Net losses in the 2006 periods included $2.5 million of non-cash income
tax expense arising out of the recording of a valuation allowance during
2006, reversing, as a result of the company’s changed outlook, the non-cash
benefit of the net deferred income tax asset that the company recorded at
December 31, 2005.
“I am very pleased at long last to be able to share with you our 2006
financial results. I am very disappointed that it has taken us so long to do
so,” said Abe Reichental, 3D Systems’ president and chief executive officer.
Rest assured that we are working very hard to return to timely reporting of
our operating results.
“As I have shared with you frequently throughout the past six months,
last year was a very difficult and challenging year for us. As you know,
during 2006, we executed a series of critical infrastructure and strategic
projects, including the implementation of our new ERP system and our
relocation to Rock Hill,” continued Reichental. “Although there is never a
perfect time to embark on such a major business transformation, after
extensive planning, we decided to make 2006 the year in which we would
invest heavily in our company to give us the systems, facilities and
products necessary to scale up and achieve the kind of sustained profitable
growth to which we aspire.”
While the company experienced sequential improvements in its revenue
during the third and fourth quarters of 2006, the revenue decreases for both
the fourth quarter and the full year 2006 reflected the effects of the
disruptions that it experienced beginning in the second quarter of 2006 from
the execution of its infrastructure and strategic initiatives, including the
implementation of its new ERP system, the outsourcing of warehousing and
logistics functions, new systems’ stability issues, special customer
accommodations, the relocation to Rock Hill and the costs incurred from its
financial restatements. The 2006 revenue decline also reflects the company’s
strategy of discontinuing the sale of certain legacy systems in favor of its
newer manufacturing-capable systems, which are equipped with integrated
materials cartridges.
Revenue increased by 35% over the company’s third-quarter 2006 revenue,
continuing the sequential-quarter recovery that began in the third quarter
of 2006 and reflecting the early impact of the corrective action plan that
the company began to implement in July 2006.
Beyond their effect on consolidated revenue in 2006, these disruptions,
initiatives, stability issues and resulting customer accommodations
adversely affected the company’s operating performance beginning in the
second quarter of 2006, and many of them continued to have some adverse
effect on its operations in the third and fourth quarters of 2006.
The adverse effect of these factors eased toward the end of the third
quarter of 2006 and that easing continued in the fourth quarter of 2006 as
the company made progress in its remediation efforts and corrective action
plan. The company believes that as it exited 2006 it has regained
operational stability and incurred most of the costs associated with the
above-mentioned disruptions.
NM = Not Meaningful “Revenue from sales of our
engineered materials and composites continued to
increase at a double-digit rate in 2006 while we
continued to experience a decrease in revenue from
legacy products and services,” commented Reichental.
“We also ended 2006 with a $5 million order backlog, primarily for
systems and materials. I believe that these combined results reflect the
operational recovery we have been making and more importantly the continued
strong demand for our products, demonstrating that the strategic actions
that we have taken in the past few years to transform our product portfolio
and re-engineer our business model are taking effect.”
|
Revenue By
Class of Product and Service
($ in millions)
|
|
Product or Service |
Fourth
Quarter |
Full Year |
|
2006 |
2005 Restated |
%
Change |
2006 |
2005 Restated |
%
Change |
|
Systems and other products |
$17.3 |
$21.5 |
(20%) |
$46.5 |
$55.1 |
(16%) |
|
Materials |
$15.3 |
$12.8 |
20% |
$52.1 |
$44.6 |
17% |
|
Services |
$10.0 |
$9.7 |
3% |
$36.3 |
$39.3 |
(8%) |
|
Total |
$42.6 |
$44.0 |
(3%) |
$134.8 |
$139.1 |
(3%) |
*Columns may not add due to rounding The $4.3 million decrease in
consolidated revenue in 2006 compared to 2005 was primarily due to the
disruptions and challenges mentioned above.
Reflecting the early success of its portfolio transformation strategy,
revenue from materials increased by $7.5 million in 2006 primarily from
higher unit volume and favorable price and mix effects. While revenue from
systems and services declined by $11.6 million, sales of new products and
services introduced since the latter part of 2003 increased by $7.0 million
during 2006 to $49.2 million, representing more than 36% of revenue for the
year.
“Notwithstanding the enormous challenges we encountered during 2006, we
managed to deliver encouraging results,” said Reichental. “Despite all of
the disruptions, our materials’ revenue increased some 17% over 2005 and at
the end of 2006 represented some 39% of our annual revenue. We believe that
the increased demand for our materials, even during this challenging period,
is an early indication that our overall product portfolio transformation
strategy is working.
“Our growing installed base, coupled with the integration of our new
systems with proprietary materials cartridges and our continuum of expert
solutions, should improve the profitability of our business as revenue from
materials continues to outpace our growth in systems. Accordingly, the
stability of our revenue base should improve as consumables’ sales rise as a
percentage of the product mix relative to systems,” continued Reichental.
Gross profit for the fourth quarter of 2006 declined to $16.1 million
from $20.5 million in the fourth quarter of 2005, as restated, and declined
to $46.3 million from $62.2 million for the full year of 2005, as restated.
These declines in gross profit were due primarily to the combined effects
of lower revenue and the ERP system, supply chain and logistics disruptions
that the company encountered.
Residual special accommodations extended to certain customers as a result
of the operating disruptions mentioned above continued to adversely affect
gross profit in the fourth quarter. The impact of equipment stability and
related resource training constraints eased toward the end of the fourth
quarter of 2006, as the company made significant progress in its training
and quality remediation efforts and corrective action plan. The company
believes that its progress in remediating its new systems’ teething problems
and training gaps resulted in greater market acceptance of its new systems
as reflected in its backlog at the end of the fourth quarter.
|
Gross
Profit Margins
($ in millions)
|
| |
Fourth Quarter |
Full Year |
|
2006 |
2005 Restated |
%
Change |
2006 |
2005 Restated |
%
Change |
Products
% Revenue |
$14.2
44% |
$17.5
51% |
(19%) |
$39.3
40% |
$49.4
50% |
(20%) |
Services
% Revenue |
$1.8
19% |
$3.0
31% |
(40%) |
$7.0
19% |
$12.7
32% |
(45%) |
|
Total
% Revenue |
$16.1
38% |
$20.5
47% |
(21%) |
$46.3
34% |
$62.2
45% |
(26%) |
*Columns may not add due to rounding
Gross profit margin on products decreased to 44% of consolidated product
revenue in the fourth quarter of 2006 from 51% for the fourth quarter of
2005, as restated. Gross profit margin on products decreased to 40% of
consolidated product revenue in 2006 from 50% in 2005, as restated. The
decrease in margins was due primarily to the combined effects of lower
revenue and the disruptions mentioned above.
Gross profit margin on services decreased to 19% of consolidated service
revenue for the fourth quarter of 2006 from 31% of consolidated service
revenue for the fourth quarter of 2005, as restated. Gross profit margin on
services decreased to 19% of consolidated service revenue for the full year
of 2006 from 32% of consolidated service revenue for the full year of 2005,
as restated. Service margins in 2006 were adversely affected by disruptions
in product availability, reduced sales volume of systems and temporarily
increased installation costs. Service margins also suffered as a result of
the company’s decision earlier in 2006 to discontinue servicing certain of
its legacy systems and to cease selling certain upgrades to extend the use
of legacy systems.
“Regretfully, implementation of our significant initiatives resulted in
the temporary disruptions discussed above adversely affecting our ability to
adequately support our customers. We believed that we had all the required
resources in place to complete these activities smoothly. Clearly, in
hindsight we did not,” added Reichental. “However, I am pleased to share
with you that I believe we are transitioning to a point where our recent
choices and their resulting new products and capabilities are now being
validated by the very same customers who already are beginning to experience
the difference and are responding favorably to our new products.”
|
Operating
Expenses
($ in millions)
|
| |
Fourth
Quarter |
Full Year |
|
2006 |
2005 Restated |
%
Change |
2006 |
2005 Restated |
%
Change |
SG&A
|
$16.4
|
$11.7
|
40% |
$51.2
|
$40.3
|
27% |
R&D
|
$4.0
|
$3.4
|
18% |
$14.1
|
$12.2
|
16% |
Severance and
restructuring
|
$1.0
|
$1.2
|
(17%) |
$6.6
|
$1.2
|
NM |
|
Total
|
$21.4 |
$16.3
|
31% |
$71.9
|
$53.7
|
34% |
*Columns may not add due to rounding NM = Not Meaningful Total operating
expenses increased by $5.1 million to $21.4 million in the fourth quarter of
2006 compared to $16.3 million in the fourth quarter of 2005, as restated,
and by $18.2 million to $71.9 million in the full year of 2006 compared to
$53.7 million in the full year of 2005, as restated.
The increase in operating expenses for the full year was due primarily to
$10.9 million of higher selling, general and administrative expenses, $5.4
million of higher severance and restructuring costs related to the
relocation of the company’s headquarters to Rock Hill, South Carolina, which
were generally in line with the company’s previously announced expectations,
and $1.9 million of higher research and development expenses.
As the company previously disclosed, the higher research and development
expenses in each period related to the company’s continuing high level of
new product development work, primarily related to its accelerated work on
the development of additional desktop 3-D Modelers, including the recently
announced V-Flash™ Desktop Modeler, and other Rapid Manufacturing solutions
as well as its previously announced research and development agreement with
Symyx Technologies, Inc.
The severance and restructuring costs related to the relocation of the
company’s headquarters to Rock Hill constituted approximately one third of
the increase in operating expenses in 2006.
The higher selling, general and administrative expenses in 2006 resulted
mostly from higher consulting expenses primarily related to the company’s
ERP system and relocation projects and its higher accounting fees and
internal expenses related to its restatement activities, higher bad debt
expense, higher depreciation and amortization expense, non-cash equity
compensation expense related to unvested options and stock-based
compensation expense relating to previously granted stock options.
“During 2006, we continued to fund infrastructure investments as well as
the abnormal costs we incurred in connection with remedying the disruptions
we incurred and our restatement activities. We ended the year with $14.3
million of unrestricted cash, of which $8.2 million was drawn against our
bank credit facility that comes due at the beginning of July 2007, and we
expect to begin work on renewing or replacing that facility shortly. Our
year-end cash position reflects in part our continued efforts to improve our
working capital management, which included a further reduction in our days
sales outstanding in the fourth quarter of 2006,” said Reichental.
“Notwithstanding all of the challenges we experienced in 2006, we reflect
on the year with mixed emotions — pride for our overall achievements and for
the strong momentum with which we ended the year, and disappointment for the
operating losses and the unintended consequences leading to restatements of
our financials. I firmly believe that by taking the bold and difficult steps
we executed during this past year, we are well positioned for the future,”
added Reichental.
“Despite the disappointments that we encountered in 2006, we managed to
make significant progress in many areas as we continued to invest in
infrastructure, products, people and capabilities to achieve our strategic
objectives.
Specifically, since the beginning of 2006:
- We stabilized and enhanced the performance of our Viper Pro SLA and
Sinterstation Pro SLS Systems, two significant, new-from-the-ground-up
Rapid Manufacturing solutions.
- We introduced an integrated digital dentistry 3-D Modeling System,
the InVision Dental Pro (DP).
- We introduced several revolutionary engineered materials and
composites.
- We continued outsourcing non-core activities such as spare parts’
distribution, resulting in improved next-day service to our customers.
- We continued pruning our older products, including curtailing
development and sale of upgrades to legacy systems.
- We expanded our network of systems’ outsourcing partners and
suppliers to include materials and service providers.
- We broadened our strategic alliances with several key industry
players and research universities globally.
- We invested heavily in strategic and tactical R&D — increasing R&D
costs to approximately $14.1 million — as part of our commitment to
improve overall customer success.
- We consolidated our corporate headquarters into a new facility in
Rock Hill, S.C., to enhance our effectiveness and customer
responsiveness and to reduce overall costs.
- We created a state-of-the-art Rapid Manufacturing Center (RMC) to
showcase our product line and an advanced research and development
center.
- We completed the development of our world-class 3D Systems
University in partnership with York Technical College to provide
training to our customers, resellers and employees.
- We implemented a new ERP system in order to streamline our
operations, enhance customer service and provide more timely and
effective management information.
- We stepped up remediation efforts to achieve effective controls
across all functions and geographies in which we operate. "As we look
ahead, we are confident in the fundamentals of our business model and in
our strengthening industry leadership position through even stronger and
more comprehensive technological leadership. Our transformed business
model, renewed organizational strength and expanded global presence
underscore our strong commitment to improve our customers’ success.
We believe that the majority of our operational issues have been resolved
successfully. We remain confident in our overall direction and expect that
the key initiatives and investments that we undertook throughout 2006 will
provide us with the right platform to achieve our long-term objectives,"
concluded Reichental.
Conference Call and Audio Webcast Details
3D Systems will hold a conference call and audio Webcast to discuss its
fourth quarter and full year 2006 financial results tomorrow morning,
Tuesday, May 1, at 8:30 a.m. Eastern Time.
- To access the Conference Call, dial 1-888-336-3485 (or 706-634-0653
from outside the United States). A recording will be available two hours
after completion of the call for three days. To access the recording,
dial 1-800-642-1687 (or 706-645-9291 from outside the United States) and
enter 7803123, the conference call ID number.
- To access the audio Webcast, log onto 3D Systems’ website at
www.3dsystems.com. The link to
the Webcast is provided on the homepage of the website. To ensure timely
participation and technical capability, we recommend logging on a few
minutes prior to the conference call to activate your participation. The
Webcast will be available for replay beginning approximately 48 hours
after completion of the call at:
www.3dsystems.com under the Investor Relations’ section.
About 3D Systems Corporation
3D Systems is a leading provider of 3-D Modeling, Rapid Prototyping and
Manufacturing solutions. Its systems and materials reduce the time and cost
of designing products and facilitate direct and indirect manufacturing by
creating actual parts directly from digital input. These solutions are used
for design communication and prototyping as well as for production of
functional end-use parts: Transform your products.
More information on the company is available at
www.3dsystems.com, or via email
at moreinfo@3dsystems.com.
Source: Material used in press releases is often supplied by external
sources and used as is.
