3D Systems Corporation — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 31, 2019. 3D Systems provides 3D printers, materials, software, and manufacturing and healthcare services. It reports as one operating segment, with geographic results also presented.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $152.0 million | $165.9 million |
| Gross profit / margin | $65.7 million / 43.2% | $77.9 million / 46.9% |
| Operating expenses | $87.0 million | $95.3 million |
| Operating loss | $21.3 million | $17.5 million |
| Net loss attributable to 3D Systems | $24.4 million | $21.0 million |
| Basic and diluted loss per share | $0.22 | $0.19 |
| Cash used in operations | $15.2 million | $1.5 million |
| Cash used in investing | $8.9 million | $11.0 million |
Revenue declined 8.4%. Product revenue fell 18.7% to $50.9 million, chiefly reflecting lower printer sales; materials declined 3.2% to $41.4 million, and services declined 1.3% to $59.6 million. Printer revenue was $28.0 million versus $39.3 million. Healthcare revenue decreased 5.2% to $50.0 million; software revenue decreased 7.6% to $20.8 million.
Gross margin fell 3.7 percentage points. Products margin dropped to 15.2% from 29.8%, reflecting lower production and unfavorable sales mix. Materials margin was 69.6%, down from 71.6%; services margin improved to 48.8% from 47.2%. SG&A and R&D declined, attributed to cost optimization and completion of product-development projects, but savings did not offset lower gross profit.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $157.3 million at March 31, up from $110.0 million at year-end. Cash, cash equivalents, and restricted cash totaled $158.2 million.
- Operating working capital was $295.9 million, up $52.8 million from year-end; inventory was $137.9 million. Days sales outstanding increased to 76 from 69, which management attributed mainly to annual maintenance billings.
- Carrying value of current and long-term debt totaled approximately $99.4 million. The company reported $100.0 million outstanding under a new five-year senior secured term facility at 4.5%; $5.0 million was due within 12 months. It also entered a $100.0 million revolving facility; revolver borrowings are not clearly stated in the filing text.
- The new facilities replaced a $150.0 million unsecured revolver and were used to refinance $25.0 million of prior borrowings. The company was in covenant compliance at quarter-end. Covenants include leverage and interest-coverage ratios and restrict certain activities.
- Financing cash flow was $71.2 million, largely from the term loan, offset by $25.0 million of debt repayment. Capital expenditures were $8.8 million.
Material changes, outlook, and risks
- Management attributed weaker revenue chiefly to the timing of large enterprise printer orders, lower printer volumes in the Americas and Asia Pacific, and unfavorable foreign exchange. EMEA revenue rose 3.9%, while Americas and Asia Pacific revenue declined 12.8% and 22.1%, respectively.
- Management said available cash, operating cash flow, and credit facilities were expected to be sufficient for foreseeable requirements. No specific full-year revenue or earnings guidance is provided in the filing text.
- Operating cash outflow worsened year over year, with working-capital requirements using $10.6 million, including lower accounts payable and accrued liabilities and inventory investment for new-product commercialization.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recording $38.4 million of operating lease assets and liabilities; management reported an immaterial effect on quarterly operations and cash flows.
- Export-control matter: the company is cooperating with U.S. agencies after identifying potentially unauthorized exports of technical data and is conducting an internal review. It expects significant legal and other related costs; the ultimate outcome cannot be predicted.
- Other contingencies include stayed shareholder derivative suits, an appeal concerning the Barranco II judgment, and potential subsidiary put-option payments estimated at approximately $8.9 million, subject to future performance.
- Management cited risks including competition, product and technology execution, foreign exchange, cash generation, litigation and investigations, and compliance with credit-facility covenants. It reported disclosure controls effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether printer demand and large-customer order timing recover, and whether the decline in product gross margin is temporary.
- Whether operating cash use and working-capital investment improve, including inventory levels and collection trends.
- Debt outstanding, revolver availability, covenant headroom, and the effects of secured-debt restrictions.
- Potential costs and outcomes of export-control and government-contract compliance reviews, litigation, and subsidiary put rights.
- Foreign-exchange exposure and the pace of revenue and margin performance across geographic regions.