Add
SSYS to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SSYS > SEC Filings for SSYS > Form 10-K on 11-Mar-2009 | All Recent SEC Filings |
11-Mar-2009
Annual Report
Introduction
Management's Discussion and Analysis of Financial Condition and Results of Operations is 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 plastic and other materials directly from a computer aided design ("CAD") workstation.
Our strategy in 2008 was three-fold:
º Continue expanding our market position in the 3D printing market through increased sales of the five Dimension products including the Dimension 1200es BST and SST introduced in January 2008. The Dimension 1200es models offer customers the ABSplus material first introduced on our Elite that on average is 40% stronger than our other ABS material offering. At the end of 2008, the Dimension product line consisted of five systems ranging in price from $18,900 to $34,900. According to the 2008 Wohler's Report ("Wohlers"), we shipped more 3D printers than other company in the world in 2007, and based on our results in 2008, we believe that we have continued that trend in 2008.
In January 2009, we introduced a new personal 3D printer; the uPrint priced at $14,900 and reduced the prices on some of our existing models creating a new price range of $14,900 to $32,900. We believe the 3D printer market is price elastic and we can grow the volume of 3D printers and the related consumables and maintenance sold as we continue to introduce lower costs 3D printers.
º Expand our position in the RP and DDM markets through new proprietary product introductions, including the Fortus 200mc, Fortus 360mc, Fortus 400mc and Fortus 900mc. In 2008, revenue from our high-performance proprietary systems grew by 41% over 2007. The system revenue growth is attributable to our focus on proprietary products, customer acceptance of new product introductions, and further penetration of DDM applications. We remain fully committed to our historic core RP business. We believe that opportunities in direct digital manufacturing and rapid tooling and expansion of traditional rapid prototyping applications will be the impetus for continued growth.
º Expand our Paid Parts service of producing parts for customers. We believe this is a fragmented global market dominated by numerous small companies generating less than $1 million each in annual sales. Sales from our Paid Parts service have been somewhat volatile quarter-to-quarter as we work to identify the most effective ways of reaching customers. In the fall of 2005, we launched RedEye RPM™, later rebranded as Redeye on Demand, as an internet site allowing customers to obtain instant quotes and then order their parts over the Internet via the submission of a standard 3D CAD STL file. In February 2008, we launched RedeyeArc.com specifically aimed at serving the architectural market through our Paid Parts business. Year-over-year sales of our Paid Parts service increased by 12%. In December 2008, we announced that AutoCAD users can now order digitally manufactured prototypes and production parts quickly and easily through a new on-demand 3D printing capability supported by our Redeye Paid Parts business. As customers continue to increase their volume of parts ordered, we are often successful in selling them systems to produce their own parts.
We also announced that effective December 2007 we discontinued our distribution agreement with Arcam AB to exclusively distribute their metal-based direct digital manufacturing and prototyping systems in North America. In Arcam's patented electron-beam melting ("EBM") process, called CAD to Metal®, titanium powder is transformed into solid metal parts for either functional prototyping or end-use. We believe that the EBM technology is attractive primarily to early adopters and our distribution agreement with Arcam did not result in significant sales or margins.
The discontinuation of the Objet and Arcam agreements impacts the year-over-year revenue and gross margin analysis. We sold approximately $188,000 and $4.0 million of distributed products and services in 2008 and 2007, respectively. These sales were at negligible gross margins. In discussing the year-over-year revenue and gross margin comparisons we refer to these two relationships as "distributed" products and services. "Proprietary" refers primarily to products that we design and manufacture including third-party peripheral items such as stands and tanks, and services we provide.
As our installed base of systems has increased, we have derived an increasing amount of revenue from sales of consumables, maintenance contracts, and other services. Revenue relating to our installed base of systems generates recurring revenue for us. In 2008, excluding revenue from distributed products, total non-system revenue increased by 15% due principally to 10% growth in maintenance, 12% growth in proprietary consumable revenue and Paid Parts revenue.
Total net unit shipments were essentially flat in 2008 amounting to 2,184 systems compared with the 2,169 net units shipped in 2007. Based upon data and estimates furnished in Wohlers, through 2007 we shipped approximately 34% of all RP systems since the industry's inception in 1987, an improvement over the 24% we realized through 2002. The 2008 Wohlers Report also states that we shipped 44% of all RP systems globally in 2007. Based on data derived from Wohlers, we believe we shipped more total systems than any other company in our industry in the world in 2007 and that this will also be the case for 2008. Our sales were derived from a number of industries, including automotive, consumer products, electronics, general manufacturing, educational, government, and aerospace.
In 2009, we plan to continue to make investments in 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 to our expense levels 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. Whereas our backlog as of December 31, 2008, was $2.6 million, it would not be sufficient to meet our budgeted sales targets should new system orders in 2009 decline.
We expect growth to be 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 2009 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.
Twelve months ended December 31, 2008 compared with twelve months ended December 31, 2007
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, 2008 2007 Net sales 100.0 % 100.0 % Cost of sales 46.7 % 46.8 % Gross profit 53.3 % 53.2 % Selling, general and administrative 29.6 % 30.1 % Research & development 7.2 % 6.7 % Operating income 16.5 % 16.5 % Other income (expense) 0.1 % 1.7 % Income before taxes 16.7 % 18.2 % Income taxes 5.7 % 5.4 % Net income 10.9 % 12.8 % |
Net Sales
Net sales of our products and services for 2008 and 2007 and changes in net
sales were as follows:
Year-over-
2008 2007 Year Change
Products $ 98,969 $ 89,280 10.9%
Services 25,526 22,963 11.2%
Net sales $ 124,495 $ 112,243 10.9%
|
In 2007 and the beginning of 2008, we discontinued distribution of Eden and Arcam products. We recognized approximately $0.2 million and $4.0 million of distributed sales in 2008 and 2007, respectively. Adjusting for the impact of the terminated distributed agreements, net sales of our products and services for 2008 and 2007, and changes in net sales, were as follows:
Year-over-
2008 2007 Year Change
Products $ 98,782 $ 86,255 14.5%
Services 25,526 22,002 16.0%
Net sales $ 124,308 $ 108,257 14.8%
|
The primary drivers of the year-over-year growth in proprietary product and service sales were:
º 41% increase in Fortus high productivity system sales
º 12% increase in our Paid Parts business
º 12% increase in consumable sales
º 10% increase in our maintenance sales
Service revenues predominately consisted of the following components:
maintenance, Paid Parts, and rentals. We saw a 12% increase in our Paid Parts
service as we continued to invest in reaching customers through trade shows,
direct mailings and our RedEye on Demand™ website, which allows customers to
order their parts over the Internet. In addition, in February, 2008 we launched
RedEye ARC in an effort to reach the architectural market. Revenues from
maintenance services on our proprietary systems saw year-over-year revenue
growth of 10% as we continued to increase our installed base of systems.
Net sales and the percentage of net sales by region for 2008 and 2007, as well as the percentage change were as follows:
Year-over-
2008 2007 Year Change
North America $ 66,698 54% $ 62,525 56% 6.7%
Europe 37,430 30% 27,144 24% 37.9%
Asia Pacific 18,534 15% 19,806 18% -6.4%
Other 1,833 1% 2,768 2% -33.8%
Total $ 124,495 100% $ 112,243 100% 10.9%
|
North American sales grew in 2008 primarily due to significant growth in our high-performance systems, higher maintenance revenue from a growing installed base and continued growth in our Paid Parts service business. This growth was partially off-set by a $3.8 million decline in distributed product revenue that resulted from the discontinuation of our distributed products agreements in 2007.
European sales grew dramatically during 2008 as a result of growth in our high-performance systems, expansion of our reseller network and a favorable US Dollar exchange rate through the first three quarters of 2008.
Asia Pacific sales declined as a result of weak sales within the Japanese market due to a decrease in overall demand. We believe sales in certain Asia Pacific countries were impacted by weak economic conditions.
We believe that the challenging economic conditions that have affected North America as well as other regions of the world in late 2008 and early 2009 may have a negative impact on our future sales and profitability.
Gross Profit
Gross profit and gross profit as a percentage of sales for our products and
services for 2008 and 2007, as well as the percentage changes in gross profit
were as follows:
Year-over-
2008 2007 Year Change
% of Related % of Related
Sales Sales
Products $ 51,297 51.8% $ 48,739 54.6% 5.2%
Services 15,116 59.2% 10,969 47.8% 37.8%
Gross profit $ 66,413 53.3% $ 59,708 53.2% 11.2%
|
º 12% growth in our high margin Paid Parts business;
º Discontinuation of service on distributed products. This service business had negligible margins;
º Improved quality and reliability of our proprietary systems resulting in reduced service costs and higher service margins.
Operating Expenses
Operating expenses and operating expense as a percentage of sales for 2008
and 2007, as well as the percentage change in operating expenses were as
follows:
Year-over-
2008 2007 Year Change
% of Sales % of Sales
Selling, general & administrative $ 36,843 29.6% $ 33,770 30.1% 9.1%
Research and development 8,973 7.2% 7,465 6.7% 20.2%
Total operating expenses $ 45,816 36.8% $ 41,235 36.7% 11.1%
|
Selling, general and administrative expenses for 2008 increased due to the growth in sales. Theses 2008 costs include approximately $545,000 in restructuring charges related to sales strategy for our Fortus high-end systems. Effective January 1, 2009, we began selling Fortus 3D Production Systems through a select group of North American resellers from our established reseller channel, which 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. This new strategy more than triples our sales support for high-end systems. 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. Cash flows related to restructuring charges began during the fourth quarter of 2008 and are expected to be completed by the first quarter of 2009. We intend to finance these restructuring charges from existing cash or from cash flows from operations.
Research and development expense increased by 20.2% over the previous year as we remain 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 is focused on accelerating our development efforts to address both the 3D printer and DDM market opportunities we believe exist. Increases were primarily the result of increases in engineering headcounts partially offset by an increase in internally capitalized software. During the quarter ended September 30, 2005, we announced that we received a $3.6 million order from a Fortune 500 global manufacturing company to advance our proprietary FDM technology for direct digital manufacturing applications. This effort resulted in the Fortus 900mc. The agreement included payments to us as R&D milestones were achieved, as well as payments that were dependent upon future deliverables. R&D payments received offset accelerated R&D efforts aimed at direct digital manufacturing advances and are not recognized as revenue. During 2008 and 2007, we offset approximately $0.3 million and $1.0 million, respectively, of R&D expenses with monies received from this customer. This contract was completed in 2008. In 2008 and 2007, capitalized software additions were approximately $2.1 million and $2.0 million, respectively.
Operating Income
Operating income and operating income as a percentage of sales for 2008 and
2007, as well as the percentage change in operating income were as follows:
Year-over-
2008 2007 Year Change
% of Sales % of Sales
Operating income $ 20,596 16.5% $ 18,473 16.5% 11.5%
|
Operating income remained constant as a percentage of sales and increased in real dollars due to the increase in sales volume.
Other Income (Expenses)
Other income (expenses) for 2008 and 2007 and changes in other income
(expenses) were as follows:
Year-over-
Year
2008 2007 Change
Interest income $ 2,037 $ 2,316 -12%
Foreign currency transaction losses (835 ) (503 ) 66%
Other (1,065 ) 76 -1501%
Total $ 137 $ 1,889 -93%
|
Interest income decreased in 2008 compared with 2007 due to lower average interest rates on investments.
We incurred foreign currency transaction losses because we sell primarily in euros throughout most of Europe. Consequently, we have euro denominated receivables that we mark to the current exchange rate at the end of each month. As the euro has fluctuated compared to the US dollar throughout most of 2008, we adjusted the carrying value of these receivables to reflect the changes in the exchange rate. Each month we enter into 30-day forward contracts to offset a portion of the impact of variations in exchange rates. In 2008, our hedging strategy resulted in a larger transaction loss due to the volatility of the US dollar relative to the euro. At December 31, 2008 we had approximately €6.0 million net in Euro-denominated receivables and a €5.0 million 30-day forward contract.
Other income (loss) for 2008 includes an impairment charge of approximately $1.3 million related to $2.6 million in a Jefferson County, Alabama, municipal bond. In February 2008, the auction for this auction rate security failed and its rating has been reduced from AAA to CCC. With the assistance of outside consultants, we determined this investment has incurred both a temporary and other-than-temporary impairment loss.
Income Taxes
Income taxes and income taxes as a percentage of net income before taxes for
2008 and 2007, as well as the percentage change were as follows:
Year-over-
2008 2007 Year Change
Income taxes $ 7,118 $ 6,038 18%
As a percent of income before income taxes 34.3 % 29.6 %
|
The following is a reconciliation of the 2008 effective income tax rate compared with the 2007 rate:
2008 Effective income tax rate 34.3 %
2007 income tax benefit recognized from prior year
amendments for state research and development credits (3.7 %)
Other, net (1.0 %)
2007 Effective income tax rate 29.6 %
|
Net Income
Net income and net income as a percentage of sales for 2008 and 2007, as well
as the percentage change in net income were as follows:
Year-over-
2008 2007 Year Change
% of Sales % of Sales
Net income $ 13,615 10.9% $ 14,324 12.8% -5.0%
|
For the reasons cited above, our net income for the year ended December 31, 2008 was lower than for the year ended December 31, 2007.
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, 2007 2006 Net sales 100.0 % 100.0 % Cost of sales 46.8 % 50.4 % Gross profit 53.2 % 49.6 % Selling, general and administrative 30.1 % 28.0 % Research & development 6.7 % 6.5 % Operating income 16.5 % 15.1 % Other income (expense) 1.7 % 1.3 % Income before taxes 18.2 % 16.4 % Income taxes 5.4 % 5.6 % Net income 12.8 % 10.8 % |
Net Sales
Net sales of our products and services for 2007 and 2006 and changes in net
sales were as follows:
Year-over-
2007 2006 Year Change
Products $ 89,280 $ 83,450 7.0 %
Services 22,963 20,359 12.8 %
Net sales $ 112,243 $ 103,809 8.1 %
|
The primary drivers of the year-over-year growth in product sales were:
º 35% increase from Dimension system sales
º 31% increase in high productivity system sales
º 23% increase in consumable sales
The increase in sales of our proprietary products was partially offset by a 73% decrease in distributed system sales.
Adjusting for the impact of the terminated distributed agreements with Objet and Arcam, net sales of our products and services for 2007 and 2006 and changes in net sales were as follows:
Year-over-
2007 2006 Year Change
Products $ 86,255 $ 66,791 29.1 %
Services 22,002 19,496 12.9 %
Net sales $ 108,257 $ 86,287 25.5 %
|
Our Dimension systems sales continued to grow as we introduced a new, higher-priced system in January 2007 and as awareness of the technology increases. Sales of high-performance systems grew with new product introductions, the refocus of the domestic sales team on proprietary products and new applications within the DDM market. As we increased our installed base of systems in the field, we continued to see solid growth in consumables. Overall, proprietary systems and consumables grew by 31% in 2007 compared to 2006.
Net sales and the percentage of net sales by region for 2007 and 2006, as well as the percentage change were as follows:
Year-over-
2007 2006 Year Change
North America $ 62,525 56 % $ 64,705 62 % -3.4 %
. . .
|
|
|