3D Systems is a multinational organization headquartered in South Carolina. The Company operates as a holding entity incorporated in Delaware. 3D Systems manufacturer 3D printers and also offer service options for content-to-print solutions. The Company’s 2012 Annual Report is the source of financial data under analysis in the following paper.
The income statement for 3D Systems can be processed to determine key company health indicators in sales, expenses, and profitability. According to Wilford and Wilford (1978) a primary measure of revenue performance and stability is the measure of one year sales to the previous year. According to 3D Systems’ SEC Annual Report filing (2013), drastic revenue growth was experienced from 2010 to 2011 as well as 2011 to 2012. The rate of growth across the previous two years was approximately 55%.
In terms of revenue diversification, no single 3D Systems customer accounted for more than 10 percent of consolidated revenue. According to the research conducted by Baysinger and Hoskisson (1989) at Texas A&M University a reduction of business failure risk exists when a corporation sells multiple service lines. 3D Systems sells multiple service lines; and in the event of a service line disruption, the impact of such a loss would not affect sustainability or greatly influence overall profitability. The performance of revenue streams in emerging markets helped fuel overall company growth. The revenue generated outside of the U.S. market accounted for roughly 50% of consolidated revenue in 2010 to 2011.
3D has experienced drastic stock price gains from 2010 through 2012. According to Fama (1965) stock price performance is heavily linked to earnings under the standard business model. The stock price grew from a low of $12.78 in 2011 to a high of $53.40 in 2012. The correlation between revenue growth and stock price gain is seen with 3D Systems. The explosive growth has left the critics of 3D’s earning and stock price performance to say the rate of growth is not sustainable. Gray Wolf Research (2012) released an article claiming that 3D was “at the peak of inflated expectations.” Their forensic accounting report stated that the level of earnings is unsustainable because organic revenue growth was overstated by 100%. Considering the growth is fueled by activity in emerging markets such as China and India, the growth appears feasible and no noticeable smoothing appears to materially affect revenues or earnings.
The expenses on 3D Systems’ income statement show growth in step with revenues. As revenues grow, it is typical to see a significant portion funnel out as new costs of operation management. One metric that illustrates this reflective property is the expensing with research and development. As the Company experienced tremendous sales growth from 2010 forward, a significant portion of the proceeds moved to fuel innovation. Research and development expenses were 23.2 million in 2012 while only 10.7 million in 2010. In order for 3D to remain competitive in the ever-changing and innovative printing market, it will be essential to continue investing in research and development opportunities. According to Eisenhardt and Tabrizi (1995) businesses involved in selling technological equipment, such as computers and printers, must be able to adapt to the changing consumer preference environment quickly as well as design and manufacture at a faster rate than other markets. 3D has invested heavily in research and development product innovation so that they may be able to innovate successfully.
Supply chain expenses appear to be healthy; however, this is a weakness of 3D Systems that warrants attention. In the event of a disruption in the supply chain, expenses can expect to increase. Although the price of raw materials has been steady, the supply chain in emerging markets is more volatile than developed countries. 3D relies on components and sub-assembly parts to be shipped to their assembly plant for completion and shipment to the point of sale. In the event a supply chain relationship failed, a delay would be experienced in which time was taken to find a substitute supplier. Essentially, economic opportunity losses and an increase in real expenses could be experienced.
The determination of company health can be supported by Balance sheet indicators. The liquidity ratio (quick ratio) is the measure of a company’s ability to meet short term debt obligations. This is determined by comparing highly liquid short-term assets such as cash and cash equivalents to current liabilities. 3D Systems’ quick ratio is well over 5. This measure shows that short term debt obligations can be covered by liquid assets over 5 times. This measure is extremely strong as a measure over 1 is considered positive.
The financial outlook of 3D systems is very strong. The health of the Company is fueled by seizing growth opportunities. Strong financial indicators are seen in revenue growth in emerging markets, expense management strategy, earnings, and ability to innovate through research and development investments. There are a couple areas of weakness that require monitoring – supply chain management in emerging markets and public relations management in response to negative publicity on growth un-sustainability. Overall, 3D Systems is a buy.
Operations are supported by global economies of scale. The Company now employs over 1,000 people in 25 offices across the world. A strong global presence can be found in the U.S., Asia, and Europe with acquisition planning currently under way in India and the Middle East. Diversified revenue streams with various product sales - product concept models, precision and functional prototypes, master patterns for tooling, as well as production parts for direct digital manufacturing.
Has patent protection for 3D printing process that is emerging with popularity. 3D systems has an extensive product and service line that reaches a cross section of economic industries – health care, government, aerospace, dental, recreation, and automotive. 3D shows strong innovation in new product developments such as STL file format and stereolithography. 3D has a long history (since 1986) of adapting to new eras and consumer needs in computing and auxiliary products and services. 3D is regarded as having a very strong executive leadership team. 3D Systems has a corporate headquarters in South Carolina that saves considerably in administrative overhead. Recent acquisitions offer a “one stop shop” approach for consumers that need print-related goods and services. 3D has a strong and well-communicated corporate vision. Revenues and profits have performed well even during the economic recession. The Company has a strong community involvement and partnership program.
3D printers are expensive to produce which causes the end product to consumers to be very expensive. Patents and other intellectual property laws are different overseas. The products are easier to copy and distribute in emerging markets without intellectual property protections. If weaknesses in the overall market continue in a recession, the price point of 3D products will come under intense pressure. With the cost of manufacture so high in the innovative industry, there isn’t much flexibility in price point versus profitability. The loss of one of its cornerstone leaders could result in slower innovation and erosion in corporate culture. Such a loss would be processed unfavorably by stakeholders. 3D operates in an extremely competitive market with competitors always able to offer a similar product for just a little less cost.
The need to rely on suppliers to hit product deadlines can be costly.The stock price has experienced volatility that tends to worry investors. Though, this may be correlated with the overall market, it is still a concern. Supply chain components are not heavily diversified. The loss of one supply chain provider could cause significant delays, increased expenses, and/or economic opportunity losses.
Positioned for multinational expansion – mergers, acquisitions, and ventures. The computer revolution is expected to grow in emerging markets (underdeveloped countries). 3D systems has a headquarters in South Carolina that is known for a healthy business climate. The location also has a sustained lower cost of business versus competitors in Silicon Valley or New York City. Operating the business in South Carolina also creates significant tax benefits and more cash for investment opportunities. The 3D Systems acquisition program has expanded the company successfully in the U.S. and can be implemented in emerging markets. Increasing demand in the largest growth economy, China, can have a huge positive impact on 3D sales.
The acquisition program has grown the company so rapidly that questions about the capacity of the current management team are becoming valid. The management team has not seen the same expansion as the collection of more engineers, software developers, designers, etc. Many analysts predict that the growth rate experienced in 2010-2012 to be unsustainable.
Gray Wolf Research (2012) reported material misstatements used in accounting of acquisitions that inflated earnings. Continued negative publicity and accounting scrutiny by outside parties can hurt stock prices and also shareholder expectations. Constant innovation needed to survive in the data industry is difficult to maintain. As companies grow, the corporate climate can become complacent and sluggish. A careful watch on over-diversification within the printing industry is needed. Rapid expansion and extreme growth often comes with a lack of expertise against the competition that may have more experience in new markets. If the economic recession continues and 3D printer prices remain high, an environment that discourages the sale of new technologies can preside.
Baysinger, B., & Hoskisson, R. (1989). Diversification strategy. Academy of Management Journal, 32(2), 310-322.
Eisenhardt, K., & Tabrizi, B. (1995). Accelerating adaptive processes: Product innovation in the global computer industry. Administrative Science Quarterly, 40, 1.
Fama, E. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34.
SEC Filing - DDD Annual Report. (n.d.). 3D Systems.com. Retrieved September 18, 2013, from http://www.3dsystems.com/files/downloads/DDD-2012-Form-10-K.pdf
Wilford, D. S., & Wilford, W. T. (1978). On revenue performance and revenue-income stability in the third world. Economic Development and Cultural Change, 26(3), 505.