiaries’ financial statements from local currency to reporting currency as a component of
comprehensive income (loss). The Company also holds securities classified as “available-for-sale” that are
accounted for at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income
(loss).
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-6, Improving Disclosures About
Fair Value Measurements, that amends existing disclosure requirements under ASC 820 by adding required
disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate
disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying,
among other things, the existing fair value disclosures about the level of disaggregation. This ASU is effective for
interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation
F-15
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disclosures, which are effective for interim and annual periods beginning after December 15, 2010. Additional
disclosures required by this standard for 2010 are included in Note 10 – Fair Value Measurements. Since this
standard impacts disclosure requirements only, the adoption of this standard did not have an impact on the
Company’s consolidated results of operations or financial condition.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses, which amends ASC 310, Receivables. The purpose of the update is to improve
transparency by companies that hold financing receivables, including loans, leases and other long-term receivables.
The update requires such companies to disclose more information about the credit quality of their financing
receivables and the credit reserves against them. ASU 2010-20 requires further disaggregated disclosures that
improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its
financing receivables and (2) the entity’s assessment of the risk in estimating its allowance for credit losses as well
as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a
reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. This
did not have an impact on the Company’s consolidated results of operations and financial condition.
Note 2. Investments
Classification of investments as current or non-current is dependent upon management’s intended holding period,
the investment’s maturity date and liquidity considerations based on market conditions. These investments are then
evaluated and classified as available-for-sale or held-to-maturity in accordance with the provisions of ASC 320,
Investments - Debt and Equity Securities. This evaluation takes into consideration the Company’s past history of
holding investments until maturity, projected cash flow estimates, future capital requirements, the existence of credit
deterioration of the issuer and the Company’s overall investment strategy as established by management and
approved by the Company’s Board of Directors.
If management has the positive intent and ability to hold its debt securities until maturity, they are classified as
“held-to-maturity” and accounted for using the amortized-cost method. All other securities are classified as
“available-for-sale” and accounted for at fair value with the unrealized gain or loss, net of tax, reported in other
comprehensive income. The Company does not hold any investments for trading purposes and had no unrecognized
gains or losses related to held-to-maturity investments at December 31, 2010 or December 31, 2009, as the fair value
of those investments approximated cost.
The Company invests in certificates of deposit, corporate bonds, tax-free government bonds, and Auction Rate
Securities (“ARS”), all of which are insured. The following is a summary of amounts recorded on the Consolidated
Balance Sheet for marketable securities (current and non-current) at December 31, 2010 and 2009.
F-16
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bonds
Other securities
Certificates of deposit
Short-term investments - held to maturity
Auction rate securities
Long-term investments - available for sale securities
Auction rate securities
Bonds
Certificates of deposit
Long-term investments - held to maturity
$
2010
6,837,521
357
1,960,000
8,797,878
$
2009
8,113,361
357
7,960,000
16,073,718
1,185,250
1,185,250
2,200,000
50,304,650
-
52,504,650
1,055,750
1,055,750
2,400,000
1,107,318
1,960,000
5,467,318
Total investments
$
62,487,778
$
22,596,786
Short-term and long-term investments consist of certificates of deposit, corporate bonds, tax-free government bonds,
and ARS. At December 31, 2010, the Company’s investments included:
•
•
•
•
approximately $57.1 million in bonds maturing between June 2011 and November 2013, all of which have
ratings between AAA and A3 at December 31, 2010;
approximately $2.0 million in certificates of deposit maturing in February 2011.
approximately $2.2 million of a tax-free ARS, which re-prices approximately every 35 days. The ARS had
a rating of A1 at December 31, 2010; and
approximately $1.2 million of a tax-free ARS, which does not currently have an active trading market and
matures in February 2042. This ARS had a rating of Caa3 at December 31, 2010 and is further explained
below.
The balance sheet caption titled “Long-term investments – available for sale securities” consists of a tax-free ARS.
This balance represents the current estimated fair value of an ARS issued by Jefferson County, Alabama with a face
value of $2.6 million and maturity in 2042. The investment is part of a multi-billion series of bonds issued by
Jefferson County to build its sewer and water treatment system (“system”). The County entered into interest rate
swaps to protect itself from rising interest rates, but the swaps proved ineffective and the revenue from the system
will not adequately support the higher interest rates. However, with the collapse of the ARS market and the
County’s financial condition, the rating of this ARS has gone from Aaa to Caa3. The Company has received
$50,000 in principal payments on this ARS and no additional principal payments have become due. The Company
has received all scheduled interest payments on this ARS through December 31, 2010. Due to the current financial
condition of the County and the absence of an active market for this security, the Company only records interest
income as cash payments are received.
With the assistance of outside consultants, the Company periodically reviews this ARS, including expected cash
flows, assesses the credit risk, analyzes and extrapolates yield information on comparable composites, and reviews
independent research from various public sources concerning the ARS market. Based upon a reevaluation that
occurred in late 2010, the Company concluded that the fair value of this ARS had increased and the Company
adjusted its carrying value to eliminate the amount of the previously recognized temporary impairment. The
following table summarizes the activity of this investment from December 31, 2007 to December 31, 2010.
F-17
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Face value of investment as of December 31, 2007
Principal payment
Temporary impairment - recognized in other comprehensive income
Other-than-temporary impairment - recognized in other income
Net carrying value at December 31, 2008
Temporary impairment transferred to other-than-temporary impairment
Other-than-temporary impairment - recognized in other income
Net carrying value at December 31, 2009
$
2,600,000
(25,000)
(195,000)
(1,270,750)
1,109,250
40,500
(94,000)
1,055,750
Principal payment
Adjustment to temporary impairment - recognized in other comprehensive income
Net carrying value at December 31, 2010
(25,000)
154,500
1,185,250
$
Note 3. Inventories
Inventories consisted of the following at December 31:
2010
2009
Finished goods
Raw materials
$
7,045,840
10,834,874
17,880,714
$
$
6,288,314
8,319,700
14,608,014
$
Note 4. Net Investment in Sales-type Leases
Certain system sales made under lease arrangements are recorded as sales-type leases. Included in revenues for the
years ended December 31, 2010, 2009 and 2008 are approximately $1.9 million, $1.7 million and $3.1 million,
respectively, related to sales-type leases.
The Company’s net investment in sales-type leases consisted of the following at of December 31, 2010 and 2009:
Future minimum lease payments receivable
Less allowance for doubtful accounts
Net future minimum lease payment receivable
Less unearned interest income
Net investment in sales-type leases
$
$
2010
6,691,118
(189,338)
6,501,780
(337,423)
6,164,357
2009
7,713,133
(222,011)
7,491,122
(395,207)
7,095,915
$
$
Future minimum lease payments due from customers under sales-type leases as of December 31, 2010 were as
follows:
Year ending December 31,
2011
2012
2013
2014
2015
$
$
3,464,982
1,532,171
1,017,402
510,694
165,869
6,691,118
F-18
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The interest income for sales-type leases amounted to approximately $277,000, $405,000, and $444,000 for the
years ended December 31, 2010, 2009 and 2008, respectively.
Additional credit risk disclosures required by ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses, only apply to the Company’s lease receivables, which account for
less than 4% of the Company’s total assets. The Company did not include additional disclosures based on the
following factors:
• The objective is to provide additional information on the credit risk exposure; however, in addition to the
minimal amount of receivables at risk, the nature of the credit risk associated with the Company’s lease
receivables is reduced by the credit process, which requires a review of the lessee’s financial statements
and current financial standing prior to the commencement of a lease agreement.
• Segmenting the lease portfolio by level of credit risk or class, which is required by ASU 2010-20, would
not be practical due to the consistent nature of the lease receivables.
• A rollforward of the allowance would provide minimal value as the allowance for doubtful accounts is less
than 3% of lease receivables and has not materially increased or decreased between 2009 and 2010.
Note 5. Property and Equipment
Property and equipment consisted of the following at December 31:
Machinery and equipment
Building and improvements
Computer equipment and software
Office equipment
Furniture and fixtures
Accumulated depreciation and amortization
Capital work-in-progess
Land and improvements
2010
2009
$
26,333,224
13,987,226
10,868,317
2,581,119
2,282,460
56,052,346
(34,588,157)
21,464,189
$
23,933,169
11,780,928
10,305,828
2,473,521
2,213,695
50,707,141
(29,352,906)
21,354,235
3,979,137
4,429,619
29,872,945
$
1,851,158
3,120,619
26,326,012
$
F-19
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Intangible Assets
Intangible assets consisted of the following at December 31:
RP technology
Capitalized software development costs
Patents
Trademarks
Accumulated amortization
Net book value of amortizable intangible assets
Goodwill
Net book value intangible assets
2010
2009
Accumulated
Amortization
$
4,024,802
10,500,398
2,352,205
276,246
$
17,153,651
Gross
Carrying
Amount
$
5,548,064
13,431,570
3,413,062
298,969
22,691,665
17,153,651
5,538,014
867,700
6,405,714
$
Gross
Carrying
Amount
Accumulated
Amortization
$
5,548,417
12,263,654
3,304,396
287,682
$
3,709,907
8,578,822
2,066,802
263,049
$
14,618,580
21,404,149
14,618,580
6,785,569
867,700
7,653,269
$
For the years ended December 31, 2010, 2009 and 2008, amortization of intangible assets charged to operations was
approximately $2.5 million, $2.4 million and $2.1 million, respectively. The weighted average remaining
amortization period for intangible assets as of December 31, 2010 and 2009 was approximately 2.2 and 2.8 years,
respectively.
Estimated amortization expense, for all intangible assets, for the five years subsequent to December 31, 2010 is as
follows:
Year ending December 31,
2011
2012
2013
2014
2015
$
2,026,000
1,250,000
902,000
555,000
354,000
Note 7. Line of Credit
The Company had an available line of credit from a financial institution of $1.0 million as of December 31, 2009
that bears interest at defined rates based upon two different indexes. The credit line was allowed to expire in July of
2010 as the Company determined that it was no longer necessary. No amounts were outstanding at December 31,
2010 and 2009.
F-20
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities consisted of the following at December 31:
2010
2009
Trade
Compensation, commissions and related benefits
Reserve for warranty expenses
Taxes
Other
$
7,406,429
3,891,146
1,204,450
-
1,906,603
14,408,628
$
$
4,833,992
2,993,844
677,757
2,686,979
1,682,226
12,874,798
$
A summary of warranty activity for the years ended December 31, 2010 and 2009 is as follows:
2010
2009
Beginning balance
Accruals for warranties issued during the period
Warranty costs incurred during the period
Ending balance
$
$
677,757
1,991,014
(1,464,321)
1,204,450
321,874
1,280,163
(924,280)
677,757
$
$
Note 9. Unearned Revenues
Unearned revenues consisted of the following at December 31:
2010
2009
Maintenance contracts
Implied maintenance contracts
Other
$
$
10,167,918
573,197
820,406
11,561,521
$
9,223,806
566,377
888,244
10,678,427
$
F-21
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Income Taxes
The components of the Company's deferred tax assets (liabilities) at December 31, 2010 and 2009 were as follows:
Current deferred tax assets:
Inventory reserves
Deferred maintenance revenue
Allowance for doubtful accounts
State research and development
credit carryforward
Reserve for warranty expenses
Vacation accrual
Warrant cost accrual
Unrealized gain on foreign currency
Current deferred tax assets
Current deferred tax liabilities:
Unrealized gain on foreign currency
Net current deferred tax assets
2010
2009
$
776,000
525,000
393,000
$
700,000
551,000
330,000
203,000
449,000
313,000
795,000
-
3,454,000
158,000
252,000
239,000
-
47,000
2,277,000
(7,000)
3,447,000
$
-
$
2,277,000
Long-term deferred tax assets:
Stock compensation expense
Investment reserves
Amortization
Long-term deferred tax assets
Long-term deferred tax liabilities:
Depreciation
Software capitalization
Net long-term deferred tax assets (liabilities)
$
487,000
639,000
973,000
2,099,000
$
458,000
694,000
820,000
1,972,000
(1,980,000)
(326,000)
(207,000)
$
(1,047,000)
(237,000)
688,000
$
Income before income taxes for the years ended December 31, 2010, 2009 and 2008 was as follows:
2010
2009
2008
United States
Foreign
$
$
13,506,311
329,027
13,835,338
$
$
5,994,420
187,852
6,182,272
$
$
20,270,134
463,353
20,733,487
F-22
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income tax expense for the years ended December 31, 2010, 2009 and 2008 were as follows:
Current
Federal
State
Foreign
Deferred
Federal
State
2010
2009
2008
$
4,336,929
247,570
103,295
4,687,794
$
3,143,000
416,000
130,000
3,689,000
$
5,976,000
878,000
121,000
6,975,000
(160,000)
(62,000)
(1,604,000)
(19,000)
133,000
10,000
Total Income taxes
(222,000)
4,465,794
$
(1,623,000)
2,066,000
$
143,000
7,118,000
$
The Company reflected a permanent book to tax difference in accounting for employee stock option transactions, in
accordance with ASC 740. The Company adjusted additional paid-in capital by approximately $3.0 million,
$(83,000) and $42,000 in the years ended December 31, 2010, 2009 and 2008 respectively, to account for the tax
impact of the stock option transactions, in accordance with ASC 740.
A reconciliation of the statutory federal income tax rate and the effective tax rate for the years ended December 31,
2010, 2009, and 2008 is set forth below:
Federal statutory rate
State income taxes, net of
federal benefit
Tax exempt interest income
Stock compensation expense
Manufacturing deduction
Federal research and
development tax credit
Tax contingencies
Other
Effective income tax rate
2010
2009
2008
35.0
%
35.0
%
35.0
%
2.1
(0.8)
0.2
(3.5)
(1.9)
1.3
(0.1)
32.3
%
2.6
(2.6)
2.0
(2.0)
(4.9)
2.4
0.9
33.4
%
2.5
(2.0)
1.3
(1.4)
(2.1)
0.9
0.1
34.3
%
At December 31, 2010 the Company had Minnesota tax credit carry-forwards of approximately $203,000. The
Company expects to utilize its state research and development tax credit carry-forwards that would otherwise expire
from 2018 through 2025.
Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income
taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate
tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of
whether, and the extent to which, additional taxes will be due. These reserves are established when the Company
believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable.
The Company adjusts these reserves in light of changing facts and circumstances, such as the outcome of a tax audit
or changes in the tax law. The provision for income taxes includes the impact of reserve provisions and changes to
F-23
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reserves that are considered appropriate. Accruals for tax contingencies are provided for in accordance with the
requirements of ASC 740.
The Company is subject to income taxes in the U.S., various states and certain foreign jurisdictions. It may be
subject to examination by the Internal Revenue Service (“IRS”) for calendar years 2007 through 2010. Its Federal
income tax returns are closed for all tax years up to and including 2006. The expiration of the statute of limitations
related to the various state income tax returns that the Company and subsidiaries file varies by state and foreign
jurisdiction.
At December 31, 2010 and 2009, the Company had unrecognized tax benefits of $1.4 million and $1.2 million,
respectively. If recognized, these benefits would favorably impact the effective tax rate. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows:
Balance at beginning of year
Additions for tax positions related to the current year
Additions for tax positions related to previous years
Reduction of reserve for statute expirations
Balance at end of year
$
$
2010
1,232,000
118,000
255,000
(200,000)
1,405,000
2009
1,223,000
95,000
-
(86,000)
1,232,000
$
$
The increase in tax liabilities is primarily due to potential U.S. federal and state adjustments related to positions
taken in the Company’s 2010 income tax provision. The balance of the reserve for tax uncertainties includes
$120,000 for estimated interest and penalties at December 31, 2010 and 2009. The Company currently estimates
that unrecognized tax benefits will not change materially in the next twelve months.
We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations
and account for the related financial statement implications. Tax reserves have been established which we believe to
be appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires us
to exercise judgment regarding the uncertain application of tax law. The amount of reserves is adjusted when
information becomes available or when an event occurs indicating a change in the reserve is appropriate. Future
changes in tax reserve requirements could have a material impact on our results of operations.
We are continually under examination by tax authorities in which we have operations. The years under examination
vary by jurisdiction. We have received a notice of proposed adjustments to our filed Minnesota returns for tax years
2007 and 2008 in relation to the claimed research and development credit. Tax reserves have been established for a
portion of this proposed change in tax, which we believe to be appropriate given the possibility of tax adjustments.
Undistributed earnings of the Company’s Germany subsidiary amounted to approximately $262,000 and $230,000
as of December 31, 2010 and 2009. The Company has not provided any additional U.S. federal or state income taxes
or foreign withholding taxes on the undistributed earnings as such earnings have been indefinitely reinvested in the
business as defined in the provisions of ASC 740. The determination of the amount of the unrecognized deferred tax
liability related to the undistributed earnings is not practicable because of the complexities associated with its
hypothetical calculation.
Note 11. Fair Value Measurements
As discussed in Note 1, the Company adopted the provisions of ASC 820, Fair Value Measurements, on January 1,
2008 for financial assets and liabilities and for non-financial assets and non-financial liabilities measured on a non-
recurring basis on January 1, 2009. In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About
Fair Value Measurements, that amends existing disclosure requirements under ASC 820 by adding required
disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate
disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying,
F-24
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
among other things, the existing fair value disclosures about the level of disaggregation. This ASU was effective for
interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation
disclosures, which are effective for interim and annual periods beginning after December 15, 2010.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been
established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the
use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs market participants would use in valuing the asset or liability developed based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
Company’s assumptions about the factors market participants would use in valuing the asset or liability developed
based upon the best information available in the circumstances. The hierarchy is broken down into three levels.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For financial assets held by the Company, fair value principally applies to available-for-sale marketable securities.
These items were previously, and will continue to be, marked-to-market at each reporting period. The information
in the following paragraphs and tables primarily addresses matters relative to these financial assets. The Company
does not have any financial liabilities that are subject to fair value measurements. Separately, there were no material
fair value measurements with respect to non-financial assets or liabilities that are recognized or disclosed at fair
value in the Company’s financial statements on a recurring basis subsequent to the effective date of such accounting
guidance.
The Company uses various valuation techniques, which are primarily based upon the market approach, with respect
to its financial assets. As discussed in Note 2, one of the auction rate securities held by the Company has
experienced a significant credit rating reduction since its acquisition. As a result, investments in auction rate
securities are valued utilizing a quantitative and qualitative third-party analysis. The Company therefore classifies
these securities as Level 3.
The following table provides a reconciliation of the beginning and ending balances of items measured at fair values
on a recurring basis that used significant unobservable inputs and are classified as long-term investments – available
for sale securities:
Auction rate securities
Beginning balance
Total gains or (losses):
Included in earnings
Included in other comprehensive income
Settlements
Ending balance
Year ended December 31,
2010
2009
$
1,055,750
$
1,109,250
-
154,500
(25,000)
1,185,250
$
(94,000)
40,500
-
$
1,055,750
F-25
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
The aspects of ASC 820 for which the effective date was deferred until January 1, 2009 relate to non-financial assets
and liabilities that are measured at fair value but are recognized or disclosed at fair value on a nonrecurring basis.
At December 31, 2009, the Company recorded a $350,000 impairment related to a $1.4 million equity investment
that is accounted for under the cost method as prescribed by ASC 325-20, Cost Method Investments. During the
fourth quarter of 2009, the Company considered the entity’s current and projected decreases in revenue to be an
impairment indicator and consequently performed a fair value analysis. The resulting impairment of $350,000 was
considered to be other-than-temporary and was recognized as a charge to other income (expense).
Note 12. Material Commitments
The Company estimates that at December 31, 2010 and 2009, it had approximately $22.5 million and $13.6 million,
respectively, of purchase commitments for inventory from vendors. The Company also rents certain of its facilities
under non-cancellable operating leases, which expire through 2014. The Company intends to finance its future
purchase commitments from existing cash and investments or from cash flows from operations.
Minimum annual operating lease payments as of December 31, 2010 are approximately as follows:
Year ending December 31,
2011
2012
2013
2014
2015
Thereafter
$
543,357
210,486
65,189
1,297
-
-
$
820,329
Rent expense for the years ended December 31, 2010, 2009 and 2008 was approximately $669,000, $589,000 and
$598,000, respectively.
Note 13. Restructuring Activities
Beginning January 1, 2009, in North America the Company began selling its Fortus 3D Production Systems through
a select group of resellers from its established reseller channel, which formerly distributed only the Dimension 3D
Printer line. This restructuring of the Company’s sales organization included costs related to workforce reductions,
closure of certain leased facilities, rebranding expenses, and other contract termination charges that were recognized
in 2008 and were settled during the first quarter of 2009.
In addition, the Company took certain cost-saving measures in the first quarter of 2009 that lowered fixed costs and
curtailed some discretionary spending while maintaining a focus on the key goals and objectives of the Company’s
long-term strategy. These cost-saving measures resulted in a charge of $779,000 in the first quarter of 2009,
consisting primarily of severance costs related to a reduction in force. Final severance payments were completed
during the third quarter of 2009 and the unused portion of the provision, noted as “adjustments” in the table below,
was recorded in income for the current period.
F-26
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the activity of these restructuring and other costs recognized in the Statement of Operations caption
“Selling, general and administrative” is as follows:
Accrued balance as of December 31, 2008
Expenses incurred
Cash payments
Adjustments
Employee-
Related Items and
Benefits
Contract
Terminations and
Other
$ 306,014
779,000
(810,707)
(274,307)
$ 66,881
-
(66,881)
-
Total
$ 372,895
779,000
(877,588)
(274,307)
Accrued balance as of December 31, 2009
$
-
$
-
$
-
Note 14. Accounting for Collaborative Arrangements
In 2008, the Company fulfilled its responsibilities under a three-year, $3.6 million agreement with a Fortune 500
global manufacturing company to jointly advance its proprietary FDM technology for rapid manufacturing
applications. This agreement entitled the Company to receive reimbursement payments as it achieved specific
milestones stated in the agreement. This effort was focused around the Company’s high-performance systems and
resulted in the commercial release of the Fortus 900mc. Because receipt of these payments represented
reimbursements of costs actually incurred under this joint development project, all payments received were recorded
as offsets to the research and development expenditures and are therefore not recognized as revenue.
Due to the success of this initial arrangement, the Company is continuing this relationship under similar terms and
objectives. During the years ended December 31, 2010, 2009 and 2008, approximately $1.2 million, $2.2 million,
and $0.3 million, respectively, of research and development expenses were offset by payments that were received
from this company.
Note 15. Foreign Currency Hedge
The Company hedged between €2.3 million and €4.5 million during the year ended December 31, 2010, between
€2.8 million and €5.0 million during the year ended December 31, 2009 and between €2.5 million and €5.1 million
during the year ended December 31, 2008 related to accounts receivable that were denominated in Euros. The
foreign currency forward contracts resulted in a currency gain of approximately $340,000 for the year ended
December 31, 2010, a loss of $115,000 for the year ended December 31, 2009 and a gain of $235,000 for the year
ended December 31, 2008.
The Company will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge
future risks may include foreign currency forward, swap, and option contracts. These instruments may be used to
selectively manage risks, but there can be no assurance that we will be fully protected against material foreign
currency fluctuations.
Note 16. Common Stock
The Company has a common stock repurchase program, but did not repurchase any shares during the years ended
December 31, 2010 and 2009. As of December 31, 2010, the Company had authorization to repurchase
approximately $10.9 million of common stock under the stock repurchase program.
F-27
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Fair Value of Warrant Related to OEM Agreement
During the first quarter of 2010, the Company signed a Master OEM Agreement (the “OEM Agreement”) with
Hewlett-Packard Company (“HP”) to develop and manufacture an HP-branded 3D printer. In connection with the
OEM Agreement, the Company issued a warrant to HP during the first quarter of 2010 to purchase 500,000 shares
of common stock at an exercise price of $17.78 per share. The exercise price was determined by the 20 day average
market closing price of the Company’s common stock immediately prior to the issuance of the warrant. The warrant
vested immediately and has a seven-year term. The warrant was not exercised during 2010. The fair value of the
warrant is properly classified as a reduction of revenue on the Consolidated Statement of Operation for the year
ended December 31, 2010
The Company used the Black-Scholes option-pricing model to determine the fair value of the warrant granted to HP.
The following assumptions were applied in determining the compensation cost:
Risk-free interest rate
Expected option term
Expected price volitility
Dividend yield
Weighted average grant date fair value
3.1%
4.5 years
47%
-
9.98
$
The Company’s computation of expected volatility is based on a combination of historical and market-based implied
volatility from traded options on the Company’s stock. The expected option term was calculated in accordance with
ASC 718. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield
curve in effect at the time of grant.
F-28
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Stock Options and Warrants
The Company has various stock option plans that have been approved by stockholders. The plans provide for the
granting of options to purchase up to 4,825,000 shares of the Company’s common stock to qualified employees of
the Company, independent contractors, consultants, and other persons of which 4,012,634 had been granted and
812,366 shares remain available to be granted by the Company as of December 31, 2010. Options principally vest
immediately or ratably over five years and are exercisable over a period ranging from five years to six years and
one-month. The information presented below has been adjusted to reflect the Company’s two-for-one stock split in
August 2007.
Number
of Options
Outstanding
Per Share
Exercise Price
Weighted
Average
Exercise
Price
Shares under option
at January 1, 2008
Granted in 2008
Exercised in 2008
Expired in 2008
Forfeited in 2008
Shares under option
at December 31, 2008
Granted in 2009
Exercised in 2009
Expired in 2009
Forfeited in 2009
Shares under option
at December 31, 2009
Granted in 2010
Exercised in 2010
Forfeited in 2010
Repurchased in 2010
Shares under option
at December 31, 2010
1,802,028
$
1.02
$
26.15
$
15.02
281,500
(234,300)
(53,050)
(60,800)
1,735,378
283,750
(294,400)
(122,800)
(82,300)
1,519,628
300,000
(456,200)
(46,900)
(138,878)
-
-
-
9.30
1.67
22.06
14.43
1.02 -
14.30
12.49
2.54
8.27
4.35
-
-
-
-
23.04
26.15
9.90
14.53
3.81 -
14.43
9.30
8.27
18.26
9.30
9.30
9.30
-
-
-
-
-
-
23.04
26.15
23.85
26.15
23.04
26.15
11.67
13.78
11.78
15.05
14.42
9.82
12.90
14.30
14.68
14.08
18.30
13.97
14.68
14.04
1,177,650
$
8.27
-
$
26.15
$
15.08
F-29
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock options exercisable at December 31, 2010, 2009 and 2008 is as follows:
Number
of
Shares
Per Share
Exercise Price
Weighted
Average
Exercise
Price
441,850
$
8.27
-
$
26.15
$
14.95
735,478
$
8.27
-
$
26.15
$
14.49
1,199,078
$
2.54
-
$
26.15
$
13.57
Options exercisable at
December 31, 2010
Options exercisable at
December 31, 2009
Options exercisable at
December 31, 2008
The following table summarizes information about stock options outstanding at December 31, 2010:
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life in Years
4.3
1.7
5.1
2.9
Number
Outstanding
at
December 31,
2010
345,750
342,900
295,000
194,000
1,177,650
Weighted-
Average
Exercise
Price
$
9.67
13.25
18.26
23.11
15.08
Exercise
Prices
$8.27 - 9.90
12.49 - 16.17
18.26 - 19.15
$21.96 - 26.15
Aggregate
intrinsic value
$
20,677,463
Options Exercisable
Number
Exercisable
at
December 31,
2010
66,150
272,700
800
102,200
441,850
$
7,814,433
Weighted-
Average
Exercise
Price
$
9.35
13.22
18.97
23.16
14.95
The weighted average life remaining on vested options is 2.0 years. The weighted average grant date fair value
based on the Black-Scholes model was $6.13 for options granted in 2010 and $5.89 for options forfeited in 2010.
The Company issues new shares of common stock upon exercise of stock options. The total intrinsic value of
options exercised was approximately $8.2 million in 2010, $3.1 million in 2009 and $1.1 million in 2008. During
the first quarter of 2010, the Company repurchased 138,878 vested stock options from 42 employees and directors.
F-30
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company used the Black-Scholes option-pricing model to determine the fair value of grants made in 2010, 2009
and 2008. The following assumptions were applied in determining the compensation cost:
2010
2009
2008
Risk-free interest rate
Expected option term
Expected price volitility
Dividend yield
Weighted average grant date fair value
2.3%
4.5 years
39%
-
6.13
$
2.0%
4.5 years
40%
-
3.59
$
3.9%
4.5 years
43%
-
4.54
$
The Company’s computation of expected volatility is based on a combination of historical and market-based implied
volatility from traded options on the Company’s stock. The expected option term was calculated in accordance with
ASC 718. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield
curve in effect at the time of grant.
As of December 31, 2010, there were 735,800 unvested options with a weighted average grant date fair value of
$5.52 based on the Black-Scholes model. As of December 31, 2010, approximately $3.6 million of total
unrecognized compensation expense related to unvested share-based compensation granted under the Company’s
plans. That cost is expected to be recognized over a weighted-average period of 2.1 years. The fair value of option
shares vested during the year 2010 was approximately $1.5 million.
In 2010, the Company issued a warrant to HP during the first quarter of 2010 to purchase 500,000 shares of common
stock at an exercise price of $17.78 per share, which vested immediately and has a seven-year term. The warrant
was not exercised during 2010. There were no outstanding warrants to purchase the Company’s common stock as of
December 31, 2009 and no warrants were exercised during 2009. As of December 31, 2008, the Company had
310,500 warrants outstanding with exercise prices ranging from $11.56 to $13.82 with a weighted average price per
share of $12.34. These remaining warrants expired on February 22, 2009 without being exercised. During 2008,
59,639 net shares were issued as a result of the exercise of warrants. Stock warrants totaling 139,500 shares were
exercised at an average price of $11.99 per share; 79,861 shares were surrendered as payment, in lieu of cash, at an
average price of $20.95 per share.
Note 19. Litigation
The Company is a party to various legal proceedings, the outcome of which, in the opinion of management, will not
have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Note 20. Export Sales
Export sales were as follows for the years ended December 31:
2010
2009
2008
Europe
Asia Pacific
Other
$
$
34,362,430
20,536,318
2,049,761
56,948,509
$
$
26,308,543
15,814,405
1,076,828
43,199,776
$
$
37,430,146
18,533,549
1,883,206
57,846,901
At December 31, 2010, 2009 and 2008, accounts receivable included balances due from foreign customers of
approximately $11.6 million, $11.7 million and $13.8 million, respectively.
F-31
STRATASYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Retirement Plan
The Company has a defined contribution retirement plan (the “Plan”) under the provisions of Section 401(k) of the
Internal Revenue Code (“IRC”) that covers all eligible employees as defined in the Plan. Participants may elect to
contribute up to 50% of pre-tax annual compensation, as defined by the Plan, up to a maximum amount prescribed
by the IRC. The Company, at its discretion, makes matching contributions equal to the lesser of $3,000 or 3% of the
participant’s annual compensation. The Company, at its discretion, may make additional contributions, also subject
to IRC limitations. Due to the weak economy, the Company suspended making discretionary matching
contributions in February 2009, but reinstated matching contributions in September of 2010. For the years ended
December 31, 2010, 2009 and 2008 the Company made 401(k) Plan contributions of approximately $219,000,
$112,000 and $578,000, respectively.
Note 22. Subsequent Events
At December 31, 2010, the Company had a $1.05 million equity investment in Quickparts.com, Inc. (“Quickparts”), a
manufacturing services company that provides customers with an online e-commerce system to procure low-volume and
high-volume custom manufactured parts. This equity investment represented an 8.86% ownership interest in
Quickparts and was accounted for under the cost method of accounting under ASC 325-20, Cost Method Investments.
During February 2011, a third party acquired all of the outstanding stock of Quickparts. In connection with that sale,
the Company received an initial payment of $1.7 million. Remaining payments of approximately $660,000 due to
the Company over the ensuing 18 months are contingent upon satisfaction of certain indemnification obligations of
the sellers, including the Company.
Note 23. Quarterly Results (unaudited)
2010
Net sales
Gross profit
Net income (loss)
Net income (loss) per common
share:
Basic
Diluted
2009
Net sales
Gross profit
Net income (loss)
Net income (loss) per common
share:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
23,006,319
9,420,075
(443,101)
$
30,059,496
14,762,004
2,332,155
$
30,258,549
14,708,988
3,175,550
$
33,774,921
17,194,901
4,304,936
$
(0.02)
(0.02)
$
0.11
0.11
$
0.15
0.15
$
0.21
0.20
$
23,144,801
9,572,352
(703,929)
$
24,648,277
11,573,221
849,571
$
24,329,396
11,868,254
1,578,800
$
26,233,758
13,369,745
2,391,829
$
(0.03)
(0.03)
$
0.04
0.04
$
0.08
0.08
$
0.12
0.12
F-32
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 2010, 2009, and 2008
COLUMN A
Column B
Column C - Additions
Column D
Column E
Description
2010
Reserve for bad debts and allowances
Balances at
beginning
of period
Charged to
costs and
expenses
Charged to
other accounts
Deductions
Balances
at end
of period
$
1,125,112
$
332,363
$
-
$
173,550
$
1,283,925
Reserve for sales returns and other allowances
-
372,811
2009
Reserve for bad debts and allowances
1,225,606
672,241
Reserve for sales returns and other allowances
121,556
-
2008
Reserve for bad debts and allowances
1,169,464
441,321
Reserve for sales returns and other allowances
191,006
-
-
-
-
-
-
372,811
-
772,735
1,125,112
121,556
-
385,179
1,225,606
69,450
121,556
F-33
Exhibits
EXHIBIT
NO.
DESCRIPTION
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
14.1
21.1
Restated Certificate of Incorporation of the Company.(8)
Amended and Restated By-Laws of the Company.(7)
Warrant to purchase 500,000 Shares of Common Stock dated January 18, 2010.(10)
Non-Competition Agreement between the Company and S. Scott Crump, dated
October 15, 1990.(1)
Employee Confidentiality Agreement between the Company and S. Scott Crump,
dated October 15, 1990.(1)
Stratasys, Inc. 1998 Incentive Stock Option Plan.(4)*
Stratasys, Inc. 2000 Incentive Stock Option Plan.(5)*
Stratasys, Inc. 2002 Long-Term Performance and Incentive Plan.(6)*
Stratasys, Inc. 2008 Long-Term Performance and Incentive Plan.(9)*
Form of Option Agreement for employees.(9)*
Form of Option Agreement for directors.(9)*
Assignment, dated October 23, 1989, from S. Scott Crump to the Company with
respect to a patent application for an apparatus and method for creating three-
dimensional objects.(3)
Assignment, dated June 5, 1992, from S. Scott Crump to the Company with respect to
a patent application for a modeling apparatus for three dimensional objects.(3)
Assignment, dated June 1, 1994, from S. Scott Crump, James W. Comb, William R.
Priedeman, Jr., and Robert Zinniel to the Company with respect to a patent application
for a process and apparatus of support removal for three-dimensional modeling.(3)
Asset Purchase Agreement between the Company and IBM dated January 1, 1995.(2)
Master OEM Agreement between Hewlett-Packard Company and Stratasys, Inc. dated
as of January 18, 2010.(11)**
Protective Rights Agreement between Stratasys, Inc. and Hewlett-Packard Company
dated as of January 18, 2010. (11)
Code of Business Conduct and Ethics.(9)
Subsidiaries of the Company.(8)
EXHIBIT
NO.
DESCRIPTION
23.1
31.1
31.2
32.1
32.2
Consent of Grant Thornton LLP.(12)
Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(12)
Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(12)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.(12)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.(12)
(1)
(2)
(3)
(4)
(5)
(6)
Incorporated by reference from the Company’s Registration Statement on Form SB-2 (File No. 33-
83638-C) filed September 2, 1994.
Incorporated by reference from the Company’s Form 8-K, Amendment No. 2, dated January 1,
1995.
Incorporated by reference from Amendment No. 1 to the Registration Statement on Form SB-2 (File
No. 33-99108) filed December 20, 1995.
Incorporated by reference from the Company’s definitive Proxy Statement on Schedule 14A with
respect to the Company’s 1998 Annual Meeting of Stockholders.
Incorporated by reference from the Company’s Registration Statement on Form S-8 (File No. 333-
32782) filed March 17, 2000.
Incorporated by reference from the Company’s definitive Proxy Statement on Schedule 14A with
respect to the Company’s 2002 Annual Meeting of Stockholders.
(7)
Incorporated by reference from the Company’s Form 8-K filed July 31, 2007.
(8)
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2007.
(9)
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2008.
(10)
Incorporated by reference from the Company’s Form 8-K filed January 19, 2010.
(11)
Incorporated by reference from the Company’s Form 10-Q for the quarter ended March 31, 2010.
(12) Filed herewith.
*
Compensatory plan or arrangement.
Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Securities and
**
Exchange Commission pursuant to the Company’s application regarding confidential treatment under Rule 406 of
the Securities Act of 1933, as amended, or Rule 24b-2of the Securities Exchange Act of 1934, as amended.
(c)
Other required financial statements
All other schedules called for under Regulation S-X are not submitted because they are not applicable or
not required, or because the required information is included in the financial statements or notes thereto.
Separate financial statements of the Registrant have been omitted because the Registrant is primarily an
operating company. All subsidiaries included in the consolidated financial statements are majority owned, and none
of the subsidiaries have indebtedness that is not guaranteed by the Registrant.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
STRATASYS, INC.
By: /s/ S. SCOTT CRUMP
S. Scott Crump
President
Dated: March 8, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ S. SCOTT CRUMP
S. Scott Crump
Chairman of the Board of Directors,
President, Chief Executive Officer,
Treasurer (Principal Executive
Officer)
March 8, 2011
/s/ ROBERT F. GALLAGHER
Robert F. Gallagher
Chief Financial Officer (Principal
Financial and Accounting Officer)
March 8, 2011
/s/ RALPH E. CRUMP
Ralph E. Crump
/s/ EDWARD J. FIERKO
Edward J. Fierko
/s/ JOHN J. MCELENEY
John J. McEleney
/s/ CLIFFORD H. SCHWIETER
Clifford H. Schwieter
/s/ GREGORY L. WILSON
Gregory L. Wilson
Director
March 8, 2011
Director
March 8, 2011
Director
March 8, 2010
Director
March 8, 2010
Director
March 8, 2010
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We have issued our reports dated March 8, 2011, with respect to the consolidated financial statements, schedule and
internal control over financial reporting included in the Annual Report of Stratasys, Inc. on Form 10-K for the year
ended December 31, 2010. We hereby consent to the incorporation by reference of said reports in the Registration
Statements of Stratasys, Inc. on Form S-3 (File No. 333-108816, effective December 2, 2003) and on Forms S-8
(File No. 33-93362, effective June 9, 1995, File No. 333-32782, effective March 17, 2000, File No. 333-116210,
effective June 4, 2004, and File No. 333-162830, effective November 3, 2009).
Minneapolis, Minnesota
March 8, 2011
/s/ GRANT THORNTON LLP
Exhibit 31.1
I, S. Scott Crump, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of Stratasys, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of and for the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls over financial reporting.
Date: March 8, 2011
/s/ S. SCOTT CRUMP
S. Scott Crump
President and Chief Executive Officer
Exhibit 31.2
I, Robert F. Gallagher, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of Stratasys, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of and for the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls over financial reporting.
Date: March 8, 2011
/s/ ROBERT F. GALLAGHER
Robert F. Gallagher
Chief Financial Officer
CERTIFICATION
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Stratasys, Inc. (the “Company”) for the period
ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, S. Scott Crump, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 8, 2011
/s/ S. SCOTT CRUMP
S. Scott Crump
Chief Executive Officer
CERTIFICATION
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Stratasys, Inc. (the “Company”) for the period
ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, Robert F. Gallagher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: March 8, 2011
/s/ ROBERT F. GALLAGHER
Robert F. Gallagher
Chief Financial Officer