3D Systems Corporation — Q2 2017 Form 10-Q
Business context and reporting period
3D Systems provides 3D printers, materials, software, on-demand manufacturing and healthcare-related solutions. This unaudited report covers the quarter and six months ended June 30, 2017; amounts below are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $159.5 million | $158.1 million | $315.9 million | $310.7 million |
| Gross profit / margin | $80.7 million / 50.6% | $80.4 million / 50.9% | $160.9 million / 50.9% | $157.9 million / 50.8% |
| Operating loss | $6.9 million | $3.7 million | $15.9 million | $20.5 million |
| Net loss attributable to 3D Systems | $8.4 million | $4.6 million | $18.4 million | $22.4 million |
| Loss per share, basic and diluted | $0.08 | $0.04 | $0.17 | $0.20 |
| Cash provided by operating activities | Not separately stated for quarter | Not separately stated for quarter | $18.4 million | $31.0 million |
At June 30, cash and cash equivalents were $154.0 million, versus $184.9 million at year-end 2016. Current assets were $411.8 million and current liabilities $140.4 million. The company had no borrowings under its $150 million revolving credit facility, with approximately $150 million available subject to covenant limitations; it was covenant-compliant. Capitalized lease obligations totaled approximately $8.0 million. Six-month investing cash outflow was $47.5 million, including $34.3 million for the Vertex acquisition and $11.2 million of property and equipment purchases. Financing cash outflow was $5.5 million.
Material changes versus comparable periods
- Quarterly revenue rose 0.8%; six-month revenue rose 1.7%. Growth came chiefly from materials and services, including healthcare demand and Vertex, while printer sales were weaker. Q2 printer revenue was $27.7 million versus $32.3 million a year earlier; six-month printer revenue was $59.1 million versus $65.2 million.
- Healthcare revenue increased 25% to $48.5 million in Q2, or 30.4% of revenue. Software revenue from products and services rose 9.1% to $24.0 million.
- Q2 operating loss widened as operating expenses increased 4.1% to $87.5 million, including a 17% rise in R&D investment, mainly in Figure 4, metals and materials. For the six-month period, lower SG&A helped reduce operating loss year over year.
- Six-month operating cash flow declined to $18.4 million from $31.0 million, with working capital using $7.3 million, including higher inventory. Cash decreased by $31.0 million from year-end.
- Vertex, a dental-materials provider, was acquired on January 31, 2017. The filing reports $43.9 million of goodwill at June 30 versus year-end; the acquisition also contributed to reported revenue growth.
Outlook, commentary, risks and unusual items
- Management said existing cash and cash equivalents were expected to cover working capital, capital expenditures, commitments and other liquidity needs in the foreseeable future, while noting that future financing might be needed. The filing provides no specific revenue or earnings guidance.
- Management cited continued movement from prototyping toward production applications and investment in product development. Backlog was $32.4 million at June 30, including $9.6 million of on-demand manufacturing orders; printer production and delivery generally do not require long lead times.
- The company is evaluating the new revenue-recognition standard and plans modified-retrospective adoption on January 1, 2018. It said some software revenue deferred under prior guidance may be recognized earlier, but the impact remains under evaluation.
- Risk factors include competition and technology changes, execution and integration of acquisitions, potential asset write-downs, intellectual-property and cybersecurity risks, supply-chain dependence, litigation, foreign exchange, and the ability to generate operating cash and obtain financing.
- Material legal matters include a securities class action and related derivative suits, which the company disputes, and an appeal concerning an $11.3 million arbitration award provision. The company reported that a separate Barranco II jury verdict favored it, with a later bench trial on damages and causation still expected. Management said other current legal matters were not expected to have a material adverse effect.
- Foreign-currency translation produced a $12.5 million Q2 gain in other comprehensive income. Cash held outside the U.S. was $95.2 million, or 61.9% of total cash. The filing states that this cash is considered permanently invested abroad.
Important facts for investors to verify
- Whether printer demand recovers and growth in healthcare, materials and services can offset printer and on-demand manufacturing softness.
- Whether R&D spending converts into revenue and improved operating profitability, particularly given the Q2 loss increase and broadly stable gross margin.
- Whether cash generation improves and inventory growth, acquisition spending and cash balances remain manageable.
- The realized contribution and integration progress of Vertex, and any implications of the increased goodwill balance.
- Developments in the securities and derivative litigation, the Barranco appeal, the recorded award provision and the potential costs or outcomes.
- The financial and disclosure effects of adopting the new revenue standard, including the timing of software revenue recognition.