3D Systems Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Amounts below are U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
3D Systems provides 3D printers, print materials, custom-parts and printer services, and related software and content solutions. The company reports one operating segment. Results reflect both organic growth and acquisitions, including Z Corp and Vidar, acquired in the first quarter of 2012.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $90.5m | $57.5m | $252.1m | $160.6m |
| Gross profit / margin | $46.9m / 51.8% | $27.8m / 48.3% | $128.7m / 51.1% | $76.2m / 47.4% |
| Operating income | $18.4m | $8.8m | $42.4m | $24.2m |
| Net income | $13.5m | $7.2m | $28.0m | $27.4m |
| Diluted EPS | $0.24 | $0.14 | $0.52 | $0.54 |
- Q3 revenue rose 57.3%; management attributed growth to higher printer, materials, and services sales, including acquired revenue. Excluding businesses owned for less than one year, reported organic growth was 26.2% for the quarter and 24.0% for the nine-month period.
- Q3 gross margin improved 3.5 percentage points, supported by product mix, higher-margin acquired printers, and improved materials and services margins. Q3 operating expenses increased 49.9% to $28.4m, slower than revenue growth.
- Nine-month net income was nearly flat despite higher operating income, principally because interest and other expense increased to $8.6m from $0.5m and the income-tax line shifted from a $3.7m benefit to a $5.8m provision. The 2011 tax benefit included a $6.2m non-cash valuation-allowance release.
- Product and service revenue for Q3 was $34.1m printers and other products, $25.5m materials, and $31.0m services. Custom-parts services accounted for $20.0m of Q3 services revenue.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $183.9m, working capital was $222.3m, and stockholders’ equity was $416.5m. Current assets were $301.5m and current liabilities $79.2m.
- For the first nine months, operating cash flow was $44.0m, investing cash flow was negative $150.7m, and financing cash flow was positive $111.4m. Acquisition payments accounted for $148.3m of investing outflow; financing included $106.9m net proceeds from a common-stock offering.
- Management said operating cash flow included a $10.0m timing benefit from accrued liabilities expected to reverse in Q4. Receivables and inventories also increased; days sales outstanding rose to 71 from 67 at year-end.
- Convertible notes had $140.5m principal outstanding and a $123.6m net carrying value, bear 5.50% interest, and mature in December 2016. Holders converted $11.5m principal into approximately 536,000 shares during Q3; the company recorded a $1.2m conversion loss. The notes were convertible at period-end. Capitalized lease obligations totaled $7.7m.
Changes, outlook and notable items
- Total assets increased to $660.5m from $463.0m at December 31, 2011, mainly reflecting acquisitions; goodwill rose to $220.5m from $107.7m and net intangible assets to $96.9m from $54.0m.
- Management described strategic priorities including expansion of custom-parts services, printer distribution and healthcare offerings, consumer products, and 3D authoring tools. New products included the ProJet 5000 printer and Cubify design tools. The filing gives no specific revenue or earnings guidance.
- Management expected $5.0m–$5.5m in annual savings from acquisition integration and severance actions, within its previously stated synergy expectations of $5.0m–$10.0m. It also stated an aim to improve operating leverage.
- After quarter-end, the company acquired TIM, a Dutch custom-parts provider, for approximately $1.4m net of cash acquired, and Rapidform, a scan-to-CAD software provider, for $35.0m cash. These acquisitions were described as not significant individually to the financial statements.
- DSM Desotech litigation remained pending. The company reported that DSM estimated damages in excess of $40m; 3D Systems said it intended to contest the claims. Two other disputes were settled and dismissed in Q3.
- Other items to monitor include acquisition integration and earnouts, foreign-currency exposure, and the timing and concentration of production-printer orders. The company reported $9.3m of backlog at September 30, down from $11.3m a year earlier, and cautioned that production-printer sales can shift between periods.
Important facts for investors to verify
- How much reported growth and margin improvement is sustainable organically versus attributable to acquisitions and product mix.
- Whether working-capital demands, especially receivables and inventory, and the $10.0m accrued-liability timing benefit affect subsequent-period cash generation.
- Actual integration savings, acquisition-related costs, earnout obligations, and the financial contribution of TIM and Rapidform.
- The outcome and potential exposure from the DSM Desotech litigation, including the asserted damages estimate.
- Potential dilution or cash-settlement effects from the convertible notes; common shares outstanding were 57,040,024 as of October 19, 2012.