3D Systems Corporation (NYSE: DDD) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
3D Systems provides additive manufacturing hardware, software, materials and services through Healthcare and Industrials businesses. The company said COVID-19 reduced customer activity and demand, particularly from late Q1 into Q2; activity improved in Q3 but remained below the prior year. Q3 revenue rose 20.6% from Q2.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $135.1 | $155.3 | $381.9 | $464.5 |
| Gross profit | $58.6 | $67.3 | $150.9 | $206.3 |
| Gross margin | 43.4% | 43.3% | 39.5% | 44.4% |
| Operating loss | $(67.6) | $(11.9) | $(119.7) | $(52.4) |
| Net loss attributable to 3D Systems | $(72.9) | $(16.8) | $(129.8) | $(65.2) |
| Loss per share, basic and diluted | $(0.61) | $(0.15) | $(1.12) | $(0.57) |
- Revenue mix and trends: Q3 products revenue was $77.3 million, down 18.2%; services revenue was $57.9 million, down 4.7%. Healthcare revenue increased 6.1% year over year to $59.8 million, while Industrial revenue fell 23.8% to $75.3 million. Nine-month revenue declined 17.8%.
- Margins and expenses: Q3 gross margin was broadly stable year over year. Nine-month margin fell 4.9 percentage points, reflecting lower volume and a $10.9 million end-of-life inventory charge; excluding that charge, management reported a 42.4% margin. Q3 operating expenses included a $48.3 million non-cash goodwill impairment charge.
- Cash flow: The company used $32.6 million in operating cash in the first nine months, versus $10.1 million generated a year earlier. Investing activities used $22.5 million, including $11.0 million in capital expenditures and $12.5 million to acquire noncontrolling interests. Financing activities used $3.8 million. Cash, cash equivalents and restricted cash ended the period at $76.3 million.
- Balance sheet and liquidity: September 30 cash and cash equivalents were $75.3 million, down from $133.7 million at year-end 2019. Total debt was approximately $21.6 million; the company also reported $30.6 million of available revolving-credit capacity and $124.5 million remaining under its $150 million ATM program. Total assets were $707.3 million and stockholders’ equity was $428.5 million. The company was in compliance with credit-facility covenants.
Material changes versus the prior comparable period
- Q3 revenue fell 13.0% year over year, mainly from lower product volumes; nine-month revenue fell 17.8%. Management attributed weaker demand primarily to the pandemic.
- Q3 net loss widened to $72.9 million from $16.8 million. For the nine-month period, net loss widened to $129.8 million from $65.0 million.
- The company recorded a $48.3 million goodwill impairment for its EMEA reporting unit after a stock-price decline and impairment review. Americas and APAC goodwill and long-lived assets were not impaired.
- Inventory rose to $126.9 million from $111.1 million at year-end; management cited inventory and prepaid expenses as significant uses of operating cash. The inventory reserve increased to $18.2 million from $12.8 million.
- Cash declined by $58.4 million from year-end, reflecting operating cash use, debt repayments, noncontrolling-interest purchases and capital expenditures, partly offset by $25.0 million of net ATM proceeds.
Outlook, management commentary, risks and unusual items
- Management expects restructuring and other cost actions to reduce annualized costs by approximately $100 million by the end of 2021, with the aim of enabling profitability at current revenue levels. The plan includes a workforce reduction of nearly 20%, facility actions and potential divestitures. Management estimated $25–$30 million of cash charges; the filing’s detailed restructuring table estimated total costs of $32.4 million, including $11.9 million incurred through Q3.
- Management said it did not anticipate further ATM share issuance in Q4 2020 based on projected cash flows, cost savings, available credit and potential divestitures. This is an expectation, not a guarantee; the remaining ATM capacity could dilute shareholders if used.
- On November 2, 2020, after quarter-end, the company agreed to sell its Cimatron and GibbsCAM businesses for approximately $65 million, subject to customary closing conditions; it expected closing in Q4 2020.
- COVID-19’s longer-term effects on demand, operations and cash flows remain uncertain. Other cited risks include execution of restructuring, supply-chain disruption, additional impairment, cash generation and compliance with borrowing terms.
- The company continues to cooperate with U.S. authorities regarding potential export-control and sanctions violations, including a Department of Justice investigation following federal grand jury subpoenas received in August 2020. It expects further legal and compliance costs. The U.S. Air Force lifted its contracting suspension in 2019, subject to a two-year administrative agreement and independent monitoring.
- The Barranco litigation was resolved by a stipulation dismissing all claims with prejudice on October 22, 2020. Management said other incidental legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue and customer activity recover, especially in Industrials, printers and on-demand manufacturing.
- Whether planned cost reductions are achieved on schedule and translate into sustainable profitability, after restructuring cash charges.
- Operating cash flow, inventory levels and cash needs, including whether the company draws on revolving credit or issues additional ATM shares.
- Assumptions supporting the EMEA goodwill valuation and the possibility of further impairment charges.
- Developments, potential penalties and ongoing costs from export-control, sanctions and government-contracting reviews.
- Completion and final proceeds of the proposed Cimatron and GibbsCAM sale.