3D Systems Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. 3D Systems provides 3D printers, materials, software, and manufacturing and healthcare services. The company reports as one operating segment, with Americas, EMEA, and Asia Pacific geographic disclosures. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and liquidity
- Q2 revenue: $176.6 million, up 10.7% from $159.5 million. Products and services revenue in the financial statements was $110.8 million and $65.8 million, respectively.
- Q2 profitability: Gross profit was $86.2 million, up 6.8%; gross margin declined to 48.8% from 50.6%. Operating loss was $7.7 million versus $6.9 million; net loss attributable to 3D Systems was $8.9 million versus $8.4 million. Basic and diluted loss per share was $0.08 in both periods.
- First-half revenue and earnings: Revenue was $342.4 million, up 8.4% from $315.9 million. Gross profit was $164.0 million and gross margin was 47.9%, down from $160.9 million and 50.9%. Operating loss widened to $25.2 million from $15.9 million; net loss attributable to the company widened to $29.8 million from $18.4 million. Loss per share was $0.27 versus $0.17.
- Cash flow: First-half operating cash flow was $9.2 million, down from $18.6 million. Investing cash outflow was $18.6 million, including $18.1 million of property and equipment purchases; financing cash outflow was $4.8 million. Cash, cash equivalents, and restricted cash decreased $16.8 million to $120.1 million. Unrestricted cash was $119.3 million at June 30, versus $136.3 million at year-end 2017.
- Balance sheet and liquidity: Total assets were $885.3 million and total liabilities $288.6 million. Current assets were $440.1 million and current liabilities $225.6 million. The company reported no borrowings under its $150 million revolving credit facility and was in compliance with its covenants. Capitalized lease obligations totaled approximately $7.4 million.
- Other metrics: Inventories increased 10.2% from year-end to $114.5 million. Days sales outstanding improved to 67 from 73, while receivables more than 90 days past due rose to 9.4% of gross receivables from 9.1%. Foreign currency translation reduced first-half comprehensive results by $11.2 million.
Changes versus prior comparable periods
- Growth was supported by higher sales volumes across regions and product classes, particularly printers and healthcare-related offerings. Q2 healthcare revenue increased 26.4% to $61.4 million; software revenue was essentially flat at $24.1 million.
- Q2 printer revenue increased to $39.2 million from $27.7 million. Asia Pacific revenue grew 38.3%; Americas grew 6.0% and EMEA 6.3%. Foreign exchange also contributed to reported growth.
- Management attributed weaker price and mix in the Americas and EMEA partly to higher sales of lower-priced printer models. Materials mix also pressured margins.
- Operating expenses rose 7.3% in Q2 to $93.9 million, led by higher SG&A, including personnel, marketing, IT infrastructure, and legal costs. R&D declined 7.1% in the quarter as some products moved from development toward commercialization.
- Services gross margin declined to 50.0% in Q2 from 53.2%; on-demand manufacturing margin fell to 41.0% from 46.0%, reflecting expansion, support, and facility investments. First-half on-demand manufacturing margin was 39.8%, versus 44.7%.
Outlook, risks, contingencies, and notable items
- The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management said existing cash was expected to cover working capital, capital expenditures, commitments, and other liquidity needs in the foreseeable future, while noting that additional funding might be needed in the future.
- At June 30, outstanding performance obligations were $131.0 million; the company expected to recognize about 93% within the next 12 months.
- Export-control review: The company disclosed potentially unauthorized exports of technical data to U.S. authorities and was cooperating with government agencies. It expected significant legal and other response costs; potential penalties could include fines, loss of export privileges, or exclusion from government contracts. The ultimate outcome and cost were not estimable in the filing, and additional potential violations could be identified.
- Litigation: A securities class-action settlement received final court approval on June 25, 2018, with a $50 million insurance-funded settlement and an offsetting receivable and liability recorded. The filing also describes related derivative actions that remained stayed. In the Barranco I matter, the company paid $9.1 million net of setoff on August 3, 2018; post-trial motions remained pending in Barranco II.
- A subsidiary put option could require an estimated payment of approximately $8.9 million if exercised, with the amount dependent on future business performance. The company also reported $2.1 million of recorded acquisition earnout liabilities.
- The company adopted ASC 606 revenue accounting on January 1, 2018 using the modified retrospective method; the recorded cumulative adjustment reduced opening accumulated deficit by $0.6 million. Management said the adoption’s financial statement effect was immaterial.
Important facts for investors to verify
- Whether revenue growth converts into improved gross margins and operating profitability, particularly given unfavorable product and materials mix and declining services margins.
- Whether operating cash flow can recover as inventory and other working-capital needs rise, and how planned capital expenditures affect the cash balance.
- The scope, duration, costs, and potential consequences of the export-control investigations, including any further disclosures or government findings.
- The final outcomes and cash effects of the Barranco proceedings, derivative litigation, subsidiary put option, and other contingencies.
- The impact of foreign exchange, overseas cash holdings, and evolving tax accounting on reported results and available liquidity.