3D Systems Corporation — Q1 2020 Form 10-Q
Period: Quarter ended March 31, 2020; financial statements are unaudited. 3D Systems sells 3D printers, materials, software and related services, including on-demand manufacturing and healthcare solutions.
Financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $134.7 million | $152.0 million; down 11.4% |
| Gross profit / margin | $57.1 million / 42.4% | $65.7 million / 43.2% |
| Operating expenses | $75.4 million | $87.0 million; down 13.4% |
| Operating loss | $18.2 million | $21.3 million |
| Net loss attributable to 3D Systems | $18.9 million; $0.17 per share | $24.4 million; $0.22 per share |
| Cash used in operating activities | $2.3 million | $15.2 million |
| Cash and cash equivalents | $112.8 million at March 31 | $133.7 million at December 31, 2019 |
| Debt | $47.6 million term-loan principal outstanding | $2.5 million of principal due within 12 months |
Product gross margin fell sharply to 3.8% from 15.2%, principally due to lower production and under-absorption of supply-chain overhead, as well as sales mix. Materials and services gross margins were 68.9% and 48.7%, respectively. The company reported $16.6 million of cash used in investing activities, including $12.5 million to purchase a noncontrolling interest and $4.4 million in capital expenditures. Financing activities provided $1.2 million.
Performance changes and liquidity
- Revenue declined across products and services: products revenue by class was down 26.5%, materials was approximately flat, and services declined 6.3%. Printer revenue was $19.3 million versus $29.9 million; on-demand manufacturing revenue was $19.7 million versus $22.6 million.
- Management attributed weaker printer and on-demand manufacturing demand partly to COVID-19. Revenue fell most in the Americas and Asia Pacific; EMEA also declined. Healthcare revenue decreased 7.3% to $46.3 million.
- Lower SG&A and R&D reflected prior cost optimization and near-term reductions in hiring, travel and outside services. These savings helped reduce the operating loss, but did not offset lower gross profit.
- Cash declined $20.9 million from year-end, primarily due to the $10.0 million payment for the remaining Robtec interest, capital expenditures and foreign-exchange effects. Operating working capital was $216.2 million, down 5.7% from year-end.
- The company reported $42.2 million available under its $100 million revolving facility, which matures in February 2024, and was compliant with debt covenants at quarter-end. It said it was discussing continued funding availability with lenders. Approximately 64.7% of cash was held outside the U.S.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic affected Q1 results but could not predict its longer-term effects. Operations remained open, though the company cited workforce, customer-demand, supply-chain and logistics uncertainty. It reported minor supply and logistics delays without a material effect on its ability to fulfill demand to date. No quantitative revenue or earnings guidance was provided.
- The company implemented executive salary reductions, two-week furloughs for non-essential employees and suspension of non-essential capital expenditures to support liquidity. Management warned prolonged disruption or economic deterioration could affect demand, cash generation and covenant compliance.
- COVID-19 and weaker operating performance triggered quantitative impairment testing. As of March 31, management concluded reporting-unit fair values exceeded carrying values and long-lived assets were recoverable; further deterioration could lead to future impairment.
- The CARES Act allowed carrybacks of certain NOLs. The company recorded an $8.9 million tax receivable and a related $3.2 million tax benefit, net of $5.7 million in uncertain tax positions. Overall Q1 income-tax benefit was $1.9 million.
- Interest and other expense increased to $2.6 million, including $1.4 million of other expense; management cited losses on investments as the primary driver. The company also recorded a $1.7 million derivative loss in other comprehensive loss.
- Export-control and sanctions matters remain under government review, including potential unauthorized exports and potential Iran-related sanctions violations. The Air Force lifted its 2019 contracting suspension after a two-year administrative agreement; independent monitors will assess compliance. The company expects continued legal and compliance costs.
- In the Barranco litigation, the Ninth Circuit vacated a $2.2 million judgment previously awarded to the company; proceedings concerning relief on remand remained pending. The filing does not provide a clear estimate of the ultimate financial exposure from this matter or the government investigations.
Important facts for investors to verify
- Whether COVID-19-related demand weakness, especially in printers and on-demand manufacturing, continued beyond Q1 and how it affected subsequent orders and revenue.
- Cash generation, use of the revolving facility, lender discussions and ongoing compliance with debt covenants.
- Whether lower product volumes or further deterioration in forecasts resulted in goodwill or long-lived-asset impairment.
- Resolution and potential costs of export-control, sanctions and government-contracting matters, and the Barranco litigation.
- Collection trends and working-capital needs, including inventory levels, receivables and the company’s stated DSO of 73 days versus 67 days at year-end.