3D Systems Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. The filing attributes significant demand pressure to COVID-19.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $112.1 | $157.3 | $246.8 | $309.3 |
| Gross profit | $35.2 | $73.3 | $92.3 | $139.0 |
| Gross margin | 31.4% | 46.6% | 37.4% | 44.9% |
| Operating expenses | $69.0 | $92.5 | $144.4 | $179.5 |
| Operating loss | $(33.9) | $(19.2) | $(52.1) | $(40.5) |
| Net loss attributable to 3D Systems | $(38.0) | $(23.9) | $(56.9) | $(48.3) |
| Loss per diluted share | $(0.33) | $(0.21) | $(0.49) | $(0.43) |
- Q2 product revenue was $61.5 million, down 34.4%; services revenue was $50.6 million, down 20.4%. For the first six months, products revenue fell 24.6% and services revenue fell 13.6%.
- Management reported Q2 Healthcare revenue of $50.0 million, down 11.4%, and Industrial revenue of $62.1 million, down 38.5%. It cited weaker dental demand and broad declines across Industrial products, services, and geographies.
- Q2 gross margin included a $10.9 million charge tied primarily to inventory, accessories, and commitments for product lines designated end-of-life. Management said Q2 gross margin would have been 41.1% excluding the charge. Lower production also caused under-absorption of supply-chain overhead.
- Operating expenses declined year over year, reflecting furloughs, executive and Board pay reductions, lower hiring and travel, and earlier cost-structuring savings. Despite these reductions, the operating loss widened as revenue and gross profit fell.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $63.9 million, versus $133.7 million at December 31, 2019. Total assets were $751.2 million and total equity was $463.4 million.
- For the six months, operating activities used $21.0 million of cash, compared with $3.6 million provided in the prior-year period. Investing activities used $19.6 million; financing activities used $27.3 million. Cash, cash equivalents, and restricted cash decreased $69.7 million.
- Management cited debt repayments of $26.3 million, operating cash use, $12.5 million of payments related to acquiring the remaining Brazilian noncontrolling interest, and $7.2 million of capital spending among the cash uses. Inventory increased $14.0 million from year-end; the cash flow statement shows a $24.5 million inventory-related cash outflow.
- Total debt was approximately $21.5 million, including $1.5 million current and $20.1 million long-term, net of financing costs. The term loan matures in February 2024. The company reported covenant compliance at June 30 and a 1.9% floating interest rate before the effect of its swap.
- The $100 million revolving facility had $10.0 million of letters of credit and $24.1 million of available borrowings at June 30. Management said cash, operating cash flow, credit facilities, and potential equity issuance were expected to meet foreseeable requirements; actual future cash generation remains uncertain.
Material changes, outlook, and risks
- COVID-19 reduced customer activity from late Q1 and through Q2, with shutdowns or reduced operations affecting demand. Management said the longer-term effects on results, liquidity, and cash flows could not be predicted.
- On August 5, 2020, after quarter-end, the company announced a strategic reorganization into Healthcare and Industrial verticals and a restructuring that includes nearly 20% workforce reduction. It targets approximately $100 million of annualized cost reductions by the end of 2021 and expects $25–$30 million of cash charges, primarily in 2020; additional 2021 charges may occur. Management said the actions are intended to support profitability at current revenue levels, but achievement is not assured.
- Also on August 5, the company established an at-the-market equity program to sell up to $150 million of common stock, depending on market conditions and liquidity needs. Proceeds may be used for general corporate purposes, including debt repayment; issuance could dilute shareholders.
- Management reported no impairment trigger at June 30 and believed goodwill and long-lived assets remained recoverable, while noting further deterioration could lead to future impairment. EMEA and APAC goodwill totaled approximately $221.5 million.
- Export-control and sanctions matters remain under government review. The Air Force lifted its 2019 contracting suspension after the company entered a two-year administrative agreement; independent monitors will assess compliance. The company expects continued legal and compliance costs, and the ultimate resolution is uncertain.
- In the Barranco litigation, the Ninth Circuit vacated the monetary judgment previously awarded to the company and remanded issues for further proceedings. The filing does not provide a clear value for any resulting exposure.
- The company reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether sales and customer activity recover, particularly in dental, printer and materials sales, and on-demand manufacturing.
- Verify the pace, costs, and realized savings of the restructuring, including whether the targeted $100 million annualized reduction is achieved.
- Monitor ATM share sales, dilution, cash proceeds, revolving-credit availability, debt repayment, and covenant compliance.
- Assess inventory levels, reserves, and the impact of discontinued product lines on future margins and cash flows.
- Follow government export-control and sanctions reviews, the Air Force administrative agreement, related costs or penalties, and the Barranco remand.
- Reassess goodwill and long-lived-asset impairment risk if operating performance or market conditions worsen.