3D Printing: Who's Got The Power

Jan.27.14 | About: 3D Systems (DDD)

Additive manufacturing, or 3D printing as it is frequently referenced, is truly a promising development. Today's 3d printers can 'print' or fabricate an item in over one hundred different materials, from plastic polymers to metals to ceramics. The technology dramatically reduces the time and cost manufacturers invest in building prototypes. It is possible to identify design errors earlier and reduce travel to production facilities. This means more efficient use of resources and a reduction in waste. Manufacturers can create high quality, precision end-products such as prosthetic limbs and dental implants or components and parts for unique, complex machines such as space craft.

The technology behind 3D printing has been around since the 'go-go' 80s. Stratasys, Inc. (NASDAQ:SSYS) and 3D Systems Corporation (NYSE:DDD) are veterans in the industry. Back in the day they called it solid imaging or stereolithography. The financial industry debacle and the ensuing recession of 2009-2010 threw a wrench in 3D printing sector progress. However, even though the economy has fumbled about for recovery, 3D printing solutions have gained favor among manufacturers and appear to be on the cusp of widespread adoption. Most market forecasts are like that of IDTechEx (idtechex.com), which pegs compound annual growth in the 3d printing market over the next ten years near 20%.

Large market opportunity and above average growth prospects have made it possible for the veterans to finally produce profits. However, it has also enticed new competitors to the field such as Voxeljet (NYSE:VJET) and The ExOne Company (NASDAQ:XONE). The rough and tumble of competition has driven a few into the hands of others. Stratasys in particular has bulked up its product line and extended its market share through acquisitions. (See my post Stratasys: Rebalancing Act with Follow-on Offering on the Seeking Alpha platform).

Now that the industry has taken off, one question investors should be asking is, which players have the financial resources to keep up the pace? Which can keep their product lines fresh with new capabilities? Which will be able jump on acquisition opportunities?

Since there are limited financial details available for the likes of privately held 3D printing companies such as EOS Optronics GmbH and EnvisionTEC GmbH, I looked at just the four public companies mentioned above to see who has the power in the 3D printing sector.

It is not enough to just look at the cash balance to measure financial muscle. Instead we need to look at how well cash resources meet operating and investment needs. There are a few handy measures that provide some light on financial strength. (In all the measures that follow I used the 2012 and 2013 annual and quarterly financial reports filed by each of these companies with the SEC. All can be found at SEC.gov.)

First, let's take a look at a measure called the Defensive Interval. It tells us about how well operating expenses are supported by a company's most liquid assets. Of the four, The ExOne Company has the highest Defensive Interval - current assets are 7.1 times operating expenses. Voxeljet has the lowest defenses at 1.9 times.

Yet, support for operating expenses at the present run rate is not really what we are worried about. We are more concerned about how each company is able to finance growth in sales as 3D printing achieves widespread adoption. The Financing Interval tells us about the turn of new business and how much of it needs to be financed by the company with working capital.

The first thing the Financing Interval tells us is that in the 3D printing business inventory sits around on average for a good five to six months, but once the sale is made customers are relatively quick to pay the bill. For our group of four, the amount of sales uncollected in accounts receivable range from two to three months worth. This means that on average the 3D printing companies are waiting about eight months from the time they lay in inventory to the time they finally see some cash roll in. They get a bit of a respite from the burden on cash resources through credit from suppliers. The average period of credit from suppliers is about sixty days.

Wahlah! We have the Financing Interval - the amount of time the company waits for cash to roll in less any period of credit they get from suppliers before they have to make payment on inventory and other costs of sales. For our group of four the average is about six months.

It is no surprise that 3D Systems, perhaps the most seasoned of the 3D printing companies, has winnowed its Financing Interval down to four months. This means 3D Systems must come up with working capital to pay for the inventory needed to support sales over a four month period. Based on the pace of sales in the last twelve months, that amounts to about $46.5 million for 3D Systems, or about 14% of cash on the balance sheet at the end of September 2014. Even if sales grow it appears 3D systems has the means to bankroll the cost of those sales.

The three others have longer Financing Intervals - ExOne, 6.6 months; Stratasys, 5.0 months and Voxeljet, 7.5 months. However, they are well endowed with cash relative to the cost of their sales. Thus even though they have a longer wait in their respective sales cycles to make a sale and then collect, each has been able to build up ample cash hoards to see them through that period. Voxeljet in particular is well endowed with cash since its U.S. offering of American Depository Shares in October 2013, when the company raised US$64.6 million in new capital.

Voxeljet had to tap the equity market to build up cash because operations have yet to generate cash. The other newcomer to the sector, The ExOne Company, is in the same boat with operations using cash rather than generating positive cash flow. Stratasys converted 3.9% of its sales in the most recently reported twelve months to operating cash flow, while 3D Systems turned a whopping 11.6% of its sales to cash.

Conversion of sales to cash is vital. In the long run that is what drives the engine of growth. We will look at one last measure - Free Cash Flow. This tells us how much cash is available for investment after the company has taken care of working capital requirements and maintenance investments. Over the last twelve months 3D Systems turned out over $40 million in Free Cash Flow. It should be no surprise that The ExOne Company and Voxeljet have no free cash flow. Likewise Stratasys has had to tap into cash reserves to supplement new cash flows to pay for planned capital expenditures. Over the last twelve months 3D Systems turned out over $40 million in Free Cash Flow.

The lack of free cash flow has not been an obstacle for Stratasys in its growth plans. It has used its high flying stock to raise capital in the equity market and as currency for acquisitions. Stratasys has no debt, but each of the other three has lain in a bit of debt to make ends meet. Voxeljet had $10.7 million in long-term debt and capital leases on its balance sheet at the end of September 2013, but may end up using some of the proceeds from its ADS offering to pay it off.

Conclusion:

Clearly each of these four publicly traded companies has built up some financial girth - enough to be real 'influencers' in the market for 3D printers and materials. However, 3D Systems is perhaps one with the greatest ability to act aggressively and sustain growth without diluting shareholder interests. 3D Systems not only has a strong balance sheet with low debt and plenty of cash resources, but it has achieved an operating model that generates enough cash to support current and new business - the ultimate competitive power.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.