Here is some important financial information from Stratasys' recently filed 10K:
" At December 31, 1996, the Company had federal and state net operating loss carryforwards of approximately $247,000 and 1,195,000, respectively, which can be utilized against future taxable income and expire in various years through the year 2009.
At December 31, 1996, the Company had research and development tax credit carryforwards of approximately $476,000, which can be utilized against future federal income tax and expire in various years through 2016."
My comment:
Stratasys has become increasingly profitable and its available operating loss carryforwards to offset federal and state taxes has been decreasing. The above numbers indicate the company will begin applying a federal tax rate of 34% to projected earnings later in '97 when their loss carryforwards is used up. Of course, other things being equal, this would decrease net income per share. As a reminder, their loss carryforwards will be increased by the amount of their expected loss ($750K ?) in Q1 '97.
I am focusing on this tax issue because the share price of competitor 3D Systems (TDSC) decreased significantly when that company used up its loss carryforwards in '96 and began incurring sizable federal and state income taxes. Since 3D's top line revenue growth rate was 25% and expenses did not decrease, their comparative year over year EPS dropped significantly on a tax reporting basis. I would speculate to say that analysts could not justify paying over $20/share for TDSC while it was reporting a lower EPS and "only" a 25% growth rate in sales. Folks, I don't write the rules, I just try to interpret them.
However, the situation with Stratasys will probably be much different since this company is growing top line revenue at 100% year-over-year. I believe that Stratasys' current share price is being supported more by the company's sales growth rate and less by their EPS. Of course, this situation and/or perception will change in the future. It should be noted the company did state FY 96 earnings per share in their press release as if it was reported on a fully taxed basis.
Here is some other information from their 10K:
"As of December 31, 1996, the Company had gross accounts receivable
of $11,077,155, less an allowance of $470,000 for returns and doubtful accounts. While the Company has historically never recorded a bad debt, an increase to its allowance for returns and bad debt was deemed appropriate because approximately 45% of its sales were generated in the fourth quarter, extended payment terms were granted to select customers and resellers, and certain international distributors had substantial balances."
From Individual Investor:
"Despite posting impressive sales and earnings gains in its fourth quarter (ended December), Stratasys' reported a large loss in its cash flow from operations. The main culprit: a surge in accounts
receivable, as days sales outstanding (DSOs) soared to 90 days. The overall figure of $10.6 million was more than double the September 1996 quarter's $4.7 million in accounts receivable outstanding. Much of the bulge stems from new-products shipments that came late in the quarter. The company contends that many of the outstanding bills have been paid and that accounts receivable now stands at a more tolerable
$5 million, or 45 days sales outstanding. "
My comments:
There is nothing wrong with the sudden increase in their accounts receivable given the huge increase in sales which occurred late in the quarter. It is just that experienced small cap investors have learned (mostly the hard way) never to take their eyes off of a company's accounts receivable and percentage of bad debt allocation (Stratasys now at 4.2%). (Small cap investors shouldn't take their eyes off of inventory levels either, especially during periods of declining gross margins or new product introductions, but that is obviously not an issue with Stratasys.) The important point when examining accounts receivable and bad debt allocations is to look at the overall financial health AND payment culture of the industry, as well as the type and size of a customer a company sells to. At the moment, Stratasys' bad debt allocation seems appropriate.
The health of the tooling industry is cyclical like other capital equipment industries with order flow decreasing when interest rates increase. With the decrease/stabilization in interest rates during the past two years many tooling shops have sprung up over night to handle the increase in tooling orders. Some of the smaller tooling shops will close down operations (skip out on their payments to suppliers and equipment providers) if interest rates rise further. Wall Street analysts know this and will systematically reduce valuations on tooling stocks as interest rates rise. No doubt, Stratasys' share price could decrease on this news. (When bad news hits, Wall Street does not discriminate, why just look at networking stocks today.) However, my contention is that Stratasys is not truly a tooling company and furthermore I do not believe their sales are centered in small tool & die companies. I mention this situation so that you will be aware of possible negative influences on Stratasys' share price. Perhaps part of the decrease in Stratasys' share price this week can be attributed to the increase in interest rates.
BTW, I've also noticed short-term volatility in Stratasys' share price tied to the PC hardware/software trend news of the day. This is related to the classification of Stratasys' machines being PC related in brokerage house trading computers.
I hope this information helps and does not hinder. I invite corrections to my interpretation and understanding of this information .
-David |
