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XONE > SEC Filings for XONE > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for EXONE CO


14-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in thousands, except per-share amounts)

The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and related notes thereto set forth in this Quarterly Report on Form 10-Q. Certain statements contained in this discussion may constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as a result of a variety of risks and uncertainties, including those described under "Cautionary Statements Regarding Forward Looking Statements" and "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.

The forward looking information set forth in this Quarterly Report on Form 10-Q is provided as of the date of this filing, and, except as required by law, we undertake no duty to update that information.

Overview.

Business and Strategy

We are a global provider of three dimensional ("3D") printing machines and printed products, materials and other services to industrial customers. Our business primarily consists of manufacturing and selling 3D printing machines and printing products to specification for our customers using our in-house 3D printing machines. We offer pre-production collaboration and print products for customers through our seven production service centers ("PSCs"), which are located in the United States, Germany and Japan. We build 3D printing machines at our facilities in the United States and Germany. We also supply the associated materials, including consumables and replacement parts, and other services, including training and technical support, necessary for purchasers of our machines to print products. We believe that our ability to print in a variety of industrial materials, as well as our industry-leading printing capacity (as measured by build box size and printhead speed), uniquely position us to serve the needs of industrial customers.

As an additive manufacturer, we are an early entrant into an evolving manufacturing technology and marketplace. Our strategy has been to position our manufacturing assets, both in terms of our ability and capacity, to prepare for an anticipated increase of customer acceptance of this form of manufacturing. We have made financial support of this growth strategy a priority. We have invested in both our research and development and infrastructure, including capital investment in 3D printing machines, and hiring key personnel.

As our infrastructure grows, we intend to shift our strategic focus to opening additional PSCs in order to broaden our potential global customer base and to expand our 3D printing capability in an increasing variety of industrial materials. Our growth strategy focuses on growing our PSCs in order to print more products for our existing customers and gain new customers. By the end of 2015, we plan to expand our PSC network from the current seven locations to fifteen locations. Like our current PSCs, we plan to locate the additional PSCs in major industrial centers near existing and potential customers.

Our growth strategy includes using our printed products as an introduction of our technology to facilitate 3D printing machine sales. An important part of reaching these goals is to increase our capability to print in a growing number of industrial materials and increase the job box sizes and production speeds (volumetric output) available to our potential customers, which will increase the efficiency and usefulness of our technology. In addition, we use our regional PSCs to educate our potential customers and the marketplace about the advantages of 3D printing.

We also believe expanding the location of our PSCs to high-growth economies and geographic regions that are readily accessible by a significant number of potential customers will help us to increase sales. To better balance our business, we intend to develop our customer base so that revenue is not dependent on any one region-North America, South America and Latin America (collectively the Americas), Europe and Asia. Likewise we intend to balance revenue between our 3D printing machines and 3D printed products, materials and other services.

Our next generation 3D printing machine platforms have achieved the volumetric output rate and quality necessary to serve industrial markets on a production scale. We believe that there is an opportunity to similarly advance the pre-print and post-print processing phases of product materialization to more fully exploit the transformative power of our 3D printing machines and drive growth. These opportunities relate to both direct and indirect part materialization. For direct metal production, we believe that enhancing pre-print processes, notably design optimization tools and suitable print material availability, can greatly accelerate our capture of market share in the near-term. Additionally, enhancements to post-print processing will increase the applications for printed parts. Through our ExOne Materials Application Laboratory ("ExMAL"), we are developing post-print processing technologies to achieve fully dense metal product materialization without the need for infiltration, and we are


exploring technology-sharing partnerships to further this initiative. In indirect production utilizing 3D printed molds and cores, advanced performance casting technologies can be leveraged to increase yields and reduce weight of casted products. To address the market opportunity and fill the execution gap, we have developed a suite of processes, many of which are proprietary, for producing high-quality castings through a process that we call ExCAST. ExCAST provides industry guidance and support through all stages of production, from computer-aided drafting at the design stage, through the 3D materialization of molds and cores, metal casting of the end product and rapid delivery to the end-user.

Finally, we intend to opportunistically identify and, through acquisitions, alliances and/or strategic investment, integrate and advance complementary businesses, technologies and capabilities. Our goal is to expand the functionality of our products, provide access to new customers and markets, and increase our production capacity. We are in active discussions with parties that we believe can contribute to a superior end-to-end manufacturing process.

Results of Operations.

Net Loss Attributable to ExOne

Net loss attributable to ExOne for the quarter ended September 30, 2013, was $224, or $0.02 per basic and diluted share, compared with a net loss attributable to ExOne of $5,932 for the quarter ended September 30, 2012. The decrease in our net loss was principally due to (i) increases in our revenue and gross profit as a result of a significant increase in 3D printing machine and micromachinery sales for 2013 compared to 2012 and (ii) a net decrease in our operating expenses from 2013 compared to 2012. The net decrease in operating expenses included a decrease in selling, general and administrative expenses, principally due to a net reduction in equity-based compensation expense between the periods, offset by higher professional service fees and personnel costs in making the transition from a private company to a publicly traded company and increased selling costs (principally increases in our global sales headcount and commissions for machine sale transactions). Offsetting the reduction in selling, general and administrative expenses were increased research and development spending, mostly associated with (i) our continued efforts in qualifying materials for our 3D printing operations and (ii) investments in enhancing our 3D printing machine and micromachinery technology. Refer to the sections below for further description of these changes.

Net loss attributable to ExOne for the nine months ended September 30, 2013, was $3,258, or $0.28 per basic and diluted share, compared with a net loss attributable to ExOne of $11,070 for the nine months ended September 30, 2012. The decrease in our net loss was principally due to (i) increases in our revenue and gross profit as a result of a significant increase in 3D printing machine and micromachinery sales for 2013 compared to 2012 and (ii) a net decrease in our operating expenses from 2013 compared to 2012. The net decrease in operating expenses included a decrease in selling, general and administrative expenses, principally due to a net reduction in equity-based compensation expense between the periods, offset by higher professional service fees and personnel costs in making the transition from a private company to a publicly traded company and increased selling costs (principally increases in our global sales headcount and commissions for machine sale transactions). Offsetting the reduction in selling, general and administrative expenses were increased research and development spending, mostly associated with (i) our continued efforts in qualifying materials for our 3D printing operations and (ii) investments in enhancing our 3D printing machine and micromachinery technology. Refer to the sections below for further description of these changes.

Revenue

The following table summarizes revenue by product line for each of the quarter
and nine month periods ended September 30:



                                                           Quarter Ended                                    Nine Months Ended
                                                           September 30,                                      September 30,
                                                   2013                     2012                      2013                      2012
3D printing machines and micromachinery    $  7,767        66.8 %    $ 5,183        60.9 %    $ 17,820        61.9 %    $  6,710        42.2 %
3D printed products, materials and other
services                                      3,854        33.2 %      3,332        39.1 %      10,965        38.1 %       9,203        57.8 %

                                           $ 11,621       100.0 %    $ 8,515       100.0 %    $ 28,785       100.0 %    $ 15,913       100.0 %

Revenue for the quarter ended September 30, 2013, was $11,621 compared with revenue of $8,515 for the quarter ended September 30, 2012, an increase of $3,106, or 36.5%. This increase was principally due to a higher volume of sales of 3D printing machines and micromachinery (eight for the quarter ended September 30, 2013 as compared to four for the quarter ended September 30, 2012) as well as 3D printed products, materials and other services based on a continued increase in customer acceptance of our additive manufacturing technologies. Offsetting increases in volume were decreases attributed to sales mix of machines as a higher percentage of machines sold for the 2012 period were S-Max units, our highest price point machine, and net negative foreign currency movements associated with the devaluation of the Japanese Yen.


The following table summarizes the significant components of the change in revenue by product line for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2013:

                                                            3D printed
                                       3D printing          products,
                                      machines and        materials and
                                     micromachinery       other services        Total
  Quarter Ended September 30, 2012   $         5,183     $          3,332      $  8,515
  Change in revenue attributed to:
  Volume                                       5,588                  588         6,176
  Pricing and sales mix                       (2,599 )                 -         (2,599 )
  Foreign currency                              (405 )                (66 )        (471 )

                                               2,584                  522         3,106

  Quarter Ended September 30, 2013   $         7,767     $          3,854      $ 11,621

Revenue for the nine months ended September 30, 2013, was $28,785 compared with revenue of $15,913 for the nine months ended September 30, 2012, an increase of $12,872, or 80.9%. This increase was principally due to a higher volume of sales of 3D printing machines and micromachinery (seventeen for the nine months ended September 30, 2013 as compared to five for the nine months ended September 30, 2012) as well as 3D printed products, materials and other services based on a continued increase in customer acceptance of our additive manufacturing technologies. Offsetting increases in volume were decreases attributed to sales mix of machines as a higher percentage of machines sold for the 2012 period were S-Max units, our highest price point machine, and net negative foreign currency movements associated with the devaluation of the Japanese Yen.

The following table summarizes the significant components of the change in revenue by product line for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2013:

                                                             3D printed
                                         3D printing          products,
                                        machines and        materials and
                                       micromachinery      other services        Total
Nine Months Ended September 30, 2012   $         6,710     $         9,203      $ 15,913
Change in revenue attributed to:
Volume                                          17,804               2,036        19,840
Pricing and sales mix                           (6,289 )                -         (6,289 )
Foreign currency                                  (405 )              (274 )        (679 )

                                                11,110               1,762        12,872

Nine Months Ended September 30, 2013   $        17,820     $        10,965      $ 28,785

The following table summarizes 3D printing machines and micromachinery sold by type for each of the quarter and nine month periods ended September 30 (refer to the "Our Machines and Machine Platforms" section of Part I Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2012, for a description of 3D printing machines and micromachinery by type):

                                     Quarter Ended           Nine Months Ended
                                     September 30,             September 30,
                                   2013         2012        2013            2012
            Machine units sold:
            S-Max                       4           3            10             4
            S-Print                     1          -              2            -
            S-15                        1           1             1             1
            M-Flex                      1          -              1            -
            X1-Lab                      1          -              2            -
            Micromachinery             -           -              1            -

                                        8           4            17             5

Cost of Sales and Gross Profit

Cost of sales for the quarter ended September 30, 2013 was $6,370 compared with cost of sales of $4,959 for the quarter ended September 30, 2012, an increase of $1,411, or 28.5%. Cost of sales as a percentage of revenue was 54.8% for the quarter ended September 30, 2013 compared with 58.2% for the quarter ended September 30, 2012, a decrease of 3.4%.


Gross profit for the quarter ended September 30, 2013 was $5,251 compared with gross profit of $3,556 for the quarter ended September 30, 2012, an increase of $1,695, or 47.7%. Gross profit percentage was 45.2% for the quarter ended September 30, 2013, compared with 41.8% for the quarter ended September 30, 2012, an increase of 3.4%. This increase was principally due to volume increases in sales of 3D printing machines and an increase in productivity for the quarter ended September 30, 2013, compared with September 30, 2012 (see table above).

Cost of sales for the nine months ended September 30, 2013 was $16,515 compared with cost of sales of $10,018 for the nine months ended September 30, 2012, an increase of $6,497, or 64.9%. Cost of sales as a percentage of revenue was 57.4% for the nine months ended September 30, 2013 compared with 63.0% for the nine months ended September 30, 2012, a decrease of 5.6%.

Gross profit for the nine months ended September 30, 2013 was $12,270 compared with gross profit of $5,895 for the nine months ended September 30, 2012, an increase of $6,375, or 108.1%. Gross profit percentage was 42.6% for the nine months ended September 30, 2013, compared with 37.0% for the nine months ended September 30, 2012, an increase of 5.6%. This increase was principally due to volume increases in sales of 3D printing machines and an increase in productivity for the nine months ended September 30, 2013, compared with September 30, 2012 (see table above).

Operating Expenses

The following table summarizes the significant components of operating expenses
for each of the quarter and nine month periods ended September 30:



                                              Quarter Ended          Nine Months Ended
                                              September 30,            September 30,
                                            2013        2012         2013          2012
     Research and development              $ 1,286     $   347     $   3,418     $  1,179
     Selling, general and administrative     3,703       8,879        11,179       14,827

                                           $ 4,989     $ 9,226     $  14,597     $ 16,006

Operating expenses for the quarter ended September 30, 2013, were $4,989 compared with operating expenses of $9,226 for the quarter ended September 30, 2012, a decrease of $4,237, or 45.9%. Operating expenses as a percentage of revenue were 42.9% for the quarter ended September 30, 2013, compared with 108.3% for the quarter ended September 30, 2012, a decrease of 65.4%.

Research and development expenses for the quarter ended September 30, 2013, were $1,286 compared with research and development expenses of $347 for the quarter ended September 30, 2012, an increase of $939, or 270.6%. This increase was primarily due to (i) increased costs associated with our materials qualification activities, including additional research and development headcount and facilities costs associated with our new materials development laboratory in the United States and (ii) continued investment in enhancing our 3D printing machine and micromachinery technology.

Selling, general and administrative expenses for the quarter ended September 30, 2013, were $3,703 compared with selling, general and administrative expenses of $8,879 for the quarter ended September 30, 2012, a decrease of $5,176, or 58.3%. This decrease was principally due to the absence of an equity-based compensation expense of $5,950 during the quarter ended September 30, 2012 associated with the sale of common units by the majority member of the former limited liability company to two executives of the former limited liability company. Offsetting this amount were increases in (i) professional service fees (including legal, audit and other consulting expenses), (ii) personnel costs associated with an increased headcount (including salaries and related benefits) in making the transition from a private company to a publicly traded company and (iii) selling costs (principally increases in our global sales headcount and commissions for machine sale transactions).

Operating expenses for the nine months ended September 30, 2013, were $14,597 compared with operating expenses of $16,006 for the nine months ended September 30, 2012, a decrease of $1,409, or 8.8%. Operating expenses as a percentage of revenue were 50.7% for the nine months ended September 30, 2013, compared with 100.6% for the nine months ended September 30, 2012, a decrease of 49.9%.

Research and development expenses for the nine months ended September 30, 2013, were $3,418 compared with research and development expenses of $1,179 for the nine months ended September 30, 2012, an increase of $2,239 or 189.9%. This increase was primarily due to increased (i) costs associated with our materials qualification activities, including additional research and development headcount and facilities costs associated with our new materials development laboratory in the United States and (ii) continued investment in enhancing our 3D printing and laser machine technology.


Selling, general and administrative expenses for the nine months ended September 30, 2013, were $11,179 compared with selling, general and administrative expenses of $14,827 for the nine months ended September 30, 2012, a decrease of $3,648, or 24.6%. This decrease was principally due to the absence of an equity-based compensation expense of $7,735 during the nine months ended September 30, 2012 associated with the sale of common units by the majority member of the former limited liability company to another member and two executives of the former limited liability company. Offsetting this amount were increases in (i) professional service fees (including legal, audit and other consulting expenses), (ii) personnel costs associated with an increased headcount (including salaries and related benefits) in making the transition from a private company to a publicly traded company and (iii) selling costs (principally increases in our global sales headcount and commissions for machine sale transactions).

Interest Expense

Interest expense for the quarter ended September 30, 2013, was $46 compared with interest expense of $234 for the quarter ended September 30, 2012, a decrease of $188, or 80.3%. This decrease was principally due to a lower average outstanding debt balance for the quarter ended September 30, 2013, as compared to the quarter ended September 30, 2012, mostly due to the absence of advances on the demand note payable to member during the quarter ended September 30, 2013.

Interest expense for the nine months ended September 30, 2013, was $326 compared with interest expense of $542 for the nine months ended September 30, 2012, a decrease of $216, or 39.9%. This decrease was principally due to a lower average outstanding debt balance for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, mostly due to decreased average amounts outstanding on the demand note payable to member.

Other (Income) Expense - Net

Other (income) expense - net for the quarter ended September 30, 2013 was $1 compared with other (income) expense - net of ($47) for the quarter ended September 30, 2012. The change of $48 was mostly due to a decrease in financing activity benefits.

Other (income) expense - net for the nine months ended September 30, 2013 was ($63) compared with other (income) expense - net of ($74) for the nine months ended September 30, 2012. Amounts for both periods consist principally of interest income on cash deposits and other financing activity benefits.

Provision for Income Taxes

The provision (benefit) for income taxes for the quarters ended September 30, 2013 and 2012 was $439 and ($63), respectively, and relate entirely to the taxable income of ExOne GmbH. The effective tax rate for the quarters ended September 30, 2013 and 2012 was 204.2% and (1.1%), respectively. For the quarter ended September 30, 2013, the effective tax rate differs from the U.S. federal statutory rate of 34.0% primarily due to net changes in valuation allowances for the period. For the quarter ended September 30, 2012, the effective tax rate differs from the U.S. federal statutory rate of 34.0% primarily due to the effects of (i) limited liability company losses not subject to tax and (ii) net changes in valuation allowances for the period.

The provision (benefit) for income taxes for the nine months ended September 30, 2013 and 2012 was $530 and $171, respectively, and relate entirely to the taxable income of ExOne GmbH. The effective tax rate for the nine months ended September 30, 2013 and 2012 was 120.5% and 101.6%, respectively. For the nine months ended September 30, 2013, the effective tax rate differs from the U.S. federal statutory rate of 34.0% primarily due to net changes in valuation allowances for the period. For the nine months ended September 30, 2012, the effective tax rate differs from the U.S. federal statutory rate of 34.0% primarily due to the effects of (i) limited liability company losses not subject to tax and (ii) net changes in valuation allowances for the period.

We have provided a valuation allowance for our net deferred tax assets as a result of our inability to generate consistent net operating profits in jurisdictions in which we operate. As such, any benefit from deferred taxes in either quarterly period has been fully offset by changes in the valuation allowance for net deferred tax assets. We continue to assess our future taxable income by jurisdiction based on (i) our recent historical operating results
(ii) the expected timing of reversal of temporary differences (iii) various tax planning strategies that we may be able to enact in future periods (iv) the impact of potential operating changes on our business and (v) our forecast results from operations in future periods based on available information at the end of each reporting period. To the extent that we are able to reach the conclusion that deferred tax assets are realizable based on any combination of the above factors, a reversal of existing valuation allowances may occur.


Noncontrolling Interests

There was no net income attributable to noncontrolling interests for the quarter ended September 30, 2013 following the acquisition of net assets in the related variable interest entities, completed during the quarter ended March 31, 2013. Net income attributable to noncontrolling interests was $138 for the quarter ended September 30, 2012.

Net income attributable to noncontrolling interests for the nine months ended September 30, 2013, was $138 compared with net income attributable to noncontrolling interests of $320 for the nine months ended September 30, 2012, a decrease of $182, or 56.9%. This decrease was principally the result of the acquisition of net assets of the variable interest entities referenced above.

Other Financial Information

We define Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) as net income (loss) attributable to ExOne (as calculated under accounting principles generally accepted in the United States ("GAAP")) plus net income (loss) of noncontrolling interests, provision (benefit) for income taxes, interest expense, depreciation, equity-based compensation associated with our 2013 Equity Incentive Plan and other (income) expense - net. Disclosure in this Quarterly Report on Form 10-Q of Adjusted EBITDA, which is a non-GAAP financial measure, as defined under the rules of the U.S. Securities and Exchange Commission ("SEC"), is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to net income (loss) attributable to ExOne or any other performance measure derived in accordance with GAAP. Our . . .

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