UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10‑Q

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☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

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

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3D SYSTEMS CORPORATION

(Exact name of Registrant as specified in its Charter)

_______________  _____________________________

 

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

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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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

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 November 5, 2014:  111,217,093

 

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3D SYSTEMS CORPORATION

Quarterly Report on Form 10-Q for the

Quarter Ended September 30, 2014

 

TABLE OF CONTENTS

 

 

 

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PART I. — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

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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 (“Form 10-K”) for the year ended December 31, 2013.

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the quarter and nine months ended September 30, 2014 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.

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-12, Compensation – Stock Compensation (“ASU 2014-12”). ASU 2014-12 is intended to resolve diverse accounting treatment for share based awards in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 and may be applied prospectively or retrospectively.  The Company does not expect adoption of this standard will have a significant impact on the Company’s consolidated financial statements.

 

In August  2014, the FASB  issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and if those conditions exist, the required disclosures.  The standard is effective for  annual periods ending  after December 15, 2016, and interim periods therein.  The Company does not expect adoption of this standard will have a significant impact on the Company’s consolidated financial statements.

 

No other accounting pronouncements, issued or effective during the third quarter of 2014, have had or are expected to have a significant impact on the Company’s consolidated financial statements.

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(2) Acquisitions

 

The Company completed five acquisitions in the third quarter of 2014, which are discussed below.

 

On August 6, 2014, the Company acquired certain assets of Bordner and Associates, Inc. d/b/a Laser Reproductions (“Laser Reproductions”).  Laser Reproductions, based in Ohio, is a provider of advanced manufacturing, tooling and rapid prototyping solutions. The fair value of the consideration paid for this acquisition, net of cash acquired, was $17,450, of which $13,075 was paid in cash and $4,375 was paid in shares of the Company’s common stock. These shares were issued in a private transaction exempt from registration under the Securities Act of 1933. The operations of Laser Reproductions have been integrated into the Company’s service revenues. The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed, based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill, and is included in the table below, which summarizes third quarter 2014 acquisitions. Factors considered in determination of goodwill include synergies, vertical integration and strategic fit for the Company.

 

On August 13, 2014, the Company acquired certain assets of sister companies American Precision Machining, L.L.C. (“APM”) and American Precision Prototyping, LLC (“APP”), based in Oklahoma. APM and APP are providers of precision machining and manufacturing services and 3D printing services. The fair value of the consideration paid for these acquisitions, net of cash acquired, was $14,089, all of which was paid in cash. The operations of APM and APP have been integrated into the Company’s service revenues. The fair value of the consideration paid for these acquisitions was allocated to the assets purchased and liabilities assumed, based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill, and is included in the table below, which summarizes third quarter 2014 acquisitions. Factors considered in determination of goodwill include synergies, vertical integration and strategic fit for the Company.

 

On August 28, 2014, the Company acquired 100% of the outstanding shares and voting rights of Simbionix USA Corporation (“Simbionix”). Headquartered in Cleveland, Ohio, with a research and development center in Israel, Simbionix is a provider of patient-specific surgical simulation solutions. The fair value of the consideration paid for this acquisition, net of cash acquired, was $121,562, all of which was paid in cash. The operations of Simbionix have been integrated into the Company’s products and service revenues. The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed, based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill, and is included in the table below, which summarizes third quarter 2014 acquisitions. Factors considered in determination of goodwill include synergies, vertical integration and strategic fit for the Company.

 

On September 3, 2014, the Company acquired 100% of the outstanding shares and voting rights of LayerWise NV (“LayerWise”), based in Belgium.  LayerWise is a provider of advanced direct metal 3D printing and manufacturing services and delivers quick-turn, 3D-printed metal parts, manufactured on its own proprietary line of direct metal 3D printers, for aerospace, high-precision equipment, and medical and dental customers. The fair value of the consideration paid for this acquisition, net of cash acquired, was $41,933, all of which was paid in cash. The operations of LayerWise have been integrated into the Company’s service revenues. The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed, based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill, and is included in the table below, which summarizes third quarter 2014 acquisitions. Factors considered in determination of goodwill include synergies, vertical integration and strategic fit for the Company.

 

The acquisitions completed in the third quarter are not material relative to the Company’s assets or operating results; therefore, no proforma financial information is provided.

 

The Company’s purchase price allocation for the acquired companies is preliminary and subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities becomes available. The amounts related to the acquisitions are allocated to the assets acquired and the liabilities assumed and are included in the Company’s unaudited condensed consolidated balance sheet at September 30, 2014 as follows:

 

 

 

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Pending Acquisition

 

On April 16, 2014, the Company entered into a definitive agreement to acquire Robtec, an additive manufacturing service bureau and  distributor of 3D printing and scanning products located in Sao Paulo, Brazil. Under the terms of the agreement, the Company will acquire 70% of the shares of Robtec at closing and the remainder of the shares on the fifth anniversary of the closing. The Company expects to close the acquisition before the end of 2014.

 

(3)  Inventories

 

Components of inventories, net at September 30, 2014 and December 31, 2013 were as follows:

 

 

(4)  Property and Equipment

 

Property and equipment at September 30, 2014 and December 31, 2013 were as follows:

 

 

Depreciation and amortization expense on property and equipment for the quarter and nine months ended September 30, 2014 was $3,828 and $10,320, respectively, compared to $2,552 and $6,984, respectively, for the quarter and nine months ended September 30, 2013.

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(5)  Intangible Assets

 

Intangible assets other than goodwill at September 30, 2014 and December 31, 2013 were as follows:

 

For the nine months ended September 30, 2014 and 2013, the Company capitalized $547 and $1,502, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries.

 

Amortization expense for intangible assets for the quarter and nine months ended September 30, 2014 was $11,096 and $28,510, respectively, compared to $6,206 and $15,102, respectively, for the quarter and nine months ended September 30, 2013.

 

Annual amortization expense for intangible assets for 2014, 2015, 2016, 2017 and 2018 is expected to be $41,878,  $29,631,  $26,573,  $23,617 and $18,567, respectively.

 

(6)  Accrued and Other Liabilities

 

Accrued liabilities at September 30, 2014 and December 31, 2013 were as follows:

 

Other liabilities at September 30, 2014 and December 31, 2013 were as follows:

 

 

 

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(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 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 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.

 

There were no foreign currency contracts outstanding at September 30, 2014  or at December 31, 2013. 

 

The total impact of foreign currency transactions on the condensed consolidated statements of operations and comprehensive income (loss) for the quarter and nine months ended September 30, 2014 reflected a loss of $1,740 and a loss of $3,085, respectively, compared to a gain of $505 and a loss of $258, respectively, for the quarter and nine months ended September 30, 2013.

 

(8) Borrowings

 

5.5% senior convertible notes

 

In November 2011, the Company issued $152,000 of 5.50% senior convertible notes due December 2016. The notes were issued with an effective yield of 5.96% based upon an original issue discount at 98.0%. The net proceeds from the issuance of these notes, after deducting original issue discount and capitalized issuance costs of $6,634, amounted to $145,366.

 

During the third quarter of 2014, the remaining $12,540 of outstanding notes were converted, reflecting a loss of $1,806 for the quarter and nine months ended September 30, 2014, compared to losses of $2,022 and $11,275, respectively, for the quarter and nine months ended September 30, 2013.  As of September 30, 2014, there is no outstanding balance for the notes.

 

Other debt

 

In connection with its acquisition of LayerWise, the Company assumed a portion of LayerWise’s outstanding bank debt, consisting of $1,427 of revolving credit facilities and $240 in term loans. The term loans bear interest at rates ranging from 1.34% to 5.40% as of September 30, 2014. The outstanding balance on the term loans was $223, as of September 30, 2014, all of which was current. There were no borrowings outstanding under the revolving credit facilities as of September 30, 2014. There is a 0.125% commitment fee on the unused portion of the facilities.

 

(9)  Stock-based Compensation Plans

 

The Company records stock-based compensation expense in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). Stock-based compensation expense for the quarter and nine months ended September 30, 2014 and 2013 was as follows:

 

 

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The number of shares of restricted common stock awarded and the weighted average fair value per share during the quarter and nine months ended September 30, 2014 and 2013 were as follows:

 

 

During the nine months ended September 30, 2014, the Company granted restricted stock awards covering 464 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan. Of the 464 shares granted in the first nine months of 2014, 30 shares were awarded to executive officers of the Company and 35 shares remained subject to acceptance at September 30, 2014. In the first nine months of 2013, the Company granted restricted stock awards covering 385 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan, of which 27 shares were awarded to executive officers of the Company. 

 

In the first nine months of 2014 and 2013, respectively, the Company granted 17 and 15 shares, respectively, of common stock pursuant to the Company’s 2004 Restricted Stock Plan for Non-Employee Directors. Stock compensation expense for Non-Employee Directors for the first nine months of 2014 and 2013 was $849 and $727, respectively.

 

(10)  International Retirement Plan

 

The following table shows the components of net periodic benefit costs and other amounts recognized in the condensed consolidated statements of operations and comprehensive income (loss) for the quarter and nine months ended September 30, 2014 and 2013:

 

 

 

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(11)  Earnings Per Share

 

The Company presents basic and diluted earnings per share (“EPS”) amounts. Basic EPS is calculated by dividing net income attributable to 3D Systems Corporation available to common stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted EPS is calculated by dividing net income by the weighted average number of common and common equivalent shares outstanding during the applicable period.

 

The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares at September 30, 2014 and 2013:

 

 

 

 

For the quarter ended September 30, 2014, average common shares for basic and diluted earnings per share were 110,737 and basic and diluted earnings per share were $0.03. For the quarter ended September 30, 2013, average common shares for basic and diluted earnings per share were 102,437 and basic and diluted earnings per share were $0.17.

 

For the nine months ended September 30, 2014, average common shares for basic and diluted earnings per share were 106,923, and basic and diluted earnings per share were $0.09. For the nine months ended September 30, 2013, average common shares for basic and diluted earnings per share were 96,874 and basic and diluted earnings per share were $0.34.

 

(12)  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 which requires an entity to maximize the use of observable inputs that may be used to measure fair value:

 

 

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For the Company, the above standard applies to cash equivalents and senior convertible notes. 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:

 

 

The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the quarter and nine months ended September 30, 2014.

 

In addition to the financial assets included in the above table, certain of our non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when impairment is recognized. The Company has not recorded any impairments related to such assets and has had no other significant non-financial assets or non-financial liabilities requiring adjustments or write-downs to fair value as of September 30, 2014 or December 31, 2013.

 

(13)  Income Taxes

 

The Company’s effective tax rates were 26.2% and 34.4% for the quarter and nine months ended September 30, 2014, respectively, compared to 31.9% and 30.8% for the quarter and nine months ended September 30, 2013.

 

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 2010 to 2013 are subject to examination by the U.S. Internal Revenue Service. The Company has utilized U.S. loss carryforwards causing the years 1997 to 2007 to be subject to examination. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in Australia (2009), Belgium (2010), China (2010), France (2011), Germany (2011), India (2012), Israel (2010), Italy (2009), Japan (2007), Korea (2008), Netherlands (2007), Switzerland (2008), and the United Kingdom (2009).

 

(14)  Segment Information

 

The Company operates in one reportable business segment. The Company conducts its business through subsidiaries in the United States, a subsidiary in Israel that operates a research and production facility and sales and service offices, a subsidiary in Switzerland that operates a research and production facility, subsidiaries in France that operate production facilities and sales and service offices, and sales and service offices operated by other subsidiaries in Europe (Belgium, Germany, the United Kingdom, Italy and the Netherlands) and in Asia-Pacific (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.  

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Summarized financial information concerning the Company’s geographical operations is shown in the following tables:

 

 

The Company’s revenue from unaffiliated customers by type was as follows:

 

 

 

Intercompany sales were as follows:

 

 

All revenue between geographic areas is recorded at prices that provide for an allocation of profit (loss) between entities. Income (loss) from operations,  assets, and cash for each geographic area was as follows:

 

 

 

 

 

 

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(15)  Commitments and Contingencies

 

The Company leases office space under various non-cancelable operating leases. Rent expense under operating leases was $2,763 and $7,673 for the quarter and nine months ended September 30, 2014 compared to $2,122 and $4,940 for the quarter and nine months ended September 30, 2013. 

 

The Company has supply commitments for printer assemblies that total $55,494 at September 30, 2014, compared to $41,091 at December 31, 2013.

 

Certain of the Company’s acquisitions contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total liabilities recorded for these earnouts as of September 30, 2014 and December 31, 2013 was $8,938 and $5,578, respectively.

 

Litigation 

 

On November 20, 2012, the Company filed a complaint in an action titled 3D Systems, Inc. v. Formlabs, Inc. and Kickstarter, Inc. in the United States District Court for the District of South Carolina (Rock Hill Division) asserting that Formlabs’ and Kickstarter’s sales of the Form 1 3D printer infringed on one of the Company’s patents relating to stereolithography machines. Formlabs and Kickstarter filed a motion to dismiss or transfer venue on February 25, 2013, and the Company filed a first amended complaint on March 8, 2013. On May 8, 2013, the Court granted the parties’ joint motion to stay the case until September 3, 2013 to enable the parties to continue settlement discussions. On November 8, 2013, the Company voluntarily dismissed the South Carolina complaint and filed a new complaint in the United States District Court for the Southern District of New York asserting that Formlabs’ sales of the Form 1 3D printer infringed on eight of the Company’s patents relating to stereolithography machines.  On December 20, 2013, Formlabs filed a motion to dismiss the Company’s claims of indirect and willful infringement, and the Company filed a memorandum in opposition on January 6, 2014.  Formlabs filed a reply on January 16, 2014. The Court ruled on the motion to dismiss on May 12, 2014, granting in part and dismissing in part Formlabs’ motion. The Company filed a first amended complaint on May 16, 2014, and Formlabs filed its answer on September 2, 2014. The Company intends to pursue claims for damages against Formlabs.  

 

The Company is also involved in various other legal matters incidental to its business. The Company believes, after consulting with counsel, that the disposition of these other legal matters will not have a material effect on our consolidated results of operations or consolidated financial position. 

 

Indemnification

 

In the normal course of business the Company periodically enters into agreements to indemnify customers or suppliers against claims of intellectual property infringement made by first parties arising from the use of the Company’s products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

 

To the extent permitted under Delaware law, the Company indemnifies directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Company’s request in such capacity, subject to limited exceptions. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has directors and officers insurance coverage that may enable the Company to recover future amounts paid, subject to a deductible and the policy limits. There is no assurance that the policy limits will be sufficient to cover all damages, if any.

 

(16)  Accumulated Other Comprehensive Income (Loss)

 

The changes in the balances of accumulated other comprehensive income (loss) by component are as follows:

 

 

 

The amounts presented above are included in other comprehensive income (loss) and are net of taxes. For additional information about foreign currency translation, see Note 7. For additional information about the pension plan, see Note 10.

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(17)  Noncontrolling Interest 

 

As of September 30, 2014, the Company owned approximately 95% of the capital and voting rights of Phenix Systems, a global provider of direct metal selective laser sintering 3D printers based in Riom, France. Phenix’s operating results are included in these condensed consolidated financial statements. In accordance with ASC 810, “Consolidation,” the carrying value of the noncontrolling interest is reported in the condensed consolidated balance sheets as a separate component of equity and condensed consolidated net income has been adjusted to report the net income attributable to the noncontrolling interest.

 

(18)  Subsequent Event

 

On October 10, 2014, the Company and certain of its subsidiaries entered into a $150,000 five-year revolving, unsecured credit facility (the “Credit Agreement”) with PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC, as Sole Lead Arranger and Sole Bookrunner, HSBC Bank USA, N.A., as Syndication Agent, and the other lenders party thereto (collectively, the “Lenders”). The Credit Agreement comprises a revolving loan facility that provides for advances in the initial aggregate principal amount of up to $150,000 (the “Credit Facility”).  Subject to certain terms and conditions contained in the Credit Agreement, the Company may, at its option and subject to customary conditions, request an increase in the aggregate principal amount available under the Credit Facility by an additional $75,000.  The Credit Agreement includes provisions for the issuance of letters of credit and swingline loans. 

 

The Credit Agreement is guaranteed by certain of the Company’s material domestic subsidiaries (the “Guarantors”).  Pursuant to the Credit Agreement, the Guarantors guarantee to the Lenders, among other things, all of the obligations of the Company and each other Guarantor under the Credit Agreement.  From time to time, the Company may be required to cause additional material domestic subsidiaries to become Guarantors under the Credit Agreement.

 

Generally, amounts outstanding under the Credit Facility bear interest, at the Company’s option, at either the Base Rate or the LIBOR Rate, in each case, plus an applicable margin.  Base Rate advances bear interest at a rate per annum equal to the sum of (i) the highest of (A) the Administrative Agent’s prime rate, (B) the Federal Funds Open Rate plus 0.5% or (C) the Daily LIBOR Rate for a one month interest period plus 1%, and (ii) an applicable margin that ranges from 0.25% to 0.50% based upon the Company’s consolidated total leverage ratio. LIBOR Rate advances bear interest at a rate based upon the London interbank offered rate for the applicable interest period, plus an applicable margin that ranges from 1.25% to 1.50% based upon the Company’s consolidated total leverage ratio. Under the terms of the Credit Agreement, (i) accrued interest on each loan bearing interest at the Base Rate is payable quarterly in arrears and (ii) accrued interest on each loan bearing interest at the LIBOR Rate is payable in arrears on the earlier of (A) quarterly and (B) the last day of each applicable interest payment date for each loan. The Credit Facility is scheduled to mature on October 10, 2019, at which time all amounts outstanding thereunder will be due and payable.

 

The Company is required to pay certain fees in connection with the Credit Facility, including a quarterly commitment fee equal to the product of the amount of the average daily available revolving commitments under the Credit Agreement multiplied by a percentage that ranges from 0.20% to 0.25% depending upon the Company’s leverage ratio, as well as customary administrative fees.

 

The Credit Agreement contains customary representations, warranties, covenants and default provisions for a Credit Facility of this type, including, but not limited to, financial covenants, limitations on liens and the incurrence of debt, covenants to preserve corporate existence and comply with laws and covenants regarding the use of proceeds of the Credit Facility. The financial covenants include a maximum consolidated total leverage ratio, which is the ratio of consolidated total funded indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization expense), as defined in the Credit Agreement, of 3.00 to 1.00, and a minimum interest coverage ratio, which is the ratio of Consolidated EBITDA to cash interest expense, of 3.50 to 1.0.  The Company is only required to be in compliance with the financial covenants as of the end of any fiscal quarter in which there are any loans outstanding at any time during such fiscal quarter.

 

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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 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” and “Cautionary Statements and Risk Factors” 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

 

We are a leading global provider of 3D printing centric design-to-manufacturing solutions, including 3D printers, print materials and on-demand custom parts for professionals and consumers alike. Our materials include plastics, metals, ceramics and edibles. We also provide integrated 3D scan-based design, freeform modeling and inspection tools and an integrated 3D planning and printing digital thread for personalized surgery and patient specific medical devices. Our products and services replace and complement traditional methods and reduce the time and cost of designing new products by printing real parts directly from digital input. These solutions are used to rapidly design, create, communicate, prototype or produce functional parts and assemblies, empowering customers to manufacture the future.

 

We derive our consolidated revenue primarily from the sales of our printers, the sales of the related print materials and services, the sales of our Quickparts brand on-demand parts services, 3D-related healthcare products and services, and the sales of software products, perceptual and haptic devices, and Simbionix simulators.

 

Recent Developments 

 

In August, we continued to expand our 3D healthcare and personalized medical solutions with the acquisition of Simbionix USA Corporation (“Simbionix”). Simbionix specializes in FDA-cleared, 3D virtual reality surgical simulation and training solutions, with over sixty interventional procedures across eight specialties through sixteen simulation platforms. With a strong sales channel, Simbionix extends our 3D medical digital thread, from training room to operating room. 

 

In August, we enhanced our Quickparts services with the acquisitions of Bordner and Associates, Inc. d/b/a Laser Reproductions (“Laser Reproductions”), American Precision Machining, L.L.C. (“APM”) and its sister company American Precision Prototyping, LLC (“APP”). These acquisitions bring expertise in SLA, precision machining, rapid prototyping and advanced manufacturing solutions, including aerospace expertise and relationships.

 

In August, we signed a lease on a new 0.2 million square foot facility in Rock Hill, South Carolina, increasing our manufacturing and distribution capacity to meet growing demand for our printers and materials.

 

In September, we acquired LayerWise NV (“LayerWise”), based in Belgium. LayerWise is a provider of advanced direct metal 3D printing and manufacturing services and delivers quick-turn, 3D-printed metal parts, manufactured on its own proprietary line of direct metal 3D printers, for aerospace, high-precision equipment and medical and dental customers.

 

In October, we entered into a $150.0 million five-year revolving, unsecured credit facility (the “Credit Agreement”) with PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC, as Sole Lead Arranger and Sole Bookrunner, HSBC Bank USA, N.A., as Syndication Agent, and the other lender’s party there to. The Credit Agreement comprises a revolving loan facility that provides for advances in the initial aggregate principal amount of up to $150.0 million (the “Credit Facility”).  Subject to certain terms and conditions contained in the Credit Agreement, the Company may, at its option and subject to customary conditions, request an increase in the aggregate principal amount available under the Credit Facility by an additional $75.0 million.  The Credit Agreement includes provisions for the issuance of letters of credit and swingline loans.

 

In November, we announced that Ted Hull will assume the role of Chief Financial Officer (“CFO”). Hull’s career spans more than three decades of progressing financial leadership roles in high-tech companies and sector leaders including Cisco, Maxtor and IBM. In addition, we announced Mark Wright as our Chief Operating Officer (“COO”). Wright has previously served in various related roles, including Senior Vice President of Operations for EMC Corporation (NYSE: EMC) and COO of EMC’s Flash Product Division. Other new management positions announced include Peter Theran as Vice-President of Consumer Retail, Kevin McAlea being promoted to Executive Vice-President & COO of Healthcare, and Jeff Blank being promoted to Vice-President, Global Engineering and Chief Development Officer.

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Results of Operations

 

Summary of 2014 financial results

 

During the third quarter of 2014, we reported improved revenue as compared to the third quarter of 2013 as our worldwide businesses continued to expand, reflecting growth in design and manufacturing printers and materials and increased software and service revenue. Revenue for the third quarter of 2014 increased by 23.0%, or $31.2 million, to $166.9 million compared to $135.7 million in the third quarter of 2013. Higher revenue offset by increased SG&A expenses and higher R&D expenses, resulted in net income of $3.1 million for the third quarter of 2014, compared to net income of $17.7 million for the same period in 2013. 

 

Products revenue increased by $13.1 million, or 21.9%, from the third quarter of 2013, to $72.9 million, driven by expanding use and rising demand for our design and manufacturing printers.

 

Materials sales for the third quarter of 2014 were $39.0 million, an increase of $5.8 million, or 17.5%, from the third quarter of 2013 as revenue from materials was impacted by continued expansion of printers installed over past periods and increased utilization of printers.

 

Revenue from services increased by $12.3 million, or 28.9%, to $55.0 million in the third quarter of 2014 from $42.7 million in the same quarter in 2013. The increase in services revenue reflects increased revenue from the addition of healthcare services and higher Quickparts revenue, from organic and acquired growth.

 

We calculate organic growth by comparing this year’s total revenue for the period, excluding the revenue recognized from all acquired businesses that we have owned for less than twelve months, to last year’s total revenue for the period. Once we have owned a business for one year, the revenue is included in organic growth. Organic growth is calculated based on total revenue for the prior year period. In the third quarter of 2014, our organic growth was 12.2% compared to 29.7% for the third quarter of 2013. For the nine months ended September 30, 2014 and 2013, our organic growth was 16.0% and 27.5%, respectively.

 

Healthcare revenue includes sales of products, materials, and services for health-related applications, including hearing aid, dental, personalized medicine and medical devices. For the third quarter of 2014, healthcare revenue increased 121.4% and made up 22.4%, or $37.4 million, of our total revenue compared to 12.4%, or $16.9 million, in the third quarter of 2013, primarily due to our increased penetration and growth in healthcare applications and the addition of Simbionix, Medical Modeling and Layerwise. During the first nine months of 2014, healthcare revenue increased 73.5% and made up 18.6%, or $86.5 million, of our total revenue compared to 13.9%, or $49.9 million, in the 2013 period.

 

Consumer revenue includes sales of Cube® 3D printers and their related print materials, Sense 3D scanners and other products and services related to consumer products and retail channels. For the third quarter of 2014, consumer revenue decreased 12.5% to $11.8 million, or 7.1% of our total revenue, compared to $13.5 million, or 9.9% of total revenue, in the third quarter of 2013. The decrease was primarily driven by delayed shipments of newer consumer products. During the first nine months of 2014, consumer revenue increased 11.4%, to $28.8 million, or 6.2% of total revenue, compared to $25.8 million, or 7.2% of total revenue, in the 2013 period, driven by expanded consumer offerings and increasing demand.

 

Our gross profit in the third quarter of 2014 improved by $8.4 million, primarily due to our higher level of revenue from increases across products, materials, and services. Our gross profit margin decreased to 47.8% in the third quarter of 2014 from 52.6% in the third quarter of 2013, reflecting current sales mix and timing of sales, availability of new products, and residual new product startup costs.

 

Our total operating expenses increased by $28.7 million in the third quarter of 2014, to $71.6 million, from $42.9 million in the same 2013 quarter. The increase reflected higher selling, general and administrative expenses primarily due to increased sales and marketing expenses and higher staffing due to our expanding portfolio.  The increase also reflects a $7.1 million increase in research and development expenses related to our portfolio expansion, new products developments, and the addition of the engineering team in Wilsonville, Oregon.

 

Our operating income for the third quarter of 2014  decreased to $8.2 million from $28.6 million in the same 2013 quarter. This decrease in operating income is due to lower gross profit margin and higher operating expenses as discussed in more detail below.

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Our operating activities generated $27.9 million of cash during the first nine months of 2014, which is discussed in further detail below. We used $261.9 million to fund our strategic investing activities, including acquisition costs. Financing activities during the first nine months of 2014 generated $307.9 million of cash, primarily due to proceeds from our equity raise in the second quarter of 2014. In total, our unrestricted cash balance at September 30, 2014 was $377.3 million compared to $306.3 million at December 31, 2013.

 

Third quarter comparison of revenue by class of product and service

 

Table 1 sets forth our change in revenue by class of product and services for the third quarter of 2014 compared to the third quarter of 2013:

 

Table 1

 

 

 

We earn revenues from the sale of products, materials and services. On a consolidated basis, revenue for the third quarter of 2014 increased by $31.2 million, or 23.0%, compared to the third quarter of 2013, reflecting increases in all classes of products and services.

 

The $13.1 million increase in revenue from products compared to the third quarter of 2013 is driven by increased demand for design and manufacturing printers. In connection with the expansion of our professional and retail channels, certain resellers may purchase stock inventory in the ordinary course of business. For the third quarter of 2014, we estimate that revenue related to reseller inventory amounted to approximately 9% of total revenue, which was impacted by timing of sales, expansion of our reseller channel and the recent shift from a partially direct sales model to the reseller channel selling our entire portfolio, which expanded the volume of transactions through the channel.

 

In addition to printers, the products category includes software products, perceptual and haptic devices, Vidar digitizers and Simbionix simulators. Software revenue contributed $5.1 million of products revenue in both 2014 and 2013.

 

Due to the relatively high price of certain professional printers and a corresponding lengthy selling cycle and relatively low unit volume of the higher priced professional printer sales 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. Revenue reported in any particular period is also affected by timing of revenue recognition under rules prescribed by generally accepted accounting principles.

 

The $5.8 million increase in revenue from materials was aided by the improvement in sales of 3D printers and the increased utilization of printers installed over past periods. Sales of integrated materials increased 17.0% to $28.2 million and represented 72.4% of total materials revenue in the third quarter of 2014 compared to 72.6% in the third quarter of 2013.  

 

The increase in services revenue primarily reflects the addition of Medical Modeling and Simbionix revenue and organic and acquired growth from our Quickparts solutions, coupled with growing consumer and software services. Service revenue from Quickparts increased 15.2% to $32.3 million, or 58.7% of total service revenue, for the third quarter of 2014, compared to $28.0 million, or 65.7%, of total service revenue in the 2013 period. Software services contributed $3.7 million of revenue in the third quarter of 2014 compared to $1.9 million in the third quarter of 2013.

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At September 30, 2014 our backlog was $46.0 million, compared to backlogs of $28.6 million at December 31, 2013 and $14.4 million at September 30, 2013. Production and delivery of our printers is generally not characterized by long lead times, backlog is more dependent on timing of customers’ requested deliveries. Currently, demand for direct metals printers outstrips our manufacturing capacity and delayed commercial shipment of new consumer products with a rising consumer order book contributed to a higher backlog. In addition, Quickparts services lead time and backlog depends on whether orders are for rapid prototyping or longer-range production runs. The backlog at September 30, 2014 includes $11.5 million of Quickparts services orders, compared to $8.7 million at September 30, 2013.

 

In addition to changes in sales volumes, including the impact of revenue from acquisitions, there are two other primary drivers of changes in revenues from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and 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. Among these changes are changes in the product mix of our materials and our printers as the trend toward smaller, lower-priced printers has continued and the influence of new printers and print materials on our operating results has grown.

 

Change in third quarter revenue by geographic region

 

Each geographic region contributed to our higher revenue in the third quarter of 2014. Table 2 sets forth the change in revenue by geographic area for the third quarter of 2014 compared to the third quarter of 2013:

 

Table 2

 

Revenue from operations in the Americas for the third quarter of 2014 increased by $16.6 million, or 22.3%, to $91.0 million from $74.4 million in the third quarter of 2013. The increase was due to higher volume, partially offset by the unfavorable combined effect of price and mix.

 

Revenue from operations outside the Americas in the third quarter of 2014 increased by $14.7 million, or 23.9%, to $76.0 million from $61.3 million in the third quarter of 2013. Revenue from operations outside the Americas as a percent of total revenue was 45.5% and 45.2%, at September 30, 2014 and 2013, respectively. This increase outside the Americas, excluding the effect of foreign currency translation, was 23.4% in the third quarter of 2014 compared to  48.2% in the third quarter of 2013.

 

Revenue from operations in EMEA in the third quarter of 2014 increased by $14.4 million, or 44.1%, to $47.2 million from $32.8 million in the third quarter of 2013. This increase was due to a $19.2 million increase in volume, partially offset by a $4.8 million unfavorable combined effect of price and mix.

 

Revenue from Asia Pacific operations in the third quarter of 2014 increased by $0.2 million, or 0.8%, to $28.7 million from $28.5 million in the third quarter of 2013, due primarily to a favorable $1.8 million increase in volume, partially offset by a $1.2 million unfavorable combined effect of price and mix and a $0.4 million unfavorable impact of foreign currency translation.

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Gross profit and gross profit margins

 

Table 3 sets forth gross profit and gross profit margins for our products and services for the third quarters of 2014 and 2013:

 

Table 3

 

On a consolidated basis, gross profit for the third quarter of 2014 increased by $8.4 million to $79.8 million from $71.4 million in the third quarter of 2013, primarily as a result of higher sales from all revenue categories.

 

Consolidated gross profit margin in the third quarter of 2014 decreased by 4.8 percentage points to 47.8% from 52.6% for the 2013 quarter. The lower gross profit margin reflects a change in revenue mix with a higher portion of revenue from lower margin products, both overall and within categories, as well as availability of new products and new product startup costs.

 

Products gross profit for the third quarter of 2014 decreased by $1.1 million, or 4.3%, to $25.8 million from $26.9 million in the 2013 quarter. Gross profit margin for products decreased by 9.7 percentage points to 35.3% from 45.0% in the 2013 quarter primarily due to sales volume and mix coupled with manufacturing expansion and residual new product start-up costs.

 

Materials gross profit for the third quarter of 2014 increased by $4.0 million, or 16.5%, to $28.5 million from $24.5 million in the 2013 quarter, and gross profit margin for print materials decreased by 0.7 percentage points to 73.1% from 73.8% in the 2013 quarter primarily due to the mix of materials sold during the quarter.

 

Gross profit for services for the third quarter of 2014 increased by $5.5 million, or 27.3%, to $25.5 million from $20.0 million in the  2013 quarter. Gross profit margin for services decreased by 0.6 percentage points to 46.3% from 46.9% in the 2013 quarter. The decrease in the gross profit margin was primarily due to a decrease in Quickparts gross profit margin to 44.7% for the third quarter of 2014 from 45.1% in the third quarter of 2013, due to the recent concentration of acquired Quickparts services.

 

Operating expenses

 

As shown in Table 4, total operating expenses increased by $28.7 million, or 67.0%, to $71.6 million in the third quarter of 2014 from $42.9 million in the third quarter of 2013. This increase was due to higher selling, general and administrative expenses and higher research and development expenses, both of which are discussed below.

 

Table 4

 

 

 

Selling, general and administrative expenses increased by $21.6 million to $53.7 million in the third quarter of 2014 compared to $32.1 million in the third quarter of 2013, and increased to 32.1% of revenue in 2014 compared to 23.6% for 2013. The increase was due primarily to a $10.3 million increase in compensation costs due to increased staffing, a $4.9 million increase in amortization, a $1.3 million increase in legal fees, a $1.0 million increase in travel expenses and a $0.8 million increase in consulting fees related to acquisitions.

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Research and development expenses increased by $7.1 million, or 65.9%, to $17.9 million in the third quarter of 2014 from $10.8 million in the third quarter of 2013. This increase was primarily due to a $3.7 million increase in compensation expenses related to talent expansion, a $0.9 million increase in R&D materials related to new product development and a $0.5 million increase in depreciation expense.

 

Income from operations

 

Our income from operations of $8.2 million for the third quarter of 2014 decreased from $28.6 million in the third quarter of 2013. See Gross profit and gross profit margins and Operating expenses above. The following table sets forth operating income by geographic area for the third quarter of 2014 compared to 2013:

 

Table 5

 

With respect to the Americas, in 2014 and 2013, the changes in operating income by geographic area reflected the same factors discussed above in Gross profit and gross profit margins and Operating expenses.

 

As most of our operations outside the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside the U.S. in 2014 and 2013 resulted primarily from changes in transfer pricing, which is a function of revenue levels. 

 

Interest and other expense, net

 

Interest and other expense, net was $4.0 million in the third quarter of 2014 compared with $2.7 million in the 2013 quarter. Interest and other expense, net in the third quarter of 2014 primarily reflected a loss on conversion of the remaining convertible notes, which amounted to $1.8 million, and a foreign exchange loss of $1.7 million. The $2.7 million of interest and other expense, net in the third quarter of 2013 primarily reflected the loss on conversion of convertible notes, which amounted to $2.0 million and the related interest, which amounted to $0.4 million, of which $0.1 million represents non-cash amortization, partially offset by $1.1 million of interest income and a foreign exchange gain of $0.5 million.

 

Provision for income taxes

 

We recorded a $1.1 million provision for income taxes in the third quarter of 2014 and an $8.3 million provision for income taxes in the third quarter of 2013. Our 2014 provision for income taxes reflects income taxes in U.S. and non-U.S. jurisdictions. The 2013 provision for income taxes primarily reflects income taxes in U.S. and non-U.S. jurisdictions, reduced by the reversal of ASC-740 provisions in non-US jurisdictions.

 

Net income

 

Net income attributable to the Company for the third quarter of 2014 decreased $14.6 million to $3.1 million compared to $17.7 million in the third quarter of 2013.  The principal reasons for the decrease, which are discussed in more detail above, were:

 

• the $20.4 million decrease in operating income and

 

• the $1.3 million increase in interest and other expense; partially offset by

 

• the $7.2 million decrease in our tax provision.

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For the quarter ended September 30, 2014, average common shares for basic and diluted earnings per share were 110.7 million and  basic and diluted earnings per share were $0.03. For the quarter ended September 30, 2013, average common shares for basic and diluted earnings per share were 102.4 million and basic and diluted earnings per share were $0.17.

 

Results of Operations – Nine Months Comparison

 

Nine months comparison of revenue by class of product and service

 

The table below sets forth our change in revenue by class of product and service for the first nine months of 2014 compared to the first nine months of 2013:

 

Table 6

 

 

We earn revenues from the sale of products, materials and services. On a consolidated basis, revenue for the first nine months of 2014 increased by $107.6 million, or 30.0%, compared to the first nine months of 2013 led by increased sales of products and aided by increased sales of materials and services.

 

The $41.9 million increase in revenue from products compared to the first nine months of 2013 was primarily driven by increased demand for design and manufacturing 3D printers.

 

The products category also includes software products, perceptual and haptic devices, Vidar digitizers and Simbionix simulators. Software products contributed $13.8 million of revenue, a 3.6% decrease from $14.3 million in 2013.

 

Due to the relatively high price of certain professional printers and a corresponding lengthy selling cycle and relatively low unit volume of the higher priced professional printer sales in any particular period, a shift in the timing and concentration of orders and shipments of a few printers from one period to another can affect reported revenue in any given period. Revenue reported in any particular period is also affected by timing of revenue recognition under rules prescribed by generally accepted accounting principles.

 

The $26.3 million increase in revenue from materials was aided by the expanding 3D printers installed base and by the continued increased utilization of printers over past periods. Sales of integrated materials increased 41.4% to $84.7 million and represented 72.1% of total materials revenue for the first nine months of 2014 compared to 70.2%, or $64.0 million for the first nine months of 2013.  

 

The increase in services revenue reflects the addition of Medical Modeling and Simbionix revenue and organic and acquired revenue growth from Quickparts, coupled with growing consumer and software services. Service revenue from Quickparts increased 23.8% to $89.9 million, or 58.7% of total service revenue, for the first nine months of 2014, compared to $72.6 million, or 63.9%, of total service revenue in the 2013 period. Services revenue from software added $11.2 million in the first nine months of 2014 compared to $4.6 million in the first nine months of 2013.

 

In addition to changes in sales volumes, including the impact of revenue from acquisitions, there are two other primary drivers of changes in revenues from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and the impact of fluctuations in foreign currencies.

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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. Among these changes are changes in the product mix of our materials and our printers as the trend toward smaller, lower-priced printers has continued and the influence of new printers and print materials on our operating results has grown.

 

Change in first nine months revenue by geographic region

 

Each geographic region contributed to our higher level of revenue in the first nine months of 2014. Table 7 sets forth the change in revenue by geographic area for the first nine months of 2014 compared to the first nine months of 2013:

 

Table 7

 

 

Revenue from operations in the Americas for the first nine months of 2014 increased by $38.4 million, or 19.3%, to $237.9 million from $199.5 million in the first nine months of 2013. The increase was due to higher volume, partially offset by the unfavorable combined effect of price and mix.

 

Revenue from operations outside the Americas in the first nine months of 2014 increased by $69.2 million, or 43.5%, to $228.3 million from $159.1 million for the first nine months of 2013. Revenue from operations outside the Americas as a percent of total revenue was 49.0% and 44.4%, respectively, for the first nine months of 2014 and 2013. The increase in revenue outside the Americas, excluding the effect of foreign currency translation, was 40.4% for the first nine months of 2014 compared to  45.2% for the first nine months of 2013.

 

Revenue from operations in EMEA in the first nine months of 2014 increased by $43.6 million, or 46.8%, to $136.8 million from $93.2 million in the first nine months of 2013. This increase was due to a $40.0 million increase in volume, a $4.6 million favorable impact of foreign currency translation, and a $1.0 million unfavorable combined effect of price and mix.

 

Revenue from Asia Pacific operations in the first nine months of 2014 increased by $25.6 million, or 38.9%, to $91.5 million from $65.9 million in the first nine months of 2013, due primarily to a favorable $34.1 million increase in volume, partially offset by a $6.8 million unfavorable combined effect of price and mix and a $1.7 million unfavorable impact of foreign currency translation.

 

Gross profit and gross profit margins

 

Table 8 sets forth gross profit and gross profit margin for our products and services for the first nine months of 2014 and 2013:

 

Table 8

 

 

On a consolidated basis, gross profit for the first nine months of 2014 increased by $40.2 million to $227.7 million from $187.5 million in the first nine months of 2013, primarily as a result of higher sales from all revenue categories.

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Consolidated gross profit margin in the first nine months of 2014 decreased by 3.5 percentage points to 48.8% from 52.3% for the 2013 period.  The lower gross profit margin reflects the revenue mix, with lower margin products making up a higher portion of revenue, combined with new product startup costs and absorption of legacy product costs.

 

Products gross profit for the first nine months of 2014 increased by $2.6 million, or 3.7%, to $72.1 million from $69.5 million in the 2013 period, due to higher revenue. Gross profit margin for products decreased by 8.4 percentage points to 36.8% from 45.2% in the 2013 period primarily due to product sales mix with lower margin products making up a higher portion of revenue coupled with manufacturing expansion and residual new product start-up costs and a write down on inventory of legacy products in the second quarter.

 

Materials gross profit for the first nine months of 2014 increased by $18.5 million, or 27.6%, to $85.4 million from $66.9 million in the 2013 period, and gross profit margin for print materials decreased by 0.7 percentage points to 72.7% from 73.4% in the 2013 period due to the mix of materials sold during the period and the increase in integrated materials sales.

 

Gross profit for services for the first nine months of 2014 increased by $19.1 million, or 37.4%, to $70.2 million from $51.1 million in the  2013 period and gross profit margin for services increased by 0.9 percentage points to 45.9% from 45.0% in the 2013 period.  The increase in the gross profit margin was due to the higher margin acquisitions of Simbionix and Medical Modeling services, higher software contribution, and an increase in Quickparts gross profit margin to 43.2% for the first nine months of 2014 from 42.9% in the first nine months of 2013.

 

Operating expenses

 

As shown in Table 9, total operating expenses increased by $81.0 million, or 65.0%, to $205.6 million in the first nine months of 2014 from $124.6 million in the first nine months of 2013. This increase was due to higher selling, general and administrative expenses and higher research and development expenses, both of which are discussed below.

 

Table 9

 

 

Selling, general and administrative expenses increased by $55.0 million to $152.7 million in the first nine months of 2014 compared to $97.7 million in the first nine months of 2013, and increased to 32.8% of revenue in 2014 compared to 27.2% for 2013. The increase was due primarily to a $26.4 million increase in compensation costs due to increased staffing, a $13.3 million increase in amortization, a $2.4 million increase in consulting fees, a $1.5 million increase in legal fees and a $1.3 million increase in travel expenses.

 

Research and development expenses increased by $26.0 million, or 96.5%, to $52.9 million in the first nine months of 2014 from $26.9 million in the first nine months of 2013. This increase was primarily due to a $12.3 million increase in compensation expenses related to talent expansion, a $4.0 million increase in R&D materials related to new product development, a $1.3 million increase in depreciation expense and a $1.1 million increase in rent expense.

 

Income from operations

 

Our income from operations of $22.1 million for the first nine months of 2014 decreased from $62.9 million in the first nine months of 2013. See Gross profit and gross profit margins and Operating expenses above.

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The following table sets forth operating income by geographic area for the first nine months of 2014 compared to 2013:

 

Table 10

 

With respect to the Americas, in 2014 and 2013, the changes in operating income by geographic area reflected the same factors discussed above in Gross profit and gross profit margins and Operating expenses.

 

As most of our operations outside the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside the U.S. in 2014 and 2013 resulted primarily from changes in transfer pricing, which is a function of revenue levels.

 

Interest and other expense, net

 

Interest and other expense, net was $6.5 million in the first nine months of 2014 compared with $15.4 million in the 2013 period.  Interest and other expense, net in the first nine months of 2014 primarily reflected a foreign exchange loss of $3.1 million, a loss on conversion of the remaining convertible notes and the related interest, which amounted to $1.8 million, and interest expense of $1.0 million. The $15.4 million of interest and other expense, net in the first nine months of 2013 primarily reflected the loss on conversion of convertible notes, which amounted to $11.3 million and the related interest, which amounted to $2.6 million, of which $0.9 million represents non-cash amortization, and also reflected a foreign exchange loss of $0.3 million.

 

Provision for income taxes

 

We recorded a $5.4 million provision for income taxes in the first nine months of 2014 and a $14.6 million provision for income taxes in the first nine months of 2013. Our 2014 provision for income taxes reflects income taxes in U.S. and non-U.S. jurisdictions. The 2013 provision for income taxes primarily reflects income taxes in U.S. and non-U.S. jurisdictions, reduced by the reversal of ASC-740 provisions in non-U.S. jurisdictions.

 

Net income

 

Net income attributable to the Company for the first nine months of 2014 decreased $22.8 million to $10.1 million compared to $32.9 million in the first nine months of 2013.  The principal reasons for the decrease, which are discussed in more detail above, were:

 

• the $40.8 million decrease in operating income; partially offset by

 

• the $8.9 million decrease in interest and other expense and

 

• the $9.3 million decrease in our provision for income taxes.

 

For the nine months ended September 30, 2014, average common shares for basic and diluted earnings per share were 106.9 million and  basic and diluted earnings per share were $0.09. For the nine months ended September 30, 2013, average common shares for basic and diluted earnings per share were 96.9 million and basic and diluted earnings per share were $0.34.

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Other Financial Information

 

In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, management believes  non-GAAP financial measures, which adjust net income and earnings per share are useful to investors in evaluating our operating performance.

 

We use non-GAAP financial measures of adjusted net income and adjusted earnings per share to supplement our unaudited condensed consolidated financial statements presented on a GAAP basis to facilitate a better understanding of the impact that several strategic acquisitions had on our financial results.

 

These non-GAAP financial measures have not been prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies and they are subject to inherent limitations as they reflect the exercise of judgments by our management about which costs, expenses and other items are excluded from our GAAP financial statements in determining our non-GAAP financial measures. We have sought to compensate for these limitations by analyzing current and expected future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP financial statements as required in our public disclosures as well as reconciliations of our non-GAAP financial measures of adjusted net income and adjusted earnings per share to our GAAP financial statements.

 

The presentation of our non-GAAP financial measures which adjust net income and earnings per share are not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. These non-GAAP financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

 

Our non-GAAP financial measures, which adjust net income and earnings per share, are adjusted for the following:

 

 

 

 

 

 

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Reconciliation of GAAP Net Income to Non-GAAP Financial Measures

Table 11

 

 

 

 

Financial Condition and Liquidity

 

Table 12

 

Our unrestricted cash and cash equivalents increased by $71.0 million to $377.3 million at September 30, 2014 from $306.3 million at December 31, 2013. We generated $27.9 million of cash from operating activities. Cash from operations consisted of $10.2 million of net income, including $50.8 million of non-cash charges and $33.1 million of cash used by net changes in operating accounts. We used $261.9 million of cash in investing activities, including $244.3 million to fund acquisitions and other investing activities. Cash from financing activities provided $307.9 million of cash, including $299.7 million of net proceeds from our common stock offering completed in May 2014. See Cash flow and Capitalized lease obligations below. 

 

Cash and cash equivalents at September 30, 2014 includes $45.9 million of cash held overseas, compared to $19.9 million at December 31, 2013. Cash held overseas is used in our foreign operations for working capital purposes and is considered to be permanently invested; consequently, we have not provided for any taxes on repatriation.

 

Cash equivalents comprise funds held in money market instruments and are reported at their current carrying values, which approximate fair value due to the short-term nature of these instruments. We minimize our credit risk by investing primarily in investment grade, liquid instruments and limit exposure to any one issuer depending on credit quality.

 

Our net working capital increased by $120.8 million to $537.2 million at September 30, 2014 from $416.4 million at December 31, 2013, primarily due to the factors discussed below.

 

Accounts receivable, net, increased by $23.4 million to $155.5 million at September 30, 2014 from $132.1 million at December 31, 2013. Gross accounts receivable increased by $28.1 million from December 31, 2013. With a greater portion of our revenue mix shifting to resellers and retailers, as part of our planned business model evolution, a larger proportion of our sales are transacted on standard credit terms. The effect of this shift in our business model was exacerbated by the combined effect of the timing and concentration of orders during the last month of the quarter as a result of increasing demand, which has driven days sales outstanding to 86 days at September 30, 2014 from 79 days at December 31, 2013. Accounts receivable more than 90 days past due increased to 12.0% of gross receivables from 9.1% at December 31, 2013. 

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Inventories, net increased by $29.8 million to $104.9 million at September 30, 2014 from $75.1 million at December 31, 2013. This increase resulted primarily from an expanding product portfolio, acquired inventory, timing of orders, assembly production, and sales and revenue recognition at quarter-end. The increase in inventory reflects a $20.7 million increase in raw materials inventory and a $9.3 million increase in finished goods inventory.  We maintained $6.4 million of inventory reserves at September 30, 2014 and $4.3 million of such reserves at December 31, 2013.    

 

The majority of our inventory consists of finished goods, including products, materials and service parts. Inventory also consists of raw materials and spare parts for the in-house assembly and support service products. We outsource the assembly and refurbishment of certain production printers; therefore, we generally do not hold in inventory most parts for production printer assembly or refurbishment. 

 

Prepaid expenses and other current assets increased by $7.2 million to $14.4 million at September 30, 2014 from $7.2 million at December 31, 2013. This increase is primarily due to prepaid materials and insurance.

 

The changes in the first nine months of 2014 that make up the other components of working capital not discussed above arose in the ordinary course of business.

 

Differences between the amounts of working capital item changes in the cash flow statement and the balance sheet changes for the corresponding items are primarily the result of foreign currency translation adjustments.

 

We have relied on our unrestricted cash,  cash flow from operations and capital markets transactions to meet our cash requirements for working capital, capital expenditures and acquisitions; however, it is possible that we may need to raise additional funds to finance our activities beyond the next twelve months or to consummate significant acquisitions of other businesses, assets, products or technologies.  If needed, we may be able to raise such funds by issuing equity or debt securities to the public or selected investors, or by borrowing from financial institutions, selling assets or restructuring debt. 

 

Cash flow

 

The table below summarizes the cash provided by or used in operating activities, investing activities and financing activities, as well as the effect of changes in foreign currency exchange rates on cash, for the first nine months of 2014 and 2013.

 

Table 13

 

 

Cash flow from operating activities

 

For the nine months ended September 30, 2014, our operating activities provided $27.9 million of net cash. This source of cash consisted primarily of net income plus the effects of non-cash items and changes in working capital, which are described above. Our cash from operations fluctuates from quarter to quarter due to the timing of transactions and receipts and payments of cash.

 

For the nine months ended September 30, 2013, our operating activities provided $28.5 million of net cash. This source of cash consisted primarily of net income plus the effects of non-cash items and changes in working capital.

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Cash flow from investing activities

 

Net cash used in investing activities for the first nine months of 2014 increased to $261.9 million from $122.5 million for the first nine months of 2013. This increase was primarily due to $244.3 million of cash paid for acquisitions in the first nine months of 2014 compared to $113.1 million paid for acquisitions in the 2013 period. Cash flow used in investing activities also includes minority investments of less than 20% made through 3D Ventures in promising enterprises that we believe will benefit from or be powered by our technologies and other investments or joint ventures. During the first nine months of 2014, we invested $0.3 million in these enterprises and ventures.

 

Cash flow from financing activities

 

Net cash provided by financing activities increased to $307.9 million for the nine months ended September 30, 2014 compared to $284.7 million in the 2013 period. Cash from financing activities for the first nine months of 2014 primarily included $299.7 million net proceeds from a common stock offering and $6.9 million of tax benefits from share-based payment arrangements. Cash from financing activities for the nine months ended September 30, 2013 included $272.1 million net proceeds from a common stock offering, $15.9 million of tax benefits from share-based payment arrangements, $0.5 million of stock-based compensation proceeds, partially offset by $0.2 million of cash paid in lieu of fractional shares and $3.7 million of capital lease payments. 

 

Contractual commitments and off-balance sheet arrangements

 

Debt

 

In November 2011, the Company issued $152.0 million of 5.50% senior convertible notes due December 2016. The notes were issued with an effective yield of 5.96% based upon an original issue discount at 98.0%. The net proceeds from the issuance of these notes, after deducting original issue discount and capitalized issuance costs of $6.6 million, amounted to $145.4 million.

 

As of September 30, 2014, there is no outstanding balance for the Notes. All remaining Notes were converted during the third quarter of 2014, resulting in a loss of $1.8 million. See Note 8 to the unaudited condensed consolidated financial statements. 

 

Capitalized lease obligations

 

Our capitalized lease obligations include lease agreements that we entered into during 2006 with respect to our Rock Hill facility and lease agreements assumed in the LayerWise acquisition. Our total capitalized lease obligations increased to $9.7 million at September 30, 2014 from $7.5 million at December 31, 2013 primarily due to the acquired $2.3 million of capital lease obligations in connection with the LayerWise acquisition, consisting of sale and leasebacks on laser-melting machines internally produced by LayerWise and used in their business. Our outstanding capitalized lease obligations carrying values at September 30, 2014 and December 31, 2013 were as follows:

 

Table 14

 

Other contractual arrangements

 

Certain of our recent acquisitions contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total amount of liabilities recorded for these earnouts at September 30, 2014 and December 31, 2013 was $8.9 million and $5.6 million, respectively.

 

As of September 30, 2014, we have supply commitments related to printer assemblies that total $55.5 million compared to $41.1 million at December 31, 2013.

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Off-balance sheet arrangements

 

We have no off-balance sheet arrangements and do not utilize any “structured debt,” “special purpose,” or similar unconsolidated entities for liquidity or financing purposes.

 

Financial instruments

 

We conduct business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, we are subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, we endeavor to match assets and liabilities in the same currency on our balance sheet and those of our subsidiaries in order to reduce these risks. We also, when we consider it to be appropriate, enter into foreign currency contracts to hedge exposures arising from those transactions.

 

We do not hedge or trade for speculative purposes, and our foreign currency contracts are generally short-term in nature, typically maturing in 90 days or less.  We have elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, “Derivatives and Hedging,” and therefore, we recognize all gains and losses (realized or unrealized) in interest and other expense, net in our unaudited condensed consolidated statements of operations and comprehensive income (loss).

 

There were no foreign exchange contracts at September 30, 2014 or December 31, 2013. See Note 7 of the unaudited condensed consolidated financial statements.

 

Changes in the fair value of derivatives are recorded in interest and other expense, net, in our unaudited condensed consolidated statements of operations and comprehensive income. Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid and other current assets or in accrued liabilities in our unaudited condensed consolidated balance sheets.

 

The total impact of foreign currency related items on our unaudited condensed consolidated statements of operations and comprehensive income (loss) was a $3.1 million loss for the nine months ended September 30, 2014 and a $0.3 million loss for the nine months ended September 30, 2013 and a $9.1 million decrease in other comprehensive income for the nine months ended September 30, 2014 compared to a $5.7 million decrease in other comprehensive income for the first nine months of 2013.

 

Recent Accounting Pronouncements

 

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our unaudited condensed consolidated financial statements, see Note 1 to the unaudited condensed consolidated financial statements.

 

Critical Accounting Policies and Significant Estimates

 

For a discussion of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Forward-Looking Statements

 

Certain statements made in this Form 10-Q that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the cautionary statements and risk factors set forth below as well as other statements made in the Form 10-Q that may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.

 

In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in future or conditional tenses or that include terms such as “believes,” “belief,” “expects,” “intends,” “anticipates” or “plans” to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations as to future events and trends affecting our business. Forward-looking statements are based upon management’s current expectations concerning future events and trends and are necessarily subject to uncertainties, many of which are outside of our control. The factors stated under the heading “Cautionary Statements and Risk Factors” set forth below and those described in our other SEC reports, including our Form 10-K for the year ended December 31, 2013, as well as other factors, could cause actual results to differ materially from those reflected or predicted in forward-looking statements.

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Any forward-looking statements are based on management’s beliefs and assumptions, using information currently available to us. We assume no obligation and do not intend to update these forward-looking statements.

 

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from those reflected in or suggested by forward-looking statements. Any forward-looking statement you read in this Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified or referred to in this Form 10-Q and our other SEC reports, including our Form 10-K for the year ended December 31, 2013, which would cause actual results to differ from those referred to in forward-looking statements.

 

Cautionary Statements and Risk Factors

 

We recognize that we are subject to a number of risks and uncertainties that may affect our future performance. The risks and uncertainties described in Item 1A in our Form 10-K for the year ended December 31, 2013 are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem not to be material also may impair our business operations. If any of these risks actually occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. The risks discussed in Item 1A in our Form 10-K for the year ended December 31, 2013 also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

 

Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

For a discussion of market risks at December 31, 2013, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Form 10-K for the year ended December 31, 2013. During the first nine months of 2014, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, 2013.

 

Item 4.  Controls and Procedures.

 

Evaluation of disclosure controls and procedures

 

As of September 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. These controls and procedures were designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures. Based on this evaluation, including an evaluation of the rules referred to above in this Item 4, management has concluded that our disclosure controls and procedures were effective as of September 30, 2014 to provide reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures.

 

Changes in Internal Controls over Financial Reporting

 

There were no material changes in our internal controls over financial reporting during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

The information set forth in Note 15 of the unaudited condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

 

Item 1A.  Risk Factors.

 

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Recent Issuances of Unregistered Securities

 

On August 6, 2014, as part of the consideration for the acquisition of certain assets of Bordner and Associates, Inc. d/b/a Laser Reproductions,  we issued 85,415 unregistered shares of 3D Systems Corporation common stock to Bordner and Associates, Inc., which represented to us that it was an “Accredited Investor”   as defined in Regulation D of the Securities Act of 1933, as amended, in reliance on the private offering exemptions contained in Section 4(2) of the Securities Act of 1933, as amended, and on Regulation D promulgated thereunder.  The fair value of the consideration paid for this acquisition, net of cash acquired, was approximately $17,450,000, of which approximately $13,075,000 was paid in cash and $4,375,000 was paid in unregistered shares of the Company’s common stock.

 

Item 6.  Exhibits.

 

The following exhibits are included as part of this filing and incorporated herein by this reference:

 

 

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

Date: November 10, 2014

 

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