Quarterly Report (10-q)

Date : 08/07/2019 @ 8:07PM
Source : Edgar (US Regulatory)
Stock : 3D Systems Corporation (DDD)
Quote : 8.99  0.0 (0.00%) @ 9:00AM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to____________

Commission File No.  001-34220
__________________________

LOGO-3D.JPG

3D SYSTEMS CORPORATION
(Exact name of Registrant as specified in its Charter)
__________________________
Delaware
95-4431352
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
333 Three D Systems Circle
Rock Hill
South Carolina
29730
(Address of Principal Executive Offices and Zip Code)

(Registrant’s Telephone Number, Including Area Code): ( 803 ) 326‑3900
_________________________

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. Yes  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). Yes  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):
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
(Do not check if smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
 

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 No
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
DDD
 
New York Stock Exchange

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 July 29, 2019 : 118,152,271

1



3D SYSTEMS CORPORATION
Form 10-Q
For the Quarter and Six Months Ended June 30, 2019

TABLE OF CONTENTS



2



PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
June 30,
2019 (unaudited)
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
150,397

 
$
109,998

Accounts receivable, net of reserves — $8,509 (2019) and $8,423 (2018)
114,093

 
126,618

Inventories
133,936

 
133,161

Prepaid expenses and other current assets
29,471

 
27,697

Total current assets
427,897

 
397,474

Property and equipment, net (1)
97,664

 
103,252

Intangible assets, net
57,267

 
68,275

Goodwill
222,293

 
221,334

Right of use assets  (1)
37,626

 
4,466

Deferred income tax asset
5,420

 
4,217

Other assets, net
29,384

 
26,814

Total assets
$
877,551

 
$
825,832

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long term debt
$
4,050

 
$

Current right of use liabilities (1)
11,451

 
654

Accounts payable
59,197

 
66,722

Accrued and other liabilities
59,730

 
59,265

Customer deposits
4,882

 
4,987

Deferred revenue
41,690

 
32,432

Total current liabilities
181,000

 
164,060

Long-term debt
75,378

 
25,000

Long-term right of use liabilities (1)
35,273

 
6,392

Deferred income tax liability
6,541

 
6,190

Other liabilities
42,041

 
39,331

Total liabilities
340,233

 
240,973

Redeemable noncontrolling interests
8,872

 
8,872

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, authorized 220,000 shares; issued 120,506 (2019) and 118,650 (2018)
120

 
117

Additional paid-in capital
1,361,569

 
1,355,503

Treasury stock, at cost — 3,182 shares (2019) and 2,946 shares (2018)
(16,519
)
 
(15,572
)
Accumulated deficit
(771,025
)
 
(722,701
)
Accumulated other comprehensive loss
(37,313
)
 
(38,978
)
Total 3D Systems Corporation stockholders' equity
536,832

 
578,369

Noncontrolling interests
(8,386
)
 
(2,382
)
Total stockholders’ equity
528,446

 
575,987

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
877,551

 
$
825,832

(1 ) For comparative purposes, prior year finance lease assets have been reclassified from "Property and equipment, net" to "Right of use assets." Prior year finance lease liabilities have been reclassified as right of use liabilities.

See accompanying notes to condensed consolidated financial statements.

3



3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Products
$
93,758

 
$
110,785

 
$
186,105

 
$
216,231

Services
63,514

 
65,783

 
123,147

 
126,206

Total revenue
157,272

 
176,568

 
309,252

 
342,437

Cost of sales:
 
 
 
 
 
 
 
Products
53,005

 
57,500

 
108,765

 
113,618

Services
30,968

 
32,906

 
61,483

 
64,788

Total cost of sales
83,973

 
90,406

 
170,248

 
178,406

Gross profit
73,299

 
86,162

 
139,004

 
164,031

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
71,654

 
71,172

 
136,761

 
140,625

Research and development
20,811

 
22,712

 
42,714

 
48,594

Total operating expenses
92,465

 
93,884

 
179,475

 
189,219

Loss from operations
(19,166
)
 
(7,722
)
 
(40,471
)
 
(25,188
)
Interest and other (expense) income, net
(2,755
)
 
1,661

 
(3,957
)
 
108

Loss before income taxes
(21,921
)
 
(6,061
)
 
(44,428
)
 
(25,080
)
Provision for income taxes
(1,938
)
 
(2,539
)
 
(3,782
)
 
(4,493
)
Net loss
(23,859
)
 
(8,600
)
 
(48,210
)
 
(29,573
)
Less: net income attributable to noncontrolling interests
70

 
262

 
114

 
246

Net loss attributable to 3D Systems Corporation
$
(23,929
)
 
$
(8,862
)
 
$
(48,324
)
 
$
(29,819
)
 
 
 
 
 
 
 
 
Net loss per share available to 3D Systems Corporation common stockholders - basic and diluted
$
(0.21
)
 
$
(0.08
)
 
$
(0.43
)
 
$
(0.27
)

See accompanying notes to condensed consolidated financial statements.



4



3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Net loss
$
(23,859
)
 
$
(8,600
)
 
$
(48,210
)
 
$
(29,573
)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Pension adjustments
24

 
164

 
116

 
147

Foreign currency translation
1,999

 
(18,612
)
 
1,247

 
(11,196
)
Total other comprehensive income (loss), net of taxes:
2,023

 
(18,448
)
 
1,363

 
(11,049
)
Total comprehensive loss, net of taxes
(21,836
)
 
(27,048
)
 
(46,847
)
 
(40,622
)
Comprehensive income attributable to noncontrolling interests
44

 
554

 
68

 
539

Comprehensive loss attributable to 3D Systems Corporation
$
(21,880
)
 
$
(27,602
)
 
$
(46,915
)
 
$
(41,161
)

See accompanying notes to condensed consolidated financial statements.


5



3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( Unaudited )
 
Six Months Ended June 30,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(48,210
)
 
$
(29,573
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
26,574

 
29,948

Stock-based compensation
13,592

 
13,734

Provision for bad debts
1,169

 
1,356

Loss on the disposition of property, equipment and other assets
1,103

 

Provision for deferred income taxes
(852
)
 
(2,287
)
Impairment of assets
1,728

 
1,411

Changes in operating accounts:
 
 
 
Accounts receivable
11,213

 
(3,384
)
Inventories
(3,124
)
 
(14,937
)
Prepaid expenses and other current assets
(1,494
)
 
(6,739
)
Accounts payable
(7,560
)
 
2,762

Deferred revenue and customer deposits
9,300

 
4,268

Accrued and other current liabilities
(2,333
)
 
14,940

All other operating activities
2,445

 
(2,328
)
Net cash provided by operating activities
3,551

 
9,171

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(14,353
)
 
(18,095
)
Other investing activities
105

 
(514
)
Net cash used in investing activities
(14,248
)
 
(18,609
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
100,000

 

Repayment of borrowings/long term debt
(45,000
)
 

Purchase of noncontrolling interest
(2,500
)
 

Payments on earnout consideration

 
(2,675
)
Other financing activities
(1,898
)
 
(2,148
)
Net cash provided by (used in) financing activities
50,602

 
(4,823
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
517

 
(2,502
)
Net increase (decrease) in cash, cash equivalents and restricted cash
40,422

 
(16,763
)
Cash, cash equivalents and restricted cash at the beginning of the period (a)
110,919

 
136,831

Cash, cash equivalents and restricted cash at the end of the period (a)
$
151,341

 
$
120,068

Supplemental cash flow information
 
 
 
Cash interest payments
$
1,975

 
$
236

Cash income tax payments, net
$
6,739

 
$
3,925

Transfer of equipment from inventory to property and equipment, net (b)
$
2,034

 
$
3,618

Transfer of equipment to inventory from property and equipment, net (c)
$
29

 
$
369

Noncash financing activity
 
 
 
Purchase of noncontrolling interest (d)
$
(11,000
)
 
$


(a)
The amounts for cash and cash equivalents shown above include restricted cash of $944 and $755 as of June 30, 2019 and 2018 , respectively, and $921 and $487 as of December 31, 2018 , and 2017 , 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 the Company requires additional machines for training or demonstration or for placement into on demand manufacturing services locations.
(c)
In general, an asset is transferred from Property and equipment, net, into inventory at its net book value when the Company has identified a potential sale for a used machine.
(d)
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
(Unaudited)


 
Quarters Ended
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except par value)
Par Value $0.001
 
Additional Paid In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total 3D Systems Corporation Stockholders' Equity
 
Equity Attributable to Noncontrolling Interests
 
Total Stockholders' Equity
March 31, 2019
$
118

 
$
1,354,683

 
$
(16,056
)
 
$
(747,096
)
 
$
(39,362
)
 
$
552,287

 
$
(8,430
)
 
$
543,857

Issuance (repurchase) of stock
2

 

 
(463
)
 

 

 
(461
)
 

 
(461
)
Acquisition of non-controlling interest

 

 

 

 

 

 

 

Stock-based compensation expense

 
6,886

 

 

 

 
6,886

 

 
6,886

Net income (loss)

 

 

 
(23,929
)
 

 
(23,929
)
 
70

 
(23,859
)
Pension adjustment

 

 

 

 
24

 
24

 

 
24

Foreign currency translation adjustment

 

 

 

 
2,025

 
2,025

 
(26
)
 
1,999

June 30, 2019
$
120

 
$
1,361,569

 
$
(16,519
)
 
$
(771,025
)
 
$
(37,313
)
 
$
536,832

 
$
(8,386
)
 
$
528,446

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
$
116

 
$
1,333,378

 
$
(9,041
)
 
$
(698,153
)
 
$
(14,137
)
 
$
612,163

 
$
(2,921
)
 
$
609,242

Issuance (repurchase) of stock

 

 
(966
)
 

 

 
(966
)
 

 
(966
)
Acquisition of non-controlling interest

 

 

 

 

 

 

 

Stock-based compensation expense

 
6,606

 

 

 

 
6,606

 

 
6,606

Net income (loss)

 

 

 
(8,862
)
 

 
(8,862
)
 
262

 
(8,600
)
Pension adjustment

 

 

 

 
164

 
164

 

 
164

Foreign currency translation adjustment

 

 

 

 
(18,905
)
 
(18,905
)
 
292

 
(18,613
)
June 30, 2018
$
116

 
$
1,339,984

 
$
(10,007
)
 
$
(707,015
)
 
$
(32,878
)
 
$
590,200

 
$
(2,367
)
 
$
587,833


See accompanying notes to condensed consolidated financial statements.


7



3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
(Unaudited)


 
Six Months Ended
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except par value)
Par Value $0.001
 
Additional Paid In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total 3D Systems Corporation Stockholders' Equity
 
Equity Attributable to Noncontrolling Interests
 
Total Stockholders' Equity
December 31, 2018
$
117

 
$
1,355,503

 
$
(15,572
)
 
$
(722,701
)
 
$
(38,978
)
 
$
578,369

 
$
(2,382
)
 
$
575,987

Issuance (repurchase) of stock
3

 

 
(947
)
 

 

 
(944
)
 

 
(944
)
Acquisition of non-controlling interest

 
(7,526
)
 

 

 
256

 
(7,270
)
 
(6,072
)
 
(13,342
)
Stock-based compensation expense

 
13,592

 

 

 

 
13,592

 

 
13,592

Net income (loss)

 

 

 
(48,324
)
 

 
(48,324
)
 
114

 
(48,210
)
Pension adjustment

 

 

 

 
116

 
116

 

 
116

Foreign currency translation adjustment

 

 

 

 
1,293

 
1,293

 
(46
)
 
1,247

June 30, 2019
$
120

 
$
1,361,569

 
$
(16,519
)
 
$
(771,025
)
 
$
(37,313
)
 
$
536,832

 
$
(8,386
)
 
$
528,446

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
115

 
$
1,326,250

 
$
(8,203
)
 
$
(677,772
)
 
$
(21,536
)
 
$
618,854

 
$
(2,906
)
 
$
615,948

Issuance (repurchase) of stock
1

 

 
(1,804
)
 

 

 
(1,803
)
 

 
(1,803
)
Cumulative impact of change in accounting policy

 

 

 
576

 

 
576

 

 
576

Stock-based compensation expense

 
13,734

 

 

 

 
13,734

 

 
13,734

Net income (loss)

 

 

 
(29,819
)
 

 
(29,819
)
 
246

 
(29,573
)
Pension adjustment

 

 

 

 
147

 
147

 

 
147

Foreign currency translation adjustment

 

 

 

 
(11,489
)
 
(11,489
)
 
293

 
(11,196
)
June 30, 2018
$
116

 
$
1,339,984

 
$
(10,007
)
 
$
(707,015
)
 
$
(32,878
)
 
$
590,200

 
$
(2,367
)
 
$
587,833


See accompanying notes to condensed consolidated financial statements.

8



3D SYSTEMS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

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 (the “Company”). A non-controlling interest in a subsidiary is considered an ownership interest in a majority-owned subsidiary that is not attributable to the parent. The Company includes 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. All significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”).

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 June 30, 2019 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. Certain prior period amounts presented in the condensed consolidated financial statements and accompanying footnotes have been reclassified to conform to current year presentation.

All dollar amounts presented in the accompanying footnotes are presented in thousands, except for per share information.

Recently Adopted Accounting Standards

On January 1, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") ASU No. 2016-02, “ Leases (Topic 842), ” which requires the recognition of right-of-use ("ROU") assets and related operating and finance lease liabilities on the balance sheet. The Company adopted ASU 2016-02 effective January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented.
As permitted under ASU 2016-02, the Company applied practical expedients that allowed it to not (1) reassess historical lease classifications, (2) recognize short-term leases on the balance sheet, nor (3) separate lease and non-lease components for its real estate leases.
As a result of the adoption of ASU 2016-02 on January 1, 2019, the Company recorded operating lease liabilities and ROU assets of $38,415 . The adoption of ASU 2016-02 had an immaterial impact on the Company's condensed consolidated statement of operations and condensed consolidated statement of cash flows for the six months ended June 30, 2019 . For additional information about leases, see Note 3 .

Accounting Standards Issued But Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, " Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) ," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is evaluating the impact the new standard will have on its consolidated financial statements.

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

9



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 standard is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual impairment tests performed on testing dates after January 1, 2017. The Company has elected not to adopt the provisions of this standard early but will re-evaluate as part of performing its 2019 impairment analysis.

In June 2016, the FASB issued ASU 2016-13, " Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), 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 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 guidance expands the disclosure requirements regarding credit losses, including the credit loss methodology and credit quality indicators. In May 2019, the FASB issued ASU 2019-05, " Financial Instruments—Credit Losses (Topic 326)," which provides transition relief to entities adopting ASU 2016-13 by allowing entities to elect the fair value option on certain financial instruments. ASU 2016-13 will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2019. Early adoption is permitted for annual reporting periods, including interim periods after December 15, 2018 and will be applied using a modified retrospective approach. The Company is evaluating the impact of adoption of this standard on its consolidated financial statements.

No other new accounting pronouncements, issued or effective during 2019 , have had or are expected to have a significant impact on the Company’s consolidated financial statements.

(2) Revenue

The Company accounts for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers,” which it adopted on January 1, 2018, using the modified-retrospective method.

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 June 30, 2019 , the Company had $128,384 of outstanding performance obligations. The Company expects to recognize approximately 93 percent of its remaining performance obligations as revenue within the next twelve months, an additional 3 percent by the end of 2020 and the balance thereafter.

Revenue Recognition

Revenue is recognized when control of the promised products or services is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Many of its contracts with customers include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative stand-alone selling price (“SSP”). Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. The amount of consideration received and revenue recognized may vary based on changes in marketing incentive programs offered to our customers. The Company's marketing incentive programs take many forms, including volume discounts, trade-in allowances, rebates and other discounts.

A majority of the Company’s revenue is recognized at the point in time when products are shipped or services are delivered to customers. Please see below for further discussion.

Hardware and Materials

Revenue from hardware and material sales is recognized when control has transferred to the customer which typically occurs when the goods have been shipped to the customer, risk of loss has transferred to the customer and the Company has a present right to payment for the hardware. In limited circumstances when a printer or other hardware sales include substantive customer acceptance

10



provisions, revenue is recognized either when customer acceptance has been obtained, customer acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in the customer acceptance provisions have been satisfied.

Software

The Company also markets and sells software tools that enable our customers to capture and customize content using our printers, design optimization and simulation software, and reverse engineering and inspection software. Software does not require significant modification or customization and the license provides the customer with a right to use the software as it exists when made available. Revenue from these software licenses is recognized either upon delivery of the product or of a key code which allows the customer to download the software. Customers may purchase post-sale support. Generally, the first year is included but subsequent years are optional. This optional support is considered a separate obligation from the software and is deferred at the time of sale and subsequently recognized ratably over future periods.

Services

The Company offers training, installation and non-contract maintenance services for its products. Additionally, the Company offers maintenance contracts customers can purchase at their option. For maintenance contracts, revenue is deferred at the time of sale based on the stand-alone selling prices of these services and costs are expensed as incurred. Deferred revenue is recognized ratably over the term of the maintenance period on a straight-line basis. Revenue from training, installation and non-contract maintenance services is recognized at the time of performance of the service.

On demand manufacturing and healthcare service sales are included within services revenue and revenue is recognized upon shipment or delivery of the parts or performance of the service, based on the terms of the arrangement.

Terms of sale

Shipping and handling activities are treated as fulfillment costs rather than as an additional promised service. The Company accrues the costs of shipping and handling when the related revenue is recognized. Costs incurred by the Company associated with shipping and handling are included in product cost of sales.

Credit is extended, and creditworthiness is determined, based on an evaluation of each customer’s financial condition. New customers are generally required to complete a credit application and provide references and bank information to facilitate an analysis of creditworthiness. Customers with a favorable profile may receive credit terms that differ from the Company’s general credit terms. Creditworthiness is considered, among other things, in evaluating the Company’s relationship with customers with past due balances.

The Company’s terms of sale generally provide payment terms that are customary in the countries where it transacts business. To reduce credit risk in connection with certain sales, the Company may, depending upon the circumstances, require significant deposits or payment in full prior to shipment. For maintenance services, the Company either bills customers on a time-and-materials basis or sells maintenance contracts that provide for payment in advance on either an annual or other periodic basis.

See Note 12 for additional information related to revenue by reportable segment and major lines of business.

Significant Judgments

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. For such arrangements, the Company allocates revenues to each performance obligation based on its relative SSP.

Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, the Company estimates SSP using historical transaction data. The Company uses a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when the product or service is not sold separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

In some circumstances, the Company has more than one SSP for individual products and services due to the stratification of those products and services by customers, geographic region or other factors. In these instances, it may use information such as the size of the customer and geographic region in determining the SSP.


11



The determination of SSP is an ongoing process and information is reviewed regularly in order to ensure SSP reflects the most current information or trends.

The nature of the Company’s marketing incentives may lead to consideration that is variable. Judgment is exercised at contract inception to determine the most likely outcome of the contract and resulting transaction price. Ongoing assessments are performed to determine if updates are needed to the original estimates.

Contract Balances

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 consolidated balance sheets. Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized at the time of invoicing, or unbilled receivables when revenue is recognized prior to invoicing. For most of the Company’s 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 the Company’s on demand manufacturing business, customers may be required to pay in full before work begins on their orders, resulting in customer deposits. The Company typically bills 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 June 30, 2019 .

Through June 30, 2019 , the Company recognized revenue of $18,521 related to our contract liabilities at January 1, 2019.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred because the amortization period would be one year or less. These costs are recorded within selling, general and administrative expenses.

(3) Leases

The Company has various lease agreements for its facilities, equipment and vehicles with remaining lease terms ranging from one to seventeen years . The Company determines 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. The Company's leases do not contain any material residual value guarantees or material restrictive covenants.

Most of the Company's leases do not provide an implicit rate, therefore the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the future lease payments.

Certain of the Company’s 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 right of use 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 right of use asset balances recorded on the balance sheet result in variable expenses being incurred when paid during the lease term.




12



Components of lease cost were as follows:
(in thousands)
 
Quarter ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost
 
$
3,675

 
$
7,464

Finance lease cost - amortization expense
 
212

 
418

Finance lease cost - interest expense
 
115

 
230

Short-term lease cost
 
26

 
50

Variable lease cost
 
94

 
35

Total
 
$
4,122

 
$
8,197


Balance sheet classifications at June 30, 2019 are summarized below:
 
 
June 30, 2019
(in thousands)
 
Right of use assets
 
Current right of use liabilities
 
Long-term right of use liabilities
Operating Leases
 
$
33,305

 
$
10,732

 
$
29,012

Finance Leases
 
4,321

 
719

 
6,261

Total
 
$
37,626

 
$
11,451

 
$
35,273



The Company’s future minimum lease payments as of June 30, 2019 under operating lease and finance leases, with initial or remaining lease terms in excess of one year, were as follows:
 
 
June 30, 2019
(in thousands)
 
Operating Leases
 
Finance Leases
Years ending June 30:
 
 
 
 
2020
 
$
7,070

 
$
583

2021
 
9,895

 
1,098

2022
 
7,498

 
811

2023
 
6,977

 
813

2024
 
5,833

 
804

Thereafter
 
10,602

 
6,009

Total lease payments
 
47,875

 
10,118

Less: imputed interest
 
(8,144
)
 
(3,125
)
Present value of lease liabilities
 
$
39,731

 
$
6,993



Supplemental cash flow information related to our operating leases for the period ending June 30, 2019 , was as follows:
(in thousands)
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash outflow from operating leases
 
$
7,610

Operating cash outflow from finance leases
 
$
229

Financing cash outflow from finance leases
 
$
338


Weighted-average remaining lease terms and discount rate for our operating leases for the period ending June 30, 2019 , were as follows:
 
 
June 30, 2019
 
 
Operating
 
Financing
Weighted-average remaining lease term
 
5.3 years

 
11.1 years

Weighted-average discount rate
 
6.51
%
 
6.74
%



13



(4) Inventories

Components of inventories at June 30, 2019 and December 31, 2018 are summarized as follows:
(in thousands)
2019
 
2018
Raw materials
$
49,393

 
$
49,624

Work in process
8,483

 
2,969

Finished goods and parts
76,060

 
80,568

Inventories
$
133,936

 
$
133,161



(5) Intangible Assets

Intangible assets, net, other than goodwill, at June 30, 2019 and December 31, 2018 are summarized as follows:

2019
 
2018
 
 
(in thousands)
Gross (a)
 
Accumulated Amortization
 
Net
 
Gross (a)
 
Accumulated Amortization
 
Net
 
Weighted Average Useful Life Remaining (in years)
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
103,638

 
$
(72,745
)
 
$
30,893

 
$
103,332

 
$
(67,129
)
 
$
36,203

 
5
Acquired technology
53,745

 
(50,279
)
 
3,466

 
52,691

 
(47,546
)
 
5,145

 
2
Trade names
23,937

 
(18,001
)
 
5,936

 
25,096

 
(17,669
)
 
7,427

 
5
Patent costs
11,548

 
(8,914
)
 
2,634

 
11,032

 
(8,382
)
 
2,650

 
14
Trade secrets
19,432

 
(14,639
)
 
4,793

 
19,374

 
(13,574
)
 
5,800

 
3
Acquired patents
16,215

 
(13,958
)
 
2,257

 
16,212

 
(13,160
)
 
3,052

 
7
Other
26,457

 
(19,169
)
 
7,288

 
26,551

 
(18,553
)
 
7,998

 
1
Total intangible assets
$
254,972

 
$
(197,705
)
 
$
57,267

 
$
254,288

 
$
(186,013
)
 
$
68,275

 
5

(a) Change in gross carrying amounts consists primarily of charges for license and patent costs and foreign currency translation.

Amortization expense related to intangible assets was $5,718 and $11,238 for the quarter and six months ended June 30, 2019 , respectively, compared to $7,836 and $15,903 for the quarter and six months ended June 30, 2018 , respectively.

(6) Accrued and Other Liabilities

Accrued liabilities at June 30, 2019 and December 31, 2018 are summarized as follows:
(in thousands)
2019
 
2018
Compensation and benefits
$
21,498

 
$
23,787

Accrued taxes
17,204

 
17,246

Vendor accruals
8,274

 
6,895

Product warranty liability
3,629

 
3,788

Arbitration awards
2,256

 
2,256

Accrued professional fees
2,117

 
1,657

Accrued other
3,460

 
2,219

Royalties payable
1,292

 
1,417

Total
$
59,730

 
$
59,265




14



Other liabilities at June 30, 2019 and December 31, 2018 are summarized as follows:
(in thousands)
2019
 
2018
Long term employee indemnity
$
14,369

 
$
13,609

Long term tax liability
3,851

 
4,168

Defined benefit pension obligation
8,472

 
8,518

Long term deferred revenue
6,910

 
8,121

Other long term liabilities
8,439

 
4,915

Total
$
42,041

 
$
39,331



(7) Borrowings

Credit Facility

On February 27, 2019, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into 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”). The Senior Credit Facility replaced the Company's prior $150,000 5 -year revolving, unsecured credit facility(the "Prior Credit Agreement"), which was terminated on February 27, 2019 in connection with the entry into the Senior Credit Facility. The proceeds of the Senior Credit Facility were used to refinance existing indebtedness of $25,000 outstanding under the Prior Credit Agreement and will be used to support working capital and for general corporate purposes. Subject to certain terms and conditions contained in the Revolving Facility, the Company has the right to request up to four increases to the amount of the Revolving Facility in an aggregate amount not to exceed $100,000 . 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 the election of the Company with the consent of the lenders subject to the terms set forth in the Senior Credit Facility.

Pursuant to the Senior Credit Facility, the guarantors guarantee, among other things, all of the obligations of the Company and each other guarantor under the Senior Credit Facility. From time to time, the Company may be required to cause additional domestic subsidiaries to become guarantors under the Senior Credit Facility.

The Senior Credit Facility contains customary covenants, some of which require the Company to maintain certain financial ratios that determine the amounts available and terms of borrowings and events of default. The Company was in compliance with all covenants at June 30, 2019 .

The payment of dividends on the Company’s common stock is restricted under provisions of the Senior Credit Facility, which limits the amount of cash dividends that the Company may pay in any one fiscal year to $30,000 . The Company currently does not pay, and has not paid, any dividends on its common stock, and currently intends to retain any future earnings for use in its business.

The Company had a balance of $80,000 outstanding on the Term Facility at June 30, 2019 at an interest rate of 4.9% , with $4,050 in principal payments due in the next twelve months.

(8) Hedging Activities and Financial Instruments

The Company conducts business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, the Company is 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, the Company endeavors to match assets and liabilities in the same currency on its balance sheet and those of its subsidiaries in order to reduce these risks. When appropriate, the Company enters into foreign currency contracts to hedge exposures arising from those transactions. The Company has 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.

The Company had $88,304 and $75,304 in notional foreign exchange contracts outstanding as of June 30, 2019 and December 31, 2018 , respectively. The fair values of these contracts were not material.

15




The Company translates 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).

The Company does not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations' results into U.S. dollars.

(9) Net Loss Per Share

The Company computes 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.

Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Numerator for basic and diluted net loss per share:
 
 
 
 
 
 
 
Net loss attributable to 3D Systems Corporation
$
(23,929
)
 
$
(8,862
)
 
$
(48,324
)
 
$
(29,819
)
 
 
 
 
 
 
 
 
Denominator for basic and diluted net loss per share:
 
 
 
 
 
 
 
Weighted average shares
113,433

 
111,920

 
113,350

 
111,870

 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
$
(0.21
)
 
$
(0.08
)
 
$
(0.43
)
 
$
(0.27
)


For the quarters ended June 30, 2019 and 2018 , 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 the Company recognized a net loss for the period and their inclusion would be anti-dilutive. Dilutive securities excluded for the quarter and six months ended June 30, 2019 were 7,117 compared to 4,168 and 4,167 for the quarter ended and six months ended June 30, 2018 .

(10) 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.

For the Company, the above standard applies to cash equivalents and Israeli severance funds. The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.


16



Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurements as of June 30, 2019
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Description
 
 
 
 
 
 
 
Cash equivalents  (a)
$
41,077

 
$

 
$

 
$
41,077

Israeli severance funds (b)
$

 
$
7,115

 
$

 
$
7,115


 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2018
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Description
 
 
 
 
 
 
 
Cash equivalents (a)
$
6,141

 
$

 
$

 
$
6,141

Israeli severance funds (b)
$

 
$
6,822

 
$

 
$
6,822


(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)
The Company partially funds the liability for its 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.

The Company 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 June 30, 2019 .

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 2018 Form 10-K.

(11) Income Taxes

For the quarter and six months ended June 30, 2019 , the Company recorded expense of $1,938 and $3,782 , resulting in effective tax rates of 8.8% and 8.5% , respectively. For the quarter and six months ended June 30, 2018 , the Company recorded expense of $2,539 and $4,493 , resulting in effective tax rates of 41.9% and 17.9% , respectively. The difference between the statutory rate and the effective tax rate in 2019 is mainly driven by the Company recording a valuation allowance on one of its foreign subsidiaries in China, withholding tax expense, release of a liability for uncertain tax positions related to a German tax audit, foreign rate differential between the U.S. tax rate and foreign tax rates, as well as the impact of the change in valuation allowances that the Company has recorded in the U.S. and other foreign jurisdictions, while in 2018 the impact was mainly driven by the change in valuation allowance that the Company has recorded in the U.S. and other foreign jurisdictions and foreign rate differential between the U.S. tax rate and foreign tax rates.

Due to the one time transition tax, the majority of the Company’s previously unremitted earnings have now been subjected to U.S. federal income tax, although, other additional taxes such as withholding tax could be applicable. The Company continues to assert that its foreign earnings are indefinitely reinvested in our overseas operations. As such, it has not provided for any additional taxes on approximately $100,268 of unremitted earnings. The Company believes the unrecognized deferred tax liability related to these earnings is approximately $15,100 .
 
Tax years 2013 and 2014 remain subject to examination by the U.S. Internal Revenue Service ("IRS") for certain credit carryforwards, while tax years 2015 through 2017 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. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in Australia ( 2014 ), Belgium ( 2015 ), Brazil ( 2013 ), China ( 2016 ), France ( 2016 ), Germany ( 2015 ), India ( 2014 ), Israel ( 2014 ), Italy ( 2013 ), Japan ( 2014 ), Korea ( 2013 ), Mexico ( 2013 ), Netherlands ( 2013 ), Switzerland ( 2013 ), the United Kingdom ( 2017 ) and Uruguay ( 2014 ).


17



(12) Segment Information

The Company operates as one segment and conducts its 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 Asia Pacific region (Australia, China, India, Japan and Korea). The Company has 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 the Company’s geographical locations is based on the location of the selling entity. Such summarized financial information concerning the Company’s geographical operations is shown in the following tables:

Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Revenue from unaffiliated customers:
 
 
 
 
 
 
 
United States
$
80,415

 
$
86,028

 
$
151,815

 
$
168,741

Other Americas
2,397

 
2,228

 
4,701

 
4,045

EMEA
55,776

 
56,859

 
115,420

 
114,280

Asia Pacific
18,684

 
31,453

 
37,316

 
55,371

Total revenue
$
157,272

 
$
176,568

 
$
309,252

 
$
342,437


Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Revenue by class of product and service:
 
 
 
 
 
 
 
Products
$
52,530

 
$
65,741

 
$
103,447

 
$
128,368

Materials
41,228

 
45,044

 
82,658

 
87,863

Services
63,514

 
65,783

 
123,147

 
126,206

Total revenue
$
157,272

 
$
176,568

 
$
309,252

 
$
342,437


 
Quarter ended June 30, 2019
 
Intercompany Sales to
(in thousands)
Americas
 
EMEA
 
Asia Pacific
 
Total
Americas
$
544

 
$
8,757

 
$
4,620

 
$
13,921

EMEA
18,758

 
14,914

 
757

 
34,429

Asia Pacific
697

 
18

 
687

 
1,402

Total intercompany sales
$
19,999

 
$
23,689

 
$
6,064

 
$
49,752

 
Quarter ended June 30, 2018
 
Intercompany Sales to
(in thousands)
Americas
 
EMEA
 
Asia Pacific
 
Total
Americas
$
738

 
$
14,243

 
$
6,992

 
$
21,973

EMEA
16,611

 
5,372

 
1,224

 
23,207

Asia Pacific
1,223

 

 
878

 
2,101

Total intercompany sales
$
18,572

 
$
19,615

 
$
9,094

 
$
47,281

 
Six Months Ended June 30, 2019
 
Intercompany Sales to
(in thousands)
Americas
 
EMEA
 
Asia Pacific
 
Total
Americas
$
990

 
$
25,465

 
$
8,456

 
$
34,911

EMEA
35,434

 
21,856

 
2,326

 
59,616

Asia Pacific
1,444

 
39

 
1,489

 
2,972

Total intercompany sales
$
37,868

 
$
47,360

 
$
12,271

 
$
97,499



18



 
Six Months Ended June 30, 2018
 
Intercompany Sales to
(in thousands)
Americas
 
EMEA
 
Asia Pacific
 
Total
Americas
$
1,022

 
$
30,224

 
$
12,415

 
$
43,661

EMEA
33,212

 
11,752

 
3,136

 
48,100

Asia Pacific
2,645

 
1

 
1,773

 
4,419

Total intercompany sales
$
36,879

 
$
41,977

 
$
17,324

 
$
96,180



Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
(Loss) income from operations:
 
 
 
 
 
 
 
Americas
$
(24,025
)
 
$
(13,539
)
 
$
(50,857
)
 
$
(33,523
)
EMEA
3,477

 
(2,119
)
 
6,395

 
(3,334
)
Asia Pacific
1,382

 
7,936

 
3,991

 
11,669

Total
$
(19,166
)
 
$
(7,722
)
 
$
(40,471
)
 
$
(25,188
)


(13) Commitments and Contingencies

Put Options

Owners of interests in a certain subsidiary have the right in certain circumstances to require the Company to acquire either a portion of or all of the remaining ownership interests held by them. The owners’ ability to exercise any such “put option” right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. In addition, these rights cannot be exercised prior to a specified exercise date. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts in 2019.

Management estimates, assuming that the subsidiary owned by the Company at June 30, 2019 , performs over the relevant future periods at its forecasted earnings levels, that these rights, if exercised, could require the Company, in future periods, to pay approximately $8,872 to the owners of such rights to acquire such ownership interests in the relevant subsidiary. This amount has been recorded as redeemable noncontrolling interests on the Consolidated Balance Sheet at June 30, 2019 and December 31, 2018 . The ultimate amount payable relating to this transaction will vary because it is dependent on the future results of operations of the subject business.

Litigation

Derivative Litigation

Nine related derivative complaints have been filed by purported Company stockholders against certain of the Company’s former executive officers and members of its Board of Directors.  The Company is named as a nominal defendant in all nine actions. The derivative complaints are styled as follows: (1) Steyn v. Reichental, et al., Case No. 2015-CP-46-2225, filed on July 27, 2015 in the Court of Common Pleas for the 16th Judicial Circuit, County of York, South Carolina (“Steyn”); (2) Piguing v. Reichental, et al., Case No. 2015-CP-46-2396, filed on August 7, 2015 in the Court of Common Pleas for the 16th Judicial Circuit, County of York, South Carolina (“Piguing”); (3)Booth v. Reichental, et al., Case No. 15-692-RGA, filed on August 6, 2015 in the United States District Court for the District of Delaware; (4) Nally v. Reichental, et al., Case No. 15-cv-03756-MGL, filed on September 18, 2015 in the United States District Court for the District of South Carolina (“Nally”); (5) Gee v. Hull, et al., Case No. BC-610319, filed on February 17, 2016 in the Superior Court for the State of California, County of Los Angeles (“Gee”); (6) Foster v. Reichental, et al., Case No. 0:16-cv-01016-MGL, filed on April 1, 2016 in the United States District Court for the District of South Carolina (“Foster”); (7) Lu v. Hull, et al., Case No. BC629730, filed on August 5, 2016 in the Superior Court for the State of California, County of Los Angeles (“Lu”); (8) Howes v. Reichental, et al., Case No. 0:16-cv-2810-MGL, filed on August 11, 2016 in the United States District Court for the District of South Carolina (“Howes”); and (9) Ameduri v. Reichental, et al., Case No. 0:16-cv-02995-MGL, filed on September 1, 2016 in the United States District Court for the District of South Carolina (“Ameduri”). Steyn and Piguing were consolidated into one action styled as In re 3D Systems Corp. Shareholder Derivative Litig., Lead Case No. 2015-CP-46-2225 in the Court of Common Pleas for the 16th Judicial Circuit, County of York, South Carolina. Gee and Lu were consolidated into one action styled as Gee v. Hull, et al., Case No. BC610319 in the Superior Court for the State of California,

19



County of Los Angeles. Nally, Foster, Howes, and Ameduri were consolidated into one action in the United States District Court for the District of South Carolina with Nally as the lead consolidated case.

The derivative complaints allege claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment and seek, among other things, monetary damages and certain corporate governance actions.
 
All of the derivative complaints listed above have been stayed.

The parties to the derivative actions listed above, following negotiations with the assistance of a mediator, have reached an agreement in principle to resolve all of the above actions, subject to execution of a stipulation of settlement and court approval. The parties intend to file and seek approval of the settlement in the derivative action captioned Nally v. Reichental, et al. , Docket No. 0:15-cv-03756-MGL (D.S.C. Sept. 18, 2015), pending before Hon. Mary Geiger Lewis of the U.S. District Court for the District of South Carolina.

Ronald Barranco and Print3D Corporation v. 3D Systems Corporation, et. al.

On August 23, 2013, Ronald Barranco, a former Company employee, filed two lawsuits against the Company and certain 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 the Company’s acquisition of Print3D Corporation (of which Mr. Barranco was a 50% shareholder) and the subsequent employment of Mr. Barranco by the Company. 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 the Company’s acquisition of certain website domains from Mr. Barranco and the subsequent employment of Mr. Barranco by the Company.  Both Barranco I and Barranco II allege the Company 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 the Company’s motion to dismiss and its 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 the Company did not commit fraud or make any negligent misrepresentations to Barranco. Pursuant to the award, the Company was directed to pay approximately $11,282 , which includes alleged actual damages of $7,254 , fees and expenses of $2,318 and prejudgment interest of $1,710 .

On August 3, 2018, following an unsuccessful appeal to the federal court in the Western District of North Carolina and the United States Court of Appeals for the Fourth Circuit, the Company paid $9,127 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 $2,182 was setoff against the Barranco I judgment (“Stipulated Setoff”). The Company paid Barranco the $101 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 the Company was not liable for either breach of contract or breach of the implied covenant of good faith and fair dealing.  Additionally, the jury found in favor of the Company on its counterclaim against Barranco and determined that Barranco violated his non-competition covenant with the Company. On March 30, 2018, the court entered Findings of Fact and Conclusions of Law and Order requiring Barranco to disgorge, and the Company recover, $523 , representing all but four months of the full amount paid to Barranco as salary during his employment with the Company 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 the Company 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 the Company a final amended judgment of $2,182 . 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, the Company filed its Answering Brief. On April 14, 2019, Barranco filed his Reply Brief. The Company intends to defend the appeal.


20



Export Controls and Government Contracts Compliance Matter

In October 2017 the Company 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 the On Demand manufacturing business done by our subsidiary, Quickparts.com, Inc. In addition, while collecting information responsive to the above-referenced subpoena, the Company 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, the Company submitted voluntary disclosures to BIS and DDTC identifying numerous potentially unauthorized exports of technical data, which supplemented an initial notice of voluntary disclosure that the Company submitted to DDTC in February 2018. The Company has and will continue to implement compliance enhancements to export controls, trade sanctions, and government contracting compliance to address the issues identified through its internal investigation and cooperate with DDTC and BIS, as well as the U.S. Departments of Justice, Defense, and Homeland Security, in their reviews of these matters.
In addition, on July 19, 2019, the Company received a notice of immediate suspension of federal contracting from the United States Air Force, pending the outcome of an ongoing investigation. The suspension applies to 3D Systems, its subsidiaries and affiliates, and is related to the potential export controls violations involving the Company’s On Demand manufacturing business described above. Under the suspension, the Company is 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 allows the Company to continue to perform current federal contracts, and also to receive awards of new subcontracts for items under $35 and for items considered commercially available off-the-shelf items. The Company has implemented significant compliance enhancements related to export controls designed to address the issues raised by the June 2018 disclosure and are engaging with the Air Force to lift the federal contracting suspension as soon as possible.

Although the Company cannot predict the ultimate resolution of these matters, the Company has incurred and expects to continue to incur significant legal costs and other expenses in connection with responding to the U.S. government agencies.
Other

The Company is involved in various other legal matters incidental to its business. Although the Company cannot predict the results of the litigation with certainty, the Company believes that the disposition of all these various other legal matters will not have a material adverse effect, individually or in the aggregate, on its consolidated results of operations, consolidated cash flows or consolidated financial position.

(14) Accumulated Other Comprehensive Loss

The changes in the balances of accumulated other comprehensive loss by component are as follows:
(in thousands)
Foreign currency translation adjustment
 
Defined benefit pension plan
 
Liquidation of non-US entity and purchase of non-controlling interests
 
Total
Balance at December 31, 2018
$
(36,669
)
 
$
(2,647
)
 
$
338

 
$
(38,978
)
Other comprehensive income (loss)
1,293

 
116

 
256

 
1,665

Balance at June 30, 2019
$
(35,376
)
 
$
(2,531
)
 
$
594

 
$
(37,313
)


The amounts presented in the table above are in other comprehensive loss and are net of taxes. For additional information about foreign currency translation, see Note 8 .

(15) Noncontrolling Interests

As of June 30, 2019 , the Company owned approximately 70% of the capital and voting rights of Robtec, a service bureau and distributor of 3D printing and scanning products in Brazil. Robtec was acquired on November 25, 2014 .

As of June 30, 2019 , the Company owned 100% of the capital and voting rights of Easyway, a service bureau and distributor of 3D printing and scanning products in China. Approximately 65%  of the capital and voting rights of Easyway were acquired on April

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2, 2015, and an additional 5%  of the capital and voting rights of Easyway were acquired on July 19, 2017 for $2,300 . The remaining 30% of the capital and voting rights of Easyway were acquired on January 21, 2019 for $13,500 to be paid in installments over four years, with the first installment of $2,500 paid in March 2019.


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

This discussion should be read in conjunction 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”). 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 solutions, including 3D printers, materials, software, on demand manufacturing services and digital design tools. Our solutions support advanced applications in a wide range of industries and key verticals including healthcare, aerospace, automotive and durable goods. Our precision healthcare capabilities include simulation, Virtual Surgical Planning (“VSP™”), and printing of medical and dental devices, models, surgical guides and instruments. Our solutions, experience and expertise provide an end-to-end digital workflow from design to prototyping to production. As the originator of 3D printing and a shaper of future 3D solutions, for over 30 years we have been enabling professionals and companies to optimize 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, repeatability, productivity and total cost of operation.

Summary of Second Quarter 2019 Financial Results

Total consolidated revenue for the quarter ended June 30, 2019 decreased by 10.9% , or $19.3 million , to $157.3 million , compared to $176.6 million for the quarter ended June 30, 2018 . These results reflect a decrease primarily in printers revenue due to the timing of shipping of metals solutions and large enterprise customer's orders in the prior year, as discussed below, as well as industrial softness, particularly in automotive and European customers.

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 June 30, 2019 , healthcare revenue decreased by 8.1% , to $56.4 million , and made up 35.8% of total revenue, compared to $61.4 million , or 34.7% of total revenue, for the quarter ended June 30, 2018 . The decrease primarily reflects the impact of the timing of orders of a large enterprise customer which was partially offset by increases in both materials and services revenues.

For the quarter ended June 30, 2019 , total software revenue from products and services decreased by 0.5% to $25.1 million , and made up 16.0% of total revenue, compared to $25.3 million , or 14.3% of total revenue, for the quarter ended June 30, 2018 , driven by weakness in the automotive vertical which offset increased revenue from additive focused software solutions.

Gross profit for the quarter ended June 30, 2019 decreased by 14.9% , or $12.9 million , to $73.3 million , compared to $86.2 million for the quarter ended June 30, 2018 . Gross profit margin for the quarters ended June 30, 2019 and 2018 was 46.6% and 48.8% , respectively.

Operating expenses for the quarter ended June 30, 2019 decreased by 1.5% , or $1.4 million , to $92.5 million , compared to $93.9 million for the quarter ended June 30, 2018 . Selling, general and administrative expenses for the quarter ended June 30, 2019 increased by 0.7% , or $0.5 million , to $71.7 million , compared to $71.2 million for the quarter ended June 30, 2018 . Research and development expenses for the quarter ended June 30, 2019 decreased by 8.4% , or $1.9 million , to $20.8 million , compared to $22.7 million for the quarter ended June 30, 2018 .

Our operating loss for the quarter ended June 30, 2019 was $19.2 million , compared to an operating loss of $7.7 million for the quarter ended June 30, 2018 .

For the six months ended June 30, 2019 and 2018 , we generated $3.6 million and $9.2 million of cash from operations, respectively, as further discussed below. In total, our unrestricted cash balance at June 30, 2019 and December 31, 2018 , was $150.4 million and $110.0 million , respectively. The higher cash balance was the result of our borrowing on the Senior Credit Facility, offset by

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repayment of amounts outstanding on the Prior Credit Agreement as well as investments in our facilities and IT infrastructure. For information on the Senior Credit Facility and the Prior Credit Agreement, see Note 7 .

Results of Operations

Comparison of revenue

Due to the relatively high price of certain 3D printers and a corresponding lengthy selling cycle and 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.

Comparison of revenue by geographic region

The following tables set forth changes in revenue by geographic region for the quarters and six months ended June 30, 2019 and 2018 .

Table 1
(Dollars in thousands)
Americas
 
EMEA
 
Asia Pacific
 
Total
Revenue — second quarter 2018
$
88,256

 
50.0
 %
 
$
56,859

 
32.2
 %