3D Systems Corporation (NYSE: DDD) — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021; compared with the quarter ended March 31, 2020. Amounts below are in millions of U.S. dollars unless noted.
Business context and reporting period
3D Systems provides 3D printers, materials, software, digital design tools, and manufacturing and healthcare services. Effective January 1, 2021, it began reporting Healthcare and Industrial as separate segments; historical segment revenue was recast, but comparable prior-period segment operating results were not available. The company completed the sale of Cimatron, its tooling CAD/CAM and GibbsCAM businesses, on January 1, 2021.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $146.1 | $135.6 |
| Gross profit / margin | $64.2 / 44.0% | $57.1 / 42.1% |
| Operating expenses | $66.2 | $75.4 |
| Operating loss | $(2.0) | $(18.2) |
| Net income (loss) | $45.2 | $(18.9) |
| Diluted EPS | $0.36 | $(0.17) |
| Cash provided by (used in) operations | $28.5 | $(2.3) |
- Revenue: Products revenue rose 17.4% to $93.6 million; services revenue fell 6.1% to $52.5 million. Healthcare revenue increased 38.7% to $72.5 million, while Industrial revenue declined 11.7% to $73.6 million, primarily reflecting the Cimatron divestiture.
- Profitability: Gross margin improved 1.9 percentage points, with product margin rising to 43.0%; services margin declined to 45.7%. Operating expenses decreased 12.1%, reflecting restructuring savings and lower travel and hiring, partly offset by higher stock-based compensation.
- Net income quality: Q1 2021 net income included $38.9 million of interest and other income, principally the $32.9 million Cimatron sale gain and a $6.5 million release of accumulated currency translation gains. A tax benefit of $8.3 million also included the effect of favorable tax rulings and release of uncertain tax positions. The operating business remained loss-making.
- Cash, debt and liquidity: Cash and cash equivalents were $132.4 million at March 31, versus $75.0 million at year-end; cash including restricted cash was $133.0 million. The company had no outstanding debt after repaying and terminating its term loan. Its $100 million revolving facility had $92 million available, with $7 million of letters of credit outstanding; the company reported compliance with covenants.
- Balance sheet: Total assets were $705.5 million, total liabilities $243.4 million, and stockholders’ equity $462.1 million. Operating cash flow benefited from working-capital improvements and included $6.6 million of withholding-tax payments related to the Cimatron sale.
Material changes and management outlook
- Revenue grew 7.7%, driven by a rebound in product volume, Healthcare strength—especially dental—and favorable product mix and currency effects. The prior-year quarter was affected by COVID-19 disruptions. Lower Industrial services reflected lower on-demand volume and divestitures.
- Management expects restructuring and other cost reductions to lower annualized costs by approximately $80 million by year-end 2021, with up to an additional $20 million dependent on potential divestitures. Estimated restructuring charges total $27.7 million; $21.1 million had been incurred through March 31.
- Management said cash, operating cash flow and other liquidity sources should be sufficient for foreseeable requirements. No specific revenue or earnings guidance was provided in the filing.
- COVID-19 continued to affect reported results. Management cited uncertainty around future pandemic developments, global economic conditions, supply-chain disruptions—including semiconductor shortages—and financial-market volatility.
- Subsequent events: on May 6, 2021, the company acquired Allevi, Inc.; it also announced an agreement to acquire Additive Works GmbH, expected to close in Q2 2021.
Risks, contingencies and unusual disclosures
- Management concluded disclosure controls were not effective at March 31, 2021 because of material weaknesses involving controls over non-standard contracts and review of internally prepared financial reports and analyses. Remediation was underway; timing of full remediation was not assured.
- Government reviews concerning potential export-control, sanctions and government-contract compliance matters remain ongoing. The company is cooperating; it is subject to a two-year U.S. Air Force Administrative Agreement and expects continued legal and compliance costs.
- Two putative securities class actions filed in April 2021 allege misleading statements and seek monetary damages. The company disputes the claims and intends to defend itself.
- The filing disclosed a non-material presentation error in prior-period allocation of product versus services cost of sales; total cost of sales and reported profit measures were unaffected.
- The company changed segment reporting and performed a goodwill impairment assessment after the change; it reported that each reporting unit’s fair value exceeded its carrying value at January 1, 2021.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist, particularly given the decline in services revenue and Industrial results.
- How much of reported net income came from the Cimatron gain and tax-related items, versus recurring operating performance.
- Progress toward the targeted $80 million annualized savings, the associated remaining restructuring charges, and any additional divestitures.
- Remediation of the material weaknesses and any subsequent changes to financial reporting controls.
- Developments and potential costs from the export-control investigations and securities litigation, as well as COVID-19 and supply-chain impacts.