3D Systems Corporation — FY 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; the fourth-quarter figures below are unaudited. 3D Systems sells 3D printers, print materials, software and on-demand custom parts services. It reported one business segment and operated across the U.S., Europe and Asia-Pacific. Its strategy emphasized expanding custom parts services, printer adoption, healthcare solutions and consumer content.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $230.4 | $159.9 | +44.1% |
| Gross profit / gross margin | $109.0 / 47.3% | $74.0 / 46.3% | Margin +1.0 percentage point |
| Operating income | $34.9 | $20.9 | +66.8% |
| Net income | $35.4 | $19.6 | +81.1% |
| Diluted EPS | $0.70 | $0.42 | Up $0.28 |
| Cash from operations | $27.7 | $31.8 | Down $4.2 |
| Cash and cash equivalents, year-end | $179.1 | $37.3 | Up $141.8 |
| Working capital, year-end | $202.4 | $42.5 | Up $159.9 |
- Revenue growth reflected higher printer and material sales, expansion of on-demand parts services, acquisitions and a 242% increase in printer unit sales. Services revenue rose to $93.1 million from $46.8 million; on-demand parts services contributed $58.8 million, including $32.1 million from 2011 acquisitions.
- Operating expenses rose 39.7% to $74.1 million, including $3.7 million of acquisition and severance costs. Research and development spending was $14.3 million, up from $10.7 million.
- The 2011 tax benefit of $3.0 million included a non-cash $6.2 million benefit from releasing deferred-tax valuation allowances. The filing says further releases may occur, subject to reassessment.
- Q4 2011 revenue was $69.9 million versus $51.6 million in Q4 2010; operating income was $10.7 million versus $9.7 million. Net income was $8.0 million versus $9.4 million, with quarterly results affected by tax items.
Liquidity, debt and capital allocation
- 2011 operating cash flow was $27.7 million; investing activities used $95.7 million, including $92.7 million for acquisitions. Financing activities provided $210.0 million, including net proceeds of $62.1 million from an equity offering and $145.4 million from convertible notes.
- In November 2011, the company issued $152 million of 5.50% senior convertible notes due December 2016. Their year-end carrying value was $131.1 million after discounts; conversion price was initially about $21.46 per share. Capitalized lease obligations were $7.8 million.
- Year-end cash included proceeds intended in part for the Z Corp and Vidar transaction. The company completed that acquisition on January 3, 2012, paying $135.5 million net of cash received; it was therefore not reflected in 2011 operating results. Final purchase-price adjustments were pending at filing.
- Capital expenditures were $2.9 million. No cash dividends were paid, and management said it intended to retain future earnings for the business.
Changes, outlook and risks
- International sales were 48.9% of 2011 revenue, down from 54.7% in 2010; U.S. revenue rose 62.5%. Healthcare-related revenue was $27.9 million, or 12.1% of total revenue, compared with $21.6 million, or 13.5%, in 2010.
- Management cited improved demand, a growing installed base and operational efficiencies, while noting that acquired parts-service businesses and lower-priced printer mix affect margins. It expected $2.0–$2.5 million of acquisition, restructuring and severance costs in 2012, primarily in the first quarter. The filing gives no clear quantified full-year revenue or earnings guidance.
- In January 2012, the company launched its Cube home 3D printer and Cubify.com marketplace. Consumer products and services revenue was not material in 2011.
- Key risks include acquisition integration and execution, competition and rapid technology change, supplier concentration, foreign exchange exposure, customer credit and collection risk, and quarterly margin variability. Days sales outstanding increased to 67 from 64; bad-debt expense rose to $1.7 million from $0.1 million.
- Material litigation includes DSM Desotech’s resin competition and patent claims, with claimed damages estimated by DSM at more than $40 million; 3D Systems was contesting the claims. A Japanese customer sought damages exceeding the equivalent of $2.1 million. Separately, a court had found certain EnvisionTEC products infringed patents asserted by 3D Systems; damages discovery and an appeal were pending.
- Goodwill was $107.7 million and other intangible assets were $54.0 million at year-end; no goodwill impairment was recorded. Management’s impairment assessment depends on forecasts and market assumptions.
Most important facts for investors to verify
- Whether organic demand and margins sustain growth after separating acquired revenue from comparable-period performance.
- Cash generation and working-capital conversion, particularly receivables, rising days sales outstanding and bad-debt reserves.
- Post-acquisition integration, performance and final purchase accounting for Z Corp and Vidar, including the effect of the $135.5 million cash payment.
- The notes’ cash interest, conversion and potential dilution terms, and the company’s capacity to meet contractual commitments.
- Developments in the DSM Desotech, MSK and EnvisionTEC proceedings and any resulting financial exposure.
- Reliability of earnings comparisons given the $6.2 million non-cash tax benefit and acquisition-related costs.