3D Systems Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in millions of dollars unless stated otherwise. The company supplies 3D printers, print materials, software and on-demand manufacturing services.
Financial performance
- Quarter revenue: $120.8, up 44.5% from $83.6. Printers and other products rose 107.9% to $54.2; materials rose 11.7% to $29.3; services rose 19.1% to $37.3. Management reported organic growth of 30.1%.
- Quarter earnings: Gross profit was $62.6, with a 51.8% gross margin versus 51.4%. Operating income was $16.8 versus $14.0. Net income was $9.3 versus $8.3; diluted EPS was $0.10 versus $0.11, as weighted-average shares increased to 96.2 million from 78.9 million.
- Six-month revenue and earnings: Revenue was $222.9, up 38.0%; gross profit was $116.1 and gross margin 52.1%, up from 50.7%. Operating income was $34.3 versus $24.0; net income was $15.2 versus $14.5. Diluted EPS was $0.16 versus $0.19. Management reported six-month organic growth of 26.2%.
- Costs and margins: Q2 operating expenses increased 58.1% to $45.8, faster than revenue. Product and materials margins improved, while services margin declined to 43.8% from 46.4%, reflecting Quickparts mix and the RPDG acquisition. The six-month effective tax rate was 29.5%, versus 17.3%.
- Cash flow: Six-month operating cash flow was $12.8, down from $21.4; investing used $90.9, including $86.2 for acquisitions; financing provided $272.2, principally from a May stock offering. Cash increased to $349.3 from $155.9.
- Liquidity and debt: Working capital was $432.0, versus $212.3 at year-end 2012. Current assets were $522.2 and current liabilities $90.2. Convertible notes had $27.5 principal outstanding ($24.7 net carrying value); capitalized leases totaled $7.5. Total liabilities were $155.4.
- Other balance-sheet items: Receivables were $111.5 and inventories $49.8. Goodwill was $297.9 and intangible assets, net, $139.6.
Material changes and notable items
- Revenue growth reflected higher printer volumes, acquired software revenue and growth in services and materials. Printer units increased 265.4% in Q2 year over year. Healthcare solutions accounted for 15.6% of Q2 revenue, versus 14.5%.
- The company raised $272.1 net through a public offering of approximately 7.1 million shares. It also completed the RPDG acquisition for stated consideration of $44.5, including cash and shares. After quarter-end, it acquired approximately 81% of Phenix Systems for $15.1 cash.
- Holders converted $63.4 principal of 5.50% convertible notes during the six months. The conversions generated a $9.3 loss in interest and other expense; $27.5 principal remained at June 30.
- Management presented non-GAAP net income of $19.0 for Q2 and $37.8 for six months, excluding items including stock compensation, acquired-intangible amortization, acquisition costs and note-conversion losses. These are supplemental, non-GAAP measures.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management described continued strategic investment in printer adoption, healthcare, Quickparts, consumer offerings and integrated design software, and cautioned that interim results are not necessarily indicative of full-year results.
- Receivables growth and collection metrics warrant attention: DSO rose to 84 days from 72 at December 31, 2012, and receivables more than 90 days past due rose to 7.8% of gross receivables from 6.4%.
- Printer orders and shipments can be uneven because of long sales cycles and timing of large orders. Price and mix reduced reported revenue growth; Quickparts service margins also weakened.
- Commitments included $17.3 of printer-assembly supply obligations and $6.0 of deferred acquisition purchase payments due in 2013. Acquisition earnout liabilities were $2.6. The company reported no off-balance-sheet arrangements.
- DSM Desotech appealed a judgment for 3D Systems on anticompetitive-behavior claims; remaining litigation counts were dismissed in connection with settlement. The company’s patent suit against Formlabs and Kickstarter was stayed through September 3, 2013 to allow settlement discussions. Management said other legal matters were not expected to materially affect results or financial position.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes in market-risk assessment or previously disclosed risk factors.
Investor verification priorities
- Verify whether revenue growth converts into stronger operating cash flow, particularly given higher receivables and DSO.
- Track dilution from the equity offering and note conversions, and reconcile GAAP EPS with the company’s adjusted non-GAAP measures.
- Assess whether product and materials margin gains can offset rising operating expenses and weaker services margins.
- Review acquisition integration, RPDG performance and the costs and results of the Phenix Systems takeover.
- Monitor the status and potential exposure of the DSM Desotech and Formlabs litigation, as well as acquisition-related payment commitments.