3D Systems Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated financial statements; amounts below are in U.S. dollars, generally millions unless stated otherwise. 3D Systems provides 3D printers, materials, software, and manufacturing, healthcare, and other services.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $166.9 | $135.7 | $466.2 | $358.6 |
| Gross profit / margin | $79.8 / 47.8% | $71.4 / 52.6% | $227.7 / 48.8% | $187.5 / 52.3% |
| Operating income | $8.2 | $28.6 | $22.1 | $62.9 |
| Net income attributable to 3D Systems | $3.1 | $17.7 | $10.1 | $32.9 |
| Basic and diluted EPS | $0.03 | $0.17 | $0.09 | $0.34 |
- Q3 revenue rose 23%; nine-month revenue rose 30%. Q3 products revenue increased 21.9%, materials 17.5%, and services 28.9%. Healthcare revenue increased 121.4% in Q3 to $37.4 million; consumer revenue declined 12.5% to $11.8 million. Organic growth was 12.2% for Q3 and 16.0% for the nine months, below the respective prior-year rates of 29.7% and 27.5%.
- Margins and earnings weakened despite higher sales. Management attributed lower gross margin to sales mix, new-product availability and start-up costs; products gross margin fell to 35.3% from 45.0% in Q3. Operating expenses rose 67% in Q3, including higher staffing, sales and marketing, R&D, amortization, and acquisition-related costs.
- Q3 interest and other expense included a $1.8 million loss on conversion of convertible notes and a $1.7 million foreign-exchange loss. The nine-month effective tax rate was 34.4% (26.2% for Q3).
- Nine-month operating cash flow was $27.9 million, versus $28.5 million a year earlier. Investing used $261.9 million, including $244.3 million for acquisitions; financing provided $307.9 million, largely from a May stock offering generating $299.7 million net proceeds. Cash increased to $377.3 million from $306.3 million at year-end 2013.
- At September 30, working capital was $537.2 million. Current assets were $667.0 million and current liabilities $129.8 million. Total liabilities were $199.8 million; the $152 million 5.5% convertible notes were fully converted during Q3. Capitalized lease obligations were $9.7 million; LayerWise also brought a small current term-loan balance. Cash included $45.9 million held overseas.
Material changes and developments
- Five Q3 acquisitions expanded services, healthcare simulation, and metal-printing capabilities, including Simbionix and LayerWise. Preliminary purchase accounting recorded $133.0 million of goodwill from Q3 acquisitions. Robtec remained pending; the company expected to close before year-end 2014.
- Backlog reached $46.0 million at September 30, compared with $14.4 million a year earlier. Management cited demand exceeding manufacturing capacity for direct-metal printers and delayed shipments of newer consumer products, among other factors. Quickparts accounted for $11.5 million of backlog.
- Accounts receivable rose to $155.5 million and inventory to $104.9 million from $132.1 million and $75.1 million, respectively, at year-end. Days sales outstanding increased to 86 from 79; receivables more than 90 days past due rose to 12.0% of gross receivables from 9.1%.
- On October 10, the company entered a five-year, unsecured $150 million revolving credit facility, with an option to seek an additional $75 million subject to conditions. It was a subsequent event, not a September 30 borrowing. In November, the company announced a new CFO and COO.
Outlook, risks, and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management described continued growth and expanding demand, while noting manufacturing capacity constraints, delayed consumer-product shipments, and the effect of printer order and shipment timing on quarterly results.
- Key operating concerns include reduced organic growth rates, lower gross margins, rapidly increasing operating expenses, consumer-revenue weakness, and rising receivables and inventory. Foreign-currency movements reduced nine-month other comprehensive income by $9.1 million; the company had no currency contracts outstanding at quarter-end.
- Supply commitments for printer assemblies were $55.5 million, up from $41.1 million at year-end. Recorded acquisition earnout liabilities were $8.9 million. The company reported no off-balance-sheet arrangements.
- The company was pursuing patent-infringement claims against Formlabs; it stated that other routine legal matters were not expected to materially affect results or financial position. The filing also describes intellectual-property indemnification obligations whose maximum potential payments could not be estimated.
- Management said disclosure controls were effective and reported no material change in internal controls over financial reporting. The company stated that risk factors were not materially different from those in its 2013 Form 10-K.
Important facts for investors to verify
- Whether revenue growth translates into improved operating income and margins, particularly as acquisition and staffing costs continue.
- How much of reported growth is organic versus acquired, and whether the slower organic growth rate persists.
- Whether direct-metal capacity and consumer-product shipment delays are resolved, and how backlog converts into recognized revenue.
- Collections and inventory quality, given higher DSO, increased past-due receivables, and inventory growth.
- Acquisition integration, preliminary purchase-price allocations, goodwill, earnouts, the pending Robtec transaction, and the terms and covenant requirements of the new credit facility.