3D Systems Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. 3D Systems sells 3D printers, materials, software and manufacturing and healthcare services. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Financial results
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Revenue | $165.9 million | $156.4 million; up 6.0% |
| Gross profit / margin | $77.9 million / 46.9% | $80.2 million / 51.3% |
| Operating expenses | $95.4 million | $89.3 million |
| Operating loss | $17.5 million | $9.1 million |
| Net loss attributable to 3D Systems | $21.0 million; $0.19 per diluted share | $10.0 million; $0.09 per diluted share |
| Cash from operations | Used $1.5 million | Generated $19.4 million |
| Cash and cash equivalents | $121.6 million at March 31 | $136.3 million at December 31, 2017 |
Revenue growth reflected higher printer, healthcare and software sales and favorable foreign exchange, partly offset by lower average selling prices and product mix. Healthcare revenue rose 21.4% to $52.4 million; software revenue rose 12.9% to $23.0 million. Product revenue increased, while materials revenue was nearly flat and services revenue rose modestly.
Gross margin declined 4.4 percentage points. Management attributed lower gross profit primarily to sales mix, particularly printers, and higher on-demand manufacturing costs. On-demand manufacturing gross margin fell to 38.8% from 43.3%. SG&A increased 4.7%, partly from go-to-market and IT investment, marketing, bad debt and legal costs; R&D increased 13.3%, including spending for planned 2018 launches. Other expense included a $1.4 million fair-value adjustment to cost-method investments.
Liquidity, debt and cash flows
- Operating cash flow was a $1.5 million outflow, versus a $19.4 million inflow a year earlier. Working-capital changes used $4.4 million, compared with providing $8.1 million in Q1 2017.
- Investing activities used $11.0 million, including $10.8 million of property and equipment purchases. Financing activities used $3.6 million, mainly for earnout payments and stock-compensation tax withholding. Cash, cash equivalents and restricted cash decreased $14.7 million.
- No borrowings were outstanding on the $150 million revolving credit facility; the company reported compliance with its covenants. The facility was scheduled to expire in October 2019. Capitalized lease obligations totaled $7.6 million.
- Current assets were $439.2 million and current liabilities $217.9 million. The company said existing cash was expected to fund working capital, capital expenditures, commitments and other liquidity needs in the foreseeable future, while noting it might need financing in the future.
- Days sales outstanding was 72; receivables over 90 days past due were 9.4% of gross receivables, up from 9.1% at year-end. Cash held outside the U.S. was $89.4 million, or 73.6% of cash and equivalents.
Material developments, outlook and risks
- Outlook: The filing provides no numerical revenue, earnings or cash-flow guidance. Management cited planned product launches throughout 2018 and investment in innovation to support adoption of 3D printing for production. It cautioned that Q1 results are not necessarily indicative of full-year results.
- Revenue accounting: The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The opening accumulated-deficit adjustment was $0.6 million; management said the impact was immaterial. Outstanding performance obligations were $157.5 million, with about 95% expected to be recognized within 12 months. Comparative periods were not restated.
- Export compliance investigation: Following a government subpoena, the company disclosed potential export-control issues, including potential ITAR and Export Administration Regulations violations, and was cooperating with the authorities. It expected significant legal and other response costs but could not estimate potential penalties or timing. Potential consequences include fines, loss of export privileges or government-contract debarment.
- Litigation: A securities class-action settlement provides for $50 million paid by insurance carriers, subject to court approval; the company recorded a $50 million liability and an offsetting insurance receivable. Final approval was scheduled for June 25, 2018. Separate derivative lawsuits were stayed. A former employee arbitration award of $11.3 million remained under appeal. In a separate matter, the court ordered the former employee to disgorge about $0.5 million plus interest; the company’s fee-and-cost request and the employee’s post-trial motion were pending.
- Other contingencies: Put rights relating to a subsidiary could require an estimated $8.9 million payment, subject to future performance and contractual conditions; the earliest exercise could fund obligations in 2019. The company also disclosed ordinary-course indemnification obligations whose maximum potential amount it could not estimate.
- Other risks: Management cited margin volatility, competition, product and technology execution, supply-chain dependence, foreign-exchange exposure, litigation and investigations, cybersecurity and financing needs. No material change in market-risk assessment or previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether revenue growth and healthcare/software momentum continue, and whether printer mix and pricing pressure ease.
- Whether gross margins recover, particularly in products and on-demand manufacturing, and whether higher R&D and SG&A spending translates into sales.
- Whether operating cash flow improves as receivables and inventory rise, and how overdue receivables develop.
- Final approval and insurance funding of the securities settlement, plus the outcome and costs of the export-control investigation.
- Developments in the arbitration appeal, Barranco II post-trial proceedings and subsidiary put rights.
- Potential balance-sheet effects of adopting lease accounting in 2019; the company expected right-of-use assets and lease liabilities, but did not anticipate material effects on operations or liquidity.