Business context and reporting period
3D Systems Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company sells 3D printers, materials, software and services, with applications including healthcare, aerospace and automotive. It operates as one segment and reports geographic results for the Americas, EMEA and Asia Pacific.
Financial results
Amounts below are in millions of dollars, except per-share figures. Comparisons are with the corresponding 2017 periods.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $164.5 | $152.9 | $506.9 | $468.8 |
| Gross profit | $77.8 | $58.5 | $241.8 | $219.4 |
| Gross margin | 47.3% | 38.3% | 47.7% | 46.8% |
| Operating loss | $(11.0) | $(32.3) | $(36.2) | $(48.3) |
| Net loss attributable to 3D Systems | $(11.6) | $(37.7) | $(41.4) | $(56.1) |
| Basic and diluted loss per share | $(0.10) | $(0.34) | $(0.37) | $(0.50) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(2.9) | $17.7 |
Q3 revenue rose 7.6%; the company cited higher sales volume across regions, including demand from healthcare customers and recently launched printers. Healthcare revenue increased 13.9% to $53.1 million. Nine-month revenue increased 8.1%. Product revenue growth was partly offset by unfavorable product and materials mix in the Americas and EMEA.
Q3 gross margin improved substantially, in part because the prior-year quarter included a $12.9 million inventory obsolescence charge. For the first nine months, operating cash flow was negative as working capital used $28.7 million, including cash tied up in inventory and payment of previously accrued litigation liabilities. Capital expenditures were $28.3 million over the nine months.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $92.1 million at September 30, 2018, down from $136.3 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $93.0 million at quarter-end.
- Current assets were $374.4 million and current liabilities $163.7 million. Inventory increased to $128.2 million from $103.9 million, as the company prepared for backlog and anticipated orders.
- No borrowings were outstanding under the $150 million unsecured revolving credit facility; the company reported covenant compliance. The facility was scheduled to expire in October 2019. Capitalized lease obligations totaled approximately $7.2 million.
- Management said existing cash was expected to cover working capital, capital expenditures, commitments and other liquidity needs for the foreseeable future, while noting that additional financing could be needed in the future.
Changes, outlook, risks and unusual items
- Operating loss narrowed year over year in both reported periods. The company attributed improvement mainly to higher sales and the absence of the prior-year inventory charge; Q3 operating expenses also declined.
- No specific revenue, profit or cash-flow guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
- The company disclosed an ongoing U.S. government review of potential export-control, trade-sanctions and government-contracting compliance violations. It submitted voluntary disclosures and expects significant legal and other response costs; possible penalties, export restrictions, or suspension or debarment from government contracts cannot be estimated.
- The Barranco matters remained partly unresolved: the company paid $9.1 million on an arbitration judgment, with a subsequent agreed setoff and a $101,000 balance payment reported; appeals and post-trial matters remained pending. A separate $50 million securities class-action settlement was funded entirely by insurers and concluded after the appeal period expired.
- Derivative lawsuits were stayed. Put rights relating to a subsidiary could require an estimated payment of approximately $8.9 million, depending on future performance and contractual conditions.
- The company adopted ASC 606 revenue guidance in 2018; the reported cumulative opening-equity adjustment was $576,000 and the filing described the effect as immaterial. It expected adoption of the new lease standard in 2019 to significantly increase balance-sheet assets and liabilities, primarily for real estate leases, but did not anticipate material effects on operating results or liquidity.
- Other risks identified include foreign-exchange exposure, customer credit and collection risk, competition, product quality, litigation and investigations, and the ability to generate operating cash. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and new-printer demand translate into sustained operating improvement, particularly given continued net losses.
- Whether inventory growth converts to sales and cash, and whether working-capital use continues.
- Cash availability and funding needs, including the credit facility’s October 2019 maturity and any lease-standard balance-sheet effects.
- Developments, costs and potential consequences of the export-control and government-compliance investigations.
- Outcomes and remaining exposure in Barranco-related proceedings and the subsidiary put rights.