3D Systems Corporation — FY 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012; quarterly figures below refer to Q4 2012. 3D Systems provides 3D printers, print materials, software, on-demand parts manufacturing and related services. It reported one business segment and operated globally.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $353.6 million | $230.4 million |
| Gross profit / margin | $181.2 million / 51.2% | $109.0 million / 47.3% |
| Operating income / margin | $60.6 million / 17.1% | $34.9 million / 15.1% |
| Net income | $38.9 million | $35.4 million |
| Diluted EPS | $0.71 | $0.70 |
| Cash from operations | $53.0 million | $27.7 million |
- Revenue by category: printers and other products $126.8 million; materials $103.2 million; services $123.7 million. On-demand parts services contributed $79.2 million.
- Q4 2012 revenue was $101.6 million, gross profit $52.5 million, operating income $18.2 million and net income $10.9 million. Q4 2011 revenue was $69.9 million and net income $8.0 million.
- At year-end, cash and cash equivalents were $155.9 million, working capital $212.3 million, total assets $677.4 million and stockholders’ equity $480.3 million. Cash declined $23.2 million year over year.
- Net cash used in investing was $187.7 million, including $183.7 million for acquisitions; capital expenditures were $3.2 million. Financing provided $111.1 million, including $106.9 million net proceeds from an equity offering.
- Convertible notes had $91.0 million principal outstanding at year-end, with an $80.5 million balance-sheet carrying value; capitalized lease obligations were $7.6 million. The notes bear 5.50% interest and mature in December 2016. Current liabilities were $75.2 million.
Material changes versus prior period
- Revenue rose 53.5%; management reported full-year organic growth of 22.4%. It attributed growth to higher printer sales, materials demand, parts services and acquisitions. Z Corp and Vidar contributed $55.6 million of 2012 revenue; management said growth would have been 23.2% if those businesses had been included in 2011.
- Printer and other product revenue grew 90.2%, materials revenue 46.1% and services revenue 32.8%. Printer unit sales, excluding Cube units, increased 83.1%.
- Gross margin improved 3.9 percentage points, reflecting cost structure and operational efficiencies, higher-margin materials mix, and acquired printer and software businesses; increased lower-margin parts-service sales partly offset these benefits.
- Operating expenses increased 62.7% to $120.6 million, including higher staffing, commissions, acquisition and severance costs, and R&D spending. R&D expense rose to $23.2 million from $14.3 million.
- Net income increased only 9.9% despite strong operating growth, as interest and other expense rose to $17.3 million, including $12.5 million of interest expense and a $7.0 million loss on convertible-note conversions. The reported tax provision was $4.3 million; it included a $5.4 million non-cash benefit from releasing deferred-tax valuation allowances.
Outlook, commentary, risks and unusual items
- Management’s five stated growth priorities were expanding global custom-parts services, increasing printer adoption, growing healthcare solutions, building consumer content and services, and integrating 3D authoring solutions. It expected consumer-solutions revenue to become meaningful in 2013, anticipated healthcare growth and planned commercialization of Bespoke products in 2013. These are strategic expectations, not quantified revenue or earnings guidance.
- The company completed nine acquisitions in 2012. It acquired COWEB in January 2013 and had signed an agreement to acquire Geomagic, expected to close by the end of February 2013; Geomagic’s terms were not disclosed. Management cautioned that integration, acquisition costs and realization of anticipated benefits are uncertain.
- From January 1 through February 15, 2013, holders converted another $34.6 million principal amount of notes. The company expected a further $4.8 million conversion loss in Q1 2013; $56.3 million principal remained outstanding as of February 15.
- A patent and antitrust suit brought by DSM Desotech remained partly unresolved: the court granted summary judgment on seven antitrust counts, but patent infringement and a tortious-interference claim remained for trial scheduled for April 2013. DSM Desotech estimated remaining damages above $8 million; 3D Systems disputed the claims. 3D Systems also brought a patent-infringement suit against Formlabs and Kickstarter.
- Key risks include acquisition integration and goodwill/intangible impairment, competitive and rapid technology change, quarterly product-mix margin volatility, supplier concentration, foreign-exchange and commodity exposure, customer credit and collections, dilution from equity issuance or note conversions, and litigation. Accounts receivable days outstanding increased to 72 from 67, and receivables and inventory used cash.
- Goodwill was $240.3 million and net intangible assets $108.4 million at year-end. The company reported no 2012 goodwill impairment, but impairment testing depends on estimates and future performance. The filing reported effective disclosure controls and internal control over financial reporting, and the auditor gave unqualified opinions on the financial statements and internal controls.
- Management’s non-GAAP adjusted net income was $67.9 million and adjusted diluted EPS $1.25, versus GAAP net income of $38.9 million and diluted EPS of $0.71. Adjustments included stock compensation, acquired-intangible amortization, acquisition and severance costs, non-cash interest, note-conversion losses and tax valuation-allowance effects; these measures are not substitutes for GAAP results.
Important facts for investors to verify
- How much of reported growth and margin expansion is organic and recurring, versus acquisition-related, product mix or purchase-accounting effects.
- Whether acquisition integration, especially the 2012 portfolio and planned Geomagic transaction, delivers expected growth without materially higher costs or impairment charges.
- Cash conversion and working-capital trends, including rising receivables, 72-day sales outstanding and inventory growth.
- Convertible-note conversion pace, associated losses, future interest costs and potential share dilution; also review the effects of the 2013 stock split when comparing per-share figures.
- Developments and potential exposure in the remaining DSM Desotech claims and the company’s patent litigation with Formlabs and Kickstarter.
- Whether reported liquidity and operating cash generation can support acquisitions and growth plans without further dilutive financing.