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2: EX-31.1 Certification -- §302 - SOA'02 HTML 28K
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19: R2 Condensed Consolidated Balance Sheets HTML 122K
42: R3 Condensed Consolidated Balance Sheets HTML 33K
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53: R5 Condensed Consolidated Statements of Comprehensive HTML 54K
Loss
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Equity
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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. (Check one):
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
(Do not check if smaller reporting company)
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, outstanding as of May 1, 2020: i118,878,168
Accounts
receivable, net of reserves — $i9,013 (2020) and $i8,762 (2019)
i108,769
i109,408
Inventories
i113,240
i111,106
Prepaid
expenses and other current assets
i32,688
i18,991
Total
current assets
i367,473
i373,170
Property
and equipment, net
i89,373
i92,940
Intangible
assets, net
i43,788
i48,338
Goodwill
i218,207
i223,176
Right
of use assets
i34,991
i36,890
Deferred
income tax asset
i5,040
i5,408
Other
assets, net
i24,840
i27,390
Total
assets
$
i783,712
$
i807,312
LIABILITIES
AND EQUITY
Current liabilities:
Current portion of long term debt
$
i2,506
$
i2,506
Current
right of use liabilities
i9,416
i9,569
Accounts
payable
i55,862
i49,851
Accrued
and other liabilities
i50,803
i63,095
Customer
deposits
i5,060
i5,712
Deferred
revenue
i42,659
i32,231
Total
current liabilities
i166,306
i162,964
Long-term
debt, net of deferred financing costs
i44,619
i45,215
Long-term
right of use liabilities
i33,880
i35,402
Deferred
income tax liability
i3,553
i4,027
Other
liabilities
i46,685
i45,808
Total
liabilities
i295,043
i293,416
Commitments
and contingencies (Note 14)
i
i
Stockholders’ equity:
Common
stock,$ii0.001/ par value, authorized ii220,000/
shares; issued i121,661 (2020) and i121,266 (2019)
i121
i120
Additional
paid-in capital
i1,370,174
i1,371,564
Treasury
stock, at cost — i3,838 shares (2020) and i3,670 shares (2019)
(i19,718)
(i18,769)
Accumulated
deficit
(i812,633)
(i793,709)
Accumulated
other comprehensive loss
(i49,275)
(i37,047)
Total
3D Systems Corporation stockholders' equity
i488,669
i522,159
Noncontrolling
interests
i—
(i8,263)
Total
stockholders’ equity
i488,669
i513,896
Total
liabilities, redeemable noncontrolling interests and stockholders’ equity
$
i783,712
$
i807,312
See
accompanying notes to condensed consolidated financial statements.
3
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTSOFOPERATIONS
(Unaudited)
Quarter
Ended March 31,
(in thousands, except per share amounts)
2020
2019
Revenue:
Products
$
i78,809
$
i92,347
Services
i55,896
i59,633
Total
revenue
i134,705
i151,980
Cost
of sales:
Products
i48,896
i55,760
Services
i28,677
i30,515
Total
cost of sales
i77,573
i86,275
Gross
profit
i57,132
i65,705
Operating
expenses:
Selling, general and administrative
i56,106
i65,107
Research
and development
i19,244
i21,903
Total
operating expenses
i75,350
i87,010
Loss
from operations
(i18,218)
(i21,305)
Interest
and other (expense) income, net
(i2,564)
(i1,201)
Loss
before income taxes
(i20,782)
(i22,506)
Benefit
(provision) for income taxes
i1,858
(i1,844)
Net
loss
(i18,924)
(i24,350)
Less:
net income attributable to noncontrolling interests
i—
i44
Net
loss attributable to 3D Systems Corporation
$
(i18,924)
$
(i24,394)
Net
loss per share available to 3D Systems Corporation common stockholders - basic and diluted
$
(i0.17)
$
(i0.22)
See
accompanying notes to condensed consolidated financial statements.
4
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVELOSS
(Unaudited)
Quarter
Ended March 31,
(in thousands, except per share amounts)
2020
2019
Net loss
$
(i18,924)
$
(i24,350)
Other
comprehensive income (loss), net of taxes:
Pension adjustments
i164
i92
Derivative
financial instruments
(i1,659)
i—
Foreign
currency translation
(i10,172)
(i752)
Total
other comprehensive income (loss), net of taxes:
(i11,667)
(i660)
Total
comprehensive loss, net of taxes
(i30,591)
(i25,010)
Comprehensive
income attributable to noncontrolling interests
i—
i24
Comprehensive
loss attributable to 3D Systems Corporation
$
(i30,591)
$
(i25,034)
See
accompanying notes to condensed consolidated financial statements.
5
3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter
Ended March 31,
(in thousands)
2020
2019
Cash flows from operating activities:
Net loss
$
(i18,924)
$
(i24,350)
Adjustments
to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
i11,690
i13,144
Stock-based
compensation
i6,312
i6,706
Provision
for bad debts
i817
i219
Loss
on the disposition of property, equipment and other assets
i137
i—
Provision
for deferred income taxes
(i106)
(i498)
Impairment
of assets
i1,100
i180
Changes
in operating accounts:
Accounts receivable
i1,568
(i2,928)
Inventories
(i2,694)
(i5,192)
Prepaid
expenses and other current assets
(i14,298)
i354
Accounts
payable
i6,616
(i11,987)
Deferred
revenue and customer deposits
i10,242
i11,811
Accrued
and other current liabilities
(i8,068)
(i5,531)
All
other operating activities
i3,323
i2,914
Net
cash used in operating activities
(i2,285)
(i15,158)
Cash
flows from investing activities:
Purchases of property and equipment
(i4,366)
(i8,837)
Proceeds
from sale of assets
i552
i—
Purchase
of noncontrolling interest
(i12,500)
(i2,500)
Other
investing activities
(i284)
(i37)
Net
cash used in investing activities
(i16,598)
(i11,374)
Cash
flows from financing activities:
Proceeds from borrowings
i—
i100,000
Repayment
of borrowings/long term debt
(i627)
(i25,000)
Proceeds
from inventory financing agreements
i2,509
i—
Payments
related to net-share settlement of stock based compensation
(i949)
(i483)
Other
financing activities
i296
(i780)
Net
cash provided by financing activities
i1,229
i73,737
Effect
of exchange rate changes on cash, cash equivalents and restricted cash
(i3,241)
i57
Net
(decrease) increase in cash, cash equivalents and restricted cash
(i20,895)
i47,262
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)
$
i113,722
$
i158,181
Supplemental
cash flow information
Cash interest payments
$
i1,069
$
i642
Cash
income tax payments, net
$
i1,832
$
i4,862
Transfer
of equipment from inventory to property and equipment, net (b)
$
i350
$
i154
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 $i946 and $i921 as of March 31, 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 four-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.
7
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.
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 ended March 31, 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 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 the Company’s reported results for the first quarter, 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 a result of these matters, the Company experienced a triggering event in the current quarter and performed a quantitative analysis for potential impairment of its goodwill or long-lived asset balances. Based on currently available information and analysis as of March 31, 2020, the Company continues to believe the fair value of the reporting units exceeds their carrying values and the carrying value of our long-lived assets is recoverable. In the event that these matters are not satisfactorily resolved, the
Company could experience another triggering event or impairment of its goodwill or long-lived asset balances in future periods.
All dollar amounts presented in the accompanying footnotes are presented in thousands, except for per share information.
i
Recently Adopted Accounting Standards
In June
2016, the FASB issued 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 current period and the implementation did not have a material effect on our financial position or results
of operations.
/
8
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 current period and the implementation did not have a material effect on our financial position or results of operations.
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 early adopting 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
i
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 March 31, 2020, we had $i98,551 of outstanding performance
obligations. We expect to recognize approximately i91 percent of our remaining performance obligations as revenue within the next twelve months, an additional i5
percent by the end of 2021 and the balance thereafter.
See Note 13 for additional information related to revenue by reportable segment and major lines of business.
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 March 31, 2020.
We have various lease agreements for our facilities, equipment and vehicles with remaining lease terms ranging from one to iseventeen 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 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.
//
9
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.
i
Components
of lease cost (income) were as follows:
Our
future minimum lease payments as of March 31, 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 $i12,832 and $i12,812
as of March 31, 2020 and December 31, 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”) that are intended 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 March 31, 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 March 31, 2020, our floating interest rate was i3.0%. 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.
We
had a balance of $i47,605 outstanding on the Term Facility at March 31, 2020, with $i2,506 of principal payments due in the next twelve months.
/
12
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 has a notional value of $i40,000 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 i16.0%. We designated the swap as a cash flow hedge for accounting treatment purposes. See Note 8 for additional information.
i
(8) Hedging
Activities and Financial Instruments
Derivatives Designated as Hedging Instruments
On July 8, 2019, we entered into an 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.
i
The notional amount and fair value of the derivative on our balance sheet at March 31, 2020 and December
31, 2019 are disclosed below:
Amounts
released from Accumulated Other Comprehensive Loss (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 quarter March 31, 2020. The net amount of AOCL expected to be reclassified to losses in the next 12 months is approximately $i589. We did not have a similar instrument during the quarter ended March
31, 2019.
Derivatives Not Designated as Hedging Instruments
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 sheet.
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.
13
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 current period, as part of the Agreement, we sold $i12,100 of inventory to the assembling manufacturer that we have an
obligation to repurchase. At March 31, 2020, we recorded a liability, obligation to repurchases inventory, included in "Accrued and other liabilities" on our condensed consolidated balance sheets for $i2,271 related to the initial sale of inventory to the assembly manufacturer. The inventory sold consists 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 March 31, 2020, inventory held at assemblers was $i8,471.
/
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 March 31, 2020, we had a commitment of $i2,300 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 March 31,
(in thousands, except per share amounts)
2020
2019
Numerator for basic and diluted net loss per share:
Net loss attributable to 3D Systems Corporation
$
(i18,924)
$
(i24,394)
Denominator
for basic and diluted net loss per share:
Weighted average shares
i114,590
i113,267
Net
loss per share - basic and diluted
$
(i0.17)
$
(i0.22)
/
For
the quarters ended March 31, 2020 and March 31, 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 quarters ended March 31, 2020 and March 31, 2019 were ii6,135/
and i5,534, respectively.
/
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.
14
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 are 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 ended March 31, 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.
i
(12) Income Taxes
We maintain the exception under ASC 740-270-30-36(b), "Accounting for Income Taxes", that jurisdictions
do not have reliable estimates of ordinary income for the 2020 year 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 ended March 31, 2020.
For the quarter ended March 31, 2020, we recorded a tax benefit of $i1,858,
resulting in an effective tax rate of i8.9%. For the quarter ended March 31, 2019, we recorded a tax expense of $i1,844,
resulting in an effective tax rate of i8.20%. The difference between the statutory rate and the effective rate is driven primarily by the valuation allowances in various jurisdictions, the foreign rate differential between the U.S. tax rate and foreign tax rates, 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.
/
15
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. We intend to carryback such NOLs to the 2013 and 2014 tax years and request a refund for cash taxes paid. During the current quarter, we recorded a tax receivable for the NOL carryback of $i8,886. We also recorded the associated tax benefit
of $i3,175, which is net of recorded uncertain tax positions of $i5,711. We
have also assessed the non-income tax related provisions of the CARES Act and do not believe that they will have a material impact on our consolidated financial statements.
Due to the one-time transition tax, the majority of our previously unremitted earnings have now been subjected to U.S. federal income tax, although, other additional taxes such as withholding tax could be applicable. We continue to assert that our foreign earnings are indefinitely reinvested in our overseas operations with the exception of Japan. The change in this assertion has no material effect. As such, we have not provided for any additional taxes on approximately $i182,050
of unremitted earnings. We estimate the unrecognized deferred tax liability related to these earnings is approximately $i20,804.
Tax years 2013 and 2014 remain subject to examination by the IRS for certain tax credit carryforwards, while tax years 2016 through 2018 remain open to examination by the IRS. State income tax returns are generally subject to examination for a period of three to four years after filing the respective tax
returns. We file income tax returns (which are open to examination beginning in the year shown in parentheses) in Australia (2015), Belgium (2016), Brazil (2014), China (2016), France (2016), Germany (2015), India (2014), Israel (2015), Italy (2014), Japan (2014), Korea (2014), Mexico (2014), Netherlands (2014), Switzerland (2014), the United Kingdom (2018) and Uruguay (2014).
i
(13) Segment
Information
We operate as ione segment and conduct our business through various offices and facilities located throughout the Americas region (United States, Canada, Brazil, Mexico and Uruguay), EMEA region (Belgium, France, Germany, Israel, Italy, the Netherlands, Switzerland and the United Kingdom), and APAC region (Australia, China, India, Japan and Korea). We have historically disclosed summarized financial information for the geographic areas of operations as if they
were segments in accordance with ASC 280, “Segment Reporting.” Financial information concerning our geographical locations is based on the location of the selling entity.
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.
/
17
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.
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 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 may file responsive briefs no later than June 19, 2020.
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 are continuing to investigate this issue and will file a final disclosure with OFAC when our review is complete.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
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 two-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
18
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
(15) Noncontrolling Interests
As
of March 31, 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.
/
19
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 3D printing and digital manufacturing solutions, including 3D printers for plastics and metals, materials, software, on demand manufacturing services and digital design tools. Our solutions support advanced applications in a wide range of industries and verticals, including healthcare, dental, aerospace, automotive and durable goods. 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 an ecosystem and end-to-end digital workflow solutions which enable customers to optimize product designs,
transform workflows, bring innovative products to market and drive new business models.
Customers can use our 3D solutions to design and manufacture complex and unique parts, eliminate expensive tooling, produce parts locally or in small batches and reduce lead times and time to market. A growing number of customers are shifting from prototyping applications to also using 3D printing for production. We believe this shift will be further driven by our continued advancement and innovation of 3D printing solutions that improve durability, reliability, repeatability and total cost of operations.
COVID-19 Pandemic Response
Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their
families. As global governments institute restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations.
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 the healthcare, aerospace and durable goods. Our balance sheet is well positioned and had $112.8 million of cash and cash equivalents at March 31, 2020, and a committed revolving credit facility maturing in 2024 with $42.2 million of credit available at March 31, 2020. We are in discussions with our lenders to ensure continued availability of funds in future quarters given the prospect of further economic
downturn.
Our Employees
We are in the midst of what is a historic deployment of remote work and digital access to services. Our Crisis Response Steering Committee is highly engaged with local site leaders across our company in safeguarding the well-being of our employees and minimizing the spread of this infection. Employees whose tasks can be done offsite have been instructed to work from home. Approximately 80% of our total personnel continue to work from home. We only allow employees in our facilities who are essential to the facilities’ operations under best practices guidelines on maintaining physical distancing, utilizing enhanced cleaning protocols and usage of personal protective equipment.
Our
Customers
We are committed to our customers to enable the support they need to continue providing vital services and tools. Our global businesses and manufacturing sites remain operational to meet customer needs during the pandemic in compliance with the orders and restrictions imposed by government authorities in each of our locations, and we are working with our customers to meet their specific shipment needs. While the pandemic has created minor delays on the inbound supply chain at our partners and our own facilities and both inbound and outbound logistical challenges, we have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfill demand.
20
Our
Community
Our team has worked hard to connect people in need during this pandemic with those who can help using digital manufacturing solutions. Together with our committed partners and customers, we have worked to architect solutions specific to user needs through a combination of materials, hardware platforms, software and professional services. This helps to integrate additive manufacturing into traditional production environments and allows companies to reduce dependency on the supply chain, manufacture parts internally or make them on demand. Additionally, the COVID-19 pandemic has created the need for protective measures for both healthcare professionals and patients resulting from bottlenecks and shortages in the worldwide supply of personal protective equipment and other vital medical devices and equipment.
In
response. we asked our network of partners, customers and others within the additive manufacturing community to circumvent the supply chain and help produce these parts as quickly as possible, to meet the urgent needs of the healthcare sector as they care for patients and contain the spread of the COVID-19 virus. We received offers from the community for everything from printer materials, usage of facilities for printing, engineers’ time and expertise and even offers to fund efforts. We believe that collaboration like this will be key to saving lives.
We have collaborated with our additive manufacturing community on several projects to combat the effect of the pandemic. We identified face shields as being something additive manufacturing could quickly support. We designed and developed a high efficiency face shield frame. Our printers can output 100 face shields every 24 hours. We offer
this the data file free of charge to the additive manufacturing community in order to enable others who have an SLS printer to go from CAD file to production in minutes.
Lonati SpA, a manufacturing company based in Brescia, Italy, deployed our ProX SLS 6100 printer with DuraForm materials to 3D print more than 100 venturi ventilator valves for respiratory machines. These valves were designed, developed, produced and delivered in just three days, evidencing the key capabilities of our technology and the value proposition of fast response time. We now have ventilator projects going on all over the world, including in hospitals, and we are working with the National Health Service in the United Kingdom on venturi valves that can be deployed quickly and close to the point of care.
With the recent trend of moving
from ventilators to CPAP masks for treatment of infected patient, we have been involved in the production of CPAP adapter components, turning what would have been a one to two month project into a solution on day one, with unit build time of just over one hour and a finished product the same day.
Finally, as widespread diagnostic testing of COVID-19 begins to ramp, there are known shortages of diagnostic tools such as nasal swabs. Our customers have been looking at repurposing dental and industrial Figure 4 printers to 3D print nasal swabs using dental and industrial grade resins as well as medical grade nylon 12. A single Figure 4 printer has demonstrated the ability to produce over 18,000 swabs per week. We have received interest from both hospitals and OEMs and are currently engaged in clinical validations with several teams.
These
activities demonstrate our thought leadership in additive manufacturing, our commitment to partnering with our community in combating the pandemic and a balanced approach to how our industry can quickly address supply and demand needs amid COVID-19.
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 the Company’s reported results for the first quarter, 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 risks appears in Part II, Item 1A, “Risk Factors” of this Form 10-Q.
21
Summary of First Quarter 2020 Financial
Results
Total consolidated revenue for the quarter ended March 31, 2020 decreased by 11.4%, or $17.3 million, to $134.7 million, compared to $152.0 million for the quarter ended March 31, 2019. These results reflect a 35.5% decrease in printers revenue and a 12.8% decrease from on demand manufacturing revenue as our customers purchases were impacted by the COVID-19 pandemic. Materials revenue decreased 0.1% to $41.4 million.
Healthcare revenue includes sales of products, materials and services for healthcare-related applications, including simulation, training, planning, anatomical models, surgical guides and instruments and medical and dental devices. For the quarter ended March
31, 2020, healthcare revenue decreased by 7.3%, to $46.3 million, and made up 34.4% of total revenue, compared to $50.0 million, or 32.9% of total revenue, for the quarter ended March 31, 2019.
For the quarter ended March 31, 2020, total software revenue from products and services decreased by 7.7% to $21.2 million, and made up 15.7% of total revenue, compared to $23.0 million, or 15.1% of total revenue, for the quarter ended March 31, 2019.
Gross profit for the quarter ended March 31, 2020 decreased by 13.0%, or $8.6 million, to $57.1 million, compared to $65.7 million for the quarter ended March
31, 2019. Gross profit margin for the quarters ended March 31, 2020 and March 31, 2019 was 42.4% and 43.2%, respectively.
Operating expenses for the quarter ended March 31, 2020 decreased by 13.4%, or $11.7 million, to $75.4 million, compared to $87.0 million for the quarter ended March 31, 2019. Selling, general and administrative expenses for the quarter ended March 31, 2020 decreased by 13.8%, or $9.0 million, to $56.1 million, compared to $65.1 million for the quarter ended March 31, 2019. Research and development expenses for the quarter ended March
31, 2020 decreased by 12.1%, or $2.7 million, to $19.2 million, compared to $21.9 million for the quarter ended March 31, 2019. Lower operating expenses reflect savings from 2019 cost optimization activities as well as short term cost savings from reduced hiring, travel, and outside service expenses.
Our operating loss for the quarter ended March 31, 2020 was $18.2 million, compared to an operating loss of $21.3 million for the quarter ended March 31, 2019.
For the quarters ended March 31, 2020 and March 31, 2019, we used $2.3 million and $15.2 million of
cash from operations, respectively, as further discussed below. In total, our unrestricted cash balance at March 31, 2020 and December 31, 2019, was $112.8 million and $133.7 million, respectively. The lower cash balance was primarily the result of the $10.0 million payment to acquire the remaining capital and voting rights of the noncontrolling interest in Brazil, $4.4 million in capital expenditures, and a $3.2 million negative effect of exchange rates.
Results of Operations
Comparison of revenue
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.
22
Comparison
of revenue by geographic region
The following table sets forth changes in revenue by geographic region for the quarters ended March 31, 2020 and 2019.
Table 1
(Dollars
in thousands)
Americas
EMEA
Asia Pacific
Total
Revenue — first quarter 2019
$
73,703
48.5
%
$
59,644
39.2
%
$
18,633
12.3
%
$
151,980
100.0
%
Change
in revenue:
Volume
(8,749)
(11.9)
%
927
1.6
%
(5,367)
(28.8)
%
(13,189)
(8.7)
%
Price/Mix
(981)
(1.3)
%
(3,500)
(5.9)
%
1,484
8.0
%
(2,997)
(2.0)
%
Foreign
currency translation
(171)
(0.2)
%
(604)
(1.0)
%
(314)
(1.7)
%
(1,089)
(0.7)
%
Net
change
(9,901)
(13.4)
%
(3,177)
(5.3)
%
(4,197)
(22.5)
%
(17,275)
(11.4)
%
Revenue
— first quarter 2020
$
63,802
47.4
%
$
56,467
41.9
%
$
14,436
10.7
%
$
134,705
100.0
%
Consolidated
revenue decreased by 11.4%, predominantly driven by lower sales volume in the Americas and Asia Pacific regions driven by plastics printers, on demand manufacturing, healthcare, and exiting the entertainment business in the prior year and unfavorable price/mix in the EMEA region driven by metals/material and healthcare; partially offset by favorable sales volume for metals printers in the Americas region.
For the quarters ended March 31, 2020 and 2019, revenue from operations outside the U.S. was 54.0% and 53.0% of total revenue, respectively.
Comparison of revenue by class
We earn revenue from the sale of products, materials
and services. The products category includes 3D printers, healthcare simulators and digitizers, software licenses, 3D scanners and haptic devices. The materials category includes a wide range of materials to be used with our 3D printers, the majority of which are proprietary, as well as conventional dental materials. The services category includes maintenance contracts and services on 3D printers and simulators, software maintenance, on demand solutions and healthcare services.
The following table sets forth the change in revenue by class for the quarters ended March 31, 2020 and 2019.
Table2
(Dollars
in thousands)
Products
Materials
Services
Total
Revenue — first quarter 2019
$
50,917
33.5
%
$
41,430
27.3
%
$
59,633
39.2
%
$
151,980
100.0
%
Change
in revenue:
Volume
(12,045)
(23.7)
%
2,021
4.9
%
(3,165)
(5.3)
%
(13,189)
(8.7)
%
Price/Mix
(1,307)
(2.6)
%
(1,690)
(4.1)
%
—
—
%
(2,997)
(2.0)
%
Foreign
currency translation
(133)
(0.3)
%
(384)
(0.9)
%
(572)
(1.0)
%
(1,089)
(0.7)
%
Net
change
(13,485)
(26.5)
%
(53)
(0.1)
%
(3,737)
(6.3)
%
(17,275)
(11.4)
%
Revenue
— first quarter 2020
$
37,432
27.8
%
$
41,377
30.7
%
$
55,896
41.5
%
$
134,705
100.0
%
Consolidated
revenue decreased 11.4%, predominantly due to lower products volume which was driven by plastics and software. For the quarters ended March 31, 2020 and 2019, revenue from printers contributed $19.3 million and $29.9 million, respectively. Software revenue included in the products category, including scanners and haptic devices, contributed $10.8 million and $12.2 million for the quarters ended March 31, 2020 and 2019, respectively.
For the quarters ended March 31, 2020 and 2019, revenue from on demand manufacturing services contributed $19.7 million and $22.6 million, respectively. For the
quarters ended March 31, 2020 and 2019, software services revenue contributed $10.4 million and $10.8 million, respectively.
23
Gross profit and gross profit margins
The following table sets forth gross profit and gross profit margins for the quarters ended March 31, 2020 and 2019.
The
decrease in total consolidated gross profit is due to the decrease in product sales, primarily lower sales of printers.
Products gross profit margin decreased primarily due to under absorption of supply chain overhead resulting from lower production, in addition to the impact of the mix of sales. Total gross profit margin reflects favorable mix.
Operating expenses
The following table sets forth the components of operating expenses for the quarters ended March 31, 2020 and 2019.
Selling,
general and administrative expenses decreased due to lower employee costs from 2019 cost structure activities as well as short term cost savings from reduced hiring, travel, and outside service expenses.
Research and development expenses decreased due to lower employee costs from 2019 cost structure activities as well as lower program spend.
24
Loss from operations
The following table sets forth (loss) income from operations by geographic region for the quarters ended March 31, 2020 and 2019.
Table
5
Quarter Ended March 31,
(Dollars in thousands)
2020
2019
(Loss)
income from operations:
Americas
$
(22,087)
$
(26,832)
EMEA
2,228
2,917
Asia
Pacific
1,641
2,610
Total
$
(18,218)
$
(21,305)
See “Comparison
of revenue by geographic region,” “Gross profit and gross profit margins” and “Operating expenses” above.
Interest and other (expense) income, net
The following table sets forth the components of interest and other (expense) income, net, for the quarters ended March 31, 2020 and 2019.
Table 6
Quarter
Ended March 31,
(Dollars in thousands)
2020
2019
Interest and other (expense) income, net
Foreign exchange (loss) gain
$
(112)
$
(1,039)
Interest
expense, net
(1,038)
(576)
Other (expense) income, net
(1,414)
414
Total interest and other (expense) income, net
$
(2,564)
$
(1,201)
The
increase in total interest and other expense, net, for the quarter ended March 31, 2020 as compared to the quarter ended March 31, 2019 was primarily driven by losses recorded on investments.
25
Net loss attributable to 3D Systems
The following table sets forth the primary components of net loss attributable to 3D Systems for the quarters ended March 31, 2020 and 2019.
Table7
Quarter Ended March 31,
(Dollars in thousands)
2020
2019
Change
Loss
from operations
$
(18,218)
$
(21,305)
$
3,087
Other non-operating items:
Interest and other (expense) income, net
(2,564)
(1,201)
(1,363)
Benefit
(provision) for income taxes
1,858
(1,844)
3,702
Net loss
(18,924)
(24,350)
5,426
Less: net income attributable to noncontrolling interests
—
44
(44)
Net
loss attributable to 3D Systems Corporation
$
(18,924)
$
(24,394)
$
5,470
Weighted average shares, basic and diluted
114,590
113,267
Net
loss per share - basic and diluted
$
(0.17)
$
(0.22)
The decrease in net loss for the quarter ended March 31, 2020, as compared to the quarter ended March 31, 2019, was primarily driven by a decrease in loss from operations and the tax benefit associated with certain net operating loss tax carrybacks, partially offset by losses recorded on investments. See “Gross
profit and gross profit margins” and “Operating expenses” above, and Note 12.
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 and accounts payable turns. Our cash requirements primarily consist of funding working capital and capital expenditures.
26
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 $100,000 senior secured term loan facility (the “Term Facility”) and a 5-year $100,000 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 March 31, 2020, we have availability under the Revolving Facility of $42.2 million. For additional information on the Senior Credit Facility, see Note 7 to the condensed consolidated financial statements in this Form 10-Q.
Cash held outside the U.S. at March 31, 2020 was $72.9 million, or 64.7% 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 additional taxes related to such amounts. However, our estimates are provisional and subject to further analysis. 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.
Days’ sales outstanding (DSO) was 73 at March 31, 2020, compared to 67 days for the year at December 31, 2019. Accounts receivable more than 90 days past due decreased to 10.3% of gross receivables at March
31, 2020, from 12.1% at December 31, 2019. We review specific receivables periodically to determine the appropriate reserve for accounts receivable.
The majority of our inventory consists of finished goods, including products, materials and service parts. Inventory also consists of raw materials for certain printers and service products. Inventory balances may fluctuate during cycles of new product launch, commercialization and timing of ramp up of production and sales of products.
The changes that make up the other components of working capital not discussed above resulted from the ordinary course of business. Differences between the amounts of working capital item changes in the cash flow statement and the balance sheet changes for the corresponding
items are primarily the result of foreign currency translation adjustments.
Cash flow
Cash flow from operations
Cash used in operating activities for the quarters ended March 31, 2020 and March 31, 2019 was $2.3 million and $15.2 million, respectively. Excluding non-cash charges, the net loss provided cash of $1.0 million for the quarter ended March 31, 2020 and used cash of $4.6 million for the quarter ended March 31, 2019. Non-cash charges generally consist of depreciation, amortization, and stock-based compensation.
Working
capital used cash of $3.3 million and $10.6 million for the quarters ended March 31, 2020 and March 31, 2019, respectively. In the quarter ended March 31, 2020, drivers of working capital related to cash outflows were an increase in prepaid expenses and inventory and a decrease in other accrued liabilities; partially offset by a increase in deferred revenue and accounts payable. In the quarter ended March 31, 2019, cash outflows were mainly due to lower accounts payable, lower accrued liabilities and investments in inventory to support of new product commercialization, partially offset by an increase deferred revenues related to software and system maintenance contracts.
Cash
flow from investing activities
For the quarters ended March 31, 2020 and 2019, the primary outflows of cash relate to the purchases of noncontrolling interest and capital expenditures.
Cash flow from financing activities
Cash provided by financing activities was $1.2 million and $73.7 million for the quarters ended March 31, 2020 and March 31, 2019, respectively. The primary inflow of cash for the quarter ended March 31, 2020 relates to the proceeds from the inventory financing
agreements, partially offset by settlements of stock-based compensation and repayment of the Term Facility. The primary inflow of cash for the quarter ended March 31, 2019 relates to borrowing on the Term Facility, partially offset by repayments of the Prior Credit Facility and Term Facility.
27
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:
Our EMEA, APAC and Americas reporting units carry approximately $182.9 million, $35.3 million and $0 of goodwill, respectively, as of March 31, 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 $63.6 million, $6.8 million, and $62.8 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.
Our operating performance through March 31, 2020 has been negatively impacted by macroeconomic factors, the decrease and mix of sales, and the effect of the COVID-19 pandemic. The Company is taking actions to counter these factors, including reducing our cost structure by focusing on cost of sales and operating expenses to drive future profitability. Refer to discussion of the COVID-19 Pandemic in this Management’s Discussion and Analysis. As a results of these matters, the
Company experienced a triggering event in the current quarter and performed a quantitative analysis for potential impairment of its goodwill or long-lived asset balances. Based on currently available information and analysis as of March 31, 2020, the Company continues to believe the fair value of the reporting units exceeds their carrying values and the carrying value of our long-lived assets is recoverable. In the event that these matters are not satisfactorily resolved, the Company could experience another triggering event or impairment of its goodwill or long-lived asset balances in future periods.
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 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 intangible assets;
•our ability to acquire and enforce intellectual property rights and defend such rights against third party claims;
28
•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 obtain additional financing on acceptable terms;
•our ability to comply with the covenants in our borrowing agreements;
•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.;
•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; and
•compliance with, and related expenses and challenges concerning, conflict-free minerals regulations; 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 Form 10-Q.
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 Form10-K. During the first three 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 March 31, 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 March 31, 2020.
29
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” and “Export
Compliance Matter” in Note 14 – Commitments and Contingencies to the Financial Statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
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 other than below. However, the impact of the COVID-19 pandemic may exacerbate the risks discussed below and in Item 1A, “Risk Factors” in our 2019 Form 10-K, 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.
The COVID-19 pandemic could materially adversely affect our financial condition and results of operations.
The novel strain of the coronavirus identified in China in late 2019 (COVID-19) has globally spread throughout other areas such as Asia, Europe, the Middle East, and North America and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns.
These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners. Each of the countries in which we operate has been affected by the outbreak and taken measures to try to contain it. The ultimate impact and efficacy of government measures and potential future measures is currently unknown.
There is considerable uncertainty regarding the business impacts from such measures and potential future measures. While we have been able to continue our operations through a combination of work-from-home and social distancing policies implemented to protect employees, these measures have resulted in reduced workforce availability at some of our sites. Restrictions on our access to customer facilities may impact our ability to meet customer demand and could have a material adverse effect on
our financial condition and results of operations, particularly if prolonged. Our customers have experienced, and may continue to experience, disruptions in their operations, which can result in delayed, reduced, or canceled orders, or collection risks, and which may adversely affect our results of operations.
The pandemic has significantly increased economic and demand uncertainty. It is likely that the current outbreak and continued spread of COVID-19 will cause an economic slowdown, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of any such slowdown or recession. Risks related to a slowdown or recession are described in our risk factor titled “Global economic, political and social conditions and financial markets may harm our ability to do business, adversely affect our
sales, costs, results of operations and cash flow,” below, and include the risk that demand for our products and services will be significantly harmed. Given the significant economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of impacts on demand for our products and services. These expectations are subject to change without warning and investors are cautioned not to place undue reliance on them.
The pandemic has led to increased disruption and volatility in capital markets and credit markets. We implemented salary decreases for executives, 2-week furloughs for non-essential employees, and suspension of all non-essential capital expenditures measures to strengthen our liquidity position given the uncertainty regarding the length and severity of the pandemic and ongoing economic uncertainty. Unanticipated consequences of the
pandemic and resulting economic uncertainty could result in a breach of the debt financial covenant, thus adversely affecting our liquidity and capital resources in the future, as well as incurring additional costs if an amendment to the credit agreement is required.
30
The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, cancellation of physical participation in meetings, events and conferences, and social distancing measures), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional
operational risks, including cybersecurity risks, and have affected the way we conduct our product development and testing, customer support, and other activities, which could have an adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
We depend on outsourcing partners for assembly of our 3D printers and our supply chain for spare parts and for raw materials used in our materials. The ongoing COVID-19 pandemic has caused supply and logistical disruptions for both our outsourcing partners and supply chain partners. If these relationships were to terminate or these disruptions worsen, our business could be disrupted while we locate alternative suppliers and our expenses may
increase.
We have outsourced selected design and manufacturing companies to assemble our printers. In carrying out these outsourcing activities, we face a number of risks, including, among others, the following:
•The risk that the parties that we retain to perform assembly activities may not perform in a satisfactory manner;
•The risk of disruption in the supply of printers or other products to our customers if such third parties either fail to perform in a satisfactory manner or are unable to supply us with the quantity of printers or other products that are needed to meet then current customer demand;
•The
risk of work delays or supply chain disruptions stemming from governmental efforts to contain the COVID-19; and
•The risk of insolvency of suppliers, as well as the risks that we face, as discussed below, in dealing with a limited number of suppliers.
We purchase components and sub-assemblies for our printers from third-party suppliers that we provide to our customers as spare parts. Additionally, we purchase raw materials that are used in our materials, as well as certain of those materials, from third-party suppliers.
While there are several potential suppliers of parts for our products, we currently choose to use only one or a limited number of suppliers for several of these items, including our
lasers, materials and certain jetting components. Our reliance on a single or limited number of suppliers involves many risks, including, among others, the following:
•Potential shortages of some key components;
•Disruptions in the operations of these suppliers;
•Product performance shortfalls; and
•Reduced control over delivery schedules, assembly capabilities, quality and costs.
The recent situation brought on by COVID-19 pandemic has created minor delays on the inbound
supply chain at our partners and our own facilities. Additional delays on both inbound and outbound logistics have also created challenges. We have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfill demand.
While we believe that, if necessary, we can obtain all the components necessary for our spare parts and materials from other manufacturers, we require any new supplier to become “qualified” pursuant to our internal procedures, which could involve evaluation processes of varying durations. Our spare parts and raw materials used in our materials production are subject to various lead times. In addition, at any time, certain suppliers may decide to discontinue production of a part or raw material that we use. Any unanticipated change in the sources of our supplies, or unanticipated supply limitations, could
increase production or related costs and consequently reduce margins.
31
If our forecasts exceed actual orders, we may hold large inventories of slow-moving or unusable parts, which could have an adverse effect on our cash flow, profitability and results of operations. Inversely, we may lose orders if our forecast is low and we are unable to meet demand. There is considerable uncertainty on the business impact from current measures and potential future measures to contain the spread of the COVID-19 pandemic on our vendors, suppliers, and partners, especially if such measures are in effect for an extended period of time. If disruptions to global businesses from the pandemic continue or worsen, our business could face greater supply chain
delays and difficulty shipping or receiving products and materials, which could have a material adverse effect on our financial condition and results of operations.
Global economic, political and social conditions and financial markets may harm our ability to do business, adversely affect our sales, costs, results of operations and cash flow.
We are subject to global economic, political and social conditions that may cause customers to delay or reduce technology purchases due to economic downturns, difficulties in the financial services sector and credit markets, geopolitical uncertainties, tariffs and other macroeconomic factors affecting spending behavior. Adverse changes in global or regional economic conditions, including recession or slowing growth, lower capital expenditures by businesses, increases
in unemployment, and lower consumer confidence and spending, periodically occur.
The COVID-19 pandemic has significantly increased economic and demand uncertainty. It is likely that the current outbreak and continued spread of COVID-19 will cause an economic slowdown, and it is possible that it could cause a global recession. Adverse changes in economic conditions, including as a result of the pandemic, can significantly harm demand for our products and services and make it more challenging to forecast our operating results and make business decisions, including regarding prioritization of investments in our business. An economic downturn or increased uncertainty may also lead to increased credit and collectability risks, reduced liquidity, and asset impairments.
We also face risks that may arise from financial
difficulties experienced by our suppliers, resellers or customers, including, among others, the following:
•Customers or partners to whom we sell our products and services may face financial difficulties or may become insolvent, which could lead to our inability to obtain payment of accounts receivable that those customers may owe;
•Customers and potential customers may experience deterioration of their businesses, which may result in the delay or cancellation of plans to purchase our products;
•Key suppliers of raw materials, finished products or components used in the products that we sell may face financial difficulties or may become insolvent, which
could lead to disruption in the supply of printers, materials or spare parts to our customers; and
•The inability of customers, including resellers, suppliers and contract manufacturers, to obtain credit financing to finance purchases of our products and raw materials used to build those products.
Changes in business conditions may cause goodwill and other intangible assets to become impaired.
Goodwill and other intangible assets are subject to an impairment test on an annual basis and when circumstances indicate that an impairment is more likely than not. Such circumstances include a significant adverse change
in the business climate or a decision to dispose of a business or product line. We face some uncertainty in our business environment due to a variety of challenges, including changes in customer demand. We may experience unforeseen circumstances that adversely affect the value of our goodwill or intangible assets and trigger an evaluation of the amount of the recorded goodwill and intangible assets. Future write-offs of goodwill or other intangible assets as a result of an impairment in the business could materially adversely affect our results of operations and financial condition.
Our EMEA, APAC and Americas reporting units carry approximately $182.9 million, $35.3 million and $0 of goodwill, respectively, as of March 31, 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 $63.6 million, $6.8 million, and $62.8 million, respectively. In our 2019 impairment testing, we determined that no impairment of goodwill or long-lived assets was required. These conclusions were driven by our forecasts of future operating performance as well as external market indicators.
32
Our operating performance through March 31, 2020 has been negatively impacted by macroeconomic factors, the decrease and mix of sales and the effect of the COVID-19 pandemic. As a result of these matters, the Company experienced a triggering event in the current
quarter and performed a quantitative analysis for potential impairment of its goodwill or long-lived asset balances. Based on currently available information and analysis as of March 31, 2020, the Company continues to believe the fair value of the reporting units exceeds their carrying values and the carrying value of our long-lived assets is recoverable.The Company is taking actions to counter these factors, including reducing our cost structure by focusing on cost of sales and operating expenses to drive future profitability. In the event that these matters are not satisfactorily resolved, we could experience another triggering event or impairment of goodwill or long-lived asset balances in future periods.
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 March 31, 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.
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 May 6, 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 May 6, 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.
34
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.
