3D Systems(DDD) - 2022 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements The Q1 2022 financial statements report a net loss of $26.8 million, a significant downturn from prior-year net income, driven by a 9.0% revenue decrease to $133.0 million and negative operating cash flow Condensed Consolidated Balance Sheets As of March 31, 2022, total assets slightly decreased to $1.51 billion, marked by a significant shift from cash ($789.7 million to $389.3 million) to $356.3 million in short-term investments, while total liabilities decreased to $679.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $389,270 | $789,657 | | Short-term investments | $356,340 | $— | | Total current assets | $987,728 | $1,031,737 | | Goodwill | $340,695 | $345,588 | | Total assets | $1,506,563 | $1,549,099 | | Liabilities & Equity | | | | Total current liabilities | $150,238 | $178,012 | | Long-term debt, net | $447,534 | $446,859 | | Total liabilities | $679,687 | $706,718 | | Total stockholders' equity | $826,876 | $842,381 | Condensed Consolidated Statements of Operations Q1 2022 saw a net loss of $26.8 million ($0.21 per diluted share) compared to $45.2 million net income in Q1 2021, driven by a 9.0% revenue decrease to $133.0 million and a 16.4% increase in operating expenses to $77.0 million, resulting in an operating loss of $23.2 million Q1 2022 vs. Q1 2021 Statement of Operations (in thousands, except per share amounts) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total revenue | $133,001 | $146,116 | | Gross profit | $53,795 | $64,240 | | Loss from operations | $(23,232) | $(1,959) | | Net (loss) income | $(26,799) | $45,228 | | Diluted net (loss) income per share | $(0.21) | $0.36 | Condensed Consolidated Statements of Cash Flows Q1 2022 operating activities used $15.1 million cash, a reversal from Q1 2021's $28.5 million inflow, while investing activities used $373.2 million for short-term investments, leading to a net cash decrease of $400.4 million Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(15,125) | $28,453 | | Net cash (used in) provided by investing activities | $(373,209) | $50,563 | | Net cash used in financing activities | $(12,518) | $(28,337) | | Net (decrease) increase in cash | $(400,388) | $48,245 | Notes to the Condensed Consolidated Financial Statements The notes provide context for financial statements, detailing accounting policies, segment reporting changes to Healthcare and Industrial, impacts of acquisitions and dispositions, revenue recognition, segment performance, $460 million convertible notes, and significant legal contingencies - The company's business is being negatively impacted by inflationary pressures, supply chain constraints, and economic disruption from the COVID-19 pandemic and the conflict in Ukraine[24] - Effective January 1, 2021, the company realigned its reporting structure into two segments: Healthcare and Industrial[28] - In Q1 2021, the company completed the sale of Cimatron for approximately $64.2 million, recording a gain of $32.0 million[37] - As of March 31, 2022, the company had $154.3 million in outstanding performance obligations, with 88% expected to be recognized as revenue within the next twelve months[52] Segment Performance - Q1 2022 vs Q1 2021 (in thousands) | Segment | Revenue (2022) | Revenue (2021) | Segment Operating Income (2022) | Segment Operating Income (2021) | | :--- | :--- | :--- | :--- | :--- | | Healthcare | $64,345 | $72,521 | $7,703 | $19,793 | | Industrial | $68,656 | $73,595 | $6,286 | $12,622 | | Total | $133,001 | $146,116 | $13,989 | $32,415 | - In November 2021, the company issued $460 million in 0% Convertible Senior Notes due 2026, with net proceeds of $446.5 million[91] - The company is subject to an ongoing government investigation into possible violations of U.S. export control laws and is also defending against a shareholder class action lawsuit and related derivative suits[113][117] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's strategic focus on Healthcare and Industrial verticals, noting the completion of its divestiture program, which led to a 9.0% YoY revenue decline in Q1 2022, while gross margin contracted to 40.4% and operating expenses rose 16.4%, maintaining a strong liquidity position with $389.6 million cash and $356.3 million short-term investments Business Overview and Strategy The company's four-phased strategy, initiated in May 2020, focuses on reorganizing into Healthcare and Industrial verticals, restructuring, divesting non-core assets, and investing for growth, with the divestiture phase now complete and recent acquisitions of Oqton and Volumetric driving strategic growth - The company's strategic plan involves four phases: reorganize, restructure, divest non-core assets, and invest for future growth[137] - Divestitures of non-core assets, including Cimatron, Simbionix, and the On Demand Manufacturing (ODM) business, are now complete[140] - Recent acquisitions to drive growth include Oqton (cloud-based Manufacturing Operating System) and Volumetric (bioprinting and regenerative medicine)[142][143] Results of Operations Q1 2022 revenue decreased 9.0% to $133.0 million due to divestitures, partially offset by volume increases, while gross profit margin declined to 40.4% and operating expenses rose, resulting in a $23.2 million operating loss Revenue Change Analysis - Q1 2022 vs Q1 2021 (in thousands) | Driver | Products Change | Services Change | Total Change | | :--- | :--- | :--- | :--- | | Volume | $22,241 | $(2,118) | $20,123 | | Divestitures | $(8,300) | $(16,903) | $(25,203) | | Price/Mix | $(4,280) | $— | $(4,280) | | Foreign currency | $(2,758) | $(997) | $(3,755) | | Net change | $6,903 | $(20,018) | $(13,115) | Gross Profit Margin Analysis - Q1 2022 vs Q1 2021 | Category | Gross Profit Margin 2022 | Gross Profit Margin 2021 | Change (Percentage Points) | | :--- | :--- | :--- | :--- | | Products | 41.8% | 43.0% | (1.2) | | Services | 36.1% | 45.7% | (9.6) | | Total | 40.4% | 44.0% | (3.6) | - Operating expenses increased by $10.8 million (16.4%) YoY, primarily due to spending to support future growth, expenses from acquired companies (including $4.0 million of Volumetric contingent consideration), and higher bad debt expense[149][165] Liquidity and Capital Resources The company maintained strong Q1 2022 liquidity with $389.6 million cash and $356.3 million short-term investments, despite operating cash flow being a $15.1 million use, with material cash requirements including $460 million convertible notes and lease obligations Cash Flow Summary - Q1 2022 vs Q1 2021 (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Operating Activities | $(15,125) | $28,453 | | Investing Activities | $(373,209) | $50,563 | | Financing Activities | $(12,518) | $(28,337) | - As of March 31, 2022, the company had $389.6 million in cash and cash equivalents and $356.3 million in short-term investments[179] - Material cash requirements include the $460 million convertible notes due 2026, purchase commitments, and $67.0 million in operating and financing lease obligations[181] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk disclosures compared to the Annual Report on Form 10-K for the year ended December 31, 2021 - There were no material changes or developments during the first three months of 2022 that would materially alter the market risk assessment performed as of December 31, 2021[192] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2022, due to material weaknesses in internal control over financial reporting related to non-standard contracts, financial closing, and income tax provision, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2022, due to material weaknesses in internal control over financial reporting[193] - The material weaknesses relate to controls in three main areas: - Certain non-standard contracts and contract terms - Review of internally prepared reports used in the financial closing process - Calculation of the provision for income taxes, especially for material non-routine transactions[194] - A remediation plan is in progress, which includes hiring additional staff, redesigning controls, implementing or enhancing software, and establishing a formal controls governance committee[196][197][199] PART II — OTHER INFORMATION Legal Proceedings This section refers to Note 14 of the financial statements for detailed information on the company's legal matters, including an ongoing government investigation into export controls and shareholder lawsuits - Information regarding legal proceedings is incorporated by reference from Note 14 – Commitments and Contingencies to the Financial Statements[189] Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - There are no material changes to the risk factors previously disclosed in the 2021 Form 10-K[190] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered equity sales but repurchased 514,276 shares at a weighted average price of $16.91 per share, primarily for employee tax withholding related to restricted stock vesting - No unregistered securities were issued during the quarter[190] Issuer Purchases of Equity Securities - Q1 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2022 | 71,754 | $20.46 | | Feb 2022 | 64,635 | $19.36 | | Mar 2022 | 377,887 | $15.81 | | Total | 514,276 | $16.91 | - The shares purchased were surrendered by employees to cover tax withholding obligations from the vesting of restricted stock[191] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, convertible notes indenture, and CEO/CFO certifications required by Sarbanes-Oxley Act - The report includes a list of filed exhibits, such as corporate governance documents, the indenture for the 0% Convertible Notes due 2026, and officer certifications required under Sarbanes-Oxley Sections 302 and 906[203]