3D Systems Corporation — Q1 2017 Form 10-Q
Reporting period: Quarter ended March 31, 2017. 3D Systems provides 3D printers, materials, software, manufacturing services, and healthcare-related solutions. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial results
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Revenue | $156.4 million | $152.6 million; up 2.6% |
| Gross profit / margin | $80.2 million / 51.3% | $77.5 million / 50.8% |
| Operating expenses | $89.3 million | $94.3 million; down 5.3% |
| Operating loss | $9.1 million | $16.8 million loss |
| Net loss attributable to 3D Systems | $10.0 million; $0.09 per share | $17.8 million; $0.16 per share |
| Cash from operating activities | $19.4 million | $18.1 million |
| Cash and cash equivalents | $161.7 million at March 31 | $184.9 million at December 31, 2016 |
| Total assets / stockholders’ equity | $865.6 million / $634.5 million | $849.2 million / $626.7 million at December 31, 2016 |
Revenue by class, as presented in MD&A, was $51.9 million for products, $42.8 million for materials, and $61.7 million for services. Materials increased 11.3% and services increased 0.2%; products declined 1.1%. Healthcare revenue rose 29.0% to $43.2 million, or 27.6% of revenue. Backlog was $34.6 million, versus $31.7 million at year-end.
Liquidity remained substantial: current assets were $409.3 million and current liabilities $141.7 million, for working capital of $267.6 million. The company reported no outstanding borrowings on its $150 million revolving credit facility and approximately $150 million of availability, subject to covenant limitations. Capitalized lease obligations totaled $8.0 million. No off-balance-sheet arrangements were reported.
Changes and management commentary
- Revenue growth reflected higher materials and healthcare-related sales, including the January acquisition of Vertex-Global Holding B.V., partly offset by lower product sales. Americas revenue fell 3.8%; EMEA and Asia Pacific revenue increased 11.6% and 7.2%, respectively.
- Gross margin improved 0.5 percentage points. Management attributed the improvement to cost reductions and a sales mix shift away from lower-margin consumer products. Materials and services margins declined, despite higher overall margin.
- SG&A declined 10.2%, primarily due to lower compensation costs, including stock-based compensation, and lower bad-debt expense. R&D increased 12.5%, reflecting staffing and product-development spending.
- Operating cash flow exceeded net loss, supported by non-cash charges and working-capital changes, including an $11.2 million increase in deferred revenue. Investing cash outflow was $40.2 million, including $34.3 million net cash paid for Vertex; the acquisition consideration was approximately $37.5 million, including $3.2 million in shares.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance was provided. Management said existing cash was expected to meet working-capital, capital expenditure, commitment, and other liquidity needs for the foreseeable future, while cautioning that future additional financing might be needed and could be unavailable on acceptable terms.
- Management highlighted competitive and technology pressures, acquisition integration and impairment risks, intellectual-property and cybersecurity risks, foreign operations and currency exposure, supply-chain dependence, litigation, and the ability to generate operating cash flow. The company did not hedge translation exposure; foreign exchange contracts had $35.3 million notional value and immaterial fair value at quarter-end.
- Material legal matters include a securities class action that survived a motion to dismiss and related derivative suits that remained stayed. The company intends to defend the claims. In a separate former-employee matter, an approximately $11.3 million arbitration award was recorded as a long-term liability; motions concerning the judgment remained pending. A related lawsuit ended with a jury verdict for the company on the plaintiff’s claims.
- Put rights over a subsidiary could require an estimated payment of approximately $8.9 million, potentially beginning in 2019; the amount depends on future subsidiary performance. Acquisition earnout liabilities were $7.9 million at quarter-end.
- Adoption of stock-compensation guidance produced a $10.2 million cumulative adjustment between additional paid-in capital and accumulated deficit, with no change to total equity. Management said the accounting change did not materially affect current-period results.
Important facts for investors to verify
- Whether revenue and margin trends persist, particularly healthcare and materials growth versus weaker product and on-demand manufacturing sales.
- Vertex’s subsequent contribution, integration progress, and the assumptions behind acquired goodwill and intangible assets.
- Cash conversion and liquidity after acquisition spending, including the level and sustainability of deferred revenue and operating cash flow.
- Developments in the securities and derivative litigation, arbitration judgment, earnouts, and subsidiary put rights.
- Potential effects of the forthcoming revenue-recognition standard; the company was still evaluating its adoption impact.