3D Systems Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in millions of dollars except per-share data. The company provides 3D printers, materials, software, healthcare solutions and custom manufacturing services.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $170.5 | $151.5 | $331.2 | $299.3 |
| Gross profit / margin | $81.6 / 47.9% | $72.4 / 47.8% | $160.6 / 48.5% | $147.9 / 49.4% |
| Operating income (loss) | $(23.8) | $4.4 | $(41.4) | $13.9 |
| Net income (loss) attributable to 3D Systems | $(13.7) | $2.1 | $(26.9) | $7.0 |
| Diluted EPS | $(0.12) | $0.02 | $(0.24) | $0.07 |
- Q2 revenue grew 12.5%; services rose 27.9% to $65.9, products rose 10.2% to $68.2, and materials fell 4.3% to $36.4. Growth reflected healthcare and software offerings; materials weakness reflected softer printer demand, sales timing and service-bureau consolidation.
- Six-month revenue increased 10.7%, but organic revenue declined 6.3% (versus 18.3% organic growth in the comparable 2014 period). Q2 organic revenue declined 5.2%, versus 10.0% growth a year earlier.
- Q2 operating expenses rose 55.0% to $105.5, including higher acquisition-related amortization, compensation, travel and R&D spending. Product gross margin fell to 27.8% from 35.7%, citing inventory write-offs and manufacturing variances during production-facility consolidation. Services and materials margins improved.
- Non-GAAP adjusted net income was $3.1 in Q2 and $8.3 for the six months, compared with $16.6 and $31.7, respectively, in 2014. These company-defined measures exclude items including stock compensation, intangible amortization and acquisition/severance expenses.
- Six-month operating cash flow was negative $6.4, versus positive $19.3 in 2014. Investing used $106.3, primarily for acquisitions, including Cimatron and Easyway. Cash declined $113.6 to $171.2; working capital was $346.0, down from $432.2 at year-end.
- At June 30, cash was $171.2; current assets were $502.8 and current liabilities $156.8. Total assets were $1,526.0. There was no borrowing under the $150.0 revolving facility; capitalized lease obligations were $9.0 and other term-loan debt was $0.018. The company reported no outstanding credit-facility balance.
Changes, outlook and notable matters
- Healthcare revenue increased 26.5% in Q2 to $34.8 and 31.7% for the first six months to $64.8. Consumer revenue rose 27.2% in Q2 to $9.3 and 48.4% for the six months to $25.3.
- Backlog was $38.8 at June 30, up from $31.9 a year earlier but down from $46.5 at December 31, 2014. Management cautions that printer backlog depends on requested delivery timing.
- The company acquired 65% of China-based Easyway and acquired assets of STEAMtrax and Noquo during Q2. Six-month acquisition cash outlays totaled $91.8. Acquisition purchase-price allocations were preliminary.
- Management said existing cash and cash equivalents should cover working capital, capital expenditures, acquisitions, commitments and other liquidity needs for the next 12 months, while noting it might need additional funding beyond that period or for significant acquisitions. No specific revenue or earnings guidance was provided.
- Risks and unusual items include foreign-exchange effects (no currency contracts were outstanding), higher overdue receivables, inventory growth and supply commitments. Receivables over 90 days past due rose to 22.0% of gross receivables from 16.7% at year-end; inventory reached $130.7, including $10.3 of reserves. Printer-assembly supply commitments were $63.8.
- Two securities class actions and a related derivative action were filed in June and July 2015. The company said it considers the claims without merit and intends to defend them vigorously. The estimated subsidiary put-option obligation was $8.9, with payment potentially due from 2019 and the ultimate amount dependent on future results.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. It reported no material changes to previously disclosed risk factors or market-risk assessment.
Investor verification points
- Whether organic revenue declines, particularly in materials and Asia Pacific, persist and how acquisition-driven growth compares with underlying demand.
- Whether operating costs, product gross margins and production-facility consolidation improve enough to restore operating profitability.
- Cash conversion, inventory levels and aging of receivables, including the elevated past-due balance and bad-debt provisions.
- Acquisition performance and integration, including final purchase-price allocations, earnouts and the subsidiary put-option exposure.
- Developments in the shareholder litigation, foreign-exchange exposure and the company’s ability to fund acquisitions and operations beyond its stated 12-month liquidity horizon.