3D Systems Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and key financial metrics
3D Systems provides 3D printers, materials, software, digital design tools, and manufacturing and healthcare services. It reports one operating segment and presents geographic information for the Americas, EMEA, and Asia Pacific.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $155.3 | $164.5 | $464.5 | $506.9 |
| Gross profit / margin | $67.3 / 43.3% | $77.8 / 47.3% | $206.3 / 44.4% | $241.8 / 47.7% |
| Operating expenses | $79.2 | $88.8 | $258.7 | $278.0 |
| Operating loss | $(11.9) | $(11.0) | $(52.4) | $(36.2) |
| Net loss attributable to 3D Systems | $(16.8) | $(11.6) | $(65.2) | $(41.4) |
| Loss per share, diluted | $(0.15) | $(0.10) | $(0.57) | $(0.37) |
| Operating cash flow | Not separately stated | Not separately stated | $10.1 | $(2.9) |
At September 30, cash and cash equivalents were $127.6, current assets $391.6, and current liabilities $171.1. Total debt on the balance sheet was $58.4, including $3.0 current and $55.4 long-term; management separately reports $59.0 outstanding on the term facility. The company had $35.0 of right-of-use assets and $43.5 of lease liabilities. Total liabilities were $307.5 and stockholders’ equity was $506.4.
For the nine months, investing cash outflow was $18.4, primarily for facilities and IT infrastructure; financing cash inflow was $27.3. Cash, cash equivalents, and restricted cash increased by $17.6 to $128.5. Unrestricted cash was $127.6. Working capital, as defined in the MD&A, was $231.1, down $12.0 from December 31, 2018.
Material changes versus prior comparable periods
- Q3 revenue fell 5.6%; nine-month revenue fell 8.4%. Management cited lower printer sales, a large enterprise customer’s ordering patterns, weaker manufacturing activity, the exit from entertainment, and unfavorable foreign-exchange translation. Asia Pacific revenue declined 37.5% in Q3; EMEA revenue increased 9.7%.
- Q3 product-class revenue (excluding materials) declined 10.9%, while materials increased 2.8% and services declined 5.9%. Healthcare revenue rose 6.3% to $56.4; software revenue increased 0.1% to $24.6.
- Gross margin contracted 4.0 percentage points in Q3. Management attributed the product margin decline chiefly to lower production and overhead under-absorption, sales mix, and inventory adjustments; service margin improved with mix and printer-service performance.
- Operating expenses declined 10.8% in Q3 and 7.0% year to date, reflecting cost reductions, lower acquired-intangible amortization, reduced legal expenses, and completed product-development projects. These savings did not offset weaker gross profit.
- Q3 net loss widened by $5.3, and nine-month net loss widened by $23.8. Higher non-operating expense reflected foreign-exchange impacts and interest expense; the nine-month comparison also included impairment of assets sold with the entertainment business.
- Nine-month operating cash flow improved from a $2.9 outflow to a $10.1 inflow, supported by working-capital movements, including lower receivables and inventory and higher deferred revenue. The company generated $10.1 despite a $65.0 net loss.
Outlook, management commentary, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management said cash, operating cash flow, and available financing were expected to be sufficient for foreseeable cash requirements. It is pursuing cost reductions to address macroeconomic pressure, lower sales, and customer ordering variability.
- Management stated that it continued to believe reporting-unit fair values exceeded carrying values and long-lived assets were recoverable. It cautioned that continued adverse performance could trigger future goodwill or long-lived-asset impairment.
- In February 2019, the company entered a five-year $100.0 secured term facility and a $100.0 revolving facility, replacing its prior $150.0 unsecured revolver. The facilities mature in February 2024; the company reported covenant compliance at quarter-end. A $50.0 interest-rate swap reduces floating-rate exposure; management estimated approximately 15% of principal debt remained floating-rate.
- Export-control and government-contracting investigations remain a material risk. The Air Force lifted its July 2019 contracting suspension on September 6 after a two-year Administrative Agreement; independent monitors will assess compliance. The company expects continued legal and compliance costs and cannot estimate potential penalties or other liabilities.
- Nine shareholder derivative actions received preliminary settlement approval in October 2019. The proposed settlement includes governance reforms and $2.15 in attorneys’ fees, expected to be funded by insurance; final approval was scheduled for December 19, 2019. A $2.15 liability and matching insurance receivable were recorded.
- Owners of a subsidiary hold put rights estimated at approximately $8.9, subject to conditions and future business performance. The amount is recorded as redeemable noncontrolling interests.
- The company acquired the remaining 30% of Easyway for $13.5 payable over four years; $2.5 was paid in March 2019. Nine-month cash financing outflows included that installment, and the filing also records a noncash purchase amount of $11.0.
- Accounts receivable more than 90 days past due rose to 12.0% of gross receivables from 8.9% at year-end. Cash held outside the U.S. was $85.0, or 66.6% of total cash and equivalents.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also notes foreign-currency exposure, competitive and macroeconomic risks, possible future impairment, and the risk of further government action.
Important facts for investors to verify
- Whether printer demand and large-customer order timing improve, and whether healthcare growth can offset weakness in other products, services, and regions.
- Whether gross margins recover, particularly in products, and whether cost reductions translate into improved operating results and cash generation.
- The status and financial consequences of export-control investigations, compliance monitoring, and the two-year Air Force Administrative Agreement.
- Debt terms, covenant headroom, revolving-facility availability, and the difference between the $58.4 balance-sheet debt total and the $59.0 term-facility amount disclosed in the note.
- Receivables aging and collections, potential impairment indicators, the final derivative-settlement outcome, and the timing and amount of any subsidiary put-option payments.