3D Systems Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Dollar amounts are in millions unless otherwise noted. 3D Systems provides 3D printers, materials, software, and related services.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $151.6 | $166.9 | $482.8 | $466.2 |
| Gross profit / margin | $71.0 / 46.9% | $79.8 / 47.8% | $231.6 / 48.0% | $227.7 / 48.8% |
| Operating income (loss) | $(34.6) | $8.2 | $(76.0) | $22.1 |
| Net income (loss) attributable to 3D Systems | $(32.2) | $3.1 | $(59.1) | $10.1 |
| Diluted EPS | $(0.29) | $0.03 | $(0.53) | $0.09 |
- Q3 revenue fell 9.2% year over year. Printer products revenue decreased 27.4% to $52.9 million and materials revenue decreased 10.7% to $34.8 million; services revenue grew 16.0% to $63.8 million. Lower printer demand and unfavorable currency effects weighed on sales, while healthcare and software services supported growth.
- For the first nine months, revenue grew 3.6%, led by services, but organically generated revenue declined 12.0%. Management said nine-month revenue outside the U.S. would have grown 11.5% excluding currency effects.
- Q3 gross margin declined 0.9 percentage points. Product margin fell to 24.2% from 35.3%; materials and services margins improved. Nine-month gross margin decreased 0.8 points, with weaker product margins partly offset by improved materials and services margins.
- Operating expenses rose 47.6% in Q3 to $105.7 million and 49.7% for the nine-month period to $307.7 million. SG&A included an $11.3 million arbitration provision; higher acquisition-related compensation and amortization, staffing, and R&D also contributed.
- Company-reported non-GAAP net income was $0.8 million in Q3 and $9.1 million for the nine months, versus $19.7 million and $51.4 million, respectively, in 2014. These company-defined measures exclude items including stock compensation, acquired-intangible amortization, acquisition costs, and the arbitration provision.
Cash, liquidity, and obligations
- Cash and cash equivalents were $157.5 million at September 30, down $127.4 million from year-end 2014. Working capital was $339.3 million, down from $432.2 million.
- Nine-month operating cash flow was negative $10.6 million, compared with positive $27.9 million in 2014. Investing used $114.3 million, including $91.8 million for acquisitions, principally Cimatron and Easyway; financing provided $0.4 million.
- Inventory rose to $138.2 million from $96.6 million, including higher finished goods and raw materials. Inventory reserves were $12.0 million, compared with $6.7 million at year-end. Receivables were $134.5 million; balances more than 90 days past due increased to 23.6% of gross receivables from 16.7% at year-end.
- No borrowings were outstanding under the $150 million unsecured revolving credit facility. Availability was approximately $110 million under current covenant limitations. Capitalized lease obligations totaled $8.9 million. Management said existing cash and cash equivalents should meet liquidity needs for the next 12 months, while noting additional financing could be needed beyond that period or for significant acquisitions.
- Other commitments included $59.6 million of printer-assembly supply commitments, $9.6 million of acquisition earnout liabilities, and a recorded $8.9 million redeemable noncontrolling interest tied to a subsidiary put option that could be exercisable in 2019.
Material developments, outlook, and risks
- On September 28, 2015, an arbitrator awarded former employee Ronald Barranco approximately $11.3 million in a contract dispute. The company recorded the expense, disputes the award, and intends to challenge it; the award was modified in October with the same amount. A separate Barranco lawsuit remained pending, with trial scheduled for January 2016.
- Three putative securities class actions were consolidated, and related derivative lawsuits were filed. The company considers the claims without merit and intends to defend itself. The filing does not quantify potential exposure for these matters.
- On October 28, 2015, CEO and director Avi Reichental stepped down. Andrew Johnson became interim CEO, and the board formed an executive management committee while searching for a permanent replacement.
- Backlog was $40.5 million at September 30, versus $46.0 million a year earlier. Management noted printer delivery lead times are generally short and backlog depends on customer delivery timing.
- No specific revenue or earnings guidance was provided. Management highlighted weaker printer demand, product mix and margins, foreign-exchange effects, Asia Pacific weakness, and the timing of higher-priced printer orders. The company reported effective disclosure controls and no material changes in internal controls; it reported no material changes to its previously disclosed risk factors.
Key facts for investors to verify
- Whether printer demand, organic revenue trends, and product gross margins recover, and whether service growth can continue.
- Inventory growth and reserves, aging receivables, and the resulting effect on operating cash flow and liquidity.
- The outcome and potential cash cost of the Barranco award and other litigation, plus the status of the CEO search and leadership transition.
- Actual credit-facility availability and covenant headroom if operating results or cash flows deteriorate.
- How much reported performance depends on acquisitions and excluded non-GAAP adjustments compared with GAAP results.