Why 3D Systems is smart to sell its on-demand manufacturing business
3D Systems announced on Tuesday that it had signed an agreement to sell its on-demand manufacturing business.
Many investors appreciated the news, as 3D printing stock jumped 11.3% on Wednesday to above-average volume. Much of this pop, however, is surely attributable to short sellers (those who bet a stock will go down) scrambling to cover their positions as the stock rose during the day.
3D Systems shares have a high short interest of 23.9%, according to the most recent data (May 14), which means that around 24% of the company’s shares available for trading have been sold short. to this date. The positive side of this high short interest for investors who are long on the stock is that the upward movement in the stock following positive news will tend to be magnified.
Here’s what investors need to know about the planned business divestiture.
3D Systems is selling its build-on-demand (ODM) business to private equity firm Trilantic North America for $ 82 million, subject to certain closing adjustments, it said in its press release. This operation has two factories in the United States and three in Europe, which Trilantic will rename.
The company expects the sale to close in the third quarter of this year.
Why the assignment?
In the press release, CEO Jeffrey Graves said that “the sole reason for the divestiture of the company is to allow all of our focus and investment priorities to focus on additive manufacturing (AM), where we play a unique leadership role in enabling industrial-scale AM adoption across a range of exciting end markets. “
3D Systems’ ODM business focuses on the rapid production of components using both additive manufacturing (3D printing) and traditional subtractive manufacturing methods.
Graves – which joined the group in April 2020 – began divesting non-core assets earlier this year after focusing on increasing efficiency last year. In January, the company sold its non-core software business, Cimatron and GibbsCAM. These companies were focused on traditional manufacturing and probably never should have been acquired in the first place.
What is the size of 3D Systems’ on-demand manufacturing business?
The ODM business probably represents around 13-16% of 3D Systems’ total revenue.
The company did not provide any revenue in the press release. In addition, it no longer breaks down the revenue from its ODM operation, which is part of its service segment. However, in the first quarter of 2020, the company has broken down this revenue. During this quarter, the ODM business generated revenue of $ 19.7 million, or 14.6% of the company’s total revenue of $ 134.7 million. This percentage probably hasn’t changed significantly in just a year.
In the first quarter of 2021, 3D Systems’ total revenue was $ 146.1 million. If we assume that ODM mining is around 13-16% of total revenue, we get ODM revenue of around $ 19-23 million.
Why this assignment is a good decision
- It allows management to focus solely on 3D printing.
- It generates a good chunk of cash – $ 82 million with possible closing adjustments – that the company can use to invest in more profitable parts of its business, such as its healthcare segment.
- This should help increase profitability. This decision will initially reduce the company’s revenues, but it should also help increase its profitability. Historically, the ODM business has generally lagged behind in profitability compared to other parts of the business of the company.
How does 3D Systems plan to use the proceeds of the sale?
“The proceeds from the sale will be used to further accelerate our investments for the growth of our core additive manufacturing capabilities, for which we see rapidly increasing demand in extraordinary new applications ranging from the human body to electric vehicles and travel in the world. ‘space,’ Graves said. said in the press release.
3D Systems can afford to invest in growth initiatives now that its balance sheet is strong. At the end of the first quarter, it had $ 133 million in cash and no debt. In addition, it now generates cash from its operations rather than gobbling them up. In the first quarter, its operating cash flow was $ 28.5 million.
In the quote above, Graves referred to the human body as an application where the company is seeing an increasing demand for 3D printing. Indeed, the company’s healthcare segment has performed very well lately. An emerging field in this vast space is bioprinting, or the use of 3D printing technology to print animal and human cells to produce functional three-dimensional tissues.
A major short-term application of bioprinting is in the drug discovery process, while a medium-term application is in the printing of body parts such as soft tissue, bones, and arteries. The long-term goal of many working in this field is to bioprint solid human organs for transplantation.
In May, 3D Systems entered the commercial bio-printing market through its acquisition of Allevi, which sells bio-printers and bio-inks to more than 380 medical and pharmaceutical laboratories in more than 40 countries. Investors can expect Graves to try to grow this business quickly.
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