3D Systems Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
3D Systems provides 3D printing hardware, materials, software and services through Healthcare and Industrial segments. Its strategy focuses on these verticals, following restructuring and divestitures of non-core businesses completed in 2021. Q2 results include the effects of the April acquisitions of Kumovis and Titan.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $140.0 | $162.6 | $273.0 | $308.7 |
| Gross profit | $53.1 | $69.0 | $106.9 | $133.2 |
| Gross margin | 37.9% | 42.4% | 39.2% | 43.2% |
| Operating loss | $(32.0) | $(10.1) | $(55.3) | $(12.0) |
| Net income (loss) attributable to 3D Systems | $(33.0) | $(9.6) | $(59.8) | $35.6 |
| Diluted loss per share | $(0.26) | $(0.08) | $(0.47) | Not applicable; diluted EPS was $0.28 |
Q2 revenue fell 13.8%; six-month revenue fell 11.5%. Services revenue declined sharply, primarily reflecting divestitures. Management also cited the cessation of Russian sales and unfavorable foreign exchange, partly offset by higher product volumes and continued demand. Q2 product revenue was $103.8 million and services revenue was $36.3 million.
Q2 segment revenue was $71.7 million for Healthcare and $68.3 million for Industrial. Segment operating income was $8.9 million and $2.5 million, respectively, compared with $22.3 million and $9.9 million a year earlier. Consolidated operating loss also reflected corporate expense, including higher legal and other settlement estimates.
Gross margin pressure reflected divestiture-related mix changes, inflation, freight and component costs, and supply-chain constraints. Q2 SG&A rose to $64.4 million and R&D to $20.8 million; SG&A included $11.0 million of estimated legal and other settlement costs. The filing also cites Volumetric contingent-consideration expense of $4.0 million in Q2 and $8.0 million for the first half.
Cash flow, debt and liquidity
- Cash flow: Operating activities used $38.2 million in the first half, versus $42.0 million provided in the prior-year period. Investing activities used $437.1 million, including $339.4 million of net short-term investment purchases, acquisitions and capital expenditures. Financing activities used $12.7 million.
- Liquidity: At June 30, cash and cash equivalents were $298.8 million and short-term investments were $339.4 million. Together with restricted cash, management reported $639.3 million, down from $789.7 million at year-end 2021.
- Debt: The company had $460.0 million principal amount of 0% convertible notes due November 2026; carrying value, net of deferred financing costs, was $448.1 million. The initial conversion price is approximately $35.92 per share. The company reported compliance with note covenants and no revolving credit facility after terminating it in 2021.
- Other obligations: Lease obligations were $67.8 million, plus $31.1 million for leases not yet commenced. A July 2022 manufacturer-exit payment was approximately $17.1 million, including an exit fee and purchases of inventory and fixed assets.
Material changes, outlook and risks
Gross margin and operating results weakened year over year, while operating cash flow turned negative. The year-ago first-half net income included a $38.5 million gain on the Cimatron sale; the 2022 period instead recorded a net loss. Revenue comparisons are also affected by the 2021 divestitures, so reported declines do not represent a like-for-like business comparison.
No specific revenue or earnings guidance is provided in the filing. Management said it believes available cash, short-term investments and other potential funding sources will meet foreseeable requirements and cash needs over the next 12 months. It expects ongoing uncertainty from inflation, recession risk, foreign exchange, the Russia-Ukraine conflict, COVID-19 and supply-chain disruption, and cannot estimate their duration or effect. The company exited the Russian market in 2022.
Growth investments included acquiring 93.75% of Kumovis for approximately $37.7 million and all of Titan for $39.5 million. Kumovis is expected to be dilutive in the near term; Titan is not expected to have a material near-term financial impact. Purchase-price allocations remain preliminary. A $10.0 million Enhatch investment and an approximately $6.5 million initial commitment to a planned Saudi joint venture are also disclosed. After quarter-end, the company announced an agreement to acquire dp polar for €30 million, expected to close in Q4 2022.
Contingencies and controls: The company estimated expected costs associated with disclosed legal matters at $8.4 million as of June 30. A securities class action and derivative suits are pending, and the SEC is conducting a formal investigation; the company says it is cooperating and considers the claims without merit. The export-controls matter remains under government review, although the Air Force ended its monitorship in 2021. Management concluded disclosure controls were not effective at quarter-end because material weaknesses remained in controls over non-standard contracts, financial-close analyses and income-tax calculations. Remediation is ongoing.
Important facts for investors to verify
- How much of revenue and margin performance reflects continuing operations versus divestitures, foreign exchange and the Russia exit.
- Whether negative operating cash flow and working-capital needs persist, and how readily short-term investments can be converted to cash without further losses.
- The resolution and potential cost of the SEC investigation, shareholder litigation and export-controls reviews; compare disclosed legal estimates with the $11.0 million Q2 expense.
- Progress remediating material weaknesses and whether acquisition accounting adjustments, including Kumovis and Titan valuations, materially change reported assets or earnings.
- Near-term performance and dilution from acquisitions and milestone arrangements, and the company’s ability to meet obligations on the 2026 convertible notes.