3D Systems Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. The company provides 3D printing and digital manufacturing products and services through Healthcare and Industrial segments. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $133.0 million | $146.1 million |
| Gross profit / margin | $53.8 million / 40.4% | $64.2 million / 44.0% |
| Operating expenses | $77.0 million | $66.2 million |
| Operating loss | $23.2 million | $2.0 million |
| Net income (loss) | $(26.8) million | $45.2 million |
| Diluted EPS | $(0.21) | $0.36 |
| Cash from (used in) operations | $(15.1) million | $28.5 million |
- Products revenue was $100.6 million, up 7.4%; services revenue was $32.5 million, down 38.2%. Recurring revenue, defined by the company to include services and materials, was $82.0 million versus $96.7 million.
- Healthcare revenue was $64.3 million, down 11.3%; Industrial revenue was $68.7 million, down 6.6%. Segment operating income was $7.7 million for Healthcare and $6.3 million for Industrial.
- At March 31, cash and cash equivalents were $389.3 million and short-term investments were $356.3 million. Their combined balance was $745.6 million. Current assets were $987.7 million versus current liabilities of $150.2 million.
- Long-term debt, net of financing costs, was $447.5 million; principal outstanding was $460.0 million under 0% convertible notes due November 2026. The company had terminated its revolving credit facility in 2021 and reported compliance with the notes’ covenants.
- Investing cash outflow was $373.2 million, primarily reflecting purchases of short-term investments; financing cash outflow was $12.5 million. Capital expenditures were $4.1 million.
Changes, outlook and notable items
- Revenue fell 9.0%, primarily due to sales of non-core businesses, partly offset by higher product volumes and continued demand. Divestitures also changed the revenue mix and reduced services revenue.
- Gross margin declined 3.6 percentage points. Management attributed the reduction mainly to divestiture-related mix changes and inflation, including freight and component costs. Operating expenses rose 16.4%, reflecting growth investment, acquired-company expenses, higher bad-debt expense and contingent consideration expense.
- The prior-year comparison includes a $32.0 million gain on the Cimatron sale in Q1 2021, contributing to the prior-year net profit. Management gave no specific revenue or earnings guidance. It said available liquidity and other sources were expected to meet foreseeable cash requirements and cash needs over the next 12 months.
- Management cited COVID-related disruption, inflation, supply-chain constraints, labor availability, transportation capacity, China shutdowns and the Russia-Ukraine conflict as continuing uncertainties. It said longer-term impacts could not be reasonably estimated.
- In March 2022, the company invested $10.0 million for an approximately 26.6% stake in Enhatch and agreed to an initial investment of about $6.5 million in a planned Saudi Arabia joint venture, with possible additional milestone-based investment. In April, after quarter-end, it acquired Kumovis and Titan for a combined $80.0 million in cash.
- Potential additional Volumetric acquisition payments of up to $355.0 million are contingent on milestones and continued employment. The filing describes Q1 milestone expense as $1.99 million in one note, while MD&A cites $4.0 million of Volumetric contingent consideration expense; the reported amounts are not reconciled in the filing text.
- Legal matters include U.S. government export-control and sanctions reviews, a securities class action and shareholder derivative suits. The company disclosed on April 15, 2022 that the SEC had opened a formal investigation and subpoenaed documents; it said it was cooperating and believed the shareholder claims were without merit.
- Disclosure controls were ineffective at quarter-end because material weaknesses remained in controls for non-standard contracts, review of financial-close reports and income-tax provisions. The company described remediation efforts but could not assure when the weaknesses would be resolved.
- The company also disclosed an immaterial, presentation-only reclassification of prior-period cash-flow items: certain noncontrolling-interest purchases were reclassified from investing to financing activities, without changing net cash movement or other financial statements.
Key facts for investors to verify
- Whether product growth and demand can offset divestiture-related declines in services and recurring revenue.
- Whether gross margins recover as inflation and supply-chain pressures evolve, and whether operating expenses translate into growth.
- The reconciliation of the filing’s $1.99 million and $4.0 million descriptions of Volumetric contingent consideration expense.
- Progress and potential financial consequences of the SEC, export-control and shareholder litigation matters, as well as remediation of material control weaknesses.
- Cash deployment and future obligations, including the post-quarter $80.0 million acquisitions, joint-venture commitments, convertible notes and up to $355.0 million of contingent Volumetric payments.