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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, 2017

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

__________________________





Picture 2





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)

 

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 7(a)(2)(B) 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 



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 26, 2017:  113,800,249



1


 



3D SYSTEMS CORPORATION

Quarterly Report on Form 10-Q for the

Quarter and Six Months Ended June 30, 2017



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,

2017

(unaudited)

 

 

December 31,
2016

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

153,991 

 

$

184,947 

Accounts receivable, net of reserves — $11,036 (2017) and $12,920 (2016)

 

 

126,287 

 

 

127,114 

Inventories

 

 

110,816 

 

 

103,331 

Prepaid expenses and other current assets

 

 

20,748 

 

 

17,558 

Total current assets

 

 

411,842 

 

 

432,950 

Property and equipment, net

 

 

87,316 

 

 

79,978 

Intangible assets, net

 

 

115,011 

 

 

121,501 

Goodwill

 

 

225,104 

 

 

181,230 

Long term deferred income tax asset

 

 

7,983 

 

 

8,123 

Other assets, net

 

 

27,989 

 

 

25,371 

Total assets

 

$

875,245 

 

$

849,153 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of capitalized lease obligations

 

$

613 

 

$

572 

Accounts payable

 

 

46,448 

 

 

40,514 

Accrued and other liabilities

 

 

45,812 

 

 

49,968 

Customer deposits

 

 

5,139 

 

 

5,857 

Deferred revenue

 

 

42,404 

 

 

33,494 

Total current liabilities

 

 

140,416 

 

 

130,405 

Long term portion of capitalized lease obligations

 

 

7,360 

 

 

7,587 

Long term deferred income tax liability 

 

 

17,250 

 

 

17,601 

Other liabilities

 

 

56,068 

 

 

57,988 

Total liabilities

 

 

221,094 

 

 

213,581 

Redeemable noncontrolling interests

 

 

8,872 

 

 

8,872 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.001 par value, authorized 220,000 shares; issued 115,583 (2017) and 115,113 (2016)

 

 

115 

 

 

115 

Additional paid-in capital

 

 

1,314,880 

 

 

1,307,428 

Treasury stock, at cost — 1,702 shares (2017) and 1,498 shares (2016)

 

 

(4,628)

 

 

(2,658)

Accumulated deficit

 

 

(629,968)

 

 

(621,787)

Accumulated other comprehensive loss

 

 

(32,560)

 

 

(53,225)

Total 3D Systems Corporation stockholders' equity

 

 

647,839 

 

 

629,873 

Noncontrolling interests

 

 

(2,560)

 

 

(3,173)

Total stockholders’ equity

 

 

645,279 

 

 

626,700 

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

 

$

875,245 

 

$

849,153 



See accompanying notes to condensed consolidated financial statements.

3


 





3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)











 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

(in thousands, except per share amounts)

2017

 

2016

 

2017

 

2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Products

$

94,421 

 

$

94,899 

 

$

189,151 

 

$

185,863 

Services

 

65,046 

 

 

63,212 

 

 

126,747 

 

 

124,803 

Total revenue

 

159,467 

 

 

158,111 

 

 

315,898 

 

 

310,666 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

Products

 

46,554 

 

 

46,200 

 

 

91,302 

 

 

90,361 

Services

 

32,240 

 

 

31,500 

 

 

63,737 

 

 

62,381 

Total cost of sales

 

78,794 

 

 

77,700 

 

 

155,039 

 

 

152,742 

Gross profit

 

80,673 

 

 

80,411 

 

 

160,859 

 

 

157,924 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

63,088 

 

 

63,228 

 

 

129,493 

 

 

137,195 

Research and development

 

24,449 

 

 

20,900 

 

 

47,301 

 

 

41,205 

Total operating expenses

 

87,537 

 

 

84,128 

 

 

176,794 

 

 

178,400 

Loss from operations

 

(6,864)

 

 

(3,717)

 

 

(15,935)

 

 

(20,476)

Interest and other income, net

 

933 

 

 

208 

 

 

1,134 

 

 

334 

Loss before income taxes

 

(5,931)

 

 

(3,509)

 

 

(14,801)

 

 

(20,142)

Provision for income taxes

 

2,067 

 

 

1,700 

 

 

3,108 

 

 

2,879 

Net loss

 

(7,998)

 

 

(5,209)

 

 

(17,909)

 

 

(23,021)

Less: net income (loss) attributable to noncontrolling interests

 

418 

 

 

(561)

 

 

478 

 

 

(585)

Net loss attributable to 3D Systems Corporation

$

(8,416)

 

$

(4,648)

 

$

(18,387)

 

$

(22,436)



 

 

 

 

 

 

 

 

 

 

 

Net loss per share available to 3D Systems Corporation common stockholders - basic and diluted

$

(0.08)

 

$

(0.04)

 

$

(0.17)

 

$

(0.20)



 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Pension adjustments, net of taxes

$

(101)

 

$

67 

 

$

(81)

 

$

36 

Foreign currency translation gain (loss)

 

12,489 

 

 

(6,654)

 

 

20,881 

 

 

1,285 

Total other comprehensive income (loss)

 

12,388 

 

 

(6,587)

 

 

20,800 

 

 

1,321 

Less foreign currency translation gain (loss) attributable to noncontrolling interests

 

74 

 

 

(43)

 

 

135 

 

 

46 

Other comprehensive income (loss) attributable to 3D Systems Corporation

 

12,314 

 

 

(6,544)

 

 

20,665 

 

 

1,275 



 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

4,390 

 

 

(11,796)

 

 

2,891 

 

 

(21,700)

Less comprehensive income (loss) attributable to noncontrolling interests

 

492 

 

 

(604)

 

 

613 

 

 

(539)

Comprehensive income (loss) attributable to 3D Systems Corporation

$

3,898 

 

$

(11,192)

 

$

2,278 

 

$

(21,161)



See accompanying notes to condensed consolidated financial statements.



4


 



3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)







 

 

 

 

 

 

Six Months Ended June 30,

(In thousands)

 

2017

 

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(17,909)

 

$

(23,021)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

30,575 

 

 

30,435 

Stock-based compensation

 

14,450 

 

 

18,893 

Provision for bad debts

 

166 

 

 

2,677 

Benefit of deferred income taxes

 

(1,580)

 

 

(2,201)

Changes in operating accounts, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

5,549 

 

 

30,375 

Inventories

 

(9,766)

 

 

(16,153)

Prepaid expenses and other current assets

 

(2,532)

 

 

(2,463)

Accounts payable

 

4,343 

 

 

(4,526)

Accrued and other current liabilities

 

(6,727)

 

 

(4,328)

Deferred revenue

 

8,032 

 

 

8,198 

All other operating activities

 

(6,209)

 

 

(6,846)

Net cash provided by operating activities

 

18,392 

 

 

31,040 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for acquisitions, net of cash assumed

 

(34,291)

 

 

Purchases of property and equipment

 

(11,243)

 

 

(7,597)

Additions to license and patent costs

 

(571)

 

 

(790)

Other investing activities

 

(1,650)

 

 

(1,000)

Proceeds from disposition of property and equipment

 

271 

 

 

Net cash used in investing activities

 

(47,484)

 

 

(9,387)

Cash flows from financing activities:

 

 

 

 

 

Payments on earnout consideration

 

(3,206)

 

 

Payments related to net-share settlement of stock-based compensation

 

(1,970)

 

 

(1,307)

Repayment of capital lease obligations

 

(290)

 

 

(524)

Net cash used in financing activities

 

(5,466)

 

 

(1,831)

Effect of exchange rate changes on cash and cash equivalents

 

3,602 

 

 

783 

Net (decrease) increase in cash and cash equivalents

 

(30,956)

 

 

20,605 

Cash and cash equivalents at the beginning of the period

 

184,947 

 

 

155,643 

Cash and cash equivalents at the end of the period

$

153,991 

 

$

176,248 



 

 

 

 

 

Cash interest payments

$

400 

 

$

211 

Cash income tax payments, net

$

3,367 

 

$

5,933 

Transfer of equipment from inventory to property and equipment, net (a)

$

7,689 

 

$

7,529 

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

$

907 

 

$

2,075 

Stock issued for acquisitions

$

3,208 

 

$



(a)

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.



(b)

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.



See accompanying notes to condensed consolidated financial statements.

 

5


 





3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except par value)

Shares

 

Par Value $0.001

 

Additional Paid In Capital

 

Shares

 

Amount

 

Accumulated Earnings (Deficit)

 

Accumulated Other Comprehensive Income (Loss)

 

Total 3D Systems Corporation Stockholders' Equity

 

Equity Attributable to Noncontrolling Interests

 

Total Stockholders' Equity

Balance at December 31, 2016

115,113 

 

$

115 

 

$

1,307,428 

 

1,498 

 

$

(2,658)

 

$

(621,787)

 

$

(53,225)

 

$

629,873 

 

$

(3,173)

 

$

626,700 

Issuance (repurchase) of stock

278 

 

 

 —

 

 

 

204 

 

 

(1,970)

 

 

 —

 

 

 —

 

 

(1,970)

 

 

 —

 

 

(1,970)

Issuance of stock for acquisitions

192 

 

 

 —

 

 

3,208 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,208 

 

 

 —

 

 

3,208 

Cumulative impact of change
  in accounting policy

 —

 

 

 —

 

 

(10,206)

 

 —

 

 

 —

 

 

10,206 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 —

 

 

 —

 

 

14,450 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,450 

 

 

 —

 

 

14,450 

Net income (loss)

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(18,387)

 

 

 —

 

 

(18,387)

 

 

478 

 

 

(17,909)

Pension adjustment

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(81)

 

 

(81)

 

 

 —

 

 

(81)

Foreign currency translation adjustment

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

20,746 

 

 

20,746 

 

 

135 

 

 

20,881 

Balance at June 30, 2017

115,583 

 

$

115 

 

$

1,314,880 

 

1,702 

 

$

(4,628)

 

$

(629,968)

 

$

(32,560)

 

$

647,839 

 

$

(2,560)

 

$

645,279 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except par value)

Shares

 

Par Value $0.001

 

Additional Paid In Capital

 

Shares

 

Amount

 

Accumulated Earnings (Deficit)

 

Accumulated Other Comprehensive Income (Loss)

 

Total 3D Systems Corporation Stockholders' Equity

 

Equity Attributable to Noncontrolling Interests

 

Total Stockholders' Equity

Balance at December 31, 2015

113,115 

 

$

113 

 

$

1,279,738 

 

892 

 

$

(1,026)

 

$

(583,368)

 

$

(39,548)

 

$

655,909 

 

$

(1,263)

 

$

654,646 

Issuance (repurchase) of
  restricted stock, net

444 

 

 

 

 

 

492 

 

 

(1,307)

 

 

 

 

 

 

(1,307)

 

 

 

 

(1,307)

Stock-based compensation expense

 

 

 

 

18,893 

 

 

 

 

 

 

 

 

 

18,893 

 

 

 

 

18,893 

Net loss

 

 

 

 

 

 

 

 

 

(22,436)

 

 

 

 

(22,436)

 

 

(585)

 

 

(23,021)

Pension adjustment

 

 

 

 

 

 

 

 

 

 

 

36 

 

 

36 

 

 

 

 

36 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

1,239 

 

 

1,239 

 

 

46 

 

 

1,285 

Balance at June 30, 2016

113,559 

 

$

113 

 

$

1,298,631 

 

1,384 

 

$

(2,333)

 

$

(605,804)

 

$

(38,273)

 

$

652,334 

 

$

(1,802)

 

$

650,532 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to condensed consolidated financial statements.



 

6


 



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 its subsidiaries (collectively, the “Company”). 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, 2016 (“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 and six months ended June 30, 2017 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 amounts presented in the accompanying footnotes are presented in thousands, except for per share information.



Recently Adopted Accounting Pronouncements



In the first quarter of 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. The following summarizes the effects of the adoption on the Company’s unaudited condensed consolidated financial statements:



Forfeitures - Prior to adoption, share-based compensation expense was recognized on a straight-line basis, net of estimated forfeitures, such that expense was recognized only for share-based awards that were expected to vest. A forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Upon adoption, the Company no longer applies a forfeiture rate and instead accounts for forfeitures as they occur. The change was applied on a modified retrospective basis resulting in a cumulative effect adjustment to retained earnings of $10,206 as of January 1, 2017. Prior periods were not adjusted.



Statement of Cash Flows - The Company historically accounted for excess tax benefits related to share-based compensation on the Statement of Cash Flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified along with other income tax cash flows as an operating activity. The Company has elected to adopt this portion of the standard on a prospective basis beginning in 2017. Prior periods were not adjusted.



Income taxes - Upon adoption of this standard, all excess tax benefits and tax deficiencies related to share-based compensation are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. Prior periods were not adjusted. 



Recently Issued Accounting Pronouncements



In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), in an effort to reduce diversity and clarify what constitutes a modification, as it relates to the change in terms or conditions of a share-based payment award. According 2017-09, the Company should account for the effects of a modification unless all of the following are met: (1) the fair value of the modified award is the same as the fair value the original award immediately before the original award is modified, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in 2017-09 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company will adopt ASU 2017-09 beginning January 1, 2018.



7


 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which standardizes the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods. The amendments in ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company will adopt ASU 2017-07 in the first quarter of 2018 and does not expect the implementation of this guidance to have a material effect 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 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 is currently in the process of evaluating when it will adopt ASU 2017-04 and its impact on its consolidated financial statements.



In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 permits the recognition of income tax consequences related to an intra-entity transfer of an asset other than inventory when the transfer occurs. It is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods.  Early adoption is permitted for any interim or annual period. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-16 on its consolidated financial statements.



In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). With the objective of reducing the existing diversity in practice, ASU 2016-15 addresses the manner in which certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017. The amendments should be applied retrospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company expects that the implementation of this guidance will not have a material effect on its consolidated financial statements.



In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize assets and liabilities arising from operating leases on the balance sheet. It is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Though still evaluating the impact of ASU 2016-02, the Company expects changes to its balance sheet due to the recognition of right-of-use assets and lease liabilities related to its real estate leases, but it does not anticipate material impacts to its results of operations or liquidity.



In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). The ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU.



The Company is in process of performing an initial assessment of the impact that the new standard will have on its financial statements. As part of the initial assessment, the Company is comparing current accounting policies to expected accounting policies under the new standard. The Company is also reviewing a sample of its contracts across various businesses and geographies to identify potential differences that could result from applying the requirements of the new standard. Further the Company is evaluating the impact of the new disclosure requirements, which are expected to be significant. In addition, the Company is in the process of evaluating potential changes to business processes, systems and controls to support recognition and disclosure under the new standard, including the possible implementation of a revenue management system.



The Company intends to use the modified retrospective method of adoption effective January 1, 2018, the cumulative effect of which would be recognized at the date of initial application with an adjustment to the opening balance of retained earnings. Under the modified retrospective approach prior year periods are not restated, however, it effectively requires a company to apply both the new revenue standard and the previous revenue guidance in the year of adoption. During the year of adoption both quantitative and qualitative disclosures are required as to the impact of the new standard compared to the previous revenue guidance.

 

8


 

Although efforts are ongoing, the Company believes certain software revenues deferred under previous guidance may be recognized earlier under the new guidance since revenue is allocated to performance obligations based on either observable inputs or estimated stand-alone selling price.  The Company is still in the process of evaluating the impact of potential differences.



No other new accounting pronouncements, issued or effective during 2017, have had or are expected to have a significant impact on the Company’s consolidated financial statements.



(2) Acquisitions



On January 31, 2017, the Company acquired 100 percent of the shares of Vertex-Global Holding B.V. (“Vertex”), a provider of dental materials worldwide under the Vertex and NextDent brands. The cash portion of the purchase price is included in cash paid for acquisitions, net of cash assumed, in the unaudited Condensed Consolidated Statement of Cash Flows. The share portion of the purchase price is included in issuance of stock for acquisitions in the unaudited Condensed Consolidated Statement of Equity. The operating results of Vertex have been included in the Company’s reported results since the closing date. The purchase price of the acquisition has been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.



The Company had no acquisition activity in the second quarter of 2017 or in fiscal year 2016.



(3)  Inventories



Components of inventories as of June 30, 2017 and December 31, 2016 were as follows:



 

 

 

 

 



 

 

 

 

 

(in thousands)

2017

 

2016

Raw materials

$

41,818 

 

$

38,383 

Work in process

 

4,719 

 

 

3,109 

Finished goods and parts

 

64,279 

 

 

61,839 

Inventories

$

110,816 

 

$

103,331 





















(4)  Property and Equipment



Property and equipment, net, as of June 30, 2017 and December 31, 2016 were as follows:



 

 

 

 

 

 

 



 

 

 

 

 

 

 

(in thousands)

2017

 

2016

 

Useful Life (in years)

Land

$

903 

 

$

903 

 

N/A

Building

 

11,122 

 

 

11,122 

 

25-30

Machinery and equipment

 

123,484 

 

 

108,682 

 

2-7

Capitalized software

 

8,749 

 

 

8,651 

 

3-5

Office furniture and equipment

 

3,606 

 

 

3,130 

 

1-5

Leasehold improvements

 

25,711 

 

 

24,423 

 

Life of lease (a)

Rental equipment

 

326 

 

 

144 

 

5

Construction in progress

 

10,433 

 

 

7,760 

 

N/A

Total property and equipment

 

184,334 

 

 

164,815 

 

 

Less: Accumulated depreciation and amortization

 

(97,018)

 

 

(84,837)

 

 

Total property and equipment, net

$

87,316 

 

$

79,978 

 

 



(a)

Leasehold improvements are amortized on a straight-line basis over the shorter of (i) their estimated useful lives and (ii) the estimated or contractual life of the related lease.



Depreciation expense on property and equipment was $6,398 and $12,271 for the quarter and six months ended June 30, 2017, respectively, compared to $6,210 and $12,210 for the quarter and six months ended June 30, 2016, respectively.



9


 

(5)  Intangible Assets



Intangible assets, net, other than goodwill, as of June 30, 2017 and December 31, 2016 were as follows:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



2017

 

2016

 

 

 

 

(in thousands)

Gross

 

Accumulated Amortization

 

Net

 

Gross

 

Accumulated Amortization

 

Net

 

Useful Life (in years)

 

Weighted Average Useful Life Remaining (in years)

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

106,238 

 

$

(53,546)

 

$

52,692 

 

$

99,067 

 

$

(46,252)

 

$

52,815 

 

1-14

 

6

Acquired technology

 

55,492 

 

 

(34,822)

 

 

20,670 

 

 

52,881 

 

 

(27,543)

 

 

25,338 

 

1-16

 

4

Trade names

 

30,409 

 

 

(18,099)

 

 

12,310 

 

 

28,110 

 

 

(16,015)

 

 

12,095 

 

1-8

 

5

Patent costs

 

17,072 

 

 

(6,613)

 

 

10,459 

 

 

16,263 

 

 

(5,873)

 

 

10,390 

 

1-20

 

9

Trade secrets

 

19,569 

 

 

(10,537)

 

 

9,032 

 

 

19,134 

 

 

(9,383)

 

 

9,751 

 

7

 

4

Acquired patents

 

17,038 

 

 

(11,526)

 

 

5,512 

 

 

16,965 

 

 

(10,674)

 

 

6,291 

 

1-6

 

4

Other

 

25,586 

 

 

(21,250)

 

 

4,336 

 

 

23,431 

 

 

(18,610)

 

 

4,821 

 

2-4

 

2

Total intangible assets

$

271,404 

 

$

(156,393)

 

$

115,011 

 

$

255,851 

 

$

(134,350)

 

$

121,501 

 

1-20

 

4



Amortization expense related to intangible assets was $8,984 and $17,816 for the quarter and six months ended June 30, 2017, respectively, compared to $8,860 and $17,679 for the quarter and six months ended June 30, 2016, respectively.



(6)  Accrued and Other Liabilities



Accrued liabilities as of June 30, 2017 and December 31, 2016 were as follows:



 

 

 

 

 



 

 

 

 

 

(in thousands)

2017

 

2016

Compensation and benefits

$

19,026 

 

$

22,771 

Accrued taxes

 

8,852 

 

 

9,831 

Vendor accruals

 

8,465 

 

 

8,231 

Accrued earnouts related to acquisitions

 

3,971 

 

 

3,238 

Accrued other

 

2,690 

 

 

2,956 

Royalties payable

 

1,954 

 

 

2,092 

Accrued professional fees

 

741 

 

 

810 

Accrued interest

 

113 

 

 

39 

Total

$

45,812 

 

$

49,968 



Other liabilities as of June 30, 2017 and December 31, 2016 were as follows:



 

 

 

 

 



 

 

 

 

 

(in thousands)

2017

 

2016

Long term employee indemnity

$

12,776 

 

$

11,152 

Arbitration award

 

11,282 

 

 

11,282 

Defined benefit pension obligation

 

8,276 

 

 

7,613 

Long term tax liability

 

7,213 

 

 

7,183 

Other long term liabilities

 

5,691 

 

 

5,726 

Long term deferred revenue

 

6,713 

 

 

7,464 

Long term earnouts related to acquisitions

 

4,117 

 

 

7,568 

Total

$

56,068 

 

$

57,988 

















10


 

(7)  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 Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging,” and therefore, all gains and losses (realized or unrealized) are recognized in “Interest and other income, net” in the condensed consolidated statements of operations and comprehensive income (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 $37,703 in notional foreign exchange contracts outstanding as of June 30, 2017, for which the fair value was not material. No foreign exchange contracts were outstanding as of December 31, 2016



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. The impact of translating the Company’s non-U.S. operations’ revenue and earnings into U.S. dollars was not material to the Company’s results of operations for the quarters and six months ended June 30, 2017 and 2016.



(8) Borrowings



Credit Facility



As of June 30, 2017, the Company had a $150,000 revolving, unsecured credit facility (the “Credit Agreement”) with a syndicate of banks, to be used for general corporate purposes and working capital needs. The Credit Agreement is scheduled to expire in October 2019. The Credit Agreement includes provisions for the issuance of letters of credit and swingline loans and contains certain restrictive covenants, which include the maintenance of a maximum consolidated total leverage ratio. The Company was in compliance with those covenants at June 30, 2017 and December 31, 2016. There were no outstanding borrowings as of June 30, 2017.



Capitalized Lease Obligations



The Company’s capitalized lease obligations primarily include a lease agreement that was entered into during 2006 with respect to the Company’s corporate headquarters located in Rock Hill, SC. The change in capitalized lease obligations, as presented in the Condensed Consolidated Balance Sheets, was due to the normal scheduled timing of payments.



(9)  Pension Benefits



The components of the Company’s pension cost recognized in the condensed consolidated statements of operations and comprehensive income (loss) for the quarters and six months ended June 30, 2017 and 2016 were as follows:







 

 

 

 

 

 

 

 

 

 

 



Quarter Ended June 30,

 

Six Months Ended June 30,

(Dollars in thousands)

2017

 

2016

 

2017

 

2016

Service cost

$

70 

 

$

60 

 

$

137 

 

$

143 

Interest cost

 

68 

 

 

52 

 

 

133 

 

 

125 

Amortization of actuarial loss

 

60 

 

 

33 

 

 

118 

 

 

65 

Total periodic cost

$

198 

 

$

145 

 

$

388 

 

$

333 





















(10)  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.  











 

 

 

 

 

 

 

 

 

 

 

11


 



Quarter Ended June 30,

 

Six Months Ended June 30,

(in thousands, except per share amounts)

2017

 

2016

 

2017

 

2016

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to 3D Systems Corporation

$

(8,416)

 

$

(4,648)

 

$

(18,387)

 

$

(22,436)



 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

111,398 

 

 

111,166 

 

 

111,350 

 

 

111,288 



 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

$

(0.08)

 

$

(0.04)

 

$

(0.17)

 

$

(0.20)



For the quarters and six months ended June 30, 2017 and 2016, 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. The effect of dilutive securities excluded was 5,439 weighted average shares and 5,471 weighted average shares for the quarter and six months ended June 30, 2017, compared to 1,382 weighted average shares and 1,263 weighted average shares for the quarter and six months ended June 30, 2016, respectively.







(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.



For the Company, the above standard applies to cash equivalents and earnout consideration. 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.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of June 30, 2017

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Description

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (a) 

$

25,159 

 

$

 

$

 

$

25,159 

Earnout consideration (b)

$

 

$

 

$

8,088 

 

$

8,088 



 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2016

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Description

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (a) 

$

25,206 

 

$

 

$

 

$

25,206 

Earnout consideration (b)

$

 

$

 

$

10,806 

 

$

10,806 



(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.



12


 

(b)

The fair value of the earnout consideration, which is based on the present value of the expected future payments to be made to the sellers of the acquired businesses, was derived by analyzing the future performance of the acquired businesses using the earnout formula and performance targets specified in each purchase agreement and adjusting those amounts to reflect the ability of the acquired entities to achieve the stated targets. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy. The change in earnout consideration reflects a $3,206 payment, partially offset by $488 of accretion.





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 or six months ended June 30, 2017.



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 our Form 10-K.



(12)  Income Taxes



For the quarter and six months ended June 30, 2017, the Company recorded provisions of $2,067 and $3,108, respectively, resulting in effective tax rates of 34.9% and 21.0%, respectively. For the quarter and six months ended June 30, 2016, the Company recorded provisions of $1,700 and $2,879, respectively, resulting in effective tax rates of 48.4% and 14.3%, respectively.



The Company has not provided for any taxes on the unremitted earnings of its foreign subsidiaries, as the Company intends to permanently reinvest all such earnings outside of the U.S. We believe a calculation of the deferred tax liability associated with these undistributed earnings is impracticable.



Tax years 2003 through 2015 remain subject to examination by the U.S. Internal Revenue Service, with most of the years open to examination due to the generation and utilization of net operating losses. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in Australia (2012), Belgium (2013), Brazil (2011), China (2014), France (2014), Germany (2013), India (2013), Israel (2012), Italy (2011), Japan (2012), Korea (2012), Mexico (2011), Netherlands (2011), Switzerland (2011), the United Kingdom (2015) and Uruguay (2011).





(13)  Segment Information



The Company operates in one reportable business segment. The Company conducts its business through various offices and facilities located throughout the Asia Pacific region (Australia, China, India, Japan and Korea), EMEA (Belgium, France, Germany, Israel, Italy, the Netherlands, Switzerland and the United Kingdom), Latin America (Brazil, Mexico and Uruguay) and the United States. 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: