3D Systems Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial amounts below are in U.S. dollars; millions unless otherwise stated. The company provides 3D printers, materials, services and custom parts solutions. Results are unaudited and the company cautions that quarterly results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $77.9 million | $47.9 million; up 62.7% |
| Gross profit / margin | $38.9 million / 49.9% | $23.2 million / 48.4% |
| Operating expenses | $28.9 million | $15.8 million |
| Operating income | $10.0 million | $7.4 million |
| Interest and other expense, net | $2.7 million expense | $0.3 million income |
| Net income | $6.2 million | $6.8 million |
| Basic and diluted EPS | $0.12 | $0.14 |
| Operating cash flow | $15.8 million provided | $0.3 million provided |
| Cash and cash equivalents | $60.0 million at March 31 | $179.1 million at December 31, 2011 |
| Working capital | $89.0 million | $202.4 million at December 31, 2011 |
Revenue rose across products, materials and services. Products revenue was $49.4 million versus $29.1 million, and services revenue was $28.5 million versus $18.8 million. Print materials revenue was $24.7 million versus $15.6 million. Gross margin improvement reflected stronger materials and services margins and sales mix, partly offset by a greater proportion of lower-margin personal and professional printers. Product, materials and services gross margins were 38.7%, 68.0% and 43.8%, respectively.
Operating expenses rose 83%, driven in part by acquisition-related staffing and commissions, $2.4 million of acquisition integration and severance costs, higher amortization of acquired intangibles, and increased R&D spending. Higher operating income was more than offset at the net-income level by increased interest expense, including $3.2 million on the convertible notes, and a higher tax provision.
Cash, liquidity and debt
- Operating activities generated $15.8 million; investing activities used $135.9 million, including $134.9 million for the Z Corporation and Vidar acquisitions. Financing activities provided $0.7 million.
- Cash declined by $119.1 million during the quarter. The prior year-end balance included $145.4 million of net proceeds from the November 2011 convertible-note offering; the company said cash increased $26.3 million excluding those proceeds.
- At March 31, the company reported $152.0 million principal amount of 5.50% senior convertible notes due December 2016, with a $131.9 million net carrying value, and $7.7 million of capitalized lease obligations. The notes are unsecured and convertible at an initial price of approximately $21.46 per share. The company reported covenant compliance.
- Current assets were $164.6 million and current liabilities were $75.6 million. Accounts receivable was $61.1 million; inventory was $34.9 million. Days sales outstanding increased to 71 from 67 at year-end.
Material changes, acquisitions and outlook
- On January 3, 2012, the company acquired Z Corporation and Vidar for $134.9 million, net of cash acquired, paid in cash. Their Q1 contribution was $12.4 million revenue and a $0.2 million operating loss after integration and severance costs. Purchase accounting allocations were preliminary; goodwill and intangible assets increased materially.
- Management reported 26.1% organic revenue growth after excluding businesses owned for less than one year. Backlog was $9.6 million at quarter-end, versus $8.3 million at year-end and $7.9 million a year earlier.
- After quarter-end, the company acquired Fresh Fiber, My Robot Nation and Paramount Industries. Management planned to integrate these businesses into consumer solutions, Cubify.com and on-demand parts services. Consideration included cash and shares; certain acquisitions have potential earnouts.
- The company continued to pursue growth in custom parts, printer distribution, healthcare and consumer products, including the announced Cube home-use printer and Cubify.com marketplace. Management expected $5.0–$5.5 million in annual savings from integration and severance actions, within its previously stated $5.0–$10.0 million synergy expectation.
- No full-year revenue or earnings guidance is provided in the filing. Management said it would continue to manage expenses and reduce costs where possible without impairing operations or customer service.
Risks, contingencies and unusual items
- DSM Desotech litigation alleges anticompetitive conduct and patent infringement. The company disputes the claims; summary-judgment motions were pending. DSM Desotech estimated damages in excess of $40 million.
- In the EnvisionTEC patent case, court judgments found infringement of certain patent claims; damages discovery was underway and EnvisionTEC had appealed.
- A Japanese customer lawsuit seeks damages exceeding the equivalent of $2.1 million; the company’s subsidiary is contesting the claims.
- Foreign currency transaction gains were $0.5 million; no foreign-currency contracts were outstanding at quarter-end. The company reported no material change in its market-risk assessment and no material change in previously disclosed risk factors.
- Acquisition accounting, integration execution, sales timing and printer mix may affect comparability. The filing notes that production-printer sales can fluctuate significantly due to long sales cycles and timing of orders and shipments.
Important facts for investors to verify
- Whether post-acquisition performance, integration costs and expected $5.0–$5.5 million annual savings develop as management anticipated.
- How much reported growth is organic and recurring, particularly given acquisitions, materials sales and changes in printer mix.
- Cash conversion, receivables aging, inventory levels and liquidity after the acquisition-related cash outflow.
- The final purchase-price allocations for Z Corporation and Vidar, including goodwill, acquired intangibles and resulting amortization.
- Developments in the DSM Desotech, EnvisionTEC and MSK K.K. matters, including potential financial exposure; the filing does not state a clear quantified reserve for these claims.
- Potential dilution or cash settlement associated with convertible notes and shares issued in subsequent acquisitions.