3D Systems Corporation — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. 3D Systems sells 3D printers and print materials and provides printer services, custom-parts services, design tools, and related products. The company reports one business segment.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $57.5 million | $41.5 million | $160.6 million | $108.3 million |
| Gross profit / margin | $27.8 million / 48.3% | $18.8 million / 45.4% | $76.2 million / 47.4% | $49.1 million / 45.4% |
| Operating income | $8.8 million | $5.2 million | $24.2 million | $11.2 million |
| Net income | $7.2 million | $5.4 million | $27.4 million | $10.1 million |
| Diluted EPS | $0.14 | $0.11 | $0.54 | $0.22 |
| Operating cash flow | Not separately presented for the quarter | $18.8 million | $18.5 million |
Quarter revenue increased 38.6%; nine-month revenue increased 48.3%. Services led growth: Q3 services revenue rose to $24.3 million from $12.8 million, with custom-parts services contributing $15.6 million. For the first nine months, services revenue was $65.6 million, including $40.1 million from custom-parts services. Materials revenue also increased, supported by installed printers and higher integrated-materials sales. Q3 printer and other products revenue rose modestly to $14.8 million from $14.5 million.
Q3 operating expenses increased 38.8% to $19.0 million, mainly from higher commissions and acquired-business staffing, litigation and acquisition costs, acquired-intangible amortization, and research and development. Nine-month expenses rose 37.2% to $52.0 million, slower than revenue growth. Q3 operating margin was approximately 15.3%, versus 12.4% a year earlier.
Liquidity and capital. Cash and cash equivalents were $72.6 million at September 30, 2011, up from $37.3 million at December 31, 2010; working capital was $89.1 million, versus $42.5 million. Nine-month investing activities used $47.4 million, including $44.8 million for acquisitions. Financing provided $64.1 million, including $62.1 million net proceeds from a common-stock offering. Capitalized lease obligations totaled $7.7 million; the filing reports no off-balance-sheet arrangements. The company had $9.1 million of 2011 printer-assembly supply commitments.
Material changes and unusual items
- Q3 gross margin improved 2.9 percentage points, reflecting stronger materials and custom-parts margins and higher overhead absorption; lower-margin personal and professional printers and revenue mix partly offset the improvement.
- Nine-month net income included a $6.2 million non-cash tax benefit from reversing part of the U.S. deferred-tax valuation allowance. The company reported a $3.7 million income-tax benefit for the period and retained a $17.1 million valuation allowance at September 30.
- Q3 foreign-exchange impact was a $0.6 million loss, compared with a $0.7 million gain in Q3 2010. No foreign-currency contracts were outstanding at quarter-end.
- Acquisitions included Alibre, Botmill-related assets, and Formero during Q3. Formero included an approximately $1.9 million accrued earnout; the company also reported $5.2 million of recorded acquisition earnout liabilities overall. Kemo was acquired October 4 for approximately $4.0 million, net of cash acquired.
- A two-for-one stock split was effected as a 100% stock dividend in May 2011; presented share and per-share amounts reflect the split. Stockholders approved increasing authorized common shares from 60 million to 120 million in October.
Outlook, risks, and contingencies
Management expected Q4 2011 SG&A expense of $15.5–$16.5 million and R&D expense of $3.5–$4.0 million. The filing provides no clear full-year revenue or earnings guidance. Management described continued strategic focus on custom-parts growth, printer distribution and penetration, healthcare solutions, and consumer content and products; it also stated that expense control should not impair operations or customer service.
Management cautioned that production-printer orders can shift between periods and materially affect reported sales, and that printer purchasing decisions may have longer lead times. Backlog was $11.3 million at September 30, including $6.3 million of custom-parts orders; it included an order for multiple printers. Receivables were $42.6 million, days sales outstanding rose to 68 from 64 at year-end, and receivables over 90 days past due increased to 8.1% of gross receivables from 5.0%.
Liquidity was supported by operating cash flow and the stock offering, but management said additional funding might be needed beyond the next twelve months or for significant acquisitions. Material legal matters include DSM Desotech’s antitrust and patent claims, with claimed damages estimated by DSM Desotech at more than $40 million, and an MSK K.K. claim seeking more than $1.6 million. 3D Systems said it intended to contest both matters. In its EnvisionTec patent litigation, the company reported infringement judgments and said damages discovery was underway. Management reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Investor verification priorities
- Assess how much revenue and margin growth is organic versus attributable to acquisitions, particularly in custom-parts services.
- Review receivables aging, rising DSO, and the extent to which collections convert reported earnings into cash.
- Separate recurring operating performance from the $6.2 million non-cash tax benefit and evaluate the remaining valuation allowance.
- Track acquired-business earnouts, deferred purchase payments, purchase-price allocations, and acquisition integration costs.
- Monitor production-printer order timing, backlog conversion, service and materials margins, and the effect of product mix on profitability.
- Review the status and potential exposure of the DSM Desotech and MSK litigation, as well as the EnvisionTec damages proceedings.