3D Systems Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. The company provides 3D printers, print materials, on-demand parts services, and related software. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Share and per-share data reflect the three-for-two stock split paid in February 2013.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $102.1 | $77.9; up 31.0% |
| Gross profit / margin | $53.5 / 52.4% | $38.9 / 49.9% |
| Operating expenses | $36.0 | $28.9 |
| Operating income | $17.5 | $10.0 |
| Interest and other expense, net | $10.1 | $2.7 |
| Income before taxes / tax provision | $7.5 / $1.6 | $7.3 / $1.1 |
| Net income / diluted EPS | $5.9 / $0.06 | $6.2 / $0.08 |
| Operating cash flow | $10.7 | $15.8 |
| Cash and cash equivalents, March 31 | $110.5 | $155.9 at December 31, 2012 |
| Working capital, March 31 | $174.2 | $212.3 at December 31, 2012 |
Investing activities used $55.4 million, including $52.9 million for acquisitions; financing activities provided $0.1 million. Cash declined by $45.3 million during the quarter. Current assets were $256.0 million and current liabilities $81.8 million at March 31.
Gross margin expanded 2.5 percentage points. Product revenue was $68.5 million and services revenue $33.6 million. Printers and other products grew 60.7%, print materials 16.4%, and services 17.9%. Printer unit sales increased 81%. Healthcare solutions represented $14.1 million, or 13.9% of revenue. Management reported organic revenue growth of 22.1%.
Debt included 5.50% senior convertible notes due December 2016. During the quarter, holders converted $42.1 million principal into approximately 3.0 million shares; the company recorded a $5.7 million conversion loss. Remaining principal was $48.3 million, with a net carrying value of $43.1 million. Capitalized lease obligations totaled $7.6 million. The company said it was compliant with note covenants and had no off-balance-sheet arrangements.
Changes versus the prior comparable period
- Revenue and operating income increased substantially, while net income fell by $0.3 million and diluted EPS declined from $0.08 to $0.06. Higher operating income was largely offset by increased interest and other expense, including the convertible-note conversion loss, foreign-exchange loss, and a litigation-settlement loss.
- Gross margin improved, including higher margins for printers and other products and print materials. Operating expenses increased 24.5%, with higher compensation, acquisition-related costs, and research and development spending.
- Operating cash flow decreased to $10.7 million from $15.8 million. Acquisition spending was lower than in Q1 2012, when cash paid for acquisitions was $134.9 million.
- Cash and working capital declined from year-end 2012. Accounts receivable rose to $89.6 million; days sales outstanding increased to 79 from 72, and receivables more than 90 days past due rose to 6.7% from 6.4%.
Outlook, management commentary, and risks
Management described continued execution of initiatives in printer adoption, healthcare, consumer products and services, on-demand parts, and integrated 3D authoring solutions. The quarter included launches of the Cube, CubeX, and ProJet 3500 series; Geomagic and Co-Web acquisitions; and April announcements of Geomagic Design and the ProJet x60 series. The filing provides no quantified full-year revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
Backlog was $11.4 million at March 31, unchanged from December 31, 2012 and up from $9.6 million a year earlier. Management noted backlog depends on customer delivery timing and the mix and lead times of custom-parts orders. It also said additional funding might be needed beyond the next twelve months or for significant acquisitions, although the company expected to rely on cash, operating cash flow, and capital-markets transactions for its requirements.
Risks and unusual items include foreign-currency exposure (a $1.0 million transaction loss in Q1 versus a $0.5 million gain in Q1 2012), acquisition integration and purchase-price allocations that remained preliminary, and the effect of product mix and timing of shipments on printer revenue. DSM Desotech appealed the court’s judgment for 3D Systems on seven antitrust counts; other specified claims were dismissed in connection with settlement. 3D Systems was pursuing patent-infringement claims against Formlabs and Kickstarter. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported growth reflects organic demand versus acquisitions, particularly the contribution of acquired software and Geomagic.
- Whether margin gains persist as product mix shifts toward lower-priced printers, and how the growth in operating expenses affects earnings.
- Cash conversion and working-capital trends, especially rising receivables, higher days sales outstanding, and past-due balances.
- The remaining convertible-note balance, potential dilution from future conversions, and the impact of any related charges.
- Integration progress and final purchase-price allocations for acquisitions, as well as earnout and supply commitments.
- Developments in the DSM Desotech appeal and the Formlabs/Kickstarter litigation, including any material financial effects.