3D Systems Corporation (NYSE: DDD) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial amounts below are in millions of dollars unless noted; the filing’s financial statements are unaudited.
Business context
3D Systems provides 3D printers, materials, software and related services through its Healthcare Solutions and Industrial Solutions segments. The company reported lower product sales, particularly in dental orthodontics, while services revenue grew.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $128.2 | $140.0 | $249.4 | $273.0 |
| Gross profit / margin | $50.0 / 39.0% | $53.1 / 37.9% | $97.1 / 38.9% | $106.9 / 39.2% |
| Operating loss | $(31.7) | $(32.0) | $(65.1) | $(55.3) |
| Net loss attributable to 3D Systems | $(28.9) | $(33.0) | $(58.3) | $(59.8) |
| Adjusted EBITDA (non-GAAP) | $(6.9) | $(2.6) | $(17.0) | $(0.7) |
| Basic and diluted loss per share | $(0.22) | $(0.26) | $(0.45) | $(0.47) |
- Revenue mix: Q2 products revenue fell 14.1% to $89.2 million; services rose 7.6% to $39.0 million. For the first half, products declined 15.1% to $173.6 million and services increased 10.5% to $75.9 million.
- Cash flow: First-half operating cash use was $46.3 million, versus $38.2 million a year earlier. Investing activities provided $150.6 million, largely from $179.8 million of short-term investment maturities and sales; capital expenditures were $13.5 million. Financing activities used $4.9 million.
- Cash and debt: June 30 cash and equivalents were $490.4 million, with $1.1 million of short-term investments. Convertible-note principal was $460 million, due November 2026; its balance-sheet carrying amount was $450.8 million. Notes carry 0% stated interest and the company reported covenant compliance.
- Liquidity: Current assets were $784.9 million and current liabilities $153.9 million. Management said available resources were sufficient for foreseeable cash requirements and the next 12 months. Cash, equivalents and short-term investments together were $491.6 million.
Material changes versus the prior comparable period
- First-half revenue decreased 8.6%, primarily from lower product volumes; management attributed much of the Healthcare decline to weaker demand for dental orthodontic products amid economic conditions. APAC revenue declined to $20.2 million from $33.1 million.
- Healthcare Solutions first-half revenue declined 19.5% to $109.6 million and segment Adjusted EBITDA fell 48.4% to $16.5 million. Industrial Solutions revenue rose 2.1% to $139.8 million, while segment Adjusted EBITDA was nearly flat at $9.2 million.
- First-half operating loss widened by $9.9 million despite lower SG&A, as lower revenue and gross profit outweighed expense reductions. Higher interest income helped limit the increase in net loss.
- Inventory rose 13.3% from year-end to $156.2 million. The company also reported $4.6 million of inventory-obsolescence and revaluation provision in first-half operating cash-flow adjustments.
- Cash plus short-term investments decreased $77.2 million from year-end, with operating cash use, capital spending, acquisitions and investments, and employee equity-award tax payments partly offset by investment maturities and sales.
Outlook, management commentary, risks and unusual items
- Restructuring: The company announced a workforce reduction of approximately 6%, mainly in corporate and business support functions, and recorded $3.0 million of severance costs plus a $0.6 million fixed-asset impairment. Along with bringing certain metal-printer manufacturing in-house, management expects operating-expense reductions of $4–6 million in 2023 and $9–11 million annually beginning in 2024. These are expectations, not guaranteed results.
- Volumetric earnout estimate: Management moved the expected timing of a regenerative-medicine milestone from year-end 2025 to year-end 2026. The change reversed $4.2 million of previously recognized earnout expense and $0.4 million of stock compensation expense. A potential $65 million payment is associated with the milestone; up to $290 million of other earnout payments had not been recognized because related milestones were not considered probable. Estimates may change materially.
- Strategic transactions: On July 3, 2023, the company acquired Wematter for approximately $10.3 million in cash, subject to adjustments, with up to €2.0 million of contingent consideration. After quarter-end, it submitted a contingent Stratasys acquisition proposal involving approximately $540 million cash, 1.5444 shares of the combined company per Stratasys share, and a proposed $32.5 million fee payment on Stratasys’s behalf. The proposal depended on multiple approvals and conditions; completion was not assured. Potential termination fees and expense reimbursements could apply if an agreement were executed and later terminated under specified conditions.
- Legal and regulatory matters: Export-control matters were settled in Q1 2023 for $15.0 million in civil penalties; $8.5 million was paid during the first half. A further $10.0 million suspended penalty was not recorded as a liability and may be used for required compliance measures or become payable. A securities class-action settlement had preliminary court approval after quarter-end but still required final approval; the SEC investigation was ongoing, and related derivative suits were stayed.
- Controls: Management concluded disclosure controls were not effective at June 30, 2023 because of material weaknesses in controls over revenue, receivables and deferred revenue, and review of financial-close reports and analyses. Remediation was ongoing; management could not assure when the weaknesses would be corrected.
- Other risks: One customer accounted for 18.9% of Q2 revenue and 16.3% of first-half revenue. The filing highlights risks including uneven sales cycles, macroeconomic and foreign-exchange conditions, supply chain dependence, acquisition integration, litigation, debt service, inventory management and commercialization of regenerative medicine. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether product demand, particularly in dental orthodontics, stabilizes and whether services growth can offset weaker product sales.
- Progress toward positive operating cash flow and execution of the restructuring savings, including timing and implementation costs.
- Cash needs and potential dilution or other obligations from the Stratasys proposal, the Wematter acquisition, leases and the 2026 convertible notes.
- Developments in the SEC investigation, final approval of the securities settlement, and the suspended export-control penalty.
- Remediation and independent validation of the disclosed material weaknesses in internal controls.
- Changes in the probability, timing and accounting expense associated with Volumetric and other contingent earnouts.