3D Systems Corporation — FY2017 Form 10-K
Business context and reporting period. 3D Systems provides 3D printers, materials, software, on-demand manufacturing and healthcare-related products and services. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below are unaudited. Financial amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $646.1 million | $633.0 million |
| Gross profit / margin | $304.8 million / 47.2% | $309.8 million / 48.9% |
| Operating loss | $54.0 million | $38.4 million |
| Net loss attributable to 3D Systems | $66.2 million; $0.59 per share | $38.4 million; $0.35 per share |
| Cash from operating activities | $25.9 million | $57.5 million |
| Cash and cash equivalents at year-end | $136.3 million | $184.9 million |
| Working capital | $231.3 million | $302.5 million |
Revenue by category in FY2017 was products $210.3 million, materials $168.8 million and services $266.9 million. The filing’s financial statements also present products and materials together as “Products” at $379.1 million; these are different presentation groupings.
FY2017 revenue rose 2.1%, but gross profit declined 1.6% and the operating loss widened. Product revenue fell 5.8% amid lower printer sales and unfavorable product mix/pricing; materials revenue grew 7.6% and services revenue grew 5.7%. Healthcare revenue increased 18.5% to $188.7 million. EMEA growth was partly offset by declines in the Americas and Asia Pacific.
Operating expenses increased 3.1% to $358.8 million, including $264.2 million of SG&A and $94.6 million of R&D. Gross margin was affected by product mix and $12.9 million of inventory adjustments, compared with $10.7 million in 2016. Printer gross margin and materials/service margins also faced mix and operating pressures.
Fourth-quarter 2017 revenue was $177.3 million, versus $165.9 million in Q4 2016. Q4 2017 gross profit was $85.5 million; operating loss was $5.7 million and net loss attributable to the company was $10.1 million. Q4 2016 reported operating income of $4.1 million and net income of $5.2 million.
Cash used in investing activities was $70.7 million, including $34.3 million net cash paid for the Vertex acquisition and $30.9 million of capital expenditures. The company ended the year with $136.3 million of cash, of which $88.9 million was held outside the U.S. Debt was modest: $7.7 million in capitalized lease obligations and no borrowings under the $150 million revolving credit facility. The company said existing cash should cover foreseeable operating and capital needs, while noting future funding could be needed.
Outlook, commentary, risks and unusual items
- Strategy and outlook: Management is prioritizing production-oriented additive manufacturing, healthcare and dental, aerospace, automotive and durable goods. It plans to continue investment in hardware, software, materials and services. The filing provides no quantified revenue or earnings guidance.
- Product plans: Following its November 2017 launch event, the company planned 2018 commercial releases including Figure 4 platform products, the ProX SLS 6100 and the DMP 8500 metals platform. It introduced the NextDent 5100 and FabPro 1000 in February 2018. These are plans and launches, not reported FY2017 results.
- Acquisition: Vertex, a dental materials provider, was acquired in January 2017 for approximately $37.6 million net of cash acquired, funded with cash and stock. The acquisition contributed to healthcare and materials growth.
- Export-control investigation: The company received a BIS subpoena in October 2017 concerning possible U.S. export-control violations, including at Quickparts. It identified potential ITAR and Export Administration Regulations issues, made an initial voluntary disclosure to DDTC in February 2018, and is cooperating. Resolution, penalties and costs were not predictable; significant legal and other expenses were expected. Potential consequences include fines, export restrictions and debarment from U.S. government contracts.
- Securities settlement: In February 2018, the company agreed to a proposed $50 million settlement of a securities class action, payable by insurers, subject to final court approval. At year-end it recorded a $50 million liability and an equal insurance-proceeds receivable. The final approval hearing was scheduled for June 25, 2018. Related derivative cases were stayed.
- Other litigation: An approximately $11.3 million arbitration award in the Barranco matter remained under appeal and was accrued. A separate Barranco case resulted in a jury finding for the company on the plaintiff’s claims; an accounting on the company’s counterclaim awaited a court ruling.
- Tax: The Tax Cuts and Jobs Act led to provisional tax accounting, including a $9.5 million transition-tax expense offset by net operating losses and deferred-tax remeasurement effects largely offset by a valuation allowance. The company said its analysis remained in progress; future tax effects could differ.
- Principal risks: Competition and pricing pressure, technology and product execution, uneven order timing and product mix, reliance on selected suppliers, international and foreign-exchange exposure, cybersecurity, litigation and regulatory compliance, and the possibility of further asset impairment. FY2017 inventory adjustments were $12.9 million; no goodwill impairment was recorded in 2017.
Most important facts for investors to verify
- Whether the $50 million securities settlement received final court approval and whether the insurers paid the full amount.
- Developments, possible penalties and continuing costs from the BIS/DDTC export-control matter.
- Whether planned 2018 product launches achieved commercial availability, customer adoption and expected economics.
- Whether operating cash generation improves as revenue grows, given FY2017 operating cash flow fell to $25.9 million and year-end cash declined by $48.6 million.
- Product-level sales, pricing and gross-margin trends, especially printer revenue and the effects of inventory adjustments and acquired dental materials.
- Potential tax outcomes as the company completes its Tax Act analysis, and the extent to which deferred tax assets and carryforwards can be realized.
- Scope of the audit-control assessment: management and auditor reported effective internal control, but excluded Vertex, which represented 5% of total assets at year-end.