3D Systems Corporation — Q2 2014 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2014. 3D Systems provides 3D printers, materials, software, on-demand parts and related services. It operates as one reportable business segment.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $151.5 million | $120.8 million | $299.3 million | $222.9 million |
| Gross profit / margin | $72.4 million / 47.8% | $62.6 million / 51.8% | $147.9 million / 49.4% | $116.1 million / 52.1% |
| Operating income | $4.4 million | $16.8 million | $13.9 million | $34.3 million |
| Net income attributable to 3D Systems | $2.1 million | $9.3 million | $7.0 million | $15.2 million |
| GAAP diluted EPS | $0.02 | $0.10 | $0.07 | $0.16 |
- Q2 revenue growth was 25.4%; first-half growth was 34.3%. Services led Q2 growth, up 38.1%, followed by materials, up 29.8%, and printers and other products, up 14.4%.
- Q2 operating expenses rose 48.6% to $68.0 million, including SG&A of $50.3 million and R&D of $17.7 million. Management cited increased staffing, sales and marketing, acquisitions, amortization, and product development.
- For the six months, operating cash flow was $19.3 million, investing cash flow was negative $63.2 million, and financing cash flow was positive $307.5 million. Cash increased to $570.3 million from $306.3 million at year-end, primarily reflecting a May stock offering that generated $299.7 million net proceeds.
- At June 30, current assets were $820.1 million and current liabilities were $127.4 million; working capital was $692.7 million. Total liabilities were $190.5 million. Debt included $12.5 million principal on convertible notes and $7.4 million of capitalized leases.
- Q2 non-GAAP adjusted net income was $16.6 million and adjusted EPS was $0.16; first-half figures were $31.7 million and $0.30. These company-defined measures exclude specified expenses and are not GAAP measures.
Material changes and management commentary
- Revenue rose across product and service categories and geographic regions. Healthcare revenue increased 45.8% in Q2; consumer revenue declined 13.6%, which management attributed mainly to delayed orders as customers awaited announced products. Organic growth was 10.0% for Q2 and 18.3% for the first half, below the respective prior-year rates of 30.1% and 26.2%.
- Gross margin fell 4.0 percentage points in Q2. Management attributed the decline to sales mix, manufacturing expansion costs, new-product availability and start-up costs, and legacy-product cost absorption; printer and other products margin also reflected an inventory write-down.
- Medical Modeling was acquired in April for $69.0 million, including $51.5 million cash and $17.5 million in stock. Robtec was under agreement, with closing expected in the second half of 2014. After quarter-end, 3D Systems agreed to acquire Simbionix for $120 million cash, subject to customary conditions.
- Backlog was $31.9 million at June 30, including $23.1 million of printers. Management said demand for direct-metal printers exceeded manufacturing capacity; delayed commercial shipment of new consumer products also contributed to backlog.
- The company leased an additional 200,000-square-foot manufacturing facility in Rock Hill, South Carolina. No specific revenue or earnings guidance was provided in the filing.
Risks, contingencies and unusual items
- Accounts receivable days outstanding increased to 83 from 79 at December 31, 2013; receivables more than 90 days past due rose to 13.4% of gross receivables from 9.1%. Inventory increased to $90.2 million, and inventory reserves rose to $7.1 million from $4.3 million.
- Printer-assembly supply commitments totaled $65.6 million, up from $41.1 million at year-end. Recorded acquisition earnout liabilities were $10.1 million. The company reported no off-balance-sheet arrangements.
- The company reported a $1.3 million foreign-exchange loss for the first half and had no foreign-currency contracts outstanding at June 30. Management stated that additional financing might be needed beyond the next 12 months or for significant acquisitions.
- The Formlabs patent-infringement litigation remained ongoing; the company stated it intended to pursue damages. A separate DSM Desotech matter concluded in the company’s favor in April 2014. Other legal matters were not expected by management to materially affect results or financial position.
- The 5.50% senior convertible notes mature in December 2016; conversion conditions had been met, but no notes converted in the first half. The company said it was in compliance with note covenants at June 30.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating earnings as elevated SG&A and R&D spending and lower product margins persist.
- Whether direct-metal printer capacity and delayed consumer-product shipments improve, and how backlog converts into recognized revenue.
- Trends in overdue receivables, inventory levels and reserves, and operating cash conversion.
- Completion, financing and integration of the Robtec and Simbionix transactions, and the returns from acquisition spending.
- Share dilution from the 2014 equity offering and stock compensation, alongside potential conversion of the remaining notes.