3D Systems Corporation — Q2 2011 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2011. 3D Systems supplies 3D printers, print materials, custom-parts and printer services, and related design and content tools. Results include ongoing acquisitions and organic expansion; all share and per-share data reflect the May 2011 two-for-one stock split.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $55.1 million | $35.1 million | $103.0 million | $66.8 million |
| Gross profit / margin | $25.2 million / 45.7% | $16.0 million / 45.4% | $48.4 million / 47.0% | $30.3 million / 45.3% |
| Operating income | $8.0 million | $3.4 million | $15.4 million | $6.1 million |
| Net income | $13.4 million | $2.7 million | $20.2 million | $4.8 million |
| Diluted EPS | $0.26 | $0.06 | $0.40 | $0.10 |
| Operating cash flow | Not separately stated | Not separately stated | $6.2 million | $7.4 million |
- Q2 revenue rose 56.9%; management reported 25.0% organic growth. Services led the increase, rising to $22.5 million from $10.5 million; custom-parts services contributed $14.2 million. Printers and other products increased 51.7% to $16.2 million, while materials rose to $16.4 million.
- For the first half, revenue grew 54.3%, with reported organic growth of 24.3%. Services revenue more than doubled to $41.3 million; printers and other products reached $29.7 million and materials $32.0 million.
- Profit growth reflected higher sales and gross profit, expense discipline, and a substantial income-tax benefit. Q2 operating expenses rose 37.2% to $17.2 million; SG&A increased with commissions, acquired-business costs, restructuring, legal costs and acquired-intangible amortization.
- The Q2 tax benefit was $5.5 million, including a $6.2 million non-cash benefit from reversing $17.0 million of the U.S. deferred-tax-asset valuation allowance. The company retained a $23.8 million valuation allowance. Without the reversal, management said Q2 tax expense would have been $2.7 million.
Liquidity, capital and balance sheet
- At June 30, cash and cash equivalents were $79.0 million, versus $37.3 million at year-end; working capital was $91.1 million, versus $42.5 million. Current assets were $153.9 million and current liabilities $62.8 million.
- First-half cash flows: $6.2 million provided by operations, $29.2 million used in investing, and $64.0 million provided by financing. Financing included $62.1 million net proceeds from a common-stock offering. Cash used for acquisitions was $28.0 million.
- Total liabilities were $81.0 million and equity $223.6 million. Capitalized lease obligations totaled $7.8 million; the filing reports no off-balance-sheet arrangements. No other conventional borrowings are identified in the supplied financial statements.
- Accounts receivable rose to $42.2 million. Days sales outstanding increased to 70 from 64 at year-end, and receivables more than 90 days past due increased to 8.8% of gross receivables from 5.0%.
Material changes, outlook and risks
- Q2 gross margin edged up to 45.7% from 45.4%; first-half margin improved to 47.0% from 45.3%. Management cited better overhead absorption and materials mix, partly offset in Q2 by a greater share of lower-margin personal/professional printers and custom-parts services. V-Flash printer sales reduced Q2 margin by about 0.5 percentage points, versus 2.3 points a year earlier.
- Management expected remaining-2011 SG&A of $29–32 million and R&D expense of $6–7 million. No full-year revenue or earnings guidance is provided in the supplied text. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Strategic activity included Q2 acquisitions of Print3D, Sycode, The3dStudio.com and Freedom of Creation; Alibre was acquired for $3.65 million cash on July 19, 2011. Acquisition-related deferred purchase payments were $10.9 million, with $3.3 million of earnout liabilities recorded. Print3D sellers could receive up to approximately $8.9 million under an earnout, for which no liability was accrued at June 30.
- Backlog was $7.4 million at June 30, including $4.2 million of custom-parts orders. Management noted that relatively few high-priced production-printer orders and shipment timing can materially affect printer revenue.
- Legal matters include DSM Desotech claims alleging anticompetitive conduct and patent infringement, with claimed damages estimated by the plaintiff at more than $40 million; the case remained in pre-trial. EnvisionTec appealed judgments finding patent infringement. MSK K.K. sought more than $1.6 million in damages; 3D Systems said it would contest the claim. The filing does not quantify a probable loss for these matters.
- Other relevant exposures include foreign-currency movements, acquisition integration and earnouts, rising aged receivables, and $13.3 million of 2011 printer-assembly supply commitments. Management stated that additional funding might be needed beyond the next twelve months or for significant acquisitions.
Most important facts for investors to verify
- Whether growth in services and acquisitions can be sustained organically, and the related impact on margins and cash conversion.
- The quality and collection of receivables, given rising DSO and the higher share of credit sales.
- The assumptions supporting the $6.2 million tax benefit, future realization of deferred tax assets, and remaining valuation allowance.
- Cash requirements and final purchase-price and earnout obligations for acquisitions, including Alibre and the Print3D earnout.
- Developments, potential exposure and timing in the DSM Desotech, EnvisionTec and MSK K.K. proceedings.
- A revenue-type table in the filing displays first-half 2011 total revenue as $103.325 million, while the consolidated statements and other reported totals show $103.025 million; verify the correct figure against the filed financial statements.