3D Systems Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise indicated.
Business context and reporting period
3D Systems provides 3D printers, print materials, on-demand manufacturing services, digital design tools, and precision-healthcare products and services. In September 2016, the company unveiled a strategy focused on digital manufacturing workflows and helping customers move from prototyping to production. It operates as one reportable business segment.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $156.4 million | $151.6 million | $467.0 million | $482.8 million |
| Gross profit / margin | $68.9 million / 44.1% | $71.0 million / 46.9% | $226.9 million / 48.6% | $231.6 million / 48.0% |
| Operating loss | $(22.0) million | $(34.6) million | $(42.5) million | $(76.0) million |
| Net loss attributable to 3D Systems | $(21.2) million | $(32.2) million | $(43.6) million | $(59.1) million |
| Basic and diluted loss per share | $(0.19) | $(0.29) | $(0.39) | $(0.53) |
Q3 revenue increased 3.2%, led by products and materials, while services declined. Nine-month revenue decreased 3.3%; lower product and service revenue outweighed materials growth. Q3 healthcare revenue rose 23.0% to $42.5 million, and software revenue from products and services rose 10.9% to $21.4 million. On-demand parts manufacturing services revenue fell 15.7% in Q3 and 17.1% year to date.
Q3 gross margin fell 2.8 percentage points year over year, principally due to lower product margins and charges related to discontinued products, as well as weaker services margins. Nine-month gross margin increased 0.6 percentage points, reflecting improved materials margins despite lower product and service margins.
Operating expenses declined 13.9% in Q3 and 12.4% year to date. Lower amortization and legal expenses contributed; the prior-year comparison included an arbitration-related provision. Q3 also included $6.1 million of R&D charges and write-offs tied to strategy changes and project reprioritization. Company-reported non-GAAP net income attributable to 3D Systems was $15.8 million for Q3 and $34.1 million for the nine months, after exclusions including amortization, stock compensation, legal/acquisition items, and portfolio realignment. These company-defined measures are not GAAP results.
- Cash flow: Nine-month operating cash flow was $38.2 million, versus cash used of $10.6 million in 2015. Investing used $13.8 million, including $12.0 million for property and equipment; financing used $2.3 million. Cash increased $23.7 million.
- Cash and working capital: Cash and equivalents were $179.4 million at September 30, 2016, versus $155.6 million at year-end 2015. Working capital was $301.3 million. Cash held outside the U.S. was $78.0 million, or 43.5% of total cash, and was considered permanently invested.
- Debt and liquidity: No balance was outstanding on the $150 million revolving credit facility, which matures in October 2019; reported availability was approximately $150 million, subject to future results and covenant compliance. Capitalized lease obligations totaled $8.4 million. The filing reports no off-balance-sheet arrangements.
- Other balance-sheet items: Total assets were $862.3 million and total liabilities $210.8 million. Net inventory was $113.7 million; accounts receivable, net, was $120.6 million. Days sales outstanding improved to 71 days from 79 at year-end 2015.
Material changes versus prior comparable periods
- Q3 sales growth reversed the nine-month revenue decline. Product and materials revenue rose in Q3, while services revenue fell; year-to-date product revenue was lower, partly reflecting lower printer sales and discontinued consumer products.
- Q3 operating loss narrowed by $12.6 million year over year, primarily as operating expenses declined. The company nevertheless remained loss-making.
- Cash from operations improved substantially, from a use of $10.6 million in the first nine months of 2015 to generation of $38.2 million in 2016. The 2015 investing cash outflow included $91.8 million for acquisitions; no acquisitions were made in the 2016 period.
- Backlog was $43.8 million at September 30, 2016, versus $40.5 million a year earlier; on-demand parts orders included in backlog were $8.9 million versus $12.9 million.
Outlook, commentary, risks, and unusual items
The filing provides no quantified revenue, earnings, or margin guidance. Management said existing cash was expected to meet working-capital, capital-expenditure, commitment, and other liquidity needs for the foreseeable future, while noting that additional financing could be needed and might not be available on acceptable terms. Management described the updated strategy as intended to help customers transition from prototyping to production using 3D printing.
- The company recorded a $10.7 million inventory reserve in Q3 for products discontinued under its updated strategy. It also reported $8.6 million of asset impairment charges for the nine months, including $7.1 million on property and equipment.
- A recorded $11.3 million long-term liability relates to an arbitration award in the Barranco matter. In August 2016, a court denied the company’s motion to vacate and entered judgment for the award’s principal amount; motions concerning the judgment and prejudgment interest remained pending at quarter-end. The company stated that any payment ultimately due would be funded from cash on hand.
- A securities class action and nine derivative actions were pending. The class-action motion to dismiss had been denied, and reconsideration was pending. The company disputed the claims and intended to defend itself.
- Other stated risks include competition, changing technology and customer needs, supply-chain dependence, litigation, intellectual-property protection, foreign-currency movements, and the ability to generate operating cash flow. The company reported no material change in its previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether the new strategy and discontinued-product actions improve product margins and overall profitability without further material inventory or asset charges.
- Whether the Q3 revenue rebound is sustained, particularly in printers, materials, healthcare, software, and on-demand services; also track backlog composition and conversion.
- Whether operating cash generation continues and how much cash is practically available given the $78.0 million held outside the U.S. and described as permanently invested.
- The resolution and potential final cost of the Barranco proceedings, the securities class action, and derivative litigation.
- Future credit-facility availability and covenant compliance, as well as potential payments under acquisition earnouts and the subsidiary put rights (estimated at approximately $8.9 million based on forecast performance).