3D Systems: Lots Of Moving Parts (NYSE:DDD)

3D Systems Corporation (NYSE:DDD) has been like a chameleon changing its colors over the years, as it continues to buy and divest of numerous businesses that make it difficult to figure out what the future holds for the company, because every time it sells one of its business it changes the future performance of the company, one way or the other.

That happened once again in the latest quarter, and in my opinion, it’ll happen again in the future, as the company is transitioning to more of a defensive posture in the current macroeconomic environment.

Until things improve management stated it’s “focusing intently on execution, profitability and cash performance.”

As for the current recessionary environment, the company says, “Our customers are confident that once recession fears subside, we will emerge from this period stronger than ever with a completely refreshed product lineup and efficient operational footprint and the scale needed to support their growth.”

Herein lies the problem I see with DDD. Notice directly above it talks about emerging from the weak economic environment “with a completely refreshed product lineup.” This is an ongoing thing with the company that, in my point of view, isn’t a positive.

It seems everything is also getting “refreshed” and there is a lack of consistency and clarity as to what the company is at any one time in regard to its product lineup and future potential.

What I’m saying is I believe there are simply too many moving parts that are asserted to be future growth drivers, but then divested of or added to the company via more acquisitions, changing the company to the point of being unrecognizable from what it was in the past.

This isn’t just about pivoting to a new business or emphasis, but it’s more of an ongoing revamping that makes it close to impossible to understand as to what the company is at any one moment.

With that in mind, we’ll look at some of the recent numbers and why it’s going to take a long time for DDD to reach its expected potential.

Some of the numbers

Revenue in the third quarter was $132 million, down 15.3 percent from the $156 million in revenue in the third quarter of 2021. Revenue for the first nine months of 2022 was $405 million, down $59 million from the $464.8 million in revenue generated in the first nine months of 2021.

Not including the effect of FX and divestitures, revenue was up 2.7 percent from last year in the same reporting period. That means revenue is going to be down in the quarters ahead in comparison to past performance because of the loss of sales from selling off some of its businesses; the gain of 2.7 percent in revenue is working from a smaller base. That’s the same with the first nine months, in which the firm grew revenue by 7.6 percent when excluding divestitures and FX.

The impact of FX on the company will continue until the strength of the U.S. dollar finally recedes. At this time international sales accounts for approximately 40 percent of DDD’s business.

Even in a more favorable FX environment the company as it stands today will underperform in revenue compared to the recent past because of divestitures.

As far as organically, the segment having the most negative impact on the performance of DDD was orthodontic products within Dental. In the past that was a high-performing segment, and if and when it recovers, it’s one of the very few positive catalysts that would support an upward move in the share price of DDD.

Net loss in the third quarter was $37 million, or $(0.03) per diluted share, compared to net income of $293 million, or $2.34 per diluted share in the third quarter of 2021. For the first nine months of 2022 the company suffered a net loss of $97 million or $(0.77) per share, compared to net income of $328 million or $2.63 per diluted share in the first nine months of 2021.

At the end of the third quarter the company held $609 million in cash and short-term investments, down $180 million from the end of calendar 2021. Of that, $85 million was used for acquisitions and $52 million in operations, among other smaller expenditures. It had $449 million in long-term debt at the end of the reporting period. Speaking to my concerns about the company, management did say it will focus primarily on integrating and organically growing the businesses it has acquired over the last 18 months or so, with an eye toward acquisition opportunities if they arise. I don’t think the company is going to remain static on the acquisition front because of the opportunities that are likely to arise in the current economic climate.

Macroeconomics and the supply chain

Two factors negatively affecting most companies today are the weak economy and supply chain constraints, and DDD isn’t immune to either of them.

The macroeconomic side is easy enough to understand. Consumers in general are being forced to prioritize spending, and outside of travel and experiences they’re tightening up in almost all other areas outside of spending on necessities.

Most important for DDD, this has had a strong, negative impact on its orthodontic products, which had been a good business for the firm in the past. The company believes it will return to be an important part of its performance once the economy strengthens.

As for supply chain constraints, management says its “customers are increasingly adopting additive manufacturing in their production operations in order to reduce supply chain risks enhance product design flexibility and reduce manufacturing costs.”

If that is an accurate assessment, then it should start showing in the results of the company. The metric to watch there will be organic growth. After all, I doubt we’ll see a more favorable environment for additive manufacturing then the one was currently in for many years. Assuming businesses are allotting for significant spend in order to mitigate current and future supply chain issues, it will be confirmed in the immediate quarters ahead.

Finding a revenue baseline

With all the moving parts of DDD, I think one of the more important things it needs to do is find a revenue baseline investors can count on to work from in their analyzes.

I don’t mean there won’t be some minor fluctuations over time, but rather, that we know very close to where the floor is and how to model the company from there.

That isn’t going to happen unless the company follows through with its assertion it’s focusing on integrating the many businesses it has already acquired. After all, how does one evaluate synergies with the acquisition spree the company has been on, or re-evaluate it after its numerous divestitures? That of course also applies to the bottom line as well.

This is made worse by the inflationary, interest rate environment that has been a headwind for DDD, especially when considering the expenses associated with paying down its debt. Now that its underperforming from macroeconomic headwinds, and it continues to add and remove businesses via acquisitions and divestitures, there is no visibility on the revenue side of where the bottom is, and where it’s likely to go in the near future.

Conclusion

The company does have a wide variety of businesses that have the potential to grow at an incremental level in the years ahead, but until we find a bottom on revenue, I don’t see how we’ll be able to evaluate that potential.

I really think the company does need follow through on its assertion it needs to focus on integrating the many acquisitions already under its belt. It seems from past actions it’s afraid to let some business with future potential slip through its grasp and competitor grabs it up. If that’s the case, it’s simply going to have to pass on some of these unless they’re extraordinary opportunities that can be immediately accretive to revenue and earnings.

Acquiring a business that may have growth potential several years from now isn’t going to cut it anymore with DDD. And even with some of those there’s no guarantee they’re going to work out over the long term.

In other words, the company needs to get better at evaluating potential and focus more on areas of the market that companies already have a proven track record with revenue and earnings.

I don’t think DDD can continue to buy up speculative companies in a speculative industry, without further increasing risk to its short and long-term performance, i.e., the company needs to get better at vetting companies it’s considering acquiring.

On an organic growth basis, the company appears to have the capability of growing incrementally, but that assumes it keeps the current companies in its portfolio and doesn’t divest of more of them.

The bottom line is there is little visibility with DDD because of the various moving parts that are changing all the time from divestitures and acquisitions. Combined with a tough macroeconomic environment, it’s extremely difficult to know what the company is going to look like in the near and long term.

It needs to integrate its acquisitions, stabilize its top line, and work on improving the bottom line in preparation for the inevitable economic recovery, which isn’t likely to start at earliest until the second half of 2023.

Until these things play out, I don’t see any catalyst at this time that will improve the outlook for the company anytime soon.