3D Systems Corporation (NYSE: DDD) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are in U.S. dollars.
Business context
3D Systems provides 3D printers, materials, software, healthcare solutions and on-demand manufacturing services. Its strategy centers on integrated digital manufacturing solutions and expanding customer use of additive manufacturing from prototyping into production. Management reported that customers created nearly 200 million production parts using its solutions in 2019.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $629.1 million | $687.7 million |
| Gross profit / margin | $278.0 million / 44.2% | $324.4 million / 47.2% |
| Operating expenses | $335.1 million | $367.6 million |
| Operating loss | $57.1 million | $43.2 million |
| Net loss attributable to 3D Systems | $69.9 million | $45.5 million |
| Loss per diluted share | $0.61 | $0.41 |
| Cash provided by operations | $31.6 million | $4.8 million |
- FY 2019 revenue by class: products $215.5 million, materials $169.1 million and services $244.5 million. Printer revenue was $123.9 million, down from $163.7 million; on-demand solutions revenue was $92.6 million, down from $107.1 million.
- Cash and cash equivalents were $133.7 million at year-end, up from $110.0 million. Working capital was $210.2 million, versus $233.4 million. Operating working capital was $229.2 million, down 5.7%.
- Year-end debt was $48.2 million, including $2.5 million current; the company had $34.3 million available under its revolving facility. It reported compliance with credit-facility covenants.
- Capital expenditures were $24.0 million. Total assets were $807.3 million and stockholders’ equity was $513.9 million.
- Accounts receivable over 90 days past due rose to 12.1% of gross receivables from 8.9%. Inventory was $111.1 million, with a $12.8 million reserve.
Fourth quarter: Revenue was $164.6 million, compared with $180.7 million in Q4 2018; gross profit was $71.8 million versus $82.6 million. Operating loss narrowed to $4.7 million from $7.0 million, while net loss attributable to 3D Systems increased to $4.7 million from $4.1 million. Loss per share was $0.04 in both quarters.
Material changes versus the prior year
- Revenue declined 8.5%, mainly from lower printer volume, ordering patterns of a large enterprise customer, the exit of the entertainment business, weaker manufacturing activity and unfavorable foreign-currency translation. APAC revenue fell 33.4%; EMEA revenue rose 1.2% and Americas revenue declined 7.3%.
- Products revenue fell 16.8%; materials declined 0.6% and services declined 5.4%. One customer represented approximately 11% of FY 2019 revenue, down from 13% in 2018.
- Gross margin fell 3.0 percentage points, with lower production and under-absorption of supply-chain overhead, as well as sales mix, weighing particularly on product margins.
- Operating expenses decreased 8.8%, reflecting cost optimization and lower amortization, but this did not offset the decline in gross profit. Operating loss widened by $13.9 million.
- Interest and other expense increased to $8.0 million from $0.04 million, reflecting higher interest expense and unfavorable foreign-exchange impacts. The company entered a five-year secured $100 million term facility and $100 million revolving facility in February 2019, refinancing its prior facility.
- Operating cash flow improved, supported in part by a $25.3 million working-capital benefit. Cash generation should be considered alongside the continuing annual net loss.
Outlook, commentary and notable risks
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management cited macroeconomic conditions, sales mix and the large enterprise customer’s ordering patterns as pressures, and described cost reductions and investment prioritization as responses.
- Management launched Figure 4 Modular, new production-grade materials and software enhancements during 2019. It planned general availability of its Brill 3D Culinary Studio in 2020. These are product plans, not financial guidance.
- The company disclosed potential U.S. export-control violations and a voluntary disclosure concerning possible Iran-related sanctions violations. A federal contracting suspension imposed in July 2019 was lifted in September after a two-year Administrative Agreement; independent monitors are to assess compliance. Penalties, further restrictions or debarment remain possible, and the company said it could not estimate any ultimate cost.
- CEO Vyomesh Joshi announced in February 2020 that he intended to retire when a successor assumes the role; the company expected related succession costs. The CFO was appointed in September 2019.
- Other key risks include competition and technology change, customer concentration, foreign exchange, supplier dependence, cybersecurity, litigation, and potential impairment of goodwill or inventory. The filing specifically noted that the coronavirus was affecting China and elsewhere as a risk factor.
- The company recorded no goodwill impairment in 2019, but disclosed that weaker performance or unresolved business conditions could trigger future impairment testing. The auditor identified goodwill recoverability and the inventory reserve as critical audit matters.
- The company reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether printer demand and the large customer’s ordering patterns recover, and how customer concentration evolves.
- Whether cost reductions and new product launches improve gross margins and operating profitability.
- The final outcomes, penalties and ongoing monitoring requirements in the export-control and sanctions matters.
- Cash conversion and liquidity, including aging receivables, inventory reserves, debt service and the $10.0 million noncontrolling-interest redemption paid in January 2020.
- Goodwill and inventory valuation assumptions, as well as potential effects of macroeconomic and foreign-exchange changes.
- CEO succession timing and costs, and the business impact of the planned leadership transition.