By and large, 3D Systems (DDD +2.92%) has been funding its various strategic growth initiatives from the cash sitting on its balance sheet -- and in recent quarters, the rate at which it has been deploying this cash for future growth has accelerated considerably.
Between the second and third quarter, 3D Systems' cash balance decreased by 33% to $377.3 million. Since then, 3D Systems acquired Cimatron for $97 million in cash, which, according to my calculation, leaves about $280 million in cash on its balance sheet. In other words, in less than six months, 3D Systems has burned through more than half of its cash reserves -- or roughly the amount it raised from a secondary offering it conducted last May.
Follow the money
By examining 3D Systems' cash flow statements, investors can determine where the company's cash has been going. During the first nine months of 2014, 3D Systems generated $27.9 million in cash from the business's normal operations, spent $261.9 million on investing activities (including $244.3 million for acquisitions), and generated $307.9 million from financing activities, the majority of which came from its secondary share offering.
All told, 3D Systems' net cash position increased by about $71 million during the first nine months of the year, which wouldn't have been possible without the secondary offering. Bear in mind, these figures do not account for the $97 million spent on Cimatron, a deal which management expects will close in the first quarter of next year.
Looking at the bigger picture, 3D Systems historically carries less cash on its balance sheet than it did in the second quarter, when its cash position reached record highs:
Source: SEC filings and author's calculations.
From this perspective, it doesn't appear that 3D Systems is depleting its cash to levels that should concern investors today. What I think should raise concerns for investors is the rate at which 3D Systems has been spending its cash reserves in recent quarters, because it's currently unsustainable without significant improvements in the business's operating performance, additional capital raises, or a major change to an aggressive investment strategy.
Historically, 3D Systems has relied on secondary share offerings to raise additional capital, which has come at the expense of existing shareholders in the form of dilution. In the chart below, the large upticks represent secondary share offerings that 3D Systems has conducted in recent years:
DDD Shares Outstanding data by YCharts.
Although this chart may look painful to existing shareholders, they shouldn't lose sight of the fact that 3D Systems is spending its cash to pursue its market opportunity, aimed at improving its future growth prospects over the long term. While the merits of 3D Systems' hyperaggressive growth strategy have come into question in recent quarters, management continues to maintain that these investments will drive increased operating leverage -- expressed as expanding revenue growth and stabilizing operating expenses -- through 2015 and beyond.
Source: 3D Systems.
Nearing a crescendo?
3D Systems had made it clear on numerous occasions that it's in the middle of a heavy investment phase, and that its operating leverage will be "fully restored" when its pace of investment begins to normalize in late 2015 or early 2016. Judging by 3D Systems' increased cash burn rate over the last six months, and with 2015 just around the corner, perhaps 3D Systems' aggressive investment phase is nearing its completion?
