3D Systems Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. The company sells 3D printers, materials, software and related services through Healthcare and Industrial segments.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $132.3 | $156.1 | $405.3 | $464.8 |
| Gross profit | $52.7 | $64.3 | $159.6 | $197.6 |
| Gross margin | 39.8% | 41.2% | 39.4% | 42.5% |
| Operating loss | $(33.7) | $(17.2) | $(89.0) | $(29.2) |
| Net income (loss) attributable to 3D Systems | $(37.4) | $292.7 | $(97.2) | $328.3 |
| Diluted earnings (loss) per share | $(0.30) | $2.34 | $(0.77) | $2.63 |
- Q3 product revenue was $96.3 million and services revenue was $35.9 million. Nine-month product and services revenue was $300.7 million and $104.6 million, respectively.
- Operating cash flow was a use of $52.4 million for the first nine months, versus $62.7 million provided in the prior-year period. Investing cash flow was a use of $374.1 million, including $272.4 million of net purchases of short-term investments, $84.7 million for acquisitions and $17.1 million of capital expenditures. Financing cash flow used $13.0 million.
- At September 30, cash and cash equivalents were $341.3 million and short-term investments were $268.1 million, or $609.4 million combined. Total current assets were $865.3 million and current liabilities $152.4 million.
- Long-term debt, net of financing costs, was $448.9 million. The company had $460 million principal amount of 0% convertible notes due November 2026; it reported compliance with the notes’ covenants. The revolving credit facility had been terminated in 2021.
Material changes and explanations
- Q3 revenue fell 15.3% year over year; nine-month revenue fell 12.8%. Management attributed the declines primarily to divestitures and adverse foreign exchange, partly offset over nine months by higher sales volumes. Q3 foreign exchange reduced revenue by $8.2 million; the nine-month impact was $17.5 million.
- Prior-year comparisons include revenue from businesses divested in 2021: $19.4 million in Q3 and $71.7 million in the first nine months. Prior-year earnings also included substantial divestiture gains, including the Simbionix, ODM and Cimatron sales. These gains contributed to 2021 net income and make the year-over-year net-income comparison unusually large.
- Gross margin declined 1.4 percentage points in Q3 and 3.1 points for the first nine months. The company cited divestitures, inflation, supply-chain pressures and higher freight costs. Healthcare’s nine-month gross margin decreased to 37.9% from 44.9%; Industrial’s increased to 40.8% from 40.1%.
- Operating expenses increased 6.0% in Q3 and 9.6% for the first nine months. Higher research and development spending, acquisition costs, legal-contingency estimates and Volumetric milestone compensation contributed; lower incentive compensation and the absence of divested-business expenses partly offset increases.
- Segment operating income for Q3 was $6.5 million in Healthcare and $6.6 million in Industrial, versus $9.1 million and $13.2 million, respectively, in Q3 2021. For the first nine months, segment operating income was $23.1 million in Healthcare and $15.3 million in Industrial, versus $51.1 million and $35.7 million.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided. Management said available cash, cash equivalents, short-term investments and other potential funding sources should be sufficient for foreseeable cash requirements and the next 12 months; requirements beyond that depend partly on profitability and working-capital management.
- Management cited COVID-19 uncertainty, inflation, possible recession, foreign-exchange volatility, the Russia-Ukraine conflict, supply-chain and labor constraints, manufacturing backlogs, and potential delays in customer purchases as risks. It said the duration and extent of these impacts could not be reasonably estimated.
- The company accrued $18.1 million for legal matters at September 30, 2022. It was discussing settlements with U.S. authorities concerning export-control, sanctions and government-contracting compliance matters and expects additional compliance-program expenditures. It continues to cooperate with authorities.
- A securities class action settlement was agreed in principle on October 28, 2022, subject to court approval. The company also disclosed an SEC formal investigation and related derivative suits; it says it believes the claims are without merit.
- Disclosure controls were deemed ineffective at September 30, 2022 because material weaknesses remained in controls over certain non-standard contracts, review of internally prepared financial reports and tax-provision calculations. Remediation efforts were ongoing; management could not assure when they would be complete.
- The company recorded a $2.8 million impairment of its Enhatch investment, citing lower-than-projected revenue and delayed regulatory approvals. It also recorded a $1.7 million contract-manufacturer exit fee and paid for committed inventory and fixed assets as it brought printer assembly in-house.
- Acquisitions included Kumovis and Titan in April 2022. Kumovis’s purchase-price allocation remained preliminary and its near-term impact was expected to be dilutive. The company also disclosed up to $355 million of potential Volumetric milestone payments, subject to milestone achievement and continued employment conditions.
- After quarter-end, the company completed its acquisition of dp polar on October 4, 2022, for €30 million, payable partly in cash and partly in 3D Systems shares.
Important facts for investors to verify
- Whether revenue, gross-margin performance and operating cash flow improve, separating continuing-business trends from divestitures and foreign-exchange effects.
- How much of the $609.4 million cash and short-term-investment balance remains available after operating needs, acquisitions and other commitments.
- Progress on internal-control remediation and whether the company reports effective controls in a later filing.
- Final outcomes and costs of the export-control and sanctions matters, shareholder litigation and SEC investigation; confirm the class-action settlement receives court approval.
- Final purchase-price allocations and financial performance of recent acquisitions, as well as potential Volumetric milestone obligations and the economics of the dp polar acquisition.