3D Systems Corporation (NYSE: DDD) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
3D Systems provides 3D printers, materials, software, and manufacturing and healthcare services. It operates as one reportable segment and reports geographic results for the Americas, EMEA, and Asia Pacific.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $157.3 | $176.6 | $309.3 | $342.4 |
| Gross profit | $73.3 | $86.2 | $139.0 | $164.0 |
| Gross margin | 46.6% | 48.8% | 44.9% | 47.9% |
| Operating loss | $(19.2) | $(7.7) | $(40.5) | $(25.2) |
| Net loss attributable to 3D Systems | $(23.9) | $(8.9) | $(48.3) | $(29.8) |
| Loss per share, diluted | $(0.21) | $(0.08) | $(0.43) | $(0.27) |
| Cash from operations | Not provided quarterly | Not provided quarterly | $3.6 | $9.2 |
- Revenue and mix: Q2 revenue fell 10.9%. Products revenue declined 20.1% to $52.5 million, materials fell 8.5% to $41.2 million, and services fell 3.4% to $63.5 million. Printer revenue was $30.0 million versus $41.3 million a year earlier.
- Margins and expenses: Lower printer sales and production under-absorption reduced product margins. Q2 operating expenses declined 1.5% to $92.5 million, but operating loss widened as gross profit fell. SG&A included legal costs and costs associated with exiting entertainment; R&D fell as projects launched in 2018 were completed.
- Cash flow and investment: First-half investing cash outflow was $14.2 million, including $14.4 million of property and equipment purchases. Operating cash flow was lower year over year; working-capital improvements provided $8.4 million, partly offsetting the net loss.
- Liquidity: June 30 cash and cash equivalents were $150.4 million, up from $110.0 million at year-end; $80.7 million was held outside the U.S. Current assets were $427.9 million and current liabilities $181.0 million. The filing says cash, operating cash flow and credit facilities are expected to be sufficient for foreseeable requirements.
- Debt: Balance-sheet debt was $79.4 million, including $4.1 million current and $75.4 million long-term. The company reported $80.0 million outstanding under its new term facility at 4.9%. It also has a $100 million revolving facility; the filing does not report a revolver balance. The facilities mature in February 2024, and the company was in covenant compliance at June 30.
- Other balance-sheet items: Goodwill was $222.3 million; deferred revenue was $41.7 million and outstanding performance obligations were $128.4 million, of which about 93% was expected to be recognized within 12 months.
Material changes versus the comparable period
- Management attributed the revenue decline principally to lower printer sales, timing of large enterprise orders and metals-printer shipments, industrial softness—particularly automotive and European customers—and foreign-exchange effects. Asia Pacific revenue fell 40.6% in Q2; EMEA revenue decreased 1.9% and Americas revenue decreased 6.2%.
- Q2 gross margin contracted 2.2 percentage points, while operating loss increased by $11.4 million. First-half net loss attributable to the company increased by $18.5 million.
- The company replaced its former $150 million unsecured revolving credit agreement in February with a $100 million secured term facility and a $100 million secured revolving facility. It borrowed $100 million and repaid $45 million during the first half; reported term debt outstanding at June 30 was $80 million.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities of approximately $38.4 million; management reported an immaterial income-statement and cash-flow effect.
Outlook, risks and unusual items
- Guidance: The filing provides no numerical revenue, earnings, or margin guidance. Management describes liquidity as adequate for foreseeable needs but cautions that quarterly results are not necessarily indicative of full-year results.
- Federal contracting suspension: On July 19, 2019, after quarter-end, the company received an Air Force notice suspending it from most new federal contracts and subcontracts pending an investigation into potential export-control violations. Existing contracts may continue; limited exceptions apply. The company is cooperating with U.S. agencies and seeking to lift or modify the suspension. It cannot estimate potential penalties or other liabilities and expects continued legal and related costs.
- Goodwill: Management said EMEA and Asia Pacific reporting units had goodwill of approximately $185.5 million and $36.8 million, respectively. It believed fair values remained above carrying values, but noted that continued underperformance against forecasts could change that assessment.
- Contingencies: Owners of a subsidiary have put rights recorded as $8.9 million of redeemable noncontrolling interests; the eventual amount depends on future results. Related derivative litigation had an agreement in principle to settle, subject to documentation and court approval. A former employee’s appeal in the Barranco matter remained pending.
- Other unusual items: The company exited its entertainment business, recording disposal-related charges. It acquired the remaining 30% interest in Easyway for $13.5 million payable over four years, including a $2.5 million first installment in March.
Most important facts for investors to verify
- Developments and potential financial consequences of the federal contracting suspension and export-control investigations.
- Whether printer demand, enterprise-order timing, regional softness, and product gross margins improve.
- Cash generation, capital spending, debt balances, revolver availability, interest costs, and continued covenant compliance.
- Goodwill impairment risk if operating performance falls materially below forecasts.
- Outcome and possible cash requirements from put rights, litigation, and other government inquiries.