bbt_120612_21258

December 6, 2012

Initiating CoverageIndustrial Equipment--Distribution &Components

Holden Lewis / (703) 471-3894 / [email protected] C. Cooper / (804) 787-8293 / [email protected]

3D Systems Corporation (DDD - $44.54) Buy

COMPANY STATISTICS12-month Price Target: $60.0052-wk Range: $14.30 - $49.35Market Capitalization (M): $2,521Avg Daily Vol. (000): 1,103Dividend: NAYield: NADebt/Total cap: 36.1%Shares Outstanding (M) fd: 56.6Book Value/Sh: $7.36Net Debt/Total Cap: (14.5)%Net Debt/EBITDA: 1.4xEst. 3-yr. EPS Growth: 34.8%Enterprise Value (M): $2,467Current Quarter Estimate: $0.40Current Quarter Consensus: $0.32

INVESTMENT THESISAs a top player in the space, 3D Systems should benefit fromstrong secular growth, augmented by a strong end-market mix(healthcare, consumer) and organic and inorganic investments.This growth should be leveragable through absorption, mix, andby integration and commercialization of acquisitions.

FINANCIALSFYE Dec 2010A 2011A 2012E 2013E 2014EEV/EBITDA Ratio 86.9x 42.8x 22.6x 15.7x 12.0xP/Op EPS Ratio NM 55.7x 35.6x 27.8x 20.7xSales $159.9 $230.4 $357.6 $452.4 $542.0EBITDA (M) $28.4 $57.6 $109.4 $157.2 $205.8

Op EPS Q1 $0.04 $0.17 $0.25A -- --

Q2 $0.06 $0.19 $0.27A -- --Q3 $0.11 $0.18 $0.32A -- --Q4 $0.20 $0.27 $0.40 -- --

Total $0.42 $0.80 $1.25 $1.60 $2.15Consensus -- -- $0.82 $1.31 $1.71BB&TCM EPS and EBITDA estimates are stated as non-GAAP;Consensus EPS is GAAP. Please see our models at the end of this reportfor our GAAP estimates.

COMPANY DESCRIPTIONSouth Carolina-based 3D Systems is a top manufacturer of 3Dprinting machines and materials with a good global presencein medical/dental consumer, academics, and general industrial/transportation. It offers additive manufacturing services as wellvia its service bureaus to businesses and consumers.

DDD: Initiating the Top Brand in 3D Printing with a Buy,$60 Price TargetKEY TAKEAWAYIn our view, 3D Systems is the best way to particapte not only the strong secular growthof 3D printing generally, but also relative strength in key areas such as consumer andhealthcare. It should remain acquisitive, which not only boosts scale but is also a toolfor sustaining organic growth. While the economy is a worry, we think the increasingadoption of the technology and an improved mix of machines vs. consumables insulatesthe sector, and 3D Systems, more than is recognized.KEY POINTS

Initiating 3D Systems with a Buy rating and price target of $60. This is predicatedon the company being able to sustain strong earnings growth over our forecast horizon(as measured by non-GAAP results; see forecasts in the sidebar). We apply a 17x-18xEBITDA multiple, or the midpoint of the historical range, to our 12-month forwardestimates one year from now.

A leading player in an emerging sector of manufacturing. Industry sources thinkdemand for 3D printing materials should expand by 15%-20% annually into theforeseeable future. As 3D Systems is one of the largest competitors in the space andwith the most diverse blend of products, we expect it to rise with this trend. This shouldsupport strong organic growth over our forecast horizon.

Well positioned in some growthier areas of the space. 3D Systems is already inhealthcare, but investments have fueled growth twice that of the industry as a whole,which it thinks will continue. Also, a diverse direct-to-consumer market has emergedthe last few years. 3D Systems has done more than anyone to position itself as theubiquitous brand in the space. Thus, we judge it as having a favorable end-market mix,and so potentially superior organic growth, to go along with the secular trends in thespace.

Likely more insulated from cyclical whims than widely believed. Printers can liftproductivity and enhance final goods. These features should support more investmentdeeper into a cycle than is typical of a capital good. Second, a rising installed base haslifted the consumables mix (now ~30% of 3D Systems' sales), which is more stable. Thisis translating into solid results despite global economic slowing.

Acquisition boosts scale and sustains organic growth. 3D Systems is a strong cashgenerator with a net cash balance. It is acquisitive, a key to diversifying its business andadding scale. Less recognized is the role of M&A in sustaining strong organic growth, asit often buys early-stage platforms and develops/commercialized them internally. Wethink this strategy should continue to be successful.

Setting aside strong general trends, there are immediate catalysts. In 2013 weexpect healthcare and consumer investments to more visibly impact sales. We believethis will continue to be leveragable. As well, there is opportunity to boost the marginsof the consumables (growing mix of captive products) and services (discipline in3Dproparts). Rolling it all together, we see strong secular and company-specific trendssupporting strong EPS growth over our forecast horizon.

For required disclosures, including analyst certification, please referto the important disclosures section on page 24 of this reportConsensus estimates from FactSet

KEY INVESTMENT CONSIDERATIONS

These comments describe 3D Systems-specific catalysts and assume some prior knowledge of the firm’s markets, drivers, and business model (for a company primer, see “Company Background and Description” on page 11). Further, the discussion centers heavily on broad themes of which we think investors in 3D Systems should be cognizant. For details on short-term variables that have been and are likely to impact the P&L see the “Valuation” section on page 9.

Well Positioned to Tap the Rapid Secular Growth of Additive Manufacturing

Additive manufacturing, or 3D printing, is a process where a good is made by stacking layers of liquefied or powdered, and subsequently hardened, material (subtractive/traditional, manufacturing starts with a block of material and whittles it into form). The 3D printing industry is relatively new, with the first machines emerging in 1988. It is also relatively tiny: at just $1.7B in size, according to Wohlers Report 2012 and excluding $1.1B in secondary tooling, patterns, molded parts, and castings, we estimate 3D printing is just 0.02% of global manufacturing output. But the potential of additive manufacturing is vast. It excels at cost-effectively producing customized and/or highly complex parts that cannot be produced through traditional means. Making products additively requires no costly, production cycle-lengthening tooling or space-consuming production lines. Assembly still may be required (there remain size constraints), but less of it since sections, even movable parts, can be printed assembled. Additive reduces the need for inventory and inspection, consolidates parts, and produces little or no scrap. Prototype lead times and costs are shortened, enabling iterative design. 3D printing holds some real advantages over traditional manufacturing. Of course, subtractive techniques have some advantages as well, specifically the ability to produce many products quickly and cost effectively through scale. But while 3D printing is unlikely to ever fully overcome these advantages, printer capabilities are improving so as to work the fringes of the manufacturing landscape and improve its own relevance. For instance, printer capabilities have improved, with each successive generation of machine getting faster, easier to use, and producing more finely featured output. Materials are proliferating to include not just plastics but metals, ceramics, and, more exotically, paper, biological agents, chocolate, etc. Even as capabilities have expanded, price points have fallen, improving cost per part. These trends have expanded applications utilizing 3D printing, a dynamic that should continue into the foreseeable future. Another way to view this is through its applications: Prototyping/modeling. New manufactured products are preceded by prototypes to evaluate

appearance, design, functionality, and/or manufacturability. Architects, engineers, and developers may want topographic or scale models of a project. Being low volume, customized applications, prototyping has been the earliest adopter of 3D printing, and it is still expanding. Architecture, for instance, has only begun utilizing 3D CAD and joined with expanding colors and detail is a rapidly growing application. Thus, 3D printing’s most mature application is still spreading and growing.

Tooling. Tools, dies, molds, and castings used to make a final part tend to be relatively low volume and highly intricate, which suits additive well. There are areas already using additive (packaging, jewelry, dental), but as printing materials/capabilities expand so should applications. Wohlers Report 2012 estimates the market for tooling made additively and the molds/castings produced from this tooling to be a $1.1B market that grew 25%–30% in 2010 and 2011 (it grew 3% in the 2009 recession).

Production parts. Even in manufacturing there are differentiated and/or low-volume products. Additive manufacturing becomes an option here. Printing to make final parts has already reached into aerospace, jewelry, automotive, medical/dental, etc. However, there are many differentiated and/or low volume products that are simply never produced because the means to do so do not exist. Additive manufacturing can open up markets in these cases. Over time, as the technology improves further, we would expect manufacturing to be less an either/or proposition, and more of a collaboration between the two techniques as OEMs utilize both subtractive and additive methods in their processes. But currently this is still but a distant ambition, and production parts remain the least-developed application for 3D printing. But it is growing: Wohlers Report 2012 shows the market for final products made additively was $411M in 2011, but is up 20x, or a ~45% CAGR, since 2003 (including up ~58% in 2011).

Roll all these applications and trends together and what you get is a market that, according to Wohlers Report 2012, should grow from $1.7B in 2011 to $6.5B by 2019, a ~18% annual CAGR. Admittedly, this likely does not envision another downturn, which probably occurs at some point in the next seven years. However, long-term growth rates of the past, which would incorporate recessions (including the nasty one in 2009), include five- and ten-year CAGRs to 2011 of +11.7% and +12.3%, respectively. No matter how it is massaged, the market for 3D printing appears to be sustainably growing at rates above most other manufacturing and capital goods markets (see Figure 1).

Additive manufacturing will not replace subtractive; it’s not close; but it has advantages that, with material and machine gains, are driving increasing adoption

3D printing is currently a very small market, constituting only about 0.02% of manufacturing value globally

Prototyping is the biggest use for 3D printing, but tooling and final production parts are gaining traction and growing the fastest

Historically the market for 3D printing machines has grown at 10%–plus organic rates through the cycle

3D Systems Corporation Company Report

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Figure 1. The 3D printing industry is not big; it is, however, growing very rapidly

Source: Wohlers Report 2012, BB&T Capital Markets estimates

There is a Business Cycle within the Secular Trend, and it is Currently in Good Shape

Within what we think is a favorable super-cycle there is a business cycle. Figure 1 shows that demand fell in the 2001 and 2009 recessions, pointing to global output as a key driver for the 3D printing. This makes sense: end markets are global and diverse and key drivers include a willingness to make capital outlays (though falling price points is reducing the importance of this) and invest to develop new products. As such, attention must be paid to corporate profitability, utilization, capital spending, and product development. Production presumably leads these variables. But we suspect it is not production per se, but its ultimate impact on profits and spending that matter. As such, it is possible to have slowing production that does not impair corporate willingness to spend on new product development and/or manufacturing/productivity improvements. A little extra attention probably also needs to be paid to trends within the aerospace and automotive sectors, specifically (30%–35% of industry placements, according to Wohlers Report 2012). But if 3D printing does not protect from the cycle, we think it does insulate. The sector has outpaced broader demand over a long period of time: its five- and ten-year CAGRs of ~12% are more than three times the 3%–4% global economic output of the same periods, according to the International Monetary Fund (IMF). We also believe it is exhibiting an ability to outperform in downturns. Relying again on Wohlers Report 2012 data, in 2001–02 demand fell an unimpressive 19%. In 2009, a much harsher global recession (global output was –0.6%, vs. +5.5% in 2001–02), demand fell just 10%, solid given the machines are capital goods. Why? One is that materials have grown in the mix: in 2001 materials were 13.2% of industry revenue; in 2009 (trough to trough) they were 20.4%. This stabilizes demand. Second, awareness of 3D printing—and how it can reduce costs, improve lead times, and improve products—is growing. As the technology gains adherents, spending for additive in capital budgets becomes stickier. Third, falling price points have increased overall demand and reduced the tendency of companies to cut that spending from budgets when things get tight. So 3D printing is classically cyclical, but with higher highs and lows.

All of this Impacts 3D Systems Very Favorably

Regarding the secular trends, 3D Systems is one of the top two companies in the space—the other being Stratasys (SSYS–$70.62–Buy)—by a wide margin for production/professional machines. It has a broad, global offering. Some of its energies have been diverted to new areas, such as the consumer, that could conceivably come at the expense of its more longstanding production machines, at least relative to other industry players. Still, to the extent there is a strong secular uptrend favoring adoption of additive manufacturing, as we think there is, we expect 3D Systems will be a key beneficiary of that.

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Additive Manufacturing Market Size(in Millions of U.S. $)

10-Yr. CAGR: 12.3%

5-Yr. CAGR: 11.7%

18-Yr. CAGR: 17.1%

8-Yr. CAGR: 18.1%(2011 to 2019)

Production can’t be ignored as a leading indicator, but a slowdown that does not impair corporate willingness to spend on product development and productivity should leave conditions for 3D printing in good shape

Even if the space is subject to the business cycle, it at least seems to outperform at each phase of it

As a proxy for the 3D printing sector, we expect 3D Systems to benefit greatly from the strong secular trends


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Regarding the business cycle, we believe the environment is still relatively friendly to the sector. Things have slowed, certainly, with many production-related indices reflecting this. The ISM Global PMI was 49.2 in October, pointing to essentially static manufacturing conditions. Though health differs by geography, aggregate industrial production seems similarly static. It is fair to call this a red flag. But conditions at this point do not seem to be getting appreciably worse, and if the weakening trend settles in at current levels it would not appear to threaten the outlook for 3D printer demand. The absolute level of production is high, after all, and utilization is still relatively high. As a result, a scan of large company intentions around capital spending and R&D betrays no retrenching. Cash flow and balance sheets are relatively healthy. So the global environment at this time seems to have both the means and willingness to make investments in new products and productivity. It should also be noted that among the healthiest of industries are automotive (at least in NorAm; Europe looks sickly) and aerospace, two big markets for 3D printing. Rolling it all together, the IMF in its October 2012 World Economic Outlook put global output at +3.3% in 2012 and +3.6% in 2013. These are modest (20 bps–30 bps) downward revisions from the last report in April, but they still represent decent activity levels. In our view, the environment facing the 3D printing companies is not particularly poor, news cycle aside. Indeed, we think results are bearing this out. Year to date in 2012, sales of 3D Systems’ machine segment are +90.6%. As recently as its Q3’12 earnings report, it had not seen any major divergence in the performance of any of its global segments, with Europe in particular still being positive. Printer units sold in 2012 have been more than double 2011’s levels in every quarter of the year, even excluding sales of the consumer-oriented Cube. As it stands, the upward push of the secular trend and adequate cyclical conditions are generating solid results for 3D Systems. If the conditions remain the same, we would expect its ability to produce strong double-digit growth would be similarly unimpaired.

Constructed to Weather the Cycles Better than Most

So even if the business cycle within the secular trend weakened, we think 3D Systems has done a great deal of work to mitigate the effects further in its own model. Two things are at play. First, mix has become more favorable. In 2002, 3D Systems’ mix of sales that derived from machines was 42.6%; in 2011 it was 28.9% (and has been 33.7% YTD in 2012). A rising mix of materials/services is relevant because those categories grow faster than machines historically, in part because they have proven to be more cycle resilient. For instance, according to Wohlers Report 2012, machines have grown at a five-year CAGR of +7.9% while demand peak-to-trough in the 2009 recession was –19.8% over two years. In contrast, materials/services grew at a five-year CAGR of +13.6% and saw peak-to-trough demand –6.9% in one year. We think this reflects both the big-ticket, capital goods nature of machines as well as the aggravating effect of declining ASPs. Whatever the reason, we think the company has cut overall cyclical volatility of its revenue stream by reducing its mix of machine sales. Second, 3D Systems can offer additive manufacturing’s capabilities to customers more affordably, likely cutting the volatility of the machine category. Only over the last two years, via acquisition, has the firm populated its offering with lower-priced machines ($10K–$200K); during previous downturns, its offering was predominantly of units with price tags in excess of $250K. We think the lower-priced units should prove more resilient in future downturns. Reduced machinery in the mix, and an improved mix within machinery, could stand to shore up 3D Systems’ financial performance in the next downturn. This has not been proved yet—the changes in question were not made until post the last downturn. But there is a tantalizing hint: despite all the ructions in the European market in 2012, the company really has not seen any material difference in its demand there. But with the changes that have been implemented since 2009, we suspect its revenue stream will prove more resilient in the next downturn than it did in the last one. The combination of a secular growth trend that reduces the effect of the business cycle and a mix that now dampens it should provide 3D Systems with more earnings protection in downturns than many investors may believe.

3D Printing is Evolving Rapidly; 3D Systems is a Beneficiary and Catalyst

We think 3D Systems is unique in the sense that it is not relying solely on the strong secular and cyclical trends described above to grow. Indeed, the company is the most diverse in the space. In simplest terms, 3D Systems’ revenue falls into the same three buckets as for any other printing company: equipment (29% of 2011 sales), materials (31%), and services (41%). But above and beyond the secular and cyclical growth, we think the company’s approach to its marketplace is unique and sets it up to be the evolutionary catalyst. We cover some other directions it is going in with the space.

Not Just for Manufacturing Anymore—Getting the Consumer into the Game

We already addressed how in professional and production environments 3D printing is becoming more widely accepted and seeing its addressable applications and markets expand. We think this will continue and that 3D Systems, by virtue of its strong position within the market, will be a beneficiary.

Paired with a decent cyclical environment, 3D Systems’ results have indeed been stellar to date in 2012

If the cycle were to turn negative, an improved product mix and lower priced but more capable products should blunt the impact versus last down cycles

Beyond secular trends, DDD is doing a great deal to evolve the 3D printing market and expand its addressable market


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But in only the last couple of years the industry has seen the emergence of the “personal 3D printer.” This is a smaller, more functionality limited unit (in terms of detail, speed, materials, etc.) with a price point in the thousands (rather than the hundreds of thousands) that is suited to use in the home. And the market has grown: from literally no unit sales in 2007, hobbyists and academics drove sales of an estimated 23K–plus units (and growing) in 2011, according to Wohlers Report 2012. It should be said that there are doubts as to whether a bona fide market for home printers will take hold, and we share those concerns. So if that were all 3D Systems were doing, we might worry. The effort, however, is much broader and we think has excellent prospects for success. 3D Systems calls its effort Cubify. It has many sources of revenue, but we think there are three big ones, which we address below. Home printers. 3D Systems got into the market in 2010 when it acquired Bits From Bytes, but in

2012 it introduced its flagship Cube printer (see Figure 2), which sells for $1,300 and can produce plastic parts in ten colors. There are a handful of firms, though one of the largest is an academia-led social collaboration, the RepRap project (Bit From Bytes emerged from RepRap). Corporate leaders include MakerBot, with 3D Systems behind it. We have little doubt that more competitors will arise in this area over time. But to the extent the consumer printer market proves real, 3D Systems as an early entrant would be a leading beneficiary.

Figure 2. 3D Systems’ iPro and ProJet models are manufacturing “assembly lines in a box.” The “Cube” is a lower-priced unit aimed at opening up the market to consumers.

Source: Company reports

Social manufacturing. 3D Systems offers online design software that allows consumers to design

their own product in CAD. It has a service that will manufacture that product for the consumer (it has been doing so for industrial customers since 2008), and it hosts storefronts from which others can browse and order. Thus, it enables small-scale invention by providing the means of production and the retail “shelf space.” There are private companies doing this (with their own model tweaks), so 3D Systems is not pioneering here. But the market is growing rapidly and will support it, plus it brings the industry’s top brand to the fray. We believe this business model has a bright future.

3D Systems is pushing into, and serving as a catalyst to the creation of, the consumer market; it has machines, manufacturing services, a retail option, etc.


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FreshFibre. 3D Systems’ first retail brand was rolled out in September 2012, and the pilot

products are cases for cell phones and tablets. It needs to evolve. Currently the company offers a range of designs on its website as well as in some retail outlets globally; how it will ultimately address its ability to create truly customized product or expand its retail channels has yet to be seen. But the company has been producing product at the behest of others—first within manufacturing (On-Demand Parts), and more recently for consumers—for several years, so making products shouldn’t be an issue. And this allows it to capture a bigger markup.

The consumer market has hurdles: Do home printers appeal beyond a thin band of hobbyists?; Will selling its own goods direct to individuals put it into competition with and alienate customers of the manufacturing services unit?; etc. In our view, what overrides these execution issues is this: the consumer market could be substantial but to this point has hardly been scratched, and 3D Systems is as aggressive as anyone in attacking all of its potential avenues for growth. We think the secular trends should overwhelmingly swamp sector growing pains over time. Indeed, we expect that the entire Cubify effort, which is currently not relevant to sales, will be a material contributor in 2013. As it relates to current trends, the fledgling effort is not materially impacting results nor being disclosed in any detail to investors. It may get more attention as we enter 2013. At this time, all management has disclosed is that sales of the Cube personal printer have topped its initial expectations, and that it is pleased with its reception in the market. It says the same about the other consumer vehicles, arguing that reception to this point justifies the investment it has made. Provided this continues, it seems likely to contribute materially to growth in 2013 and beyond.

Health Care—Not Just Another Market, but an Avenue to a New Sort of Product

Health care is a well-worn application for 3D printing; Wohlers Report 2012 notes that medical/dental constitutes ~15% of the market. It is also a longstanding end market for 3D Systems, which began producing hearing aids in 2006 and is now also a significant producer of molds for braces produced by Invisalign. In many respects, medical/dental is the perfect market for 3D printing given the uniqueness of each individual. Indeed, other companies produce cups for joint replacement, fabricate skull sections, etc. There appears to remain ample opportunity to improve customization in prosthetics, braces, orthotics, ergonomics, etc. 3D Systems plans on expanding from its traditional dental market into the outside-the-body medical side (3D Systems does not play for inside-the-body parts). It is notable how much medical experience exists on 3D Systems’ board. Combine the medical/dental opportunity, experience, and knowledge, and this seems likely to grow going forward. As intriguing is the May 2012 acquisition of Bespoke Innovations. Bespoke uses its scanning technology to design prosthetics that closely mimic the wearer’s natural form and incorporate wearer-specific customizations. The final product is printed. Bespoke basically is a development-stage company, but one with great potential. First, 3D Systems’ resources and knowledge of printing will enable it to bring production to market, putting it in the prosthetics market. Second, we see no reason why this cannot be applied to other targeted medical markets, where products may be better designed to an individual’s specific contours, such as physical braces. Third, Bespoke sold the scanner/software and outsourced the printing. 3D Systems will be able to offer the entire service from scan to print to labs, generating a cross-selling opportunity. Fourth, there was a time when 3D printing required a CAD design to be usable. That has changed, and half of the applications that 3D Systems prints now sources from some scan rather than a CAD file. We suspect scanning will have applications beyond medical, and over time having that in-house will likely enable 3D Systems to take full advantage as it evolves. Health care revenue for 3D Systems has grown 82% year to date in 2012. Obviously that includes acquisitions, but management asserts that even organically this franchise has been growing 30%–40% annually, topping the pace of the company as a whole. It also believes it can maintain a rate of premium growth as Bespoke gets commercialized and it pushes deeper into surgical aids, dental, etc.

Expanding its Applications, and market, in Product Lifecycle Management (PLM)

3D Systems’ core offering—printers, materials, and part production—addresses the part of the product lifecycle involved in development (iterative design, prototypes) and manufacturing (final goods, tooling). There is ample room for additive growth just within there. But management is expanding the company’s horizons. 3D printing is CAD based, so it has acquired a firm (Libre) that does CAD software. It has acquired a firm (Bespoke) that does scanning, and it has bought a company (Rapidform) that makes software that seamlessly integrates the scan and CAD software. The end result is that 3D Systems has now given itself products that get it into the research and the quality control phases of the product lifecycle. At this point, it has not integrated or bundled its offerings; it seems likely this could be done over time as the company digs into its assets and figures out what to do with them. But developing an integrated PLM package is essentially an option on the future. In the immediate term, expanding its presence in the product lifecycle sharply expands 3D Systems’ addressable market.

Initiatives in the consumer and healthcare areas should begin to bear incremental fruit by H2’13

Already a big player in medical and dental, 3D Systems wants to get deeper (who doesn’t?) but its approach is unique and should expand addressable applications

There are questions about how big the consumer market could be; with its diverse channels, we think it will be a substantial positive to the 3D Systems story

Its newest initiative–enabled by scan and software deals (among others)–is to push into all phases of Product Lifecycle Management


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Figure 3. Acquisition history


Acquisition—Ongoing but Narrower, with an Eye to Scaling the Value Chain

3D Systems is an acquisitive company, with the company doing 31 deals since 2009 when M&A began to be viewed as a means of growth (see Figure 3). It has not been limited in its targets. It has acquired machine OEMs, such as Bits From Bytes (personal) and Z Corp (professional), to round out its print engine technologies/platforms. It has built out its service bureau offering 3Dproparts, through 14 deals. It has bought a retail brand, content libraries, and digitizers to underpin what has become Cubify. It has bought scanners to extend its health care offering. And it even did a deal to bring materials in house, though most of its materials portfolio is organically developed. What is clear is that these acquisitions were designed to broaden the product portfolio and the capabilities of that portfolio, consistent with management’s long-stated goal of diversifying the company into all the revenue streams that 3D printing might tap. The rationale has not been to consolidate the industry (though as a secondary benefit it has had that effect), and the deals have not been cost synergy-driven (though as a secondary benefit that does happen, such as the $5M–$10M it expects to farm from Z Corp). We expect the company to remain acquisitive and expect the nature of those deals—strategic and growth-oriented—to be unchanged. The targets may be narrower. For instance, there may be some holes in the machine offering—metals, for instance, or food if it really wanted to go niche, or a hybrid printing-machining unit. But these do not seem like focal points. Another big machine acquisition would seem unlikely. Materials may be even less of a target. So that points to additional service bureau deals, which would add sales immediately and be accretive within two years, and other niche technologies that could range from startup to revenue generating.

Acquisitions are Also a Source of Organic Growth

We do not model acquisitions prior to their happening. When deals happen is uncertain, and some that get done may not have any immediate financial contribution. Still, it seems a reasonable expectation that over our forecast horizon there will be more acquisitions, some of which should be materially accretive. For instance, its acquisition of Korea-based Rapidform should add $0.06–$0.09 to non-GAAP EPS in 2013. Many of its acquisitions, such as FreshFibre and Bespoke most recently, come without any real revenue streams. These become additive sometime after the acquisition date, when the company has applied resources to commercializing the technology/product. And then there are deals that bring additional sales resources that encourage cross-selling. Z Corporation, for instance, nearly doubled 3D Systems’ total sales force, and as the training on the new products has advanced, the company has generated growth in 2012 through cross-selling. We expect something similar with the ~90 new salespeople that have joined from Rapidform. So acquisitions are not only providing a source of inorganic expansion, but they are a tool to sustain high organic growth as well. This should continue in 2012 (sales synergies) and 2013 (commercializing new health care and consumer products, sales synergies).

Machines Materials Service Bureaus Software/Other

2009 (3) Desktop Factory (U.S.) Acucast (U.S.)

Adva-Tech (U.S.)

2010 (7) Bits From Bytes (U.K.) Moeller Design (U.S.)

DPT (U.S.)

CEP (France)

ProtoMetal (France)

Express Pattern (U.S.)

Provel (Italy)

2011 (12) BotMill (U.S.) RenShape (from Huntsman) National RP Support (U.S.) Sycode (India)

Quickparts (U.S.) Print 3D

Accelerated Tech. (U.S.) The3dStudio.com (U.S.)

Formero (Australia) Freedom of Creation (Neth.)

Kemo (Neth.) Alibre (U.S.)

2012 (7) Z Corp. (U.S.) Paramount Industries (U.S.) Vidar Systems (U.S.)

TIM (Neth.) FreshFibre (Neth.)

My Robot Nation (U.S.)

Bespoke (U.S.)

Viztu (U.S.)

Rapidform (Kor.)

Don’t undersell the role of M&A in 3D Systems’ organic growth; it has effectively stimulated product and sales force development

Since embarking on an M&A strategy in 2009, 3D Systems has been very aggressive; we would expect this to remain the case going forward


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RISKS

We believe risks to an investment in 3D Systems, and to achieving our price and/or earnings targets, include the following.

Weak Customer Spending, and/or the Consumer Market Could Fizzle

Professional/production equipment can be expensive ($10K to more than $1M per unit). A major application is prototyping. As such, anything causing global/regional customers to rein in R&D and/or capital spending would likely adversely affect machine sales. Sales of 3D printers have proven somewhat insulated from the worst impacts of recent economic downturns, but they have behaved cyclically. 3D Systems has done more than anyone to lay the groundwork for personal 3D printers to go from niche to mainstream. The ultimate broad acceptance beyond a thin layer of buzz-susceptible early adopters/novelty seekers is not assured. The company has developed a lot of paths to the consumer, diversifying its risk. But if consumers do not want at-home printing capability or embrace printing services, those efforts could produce less return than hoped.

Declining Average Price Points

ASPs on machines have declined for years, and 2012 price/mix has been a big drag to 3D Systems’ sales growth. This is mostly from mix as it is selling more low-priced machines. Prices on specific models are reasonably stable. But it is the goal of Stratasys and other 3D printer firms to introduce lower-priced units on the premise that demand is price elastic and this will accelerate adoption. To this point in the industry’s evolution, this has worked: ASPs have fallen but units have increased, the net effect being very strong sales growth. However, if the addressable market proves smaller than we expect and saturation arrives sooner than anticipated, declining ASPs could become a weight on the story.

Technical Hurdles may be Insurmountable, and/or R&D Spending may be Stretched Thin

Additive manufacturing is a tiny piece of the total manufacturing landscape, but it has made inroads into the manufacturing world and grown quickly. Sustaining this growth depends on further advances to reduce cost, increase output/quality, expand materials, etc. The industry, and 3D Systems, have made such strides historically, but that gets tougher as time goes on. 3D Systems is unique in its broad technology offering. Most companies focus on a more limited set of technologies. With technological advancement being critical to the sector’s growth, it is reasonable to ask whether spreading development dollars over so many offerings rather than concentrating it on fewer will hurt its technological progress and/or machine functionality. For instance, 3D Systems spends just ~6% of sales on R&D, versus 8%–9% for Stratasys. In 2012 the company has introduced eight new printers, but these fall within only four of its seven print engines. 3D Systems asserts not all its products require the same level of investment. Still, technological evolution is such an important element of the additive manufacturing story that it bears watching.

Lots of Catalysts for New Competition to Emerge, and a History of Just that Happening

First, printing technologies are protected by patents that periodically expire. “Picket fences” of fresh patents are utilized, but this did not keep the expiry of a key FDM patent from ultimately creating the personal printer market. Also, 3D Systems filed suit against Formlabs where the status of patents for stereolithography is in question. Second, traditional job shops at some point may offer printing services (service bureaus, after all, have added CNC/extrusion capabilities). Third, nontraditional competition may be attracted to the growth, be that multi-industry or consumer printer firms. Existing players no doubt can erect barriers to entry against new entrants: technology, materials portfolio, etc. But it cannot be ignored that the brief history of 3D printing has seen a constant flow of competitors.

Litigation-related Risk

DSM Desotech filed suit in 2008 related to 3D Systems’ effort to tie the sale of its machines and its materials together. At one time, a user could buy a machine and source its materials from another firm. 3D Systems changed that (as did others), integrating the machine and the material to improve performance and voiding the machine’s warranty if a material other than its own is used in it. DSM, a materials producer, claims this is anticompetitive. This suit appears likely to go to trial. Other suits that arise in the normal course of business seem unlikely to have any material impact. Regarding DSM, the monetary damages of $40M are not burdensome, and the company has not reserved for it. The greater problem would be if the tying of machine and materials were ruled anticompetitive. The captive nature of its proprietary materials is a significant positive to the company’s growth and margin prospects.

Acquisition-related Risk

Since 2009, 3D Systems has been very aggressive with acquisitions. Outwardly, these mostly seem to have gone seamlessly, but there is always risk that the company pays too much or integrates it poorly.

If the printer cycle went negative or adoption proved less robust than anticipated, it would be a problem exacerbated by falling price points

There are many emerging growth challenges as well: the need for substantial technological strides, a fluid competitive picture, and litigation risk


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RECENT RESULTS AND OUTLOOK

November 27, 2012—3D Systems announces the expansion of its Quickparts services to Europe. November 20, 2012—3D Systems files patent infringement suit against Formlabs, Kickstarter. 3D Systems alleges that a printer designed by Formlabs and financed via a campaign on Kickstarter infringes its own stereolithography patents. Formlabs counters that the patents in question have expired, making this a test of 3D Systems’ “picket fence” approach to defending its technology. October 25, 2012—3D Systems reports Q3’12 earnings. Non-GAAP EPS were $0.32, +77.8%. Sales were +57.3%; all categories, especially machines (+130%), had strong growth. Organic sales were +26.2%, with demand remaining healthy in all geographies. The strong sales translated into a non-GAAP operating margin of 27.1%, +630 bps on product mix and strong operating expense leverage. On the back of this strong report, management increased its sales and non-GAAP EPS forecasts for 2012 to $345M–$365M (was $330M–$360M) and $1.20–$1.30 (was $1.00–$1.25), respectively. October 9, 2012—3D Systems acquires Rapidform. North Korea-based Rapidform produces software that takes scanned data and integrates it directly into CAD, allowing a user to seamlessly work with the scanned product. Thus, it streamlines efforts to reverse engineer and analyze products, putting 3D Systems for the first time into the inspection/verification phase of the product life cycle (PLM). Rapidform is expected to have sales of ~$15M in 2013, with software-type gross margins (85%–plus) and non-GAAP accretion of $0.06–$0.09. It reiterated these figures when it reported Q3’12 EPS.

VALUATION

We emphasize a TEV/EBITDA ratio as it is closer to a cash valuation than P/E and has more, and more stable, historical results. This metric has swung wildly going back to 2005, ranging from ~10x at the low end to ~50x at the high end, but we do not view this whole range as valid. From 2005 to 2009 results were poor and the combination of a severe recession, restatements, and what were likely large swings in sentiment from anticipation to disappointment likely explains the volatility. From 2010 to present, results, execution, and growth have been consistently and strongly improved, and the volatility has eased: over the last few years a range of 13x–23x seems to have emerged (see Figure 4). This is similar to the range of its peer, Stratasys (12x–20x). It argues for a mid- to high-teens multiple; we will use 17x–18x. Applied to our 12-month forward forecasts one year from now (our time horizon), would generate a price target of $61–$62. We have also looked at the value of the company utilizing a discounted cash flow model, which puts fair value at $58–$59.

Figure 4. Valuation has been stable over time and is reasonably inexpensive currently


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Utilizing historical valuations and a DCF model, we believe a share price of $60 versus our non-GAAP forecasts is reasonable


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Taken together, we are going to begin 3D Systems with a price target of $60. This has the virtue of being between the conclusions drawn by the TEV/EBITDA and DCF methodologies. It also has the virtue of being comparable to current valuations: it utilizes a TEV/EBITDA multiple of 17.1x applied to forward earnings one year from now, not unlike the current multiple (17.0x). It implies a P/E of 29.0x our forward earnings one year from now, similar to the current multiple (29.4x). In evaluating 3D Systems’ valuation, several things should be noted. First, we use non-GAAP estimates. 3D Systems is growthy with low capital needs and generating lots of cash; GAAP earnings understate these characteristics. Second, these valuations and the price target are predicated on the company sustaining rapid growth. In our DCF model we have not carried forward current growth rates, nor have we given full credit for what management thinks it can achieve margin-wise. It does, however, assume five- to ten-year NOPAT growth in the neighborhood of 20% over the time horizon. If facts on the ground were to suggest that this growthy character is in some way impaired (or if a recession broke out, without impairing long-term growth), it is doubtful our targets would remain in force.

Earnings Picture

The first three quarters of 2012 were strong. Sales were +57.0%; organically sales were +24.0%. Growth has been strong in all categories. Printers are +90.6%, with units more than doubling but being partly offset by lower ASPs as it establishes high-performance but lower-cost units. Materials are +51.3% while Services are +38.6%. Clearly acquisition plays a role in these figures, but the healthcare end market continues to grow rapidly and broader demand remains healthy in all regions, including Europe. YTD’12 gross margin of 51.1% is +360 bps, benefiting from volume/absorption, relative growth of integrated materials within the mix (+81%), and expansion of 3Dproparts margins as it integrates past service bureau acquisitions. It has not gotten much leverage from operating costs (though that did change in Q3’12, specifically) mostly due to costs and D&A added with recent large acquisitions (Z Corp., Vidar) and more aggressive R&D spending. Rolled together, the YTD’12 operating margin of 16.8% was +170 bps annually. However, the EBITDA margin of 23.1% was +340 bps, reflecting the impact of non-cash, acquisition D&A, and both profit measures improved substantially in Q2’12 from Q1’12 as accounting-related costs from the Z Corp./Vidar deal washed out and integration progressed and began to build in synergy benefits (at a $5M–$5.5M run rate, the low end of a $5M–$10M goal). In Q3’12 the company raised its full-year sales guidance to $345M–$365M (was $330M–$360M). Results reflect a June 2012 secondary offering of 4.1M shares used to reduce leverage (currently the balance sheet is net cash positive) following its January 2012 acquisition of Z Corp and Vidar Systems.

Figure 5. For the foreseeable future, 3D Systems should sustain its EPS momentum

Source: Company reports; BB&T Capital Markets estimates

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2012 has enjoyed strong sales growth, good margin expansion, and upward revisions to sales and EPS forecasts; execution, in other words, has been stellar

But make no mistake about it—we believe achieving our price target will require recent superior growth to prove sustainable


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In our view, the picture for the balance of 2012 and into 2013 remains favorable. Downside risks still very much exist in global economic conditions. However, global output is expected to remain positive and plans around capital spending and R&D spending at this point remain relatively favorable. Combined with what we expect will be strong growth at Cubify and in healthcare, especially as products from its May 2012 acquisition of Bespoke begin to be commercialized in 2013, we anticipate sustained double-digit organic growth. Leverage, incremental synergies/savings from the Z Corp./Vidar integration, mix gains in materials, and steady margin capture in 3Dproparts should all push margins higher over the forecast horizon. As a result, we build in organic sales growth of +24.9% in Q4’12 and +21.7% in 2013 as well as gross and operating margin expansion through the period. This generates estimated GAAP EPS of $0.83 in 2012 and $1.18 in 2013. We also have begun with estimated GAAP EPS of $1.71 in 2014. The company spends a fair bit of time discussing non-GAAP EPS, which it began doing because of the increasing weight non-cash amortization is having owing to its M&A activities. This excludes stock-based compensation, amortization of intangibles, acquisition/severance expenses, and other expenses that may arise that it views as being non-cash or unusual. Indeed, it provides annual EPS guidance using this non-GAAP formulation, which is obviously higher than the figures we provided in the paragraph above. Figure 5 shows our sales and EPS forecasts, using non-GAAP figures for the latter as it better reflects the earnings momentum taking place at the company. Our non-GAAP EPS estimates are $1.25 in 2012 and $1.60 in 2013. We also have begun with a GAAP EPS estimate of $2.15 in 2014.

Short- and Long-term Guidance

The company began providing annual revenue and EPS guidance in 2012, and uses non-GAAP to do so. It has forecast 2012 sales of $345M–$365M and non-GAAP EPS of $1.20–$1.30. It has raised these levels that last two quarters. In terms of long-term goals, 3D Systems has not laid out when it expects to achieve a certain revenue level. However, it has said that at a $400M sales run rate it can achieve a 35% operating margin and a 20% net margin (both non-GAAP). Whenever it achieves $500M in sales it would expect to have an operating margin of 41% and a net margin of 24% (both non-GAAP). We think it will achieve the $400M–plus level in 2013 and the $500M–plus level in 2014, and have projected increases in margins as a result. We would note that we do not build the model all the way up to management’s target for each revenue level, indicating some room for outperformance should it execute on its goals.

COMPANY BACKGROUND AND DESCRIPTION

3D Systems began in the mid-1980s, when Chuck Hull began to commercialize his inventions of stereolithography (SLA) and the code (STL) to convert CAD to a language usable by 3D printers. In 1992 the company acquired a laser sintering technology (SLS), which provided it with a core offering of production-grade machines. 3D Systems struggled in the early 2000s as the downturn negatively affected its big ticket, capital goods–oriented offering. The company also was not keeping its offering fresh during this period, causing it to lose market share. It brought in a new CEO, Abe Reichental, who laid out a new direction for the firm: expand/diversify the print engine lineup, reduce price points, and add other sources of revenue. It set about doing some of this internally, refocusing internal development on freshening the line and building out a portfolio of new materials. From 2009 it acquired new print engines (Bits From Bytes, Z Corp,) and materials (RenShape, from Huntsman). It also began to add service bureaus and put together the content-to-print pieces necessary to roll out what is now called Cubify. Today 3D Systems is the most diverse firm in the industry. The company went public in 1987 on AMEX, before moving to NASDAQ (1993) and then the NYSE in 2011. The stock trades under the symbol “DDD.” The financial history of 3D Systems has two epochs (see Figure 6). From 2002 through 2009 its sales fell at a 0.7% CAGR rate. This period was bookended by recessions, but still Wohlers Report 2012 puts machine growth during that period at +10.5%, so it seems likely the company was losing share. It lost money in five of the eight years, and ~$66M cumulatively, and had two financial restatements (neither was particularly material). It is true the current CEO came on in late 2003 and so oversaw much of this, but we tend to view him as being the catalyst for the later epoch. He had to change the culture, but first he had to change the cost base. 3D Systems cut third-party logistics and production, localized manufacturing, implemented ERP, reorganized its units (yielding cuts to overhead and personnel), relocated its headquarters, etc. Its sales mix shifted from machinery-centric to materials-centric, providing stability and profitability. The result was that, while sales were unchanged from 2002 ($116M) to 2009 ($113M), gross margin was +390 bps and SG&A dollars were –26.5%. The company went from a big loss in 2002 (–$0.91) to a modest gain in 2009 (+$0.02). At this point, the turnaround was complete, with the gains being somewhat difficult to ascertain due to the sheer nastiness of the 2009 Great Recession.

3D Systems is a pioneer of the 3D printing industry

We expect more of the same in Q4’12 and 2013; this should be driven by demand, new products, leverage, mix, and margin capture in 3Dproparts

Still, 3D Systems was in a long, financially unsatisfying rebuild until 2009; all that spadework over the last few years—including new personnel and approaches—has generated what looks to be sustainably strong results

The company has lofty long-term goals; we have not given full credit for their being achieved


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Figure 6. Until very recently, and only after a long turnaround, 3D Systems’ place in the industry did not yield strong financial performance


The second epoch began in 2010. With the turnaround complete and the recession fading, 3D Systems shifted to pursuit of growth, organically (especially materials) and via acquisition. It has done 31 deals from 2009 to 2012 year to date, but it’s not the volume but the substance that is relevant. Acquisition expanded the print engine menu beyond its big-ticket production units and populated a broader range of price points. It acquired service bureaus to diversify its sales stream. It bought smaller personal printer firms/technologies as well as content/software, all of which underpins what is now Cubify. It has diversified its revenue stream, (we think) reduced its cyclicality, and re-energized its product development and portfolio. The result: stronger growth (sales were a record in 2010 and 2011), margins (EBIT/EBITDA margins were at record levels in 2010 and 2011), and profitability (EPS were at record levels in 2010 and 2011). All these measures should be at record levels again in 2012.

Management—Success and Continuity

3D Systems’ president and CEO is Abe Reichental, a role he has held since joining from outside of the company in September 2003 (see Figure 7). He is responsible for the transformation of the company from a manufacturer of a narrow range of high-cost machines to what is now the most diverse printer company in the space. Damon Gregoire is 3D Systems’ CFO, a role he has held since 2007 when he came in from outside the company following a financial restatement. Chuck Hull, who was a founder of the company, and at various times its president, CEO, and COO, among others, is its chief technical officer, a position he has held since 1997. Clearly, key cultural, technological, and strategic moorings upon which today’s 3D Systems was built remain very much in place. Stacey Witten is the manager of investor relations and primary investor contact. The board has eight members. It has an independent chairman, G. Walter Loewenbaum, II, with operational and executive backgrounds in banking and helpful board memberships with some growthy, technology-oriented firms (software, lab testing equipment). Two board members have executive roles: Reichental and Hull. The remaining directors have financial/accounting and executive/operational experience in global manufacturing businesses, many with links to the medical field. There are a lot of ties between board members and/or members of the executive team. For instance, Loewenbaum and Reichental are connected by Finetooth directorships, Loewenbaum and Kever are connected by Luminex directorships, and Reichental and Van Riper are connected by past operational roles at Sealed Air. However, the split in oversight and management, the strong relevance of the skill sets of the board, and track record leaves us comfortable with the composition. It should be noted that half of the board is 67 years old or older, including Hull, so there could be some turnover over time.

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Key architects of 3D Systems’ present strong position remain in key executive roles

Skill sets and a strong track record speak well of the board of directors


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Figure 7. 3D Systems Management Profile


There is one class of stock, and directors/officers hold ~12%. The last few years, 55% of an executive’s incentive compensation has been driven by achievement of EPS and cash balance objectives. This is a cliff feature: if the goals are achieved, it is paid out, if not, there is no payout. The remaining 45% of an executive’s incentive compensation is based on individual-specific execution and completion of goals appropriate to that individual’s responsibilities. An executive can earn this in part or in full. Incentive pay, if paid in full, would represent 25%–50% of an executive’s total annual compensation (though Reichental could be higher given well-above expectation performance).

Figure 8. 3D Systems has the broadest range of products in the 3D printing industry


3D Systems -- MANAGEMENT & BOARD PROFILE

EXECUTIVE OFFICERS POSITION AGE SINCE EXPERIENCE

Abe N. Reichental Pres. & CEO 2003 Sealed Air, as corporate officer and VP of Shrink Packaging

Damon J. Gregoire CFO 2007 Infor Global Solutions, as divisional CFO

Andrew M. Johnson General Counsel 2012 Held the assistant roles with 3D Systems before being promoted

Kevin P. McAlea Sr. V.P. 2001 Joined when 3D Systems acquired DTM

Charles W. Hull Chief Tech. Off. 1986 Founder, Inventor of several of 3D Systems' print engines

Cathy Lewis V.P., Marketing 2009 Desktop Factory, as CEO (acq. by DDD); previously with Xerox

BOARD MEMBERS

G. Walter Loewenbaum, II Chairman 67 1999 Former CEO of Finetooth Ent., a health care software developer

Abe N. Reichental Director 55 2003 Held executive roles at Sealed Air, a packaging manufacturer

William E. Curran Director 63 2008 Held executive roles at Philips Electronics & Philips Medical

Charles W. Hull Director 72 1993 Founder, former CEO of 3D Systems

Jim D. Kever Director 59 1996 Principal in a venture capital firm; former executive with WebMD

Kevin S. Moore Director 57 1999 President, The Clark Estates (private investment firm)

Daniel S. Van Riper Director 71 2004 Accounting b'ground; financial consultant & former CFO of Sealed Air

Karen E. Welke Director 67 2008 Held executive roles in the 3M medical units

MAJOR SHAREHOLDERS

All Directors & Officers 11.6%

T. Rowe Price 13.4%

St. Denis J. Villere & Co. 10.8%

The Clark Estates 5.6%

BlackRock 7.9%

Production

MACHINES (30% of Sales) Professional

Consumer

DDD CONSUMABLES (30% of Sales) ~100 Materials

Maint. Contracts

SERVICES (40% of Sales) On-Demand Parts

Cubify

Storefront

Software

Cloud Scanners

Printing

Stereolithography (SLA)Selective Laser Sintering (SLS)Selective MetalSintering (SLM)

Multi-Jet Molding (MJM)3D Printing (3DP)

Film Transfer Imaging (FTI)Plastic Jet Printing (PJP)

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Printer Application Print Engines Process Brands Price Points

1.) SLA (Stereolithography) Vat Photopolymerization ProJet $250K-$950K

Production 2.) SLS (Selective Laser Sintering) Powder Bed Fusion sPro $250K-$950K

3.) SLM (Selective Metal Sintering) Powder Bed Fusion sPro $250K-$950K

Professional 4.) MJM (Multi-Jet Modeling) Material Jetting ProJet $50K-$200K

5.) 3DP (3D Printing) Binder Jetting ZPrinter $15K-$200K

Consumer 6.) FTI (Film Transfer Imaging) Vat Photopolymerization ProJet, V-Flash $10K-$15K

7.) PJP (Plastic Jet Printing) Material Extrusion 3D Touch, RapMan, Cube $1K-$4K


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Company Profile and Business Model

The Offering: The Industry’s Most Diverse Lineup and Source of Revenue

3D Systems began as a manufacturer of 3D printing machines, and specifically big-ticket production printers, but in recent years it has been successful in diversifying its revenue stream. Today, machines are only ~30% of total revenue, but the company has seven print engines across three applications employing five processes. They span price points from $1K for a low-end consumer machine to $1M for a high end production machine (see Figure 8). All of these machines build products up layer by layer. But they employ different processes and utilize different materials, which imbue each print engine with different characteristics: a product can vary in durability, surface detail and accuracy, color capability, etc. These characteristics combine with varying degrees of ease of use and capacity to allow for a wide range of price points. It is likely a customer will find the right combination of features for just about any need in 3D Systems’ diverse product line-up. Materials—plastics, metals, composites, etc.—are ~30% of sales. These are consumable “razorblades.” The product or prototype is built in these materials, so as long as the printer is working, demand for materials will remain high. Also, once a machine is placed 3D Systems’ proprietary materials are almost always consumed (these are 60%–65% of total materials sales currently). Machine and material are integrated so as to be more productive when using a 3D Systems’ material. Use of other materials voids a machine’s warranty. So once a unit is placed, materials/consumables are largely captive. And the take can be significant. Ultimately, materials usage depends on throughput and speed. But it is typical for production printers to consume $25K–$250K per year in materials and professional printers to use $10K–$15K per year. Less than ten years ago, 3D Systems had a limited portfolio of proprietary materials. Today, it has ~100 different types and is introducing several new materials to its portfolio annually (six in 2012). The company keeps its materials development very close to the vest.

Figure 9. A diverse revenue pie, with an expanding services slice


The remaining sales are what are considered services. This comes in several forms, such as spare parts, service contracts, warranty revenue, etc., but the largest single source now is service bureaus. In 2009 3D Systems introduced 3Dproparts, which is a captive service bureau that manufactures finished parts for customers. The underlying purpose of this enterprise is to gain access to customers when they first begin using additive manufacturing so as to build its brand for the future when users may want to own their own printing capability. Using its financial strength and the weakness of the industry during and after the recession of 2009, 3D Systems has been aggressively acquiring global service bureaus. Services have gone from 25.4% of sales in 2008, before service bureaus were a part of the mix, to 40.4% of sales in 2011 (see Figure 9). The Cubify platform also funnels its revenue through this segment.

The Path to Market: A Hybrid Direct/Indirect Model

3D Systems has a hybrid sales channel. For its larger, big-ticket production printers, it has a direct sales force of 30–40 people globally with regional assignments, supplemented by smaller agents in smaller markets. Post-sale, direct sales yield to field engineers for technical support. This approach with production printers is due to big ticket sizes and a highly technical sale to a more sophisticated buyer; the firm thinks this profile lends itself better to an inside effort. For smaller, less expensive professional and personal printers, the company maintains 300-plus exclusive resellers (VARs) with geographic responsibilities and a mission to sell the entire range of professional and personal products. They do not typically carry inventory; 3D Systems supports them with direct shipping of orders. In contrast to how it sells machines, the company has a captive sales force dedicated to selling its On-Demand Parts production services.

Machines29%

Materials31%

Services

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Machines30%

Materials45%

Services

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… materials (the captive razorblades of industry), …

… and services, including a burgeoning service bureau business (3Dproparts)

3D Systems will go direct with its most expensive and sophisticated systems, but employs a reseller model for its professional and personal machines

3D Systems has the industry’s most extensive lineup of print engines and price points, …


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Not Just a Developed Economy Technology—3D Printing is Already Global

Unlike many advanced technologies, adoption of 3D printing is not radiating outward from the developed countries to the developing one. It may be a fledgling industry, but it is already global. Based on the data compiled by Wohlers Report 2012, more units have been installed in the US than in other regions, but it is less than half of total installations. Installations in Europe and Asia are roughly even. The picture is a bit different for 3D Systems. It is heavier in the US and lighter in Asia, likely reflecting the US being its founding geographic base, the past strength of Japanese OEMs and current emergence of Chinese ones, and the lack of much service bureau presence. But in substance we think 3D Systems mix, with the US being just around half of sales, reflects the global nature of the demand for printers. Setting aside mix, there is also little difference operationally between regions. The whole range of products is applicable, the sales pitch is unchanged, price points are the same, as are the sales channels—direct for production printers and resellers for professional and personal printers. The company sells in US dollars and euros, plus some other local currencies. Specific lines may see shifts in relative competitive position based on currency movements. But the firm does have natural hedges. It produces all its production/professional printers in the US and exports, for instance, but produces all its RapMan and 3D Touch personal printers in the UK and its materials in Switzerland. So we doubt its net competitive position changes much. But translation can certainly matter.

End Markets—That is a Bit Fuzzy; It Also May Not Be Particularly Important

The printer companies do not have a great grasp of how much of their product goes into certain markets. 3D Systems does sell its production printers direct, so it would have a good sense of where those are going. But it sells professional/personal printers through independent resellers, and while 3D Systems ships direct (resellers keep little inventory), it does not always know what the company does and what its output goes to. Materials are similarly not necessarily earmarked for a specific industry when purchased, and that can be true as well for 3Dproparts. But some insights can nonetheless be inferred. Figure 10 gives the industry’s end-market breakdown, as compiled by Wohlers Report 2012. Automotive and aerospace are large 3D printing users, and are similarly material to 3D Systems (they should know: larger production printers are used in these applications and are sold direct). 3D Systems is probably stronger in universities/schools than the industry as a whole, likely reflecting its success pushing down price points. It may be less penetrated into consumer products than the industry as a whole, perhaps due to it being later to color-capable printing. The industry and 3D Systems list medical/dental as a big market. But 3D Systems has singled it out as a market worthy of aggressive investment and resources given its need for customization is well suited to the technology. It may need to catch up in spots to reflect the heavy acquisition activity of the past few years, but when it comes down to it, 3D Systems is the industry’s largest and most diverse player. It is probably going to be a pretty good proxy for the market as a whole.

Figure 10. Don’t get too attached to it; it could look very different in the future

Source: Wohlers Report 2012

Consumer Products20%

Automotive20%

Medical/Dental15%

Aerospace12%

Industrial/Business11%

Academics8%

Government6%

Architectural3%

Other5%

End Markets - 3D Printing Industry

3D Systems is a good proxy for the industry as a whole, which is heavy in automotive, aerospace, electronics, and medical/dental

Market composition today likely will look much different in the future—the industry should be unearthing new applications for some time

The 3D printing market, and 3D Systems itself, are both highly global, with the products and means of selling being unchanged everywhere they go to market


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But at the end of the day, it is doubtful that this chart, or 3D Systems’ current end-market mix, will matter much. 3D printing is infinitesimally small on the total global manufacturing landscape today. We estimate it is just 0.02% of the total value of global manufacturing output, far below the value it brings suggests it should be. Markets in this pie chart should grow over time as additional applications are found; companies such as General Electric, Boeing (BA–$73.98–Buy), and General Motors have all been reasonably vocal in their endorsement of 3D printing. Indeed, GE recently acquired its own service bureaus to bring the 3D printing function within its aerospace engine unit in house. But many applications are yet to be identified. Architecture, for instance, is only just peeking onto the industry chart, but it is an emerging opportunity as more architects and engineers employ 3D (rather than 2D) CAD drawing. And ultimately it seems likely that some hybrid manufacturing system will emerge combining the best characteristics of additive and subtractive technologies, at which point 3D printing will probably become ubiquitous on the global manufacturing landscape. Then, the end-market pie chart may look very different from how it looks today.

Competition—Some Separation, but the Big Competition Is Outside, Not Inside, the Industry

Consolidation has created two clear winners in the 3D printing arena: it seems likely that 3D Systems and Stratasys are comparably sized, if you use pro forma figures, with sales in the $250M–$300M range in 2011. They are differently constructed. For instance, Stratasys/Objet place more industrial machines, but 3D Systems has more print engine options and derives more revenue from consumables/materials and its service bureau. 3D Systems has also made a bet on the emergence of the consumer as a driver of printers and printer services, whereas Stratasys does not, at this time, compete in that arena. So two “800-lb gorillas” have emerged, and then there are a handful of other established competitors with significant annual machine placements: China’s Beijing Tiertime, Germany’s Envisiontec and EOS, and Italy’s DWS. However, it is also clear that the competitive landscape is in flux. The top tier looks stable. In truth, in the last decade alone there have been many industrial printer firms to blink into and out of existence (some being acquired) and there are niche firms, on the list and not counted, that run below the radar currently. Given the number of additive techniques that do/will exist, the expiry of patents over time, and the importance of technological evolution, it should surprise no one if the second and third tiers see a lot of movement over time. And this says nothing of the consumer market. On the machine side, there is not a lot of competition: 3D Systems has entered it with gusto, and there are only a handful of other competitors. But that would change if demand in that market proves durable, and there is always the evolution of the RepRap project, an open source, academia-driven, and communal effort to build a low-cost, consumer printer. Similarly, while the industrial service bureau is consolidating, models have emerged enabling consumers to design, create, and sell products. The bigger players would seem to have the resources to adapt to, and even affect, the evolution of the 3D printing industry. But the competitive landscape remains unsettled. But to a large extent, to worry about competition between 3D printer companies is to miss the point. Stratasys and 3D Systems certainly compete, but both note that more important than eating into each other’s share is simply increasing the share of printing in manufacturing. Competition is to improve the functionality of the products and technologies within niches, reduce the price points, and gain share of as yet unidentified markets with first-mover advantages. As a result, competition within the industry is disciplined, and price competition is limited. The falling price points the industry has experienced are due to deliberate, company-directed efforts to reduce price points through product design and functionality to expand the addressable market. Within specific product categories, pricing has been relatively stable.

CONCLUSION

We are initiating coverage of 3D Systems with a Buy rating. This has five tenets: Demand for 3D printing equipment/services has historically grown well in excess of global output.

This is being driven by rising functionality, expanding materials, and falling costs lifting awareness of what additive manufacturing brings to a wider range of end markets and applications. As that continues it should fuel above-average growth for the industry and companies, such as 3D Systems, that compete within it.

3D Systems is pushing the bounds of 3D printing and in so doing making itself synonymous with

the technology. If the nascent but potentially vast consumer market develops, the firm sells machines, has a content-to-print model with a storefront, and has introduced its own retail brand. If consumer applications catch on, and we think they will, we doubt any company would benefit as much as 3D Systems.

But the main competition is not 3D printing peers

But below the top tier, there remains a lot of movement; with the technical innovation yet to be had, that is unlikely to change

Some big players, including 3D Systems, have emerged

Initiating coverage of 3D Systems with a Buy rating and a price target of $60


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3D Systems has an optimal mix of machines, consumable materials, and service bureau sales. Not only does this balanced construct ensure 3D Systems has its finger in every pie, it should smooth any cyclicality that occurs within the secular trend, especially relative to past cycles.

The company should continue to use acquisition to further balance its mix and extend its

technological capabilities. There remains ample opportunity to boost margins over our forecast horizon. As the use of

integrated materials increases in the mix, it should boost the Materials margin. As its service bureau offering matures further, it should boost the Services margin. As new products emerge from health care in 2013, it should boost sales and margin mix. And of course, at the growth we have forecast, we would expect the company to be able to leverage SG&A and R&D.

In summary, the rating rests on a strong secular trend favoring 3D printing, unique aggressiveness in creating and addressing a wider range of possibly vast markets, a business mix that should smooth business cyclicality, and a willingness to use M&A to further its mix and technological goals. Financially, we expect further solid, mid- to high-teens organic growth and good margin expansion driven by richer mix and volume/absorption. Rolled together, we see GAAP (non-GAAP) EPS of $0.83 ($1.25) in 2012, $1.18 ($1.60) in 2013, and $1.71 ($2.15) in 2014. Applying a 16.6x TEV/EBITDA multiple to our forecasts, which in our opinion is justified by current valuation, the historical range, and its strong growth potential, generates our 12-month price target of $60. For these reasons, we believe investors should be constructive on 3D Systems’ shares.

The story should benefit from the sector’s secular growth, its own product and market development, further M&A activity, and levers to improve margins


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3D SYSTEMS CORP. (NYSE: DDD)1Q11 2Q11 3Q11 4Q11 2,011.0 1Q12 2Q12 3Q12 4Q12 2,012.0 2,013.0 2,014.0

Q1A Q2A Q3A Q4A 2011A Q1A Q2A Q3A Q4E 2012E 2013E 2014E

Mar-11 Jun-11 Sep-11 Dec-11 Annual Mar-12 Jun-12 Sep-12 Dec-12 Annual Annual Annual

INCOME STATEMENT

Revenues $47.9 $55.1 $57.5 $69.9 $230.4 $77.9 $83.6 $90.5 $105.6 $357.6 $452.4 $542.0

COGS (24.7) (29.9) (29.8) (37.0) (121.4) (39.1) (40.6) (43.7) (50.3) (173.7) (197.7) (219.3)

Gross Income 23.2 25.2 27.8 32.9 109.0 38.9 43.0 46.9 55.3 184.0 254.6 322.7

SG&A (13.0) (14.2) (15.1) (17.6) (59.8) (24.0) (24.0) (22.9) (24.0) (94.9) (115.5) (133.0)

R&D (2.8) (3.0) (3.9) (4.6) (14.3) (4.9) (4.9) (5.5) (5.7) (21.1) (25.3) (28.7)

EBITDA 9.8 10.6 11.2 14.8 46.4 15.4 19.3 23.6 30.9 89.1 136.6 184.5

Operating Income 7.4 8.0 8.8 10.7 34.9 10.0 14.0 18.4 25.6 68.0 113.8 161.0

Interest Expense (0.1) (0.1) (0.1) (0.8) (1.2) (0.1) (4.2) (3.2) (3.2) (10.7) (12.0) (11.6)

Other 0.4 0.0 (0.5) (1.2) (1.3) (2.5) 0.4 1.0 (0.4) (1.5) 0.9 0.8

Pre-Tax Income 7.7 7.9 8.1 8.7 32.4 7.3 10.3 16.3 22.0 55.8 102.7 150.1

Income Taxes (0.9) 5.5 (0.9) (0.7) 3.0 (1.1) (1.9) (2.8) (4.6) (10.4) (36.0) (52.5)

Net Income (from Ops.) 6.8 13.4 7.2 8.0 35.4 6.2 8.3 13.5 17.4 45.4 66.8 97.6

Non-Recurring Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income 6.8 13.4 7.2 8.0 35.4 6.2 8.3 13.5 17.4 45.4 66.8 97.6

Shares Outstanding (Primary) 47.6 50.3 50.5 50.6 49.7 50.9 51.8 55.9 55.9 53.6 56.1 56.4

Shares Outstanding (Diluted) 48.6 51.3 51.4 51.5 50.7 51.7 52.6 56.6 56.6 54.4 56.8 57.1

Net EPS $0.14 $0.26 $0.14 $0.16 $0.70 $0.12 $0.16 $0.24 $0.31 $0.83 $1.18 $1.71

Effect of Non-Recurring $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Participating Securities Adj. $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Net EPS (from Ops.) $0.14 $0.26 $0.14 $0.16 $0.70 $0.12 $0.16 $0.24 $0.31 $0.83 $1.18 $1.71

Ratios

Yr./Yr. % Change - Revenues 51.4% 56.9% 38.6% 35.4% 44.1% 62.7% 51.7% 57.3% 51.1% 55.2% 26.5% 19.8%

Yr./Yr. % Change - Gr. Income 62.0% 58.0% 47.5% 32.1% 47.4% 67.5% 70.5% 68.9% 68.2% 68.7% 38.4% 26.7%

Yr./Yr. % Change - Op. Income 178.8% 134.4% 70.4% 10.4% 66.8% 34.5% 75.0% 109.7% 139.3% 94.8% 67.4% 41.4%

Yr./Yr. % Change - EBITDA 135.6% 98.6% 58.0% 24.8% 63.2% 56.4% 82.1% 110.5% 108.8% 92.0% 53.3% 35.0%

Yr./Yr. % Change - Net Income 238.1% 388.6% 34.5% (15.2%) 81.0% (9.3%) (37.8%) 87.2% 117.0% 28.2% 47.1% 46.1%

Yr./Yr. % Change - EPS 221.4% 344.1% 22.7% (21.5%) 67.3% (14.7%) (39.3%) 70.1% 97.2% 19.5% 40.8% 45.4%

Gross Margin 48.4% 45.7% 48.3% 47.0% 47.3% 49.9% 51.4% 51.8% 52.3% 51.4% 56.3% 59.5%

Operating Margin 15.5% 14.5% 15.3% 15.3% 15.1% 12.8% 16.7% 20.4% 24.2% 19.0% 25.2% 29.7%

EBITDA Margin 20.5% 19.2% 19.5% 21.2% 20.1% 19.7% 23.1% 26.0% 29.3% 24.9% 30.2% 34.0%

Pre-Tax Margin 16.1% 14.3% 14.1% 12.5% 14.1% 9.4% 12.3% 18.0% 20.9% 15.6% 22.7% 27.7%

Net Margin (from Ops.) 14.2% 24.3% 12.5% 11.5% 15.4% 7.9% 10.0% 14.9% 16.5% 12.7% 14.8% 18.0%

COGS as a % of Sales 51.6% 54.3% 51.7% 53.0% 52.7% 50.1% 48.6% 48.2% 47.7% 48.6% 43.7% 40.5%

SG&A as a % of Sales 27.1% 25.7% 26.2% 25.2% 26.0% 30.7% 28.8% 25.3% 22.7% 26.5% 25.5% 24.5%

R&D as a % of Sales 5.9% 5.5% 6.7% 6.6% 6.2% 6.3% 5.9% 6.1% 5.4% 5.9% 5.6% 5.3%

D&A as a % of Sales 5.0% 4.7% 4.2% 5.9% 5.0% 6.9% 6.3% 5.7% 5.0% 5.9% 5.0% 4.3%

Debt-to-EBITDA (non-GAAP) 0.7x 0.3x 0.2x 2.4x 2.4x 2.0x 1.8x 1.4x 1.2x 1.2x 0.8x 0.6x

Tax Rate 11.5% (69.4%) 11.3% 8.1% (9.2%) 15.1% 18.9% 16.9% 21.1% 18.7% 35.0% 35.0%

Non-GAAP Adjustments

Net Income - GAAP 6.8 13.4 7.2 8.0 35.4 6.2 8.3 13.5 17.4 45.4 66.8 97.6

Stock-Based Compensation (0.4) (0.8) (0.6) (0.8) (2.6) (1.0) (1.2) (1.0) (1.1) (4.4) (6.0) (8.0)

Intangible Amortization (0.8) (1.1) (0.9) (2.1) (4.9) (3.0) (2.8) (2.7) (3.1) (11.6) (13.3) (13.3)

Acq./Integration Costs (0.1) (0.6) (0.4) (2.5) (3.7) (2.1) (0.6) (0.2) (0.4) (3.4) (1.2) 0.0

Non-Cash Interest Expense 0.0 0.0 0.0 (0.4) (0.4) (0.8) (0.9) (0.9) (0.9) (3.6) (3.6) (3.6)

Other 0.0 6.2 0.0 0.0 6.2 0.0 0.0 0.2 0.0 0.2 0.0 0.0

Net Income - Non-GAAP 8.1 9.7 9.1 13.8 40.8 13.2 13.9 18.2 22.9 68.2 90.9 122.5

Adjusted EPS - Non-GAAP $0.17 $0.19 $0.18 $0.27 $0.80 $0.25 $0.27 $0.32 $0.40 $1.25 $1.60 $2.15

Yr./Yr. % Change 283.9% 222.7% 54.8% 35.4% 92.6% 52.1% 40.1% 81.1% 50.6% 55.8% 27.7% 34.0%

EBITDA (non-GAAP) 11.1 13.2 13.1 20.2 57.6 22.4 24.0 27.5 35.5 109.4 157.2 205.8

Operating Profit (non-GAAP) 8.7 10.6 10.7 16.1 46.1 17.0 18.7 22.4 30.2 88.3 134.4 182.3

Incremental Op. Margin 37.4% 35.8% 34.4% 35.1% 35.7% 27.4% 28.6% 35.5% 39.4% 33.1% 48.7% 53.5%

EBITDA Margin (non-GAAP) 23.3% 23.9% 22.7% 28.9% 25.0% 28.7% 28.7% 30.4% 33.6% 30.6% 34.8% 38.0%

Operating Margin (non-GAAP) 18.2% 19.2% 18.6% 23.0% 20.0% 21.8% 22.4% 24.8% 28.6% 24.7% 29.7% 33.6%

Net Margin (non-GAAP) 17.0% 17.6% 15.8% 19.8% 17.7% 16.9% 16.7% 20.1% 21.7% 19.1% 20.1% 22.6%

Cash Flow Information

D&A 2.4 2.6 2.4 4.1 11.5 5.4 5.3 5.1 5.3 21.1 22.8 23.5

Operating Cash Flow 0.3 5.9 12.6 8.9 27.7 15.8 5.6 22.6 (0.4) 43.6 63.8 99.9

Capital Expenditures (0.5) (0.5) (1.3) (0.6) (2.9) (0.8) (0.8) (0.4) (1.1) (3.0) (3.5) (4.0)

Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Free Cash Flow (0.2) 5.4 11.2 8.3 24.8 15.1 4.8 22.3 (1.5) 40.6 60.3 95.9

Op. Cash as a % of Sales 0.6% 10.8% 21.8% 12.7% 12.0% 20.3% 6.6% 25.0% (0.4%) 12.2% 14.1% 18.4%

CapEx as a % of Sales 1.0% 0.9% 2.3% 0.8% 1.2% 1.0% 1.0% 0.4% 1.0% 0.8% 0.8% 0.7%

Discretionary Cash Uses

Acquisitions (22.1) (5.9) (16.9) (47.8) (92.7) (134.9) (12.6) (0.8) 0.0 (148.3) 0.0 0.0

Stock Repurchase 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Debt Repayment (Net) (0.1) (0.1) (0.1) 148.9 148.7 (0.0) (0.0) (0.0) (7.9) (8.0) (3.0) (2.0)


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3D SYSTEMS CORP. (NYSE: DDD)1Q11 2Q11 3Q11 4Q11 2,011.0 1Q12 2Q12 3Q12 4Q12 2,012.0 2,013.0 2,014.0

Q1A Q2A Q3A Q4A 2011A Q1A Q2A Q3A Q4E 2012E 2013E 2014E

Mar-11 Jun-11 Sep-11 Dec-11 Annual Mar-12 Jun-12 Sep-12 Dec-12 Annual Annual Annual

SEGMENT DATA

TOTAL REVENUES $47.9 $55.1 $57.5 $70.2 $230.8 $77.9 $83.6 $90.5 $105.6 $357.6 $452.4 $542.0

Machines 13.5 16.2 14.8 22.1 66.7 24.7 26.1 34.1 39.9 124.7 150.8 180.2

Materials 15.6 16.4 18.5 20.2 70.6 24.7 26.2 25.5 27.6 104.0 124.3 149.8

Services 18.8 22.5 24.3 27.9 93.5 28.5 31.3 31.0 38.1 128.9 177.3 212.0

Yr./Yr. % Growth

Machines 54.1% 51.7% 2.0% 6.9% 21.9% 82.6% 61.0% 130.3% 80.0% 87.1% 20.9% 19.5%

Materials 14.7% 17.5% 29.7% 21.4% 20.9% 58.1% 59.6% 38.1% 37.0% 47.2% 19.5% 20.5%

Services 103.2% 114.5% 90.3% 95.7% 99.9% 52.1% 39.2% 27.5% 36.5% 37.9% 37.5% 19.6%

Total Growth 51.4% 56.9% 38.6% 36.1% 44.4% 62.7% 51.7% 57.3% 50.4% 55.0% 26.5% 19.8%

Organic Growth 23.0% 25.0% 12.0% 18.1% 19.0% 26.1% 19.9% 26.2% 24.9% 24.3% 21.7% 19.8%

Revenue Mix

Machines 28.3% 29.4% 25.7% 31.5% 28.9% 31.7% 31.2% 37.6% 37.8% 34.9% 33.3% 33.2%

Materials 32.6% 29.8% 32.1% 28.7% 30.6% 31.7% 31.3% 28.1% 26.2% 29.1% 27.5% 27.6%

Services 39.2% 40.8% 42.2% 39.8% 40.5% 36.6% 37.5% 34.2% 36.1% 36.1% 39.2% 39.1%

Supplemental Data

Sales Composition

Total Sales 47.9 55.1 57.5 69.9 230.4 77.9 83.6 90.5 105.6 357.6 452.4 542.0

Total Sales Growth 51.4% 56.9% 38.6% 35.4% 44.1% 62.7% 51.7% 57.3% 51.1% 55.2% 26.5% 19.8%

Organic Sales Growth 23.0% 25.0% 12.0% 18.1% 19.0% 26.1% 19.9% 26.2% 24.9% 24.3% 21.7% 19.8%

Volume 21.8% 16.2% 10.5% 22.5% 17.9% 62.2% 51.3% 108.9% --- --- --- ---

Price/Mix (0.3%) 2.0% (2.4%) (4.7%) (1.7%) (34.8%) (26.9%) (78.6%) --- --- --- ---

Volume/Price/Mix 21.5% 18.2% 8.1% 17.8% 16.1% 27.4% 24.4% 30.3% 26.0% 27.0% 21.3% 19.8%

Acquisition 28.5% 31.9% 26.6% 17.3% 25.1% 36.6% 31.8% 31.1% 26.2% 30.9% 4.8% 0.0%

ForEx 1.5% 6.8% 3.9% 0.3% 2.9% (1.3%) (4.5%) (4.1%) (1.0%) (2.7%) 0.3% 0.0%

New Product Contribution

New Product Revenues 15.6 17.3 17.6 27.3 77.8 23.9 28.6 36.5 --- --- --- ---

Yr./Yr. % Growth 73.3% 66.3% 2.3% 24.1% 32.8% 53.2% 65.3% 107.4% --- --- --- ---

As a % of Sales 32.6% 31.4% 30.6% 39.1% 33.8% 30.7% 34.2% 40.3% --- --- --- ---

GROSS PROFIT $23.2 $25.2 $27.8 $33.2 $109.4 $38.9 $43.0 $46.9 $55.3 $184.0 $254.6 $322.7

GROSS MARGIN 48.4% 45.7% 48.3% 47.3% 47.4% 49.9% 51.4% 51.8% 52.3% 51.4% 56.3% 59.5%

Machines 5.5 6.0 5.3 8.2 25.0 9.6 11.2 15.4 18.4 54.6 71.6 89.2

Materials 9.9 10.7 12.0 13.2 45.8 16.8 17.2 17.4 19.1 70.4 86.6 107.1

Services 7.8 8.6 10.5 11.8 38.7 12.5 14.5 14.1 17.8 58.9 96.4 126.4

Margin - Machines 40.6% 36.9% 35.5% 37.2% 37.5% 38.7% 43.1% 45.2% 46.2% 43.8% 47.5% 49.5%

Margin - Materials 63.4% 64.9% 64.9% 65.5% 64.8% 68.0% 65.6% 68.3% 69.0% 67.7% 69.7% 71.5%

Margin - Services 41.6% 38.0% 43.3% 42.1% 41.3% 43.8% 46.4% 45.4% 46.7% 45.7% 54.4% 59.6%

Gross Margin - Total 48.4% 45.7% 48.3% 47.3% 47.4% 49.9% 51.4% 51.8% 52.3% 51.4% 56.3% 59.5%


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3D SYSTEMS CORP. (NYSE: DDD)

2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E

INCOME STATEMENT

Revenues $109.3 $118.7 $116.0 $110.0 $125.6 $139.1 $134.8 $156.5 $138.9 $112.8 $159.9 $230.4 $357.6 $452.4 $542.0

COGS (56.7) (67.2) (69.3) (66.9) (69.1) (76.9) (88.6) (93.1) (83.0) (63.1) (85.9) (121.4) (173.7) (197.7) (219.3)

Gross Income 52.6 51.5 46.6 43.1 56.6 62.2 46.3 63.5 56.0 49.7 74.0 109.0 184.0 254.6 322.7

SG&A (32.7) (42.8) (48.3) (48.6) (39.4) (40.3) (51.2) (54.2) (45.9) (35.5) (42.3) (59.8) (94.9) (115.5) (133.0)

R&D (7.8) (11.0) (15.4) (9.0) (10.5) (12.2) (14.1) (14.4) (15.2) (11.1) (10.7) (14.3) (21.1) (25.3) (28.7)

EBITDA 18.3 5.4 (7.2) (6.1) 13.6 15.6 (12.5) 1.8 1.6 9.0 28.4 46.4 89.1 136.6 184.5

Operating Income 12.1 (2.3) (17.1) (14.5) 6.7 9.6 (19.0) (5.1) (5.1) 3.1 20.9 34.9 68.0 113.8 161.0

Interest Expense 0.0 0.0 0.0 0.0 (2.2) (1.5) (1.5) (1.8) (0.9) (0.6) (0.6) (1.2) (10.7) (12.0) (11.6)

Other 0.1 (1.0) (3.0) (2.9) 0.2 0.8 0.1 0.7 0.2 (0.5) (0.6) (1.3) (1.5) 0.9 0.8

Pre-Tax Income 12.2 (3.3) (20.1) (17.4) 4.7 8.9 (20.5) (6.2) (5.9) 1.9 19.7 32.4 55.8 102.7 150.1

Income Taxes (4.3) 1.0 (4.0) (1.3) (1.3) 1.3 (4.5) (0.5) (0.3) (0.8) (0.2) 3.0 (10.4) (36.0) (52.5)

Net Income (from Ops.) 7.9 (2.4) (24.0) (18.7) 3.4 10.2 (25.0) (6.7) (6.2) 1.1 19.6 35.4 45.4 66.8 97.6

Non-Recurring Items 0.0 0.0 9.2 (7.3) (0.4) (0.8) (4.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income 7.9 (2.4) (14.9) (26.9) 1.5 7.7 (30.7) (6.7) (6.2) 1.1 19.6 35.4 45.4 66.8 97.6

Shares Outstanding (Primary) 11.9 12.6 25.7 25.6 26.5 29.8 34.6 41.2 44.7 45.1 46.2 49.7 53.6 56.1 56.4

Shares Outstanding (Diluted) 12.9 12.6 26.4 25.6 29.8 34.4 34.6 41.9 44.8 45.2 46.9 50.7 54.4 56.8 57.1

Net EPS $0.61 ($0.19) ($0.56) ($1.05) $0.05 $0.22 ($0.89) ($0.16) ($0.14) $0.02 $0.42 $0.70 $0.83 $1.18 $1.71

Effect of Non-Recurring $0.00 $0.00 $0.35 ($0.29) ($0.01) ($0.02) ($0.12) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Participating Securities Adj. $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Net EPS (from Ops.) $0.61 ($0.19) ($0.91) ($0.76) $0.06 $0.25 ($0.76) ($0.16) ($0.14) $0.02 $0.42 $0.70 $0.83 $1.18 $1.71

Ratios

Yr./Yr. % Change - Revenues 12.7% 8.7% (2.3%) (5.1%) 14.2% 10.7% (3.1%) 16.1% (11.2%) (18.8%) 41.7% 44.1% 55.2% 26.5% 19.8%

Yr./Yr. % Change - Gr. Income 31.4% (2.1%) (9.5%) (7.5%) 31.1% 9.9% (25.6%) 37.2% (11.8%) (11.1%) 48.8% 47.4% 68.7% 38.4% 26.7%

Yr./Yr. % Change - Op. Income (389.4%) (119.2%) 637.3% (15.1%) (146.0%) 44.6% (297.5%) (73.1%) (0.8%) (160.4%) 580.8% 66.8% 94.8% 67.4% 41.4%

Yr./Yr. % Change - EBITDA 863.6% (70.6%) (233.1%) (15.3%) (324.4%) 14.3% (180.4%) (114.7%) (13.9%) 464.9% 217.5% 63.2% 92.0% 53.3% 35.0%

Yr./Yr. % Change - Net Income (353.8%) (129.9%) 919.8% (22.3%) (118.3%) 198.9% (344.6%) (73.0%) (8.7%) (117.3%) 1735.5% 81.0% 28.2% 47.1% 46.1%

Yr./Yr. % Change - EPS (324.0%) (130.7%) 385.3% (15.9%) (108.3%) 293.5% (407.1%) (78.9%) (14.6%) (117.1%) 1670.5% 67.3% 19.5% 40.8% 45.4%

Gross Margin 48.1% 43.4% 40.2% 39.2% 45.0% 44.7% 34.3% 40.5% 40.3% 44.1% 46.3% 47.3% 51.4% 56.3% 59.5%

Operating Margin 11.0% (2.0%) (14.7%) (13.2%) 5.3% 6.9% (14.1%) (3.3%) (3.7%) 2.7% 13.1% 15.1% 19.0% 25.2% 29.7%

EBITDA Margin 16.8% 4.5% (6.2%) (5.5%) 10.8% 11.2% (9.3%) 1.2% 1.1% 7.9% 17.8% 20.1% 24.9% 30.2% 34.0%

Pre-Tax Margin 11.1% (2.8%) (17.3%) (15.8%) 3.7% 6.4% (15.2%) (4.0%) (4.2%) 1.7% 12.3% 14.1% 15.6% 22.7% 27.7%

Net Margin (from Ops.) 7.2% (2.0%) (20.7%) (17.0%) 2.7% 7.3% (18.5%) (4.3%) (4.4%) 0.9% 12.2% 15.4% 12.7% 14.8% 18.0%

COGS as a % of Sales 51.9% 56.6% 59.8% 60.8% 55.0% 55.3% 65.7% 59.5% 59.7% 55.9% 53.7% 52.7% 48.6% 43.7% 40.5%

SG&A as a % of Sales 29.9% 36.1% 41.7% 44.2% 31.4% 29.0% 38.0% 34.6% 33.0% 31.5% 26.5% 26.0% 26.5% 25.5% 24.5%

R&D as a % of Sales 7.2% 9.3% 13.3% 8.2% 8.3% 8.8% 10.5% 9.2% 10.9% 9.9% 6.7% 6.2% 5.9% 5.6% 5.3%

D&A as a % of Sales 5.7% 6.5% 8.5% 7.7% 5.5% 4.3% 4.8% 4.5% 4.8% 5.2% 4.7% 5.0% 5.9% 5.0% 4.3%

Debt-to-EBITDA (non-GAAP) 0.2x 6.5x nmf nmf 2.0x 1.7x nmf 6.6x 7.4x 0.9x 0.3x 2.4x 1.2x 0.8x 0.6x

Tax Rate 35.4% 29.6% (19.8%) (7.3%) 27.2% (14.1%) (22.0%) (7.9%) (5.0%) 40.5% 0.9% (9.2%) 18.7% 35.0% 35.0%

Non-GAAP Adjustments

Net Income - GAAP 7.9 (2.4) (24.0) (18.7) 3.4 10.2 (25.0) (6.7) (6.2) 1.1 19.6 35.4 45.4 66.8 97.6

Stock-Based Compensation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (2.6) (4.4) (6.0) (8.0)

Intangible Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (4.9) (11.6) (13.3) (13.3)

Acq./Integration Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (3.7) (3.4) (1.2) 0.0

Non-Cash Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.4) (3.6) (3.6) (3.6)

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.2 0.2 0.0 0.0

Net Income - Non-GAAP 7.9 (2.4) (24.0) (18.7) 3.4 10.2 (25.0) (6.7) (6.2) 1.1 19.6 40.8 68.2 90.9 122.5

Adjusted EPS - Non-GAAP $0.61 ($0.19) ($0.91) ($0.73) $0.11 $0.30 ($0.72) ($0.16) ($0.14) $0.02 $0.42 $0.80 $1.25 $1.60 $2.15

Yr./Yr. % Change (324.0%) (130.7%) 385.3% (19.7%) (115.7%) 158.6% (343.5%) (77.7%) (14.6%) (117.1%) 1670.5% 92.6% 55.8% 27.7% 34.0%

EBITDA (non-GAAP) 18.3 5.4 (7.2) (6.1) 13.6 15.6 (12.5) 1.8 1.6 9.0 28.4 57.6 108.5 157.2 205.8

Operating Profit (non-GAAP) 12.1 (2.3) (17.1) (14.5) 6.7 9.6 (19.0) (5.1) (5.1) 3.1 20.9 46.1 87.4 134.4 182.3

Incremental Op. Margin 131.6% (152.1%) 531.1% (43.3%) 135.7% 22.1% 673.7% 64.1% (0.2%) (31.3%) 37.9% 35.7% 32.5% 49.6% 53.5%

EBITDA Margin (non-GAAP) 16.8% 4.5% (6.2%) (5.5%) 10.8% 11.2% (9.3%) 1.2% 1.1% 7.9% 17.8% 25.0% 30.3% 34.8% 38.0%

Operating Margin (non-GAAP) 11.0% (2.0%) (14.7%) (13.2%) 5.3% 6.9% (14.1%) (3.3%) (3.7%) 2.7% 13.1% 20.0% 24.4% 29.7% 33.6%

Net Margin (non-GAAP) 7.2% (2.0%) (20.7%) (17.0%) 2.7% 7.3% (18.5%) (4.3%) (4.4%) 0.9% 12.2% 17.7% 19.1% 20.1% 22.6%

Cash Flow Information

D&A 6.2 7.7 9.9 8.4 7.0 5.9 6.5 7.0 6.7 5.9 7.5 11.5 21.1 22.8 23.5

Operating Cash Flow 5.1 6.6 1.3 1.2 2.6 (5.8) (8.6) 2.6 (3.5) 7.7 31.8 27.7 43.6 63.8 99.9

Capital Expenditures (4.9) (3.3) (3.2) (0.9) (0.8) (2.5) (10.1) (0.9) (5.8) (1.0) (1.3) (2.9) (3.0) (3.5) (4.0)

Dividends 0.0 0.0 0.0 (0.6) (1.4) (1.6) (0.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Free Cash Flow 0.2 3.3 (1.9) (0.3) 0.4 (9.9) (19.4) 1.7 (9.3) 6.8 30.6 24.8 40.6 60.3 95.9

Op. Cash as a % of Sales 4.7% 5.6% 1.1% 1.1% 2.1% (4.1%) (6.3%) 1.7% (2.5%) 6.9% 19.9% 12.0% 12.2% 14.1% 18.4%

CapEx as a % of Sales 4.5% 2.8% 2.8% 0.8% 0.6% 1.8% 7.5% 0.6% 4.2% 0.9% 0.8% 1.2% 0.8% 0.8% 0.7%

Discretionary Cash Uses

Acquisitions 0.0 0.0 (3.3) 0.0 0.0 0.0 0.0 0.0 0.0 (4.1) (19.2) (92.7) (148.3) 0.0 0.0

Stock Repurchase 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Debt Repayment (Net) (0.1) 30.4 (7.9) 9.2 (0.2) (0.2) 8.0 (8.6) (0.4) (3.3) (0.2) 148.7 (8.0) (3.0) (2.0)


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SEGMENT DATA

TOTAL REVENUES $109.3 $118.7 $116.0 $110.0 $125.6 $139.1 $134.8 $156.5 $138.9 $112.8 $159.9 $230.8 $357.6 $452.4 $542.0

Machines 54.6 53.9 49.4 41.1 46.2 55.1 46.5 58.2 41.3 30.5 54.7 66.7 124.7 150.8 180.2

Materials 25.3 30.6 31.6 32.0 38.0 44.6 52.1 62.0 62.3 50.3 58.4 70.6 104.0 124.3 149.8

Services 29.4 34.2 34.9 36.9 41.4 39.3 36.3 36.4 35.3 32.0 46.8 93.5 128.9 177.3 212.0

Yr./Yr. % Growth

Machines 13.1% (1.2%) (8.4%) (16.8%) 12.4% 19.3% (15.7%) 25.2% (29.0%) (26.2%) 79.3% 21.9% 87.1% 20.9% 19.5%

Materials 36.1% 21.2% 3.2% 1.2% 18.7% 17.5% 16.6% 19.0% 0.5% (19.3%) 16.2% 20.9% 47.2% 19.5% 20.5%

Services (2.4%) 16.2% 2.2% 5.8% 12.1% (5.1%) (7.6%) 0.2% (2.9%) (9.3%) 45.9% 99.9% 37.9% 37.5% 19.6%

Total Growth 12.7% 8.7% (2.3%) (5.1%) 14.2% 10.7% (3.1%) 16.1% (11.2%) (18.8%) 41.7% 44.4% 55.0% 26.5% 19.8%

Organic Growth

Revenue Mix

Machines 50.0% 45.4% 42.6% 37.4% 36.8% 39.6% 34.5% 37.2% 29.7% 27.0% 34.2% 28.9% 34.9% 33.3% 33.2%

Materials 23.1% 25.8% 27.3% 29.1% 30.3% 32.1% 38.6% 39.6% 44.8% 44.6% 36.5% 30.6% 29.1% 27.5% 27.6%

Services 26.9% 28.8% 30.1% 33.6% 33.0% 28.3% 26.9% 23.2% 25.4% 28.4% 29.2% 40.5% 36.1% 39.2% 39.1%

Supplemental Data

Sales Composition

Total Sales --- --- 116.0 110.0 125.6 139.1 134.8 156.5 138.9 112.8 159.9 230.4 357.6 452.4 542.0

Total Sales Growth --- --- --- (5.1%) 14.2% 10.7% (3.1%) 16.1% (11.2%) (18.8%) 41.7% 44.1% 55.2% 26.5% 19.8%

Organic Sales Growth --- --- Undisc. Undisc. Undisc. Undisc. Undisc. Undisc. Undisc. Undisc. Undisc. 19.0% 24.3% 21.7% 19.8%

Volume --- --- --- --- --- 8.0% (2.3%) 8.7% (13.9%) (10.3%) 45.3% 17.9% --- --- ---

Price/Mix --- --- --- --- --- 3.7% (1.0%) 3.3% 0.2% (5.7%) (1.0%) (1.7%) --- --- ---

Volume/Price/Mix --- --- 0.0% 0.0% 0.0% 11.7% (3.4%) 12.0% (13.7%) (15.9%) 44.2% 16.1% 27.0% 21.3% 19.8%

Acquisition --- --- --- --- --- --- --- --- --- --- --- 25.1% 30.9% 4.8% 0.0%

ForEx --- --- --- --- --- (1.0%) 0.3% 4.1% 2.5% (2.8%) (2.5%) 2.9% (2.7%) 0.3% 0.0%

New Product Contribution

New Product Revenues --- --- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 58.6 77.8 --- --- ---

Yr./Yr. % Growth --- --- 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% --- 32.8% --- --- ---

As a % of Sales --- --- 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 36.7% 33.8% --- --- ---

GROSS PROFIT $52.6 $51.5 $46.6 $43.2 $56.6 $62.2 $46.3 $63.5 $56.0 $49.7 $74.0 $109.4 $184.0 $254.6 $322.7

GROSS MARGIN 48.1% 43.4% 40.2% 39.2% 45.0% 44.7% 34.3% 40.5% 40.3% 44.1% 46.3% 47.4% 51.4% 56.3% 59.5%

Machines 44.9 42.3 37.6 33.3 40.5 49.4 39.3 16.0 8.4 7.8 21.4 25.0 54.6 71.6 89.2

Materials --- --- --- --- --- --- --- 38.5 39.3 29.7 35.7 45.8 70.4 86.6 107.1

Services 7.7 9.2 9.0 9.9 16.0 12.7 7.0 8.9 8.3 12.2 16.9 38.7 58.9 96.4 126.4

Margin - Machines 56.2% 50.0% 46.4% 45.5% 48.1% 49.6% 39.9% 27.6% 20.3% 25.7% 39.0% 37.5% 43.8% 47.5% 49.5%

Margin - Materials --- --- --- --- --- --- --- 62.1% 63.0% 59.0% 61.1% 64.8% 67.7% 69.7% 71.5%

Margin - Services 26.2% 27.0% 25.7% 26.7% 38.7% 32.4% 19.2% 24.6% 23.6% 38.2% 36.2% 41.3% 45.7% 54.4% 59.6%

Gross Margin - Total 48.1% 43.4% 40.2% 39.2% 45.0% 44.7% 34.3% 40.5% 40.3% 44.1% 46.3% 47.4% 51.4% 56.3% 59.5%


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BALANCE SHEET

Cash/Equivalents 19.0 5.9 2.3 24.0 26.5 24.3 14.3 29.7 22.2 24.9 37.3 179.1 171.5 229.1 323.2

S/T Investments 0.0 0.0 0.0 0.6 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0

Accts. Receivables 33.3 36.3 27.4 22.8 22.2 32.8 34.5 31.1 25.2 23.8 35.8 51.2 68.0 85.2 102.5

Inventories (LIFO) 14.9 18.5 12.6 9.7 9.5 14.8 26.1 20.0 21.0 18.4 23.8 25.3 44.3 59.3 70.2

Other Current 7.8 8.6 4.0 2.2 5.2 11.8 11.7 9.8 6.0 3.0 3.2 5.8 8.0 5.6 6.5

Total Current Assets 75.1 69.3 46.3 59.2 63.4 83.7 86.6 90.6 74.3 70.2 100.1 261.4 291.7 379.3 502.3

PP&E 13.1 17.9 15.3 11.5 9.6 12.0 23.8 21.3 24.1 24.8 27.7 29.6 29.5 28.2 26.7

Intangible Assets 8.4 21.5 22.6 12.6 10.8 8.6 6.6 5.2 3.7 3.6 18.3 54.0 96.9 96.9 96.9

Goodwill 0.0 44.2 44.5 44.9 45.1 44.7 46.9 47.7 48.0 48.7 59.0 107.7 225.0 225.0 225.0

Other L/T 13.3 12.1 3.6 3.3 2.5 2.2 2.3 2.6 3.0 3.1 3.7 10.3 10.8 11.4 11.9

Total Assets 109.9 164.9 132.2 131.5 131.5 151.2 166.2 167.4 153.0 150.4 208.8 463.0 653.9 740.7 862.8

Current Debt 0.1 9.3 13.0 0.2 0.2 0.2 11.9 3.5 3.3 0.2 0.2 0.2 0.2 0.2 0.2

Accts. Payables 8.3 12.8 10.8 7.3 7.0 11.7 26.8 20.7 17.1 13.0 26.6 25.9 27.8 30.6 32.9

Customer Deposits 1.1 1.6 0.8 0.8 0.8 1.9 6.5 1.5 1.1 0.6 2.3 3.4 3.0 3.0 3.0

Accrued/Other 21.0 29.6 30.3 32.1 26.9 26.0 24.0 24.0 17.5 19.6 28.6 29.6 45.0 47.3 49.6

Total Current Liabilities 30.5 53.3 54.9 40.3 34.9 39.9 69.3 49.7 39.0 33.4 57.7 59.0 76.0 81.1 85.7

L/T Debt 4.4 25.6 14.1 36.6 26.5 26.2 24.2 8.7 8.5 8.3 8.1 138.7 130.7 127.7 125.7

Deferred Tax Liability 0.0 4.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.7 25.0 25.0 25.0

Other 3.2 3.3 3.4 2.6 1.6 1.0 3.0 4.2 3.3 3.9 10.0 6.8 40.2 58.1 80.0

Total Liabilities 38.1 86.5 72.4 79.6 62.9 67.1 96.5 62.6 50.8 45.6 75.7 208.2 246.8 266.9 291.4

Minority Interest 0.0 0.0 0.0 15.2 15.2 15.2 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0

Shareholders' Equity 71.8 78.4 59.9 36.7 53.4 68.9 69.7 104.8 102.2 104.7 133.1 254.8 407.1 473.9 571.4

Ratios

Leverage Ratios

Net Debt ($14.5) $29.0 $24.8 $12.3 $0.2 $2.1 $21.8 ($17.5) ($10.4) ($16.5) ($29.1) ($40.3) ($40.6) ($101.2) ($197.3)

Debt-to-Equity (20.2%) 36.9% 41.4% 33.5% 0.3% 3.0% 31.3% (16.7%) (10.2%) (15.8%) (21.8%) (15.8%) (10.0%) (21.4%) (34.5%)

Debt-to-Total Capital (25.3%) 27.0% 29.3% 25.1% 0.3% 2.9% 23.8% (20.1%) (11.3%) (18.7%) (28.0%) (18.8%) (11.1%) (27.2%) (52.7%)

Liquidity Ratios

Quick Ratio 1.71 0.79 0.54 1.16 1.40 1.43 0.70 1.22 1.21 1.46 1.27 3.90 3.15 3.88 4.97

Current Ratio 2.46 1.30 0.84 1.47 1.82 2.10 1.25 1.82 1.90 2.10 1.74 4.43 3.84 4.68 5.86

Activity Ratios

Receivables/Sales 27.5% 29.3% 27.5% 22.8% 17.9% 19.8% 25.0% 21.0% 20.3% 21.7% 18.6% 18.9% 19.0% 18.8% 18.9%

Days Receivables 98.9 105.5 98.9 82.1 64.4 71.1 89.8 75.5 72.9 78.0 67.1 68.0 68.4 67.8 68.1

Payables/COGS 12.4% 15.7% 17.1% 13.6% 10.3% 12.1% 21.7% 25.5% 22.8% 23.9% 23.0% 21.6% 16.0% 15.5% 15.0%

Days Payables 44.8 56.4 61.4 48.8 37.2 43.7 78.3 92.0 82.1 85.9 82.9 77.8 57.6 55.8 54.0

Inventory/COGS 20.9% 24.9% 22.4% 16.6% 13.9% 15.8% 23.1% 24.8% 24.7% 31.2% 24.6% 20.2% 25.5% 30.0% 32.0%

Inventory Turnover 4.8x 4.0x 4.5x 6.0x 7.2x 6.3x 4.3x 4.0x 4.0x 3.2x 4.1x 4.9x 3.9x 3.3x 3.1x

Return Ratios

ROAA (EBITDA) 18.3% 3.9% (4.8%) (4.6%) 10.4% 11.0% (7.9%) 1.1% 1.0% 5.9% 15.8% 13.8% 16.0% 19.6% 23.0%

ROAA (Net Income) 7.8% (1.7%) (16.2%) (14.2%) 2.6% 7.2% (15.7%) (4.0%) (3.8%) 0.7% 10.9% 10.5% 8.1% 9.6% 12.2%

ROAE (EBITDA) 27.9% 7.2% (10.4%) (12.6%) 30.3% 25.5% (18.1%) 2.1% 1.5% 8.7% 23.9% 23.9% 26.9% 31.0% 35.3%

ROAE (Net Income) 12.0% (3.1%) (34.8%) (38.7%) 7.6% 16.7% (36.0%) (7.7%) (5.9%) 1.0% 16.5% 18.3% 13.7% 15.2% 18.7%

Book Value/Share 5.57 6.23 2.26 1.44 1.79 2.00 2.02 2.50 2.28 2.32 2.84 5.02 7.48 8.34 10.01

Tang. BV/Share 4.92 1.01 (0.27) (0.82) (0.09) 0.45 0.47 1.24 1.13 1.16 1.19 1.84 1.57 2.67 4.37


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CASH FLOW STATEMENT

Net Income 7.9 (2.4) (14.9) (26.0) 3.0 9.4 (29.3) (6.7) (6.2) 1.1 19.6 35.4 45.4 66.8 97.6

D&A 6.2 7.7 9.9 8.4 7.0 5.9 6.5 7.0 6.7 5.9 7.5 11.5 21.1 22.8 23.5

Extraordinary Items 0.0 0.0 (20.3) 7.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Change: Working Capital (13.1) 1.1 14.9 6.4 (7.7) (18.5) 8.2 (0.1) (6.2) (1.9) 4.4 (18.7) (33.9) (29.4) (25.9)

Other 4.1 0.2 11.7 4.4 0.3 (2.6) 6.0 2.5 2.2 2.6 0.4 (0.5) 11.0 3.6 4.7

OPERATING CASH FLOW $5.1 $6.6 $1.3 $1.2 $2.6 ($5.8) ($8.6) $2.6 ($3.5) $7.7 $31.8 $27.7 $43.6 $63.8 $99.9

CapEx (4.9) (3.3) (3.2) (0.9) (0.8) (2.5) (10.1) (0.9) (5.8) (1.0) (1.3) (2.9) (3.0) (3.5) (4.0)

Proceeds from Sales 3.0 0.0 0.6 0.1 0.0 0.7 0.2 0.0 3.5 0.1 0.0 0.2 0.1 0.1 0.1

Acquisitions 0.0 0.0 (3.3) 0.0 0.0 0.0 0.0 0.0 0.0 (4.1) (19.2) (92.7) (148.3) 0.0 0.0

Other (0.7) (54.8) (5.1) (1.3) (1.2) (0.9) (1.2) (1.3) (0.3) (0.2) (0.3) (0.3) (0.3) (0.3) (0.3)

INVESTMENT CASH FLOW ($2.6) ($58.1) ($11.0) ($2.1) ($1.9) ($2.7) ($11.0) ($2.2) ($2.7) ($5.2) ($20.8) ($95.7) ($151.5) ($3.7) ($4.2)

Net Debt Activity (S/T) 0.0 53.5 44.2 (2.5) 0.0 0.0 8.2 (8.2) 0.0 (3.1) 0.0 0.0 0.0 0.0 0.0

Net Debt Activity (L/T) (0.1) (23.1) (52.1) 11.6 (0.2) (0.2) (0.2) (0.4) (0.4) (0.2) (0.2) 148.7 (8.0) (3.0) (2.0)

Dividend Payments 0.0 0.0 0.0 (0.6) (1.4) (1.6) (0.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Share Repurchase 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Share Issuance 0.0 8.0 12.5 15.2 4.9 8.1 2.8 20.4 0.0 0.0 0.0 62.1 106.9 0.0 0.0

Other 4.3 2.5 1.2 (1.5) (2.2) (0.8) 0.0 2.9 (1.0) 3.6 1.3 (0.8) 1.3 0.6 0.4

FINANCING CASH FLOW $4.2 $40.9 $5.8 $22.2 $1.1 $5.5 $10.0 $14.7 ($1.4) $0.3 $1.0 $210.0 $100.2 ($2.4) ($1.6)

Effect of Exchange Rates (0.2) (2.5) 0.2 0.4 0.2 0.7 (0.4) 0.3 0.0 (0.0) 0.3 (0.2) 0.0 0.0 0.0

Beginning Cash Balance 12.5 19.0 5.9 2.3 23.9 26.4 24.3 14.3 29.7 22.2 24.9 37.3 179.1 171.5 229.1

Change: Cash 6.4 (13.1) (3.7) 21.7 2.5 (2.2) (10.0) 15.4 (7.5) 2.7 12.4 141.8 (7.6) 57.7 94.1

Ending Cash Balance 19.0 5.9 2.3 23.9 26.4 24.3 14.3 29.7 22.2 24.9 37.3 179.1 171.5 229.1 323.2

Valuations

Avg. Share Price $7.17 $6.96 $5.13 $3.90 $6.33 $10.30 $9.22 $10.06 $5.91 $3.94 $8.70 $18.62 $32.35 $38.19 $38.19

Earnings per Share 0.61 (0.19) (0.91) (0.76) 0.06 0.25 (0.76) (0.16) (0.14) 0.02 0.42 0.70 0.83 1.18 1.71

P/E Ratio 11.7x (37.2x) (5.6x) (5.1x) 100.3x 41.5x (12.1x) (62.5x) (43.0x) 167.0x 20.8x 26.7x 38.8x 32.5x 22.3x

FCF per Share 0.02 0.26 (0.07) (0.01) 0.01 (0.29) (0.56) 0.04 (0.21) 0.15 0.65 0.49 0.75 1.06 1.68

TEV/FCF Ratio 334.4x 35.0x (84.6x) (337.4x) 487.3x (36.0x) (17.5x) 240.5x (27.3x) 23.9x 12.4x 36.5x 42.3x 34.3x 20.7x

OCF per Share 0.40 0.53 0.05 0.05 0.09 (0.17) (0.25) 0.06 (0.08) 0.17 0.68 0.55 0.80 1.12 1.75

OCF Yield 5.55% 7.59% 0.97% 1.19% 1.37% -1.63% -2.68% 0.62% -1.32% 4.34% 7.81% 2.93% 2.48% 2.94% 4.58%

TEV/OCF Ratio 15.2x 17.5x 122.0x 94.7x 72.9x (61.8x) (39.8x) 153.8x (73.0x) 20.9x 11.9x 32.7x 39.4x 32.4x 19.8x

Revenue per Share 8.48 9.44 4.39 4.30 4.22 4.04 3.90 3.74 3.10 2.50 3.41 4.54 6.58 7.96 9.49

TEV/Sales Ratio 0.71x 0.98x 1.38x 1.02x 1.50x 2.56x 2.53x 2.58x 1.83x 1.43x 2.37x 3.92x 4.81x 4.57x 3.66x

EBITDA per Share 1.42 0.43 (0.27) (0.24) 0.46 0.45 (0.36) 0.04 0.04 0.20 0.61 0.92 1.64 2.41 3.23

TEV/EBITDA Ratio 4.3x 21.6x (22.4x) (18.4x) 13.8x 22.9x (27.2x) 219.3x 160.1x 18.0x 13.3x 19.5x 19.3x 15.1x 10.7x

BV per Share 5.57 6.23 2.26 1.44 1.79 2.00 2.02 2.50 2.28 2.32 2.84 5.02 7.48 8.34 10.01

TEV/BV Ratio 1.09x 1.49x 2.68x 3.05x 3.53x 5.17x 4.89x 3.85x 2.48x 1.54x 2.84x 3.55x 4.22x 4.36x 3.47x

TEV/Tang. BV Ratio 1.23x 9.13x (22.28x) (5.37x) (73.12x) 22.90x 21.02x 7.78x 5.02x 3.09x 6.78x 9.71x 20.18x 13.61x 7.95x

Dividend/Share $0.00 $0.00 $0.00 $0.03 $0.05 $0.05 $0.02 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Dividend Yield 0.0% 0.0% 0.0% 0.6% 0.8% 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Payout Ratio (3-yr. avg. N.I.) 0.0% 0.0% 0.0% (4.3%) (10.8%) (95.9%) (20.8%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


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IMPORTANT DISCLOSURES

Price Chart

BB&T Capital Markets rating distribution by percentage (as of December 6, 2012):All companiesunder coverage:

All companies under coverage to which it has providedinvestment banking services in the previous 12 months:

Buy (1) 47.17% Buy (1) 14.67%Hold (2) 51.89% Hold (2) 4.85%Underweight/Sell (3) 0.94% Underweight/Sell (3) 0.00%Not Rated (NR) 0.00% Not Rated (NR) 0.00%

BB&T Capital Markets Ratings System:The BB&T Capital Markets Equity Research Department Stock Rating System consists of three separate ratings. The appropriate rating is determined by a stock’s estimated12-month total return potential, which consists of the percentage price change to the 12-month price target and the current yield on anticipated dividends. A 12-month price

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target is the analyst’s best estimate of the market price of the stock in 12 months. A 12-month price target is highly subjective and the result of numerous assumptions,including company, industry, and market fundamentals, both on an absolute and relative basis, as well as investor sentiment, which can be highly volatile.

The definition of each rating is as follows:

Buy (1): estimated total return potential greater than or equal to 10%, Hold (2): estimated total return potential greater than or equal to 0% and less than 10%, Underweight(3): estimated total return potential less than 0%

B: Buy H: Hold UW: Underweight NR: Not Rated NA: Not Applicable NM: Not Meaningful SP: Suspended

Stocks rated Buy (1) are required to have a published 12-month price target, while it is not required on stocks rated Hold (2) and Underweight (3).

BB&T Capital Markets Equity Research Disclosures as of December 6, 2012BB&T Capital Markets makes a market in the securities of The Boeing Company.BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from 3D Systems Corporation, The Boeing Company andStratasys, Inc. in the next three months.An affiliate of BB&T Capital Markets received compensation from The Boeing Company for products or services other than investment banking services during the past 12months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST

For valuation methodology and related risk factors on Buy (1)–rated stocks, please refer to the body text of this report or to individual reports on any covered companiesreferenced in this report.The analyst(s) principally responsible for preparation of this report received compensation that is based upon many factors, including the firm’s overall investment bankingrevenue.

Analyst CertificationThe analyst(s) principally responsible for the preparation of this research report certify that the views expressed in this research report accurately reflect his/her (their)personal views about the subject security(ies) or issuer(s) and that his/her (their) compensation was not, is not, or will not be directly or indirectly related to the specificrecommendations or views contained in this research report.

OTHER DISCLOSURESThe information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accuracy or completeness. We do notundertake to advise the reader as to changes in figures or our views. This is not a solicitation of an order to buy or sell any securities.BB&T Capital Markets is a division of Scott & Stringfellow, LLC, a registered broker/dealer subsidiary of BB&T Corporation. Member FINRA/SIPC. NOT A DEPOSIT, NOT FDICINSURED, NOT GUARANTEED BY THE BANK, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY AND MAY GO DOWN IN VALUE.The opinions expressed are those of the analyst(s) and not those of BB&T Corporation or its executives.Important Information Regarding the Distribution of this Report in the United Kingdom

This report has been produced by BB&T Capital Markets and is being distributed in the United Kingdom (UK) by Seymour Pierce Limited (SPL). SPL is authorized andregulated in the UK by the Financial Services Authority to carry out both corporate finance and investment services and is a member of the London Stock Exchange.Although BB&T Capital Markets is under separate ownership from SPL, BB&T Capital Markets has appointed SPL as its exclusive distributor of this research in the UK,and BB&T Capital Markets will be remunerated by SPL by way of a fee. This report has not been approved for purposes of section 21 of the UK's Financial Services andMarkets Act 2000, and accordingly is only provided in the UK for the use of persons to whom communications can be made without being so approved, as detailed in theFinancial Services and Markets Act 2000 (Financial Promotion) Order 2005.

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COMMERCIAL AND INDUSTRIALBuilding MaterialsJohn F. Kasprzak Jr. (804) 782-8715 Paul Betz, CFA (804) 782-8746 Teresa T. Nguyen, CFA (804) 782-8745

Commercial DurablesMatthew S. McCall, CFA (804) 780-3582 Vineet Khanna (804) 482-7111

Industrial Equipment - Distribution & ComponentsHolden Lewis (703) 471-3894 John C. Cooper (804) 787-8293

Industrial Equipment - Flow ControlKevin R. Maczka, CFA (804) 782-8811 Nicholas V. Prendergast (804) 782-2006

Industrial Equipment - MachineryC. Schon Williams (804) 782-8769 Aaron M. Reeves (804) 780-3237

Specialty Construction/Environmental ServicesAdam R. Thalhimer, CFA (804) 344-8377 Charles E. Redding (804) 782-8853

CONSUMERAgribusiness/Consumer FoodsHeather L. Jones (804) 780-3280 Brett M. Hundley, CFA (804) 782-8753 Harsh Nahata (804) 482-5775

Apparel, Footwear, & Specialty RetailScott D. Krasik, CFA (212) 822-8138 Kelly L. Halsor, CFA (212) 822-8132

Automotive AftermarketBret D. Jordan, CFA (617) 316-1345 David L. Kelley (617) 316-1344

Food & Drug MerchandisingAndrew P. Wolf, CFA (804) 787-8224 Ashby W. Price (804) 782-8711

Specialty Hardlines RetailersAnthony C. Chukumba (212) 822-8143 Eric Cohen (212) 822-8140

ENERGYCoalMark A. Levin (804) 782-8856 Nathan P. Martin (804) 782-8799Garrett S. Nelson (804) 787-8259

Diversified MiningGarrett S. Nelson (804) 787-8259 Nathan P. Martin (804) 782-8799

Energy InfrastructureRobert F. Norfleet III (804) 787-8231 John Ellison (804) 782-8732

FINANCIAL SERVICESBanks/ThriftsCary A. Morris (804) 782-8831Blair C. Brantley, CFA (804) 727-2604

Specialty FinanceVernon C. Plack, CFA (804) 780-3257 Peter W. Councill, CFA (804) 782-8850

TECHNOLOGYAerospaceF. Carter Leake (804) 482-7167 John C. McLeod (804) 225-5899

Commercial IT Services/Government ServicesGeorge A. Price Jr. (703) 471-3892 Jethro R. Solomon (703) 471-3893

DefenseJeremy W. Devaney (703) 471-3891

TRANSPORTATION SERVICESAirfreight & Logistics/MaritimeKevin W. Sterling, CFA (804) 782-8804 William W. Horner (804) 787-1143 Chip Rowe (804) 782-8787

RailroadsMark A. Levin (804) 782-8856 Nathan P. Martin (804) 782-8799Garrett S. Nelson (804) 787-8259

Surface TransportationThomas S. Albrecht, CFA (804) 787-8210 Willard P. Milby, IV (804) 775-7919 John L. Washington (804) 225-5898 A. Rhem Wood, Jr. (804) 782-8784

RESEARCH DEPARTMENTDirector of ResearchVernon C. Plack, CFA (804) 780-3257

Assistant Director of ResearchJames H. Weber, CFA (804) 782-8773

Product ManagerW. Moultrie Dotterer, CFA (804) 780-3279

Supervisory AnalystsKathleen R. Schneider (732) 567-8766Denise Bossé Tyznar (804) 782-8880James H. Weber, CFA (804) 782-8773

EditorPeggy Myers Walz (804) 782-8785

RESEARCH OFFICESRichmondBostonNew YorkReston

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