3D Systems Corporation (NYSE: DDD) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar amounts below are in millions unless noted. The company reports Healthcare and Industrial segments; prior-period segment revenue is presented on the revised basis.
Business context and results
3D Systems sells 3D printers, materials, software and related services for Healthcare and Industrial applications. During 2021 it sold Cimatron, its On Demand Manufacturing business (ODM), and Simbionix, its medical simulation business. The divestitures materially affect comparisons and reported earnings.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $156.1 | $136.2 | $464.8 | $384.6 |
| Gross profit | $64.3 | $58.6 | $197.6 | $150.9 |
| Gross margin | 41.2% | 43.1% | 42.5% | 39.2% |
| Operating loss | $(17.2) | $(67.6) | $(29.2) | $(119.7) |
| Net income (loss) | $292.7 | $(72.9) | $328.3 | $(129.8) |
| Diluted EPS | $2.34 | $(0.61) | $2.63 | $(1.12) |
Performance and material changes
- Q3 revenue grew 14.6%; product revenue rose 39.1% to $108.9 million, while services revenue fell 18.4% to $47.2 million. Management attributed product growth largely to recovery from prior-year pandemic disruption. Service declines reflected divestitures and lower on-demand volume.
- Q3 Healthcare revenue increased 28.3% to $76.4 million, supported by dental demand; Industrial revenue rose 4.0% to $79.7 million. For the nine months, revenue increased 20.8%, with Healthcare at $231.7 million and Industrial at $233.1 million.
- Q3 gross margin declined 1.9 percentage points year over year. The filing cites divestitures, higher logistics and supply-chain costs, volume-based pricing on certain key accounts, and changes in collaboration revenue estimates. For the nine months, gross margin improved, helped by higher volume, capacity utilization and the absence of a prior-year end-of-life inventory charge.
- Q3 operating loss narrowed from $67.6 million to $17.2 million. Lower prior-year goodwill impairment and restructuring costs, cost savings and higher gross profit contributed; higher compensation, stock-based compensation and a $9.8 million Simbionix employee bonus partially offset these benefits. The 2020 quarter included a $48.3 million goodwill impairment.
- Despite reported net income, the company recorded an operating loss. Q3 net income included $311.1 million of gains on ODM and Simbionix divestitures; nine-month net income included $343.1 million of gains on Cimatron, ODM and Simbionix sales. These gains make reported earnings unrepresentative of recurring operating performance.
- Q3 segment operating profit was $9.1 million in Healthcare and $13.2 million in Industrial, before $39.5 million of net general corporate expense.
Cash flow, debt and liquidity
- At September 30, cash and cash equivalents were $502.8 million; cash including restricted cash was $503.1 million. The company reported no outstanding debt after repaying its term loan and terminating its revolving credit facility.
- Nine-month operating cash flow was $62.7 million, versus cash use of $32.6 million in 2020. Investing cash flow was $395.6 million, primarily reflecting $427.7 million of net proceeds from business and asset sales; financing cash use was $32.2 million. Capital expenditures were $14.8 million.
- Management said operating cash flow, cash on hand and other potential liquidity sources should be sufficient for foreseeable cash requirements. Cash held outside the U.S. was $56.1 million.
- Total assets were $1.005 billion and total liabilities were $256.0 million at quarter-end. The filing reports $151.5 million of outstanding performance obligations, including deferred revenue, backlog and customer deposits.
Outlook, transactions, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management said the ongoing effects of COVID-19, labor availability, supply-chain disruption, critical-component shortages and financial-market volatility were uncertain.
- The restructuring plan, announced in 2020, was completed in Q2 2021; total charges were approximately $21.1 million. Management described the plan as aligning costs with revenue and supporting sustainable, profitable growth.
- On November 1, 2021, after quarter-end, the company completed its approximately $180 million Oqton acquisition, expected to be dilutive near term; consideration included approximately $106 million cash and the balance in shares. A proposed Volumetric acquisition announced October 27 contemplated $45 million upfront plus up to $355 million in milestone payments, approximately half cash and half shares; completion was expected in Q4 2021.
- COVID-19 and supply-chain disruptions may affect production, customer demand and fulfillment. The company also warned that federal contractor vaccination requirements could cause employee attrition, increased costs or disruption. One large customer was expected to represent over 20% of 2021 revenue after adjustment for divestitures.
- Export-control and sanctions investigations remain ongoing, and the company expects further legal costs; the Air Force ended its compliance monitorship early in August 2021. The company also faces a securities class action and derivative suits, which it considers without merit and intends to defend.
- Management concluded disclosure controls were ineffective at September 30 because of material weaknesses involving non-standard contracts and review of internally prepared reports and analyses. Remediation was underway, but the company gave no assurance as to timing or completion.
Important facts for investors to verify
- How much revenue and operating profit the continuing businesses can sustain after the Cimatron, ODM and Simbionix divestitures.
- Whether product growth converts to improved margins and operating profitability despite service declines, pricing pressure and supply-chain costs.
- Use of divestiture proceeds, cash outlay and share dilution from Oqton and any Volumetric transaction, including the expected near-term dilution.
- Progress in remediating the material weaknesses and any subsequent changes in internal-control effectiveness.
- Developments, potential costs and business consequences from the government investigations and shareholder litigation, alongside customer concentration and supply-chain risks.