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3D Earnings Flounder as Lawsuits Distract Managers

3D Earnings Flounder as Lawsuits Distract Managers By SHELLY GARCIA Senior Reporter 3D Systems Corp. built its business offering manufacturers ways to make three-dimensional models and prototypes quickly and inexpensively. A financial model for the Valencia-based company is proving to be somewhat more elusive. Despite several recent acquisitions to bolster its product offerings and technical expertise, 3D’s earnings have slipped and its revenue growth has stalled. Like many companies whose fortunes are tied to industrial and corporate growth, 3D has been hit by a virtual shutdown in capital spending across every industry sector. The company has also been embroiled in several lawsuits that drained management resources and curtailed growth. These factors came to bear in the first quarter of 2002. Excluding the proceeds of a legal settlement and without benefit of an acquisition made last year, 3D would have reported a loss of $3.5 million or $.27 per diluted share and a 28-percent decline in revenues for its most recent quarter ended March 31. 3D heralded the problems early in April, revising its first-quarter guidance downward, a move that led A.G. Edwards & Sons Inc. to downgrade the company’s stock to a “sell.” “We are not pleased with first-quarter results,” said Brian K. Service, president and chief operating officer of 3D, in announcing first-quarter results. (3D executives declined to comment for this story.) “We are in the process of recalibrating our cost structure in line with current market conditions, including a reduction of approximately 10 percent of our work force.” As of the end of 2001, 3D employed 580 workers. For the first quarter of 2002, 3D reported net income of $8.5 million or $.58 per diluted share on revenues of $27.2 million. That compares with earnings of $1.4 million or $.11 per share on revenues of $27.9 million in the comparable period last year. But the results include a pre-tax benefit of $18.5 million due to the settlement of a claim with a former business affiliate. The company’s revenues, too, would have shown a decline if not for the contribution of DTM Corp., a company acquired in August 2001. “The majority of the products the company sells are capital equipment and, post-Sept. 11, capital spending plans were largely put on hold,” said Jay R. Harris, a security analyst and president of Goldsmith & Harris in New York. “What you saw in the first quarter was the consequence of that kind of corporate-America, corporate-Europe decision-making process.” Founded in 1986, 3D makes solid imaging products and systems used to create prototypes and concept models. Its systems, allowing manufacturers to “print” three-dimensional models directly from computer-assisted designs, eliminate the need for tooling, shortening the length of time it takes to bring a product to market and reducing the expense. Whereas injection molding and other traditional techniques can be amortized over long periods of production and sales, 3D’s systems, ranging from $50,000 to $800,000, have had particular appeal in lower volume productions when designs are likely to change every few years. And 3D, which saw revenues grow to more than $120 million from about $90.3 million in 1997, has carved out the No. 1 position in its niche. But last year, the company attracted the interest of the Justice Department when it announced plans to acquire DTM, a $45 million maker of three-dimensional prototypes using laser technology. The DOJ challenged the acquisition, and 3D executives were engaged in defending their merger until a resolution was reached in February. About the same time, a decision by 3D to terminate a development agreement with Vantico Inc. led to a challenge that was not settled until March. “A lot of senior people and marketing managers spent long hours testifying before the Justice Department,” said Harris, “and they basically lost control of the marketplace.” In recent months, 3D’s stock price has fallen into the $13 range from a 52-week high of $18.52. On Friday, May 24, the stock closed at $13.11

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