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3D Systems Inc. (DDD - Free Report) reported second-quarter 2014 non-GAAP earnings of 16 cents a share, which surpassed the Zacks Consensus Estimate of 14 cents by 14.3%. However, the company’s adjusted income declined 20% year over year.

On a GAAP basis, earnings came in at 2 cents per share, down 80% from 10 cents in the prior-year quarter. The year-over-year decline in earnings can be attributed to a significant increase in the number of weighted average shares this year.

Quarterly Details

The company reported quarterly revenues of $151.5 million, reflecting a year-over-year increase of about 25%. However, revenues fell short of the Zacks Consensus Estimate of $161 million. The year-over-year upside was driven by increased demand across all its categories, which translated into organic growth of 10%.

Growth was driven by a 126% rise in the demand for designing and manufacturing of printers. Moreover, the continuing placement of advanced 3D printers drove the growth rate of materials to 30% in the quarter.

In the reported quarter, design and manufacturing revenues grew 28% year over year to $144.2 million while print materials revenues improved 30%. Further, service revenues increased 38% while healthcare revenues recorded growth of 46%.

At the end of the quarter, 3D Systems had backlog levels of $31.9 million that included recent printer orders worth $23.1 million. The increased demand for the company's Direct Metal 3D printers drove the upside in backlog levels.

Margins

Gross margin declined 400 basis points (bps) to 47.8% year over year. The significant decline was led by transitional effects of concentrated new product launches, the absorption costs related to products obsolescence and increase in expansion costs.

The operating margin also contracted an astounding 1103 basis points to 2.9% from 13.9% in the prior-year quarter. The decline can be attributed to a significant increase in research and development (R&D) expenditures as well as selling, general and administrative expenses.

Cash and Balance Sheet

3D Systems ended the quarter with cash and cash equivalents of $570.3 million compared with $306.3 million in the past year. Net cash flow from operating activities increased to $19.3 million from $3.4 million in the prior-year quarter.

Acquisitions

During the second quarter, 3D Systems executed several strategic acquisitions to broaden its presence in the high potential 3D printing market. The company acquired Medical Modeling, a leading provider of personalized surgical treatment planning and patient specific medical devices, to create the most comprehensive 3D printing medical device capabilities and enhance its 3D printing digital thread. Further, the company signed a definitive agreement to acquire Robtec, which will provide a strategic sales and service platform and scalable gateway into Latin America.

This apart, the company extended its global reseller channel, adding several key distributors including ScanSource and Konica Minolta. Most recently, the company signed a definitive agreement to acquire Simbionix, the global leader in 3D virtual reality surgical simulation. 3D Systems is pursuing this takeover to extend its healthcare reach with the addition of powerful synergistic technology, experience and domain expertise.

Outlook

Encouraged by the company’s revenue and increasing demand for designed and manufactured printers, management has raised its revenue guidance for fiscal 2014.

Management now expects revenues in the range of $700 million to $740 million versus$680 million to $720 million stated previously.

However, the company reiterated its earnings guidance for fiscal 2014. GAAP earnings per share are expected in the band of $0.44 to $0.56 while non-GAAP earnings per share are anticipated in the range of $0.73 to $0.85.

Management also believes that despite short–run headwinds emerging from increased expenses, the company is favorably positioned to reap considerable benefits from the R&D investments, by the end of 2015.

3D Systems currently has a Zacks Rank #2 (Buy). Some other stocks that also look promising include China Automotive Systems Inc. (CAAS - Free Report) , Meritor, Inc. (MTOR - Free Report) and Twin Disc (TWIN - Free Report) . All three hold the same Zacks Rank as 3D Systems.



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