3D Systems Inc. (DDD - Analyst Report) reported third-quarter 2014 non-GAAP earnings of 18 cents a share, which surpassed the Zacks Consensus Estimate of 15 cents by 20%. However, the bottom line declined 37.8% compared with 26 cents earned in the year-ago quarter.

On a GAAP basis, earnings came in at 3 cents per share, plummeting 82.4% from 17 cents in the prior-year quarter.

3D Systems’ business in the quarter was impacted by increasing expenses. Though demand for products remained strong, the company failed to reap the gains fully, owing to certain manufacturing and delivery constraints which weighed down on its earnings.

Quarterly Details

The company reported quarterly revenues of $166.9 million, reflecting a year-over-year increase of 23%. However, revenues fell short of the Zacks Consensus Estimate of $174 million.

The year-over-year upside was driven by an increased demand across all its categories, which translated into organic growth of 12%. However, this increase was partially offset by a delayed availability of the company’s latest offerings, coupled with manufacturing constraints faced in the direct metal printer domain.

Organic growth was driven by a 57% increase in units sold of the designing and manufacturing printers organically. Design and manufacturing revenues grew 27% year over year to $155.2 million while print materials revenues improved 18%. Further, service revenues increased 29% while healthcare revenues surged a robust 121%.

New orders in the quarter totaled $46 million, reflecting a sequential increase of 44%.  At the end of the quarter, 3D Systems had a backlog level of $8.3 million.

Margins

Gross margin remained flattish at 47.8% on a sequential basis. Despite strong margin growth in the company’s Materials and Quickparts businesses, margins were adversely impacted by the sluggish revenue growth.

The operating margin contracted an astounding 1620 basis points to 4.9% from 21.1% recorded in the prior-year quarter. The huge 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 $377.3 million compared with $306.3 million as on Dec 31, 2013. In the quarter, the company’s cash from operating activities came in at $8.6 million.

For the nine month period ended Sep 30, 2014, net cash flow from operating activities inched down to $27.9 million from $28.5 million in the prior-year comparable period.

Business Update

As evident from its capital allocation strategies, 3D Systems remains focused on expanding its presence in the high potential 3D printing market. In the quarter, the company  acquired three service bureaus for its Quickparts business, namely, American Precision Prototyping, American Precision Machining and Laser Reproductions. These additions are intended to enhance 3D Systems’ offerings in aerospace and industrial applications as well as aid its geographical expansion over the U.S.

These apart, the company added LayerWise to its direct metal printing division. This acquisition will enhance the company’s production of medical, dental and aerospace precision metal parts. The company also closed the $120 million acquisition of Simbionix, the Cleveland, OH-based leading 3D surgical simulation and training company.

Simbionix complements 3D Systems’ strength in printing patient-specific instruments and devices, which in turn, will significantly help in the advancement of healthcare industry. Furthermore, the company’s training capabilities mark a positive for growth of the combined entity.

Moreover, 3D Systems has made a number of senior level personnel changes. Also, the company entered into a $150 million five-year credit facility to augment its liquidity and ensure free growth.

Outlook

The company reiterated its earnings and revenue guidance for fiscal 2014.

Revenues are expected in the range of $650 – $690 million. GAAP earnings per share are estimated in the band of 18 – 28 cents while non-GAAP earnings per share are projected in the range of 70 – 80 cents.

Management believes that despite short-run headwinds arising from mounting expenses, the company is favorably positioned to reap considerable benefits from the R&D investments, by the end of 2015. This Zacks Rank #4 (Sell) company remains optimistic about its long-term growth, backed by its persistent efforts to pursue innovation and meet the rising demand.

However, stiff competition from other players in the industry like Stratasys (SSYS- Analyst Report), Hewlett-Packard (HPQ - Analyst Report) and Voxeljet (VJET - Snapshot Report) remains a concern.

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