3D Systems Corporation (10-Q) — Quarter ended June 30, 2012
Business context and reporting period
3D Systems provides 3D printers, print materials, custom-parts services, and related software and content solutions. This unaudited filing covers the second quarter and first six months of 2012, compared with the corresponding 2011 periods. The company reports one operating segment.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $83.6 million | $55.1 million | $161.5 million | $103.0 million |
| Gross profit / margin | $43.0 million / 51.4% | $25.2 million / 45.7% | $81.8 million / 50.7% | $48.4 million / 47.0% |
| Operating income | $14.0 million | $8.0 million | $24.0 million | $15.4 million |
| Net income | $8.3 million | $13.4 million | $14.5 million | $20.2 million |
| Diluted EPS | $0.16 | $0.26 | $0.28 | $0.40 |
- Q2 revenue rose 51.7%; product revenue increased 60.3% and services revenue 39.2%. Management attributed growth to organic expansion and acquisitions. It reported Q2 organic growth of 19.9% after accounting for businesses owned less than a year; the comparable six-month figure was 22.8%.
- Q2 gross margin improved 5.7 percentage points, reflecting product mix, acquired printer margins, and improved materials and custom-parts service margins. Operating expenses increased 68.4% to $29.0 million, faster than revenue, including higher compensation, acquired-intangible amortization, R&D, and acquisition/severance costs.
- Net income declined despite higher operating income. Q2 2011 included a $6.2 million tax benefit from releasing a deferred-tax valuation allowance; 2012 also had materially higher interest expense on convertible notes. Six-month 2011 earnings likewise included that tax benefit.
- Q2 healthcare solutions revenue was $12.2 million, or 15% of revenue, versus $6.5 million, or 12%, a year earlier. Printer unit sales increased 117% year over year. Backlog was $12.3 million at June 30, versus $7.4 million a year earlier.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was $21.4 million, versus $6.2 million in 2011. Investing activities used $149.5 million, including $147.5 million for acquisitions; financing provided $107.7 million, including $106.9 million net proceeds from a June common-stock offering. Cash declined $20.6 million to $158.5 million from year-end.
- At June 30, current assets were $272.6 million and current liabilities $73.1 million; working capital was $199.5 million. Total assets were $632.3 million and stockholders’ equity $384.1 million. Receivables were $63.9 million and inventory $40.0 million; days sales outstanding rose to 70 from 67 at year-end.
- The company had $152.0 million principal of 5.5% senior convertible notes due December 2016, with a $132.8 million net carrying value, plus $7.7 million of capitalized lease obligations. The notes’ stock-price conversion condition was met; they were convertible in the quarter ending September 30, 2012. The company may settle conversions in cash, shares, or both. It reported compliance with note covenants and no off-balance-sheet arrangements.
Changes, outlook, and risks
- Second-quarter acquisitions included Fresh Fiber, My Robot Nation, Paramount Industries, and Bespoke Innovations. In July, after quarter-end, the company acquired Viztu Technologies for approximately $1.0 million. Acquisition purchase-price allocations were preliminary. Goodwill rose to $217.3 million and intangible assets to $99.2 million from $107.7 million and $54.0 million, respectively, at year-end.
- Management expected annual savings of $5.0 million to $5.5 million from acquisition and integration actions, and said it expected to improve operating leverage as costs declined as a share of revenue. It continued to invest in consumer, healthcare, printer, materials, and custom-parts initiatives. The filing gives no formal revenue or earnings guidance.
- Acquisition and severance costs were $2.7 million in the first six months; management stated these actions were consistent with its prior synergy expectations of $5.0 million to $10.0 million. Earnout liabilities were $6.1 million at June 30, with additional deferred purchase-price commitments of $1.8 million.
- Liquidity risks include acquisition spending, working-capital needs, and the possibility that additional funding could be needed beyond the next twelve months or for significant acquisitions. Foreign-currency losses were $1.0 million in Q2 and $0.5 million for the six months; no currency contracts were outstanding at quarter-end.
- In the DSM Desotech litigation, the plaintiff estimated damages above $40 million; the company disputed the claims and awaited rulings on its summary-judgment motions. In its patent litigation against EnvisionTEC, the company had obtained infringement judgments, but the defendant’s appeal remained pending. A Japanese contract claim sought damages exceeding the equivalent of $2.1 million; the company’s subsidiary was contesting it.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much reported growth and margin improvement persists organically after acquired-company contributions and integration effects.
- Whether acquisition synergies materialize as expected, alongside rising operating expenses, amortization, and acquisition-related earnouts.
- The timing and settlement method of any convertible-note conversion, including potential dilution and cash requirements.
- Cash conversion and working-capital quality, particularly receivables aging, inventory growth, and future acquisition funding needs.
- Developments in the DSM Desotech, EnvisionTEC, and MSK disputes, and the exposure from contingent acquisition payments.
- The effect of tax-allowance utilization and the prior-year $6.2 million tax benefit when comparing earnings periods.