3D Systems Corporation

Greetings and welcome to the 3D Systems third quarter 2020 conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Melanie Solomon, Investor Relations for 3D Systems. Thank you. You may begin.

Thanks, Jeffy. Good afternoon, and welcome to 3D Systems Conference Call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer, Jags Harna Rula, Chief Financial Officer, and Andrew Johnson, Executive Vice President and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so in the Investor Relations section of our website. For those who have access to the streaming portion of the webcast, please be aware that there may be a few-second delay and that you will not be able to pose questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our investor relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2019. Now, I'm pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Thanks, Melanie. Let me start by saying thank you all for joining our call this morning. I hope everyone's bearing up well and staying healthy in these stressful times. While the challenges of the COVID virus continue, I'm very proud of our employees for balancing so well their needs and those of their families with the commitments we've made to our customers. As businesses become more efficient in dealing with the effects of the COVID-19 pandemic and as the economies around the world begin to open, we're pleased to see rising demand across the markets we serve. We're hopeful that these trends continue as we move through our fourth quarter and as this momentum is sustained in the new year. On our last call, which was my first since joining the company in late May, we talked about the importance of clarifying our strategic purpose and how it would drive our actions moving forward. As a reminder, our 3D Systems purpose statement is as follows. We are the leaders in enabling additive manufacturing solutions for applications in growing markets that demand high reliability products. We developed this purpose statement to provide the strategic focus needed in order to simplify our operations to improve our operating efficiencies, while prioritizing our investments to deliver greater value to our customers. These actions will lead to improved profitability in the short term, while enhancing growth and margin expansion in the future. Having defined our purpose statement, we moved rapidly forward in our transformation journey, which can be described very simply in four phases of activity. Reorganize, restructure, divest and invest. We're moving forward on each phase with parallel efforts, and I'd like now to update you on our progress with each. Let's begin with reorganization. As we briefly touched on last quarter, one of our first actions was to reorganize the company to focus on two key market verticals, healthcare and industrial. Within healthcare, our primary focus is on dental applications, medical devices, medical simulation, and virtual surgical planning. Industrials include aerospace, defense, automotive, and durable goods applications. These growth markets all place a premium on performance and reliability for key components, have engineering and technology cultures that seek innovation as a way to deliver value to their customers, and processes that tend to be highly controlled or regulated. As our company has an established, strong foundation in these markets, our goal in this reorganization is to focus our full efforts on acceleration of our customers' adoption of additive manufacturing for specific application solutions within their new product offerings. With our exceptional technology portfolio that encompasses hardware, software, and materials, our application engineers are uniquely positioned with tools and expertise needed to support our customers in their adoption of additive manufacturing, while our global service team supports their ongoing needs in the field. It's a unique and winning combination that we believe will enable exciting growth and profitability in the years ahead. As validation of our capability to deliver this value, you need look no further than our current success. Today, our technologies are delivering over a half million production components for our customers each day, translating to over 180 million components on an annual basis, a number that dwarfs all other competitors in this industry. It's this foundation that we will build upon moving forward with an intense focus on our customer success and adopting this exciting manufacturing technology on a much greater scale each year. With the appointment of our two business unit leaders this quarter, along with our new Chief Financial Officer, Jack Tartanarulo, who I'm very pleased to welcome to our call today, our management team is complete and we're fully focused on executing our game plan. Having described our reorganization, let me now update you on our restructuring efforts, which we introduced in our last earnings call. Our expectation is that we will deliver $100 million of cost savings on a run rate basis by the end of 2021. We also stated that $60 million of the savings would be achieved by the end of 2020. I'm pleased to tell you that we're on track to deliver to our plan. Actions being taken include a combination of restructuring our workforce, consolidating real estate and facilities, and optimizing non-employee spend. In executing these plans, our leadership team created a set of operating principles to guide their efforts, which included a high-level prioritizing employee safety and ethics each day, working as one team, always acting with the customer success in mind, being bold and decisive in our decision-making, and focusing on quality in all aspects of our business. These operating principles help ensure that we're moving forward rapidly through our restructuring efforts while ensuring the long-term success of our customers, partners, and employees. With the focus embodied in our purpose statement and parallel to the reorganization and restructuring efforts, we were able to identify certain assets that were no longer core to the company and begin the process of divestiture. As a result of these efforts, earlier this week, I was pleased to announce the sale of our Simitron and GibbsCAM software businesses for $65 million. These businesses were focused on subtractive technologies rather than the additive manufacturing, and while highly valuable to their customers, was not core to our future additive manufacturing business. The proceeds from this sale will further strengthen our balance sheet, leaving us in a net cash position, and will be used in the completion of our restructuring efforts and for investment in future growth initiatives. We expect to continue to vest your efforts over the next several quarters. Jagtar will comment further on our plans for the balance sheet and specifically around our plans for the ATM equity program in a few moments. However, let me add that with the prospect of further divestitures of non-core assets in the next few quarters, we'll be evaluating in parallel investment opportunities to enhance growth and profitability of our core businesses. As with our divestiture actions, any investments we make will follow a rigorous and disciplined process with an unwavering goal of creating shareholder value, in this increasingly exciting industry. We'll keep you updated on our plans and progress in future earnings calls. With that, I'd like to end my opening comments with examples of how our focus and expertise is bringing value to our customers and delivering exciting new growth opportunities for the company. As many of you know, the pandemic has changed the operating environment for organizations around the world. and there's a keen interest in the application of additive manufacturing to create a more flexible and versatile supply chain. In healthcare, this is especially true for hospitals, as illustrated in our recent experience with the Veterans Health Administration. The VA is the country's largest integrated healthcare system, providing healthcare through 1,255 facilities for over 9 million veterans each year. Earlier this month, we were extremely proud to be awarded a multimillion dollar contract to help the VA establish an additive manufacturing production capability for medical devices. As a part of this program, 3D Systems will establish the required workflows, medical grade quality systems, and regulatory approvals, deploy our additive manufacturing printers, and then fully train and staff the operations. This turnkey capability will be operational by the end of 2021. after which the VA can independently produce medical devices for their own in-network use. The pilot application is COVID nasal swabs, which we're enabling with our SLS platform and medical grade nylon powder, which will be followed by several other medical device applications. The experience gained with the VA and other early adopters positions as well, positions us well to support other hospital systems in the future. While we enjoy the business opportunities we see ahead, The best part of this is the fact that we get to support the wonderful mission of the VA and the critical support it provides to our veterans, all while allowing what our team at 3D Systems does best. Next, let's turn to technology. Enabling our application's progress in both of our business units are our continuing technological breakthroughs in hardware, software, and material systems. As an example, a year ago, we announced a new $15 million program sponsored by the U.S. Army create the world's largest, fastest, most precise metal printer. This groundbreaking nine laser system, which builds upon our newly expanded DMP family of printers, will be able to manufacture aerospace quality one meter by one meter by 600 millimeter components using a broad range of high temperature and lightweight aerospace alloys for a range of advanced flight and ground vehicle applications. In spite of the challenges of COVID this past year, We've made substantial progress in the program, successfully completing our first test print in late October. We'll be sharing more updates on this program and the exciting applications that are enabled by it in the near future. With that, let me turn the call over to Jagtar, who will now describe our results for the third quarter and our current market outlook. Jagtar.

Thanks, Jeff. Good morning, everyone. For the third quarter, we reported revenue of $135.1 million. a decrease of 13% compared to the third quarter of 2019, and an increase of 21% compared to the second quarter of this year as we saw a rebound in customer activity from the worst of the pandemic-related shutdown. We reported a loss of $0.61 per share in the third quarter compared to a loss of $0.15 in the third quarter of 2019. Included in the third quarter 2020 net loss was a $48.3 million pre-tax non-cash goodwill impairment charge. This impairment charge was identified in connection with the interim goodwill impairment test that was necessitated by certain triggering events associated with the decline of the company's share price ultimately due to the impact of the business and economic environment from the COVID-19 pandemic. The impairment charge will not result in any cash expenditures and will not affect the company's cash position liquidity, availability, or covenant test under our senior secured term loan facility and our senior secured revolving credit facility. Turning to non-GAAP results, we reported a non-GAAP loss of $0.03 per share in the third quarter of 2020 compared to $0.04 per share in the third quarter of 2019. Consistent with our new strategic focus announced last quarter, we are now discussing revenue by market, healthcare, and industrial. Revenue from healthcare increased 6.1% year-over-year to 59.8 million, driven by stronger sales in the dental market following closures in the first half of the year related to the pandemic. Industrial sales decreased 23.8% year-over-year to 75.3 million, with decreases in all products, materials, and services across all geographies due primarily to the pandemic and associated reduced level of customer activity. On a sequential quarter-over-quarter basis, we saw strong revenue improvement of approximately 20% in both of our vertical businesses. Now we turn to gross margin. We reported gross profit margin of 43.4% in the third quarter of 2020 compared to 43.3% in the third quarter of 2019. Our gross margins were impacted due to lower absorption of overhead cost by the lower volume in Q3 2020 versus the third quarter of 2019, offset by our initial cost reduction activities. Many of the restructuring actions we are taking will further help strengthen our gross profit margins over the coming quarters. Operating expenses for the quarter were $126.2 million on a GAAP basis, an increase of 59.4% compared to the third quarter of 2019, including a 1.4% increase in SG&A expenses and a 9.9% decrease in R&D expenses. Also included in operating expenses is the goodwill impairment charge that I mentioned previously. Excluding this goodwill impairment charge, operating expenses for the quarter decreased 1.6% or 1.3 million to 77.9 million, compared to 79.2 million for the third quarter of 2019. Importantly, our non-GAAP operating expenses in the third quarter were $58.8 million, a 15.2% decrease from the third quarter of the prior year. The primary differences between GAAP and non-GAAP operating expenses is the exclusion of the aforementioned goodwill impairment, $11.9 million in restructuring charges, as well as amortization of intangibles and stock-based compensation consistent with our historical GAAP to non-GAAP adjustments. Now, let's turn to the cash flow statement and balance sheet. We ended the quarter with $75.3 million of cash and cash equivalents. Cash on hand has decreased $58 million since the beginning of the year. We used $26.5 million for debt repayments, $32.6 million for operations, which includes nearly $24 million used for inventories, $12.5 million for one-time payments made in the first quarter of 2020 to purchase non-controlling interest, and $11 million for capital expenditures, partially offset by proceeds of $25 million from the issuance of common stock. Our term loan is now $22 million, so our net cash position at quarter end was $54 million. We have a $100 million revolver that was undrawn as of September 30, 2020, and and has $31 million of availability based on terms of the agreement. Let me make a quick comment on inventories. We have seen the cash used in inventories go up nearly $24 million so far this year. As the market rapidly turned down in the first half of the year due to the pandemic, we were unable to slow down our inventory additions fast enough due to committed lead times with our contract manufacturers and suppliers. With these adjustments now made, our sales now strengthening, and a strong focus on sales forecasting, we expect inventory improvements as we exit the year. Finally, let me end my remarks with a comment on our at-the-market equity program called our ATM program, which we announced last quarter. At the time, with COVID raging and the economic impact highly uncertain, We believe the ATM program was a necessary risk abatement needed to ensure support for our restructuring initiatives and to provide financial flexibility during highly uncertain times. Under this program, in the third quarter, we issued $25 million of common stock, leaving $125 million still available to us on the program if needed. However, with the improved business environment, progress in our restructuring efforts and the cash generated from the Q3 stock sales. We do not anticipate additional sales under the ATM program in Q4. Furthermore, as we announced earlier this week, we have signed an agreement to divest our Simitron and GivesCam software businesses, and our expectations are that this deal will close in Q4. We announced a $65 million purchase price and expect price adjustments of approximately $5 million for liabilities that we are transferring to buyer. In addition, we expect about $10 to $15 million of taxes primarily for distributions of cash between our foreign entities and the parent that is built up over time. The final net cash number will be around $45 to $50 million. This transaction will leave us in a net cash position on our balance sheet. Therefore, following the closure of the sale of Simitron and Gipscam and the receipt of proceeds therefrom, we plan to evaluate the continued need for the ATM program and may very well elect to terminate it altogether. With that, I'll turn the call back now to Jeff. Jeff?

Thanks, Jagtar. So to summarize, I'm very pleased with the progress we're making on our transformation and the strategic realignment of our company. Our reorganization is complete. Our leadership team of seasoned professionals is in place. Our restructuring efforts continue, and we're on track to deliver $60 million in run rate cost savings by the end of 2020. We continue to see demand returning as the economy opens up from the effects of the pandemic. As a result, while the risks related to COVID will continue for some time, we anticipate continued strengthening of the business moving forward. I want to thank our employees, customers, and stakeholders for their loyalty and dedication during these challenging times. With continued focus and strong execution, we look forward to emerging from this period stronger than ever and excited about a very bright future ahead. And with that, we'll now open the floor for questions. Operator?

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press R1 on your telephone keypad. The confirmation tool will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Greg Palm with Greg Hallam. Please proceed with your question.

Great. Thanks. Good morning, everyone. I guess just kind of starting with the quarter, you know, obviously it exceeded a lot of our expectations, but materials segments specifically bounced back really hard. I mean, almost to pre-COVID levels, which surprises us given I think many of your customers are still kind of gradually ramping back operations. So what drove the sizable increase relative to Q2?

Greg, I think it's pretty straightforward. I think that, you know, customers – reacted pretty promptly when the COVID shutdown occurred a few quarters ago, depleted inventories, and now as their production ramps up, they need to bring in materials. So, I mean, clearly the supply chain was heavily depleted. There was a nice bounce back. You had the opening of some entire industries that had shut down, like dentistry. So we were pleased with the rebound. It was nice and strong, and we would expect to see our customers increasingly use the assets they purchased previously to make parts. So we were pleased with that.

Yeah. Okay, good. And I guess in a normal year, usually you'd see a seasonal bump in revenue. I'm talking across the company in Q4 from Q3. I mean, taking out the impact of the expected divestiture, I mean, knowing really this year is anything but normal, but do you still see ongoing improvement in the top line? What are you seeing thus far in October?

Yeah, Greg, I hope this is the most abnormal year I ever experienced. I would assume, Greg, that the normal seasonality will still occur, will still be in place, but you know, the opening and the ratcheting back in different parts of the world, it just makes it so darn unpredictable. I can tell you broadly, we continue to see strengthening in the markets, the, you know, logistics. Companies have really adapted incredibly to this COVID environment in terms of being creative on logistics and supply chain. So while that was a huge impact as the economy shut down initially, you know, as they go through some fits and starts with shutdowns around the world, They're much, much better at dealing with logistical issues and getting product in. So as long as their demand remains and they continue to desire to ramp up production, you know, we continue to see strengthening. And I would expect that, you know, some seasonality patterns that you've historically observed to continue, it's just such a, you know, it's such a bizarre year this year with COVID. So I don't know if it'll amplify it or dampen it based on history. But I am pleased to see that the world continues to get incrementally better. That's the best I can tell you.

Nope. Okay, that's helpful. And I know, you know, given that level of revenue, you know, if we assume sequential strength in December versus September, I'm assuming that puts you at a level that was probably higher than what you were expecting last quarter when you talked about being – you know, net income or adjusted net income profitable exiting the year. So on top of that new level of revenue and given what we know about the progress of the restructuring, I mean, do you expect to report profitability in Q4 then?

Well, we're not going to provide guidance, Greg, because of the volatility in the market. You know, that's the way the, you know, directionally that's the way the math would go. But I would just be really cautious about about predicting, you know, what happens with COVID. It's just such a doggone wild card. I can tell you that demand continues to rise. You know, if we're able to ship, you know, you would expect volumes to rise. So, you know, and with that, that's the direction the math works. But, again, I just don't believe we're in a position to really comment on, you know, quarter by quarter how this goes as the pandemic continues to rage.

Yep, no worries. Understood. All right, I'll hop back in queue. Thanks. Thanks, Greg.

Thank you. Our next question comes from the line of Ananda Barua with Luke Capital Markets. Please proceed with your question.

Hi. Good morning, guys. Thanks for taking the questions. And, yeah, congrats on the progress, no doubt. Just a couple for me. Jeff, are you able, aside from dentistry, able to get visibility to, you know, than other end markets, both from a hardware and supplies perspective?

You know, Amanda, there's a lot of variability. But what I was really pleased about, dentistry, obviously, you know, at the peak of the pandemic shutdown, it had really ground to a halt. You know, I'm sure everybody knows when they go to the dentist, you just couldn't go see anybody. So now that's opening back up. That's great. But what I'm particularly pleased about is the rest of the health care market Now, portions of that were shut down as well. There were orthopedic areas and things that were viewed as nonessential operations, so people postponed those. But, I mean, we saw a broad strengthening in the health care market, you know, across virtually all of our customer base. And we were really pleased. You might have anticipated the dentistry thing, you know, there was a lot of pent-up demand. But I would say it was a nice broad resurgence in health care. And the fact that we got to actual year-over-year growth, I mean, not only sequential quarterly growth, which we were thrilled about, but the year-over-year growth of 6% to 7% was fabulous. In this environment, we're very pleased with that, and I think it harkens well toward our real focus on health care for the future. It's a great market to be in.

And are you – what's the state of the industrial markets right now? It sounds like maybe that's not contributing as much, and so that's still something to come. Is that –

On a percentage basis, as I think we mentioned or we mentioned in the release, both of them, both healthcare and industrial rose sequentially about 20%, a little over 20% in both of them. But industrial is starting from a much lower base. Industrial is still down year over year. And it's great to see the resurgence. It's just got a long way to go. And, you know, you can view it as cup half full or empty. I mean, it's got a long way to go, which is depressing. It went down a long way. but it's got a lot more headroom, you know, moving forward as well. And obviously health care is strong. So I love the markets we play in. I mean, we're well positioned with key customers in both, and I'm bullish on both of them right now.

Okay, great. And then just with regards to the disaster chairs, is there any way, Anna, you can help us think about, you know, kind of the context of what the opportunity might be, the company – did, you know, tens of acquisitions, you know, sort of a, I call it a handful, but a number of years ago, it was sort of in various stages of integration. You know, any help you can give us there to think about not what you'll do, but what the opportunity set may be that you guys will be exploring.

You know, and it's very hard to provide much more color on that. I can tell you there was a Once we said it publicly that we were, you know, really focused on additive manufacturing, there were a lot of inbound interest on a number of these assets. Well, it nicely put us in a position to sit back and say, you know, number one, we want to run good processes, make sure our shareholders get good value out of anything we do divest. But you really want to be thoughtful about, you know, they were accumulated for a reason. You want to be very thoughtful about what you divest. So I'm really not in a position to comment on you know, specific expectations, you know, plus valuations will depend on, you know, what buyers see about the future of the business and any synergies they bring. So it's just hard. And I apologize for that. I know it's probably frustrating to try to bound, but we just want to be very thoughtful about it. Nicely now with this first one, which was probably the most obvious one because it was heavily focused on subtractive technology, we're increasingly in a position where we can be very thoughtful and make sure we for making a decision on what we'll divest and then how we go about doing it.

Now, listen, any context is helpful. So that is helpful. I have a quick follow-up there. Same question. Is for sort of the opportunity set for your evaluation set, Jeff, are there any assets for which you'd say, you know, for the right price, we'd do it? I mean, I get that the answer is always yes, but I mean, really what I'm saying is it mostly, hey, listen, this just doesn't fit, and so we want to kind of divest it because worst case, it's a distraction, right? Or some of these are kind of gray area, and for the right price, we'd sell the gray area stuff.

No, I would say just qualitatively, there's not much that's in a gray area. There's stuff that You know, we look at it and say, look, in the long term, I'm not sure that fits with where we're going. And bear in mind, Ananda, these are fine businesses. They really are very fine businesses. They're just focused outside of our core. And for that reason, we think there may be better owners out there, and we want to try to get the right value for them, of course. But strategically, you know, they really should be owned by a company that will continue to invest for growth in that business. But they are all fine businesses. They're very good. But there's not much that's really that gray. The grayness has crept up just a little bit because some of these groups of folks can do multiple activities. And over time, they've grown to focus more on the core business. But there's still elements that are non-core. So as you might imagine, separating the non-core stuff when that's happened is tricky sometimes. because obviously a buyer wants to get the right value as well. So we just want to be thoughtful about how we separate those and go after them. But there's not a lot of gray. Our purpose statement is very specific. Additive manufacturing focused around specific applications. That's what we're going to continue being. It's our heritage, and it's what we can be, we believe, best in class at. So things that are outside that perimeter, we are over time, going to look at divesting.

That's really helpful.

Thanks so much.

Thanks, Amanda.

Thank you. Our next question comes from the line of Sarkesh Ravetchian with B. Riley SBR. Please proceed with your question.

Good morning, Jeff and Jack. Thanks for taking my question here. So just wanted to kind of follow up on the last line of questioning. You know, if we kind of look at the other parts of the business that could be divested, right, because they no longer fit the strategic direction you're going in. I guess from a very high level, like what's the magnitude of sales and potentially associated P&L expenses that could come out of 3D systems, P&L assuming all is said and done?

Well, I'm sure the answer will frustrate you, but it's highly dependent on you know, which businesses or which parts of businesses that we end up divesting. So it's very similar to Ananda's question before you. It's just really difficult for us to give you a target of either size or timing. And my apologies for that. But we just want to be very thoughtful about what we separate from the company and divest. And we're just not in a position today to guide you on either what those are or the impacts coming from them. So it's the best we can do to just find the direction we're going.

Okay, no worries. I guess if we can maybe focus on the Symmetron and Gibbs-CAM software businesses for a second. Maybe if you can disclose what the financial profile of those businesses were, right, and also maybe talk about the multiples received for those businesses.

Sure. The Simitron Gibson revenue is around $35 to $40 million. It's been declining high single-digit to low double-digit rates annually. The direct costs associated with the business that will be transferring to the buyer are around $20 to $25 million. There's also some small level of corporate overhead-type costs that we'll look to evaluate, but it's largely not material. So you can think of it as the $35 to $40 million revenue declining $20 to $25 million of cost.

And is the $20 to $25 million in cost out contemplated in the run rate savings that you guys have communicated to achieve in the next 18 months?

No, that's not contemplated in that.

Thank you for that. And I guess just kind of moving on – Jeff, you mentioned, you know, sales improving and some expected continued strength. You know, maybe what's kind of the more specific tangible drivers to support this comment? I know it's a difficult environment, but just anything that we can kind of, you know, hang our hat on and, you know, take going forward?

No, it's interesting. If you look at the markets that we've participated in up in kind of pre-COVID, those are strengthening broadly. So, So in healthcare, you'd say it's medical devices broadly. Dentistry, you know, has certainly returned to growth. That's a nice business for us. And the virtual surgical planning is more popular than ever, frankly. I mean, as surgeons get back to business and are taking care of patients. So we love those businesses. They're growing. The new facet in the healthcare business is the one we released a press release on here yesterday morning, I believe, around the VA. And I think you can look at that as an example of how folks are rethinking their supply chains, and particularly hospital systems that were really caught short when COVID hit, as everyone knows, on PPE and respirators and a number of critical areas. And as we move forward now and react to that, they're looking at, you know, how do they create a more responsive supply chain? and especially to fill short-term needs for critical patient care. And the VA has moved out aggressively in that direction, and we're thrilled with it, where they've hired us now to basically put in a turnkey production-capable system in a number of their hospitals to provide medical devices on a short-term basis. And it'll give them much more flexibility and short-term capacity to address medical device needs. That's a brand new market. That's a new one. And we think we're very well positioned to do that with our range of printer hardware, FDA-approved materials, and software systems that are very well adapted to that environment and our knowledge of the quality systems that are required. So I love our traditional markets in healthcare. They're growing again. The extension now to supply chains and hospital systems Great opportunity there, I think, to drive further growth, incremental growth. On the industrial side, I think you'll see the same basic responses. There's the traditional demands for, you know, certainly for ground transportation, put it that way, cars, you know, and new electric vehicles and things like that. So those companies will all be looking to increase sales, and clearly they were severely impacted by supply chains that had largely moved around the world to low-cost countries, that were extremely hampered during the COVID period. So you see the resurgence of sales, so overall demand, and then you see on top of it a move for more flexible supply chains. So I look at some of those and say those could become very exciting markets for us. You know, aerospace, clearly commercial aerospace is in the doldrums right now because of the COVID impact. hopefully that will rebound over the next couple of years, and that's always an early adopter, if you will, of these new manufacturing techniques. So I've kind of covered the waterfront for you there, but I'm sincere about each one of them. I think you've got historical demand and trends, and on top of it, you've got this need for a more flexible, localized supply chain to make up for disruptions around the world. So that means, and it's true for our entire industry, I think it's you're going to come into a nice period here where there's rising demand.

That's certainly helpful. Yeah, yeah. One more for me, and I'll hop back in the queue. You know, you mentioned as you're going through the divestiture process, you know, you're kind of also looking to enhance investment and growth. I just want to get your sense for, you know, looking at your portfolio position, you know, are there any opportunities either in materials or maybe new processes to kind of build or buy and what I'm getting to is it sounds like the fiber or composite markets is also pretty interesting from an additive perspective. Are you considering any investments in that direction? Do you have anything in your portfolio that can help bridge the gap? I just want to kind of understand the opportunities out there.

Yes. So I would say to answer the last part first, yes. We have probably the broadest range in the industry of hardware, software, and material systems. And we're very proud of that. And we can bring application solutions to our customers, I think, better and faster than anybody in the world. And that's what we're going to really focus on going forward. Now, to keep that stream going, we have to make key investments in technology, whether it's organic or inorganic. We really need to. So we're constantly evaluating and talk a lot about our material systems. We have great hardware systems, and we continue to launch new hardware platforms. Materials are what customers actually use and turn into components. So we want to make sure we stay really fresh and at the leading edge of the range of materials we can put through our platforms. We have a great team in place, particularly on the polymer side, to leverage the technology and grow. So those areas for investment are really ripe. And we'll continue to put money in those areas. Periodically, we will launch new platform, new hardware platforms to stay current on those. And that's really around speed and efficiency. And in the case of aerospace, enhanced high-temperature capability, multi-materials capability, things like that. And then on the software side, we have a great suite of software around both our plastics and metals capability. which allows customers to not only print with high precision, but faster and faster each day. And that really comes together through our centers of excellence and our application engineers, who we're very, very focused on, because those are the guys that bring it home for customers and define workflows that customers can use. So I think to be competitive in this industry, you need to have all three capabilities, hardware, software, and materials, and The better you bring that together in applications, the more successful you're going to be in the industry.

Thanks, Paul. I'll hop back in the queue.

Thank you. To allow as many questions as possible, we ask that you please bring yourself to one question and one follow-up and then read through for any additional questions. Our next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Thanks for taking my questions. Symmetron, that was a software business that was running over 80% gross margin before it was acquired by 3D. Is that the kind of level of gross margin that that business was running at? Yeah. Can you talk about that?

Okay. Yeah. Of the $20 to $25 million of cost that I mentioned, associated with that business, I'd say about 10% of that, 10% to 15% hit the cost of goods sold line.

Okay. And then do you feel, you know, of the, you know, there are, I think, you know, 52 acquisitions that were made in the 2009, 2015 period. Is Sinitron, as you look through that list, is that the largest one that you, when you, you know, think of the ones that you can divest? Is this probably the biggest one that you're able to do, or are there other big fish in that pile?

Oh, no, there are other assets that, you know, we could potentially invest, but it would be larger. You know, you just want to kind of work your way through. There was a lot of inbound demand, obviously, on the Cimetron assets. They were excellent assets. Again, they were focused out of our core. They were focused largely on subtractive technologies. But they were so under our ownership. we weren't going to invest in that direction. So it was a declining business for us, but excellent assets for someone else. And I think the owner can be very proud of it and we'll see a great future there. We did retain portions of that team that were involved in additive manufacturing, especially the software for additive, really talented group of people that we did retain for work on additive manufacturing, which made it a complex divestiture. But It was nice to have the inbound interest, and we worked really hard to get that done because it strengthened our balance sheet and allowed us to have much more flexibility moving forward. It's not by any means the largest asset we could divest, but we will consider each one in its own right and what the timing and process we want to follow is. So if that's helpful to you. But, again, I think it was a win-win, the divestiture, and it certainly frees up resources for us to invest in our corp. Yeah, very helpful. Thanks very much.

Thanks.

Thank you. Our next question comes from Jim Rusciutti with Needham & Company. Please proceed with your question.

Hi. Good morning. I realize you're not in a position really to talk a whole lot about the top-lining Q4, just given all the moving parts. I'm just wondering if you can give any help to us in terms of how we might think about non-GAAP operating expansion, particularly we don't know the timing and symmetry Yeah, sure.

So, regarding the timing of Simitron closing, you know, we expect that to happen in Q4, but we think it will be later in Q4. So, I think it will be a smaller impact to kind of changes in our OpEx number. Regarding how I think about OpEx, right, so we're going through this restructuring program, you know, I'd say we've got half the cost out now. We want to exit the year with a $60 million cost savings run rate. That'll tell you that we've got to get the other half of that $60 million out in Q4. Think about the OPEX line. I'd say about, you know, 70% of that $60 million savings hits the OPEX line. So if you think about, you know, we're halfway done, you get the other half in Q4, you know, ramping to that $60 million, 70% of it hits OPEX. You know, I think that – gives you some perspective of what we'd expect the OPEX number to be.

Okay, and then just with respect to the sequential improvement you saw on the product line, product revenue line, any colors to what you're seeing sometimes?

Sorry, you're breaking up a little bit, but I think you were asking about the sequential... Improvement in the product side, and what I'm trying to get to is

any particular areas within the product portfolio where you're seeing some improved demand?

I mean, I would say it was pretty broad-based. So, within our product line, you know, we saw it in materials. We saw it in printers. We saw it in software, so it was across the board. You know, within our printer category, we saw it in both plastics and metals. So it was a pretty broad-based recovery on the revenue side. Thanks. Thanks, Jack.

Thank you. Our next question will come from Paul Koster with JC Morgan. Please proceed with your question.

Yeah, thanks, Jack. I'm trying to get to a sort of decent EBITDA number, and I'm just wondering, with the write-downs, what happens to sort of DNA moving forward? Perhaps you can kind of give us some sense of what the run rate is now.

Yeah, so our depreciation run rate has been about $25 million. I think it will reduce a few million dollars, but it will move a little bit, but it won't be significantly different.

Okay, and do you expect any sort of restructuring charges in the fourth quarter, cash, non-cash?

Yeah, we do. So we're expecting about $9 million of restructuring charges. $6 million of that we're expecting on the cash side, another $3 million not in cash.

Okay, and then I assume that the Symmetron business was in the industrial segment, or, well, which was it?

Yeah, that was in the industrial segment.

Okay, and that obviously, given the subject's closing, probably doesn't start to impact the revenues until the beginning of 2021.

That's a fair assumption. We're expecting a mid-December close.

Were there any synergies between the Symmetron software and product or material sales?

Not that I'm aware of.

No, it was a completely different customer base, Paul, so none really. As I mentioned, we did keep a small number of software design engineers that were working on software for our additive system. So whatever synergy we had with owning the business, we kept those resources in with our parent company. And what the buyer was really interested in were the subtractive resources.

Gotcha. And, Jeff, I want to go back to your opening statement. I may have misheard, but I think you said something like half a million objects being created every day using 3D printers. I don't know if it was your printers or all printers or whatever, but perhaps you can just elaborate on that. But the main question is, Are the objects getting bigger or are they getting smaller? In other words, you know, I'm sort of trying to understand what the implication is in terms of material quantity.

Yeah, Paul, that's an interesting question on the size. Yeah, I know you heard correctly. So our technology, and my comment was around specifically around 3D systems technology. Our technology, to the best of our estimation, and I'm trying to be somewhat conservative on the numbers and not being aggressive, but it's half a million a day. Our technologies are being used to make half a million components a day, and that's not a stretch. I mean, that's our printers, our materials, our software. That's not including any other peripheral stretch application. Those are hardcore components that are being made with our base technologies every day. Because I have to smile when I hear about numbers other people are excited about. And the whole industry is growing, which is great. But I look at our legacy and our installed base, half a million a day or 180 million components a year are made with our technology. So we're building up a tremendous base of experience. And that's what's also fueling our service team to, you know, keep the machines replenished and keep them running well. And it's very successful. In terms of size, that's a really interesting question. We're learning, and our software is really targeted to this in part, about how to pack components more densely in the machine so it can increase the customer's efficiency. So that's very helpful. Are they physically getting smaller? I would say it's really hard to say a trend. There's a lot of small stuff being made, but, wow, our newest machines that are our largest machines, are making some really large components, especially on the industrial side of the business these days. So if you look at our newest metal printers, you know, half a meter by a half a meter size componentry, and customers are actually making those size parts out of titanium and other materials. So it's exciting. It really is exciting. I can't give – I'll look at that. I can't give you a really – Any more insight on the size of the parts being made? I can tell you the small stuff is being more densely packed in the printer, which is helpful for efficiency.

Thank you very much. Thanks, Paul.

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Please proceed with your question.

Yes, thank you. Good morning. I was wondering if you can comment on the trajectory of gross margins, given all the puts and takes, and particularly some of this inventory drawdown that you're talking about that should happen here in the fourth quarter. Can you give us some color on how we should think about this trajectory?

Yeah, sure. Let me start with gross margins. So, you know, with Q3, you know, gross margins, if I look at the product line versus the services line, product line was down year over year – down slightly year over year. And, you know, that was driven by, you know, two effects, right? On the one hand, we had lower volumes year over year. On the other hand, we had the cost restructuring actions. So those were sort of fighting each other. We remained slightly down but essentially flat. On the services line, we were up year over year. That was driven by improvements in our parts manufacturing business volumes. as well as our field services business, lower labor costs and lower parts cost usage there, which drove that improvement. Regarding inventories, you know, we're at – we ended the quarter at $127 million, as I talked about in my prepared remarks, up $24 million this year. You know, we've done a lot of actions to sort of – improve the cadence between the sales forecasting teams and the supply chain teams to enhance flexibility in our supply chain. And so we're expecting, you know, by the end of the year, inventory turns to be back to historical levels. So we'll draw down inventory to get back to where we've historically been.

Okay, thank you. And as a follow-up, Jeff, as you think about this divestiture process – Do you have a rough timeline in mind to sort of completing all the divestitures that you view as non-core? Is this going to be something that we think is a, you know, two-quarter phenomenon, a 2021 phenomenon, or does it get stretched out longer depending on sort of what the appetite is from a buyer perspective?

Yeah, I would tell you not to think of it as a two-quarter phenomenon. I think, you know, kind of looking, we're going to be continuing to evaluate work on things through 21. because, you know, there are a number of considerations. And these things all take time. You know, you want to run discipline processes. What drives you to shorter time frames, you know, are just employee considerations and disruptions. We don't want to leave a lot of uncertainty internally, you know, and we do want to move them along. At the same time, we want to run good processes for the things we do the best. So, you know, that all adds up to probably looking out through 21 and And just, you know, look at it systematically. And we'll keep you updated as we make decisions and as we obviously conclude things each time. We'll keep you updated. Just in reference to your first question on gross margins, one of the nice things about our focus, our reorganization and our focus, is we're driving growth in markets that really value additive manufacturing, meaning they get a lot of value out of it for their customers. And those tend to be markets that have a higher gross margin associated with them. They put a premium on the capability of the component, the quality of the component, the quality systems that you have, for example, in health care. Those tend to be higher gross margin businesses or markets. But so broadly, Jagtar told you about kind of the short-term comparisons and the puts and takes quarter by quarter on gross margin. I was actually pleased that we could hold the gross margin relatively flat in a condition where we're still facing lower demand versus last year in the industrial space. We were able to get enough cost out of the business to hold gross margins at a good level. But moving forward over the future years, I love the businesses that we're in because they generally carry a higher gross margin associated with them. And as we have a built-out service team and it's becoming more sophisticated every day, as we look at leveraging that team, that tends to bring higher gross margins as well. So it's a nice environment to be in. We're focused where the value is, and I would hope that trend is one you'll see in future quarters.

Jeff, just if I could follow up on that comment. I mean, is there any consideration or any thinking around separating out the attach of materials to printers as in allowing, you know, it being more of an open systems-based approach as opposed to a closed systems-based approach from a material perspective. I mean, if I heard your gross margin comments, I mean, it sounds like that wouldn't really change, but just wanted to see if you had any thoughts on if the business model was going to have a bigger change in your mind.

Yeah, I know it's a great question, and it's one that, you know, we and our competitors all take different positions on. we tend to be able to deliver a lot of value out of linking the materials and the printers together. So, in many, many of our systems, we can derive extra value by targeting tailored materials, by tailoring a material for a certain printer and application. And that's why we've taken this approach being extremely applications focused. So, the reason that we want to, you know, we want to sell materials with printers is not only financially driven, we can deliver much more value that way to our customers. So if we ever get to a point where we say, look, our material that we can offer through a printer is not special, it's the same as everybody else's material or commercially available, then we wouldn't link them together. But as long as we can deliver special value to customers that are worth something to them, that they really value and will pay for, by tailoring materials to certain printers – it's a great outcome for our customers and it's a good economic outcome for us. So that's the kind of work that we're focused on doing more of going forward.

Okay, great. Thanks a lot.

Thanks.

Thank you. Our next question comes from Kenny Valance with Barenburg Capital Markets. Please proceed with your question.

Good morning, everyone. Thanks for taking my question. It's obviously covered a lot here, but I just wanted to – hit on the, you know, direct metal printers. Any updates on the commercial launch from earlier this spring is kind of briefly mentioned in the comments. But how are you thinking about the market opportunity there? And what is competition kind of look like, particularly as the recovery kind of comes into play in 2021?

Yeah, well, we're obviously bullish on metal printers. It's going to be a very big market out there, and there are a variety of technologies being used to pursue it. With ours, you know, ours is particularly good with aerospace-type materials or difficult materials to process, meaning you need very good atmospheric control, and obviously we have some very large printers. So we're, you know, for example, aerospace companies are interested in making flight hardware out of, very sensitive, high-temperature materials. You want the best atmosphere for making the part you can find, and that's the technology we really exploited in our printers. So now going forward, we're working on making them faster and better and able to demonstrate a broader range of materials or even multiple materials into the same printer. So that's the challenge for us. I would say metals in general, a nice growth market. Our platforms are being well-received. The 350 has been in production for a while, and it's in continued demand across a large number of markets. The 500 is much newer for us, and we're able to start shipping it now and building up an install base and kind of seeing what the customer experience is like on a larger scale there. But we anticipate growing demand for that as well. So I don't want to oversell it and say it's going to change the entire business, but I The future of metals is very big, and we will certainly look to fully participate. A lot of our customers want to move from plastics and metals and back to plastics again over time, depending on what the components they are trying to manufacture. So we believe very strongly in offering that range of technologies to our customers.

Awesome. And then just kind of as a quick follow-up, would you highlight – Metal is a particularly interesting area for investment, you know, as investments happen and you have more cash on hand.

No, I wouldn't. Actually, I wouldn't say specifically metals. Plastics have an enormous range to go. And you look at the range of plastics for, again, we're heavily focused on, you know, broadly on industrial applications. And I mean that to apply to healthcare, too, but there are useful devices that They're actual components that are going into machines or into human bodies. It changes a lot day to day from metal to plastic and back again. So I am very excited about metals. I am equally excited about plastics. And there was a prior question which I neglected to address on reinforced plastics or blended plastics, things like that. I think you have a great future, whether it's carbon fiber or carbon reinforced, you know, more alloyed or more blends of plastics going through printers, fantastic opportunity. So I'd say I'm equally bullish on both. I like both areas, and our customers do as well.

Awesome. Thank you very much, Jeff. Thanks for the questions.

Thank you. For our last question, we'll take a follow-up from Greg Palm with Craig Hallam. Please proceed with your question.

Yeah, thanks for sneaking me in. I guess one of the questions I've been getting from investors is sort of the pathway to organic growth. And I guess, you know, the assets you're divesting, are the majority that you're looking at divest shrinking in revenue similar to Simitron? I don't know if you can confirm that. And then as we think about health care, I mean, by our math, that's a segment that actually has been growing pretty consistently on an organic basis over the years. I mean, is that something you can expect to continue going forward?

Yes, absolutely, Greg. And I would tell you, just generically, the company had so many exciting opportunities that we were trying to do, just broadly speaking, Greg, too much, too far. We were under-investing in many areas. And certainly, the subtractive assets that we sold with Gives Can and Symmetron is an example of You know, I'm not convinced under the right ownership those are shrinking markets. They were shrinking businesses for us because we weren't able to invest properly in them. And as soon as we laid out our purpose statement and we said we're going to invest in additive, that meant that trajectory was going to continue. So it's best to get rid of that stuff, put it under the right ownership for growth in the future, and let us focus on areas where we can grow. Our customer base in healthcare, just to use that as an example – is absolutely fabulous. We do pockets of great work with some of the leading healthcare companies in the world. But if I look at their demand, they want us in a number of other areas that we just haven't been able to invest in because we were trying to do too much for too many. And so as we're getting out of things, we're trying to double down on the things that are working and growing. And healthcare is a great example. Med devices, surgical planning, Those areas are fabulous. This new work we're doing with the VA, those are the kind of areas that we're going to really focus on all the way from sales and marketing through our technology base and application engineering because there's real growth in those areas. And I saw the industry is growing. I think you'll end up seeing us grow as well. Our shortest-term priority here is to drive to profitability, you know, stop doing things that are non-core, get the cost out of the business, get the profitability, and earn cash that we can reinvest in our core business for further growth. And I think you'll see that increasingly in the discussions turning increasingly to growth as we go into 21.

Yep. Okay. And then just to be clear on the gross margin trajectory, I mean, so the divestiture of Simitron – that will take out some pretty high margin business. I assume on the flip side, there's probably divestitures that you're looking at that are lower margin. So maybe that can offset that. But Jack, I mean, I think you mentioned restructuring efforts and the impact to gross margins going forward. I mean, do you have an internal target over the next year where we could go from here?

So what we said is, right, 60 million of run rate cost savings, exiting this year, $100 million in total by the end of next year. So if you think about 30% of that roughly is on the cost-to-good-sale line, that probably gives you some perspective on where we expect gross margins to end up.

Okay. But even with the divestiture at Zimadron, that would certainly put some upward pressure on gross margins just by that matter, right?

Yeah, that's fair. I mean, that is a high-margin business.

Yep. Okay. All right. Great. Thanks.

Thanks, Greg.

Thank you. This concludes our question and answer session. I'll now turn the floor back over to Melanie Solomon for additional closing comments.

Thank you all for joining us today and for your continued support of 3D Systems. A replay of this webcast will be available after the call on the Investor Relations section of our website. Have a good day.

Ladies and gentlemen, this does conclude today's public conference and webcast. We thank you for your participation, and you may disconnect your lines at this time.