3D Systems Corporation — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 31, 2014. Unaudited results are for the three months ended March 31 and are not necessarily indicative of full-year performance. 3D Systems supplies 3D printers, materials, software and on-demand parts and related services.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $147.8 million | $102.1 million; up 44.7% (organic growth 28.1%) |
| Gross profit / margin | $75.5 million / 51.1% | $53.5 million / 52.4% |
| Operating expenses | $66.0 million | $36.0 million |
| Operating income | $9.5 million | $17.5 million |
| Net income attributable to 3D Systems | $4.9 million; $0.05 per diluted share | $5.9 million; $0.06 per diluted share |
| Cash from operating activities | $0.3 million | $6.4 million |
| Cash and cash equivalents at period end | $306.7 million | $306.3 million at Dec. 31, 2013 |
| Working capital at period end | $433.8 million | $416.4 million at Dec. 31, 2013 |
Amounts are in U.S. dollars. Operating margin was approximately 6.4%, versus 17.2% in Q1 2013; net margin was approximately 3.3%, versus 5.8% (calculated from reported figures). Management also reported non-GAAP net income of $15.1 million and non-GAAP diluted EPS of $0.15, versus $18.9 million and $0.21. These company-defined measures exclude specified items, including stock compensation and intangible amortization.
Balance sheet and debt: Total assets were $1.13 billion and total liabilities were $176.3 million. Convertible notes had $12.5 million principal outstanding ($11.5 million net carrying value), bear 5.50% interest and mature in December 2016; $7.4 million of capitalized lease obligations was also outstanding. Cash substantially exceeded these reported obligations.
Performance changes and management commentary
- Revenue rose across products, materials and services. Printers and other products increased 53.0% to $60.8 million; print materials rose 40.8% to $40.4 million; services increased 38.5% to $46.6 million.
- Healthcare solutions revenue rose 53.2% to $21.7 million. Consumer revenue grew 149.8% to $9.7 million, including acquired revenue.
- Gross margin fell 1.3 percentage points, mainly because printer and other-products growth shifted revenue toward lower-margin products and manufacturing capacity expanded. Product gross margin declined to 39.8%; materials margin rose to 74.7% and services margin to 45.3%.
- Operating expenses increased 83.4%. SG&A rose with sales and marketing activity, staffing and amortization; R&D increased with portfolio expansion, product development and the addition of the Wilsonville engineering team. Operating income declined despite higher revenue.
- Net income declined by $1.0 million. Lower operating income and a higher tax provision were partly offset by lower interest and other expense; Q1 2013 included a $5.7 million loss on convertible-note conversions.
- Revenue outside the U.S. increased 77.5% and represented 54.0% of total revenue, versus 44.0% a year earlier. Backlog was $28.8 million, compared with $11.4 million at March 31, 2013.
Liquidity, outlook, risks and notable items
- Operating cash flow was limited by working-capital use, including increases in receivables, inventory and prepaid assets. Investing used $5.9 million; financing provided $5.9 million. Cash increased $0.4 million during the quarter.
- Days sales outstanding rose to 86 from 79 at year-end; receivables more than 90 days past due were 9.7% of gross receivables, up from 9.1%. Management linked the increase partly to reseller and retailer sales on standard credit terms and quarter-end order timing.
- Inventory increased to $86.0 million from $75.1 million. Printer-assembly supply commitments were $61.0 million, up from $41.1 million at year-end. Acquisition earnout liabilities were $10.0 million, versus $5.6 million; deferred purchase-price commitments were $4.5 million, due through 2014.
- No formal financial forecast or quantified earnings guidance is provided. Management described expected launches: Cube 3, CubePro, Touch, iSense and 3DMe Photobooth during Q2 2014; ChefJet, ChefJet Pro, CeraJet and CubeJet in the second half of 2014. The company also announced an Intel partnership and a multi-year Hershey development agreement.
- Acquisitions and expansion: Digital Playspace was acquired in February for $4.0 million (cash and stock). Medical Modeling was acquired April 2. On April 16, the company agreed to acquire 70% of Robtec at closing, with the remainder to be acquired on the fifth anniversary; closing and financial terms beyond those stated are not provided here.
- Litigation: On April 18, 2014, the Federal Circuit affirmed summary judgment for 3D Systems in the DSM Desotech antitrust claims. The company was pursuing patent-infringement claims against Formlabs in New York. Management said other legal matters were not expected to materially affect results or financial position.
- Management cited risks including foreign-exchange exposure, product and order timing, growth execution, and the possibility that additional funding could be needed for activities beyond the next twelve months or significant acquisitions. The company reported no material change in its previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether revenue growth and announced product launches translate into sustained sales, margins and operating cash generation.
- Receivables aging, credit exposure and inventory levels as reseller-channel sales and demand expand.
- Execution and financial impact of recent and proposed acquisitions, including earnouts, supply commitments and Robtec closing terms.
- Reported GAAP performance alongside the company’s non-GAAP adjustments, particularly the sizable amortization and stock-compensation exclusions.
- Developments in the Formlabs litigation, convertible notes and other disclosed contingencies.