3D Systems Corporation (NYSE: DDD) — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
3D Systems sells 3D printers, printing materials, software, on-demand manufacturing and healthcare-related solutions. Its strategy centers on expanding additive manufacturing from prototyping into production, with a focus on healthcare, dental, aerospace, automotive and durable goods. The company reports one operating segment and presents geographic information for the Americas, EMEA and Asia Pacific.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $687.7 million | $646.1 million |
| Gross profit / margin | $324.4 million / 47.2% | $304.8 million / 47.2% |
| Operating expenses | $367.6 million | $358.8 million |
| Operating loss | $43.2 million | $54.0 million |
| Net loss attributable to 3D Systems | $45.5 million; $0.41 per share | $66.2 million; $0.59 per share |
| Cash provided by operating activities | $4.8 million | $26.1 million |
| Capital expenditures | $40.7 million | $30.9 million |
| Cash and cash equivalents at year-end | $110.0 million | $136.3 million |
| Working capital | $233.4 million | $231.3 million |
| Debt outstanding at year-end | $25.0 million | None |
Revenue grew 6.4%. Printer revenue increased 24.5% to $153.7 million, while healthcare revenue rose 19.5% to $225.5 million, or 32.8% of total revenue. Revenue by class was $259.1 million in products, $170.1 million in materials and $258.4 million in services. Product gross margin improved to 30.8% from 23.4%; materials and services margins each declined 2.6 percentage points, to 70.3% and 48.4%, respectively. On-demand manufacturing margin fell to 35.9% from 43.1%.
Operating cash flow fell by $21.3 million year over year, principally reflecting working-capital use, including a $34.0 million inventory cash outflow. Capital expenditures exceeded operating cash flow by approximately $35.9 million. Inventory increased 28.2% to $133.2 million. Approximately 66.7% of year-end cash was held outside the United States and management described it as permanently invested. Current assets were $397.5 million and current liabilities were $164.1 million.
Fourth quarter: Revenue was $180.7 million versus $177.3 million in Q4 2017. Gross profit was $82.6 million versus $85.5 million, and operating loss was $7.0 million versus $5.7 million. Net loss attributable to 3D Systems was $4.1 million, or $0.04 per share, compared with $10.1 million, or $0.08 per share.
Material changes versus prior periods
- Revenue growth reflected higher sales volume across regions and categories, including new printer launches; unfavorable product and materials mix partly offset growth.
- Operating loss narrowed by $10.8 million, primarily as gross profit increased and operating expenses grew more slowly than revenue. SG&A rose 3.1%, largely due to product launches, go-to-market investment, IT infrastructure and legal costs.
- Cash declined $26.3 million, reflecting operating and investment outflows, legal/compliance expenses and litigation-related payments. The company drew $25.0 million on its revolving credit line in Q4.
- The company recorded no goodwill impairment in 2018. Intangible assets declined to $68.3 million from $98.8 million, including amortization.
- One customer accounted for approximately 13% of 2018 revenue; no customer exceeded 10% in either 2017 or 2016.
Outlook, risks, contingencies and unusual items
Management gave no specific numerical revenue, earnings or cash-flow guidance in the provided filing text. It expects to continue investing in hardware, software, materials, services, facilities and go-to-market capabilities, while seeking sustainable growth and profitability. New 2018 offerings included Figure 4 solutions, dental printers and materials, next-generation SLS and metal systems, and a strategic metals partnership with GF Machining Solutions.
- Export-control and government-contracting review: Following a BIS subpoena, the company disclosed potential unauthorized exports to BIS and DDTC, is cooperating with U.S. agencies and continues an internal review. It expects significant related legal and other costs; potential penalties, export restrictions, contract claims or debarment cannot currently be estimated.
- Credit facility after year-end: On February 27, 2019, the company refinanced its prior facility with a five-year $100 million secured term loan and $100 million secured revolver. Substantially all company and guarantor assets secure the facility. It includes leverage and interest-coverage covenants and restrictions on debt, liens and distributions.
- Other contingencies: A put option relating to a subsidiary could require an estimated $8.9 million payment if exercised, with the ultimate amount dependent on future performance. The filing also describes shareholder derivative actions and an ongoing Barranco appeal; prior related judgments included payments in 2018.
- Key operating risks: Competition and patent expirations, technology and product execution, uneven hardware sales cycles, product mix and margin variability, supplier concentration, foreign exchange, cyber and information-system risks, and potential goodwill or inventory impairment.
- The company adopted ASC 606 in 2018; management said the adoption’s effect was immaterial. It expected to recognize $40–$50 million of operating lease liabilities upon adopting the lease standard in 2019.
BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018.
Important facts for investors to verify
- Progress, timing and potential financial or operational consequences of the export-control and government-contracting investigations and internal review.
- Cash generation, inventory growth and the company’s ability to fund capital spending and working capital without additional borrowing.
- Terms, covenant headroom, collateral and outstanding balances under the new secured credit facilities.
- Whether printer and healthcare revenue growth is sustainable and whether services and materials margins recover.
- Exposure to the 13% revenue customer and to the potential subsidiary put-option payment and pending litigation.
- Effects of lease-standard adoption and the company’s substantial deferred-tax valuation allowance.