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2: EX-4.1 Instrument Defining the Rights of Security Holders HTML 118K
3: EX-10.3 Material Contract HTML 110K
4: EX-10.4 Material Contract HTML 121K
5: EX-10.5 Material Contract HTML 31K
6: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
7: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
9: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
16: R1 Document And Entity Information HTML 73K
17: R2 Condensed Consolidated Balance Sheets HTML 130K
18: R3 Condensed Consolidated Balance Sheets HTML 32K
(Parenthetical)
19: R4 Condensed Consolidated Statements of Operations HTML 88K
20: R5 Condensed Consolidated Statements of Comprehensive HTML 56K
Loss
21: R6 Condensed Consolidated Statements of Cash Flows HTML 128K
22: R7 Condensed Consolidated Statements of Cash Flows HTML 26K
(Parenthetical)
23: R8 Condensed Consolidated Statements of Stockholders' HTML 74K
Equity
24: R9 Basis of Presentation HTML 34K
25: R10 Revenue HTML 41K
26: R11 Leases HTML 147K
27: R12 Inventories HTML 31K
28: R13 Intangible Assets HTML 55K
29: R14 Accrued And Other Liabilities HTML 43K
30: R15 Borrowings HTML 27K
31: R16 Hedging Activities and Financial Instruments HTML 34K
32: R17 Inventory Financing Agreements HTML 25K
33: R18 Net Loss Per Share HTML 37K
34: R19 Fair Value Measurements HTML 49K
35: R20 Income Taxes HTML 28K
36: R21 Commitments and Contingencies HTML 36K
37: R22 Noncontrolling Interests HTML 23K
38: R23 Exit Activity Costs HTML 45K
39: R24 Subsequent Events HTML 23K
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(Exact name of Registrant as specified in its Charter)
__________________________
iDelaware
i95-4431352
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i333 Three D Systems Circle
iRock Hill,
iSouth Carolinai29730
(Address of Principal Executive Offices and Zip Code)
(Registrant’s Telephone Number, Including Area Code): (i803)
i326-3900
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name
of each exchange on which registered
iCommon Stock, par value $0.001 per share
iDDD
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes i☐
No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares of Common Stock, par value $0.001 per share, outstanding as of November 2, 2020: i124,141,935
Accounts
receivable, net of reserves — $i8,243 and $i8,762
i98,755
i109,408
Inventories
i126,882
i111,106
Prepaid
expenses and other current assets
i34,671
i18,991
Total
current assets
i335,572
i373,170
Property
and equipment, net
i81,433
i92,940
Intangible
assets, net
i36,888
i48,338
Goodwill
i179,536
i223,176
Right
of use assets
i44,366
i36,890
Deferred
income tax asset
i6,502
i5,408
Other
assets, net
i22,985
i27,390
Total
assets
$
i707,282
$
i807,312
LIABILITIES
AND EQUITY
Current liabilities:
Current portion of long-term debt
$
i1,758
$
i2,506
Current
right of use liabilities
i9,431
i9,569
Accounts
payable
i41,674
i49,851
Accrued
and other liabilities
i66,749
i63,095
Customer
deposits
i4,463
i5,712
Deferred
revenue
i36,353
i32,231
Total
current liabilities
i160,428
i162,964
Long-term
debt, net of deferred financing costs
i19,804
i45,215
Long-term
right of use liabilities
i44,521
i35,402
Deferred
income tax liability
i5,121
i4,027
Other
liabilities
i48,890
i45,808
Total
liabilities
i278,764
i293,416
Commitments
and contingencies (Note 13)
i
i
Stockholders’
equity:
Common stock, $ii0.001/
par value, authorized ii220,000/ shares;
issued i127,664 and i121,266
i128
i120
Additional
paid-in capital
i1,404,265
i1,371,564
Treasury
stock, at cost — i3,456 shares and i3,670 shares
(i22,590)
(i18,769)
Accumulated
deficit
(i923,473)
(i793,709)
Accumulated
other comprehensive loss
(i29,812)
(i37,047)
Total
3D Systems Corporation stockholders' equity
i428,518
i522,159
Noncontrolling
interests
i—
(i8,263)
Total
stockholders’ equity
i428,518
i513,896
Total
liabilities, redeemable noncontrolling interests and stockholders’ equity
$
i707,282
$
i807,312
See
accompanying notes to condensed consolidated financial statements.
3
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTSOFOPERATIONS
(Unaudited)
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2020
2019
2020
2019
Revenue:
Products
$
i77,267
$
i94,506
$
i217,572
$
i280,611
Services
i57,880
i60,766
i164,340
i183,913
Total
revenue
i135,147
i155,272
i381,912
i464,524
Cost
of sales:
Products
i49,010
i58,044
i150,395
i166,809
Services
i27,510
i29,947
i80,591
i91,430
Total
cost of sales
i76,520
i87,991
i230,986
i258,239
Gross
profit
i58,627
i67,281
i150,926
i206,285
Operating
expenses:
Selling, general and administrative
i59,065
i58,275
i167,213
i195,036
Research
and development
i18,866
i20,940
i55,107
i63,654
Impairment
of goodwill
i48,300
i—
i48,300
i—
Total
operating expenses
i126,231
i79,215
i270,620
i258,690
Loss
from operations
(i67,604)
(i11,934)
(i119,694)
(i52,405)
Interest
and other (expense) income, net
(i2,419)
(i2,818)
(i7,598)
(i6,774)
Loss
before income taxes
(i70,023)
(i14,752)
(i127,292)
(i59,179)
Provision
for income taxes
(i2,866)
(i2,010)
(i2,472)
(i5,793)
Net
loss
(i72,889)
(i16,762)
(i129,764)
(i64,972)
Less:
net income attributable to noncontrolling interests
i—
i81
i—
i195
Net
loss attributable to 3D Systems Corporation
$
(i72,889)
$
(i16,843)
$
(i129,764)
$
(i65,167)
Net
loss per share available to 3D Systems Corporation common stockholders - basic and diluted
$
(i0.61)
$
(i0.15)
$
(i1.12)
$
(i0.57)
See
accompanying notes to condensed consolidated financial statements.
4
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVELOSS
(Unaudited)
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2020
2019
2020
2019
Net loss
$
(i72,889)
$
(i16,762)
$
(i129,764)
$
(i64,972)
Other
comprehensive income (loss), net of taxes:
Pension adjustments
(i47)
i91
i130
i207
Derivative
financial instruments
i11
(i798)
(i413)
(i798)
Foreign
currency translation
i11,214
(i8,101)
i8,079
(i6,854)
Total
other comprehensive income (loss), net of taxes
i11,178
(i8,808)
i7,796
(i7,445)
Total
comprehensive loss, net of taxes
(i61,711)
(i25,570)
(i121,968)
(i72,417)
Comprehensive
income attributable to noncontrolling interests
i—
i60
i—
i128
Comprehensive
loss attributable to 3D Systems Corporation
$
(i61,711)
$
(i25,630)
$
(i121,968)
$
(i72,545)
See
accompanying notes to condensed consolidated financial statements.
5
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
Months Ended September 30,
(in thousands)
2020
2019
Cash flows from operating activities:
Net loss
$
(i129,764)
$
(i64,972)
Adjustments
to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization
i34,830
i39,305
Stock-based
compensation
i16,621
i19,221
Provision
for inventory obsolescence and revaluation
i10,894
i—
Loss
on hedge accounting de-designation
i1,235
i—
Provision
for bad debts
i1,039
i1,152
Loss
on the disposition of property, equipment and other assets
i434
i1,620
Provision
for deferred income taxes
i—
(i1,346)
Impairment
of goodwill and assets
i54,072
i1,728
Changes
in operating accounts:
Accounts receivable
i12,668
i12,290
Inventories
(i23,987)
i6,481
Prepaid
expenses and other current assets
(i15,376)
(i3,122)
Accounts
payable
(i9,166)
(i12,885)
Deferred
revenue and customer deposits
i2,714
i4,491
Accrued
and other current liabilities
i6,309
i1,199
All
other operating activities
i4,828
i4,922
Net
cash (used in) provided by operating activities
(i32,649)
i10,084
Cash
flows from investing activities:
Purchases of property and equipment
(i11,015)
(i18,265)
Proceeds
from sale of assets
i552
i1,620
Purchase
of noncontrolling interest
(i12,500)
(i2,500)
Other
investing activities
i504
(i1,744)
Net
cash used in investing activities
(i22,459)
(i20,889)
Cash
flows from financing activities:
Proceeds from revolving credit facilities
i20,000
i—
Payments
on revolving credit facilities
(i20,000)
i—
Proceeds
from borrowings/long-term debt
i—
i100,000
Repayment
of borrowings/long-term debt
(i26,547)
(i66,013)
Proceeds
from issuance of common stock
i25,003
i—
Proceeds
from inventory financing agreements
i2,509
i—
Payments
related to net-share settlement of stock-based compensation
(i5,034)
(i3,029)
Other
financing activities
i296
(i1,125)
Net
cash (used in) provided by financing activities
(i3,773)
i29,833
Effect
of exchange rate changes on cash, cash equivalents and restricted cash
i526
(i1,400)
Net
(decrease) increase in cash, cash equivalents and restricted cash
(i58,355)
i17,628
Cash,
cash equivalents and restricted cash at the beginning of the period (a)
i134,617
i110,919
Cash,
cash equivalents and restricted cash at the end of the period (a)
$
i76,262
$
i128,547
Supplemental
cash flow information
Cash interest payments
$
i1,836
$
i3,020
Cash
income tax payments, net
$
i2,861
$
i8,984
Transfer
of equipment from inventory to property and equipment, net (b)
$
i671
$
i2,861
Noncash
financing activity
Purchase of noncontrolling interest (c)
$
i—
$
(i11,000)
(a)The
amounts for cash and cash equivalents shown above include restricted cash of $i998 and $i931 as of September 30, 2020 and 2019,
respectively, and $i952 and $i921 as of December 31, 2019, and 2018, respectively, which were included in Other assets, net, in
the condensed consolidated balance sheets.
(b)Inventory is transferred from inventory to property and equipment at cost when we require additional machines for training or demonstration or for placement into on demand manufacturing services locations.
(c)Purchase of noncontrolling interest to be paid in installments over a ifour-year period recorded to Accrued and other liabilities and Other liabilities on the condensed consolidated balance sheets.
See
accompanying notes to condensed consolidated financial statements.
6
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See
accompanying notes to condensed consolidated financial statements.
8
3D SYSTEMS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
(1) Basis
of Presentation
i
The accompanying unaudited condensed consolidated financial statements include the accounts of 3D Systems Corporation and all majority-owned subsidiaries and entities in which a controlling interest is maintained (“3D Systems” or the “Company” or “we” or “us”). All significant intercompany transactions and balances have been eliminated in consolidation. A non-controlling interest in a subsidiary is considered
an ownership interest in a majority-owned subsidiary that is not attributable to the parent. We include noncontrolling interests as a component of total equity in the condensed consolidated balance sheets and the net income attributable to noncontrolling interests are presented as an adjustment from net loss used to arrive at net loss attributable to 3D Systems Corporation in the condensed consolidated statements of operations and comprehensive loss. As of March 31, 2020, there were no longer any non-controlling interests held by us.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they
do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). Our annual reporting period is the calendar year.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the quarter and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year. The preparation of
financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates and assumptions.
Our operations in North America and South America (collectively referred to as "Americas"), Europe and the Middle East (collectively referred to as "EMEA") and the Asia Pacific region ("APAC") expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic. While the COVID-19 pandemic has impacted the Company’s reported results for the quarter and nine months ended September 30, 2020, we are unable to predict the longer-term impact that the pandemic may have on our
business, results of operations, financial position or cash flows. The extent to which our operations may be impacted by the dynamic nature of the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the financial markets remain unknown.
As of September 30, 2020, we experienced a triggering event due to a drop in our stock price, which ultimately had been negatively impacted by the business environment as a result of the COVID-19 pandemic, and performed a quantitative analysis
for potential impairment of our goodwill and long-lived asset balances. Based on available information and analysis as of September 30, 2020, we determined the carrying value of the EMEA reporting unit exceeded its fair value and recorded a non-cash goodwill impairment charge of $i48,300. We determined the fair value of the Americas and APAC reporting units exceeded their carrying values and the carrying value of our long-lived assets is recoverable for all reporting units.
Fair
value was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and a market approach. The valuation methodology and underlying financial information included in the Company's determination of fair value required significant judgments by management. The principal assumptions used in the Company's discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal
assumption included an estimate for a control premium.
All dollar amounts presented in the accompanying footnotes are presented in thousands, except for per share information.
/
9
i
Recently
Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), as revised in July 2018, which provides guidance regarding the measurement of credit losses for financial assets and certain other instruments that are not accounted for at fair value through net income, including trade and other receivables, debt securities, net investment in sales type and direct financing leases, and off-balance sheet credit exposures. The new guidance requires companies to replace the current incurred loss impairment methodology with a methodology that measures all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable
forecasts. The Company adopted this guidance during the first quarter of 2020. The implementation did not have a material effect on our financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any
tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The Company adopted this guidance during the first quarter of 2020. The implementation did not have a material effect on our financial position or results of operations. We followed this guidance during our goodwill impairment analysis this quarter.
Accounting Standards Issued But Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by eliminating some exceptions to the general approach in Accounting Standards Codification
740, Income Taxes. It also clarifies certain aspects of the existing guidance to promote more consistent application. This standard is effective for calendar-year public business entities in 2021 and interim periods within that year, and early adoption is permitted. We are currently not planning to early adopt and are in the process of evaluating the impact the new standard will have on our consolidated financial statements.
No other new accounting pronouncements, issued or effective during 2020, have had or are expected to have a significant impact on our consolidated financial statements.
i
(2) Revenue
We account for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers.”
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied.
At September 30, 2020, we had $i104,758 of outstanding performance obligations, comprised of deferred revenue, customer order backlog and customer deposits. We expect to recognize approximately i94
percent of our remaining performance obligations as revenue within the next twelve months, an additional i2 percent by the end of 2021 and the remaining balance thereafter.
i
Revenue
Recognition
Revenue is recognized when control of the promised products or services is transferred to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Many of our contracts with customers include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative stand-alone selling price (“SSP”). Revenue is recognized net of allowances for returns and any taxes collected from customers,
which are subsequently remitted to governmental authorities. The amount of consideration received and revenue recognized may vary based on changes in marketing incentive programs offered to our customers. Our marketing incentive programs take many forms, including volume discounts, trade-in allowances, rebates and other discounts.
/
10
A majority of our revenue is recognized at the point in time when products are shipped or services are delivered to customers. Please see below for further discussion.
Hardware
and Materials
Revenue from hardware and material sales is recognized when control has transferred to the customer, which typically occurs when the goods have been shipped to the customer, risk of loss has transferred to the customer and we have a present right to payment. In limited circumstances, when printer or other hardware sales include substantive customer acceptance provisions, revenue is recognized either when customer acceptance has been obtained, customer acceptance provisions have lapsed, or we have objective evidence that the criteria specified in the customer acceptance provisions have been satisfied.
Printers and certain other products include a warranty under which we provide maintenance for periods up to ione
year. For these initial product warranties, estimated costs are accrued at the time of the sale of the product. These cost estimates are established using historical information based on the nature, frequency and average cost of claims for each type of printer or other product as well as assumptions about future activity and events. Revisions to expense accruals are made as necessary based on changes in these historical and future factors.
Software
We also market and sell software tools that enable our customers to capture and customize content using our printers, design optimization and simulation software, and reverse engineering and inspection software. Software does not require significant modification or customization and the license provides the customer with a right to use the software as it
exists when made available. Revenue from these software licenses is recognized either upon delivery of the product or of a key code which allows the customer to download the software. Customers may purchase post-sale support. Generally, the first year is included but subsequent years are optional. This optional support is considered a separate obligation from the software and is deferred at the time of sale and subsequently recognized ratably over future periods.
Services
We offer training, installation and non-contract maintenance services for our products. Additionally, we offer maintenance contracts customers can purchase
at their option. For maintenance contracts, revenue is deferred at the time of sale based on the stand-alone selling prices of these services and costs are expensed as incurred. Deferred revenue is recognized ratably over the term of the maintenance period on a straight-line basis. Revenue from training, installation and non-contract maintenance services is recognized at the time of performance of the service.
On demand manufacturing and healthcare service sales are included within services revenue and revenue is recognized upon shipment or delivery of the parts or performance of the service, based on the terms of the arrangement.
Terms
of Sale
Shipping and handling activities are treated as fulfillment costs rather than as an additional promised service. We accrue the costs of shipping and handling when the related revenue is recognized. Our incurred costs associated with shipping and handling are included in product cost of sales.
Credit is extended, and creditworthiness is determined, based on an evaluation of each customer’s financial condition. New customers are generally required to complete a credit application and provide references and bank information to facilitate an analysis of creditworthiness. Customers with a favorable profile may receive credit terms that differ from our general credit terms. Creditworthiness is considered, among other things, in evaluating our relationship with customers with past due balances.
Our
terms of sale generally provide payment terms that are customary in the countries where we transact business. To reduce credit risk in connection with certain sales, we may, depending upon the circumstances, require significant deposits or payment in full prior to shipment. For maintenance services, we either bill customers on a time-and-materials basis or sell maintenance contracts that provide for payment in advance on either an annual or other periodic basis.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. For such arrangements, we allocate
revenues to each performance obligation based on its relative SSP.
11
Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, we estimate SSP using historical transaction data. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when the product or service is not sold separately, we determine the SSP using information that may include market conditions
and other observable inputs.
In some circumstances, we have more than one SSP for individual products and services due to the stratification of those products and services by customers, geographic region or other factors. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
The determination of SSP is an ongoing process and information is reviewed regularly in order to ensure SSP reflects the most current information or trends.
The nature of our marketing incentives may lead to consideration that is variable. Judgment is exercised at contract inception to determine
the most likely outcome of the contract and resulting transaction price. Ongoing assessments are performed to determine if updates are needed to the original estimates.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer deposits and deferred revenues (contract liabilities) on the condensed consolidated balance sheets. Timing
of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized at the time of invoicing, or unbilled receivables when revenue is recognized prior to invoicing. For most of our contracts, customers are invoiced when products are shipped or when services are performed resulting in billed accounts receivables for the remainder of the owed contract price. Unbilled receivables generally result from items being shipped where the customer has not been charged, but for which revenue had been recognized. In our on demand manufacturing business, customers may be required to pay in full before work begins on their orders, resulting in customer deposits. We typically bill in advance for installation, training and maintenance contracts
as well as extended warranties, resulting in deferred revenue. Changes in contract asset and liability balances were not materially impacted by any other factors for the period ended September 30, 2020.
We generally expense sales commissions when incurred because the amortization period would be one year or less. These costs are recorded within selling, general and administrative expenses.
ii
(3) Leases
We have various lease agreements for our facilities, equipment and vehicles with remaining lease terms ranging from one to isixteen years. We determine if an arrangement contains a lease at inception. Some leases include the options to purchase, terminate or extend for one or more years; these options are included in the right-of-use (“ROU”) asset and liability lease term when it is reasonably certain an option will be exercised. Our leases do not contain any material residual value guarantees or material restrictive
covenants.
Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of the future lease payments.
Certain of our leases include variable costs. Variable costs include non-lease components that were incurred based upon actual terms rather than contractually fixed amounts. In addition, variable costs are incurred for lease payments that are indexed to a change in rate or index. Because the ROU asset recorded on the balance sheet was determined based upon factors considered at the commencement date, subsequent changes in the rate or index that were not contemplated in the ROU asset balances recorded on the balance sheet result in variable expenses being incurred when paid during
the lease term.
//
12
i
Components of lease cost (income) were as follows:
On
September 1, 2020, we closed itwo facilities in connection with our restructuring plan. These facilities occupied leased office space that terminates in 2024. In conjunction with these closings, we recorded impairment charges totaling $i1,627
related to our ROU assets and impairment charges totaling $i1,953 related to leasehold improvements.
ii
Our
future minimum lease payments as of September 30, 2020 under operating lease and finance leases, with initial or remaining lease terms in excess of one year, were as follows:
We
record a reserve to the carrying value of our inventory to reflect the rapid technological change in our industry that impacts the market for our products. The inventory reserve was $i18,222 and $i12,812
as of September 30, 2020 and December 31, 2019, respectively.
In June 2020, as part of our assessment of prospective sales and evaluation of inventory, we determined the end-of-life for certain product lines. The end-of-life determination for these products reflects management's plans to focus our resources that are better aligned with our new strategic focus, as further discussed in Note 15. As a result, for the nine months ended September 30, 2020, we recorded a charge of $i10,894
to products costs of sales, primarily attributable to inventory, accessories and inventory commitments for these products. We have ceased production for these items.
(a)
Change in gross carrying amounts consists primarily of charges for license and patent costs and foreign currency translation.
/
Amortization expense related to intangible assets was $i4,260 and $i12,806
for the quarter and nine months ended September 30, 2020, respectively, compared to $i5,287 and $i16,525
for the quarter and nine months ended September 30, 2019, respectively.
We hold a i5-year $i100,000
senior secured term loan facility (the “Term Facility”) and a i5-year $i100,000 senior secured revolving credit facility (the “Revolving Facility” and,
together with the Term Facility, the “Senior Credit Facility”) to support working capital and general corporate purposes. The Senior Credit Facility is guaranteed by certain of our subsidiaries. The guarantors guarantee, among other things, all our obligations and each other guarantor's obligations under the Senior Credit Facility. From time to time, we may be required to cause additional domestic subsidiaries to become guarantors under the Senior Credit Facility. The Senior Credit Facility is scheduled to mature on February 26, 2024, at which time all amounts outstanding thereunder will be due and payable. However, the maturity date of the Revolving Facility may be extended at our election with the consent of the lenders subject to
the terms set forth in the Senior Credit Facility. The Senior Credit Facility contains customary covenants, some of which require us to maintain certain financial ratios that determine the amounts available and terms of borrowings and events of default. We were in compliance with all covenants at September 30, 2020.
The payment of dividends on our common stock is restricted under provisions of the Senior Credit Facility, which limits the amount of cash dividends that we may pay in any one fiscal year to $i30,000.
We currently do not pay, and have not paid, any dividends on our common stock, and currently intend to retain any future earnings for use in our business.
Borrowings under the Senior Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. At September 30, 2020, our floating interest rate was i1.9%. Subject to certain terms and conditions contained
in the Revolving Facility, we have the right to request up to ifour increases to the amount of the Revolving Facility in an aggregate amount not to exceed $i100,000.
As of September 30, 2020, there was $i10,000 of outstanding letters of credit and $i30,601 of available borrowings under the Revolving Facility.
We
had a balance of $i21,685 outstanding on the Term Facility at September 30, 2020, with $i1,758 in principal payments due in the next twelve months.
/
15
As
a result of the Term Facility, we have exposure to floating interest rates. To manage interest expense, we entered into a floating to fixed interest rate swap to reduce exposure to changes in floating interest rates on the Term Facility. The interest rate swap at September 30, 2020 had a notional value of $i15,000 and will expire on February 26, 2024, concurrent with the Term Facility. The notional value will decline over the term of the interest rate swap as amortization payments
reduce the principal amount of the Term Facility. As a result of the interest rate swap, the percentage of total principal debt (excluding capital leases) that is subject to floating interest rates is approximately i31%. Due to an amendment to the swap on June 30, 2020, the swap is no longer designated as a cash flow hedge for accounting treatment purposes. See Note 8 for additional information.
On
October 9, 2020, we amended the Senior Credit Facility eliminating the $i50,000 cap on the sale, transfer or lease of assets, in one or more transactions in any fiscal year, while the $i200,000
cap during the life of the agreement remained intact. In addition we modified the terms of LIBOR replacement when that benchmark is no longer available.
On
July 8, 2019, we entered into a $i50,000 interest rate swap contract, designated as a cash flow hedge, to minimize the risk associated with the variability of cash flows in interest payments from variable-rate debt due to fluctuations in the one-month USD-LIBOR, subject to a i0%
floor, through February 26, 2024. Changes in the interest rate swap are expected to offset the changes in cash flows attributable to fluctuations of the one-month USD-LIBOR for the interest payments associated with our variable-rate debt.
On June 30, 2020, we executed an amendment to the swap which reduced the notional amount to $i15,000 and resulted in the de-designation as a cash flow hedge.
The reduction required a mark-to-market settlement of $i1,253 paid in July 2020. Amounts previously recognized in Accumulated Other Comprehensive Loss ("AOCL") of $ii1,235/
were released and reclassified into “Interest and other expense, net” on the accompanying condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2020. Subsequent to June 2020, changes in the swap’s fair value are recognized currently in earnings and included in the line item “Interest and other expense, net” and the remaining $i731 in AOCL as of September
30, 2020 will be amortized to “Interest and other expense, net” when those future cash flows are expected to occur.
Except
as noted above, amounts released from AOCL and reclassified into “Interest and other expense, net” did not have a material impact on our condensed consolidated statements of operations and comprehensive loss for the quarters and nine months ended September 30, 2020 and 2019. The net amount of AOCL expected to be reclassified to losses in the next 12 months is approximately $i59.
We conduct business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, we are subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, we endeavor to match assets and liabilities in the same currency on our balance sheet and those of our subsidiaries in order to reduce these risks. When appropriate, we enter into foreign currency contracts
to hedge exposures arising from those transactions. We have elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, “Derivatives and Hedging,” and therefore, all gains and losses (realized or unrealized) are recognized in “Interest and other expense, net” in the condensed consolidated statements of operations and comprehensive loss. Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid expenses and other current assets or in accrued liabilities on the condensed consolidated balance sheets.
We translate foreign currency balance sheets from each international businesses’ functional currency (generally the respective local currency) to U.S. dollars at end-of-period exchange rates, and statements of earnings at average exchange rates for each period. The resulting foreign currency translation adjustments are a component of other comprehensive income (loss). We do not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations' results into U.S. dollars.
i
(9) Inventory
Financing Agreements
On December 1, 2018 and January 17, 2020, we entered into a Manufacturing Services Agreement and Amendment One to Manufacturing Services Agreement (together, the "Agreement"), with an assembling manufacturer to produce products on behalf of 3D Systems Corporation. During the quarter ended March 31, 2020, as part of the Agreement, we sold $i12,100
of inventory to the assembling manufacturer that we have an obligation to repurchase. At September 30, 2020, our obligation to repurchase inventory, included in "Accrued and other liabilities" on our condensed consolidated balance sheets, was $i712, relating to the initial sale of inventory to the assembly manufacturer and adjusted for transactions. The inventory sold consisted of raw materials, packaging materials and consumables representing stock on hand related to certain product families for which the manufacturing has been outsourced to the assembling manufacturer.
Although the assembling manufacturer holds legal title, we account for the inventory similar to a product financing arrangement; therefore, the inventories sold to the assembling manufacturer will continue to be included in "Inventories" on our condensed consolidated balance sheets until processed into finished goods and sold back to us. At September 30, 2020, inventory held at assemblers was $i4,270.
/
Additionally,
as part of the Agreement, we have a commitment to purchase certain materials and supplies that the assembling manufacturer purchased from third parties. At September 30, 2020, we had a commitment of $i3,004 with the assembling manufacturer.
i
(10) Net
Loss Per Share
We compute basic loss per share using net loss attributable to 3D Systems Corporation and the weighted average number of common shares outstanding during the applicable period. Diluted loss per share incorporates the additional shares issuable upon assumed exercise of stock options and the release of restricted stock and restricted stock units, except in such case when their inclusion would be anti-dilutive.
i
Quarter
Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share amounts)
2020
2019
2020
2019
Numerator for basic and diluted net loss per share:
Net loss attributable to 3D Systems Corporation
$
(i72,889)
$
(i16,843)
$
(i129,764)
$
(i65,167)
Denominator
for basic and diluted net loss per share:
Weighted average shares
i118,527
i114,053
i116,216
i113,587
Net
loss per share - basic and diluted
$
(i0.61)
$
(i0.15)
$
(i1.12)
$
(i0.57)
/
On
August 5, 2020, we entered into an Equity Distribution Agreement for an At-The-Market equity offering program (“ATM Program”) where we may issue and sell, from time to time, shares of our common stock. Our ATM Program allows for an aggregate gross sales price of up to a total of $i150,000, depending upon market conditions and our liquidity requirements, through Truist Securities, Inc. and HSBC Securities (USA) Inc. For the three months ended September
30, 2020, we sold i4,616 shares of our common stock under our ATM Program for net proceeds of $i24,965,
net of $i548 in fees, commissions and other costs. As of September 30, 2020, we had $i124,487
in availability remaining under the ATM Program.
For the quarters and nine months ended September 30, 2020 and 2019, the effect of dilutive securities, including non-vested stock options and restricted stock awards/units, was excluded from the denominator for the calculation of diluted net loss per share because we recognized a net loss for the period and their inclusion would be anti-dilutive. Dilutive securities excluded for the quarter and nine months ended September 30, 2020 were ii4,453/
compared to ii5,786/ for the quarter and nine months ended September
30, 2019, respectively.
/
17
i
(11) Fair Value Measurements
ASC
820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The above standard applies to cash equivalents, Israeli severance funds and derivatives. We utilize the market approach to measure fair value for financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
i
Assets
and liabilities measured at fair value on a recurring basis are summarized below:
(a)Cash
equivalents include funds held in money market instruments and are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments and are included in cash and cash equivalents in the consolidated balance sheet.
(b)We partially fund a liability for our Israeli severance requirement through monthly deposits into fund accounts, the value of these contributions is recorded to non-current assets on the consolidated balance sheet.
(c)Derivative instruments are reported based on published market prices for similar assets or are estimated based on published market prices for similar assets or are estimated based on observable inputs such as interest rates, yield curves, credit risks, spot and future commodity prices and spot and future exchange rates. See Note 8 for additional information
on our derivative financial instruments.
/
We did not have any transfers of assets and liabilities between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy during the quarter and nine months ended September 30, 2020.
In addition to the assets and liabilities included in the above table, certain of our assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes goodwill and other intangible assets measured at fair value for impairment assessment, in addition to redeemable noncontrolling interests. For additional
discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Estimates” in the 2019 Form 10-K.
/
18
i
(12) Income
Taxes
We maintain the exception under ASC 740-270-30-36(b), "Accounting for Income Taxes", for jurisdictions that do not have reliable estimates of ordinary income due to the volatility in the industry. Based on the increased global financial uncertainty due to the COVID-19 pandemic and continued volatility in the industry, we have continued to use a year-to-date methodology in determining the quarterly effective tax rate for the quarter and nine months ended September 30, 2020.
For the quarter and nine months ended September 30, 2020, the Company's effective tax rate was (i4.1)%
and (i1.9)%, respectively. For the quarter and nine months ended September 30, 2019, the Company's effective tax rate was (i13.6)%
and (i9.8)%, respectively. The difference between the statutory tax rate and the effective tax rate for the quarter and nine months ended September 30, 2020 is comprised of the foreign rate differential between the U.S. tax rate and foreign tax rates, impairment of non-deductible goodwill, and the change in U.S. tax law allowing for the carryback of certain U.S. net operating losses ("NOLs") as explained in the subsequent paragraph, and the presence of a full valuation allowance in various
jurisdictions. The effective tax rate for the quarter and nine months ended September 30, 2019 differs from the statutory tax rate due to withholding tax expense, reduction of a liability for uncertain tax positions, the foreign rate differential between the U.S. tax rate and foreign tax rates, and the presence of a full valuation allowance in various jurisdictions.
In response to the global pandemic resulting from COVID-19, the U.S. government enacted tax legislation on March 27, 2020 under the Coronavirus Aid Relief, and Economic Security Act ("CARES Act"). This legislation allows us to carryback NOLs generated in the 2018 and 2019 tax years up to five years. A tax receivable was recorded during the first quarter for the anticipated carryback in the amount of $i8.9
million. We also recorded the associated tax benefit of $i3.2 million, which is net of recorded uncertain tax positions of $i5.7
million.During the second quarter, these NOLs were carried back to the 2013 and 2014 tax years and a refund was requested for cash taxes paid. As of the close of the third quarter, approximately $i2.5 million has been received by the Company thus far.
/
i
(13) Commitments
and Contingencies
We have an inventory purchase commitment with an assembling manufacturer, see Note 9.
Litigation
Ronald Barranco and Print3D Corporation v. 3D Systems Corporation, et. al.
On August 23, 2013, Ronald Barranco, a former Company employee, filed itwo
lawsuits against us and certain of our officers in the United States District Court for the District of Hawaii. The first lawsuit (“Barranco I”) is captioned Ronald Barranco and Print3D Corporation v. 3D Systems Corporation, 3D Systems, Inc., and Damon Gregoire, Case No. CV 13-411 LEK RLP, and alleges seven causes of action relating to our acquisition of Print3D Corporation (of which Mr. Barranco was a i50% shareholder) and our subsequent employment of Mr. Barranco. The second lawsuit (“Barranco II”) is captioned Ronald Barranco v. 3D Systems Corporation, 3D Systems, Inc., Abraham
Reichental, and Damon Gregoire, Case No. CV 13-412 LEK RLP, and alleges the same seven causes of action relating to our acquisition of certain website domains from Mr. Barranco and our subsequent employment of Mr. Barranco. Both Barranco I and Barranco II allege we breached certain purchase agreements in order to avoid paying Mr. Barranco additional monies pursuant to royalty and earn out provisions in the agreements.
With regard to Barranco I, the Hawaii district court, on February 28, 2014, denied our motion to dismiss and our motion to transfer venue to South Carolina for the convenience of the parties. However, the Hawaii court recognized that Barranco’s claims were all subject to mandatory and binding arbitration
in Charlotte, North Carolina. The parties selected an arbitrator and arbitration took place in September 2015 in Charlotte, North Carolina.
On September 28, 2015, the arbitrator issued a final award in favor of Barranco with respect to two alleged breaches of contract and implied covenants arising out of the contract. The arbitrator found that we did not commit fraud or make any negligent misrepresentations to Barranco. Pursuant to the award, we were directed to pay approximately $i11,282,
which includes alleged actual damages of $i7,254, fees and expenses of $i2,318 and prejudgment interest of
$i1,710.
On August 3, 2018, following an unsuccessful appeal to the federal court in the Western District of North Carolina and the United States Court of Appeals for the Fourth Circuit, we paid $i9,127
of the Barranco I judgment, net setoff. On September 28, 2018, the parties filed a Consent Stipulation Resolving Motion for Setoff of Judgment, stipulating that subject only to vacatur or amendment reducing the Barranco II judgment in Barranco’s appeal to the Ninth Circuit related to the Barranco II action discussed below, the Barranco II judgment in the amount of $i2,182 was setoff against the Barranco I judgment (“Stipulated Setoff”). We paid Barranco the $i101
balance remaining due after the Stipulated Setoff.
/
19
With regard to Barranco II, the case was tried to a jury in Hawaii district court in May 2016, and on May 27, 2016 the jury found that we were not liable for either breach of contract or breach of the implied covenant of good faith and fair dealing. Additionally, the jury found in our favor on our counterclaim against Barranco and determined that Barranco violated his non-competition covenant with
us. On March 30, 2018, the court entered Findings of Fact and Conclusions of Law and Order requiring Barranco to disgorge, and us recover, $i523, representing all but four months of the full amount paid to Barranco as salary during his employment with us as well as a portion of the up front and buyout payments made to Barranco in connection with the purchase of certain web domains. In addition, the court ordered Barranco to pay pre-judgment interest to us to be calculated beginning as of his first breach of the non-competition covenant
in August 2011. Judgment was entered thereafter on April 2, 2018.
On September 13, 2018, the Hawaii district court entered its Amended Judgment in a Civil Case, awarding us a final amended judgment of $i2,182. On September 19, 2018, Barranco filed an Amended Notice of Appeal. On January
13, 2019, Barranco filed Appellant’s Opening Brief in the Ninth Circuit. On March 15, 2019, we filed our Answering Brief. On April 14, 2019, Barranco filed his Reply Brief. Oral Arguments took place on October 24, 2019. On March 12, 2020, the Ninth Circuit affirmed the district court’s evidentiary rulings and reversed and vacated the monetary judgment in our favor on our breach of contract counterclaim. The formal mandate was issued on April 17, 2020. On April 20, Barranco filed a Motion to Recall and Amend Mandate to Conform with Rule 37(b) in the Ninth Circuit. We filed an opposition brief on April 28 and the Ninth Circuit denied
Barranco’s motion the same day. On April 21, 2020, the district court issued a Minute Order regarding issues on remand from the Ninth Circuit. The district court directed the parties to file simultaneous initial briefs on May 21 addressing what relief we are entitled to receive in light of the Ninth Circuit’s opinion. Both parties filed responsive briefs in June 2020. On August 31, 2020, the Court issued its decision regarding post-remand issues, which determined that no further proceedings were warranted on remand and ordered the case closed. Thereafter, the parties agreed to resolve the matter and reconcile the amount setoff for the Amended Judgment to reflect the award vacated by the Ninth Circuit and to resolve any and all remaining claims between the parties. The Court entered the Stipulation of Dismissal With Prejudice of All Claims Against All Parties on October
22, 2020 and closed the case.
Export Controls and Government Contracts Compliance Matter
In October 2017, we received an administrative subpoena from the Bureau of Industry and Security of the Department of Commerce (“BIS”) requesting the production of records in connection with possible violations of U.S. export control laws, including with regard to our Quickparts.com, Inc. subsidiary. In addition, while collecting information responsive to the above-referenced subpoena, our internal investigation identified potential violations of the International Traffic in Arms Regulations (“ITAR”) administered by the Directorate of Defense Trade Controls of the Department of State (“DDTC”) and potential
violations of the Export Administration Regulations administered by the BIS.
On June 8, 2018 and thereafter, we submitted voluntary disclosures to BIS and DDTC identifying numerous potentially unauthorized exports of technical data. As part of our ongoing review of trade compliance risks and our cooperation with the government, on November 20, 2019, we submitted to the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) an initial notice of voluntary disclosure regarding potential violations of economic sanctions related to Iran. We continued to investigate this issue and filed a final disclosure with OFAC on May 20, 2020. We have and will continue to implement compliance enhancements to our export controls, trade
sanctions, and government contracting compliance program to address the issues identified through our ongoing internal investigation and will cooperate with DDTC and BIS, as well as the U.S. Departments of Justice, Defense, Homeland Security and Treasury in their ongoing reviews of these matters. In connection with these ongoing reviews, in August 2020, the Company received two federal grand jury subpoenas issued by the U.S. District Court for the Northern District of Texas. The Company responded to these two subpoenas and will continue to fully cooperate with the U.S. Department of Justice in the related investigation.
20
In
addition, on July 19, 2019, we received a notice of immediate suspension of federal contracting from the United States Air Force, pending the outcome of an ongoing investigation. The suspension applied to 3D Systems, its subsidiaries and affiliates, and was related to the potential export controls violations involving our On Demand manufacturing business described above. Under the suspension, we were generally prohibited from receiving new federal government contracts or subcontracts from any executive branch agency as described in the provisions of 48 C.F.R Subpart 9.4 of the Federal Acquisition Regulation. The suspension allowed us to continue to perform current federal contracts,
and also to receive awards of new subcontracts for items under $i35 and for items considered commercially available off-the-shelf items. The Air Force lifted the suspension on September 6, 2019 following the execution of a itwo-year
Administrative Agreement with us. We are now eligible to obtain and perform U.S. government contracts and subcontracts without restrictions. Under the Administrative Agreement, we will be monitored and evaluated by independent monitors who will report to the Air Force on our compliance with the terms of the Company’s Ethics & Compliance Program, including its overall culture, government contracting compliance program, and export controls compliance program.
Although we cannot predict the ultimate resolution of these matters, we have incurred and expect to continue to incur significant legal costs and other expenses in connection with responding to the U.S. government agencies.
Other
We
are involved in various other legal matters incidental to our business. Although we cannot predict the results of the litigation with certainty, we believe that the disposition of all these various other legal matters will not have a material adverse effect, individually or in the aggregate, on our consolidated results of operations, consolidated cash flows or consolidated financial position.
i
(14) Noncontrolling Interests
As
of September 30, 2020, we owned i100% of the capital and voting rights of Robtec, a service bureau and distributor of 3D printing and scanning products in Brazil. Approximately i70% of
the capital and voting rights of Robtec were acquired on November 25, 2014. On January 7, 2020, we made a payment equal to the redemption price of $i10,000 and acquired the remaining i30%
of the capital and voting rights.
/
i
(15) Restructuring and Exit Activity Costs
On August 5, 2020,
we announced, in connection with the new strategic focus and organizational realignment, a restructuring plan intended to align our operating costs with current revenue levels and better position the Company for future sustainable and profitable growth. The restructuring plan includes a reduction of nearly i20% of our workforce, with the majority of the workforce reduction expected to be completed by December
31, 2020. We expect that the restructuring plan, in conjunction with other cost reduction measures, will reduce our annualized costs by approximately $i100,000 by the end of December 31, 2021. Cost reduction efforts include reducing the number of facilities and examining every aspect of our manufacturing and operating costs. We will incur cash charges for severance, facility closing and other costs, primarily in the second half of this year. We may incur additional charges in 2021 as we finalize all the
actions to be taken. Non-cash charges related to these actions are expected to be $i7,600 and are included in facility closing costs. We are also evaluating the divestiture of parts of the business that do not align with this strategic focus. See Note 16.
i
In
connection with the restructuring plan, we recorded pre-tax costs during the quarter and nine months ended September 30, 2020, included within Selling, general and administrative in the condensed consolidated income statement, and expect to incur total costs as follows:
Severance,
termination benefits and other employee costs
$
i21,100
$
ii8,237/
Facility
closing costs
i7,600
ii3,621/
Other
costs
i3,700
ii—/
Total
$
i32,400
$
i11,858
//
21
i
The
liabilities at September 30, 2020 related to these costs were principally recorded in accrued expenses in the condensed consolidated balance sheets and were as follows:
Severance, termination benefits and other employee costs
$
i—
$
i8,237
$
(i3,699)
$
i—
$
i4,538
Facility
closing costs
i—
i3,621
i—
(i3,621)
i—
Other
costs
i—
i—
i—
i—
i—
Total
$
i—
$
i11,858
$
(i3,699)
$
(i3,621)
$
i4,538
/
i
(16) Subsequent
Events
For information on subsequent events related to borrowings, see Note 7.
On November 2, 2020 we entered into an agreement with ST Acquisition Co., an affiliate of Battery Ventures, to sell i100% of the equity interests
of Cimatron Ltd., the subsidiary that operates our Cimatron integrated CAD/CAM software for tooling business and its GibbsCAM CNC programming software business, for an aggregate transaction value of approximately $i65,000. This transaction is expected to close during the fourth quarter of 2020, contingent upon satisfaction of customary closing conditions.
/
22
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 (the “Financial Statements”) of this Quarterly Report on Form 10-Q (“Form 10-Q”). Also, we are subject to a number of risks and uncertainties that may affect our future performance that are discussed in greater detail in the sections entitled “Forward-Looking Statements” at the end of this Item 2 and that are discussed or referred to in Item 1A of Part II of this Form 10-Q.
Business Overview
3D
Systems Corporation (“3D Systems” or the “Company” or “we” or “us”) is a holding company incorporated in Delaware in 1993 that markets our products and services through subsidiaries in North America and South America (collectively referred to as “Americas”), Europe and the Middle East (collectively referred to as “EMEA”) and the Asia Pacific region (“APAC”). We provide comprehensive additive manufacturing solutions for applications in growing markets that demand high reliability products. Our solutions support markets and applications where a premium is placed upon performance and reliability, with engineering and technology cultures that seek product innovation as a means of delivering value to their customers, and with processes that tend to be highly controlled. Through our two key market verticals of Healthcare and Industrials,
we offer hardware, software, materials and services, combined with leadership in application knowledge to provide additive manufacturing solutions for specific, high-value applications in growing markets like healthcare, aerospace, automotive and defense. Our precision healthcare capabilities include simulation; Virtual Surgical Planning (VSP®) (“VSP”); and printing of medical and dental devices, models, and surgical guides and instruments. We have over 30 years of experience and expertise which have proven vital to our development of end-to-end digital workflow solutions that enable customers to optimize product designs, transform workflows, bring innovative products to market, and drive new business models.
As of September 30, 2020, we experienced a triggering event due to a drop
in our stock price, which ultimately had been negatively impacted by the business environment as a result of the COVID-19 pandemic, and performed a quantitative analysis for potential impairment of our goodwill or long-lived asset balances. Based on available information and analysis as of September 30, 2020, we determined the carrying value of the EMEA reporting unit exceeded its fair value and recorded a non-cash goodwill impairment charge of $48.3 million. We determined the fair value of the Americas and APAC reporting units exceeded their carrying values and the carrying value of our long-lived assets is recoverable for all reporting units. See Note 1 for additional discussion.
COVID-19 Pandemic Response
As we continue to closely monitor the COVID-19
pandemic, our top priority remains the health and safety of our employees and their families and communities. Our Crisis Response Steering Committee regularly reviews and adapts our protocols based on evolving research and guidance related to the virus. While essential operations continue, we have restricted travel and meetings, published pertinent information, and adapted to a world where many in our workforce are remote and those coming on-site are following new safety measures. We have a multi-phase plan to return to working on-site, and remain committed to protecting our employees, delivering for our customers and supporting our communities.
Our Employees
Since the start of the pandemic, employees who are necessary to our facilities’ operations have continued to work on-site. The additional safety measures
and practices we put in place during the first quarter of 2020 to protect these employees, including maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment, continue to be implemented subject to each location’s return on-site processes. Our plan for returning the remainder of our workforce to work on-site involves multiple phases that gradually allow additional workers to return while practicing social distancing and other safety measures. This plan considers the varying needs of each location and site and depends on local government regulations, community case trends, and recommendations from public health organizations.
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Our New Strategic Focus, Restructuring and Liquidity
While
no company is immune to global economic challenges, our business portfolio is well-balanced across end markets and geographies and includes a high degree of businesses serving critical sectors such as healthcare, aerospace and durable goods. In May 2020, a new CEO and President, Dr. Jeffrey Graves, was hired. Dr. Graves completed his initial assessment of the Company and on August 5, 2020, a new strategic focus (outlined in the Business Overview) and reorganization was announced and, to align our cost structure to the current level of revenues, a restructuring plan was also announced. We expect the restructuring effort, when complete and in conjunction with other cost reduction measures, to reduce annualized costs by approximately $100 million by the end of 2021. This should enable us to be profitable at current revenue levels and be
well positioned to leverage the sales growth as it returns. Other cost reduction efforts include reducing the number of facilities and examining every aspect of our manufacturing and operating costs. We estimate to incur total cash charges in the range of $25 to $30 million for severance, facility closings and other costs in accomplishing these efforts. We have already incurred restructuring charges in the third quarter of 2020 and expect to incur much of the remaining charges prior to the end of 2020, though we may incur additional charges in 2021 as we finalize all the actions to be taken. We are also evaluating the divestiture of parts of the business that do not align with this strategic focus. See Note 15 and Note 16 for additional discussion.
To provide additional financial flexibility while executing our restructuring plan, on August
5, 2020, we entered into an Equity Distribution Agreement for an At-The-Market equity offering program ("ATM Program") where we may issue and sell, from time to time, shares of our common stock. Our ATM Program allows for an aggregate gross sales price of up to a total of $150.0 million, depending upon market conditions and our liquidity requirements, through Truist Securities, Inc. (“Truist Securities”) and HSBC Securities (USA) Inc. (“HSBC,” and together with Truist Securities, the “Sales Agents”). For the quarter ended September 30, 2020, we sold 4,616 shares of our common stock under our ATM Program for net proceeds of $25.0 million, net of $0.5 million in fees, commissions and other costs. As of September 30, 2020, we have $124.5 million in availability remaining under the ATM Program. Based on projected cash flows, the results of our
cost savings initiatives, availability under our Revolving Facility, and potential divestitures (see Note 16), we do not anticipate issuing shares under the ATM Program during the fourth quarter of 2020.
We believe our balance sheet is well positioned and had cash on hand of $75.3 million and total debt of $21.7 million at September 30, 2020. We had a $100 million unused revolving credit facility with approximately $30.6 million of availability at September 30, 2020, based on the terms of the agreement. Additionally, our ATM Program may be used as a source of additional liquidity, if needed. In the second and third quarters of 2020, we began reducing our cost structure by focusing on cost of sales and operating expenses to drive future profitability. We implemented an employee furlough
program, executive and Board pay reductions, reduced our hiring and lowered travel expenses. We also implemented a restructuring plan, which included workforce reductions and facility closings. We believe these actions and our current financial position will enable us to handle the near-term impacts of the current economic uncertainty as well as position us for future profitable growth.
Looking Forward
Our operations in Americas, EMEA and APAC expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic. While the COVID-19 pandemic has impacted our reported results for the quarter and nine months ended September 30, 2020, we are unable to predict the longer-term impact that the pandemic may have on our business,
results of operations, financial position or cash flows. The extent to which our operations may be impacted by the dynamic nature of the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the financial markets remain unknown. Additional information regarding COVID-19 risk appears in Part II, Item 1A, “Risk Factors” of the Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
Summary
of Third Quarter 2020 Financial Results
Total consolidated revenue for the third quarter of 2020 decreased 13.0% compared to the same period last year. The lower demand was across all products and services and due primarily to the COVID-19 pandemic, as many customers were on a significantly reduced level of activity. Total consolidated revenue for the third quarter of 2020 increased 20.6% compared to the second quarter of 2020 as customer activity levels increased. Revenue from Healthcare increased 6.1% to $59.8 million, compared to the same period last year, driven by stronger sales to the dental market. Industrial sales decreased 23.8% to $75.3 million, compared to the same period last year; decreases were in all products and services across all geographies.
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Gross
profit for the quarter ended September 30, 2020 decreased by 12.9%, or $8.7 million, to $58.6 million, compared to $67.3 million for the quarter ended September 30, 2019. Gross profit margin for the quarters ended September 30, 2020 and September 30, 2019 was 43.4% and 43.3%, respectively. The decrease in gross profit was primarily due to lower sales volumes resulting from COVID-19, as many of our customers were on a significantly reduced level of activity.
Operating expenses for the quarter ended September 30, 2020 increased by 59.4%, or $47.0 million, to $126.2 million, compared to $79.2 million for the quarter ended September
30, 2019. Excluding our goodwill impairment charge, operating expenses for the quarter ended September 30, 2020 decreased by 1.6%, or $1.3 million, to $77.9 million, compared to $79.2 million for the quarter ended September 30, 2019. Selling, general and administrative expenses for the quarter ended September 30, 2020 increased by 1.4%, or $0.8 million, to $59.1 million, compared to $58.3 million for the quarter ended September 30, 2019. Research and development expenses for the quarter ended September 30, 2020 decreased by 9.9%, or $2.1 million, to $18.9 million, compared to $20.9 million for the quarter ended September 30, 2019. For the quarter ended September
30, 2020, we recorded a non-cash goodwill impairment charge of $48.3 million. See Note 1 for additional discussion. No similar charge was recorded in the prior year. Excluding the goodwill impairment charge, our lower operating expenses reflect reduced hiring and lower travel expenses incurred in the current year, resulting from the COVID-19 pandemic, as well as savings achieved in the current year from cost restructuring activities, including personnel and marketing activities, originating in 2019; partially offset by costs associated with restructuring efforts including employee severance and facility closings and related impairment charges.
Our operating loss for the quarter ended September 30, 2020 was $67.6 million, compared to an operating loss of $11.9 million for the quarter ended September
30, 2019. The higher loss was predominantly due to the non-cash goodwill impairment charge of $48.3 million recorded in the current quarter. See Note 1 for additional discussion.
For the nine months ended September 30, 2020, we used $32.6 million of cash from operations, primarily driven by the increase in inventories. For the nine months ended September 30, 2019, we generated $10.1 million of cash from operations. In total, our unrestricted cash balance at September 30, 2020 and December 31, 2019, was $75.3 million and $133.7 million, respectively. The lower cash balance primarily resulted from $32.6 million for operations, $26.5 million for repayments of debt, $12.5 million for payments
to purchase noncontrolling interests and $11.0 million for capital expenditures, offset by net proceeds of $25.0 million from third quarter common stock issuances under our ATM Program.
Results of Operations
Revenue
Current year revenue has been greatly impacted by COVID-19, most severely toward the end of the first quarter and into the second quarter, as many of our customers were shutdown or on a significantly reduced level of activity. The third quarter has experienced some return in activity, though levels remain lower than that of prior year. Excluding impacts due to the pandemic, due to the relatively
high price of certain 3D printers and a corresponding lengthy selling cycle as well as relatively low unit volume of the higher priced printers in any particular period, a shift in the timing and concentration of orders and shipments from one period to another can affect reported revenue in any given period.
In addition to changes in sales volumes, there are two other primary drivers of changes in revenue from one period to another: (1) the combined effect of changes in product mix and average selling prices and (2) the impact of fluctuations in foreign currencies. As used in this Management’s Discussion and Analysis, the price and mix effects relate to changes in revenue that are not able to be specifically related to changes in unit volume.
We earn revenue from the sale of products and services. The products
category includes 3D printers and corresponding materials, healthcare simulators and digitizers, software licenses, 3D scanners and haptic devices. The majority of materials used in our 3D printers are proprietary. The services category includes maintenance contracts and services on 3D printers and simulators, software maintenance, on demand solutions and healthcare services.
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The following tables set forth the change in revenue for the quarters and nine months ended September 30, 2020 and 2019.
Table
1
(Dollars in thousands)
Products
Services
Total
Revenue
— third quarter 2019
$
94,506
60.9
%
$
60,766
39.1
%
$
155,272
100.0
%
Change in revenue:
Volume
(19,342)
(20.5)
%
(3,903)
(6.4)
%
(23,245)
(15.0)
%
Price/Mix
540
0.6
%
1
—
%
541
0.3
%
Foreign
currency translation
1,563
1.7
%
1,016
1.7
%
2,579
1.7
%
Net change
(17,239)
(18.2)
%
(2,886)
(4.7)
%
(20,125)
(13.0)
%
Revenue
— third quarter 2020
$
77,267
57.2
%
$
57,880
42.8
%
$
135,147
100.0
%
Consolidated revenue decreased 13.0%, predominantly
due to lower products volume, driven by decreased sales of printers and lower on demand volume, partially offset by the favorable impact of foreign currency. The lower demand was due to COVID-19, as many of our customers were on a significantly reduced level of activity. For the quarters ended September 30, 2020 and 2019, revenue from printers contributed $21.7 million and $30.4 million, respectively. Software revenue included in the products category contributed $10.2 million and $13.3 million for the quarters ended September 30, 2020 and 2019, respectively. Materials revenue included in the products category contributed $39.0 million and $41.4 million for the quarters ended September 30, 2020 and 2019,
respectively.
Revenue from services decreased 4.7%, or $2.9 million, as compared to the third quarter of 2019. The decrease was primarily comprised of a 19.0%, or $4.4 million, decline in our on demand manufacturing services, partially offset by an increase in services on printers and simulators, software maintenance and healthcare services.
For the quarters ended September 30, 2020 and 2019, revenue from operations outside the U.S. was 50.9% and 51.3% of total revenue, respectively.
Table 2
(Dollars
in thousands)
Products
Services
Total
Revenue — nine months 2019
$
280,611
60.4
%
$
183,913
39.6
%
$
464,524
100.0
%
Change
in revenue:
Volume
(64,437)
(23.0)
%
(19,295)
(10.5)
%
(83,732)
(18.0)
%
Price/Mix
836
0.3
%
1
—
%
837
0.2
%
Foreign
currency translation
562
0.2
%
(279)
(0.2)
%
283
0.1
%
Net change
(63,039)
(22.5)
%
(19,573)
(10.6)
%
(82,612)
(17.8)
%
Revenue
— nine months 2020
$
217,572
57.0
%
$
164,340
43.0
%
$
381,912
100.0
%
Consolidated revenue decreased 17.8%, predominantly
due to lower products volume, driven by decreased sales of printers and corresponding materials and lower on demand volume. The lower demand was due to COVID-19, as many of our customers were shutdown or on a significantly reduced level of activity starting in the latter part of the first quarter. For the nine months ended September 30, 2020 and 2019, revenue from printers contributed $58.1 million and $90.3 million, respectively. Software revenue included in the products category contributed $31.0 million and $39.2 million for the nine months ended September 30, 2020 and 2019, respectively. Materials revenue included in the products category contributed $109.0 million and $124.0 million for the nine months ended September 30,
2020 and 2019, respectively.
Revenue from services decreased 10.6%, or $19.6 million, as compared to the nine months ended 2019. The decrease was primarily comprised of a 21.2%, or $14.8 million, decline in our on demand manufacturing services. The remaining decrease resulted from maintenance contracts and services on printers and simulators, software maintenance and healthcare services.
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Gross profit and gross profit margins
The
following tables set forth gross profit and gross profit margins for the quarters and nine months ended September 30, 2020 and 2019.
The
decrease in total consolidated gross profit is predominantly due to the lower sales volume as previously discussed. Products gross profit decreased primarily due to the under absorption of supply chain overhead, resulting from lower production.
The
decrease in total consolidated gross profit is predominantly due to the lower sales volume as previously discussed, as well as an end-of-life inventory charge of $10.9 million. Excluding the end-of-life inventory charge, total gross profit margin would have been 42.4%. See Note 4 for additional discussion.
Products gross profit decreased primarily due to an end-of-life inventory charge of $10.9 million as well as the under absorption of supply chain overhead, resulting from lower production. Excluding the end-of-life inventory charge, products gross profit margin would have been 35.9%. See Note 4 for additional discussion.
Operating expenses
The following tables set forth the components of operating expenses for the quarters
and nine months ended September 30, 2020 and 2019.
Selling,
general and administrative expenses increased slightly due to restructuring efforts, predominantly employee severance and facility closings, and related impairment charges. See Note 15 for additional discussion regarding restructuring charges. See Note 3 for additional discussion regarding facility closings and related impairment charges. These costs were partially offset by
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reduced hiring and lower travel expenses incurred in the current year, resulting from the COVID-19 pandemic, as well as savings achieved in the current year from cost restructuring activities, including personnel and marketing activities, originating in 2019.
Research and development expenses decreased due to current
year savings achieved from cost restructuring activities, including personnel reductions, originating in 2019, as well as lower overall program spend.
For the quarter ended September 30, 2020, we recorded a non-cash goodwill impairment charge of $48.3 million, related to the EMEA reporting unit, that was ultimately due to the negative impact of the business environment as a result of the COVID-19 pandemic. See Note 1 for additional discussion.
Selling,
general and administrative expenses decreased due to an employee furlough program in the second quarter of 2020; reduced hiring and lower travel expenses incurred in the current year, resulting from the COVID-19 pandemic; savings achieved in the current year from cost restructuring activities, including personnel and marketing activities, originating in 2019; reduced litigation and legal fees incurred in the current year; and the run-out of certain intangible amortization. These savings were partially offset by restructuring efforts, predominantly employee severance and facility closings, and related impairment charges. See Note 15 for additional discussion regarding restructuring charges. See Note 3 for additional discussion regarding facility closings and related impairment charges.
Research and development expenses decreased due to an employee furlough program in the secondquarter of 2020, current year savings achieved from cost restructuring activities, including personnel, originating in 2019, as well as lower overall program spend; partially offset by an increase in materials spend.
For the nine months ended September 30, 2020, we recorded a non-cash goodwill impairment charge of $48.3 million, related to the EMEA reporting unit, that was ultimately due to the negative impact of the business environment as a result of the COVID-19 pandemic. See Note 1 for additional discussion.
Loss from operations
The following table sets forth loss from operations for the quarters and nine months ended September
30, 2020 and 2019.
Table 7
Quarter Ended September 30,
Nine Months Ended September 30,
(Dollars in thousands)
2020
2019
2020
2019
Loss
from operations:
$
(67,604)
$
(11,934)
$
(119,694)
$
(52,405)
See “Revenue,” “Gross profit and gross profit margins” and “Operating expenses” above.
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Interest
and other (expense) income, net
The following table sets forth the components of interest and other (expense) income, net, for the quarters and nine months ended September 30, 2020 and 2019.
Table 8
Quarter
Ended September 30,
Nine Months Ended September 30,
(Dollars in thousands)
2020
2019
2020
2019
Interest and other (expense) income, net
Foreign exchange (loss) gain
$
(601)
$
(1,095)
$
(1,584)
$
(2,204)
Interest
expense, net
(611)
(953)
(3,699)
(2,393)
Other (expense) income, net
(1,207)
(770)
(2,315)
(2,177)
Total
interest and other (expense) income, net
$
(2,419)
$
(2,818)
$
(7,598)
$
(6,774)
Total interest and other (expense) income, net, for the quarter ended September 30, 2020 as compared to the quarter ended September 30, 2019 remained relatively flat.
Total
interest and other (expense) income, net, for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 resulted in a higher loss as amounts previously recognized in Accumulated Other Comprehensive Loss ("AOCL") were released in the second quarter of 2020 and reclassified to "Interest and other expense, net," as a result of the reduction in the interest rate swap. See Note 8 for additional discussion. For the nine months ended September 30, 2020 and 2019, losses on equity investments were recorded in both periods to "Other (expense) income, net".
Net loss attributable to 3D Systems
The
following tables set forth the primary components of net loss attributable to 3D Systems for the quarters and nine months ended September 30, 2020 and 2019.
Table 9
Quarter Ended September 30,
(Dollars in
thousands)
2020
2019
Change
Loss from operations
$
(67,604)
$
(11,934)
$
(55,670)
Other non-operating items:
Interest
and other (expense) income, net
(2,419)
(2,818)
399
Provision for income taxes
(2,866)
(2,010)
(856)
Net loss
(72,889)
(16,762)
(56,127)
Less:
net income attributable to noncontrolling interests
—
81
(81)
Net loss attributable to 3D Systems Corporation
$
(72,889)
$
(16,843)
$
(56,046)
Weighted
average shares, basic and diluted
118,527
114,053
Net loss per share - basic and diluted
$
(0.61)
$
(0.15)
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Table 10
Nine
Months Ended September 30,
(Dollars in thousands)
2020
2019
Change
Loss from operations
$
(119,694)
$
(52,405)
$
(67,289)
Other non-operating items:
Interest
and other (expense) income, net
(7,598)
(6,774)
(824)
Provision for income taxes
(2,472)
(5,793)
3,321
Net loss
(129,764)
(64,972)
(64,792)
Less:
net income attributable to noncontrolling interests
—
195
(195)
Net loss attributable to 3D Systems Corporation
$
(129,764)
$
(65,167)
$
(64,597)
Weighted
average shares, basic and diluted
116,216
113,587
Net loss per share - basic and diluted
$
(1.12)
$
(0.57)
The increase in net loss for the quarter and nine months ended September 30, 2020, as compared to the quarter and nine months
ended September 30, 2019, was primarily driven by an increase in loss from operations, which was impacted by a goodwill impairment charge of $48.3 million, restructuring charges of $11.9 million, and an end-of-life inventory charge of $10.9 million. See Note 1 for additional discussion regarding the goodwill impairment charge. See Note 4 for additional discussion regarding the end-of-life inventory charge. See Note 15 for additional discussion regarding the restructuring charges.
See “Gross profit and gross profit margins” and “Operating expenses” above, and Note 12.
Liquidity
and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments, accounts payable turns and funding requirements. Our cash requirements primarily consist of funding working capital and capital expenditures.
At September 30, 2020, we had cash on hand of $75.3 million and total debt of $21.7 million. We also had a $100 million unused revolving credit facility with approximately $30.6 million of availability, based on the terms of the agreement. Additionally, our ATM Program may be used as a source of additional liquidity, if
needed. Cash on hand decreased $58.4 million since December 31, 2019. The uses of cash included $32.6 million for operations, $26.5 million for repayments of debt, $12.5 million for payments to purchase noncontrolling interests and $11.0 million for capital expenditures. The primary use of cash in operations related to our net loss as well was our inability to slow down our inventory levels fast enough earlier in the year, specifically for committed lead times with our contract manufacturers and suppliers due to COVID-19. Cash provided included net proceeds of $25.0 million from third quarter common stock issuances under our ATM Program.
Cash flow from operations, cash and cash equivalents, and other sources of liquidity such as bank credit facilities
and issuing equity or debt securities, are expected to be available and sufficient to meet foreseeable cash requirements. We hold a 5-year $100.0 million senior secured term loan facility (the “Term Facility”) and a 5-year $100.0 million senior secured revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facility”) that are intended to support working capital and general corporate purposes. The Senior Credit Facility is scheduled to mature on February 26, 2024, at which time all amounts outstanding thereunder will be due and payable. As of September 30, 2020, we had $10.0 million of outstanding letters of credit and $30.6 million of available borrowings under the Revolving Facility. For additional information on the Senior Credit Facility, see Note 7 for further discussion. We also launched an
ATM Program to provide us with additional financial flexibility to complete our reorganization and to work through these uncertain times caused by the pandemic. Our ATM Program allows us from time to time to issue up to a total of $150 million of shares of our common stock to the public, at our discretion. We intend to use the net proceeds from this offering for general corporate purposes, which may include repaying amounts outstanding under the Term Facility and the Revolving Facility. At September 30, 2020, we had approximately $124.5 million of availability remaining under the ATM Program; however, based on projected cash flows, the results of our cost savings initiatives, availability under the Revolving Facility, and potential divestitures (see Note 16), we do not anticipate issuing shares under the ATM Program during the fourth quarter of 2020.
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Cash
held outside the U.S. at September 30, 2020 was $53.8 million, or 71.5% of total cash and equivalents, compared to $75.7 million, or 56.5% of total cash and equivalents at December 31, 2019. As our previously unremitted earnings have been subjected to U.S. federal income tax, we expect any repatriation of these earnings to the U.S. would not incur significant federal and state taxes. However, these dividends are subject to foreign withholding taxes that are estimated to result in the Company incurring tax costs in excess of the cost to obtain cash through other means. Cash equivalents are comprised of funds held in money market instruments and are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments. We strive to minimize
our credit risk by investing primarily in investment grade, liquid instruments and limit exposure to any one issuer depending upon credit quality. See “Cash flow” discussion below.
Cash flow
Cash flow from operations
Cash used in operating activities for the nine months ended September 30, 2020 was $32.6 million, while cash provided by operating activities for the nine months ended September 30, 2019 was $10.1 million.
Working capital used cash of $22.0 million for the nine months ended September
30, 2020 and provided cash of $13.4 million for the nine months ended September 30, 2019. In the nine months ended September 30, 2020, drivers of working capital related to cash outflows were an increase in inventory and prepaid expenses and a decrease in accounts payable, partially offset by a decrease in accounts receivable and an increase in other accrued liabilities and deferred revenue. In the nine months ended September 30, 2019, drivers of working capital related to cash inflows were a decrease in accounts receivable and an increase in deferred revenues related to software and system maintenance contracts, partially offset by a decrease in accounts payable and accrued and other current liabilities.
Cash
flow from investing activities
For the nine months ended September 30, 2020 and 2019, the primary outflows of cash relate to the purchases of noncontrolling interests and capital expenditures. Purchases of noncontrolling interests were $10.0 million, related to Robtec, and $2.5 million, related to Easyway, for the nine months ended September 30, 2020 and 2019, respectively. See Note 14 for additional discussion. Capital expenditures were $11.0 million and $18.3 million for the nine months ended September 30, 2020 and 2019, respectively. The lower expenditures in 2020 reflect the reduced spending
due to the lower revenue volume because of the pandemic.
Cash flow from financing activities
Cash used in financing activities was $3.8 million for the nine months ended September 30, 2020, while cash provided by financing activities was $29.8 million for the nine months ended September 30, 2019. The primary outflow of cash for the nine months ended September 30, 2020 relates to repayment of the Term Facility and settlements of stock-based compensation, partially offset by net proceeds from issuances of common stock under our ATM Program and proceeds from an inventory financing agreement. The primary inflow of cash for the nine months ended September
30, 2019 relates to borrowing on the Term Facility, partially offset by repayments of the prior credit facility and Term Facility.
Recent Accounting Pronouncements
Refer to Note 1 - Basis of Presentation of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion.
Critical Accounting Policies and Significant Estimates
Our condensed consolidated financial statements are
prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
As of the date of this report, there have been no changes to our critical accounting policies and estimates described in the Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020 that have had a material impact on our condensed consolidated financial
statements and related notes, other than the following:
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Our EMEA and APAC reporting units carry approximately $142.6 million and $37.0 million of goodwill, respectively, as of September 30, 2020. Goodwill in the Americas region was written off in 2015. The net carrying values of our long-lived assets in the EMEA, APAC, and Americas regions are approximately $58.8 million, $6.2 million, and $53.3 million, respectively. In our 2019 impairment testing, we determined the EMEA and APAC reporting units had fair values in excess of their carrying values. Our 2019 impairment testing also indicated no impairment of long-lived assets in the Americas region as the undiscounted cash flows were
in excess of the carrying value of long-lived assets. This headroom and recoverability were driven by our forecasts of future operating performance as well as external market indicators.
As of March 31, 2020, we experienced a triggering event due to our operating performance, which had been negatively impacted by macroeconomic factors, the decrease and mix of sales, and the effect of the COVID-19 pandemic, and performed a quantitative analysis for potential impairment of our goodwill or long-lived asset balances. We also took action to counter these factors, including reducing our cost structure by focusing on cost of sales and operating expenses to drive future profitability. Based on available information and analysis as of March 31, 2020, we continued to believe the fair value of our
reporting units exceed their carrying values and the carrying value of our long-lived assets were recoverable.
As of September 30, 2020, we experienced a triggering event due to a drop in our stock price, which had been negatively impacted by the business environment as a result of the COVID-19 pandemic, and performed a quantitative analysis for potential impairment of our goodwill or long-lived asset balances. Based on available information and analysis as of September 30, 2020, we determined the carrying value of the EMEA reporting unit exceeded its fair value and recorded a non-cash goodwill impairment charge of $48.3 million. We determined the fair value of the Americas and APAC reporting units exceeded their carrying values and the carrying value of our long-lived assets is recoverable
for all reporting units.
Forward-Looking Statements
Certain statements made in this Form 10-Q that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “believes,”“belief,”“expects,”“estimates,”“intends,”“anticipates,” or “plans” or the negative of these terms or other comparable terminology.
Forward-looking statements are based upon management’s beliefs, assumptions and current expectations concerning future events and trends, using information currently available, and are necessarily subject to uncertainties, many of which are outside our control. Although we believe that the expectations reflected in the forward-looking statements are reasonable, forward-looking statements are not, and should not be relied upon as a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include without limitation:
•impact
of production, supply, contractual and other disruptions, including facility closures and furloughs, due to the spread of the COVID-19 pandemic;
•our ability to deliver products that meet changing technology and customer needs;
•our ability to successfully execute the strategic reorganization without significant disruption to our business;
•our ability to achieve the savings targeted in our recently announced restructuring program;
•our decisions regarding additional equity sales under the ATM Program;
•our ability to successfully raise additional funds from the ATM Program, if any, and the possible impact on our stock price;
•our
ability to identify strategic acquisitions, to integrate such acquisitions into our business without disruption and to realize the anticipated benefits of such acquisitions;
•impact of future write-off or write-downs of goodwill and intangible assets;
•our ability to acquire and enforce intellectual property rights and defend such rights against third party claims;
•our ability to protect our intellectual property rights and confidential information, including our digital content, from third-party infringers or unauthorized copying, use or disclosure;
•failure of our information technology infrastructure or inability to protect against cyber-attack;
•our
ability to generate net cash flow from operations;
•our ability to comply with the covenants in our borrowing agreements and maintain adequate borrowing capacity;
•impact of natural disasters, public health issues (including the COVID-19 pandemic), and other catastrophic events;
•impact of global economic, political and social conditions and financial markets on our business;
•fluctuations in our gross profit margins, operating income or loss and/or net income or loss;
•our ability to efficiently conduct business outside the U.S.;
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•our
dependence on our supply chain for components and sub-assemblies used in our 3D printers and other products and for raw materials used in our print materials;
•our ability to manage the costs and effects of litigation, investigations or similar matters involving us or our subsidiaries;
•product quality problems that result in decreased sales and operating margin, product returns, product liability, warranty or other claims;
•our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs;
•our exposure to product liability claims and other claims and
legal proceedings;
•disruption in our management information systems for inventory management, distribution, and other key functions;
•compliance with U.S. and other anti-corruption laws, data privacy laws, trade controls, economic sanctions, and similar laws and regulations;
•our ability to comply with the terms of the Administrative Agreement with the U.S. Air Force and to maintain our status as a responsible contractor under federal rules and regulations;
•changes in, or interpretation of, tax rules and regulations;
•compliance with, and related expenses and challenges concerning, conflict-free minerals regulations;
•our
ability to complete the proposed sale of the Cimatron and GibbsCAM businesses in a timely manner (or at all); and
•the other factors discussed in the reports we file with or furnishes to the SEC from time to time, including the risks and important factors set forth in additional detail in Item 1A. “Risk Factors” in the 2019 Form 10-K and in Part II, Item 1A of the quarterly report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
Readers are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included herein are made only as of the date of this Form 10-Q and we undertake no obligation to publicly update or review any forward-looking statement
made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise. All subsequent written or oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by the cautionary statements referenced above.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
For a discussion of market risks at December 31, 2019, refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in the 2019 Form 10-K. During the first nine months of 2020, there were no material changes or
developments that would materially alter the market risk assessment performed as of December 31, 2019.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
As of September 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. These controls and procedures were designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures. Based on this evaluation, management has concluded that our disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Controls over Financial Reporting
There
were no material changes in our internal controls over financial reporting during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in “Litigation,”“Export Compliance Matter” and "Other" in Note 13 – Commitments and Contingencies to the Financial Statements in Part I, Item 1 of
this Form 10-Q is incorporated herein by reference.
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Item 1A. Risk Factors.
There are no material changes to the risk factors previously disclosed in our 2019 Form 10-K in response to Item 1A to Part I of Form 10-K and in Part II, Item 1A, “Risk Factors” of our Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. However, the impact of the COVID-19 pandemic may exacerbate
the risks in Item 1A, “Risk Factors” in our 2019 Form 10-K and in Part II, Item 1A, “Risk Factors” of our Form 10-Q for the quarters ended March 31, 2020, and June 30, 2020, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently. See also Part I Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding our response to the COVID-19 pandemic and Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent
Issuances of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about purchases of equity securities that are registered pursuant to Section 12 of the Exchange Act for the quarter ended September 30, 2020:
Total
number of shares (or units) purchased
Average price paid per share (or unit)
Shares delivered or withheld pursuant to restricted stock awards
(a)Reflects
shares of common stock surrendered to the Company for payment of tax withholding obligations in connection with the vesting of restricted stock.
(b)The average price paid reflects the average market value of shares withheld for tax purposes.
Amendment No. 2, dated October 9, 2020, to the Credit Agreement, dated
February 27, 2019 (as amended by Amendment No. 1, dated as of September 30, 2019), by and among 3D Systems Corporation, HSBC Bank USA, National Association, as Administrative Agent, Swing Loan Lender and Issuing Lender, the guarantors party thereto, and the other lenders party thereto.. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on October 14, 2020.)
Amendment
to the Second Letter of Secondment, dated August 13, 2020, by and between 3D Systems Corporation and Herbert Koeck. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on August 17, 2020.)
Equity Distribution Agreement, dated August 5, 2020, by and among 3D Systems Corporation and Truist Securities, Inc. and HSBC Securities (USA) Inc. (Incorporated
by reference to Exhibit 1.1 of Registrant’s Current Report on Form 8-K filed on August 5, 2020.)
Certification of Principal Executive Officer filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 5, 2020.
Certification
of Principal Financial Officer filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 5, 2020.
101.INS†
XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document.
Cover
Page Interactive Data File - this data file does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document.
* Management contract or compensatory plan or arrangement
† Exhibits filed herein. All exhibits not so designated are incorporated by reference to a prior filing, as indicated.
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
