3D Systems Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. 3D Systems sells 3D printers, materials, software, and manufacturing and healthcare services. Financial amounts below are in U.S. dollars; millions are shown unless stated otherwise.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $152.9m | $156.4m | $468.8m | $467.0m |
| Gross profit / margin | $58.5m / 38.3% | $68.9m / 44.1% | $219.4m / 46.8% | $226.9m / 48.6% |
| Operating loss | $(32.3)m | $(22.0)m | $(48.3)m | $(42.5)m |
| Net loss attributable to 3D Systems | $(37.7)m | $(21.2)m | $(56.1)m | $(43.6)m |
| Loss per share, basic and diluted | $(0.34) | $(0.19) | $(0.50) | $(0.39) |
| Cash from operating activities | Not stated separately | Not stated separately | $17.7m | $38.2m |
Q3 revenue fell 2.2% year over year: products declined while materials and services grew. For the nine-month period, revenue was nearly flat. Q3 healthcare revenue rose 9.7% to $46.6m, or 30.5% of total revenue; software revenue was approximately flat at $21.3m.
Operating expenses were $90.9m in Q3, broadly unchanged year over year. The company recorded a $3.7m income tax provision for the quarter and a $6.8m provision for the nine-month period despite reporting losses.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $138.3m at September 30, 2017, down $46.6m from December 31, 2016. Cash held outside the U.S. was $88.8m, or 64.2% of total cash.
- Current assets were $382.7m and current liabilities $145.4m. Operating working capital, as defined by the company, was $258.4m, down $65.9m from year-end.
- No borrowings were outstanding under the $150m revolving credit facility; the company reported approximately $150m available, subject to covenant limitations, and compliance with its covenants.
- Capitalized lease obligations totaled $7.9m. Total liabilities were $217.8m; stockholders’ equity was $614.7m.
- Management said existing cash and cash equivalents should cover working capital, capital expenditures, commitments and other liquidity needs in the foreseeable future, while noting that additional financing could be needed in the future.
Material changes and unusual items
- Q3 gross margin declined 5.8 percentage points. A $12.9m inventory adjustment—versus $10.7m in Q3 2016—primarily affected legacy plastics printers, refurbished and used metal printers, and slow-moving parts. The charge largely affected product gross profit.
- Printer revenue was $29.4m in Q3, down from $33.0m; management cited demand for lower-priced printers and softer simulator demand. Services growth included higher healthcare and on-demand manufacturing demand.
- The January 2017 acquisition of dental-materials provider Vertex was funded with approximately $34.3m net of cash acquired, plus stock consideration. Vertex contributed to growth in healthcare and materials revenue.
- Nine-month investing cash outflow was $60.6m, including $36.5m for acquisitions and $21.1m for property and equipment. Operating cash flow fell from $38.2m to $17.7m.
- Backlog was $26.6m at September 30, down from $32.4m at June 30; $8.9m related to on-demand manufacturing orders. Management cautioned that backlog is affected by customer delivery timing and service-order lead times.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management described continued investment in R&D, go-to-market activities and IT infrastructure, including its Figure 4 platform, metals, materials and software.
- In October 2017, the company received a Bureau of Industry and Security subpoena concerning possible U.S. export-control violations, including involving Quickparts.com. It is cooperating and expects significant legal and other response costs; the outcome, penalties and timing are not estimable. Potential penalties could include significant fines, loss of export privileges or debarment from U.S. government contracts.
- An $11.3m arbitration award in the Barranco I matter was accrued as a current liability; the company appealed and said any eventual payment would be funded from cash. The appeal was pending. Barranco II had a November 20, 2017 bench trial scheduled concerning damages on the company’s counterclaim.
- A securities class action and related derivative suits remained pending; the company disputed the claims and intended to defend them. It stated that other current legal matters were not expected to materially affect its financial position, results or cash flows.
- Put rights related to a subsidiary could require an estimated payment of approximately $8.9m if exercised at the earliest contractual date in 2019; the ultimate amount depends on future performance.
- Management identified risks including competitive and technology pressures, ability to generate operating cash, acquisition integration, litigation and investigations, product quality, supply chain, cybersecurity, and trade-control compliance.
Important facts for investors to verify
- Whether revenue and printer demand stabilize, and whether growth in healthcare materials and services can offset weaker product sales.
- How much of the Q3 margin decline reflects the inventory charge versus ongoing product mix, pricing and service-margin pressures.
- Whether operating cash generation improves after the Vertex acquisition and elevated capital spending.
- The progress and possible financial or operational consequences of the BIS export-compliance investigation.
- The resolution of the Barranco appeal, shareholder litigation, and subsidiary put rights.
- The expected effects of adopting the new revenue-recognition standard in 2018; the company anticipated that some software revenue deferred under prior guidance could be recognized earlier and expected significant new disclosures.