3D Systems Corporation — Q1 2015 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2015, compared with the same period in 2014. 3D Systems sells 3D printers, materials, software and related services. The company completed its acquisition of Cimatron on February 9, 2015.
Financial performance and liquidity
- Revenue: $160.7 million, up 8.8% from $147.8 million. Products revenue was $62.7 million, materials $37.1 million and services $60.9 million. Organic revenue declined 7.4%, as reported by management.
- Profitability: Gross profit rose 4.7% to $79.0 million, but gross margin fell to 49.1% from 51.1%. Operating expenses increased 46.3% to $96.5 million, producing an operating loss of $17.5 million versus operating income of $9.5 million. Net loss attributable to 3D Systems was $13.2 million, or $0.12 per share, compared with net income of $4.9 million, or $0.05 per share.
- Cash flow: Operating activities used $0.9 million, compared with $0.3 million provided a year earlier. Investing activities used $82.5 million, including $78.0 million net cash paid for Cimatron. Financing activities provided $0.6 million. Cash declined to $199.9 million from $284.9 million at year-end.
- Liquidity and debt: Working capital was $348.2 million, down from $432.2 million at December 31, 2014. The $150 million revolving credit facility had no borrowings outstanding. Capitalized lease obligations totaled $9.1 million; other term loans were approximately $0.1 million.
- Other measures: Total assets were $1.51 billion and total stockholders’ equity was $1.27 billion at March 31. Foreign currency translation contributed a $21.0 million comprehensive loss in the quarter. The company reported non-GAAP net income of $5.2 million and non-GAAP EPS of $0.05; these measures exclude specified items and are not GAAP results.
Material changes versus Q1 2014
- Services revenue increased 30.8%, mainly reflecting healthcare and software services growth and acquired businesses. Products revenue rose 3.2%; materials revenue declined 8.3%.
- Healthcare revenue increased 38.4% to $30.0 million, and consumer revenue increased 64.5% to $15.9 million.
- Management attributed the operating deterioration primarily to higher compensation, acquisition-related costs and amortization, expanded research and development, and lower gross margin. SG&A rose to $74.3 million from $48.7 million; R&D rose to $22.2 million from $17.2 million.
- Foreign currency translation reduced revenue by $11.7 million, according to management’s revenue bridge. The company also recorded a $2.2 million foreign currency transaction loss in interest and other expense.
- Revenue outside the Americas declined 6.6% as reported, with Asia Pacific revenue down 20.0%. Americas revenue increased 26.8%.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management notes that quarterly results may not indicate full-year results.
- Management cited printer order and shipment timing, revenue-recognition timing, product mix and foreign exchange as factors that can cause period-to-period volatility. Backlog was $37.8 million at March 31, down from $46.5 million at December 31, 2014, but above $28.8 million a year earlier.
- Printer-assembly supply commitments for Q2 2015 totaled $77.6 million. Inventory increased to $114.6 million from $96.6 million at year-end.
- The Cimatron purchase-price allocation was preliminary. On April 2, 2015, after quarter-end, the company acquired 65% of China-based Wuxi Easyway, with an option to acquire the remaining interest in the future.
- Potential put rights over a subsidiary were recorded as $8.9 million of redeemable noncontrolling interests; exercise could require funding in 2019, and the ultimate amount depends on future results. Acquisition earnout liabilities totaled $9.2 million.
- The company said existing legal matters were not expected to have a material effect. It reported no material change in risk factors from its 2014 Form 10-K and no material change in market-risk assessment.
Important facts for investors to verify
- Whether organic growth, excluding recently acquired businesses, stabilizes after the reported 7.4% decline.
- Whether revenue growth translates into improved operating profitability given the sharp increase in operating expenses and lower product margins.
- Whether inventory, receivables and backlog convert into sales and cash; monitor the $77.6 million supply commitment and backlog trend.
- How foreign-exchange movements affect reported revenue, earnings and accumulated comprehensive loss.
- The final Cimatron purchase-price allocation, the financial contribution of acquisitions, and the potential cost of put rights and earnouts.
- Cash generation and liquidity after acquisition spending; the company noted it might need additional funding for activities beyond the next twelve months or for significant acquisitions.