3D Systems Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. The filing is unaudited.
Business context and reporting period
3D Systems sells 3D printers, print materials, digital design tools, and manufacturing and healthcare services. It reports one business segment. Second-quarter revenue was $158.1 million, down 7.3% year over year. Healthcare revenue rose 11.4% to $38.8 million, or 24.5% of revenue.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $158.1m | $170.5m | $310.7m | $331.2m |
| Gross profit / margin | $80.4m / 50.9% | $81.6m / 47.9% | $157.9m / 50.8% | $160.6m / 48.5% |
| Operating loss | $(3.7)m | $(23.8)m | $(20.5)m | $(41.4)m |
| Net loss attributable to 3D Systems | $(4.6)m | $(13.7)m | $(22.4)m | $(26.9)m |
| Basic and diluted loss per share | $(0.04) | $(0.12) | $(0.20) | $(0.24) |
Revenue mix and drivers: Q2 products revenue was $54.3 million, materials $40.6 million, and services $63.2 million. Printer sales and the discontinuation of consumer products weighed on product revenue; on-demand parts manufacturing revenue fell 20.2% to $27.1 million. Materials revenue increased 11.5%, supported by demand and a 13.3% increase in integrated materials sales. Healthcare growth reflected higher materials and services sales.
Cash flow and liquidity: Six-month operating cash flow was $31.0 million, versus cash use of $6.4 million a year earlier. Investing activities used $9.4 million; financing activities used $1.8 million. Cash rose to $176.2 million from $155.6 million at year-end 2015. Working capital was $297.1 million. The company reported $69.1 million of cash held outside the U.S.
Debt and obligations: No borrowings were outstanding under the $150 million revolving credit facility, with reported availability of approximately $150 million, subject to financial covenants and future results. Capitalized lease obligations totaled $8.5 million. Printer-assembly supply commitments were $40.6 million; recorded earnout and deferred-payment liabilities were $9.5 million. A subsidiary put option was estimated at $8.9 million, payable no earlier than 2019 if exercised.
Material changes versus prior comparable periods
- Revenue declined in Q2 and the first half, mainly due to lower printer sales and on-demand manufacturing services; materials growth partly offset the declines.
- Gross margin improved to 50.9% in Q2 from 47.9%, largely due to improved product margins and the discontinuation of consumer products. Services margins weakened, reflecting higher printer-service costs.
- Operating expenses fell 20.2% in Q2, including lower intangible amortization, compensation, bad-debt expense, marketing, and R&D costs. The operating loss narrowed substantially.
- GAAP net losses persisted. The 2015 periods included tax benefits, whereas 2016 had tax provisions; the company attributed the difference principally to valuation allowances recorded in 2015.
- Backlog was $35.1 million at June 30, down from $38.8 million a year earlier; on-demand parts manufacturing orders were $9.2 million, versus $13.4 million.
Outlook, commentary, risks, contingencies, and unusual items
The filing provides no numerical revenue or earnings guidance. Management said existing cash and cash equivalents were expected to cover working-capital needs, capital expenditures, commitments, and other liquidity requirements for the foreseeable future, while noting that additional funding could be needed and might not be available on acceptable terms. Management cautioned that interim results are not necessarily indicative of full-year results.
Risks highlighted include competitive and technology pressures, printer and materials supply-chain dependence, ability to generate operating cash, international operations and currency exposure, litigation, intellectual-property protection, product quality, and retention of employees. No foreign-currency contracts were outstanding at quarter-end. The company reported no material change in its market-risk assessment, no material change in internal controls, and no material change to previously disclosed risk factors.
Legal matters include a securities class action whose motion to dismiss was denied on July 25, 2016, and related derivative suits that were stayed. The company disputed an approximately $11.3 million arbitration award in the Barranco matter; the award was recorded as a long-term liability, and the challenge remained pending. In a separate Barranco case, a jury found for the company in May 2016, including on its counterclaim. The company stated it believed the securities and derivative claims were without merit.
Non-GAAP adjusted net income was $13.2 million in Q2 and $18.4 million for the first half, compared with GAAP attributable net losses of $4.6 million and $22.4 million, respectively. The company’s reconciliation excludes items including amortization, acquisition and severance costs, and stock-based compensation; these non-GAAP figures should be considered alongside GAAP results. Subsequent events included the appointment of John N. McMullen as CFO effective July 1, 2016, and the CEO’s election to the board on July 26.
Most important facts for investors to verify
- Whether printer demand and on-demand manufacturing revenue stabilize, and whether backlog converts to recognized revenue.
- Whether cost reductions and improved product margins can be sustained without impairing growth, product development, or service quality.
- The source and durability of positive operating cash flow, given the period’s working-capital movements and continuing GAAP losses.
- Future credit-facility availability and covenant compliance, along with the potential cash effects of leases, supply commitments, earnouts, put rights, and legal matters.
- Developments and potential exposure in the securities litigation and the pending Barranco arbitration challenge.