UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10‑K

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

 

For the fiscal year ended December 31, 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)

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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 ☐

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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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 ☒

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2014 was $6,169,912,421. For purposes of this computation, it has been assumed that the shares beneficially held by directors and executive officers of the registrant were “held by affiliates.” This assumption is not to be deemed an admission by these persons that they are affiliates of the registrant.

 

The number of outstanding shares of the registrant’s common stock as of February 18, 2015 was 111,210,093.

 

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement for its 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

A

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3D SYSTEMS CORPORATION

Annual Report on Form 10‑K for the
Year Ended December 31, 2014

 

 

 

 

 

 

 

 

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PART I

 

Item 1. Business

 

General

 

3D Systems Corporation (“3D Systems” or the “Company” or “we” or “us”) is a holding company incorporated in Delaware in 1993 that operates through subsidiaries in the Americas and Asia Pacific region (“APAC”), as well as Europe and the Middle East (“EMEA”). We distribute our products in those areas as well as in other parts of the world. We are a leading global provider of 3D printing centric solutions, and are pioneering 3D printing for everyone. We provide the most advanced and comprehensive 3D design-to-manufacturing solutions, including 3D printers, print materials and cloud sourced custom parts. Our powerful digital thread, a seamless information exchange across design and manufacturing, empowers professionals and consumers everywhere to bring their ideas to life in material choices including plastics, metals, ceramics and edibles. Our leading healthcare solutions include end-to-end simulation, training and planning and printing of surgical instruments and devices for personalized surgery and patient specific medical and dental devices. Our democratized 3D digital design and inspection products provide seamless interoperability between additive and subtractive manufacturing and incorporate the latest immersive computing technologies. Our products and services replace and complement traditional methods with improved results and reduced time to outcome. These solutions are used to rapidly design, create, communicate, plan, guide, prototype or produce functional parts, devices and assemblies, empowering our customers to manufacture the future. 

 

Over the past three decades, entire industries have transformed their design-to-manufacturing processes using 3D content-to-print solutions. Companies utilizing 3D printing technology have the freedom to create and manufacture precision products on demand, with no additional cost for complexity or uniqueness. Customers can use 3D printing to mass customize and locally print what they need, when they need it, often in a more cost effective way, by eliminating expensive tooling and long lead times, while significantly reducing the adverse environmental impacts that are often associated with traditional manufacturing.

 

We pioneered 3D printing and digital manufacturing with the invention of stereolithography (“SLA”) and the universally used .stl file format almost 30 years ago. Subsequently, we developed selective laser sintering (“SLS”), multi-jet printing (“MJP”), film transfer imaging (“FTI”), color jet printing (“CJP”), direct metal printing (“DMP”) and plastic jet printing (“PJP”) 3D printing technologies. Over the past decades, our customers have strengthened their competitive advantage by embracing our solutions to enhance and accelerate their product development cycles and, as our technology has advanced, a growing number of customers have also transitioned to direct manufacturing of end use parts and custom products. Today, we continue to drive the adoption of large-scale custom manufacturing solutions, including the printing of highly complex end use parts in a variety of aerospace, defense, automotive and healthcare applications worldwide. At the same time, we are democratizing 3D printing solutions by extending the range of our affordable 3D printing solutions to the engineer’s desktop, classroom and living room. 

 

3D printers can print almost anything, from patient-specific medical devices to functional aerospace and automotive parts and from personalized accessories and jewelry to customized toys, art and decor. Our portfolio of 3D printers ranges from less than $1,000 to over $1 million and includes several unique print engines that employ proprietary, additive layer printing processes designed to meet our customers’ most demanding design, prototyping, testing, tooling, production and manufacturing requirements. We also offer proprietary software printer drivers and pre-sale and post-sale services, ranging from applications development and custom engineered production solutions to installation, warranty and maintenance services related to our products.  

 

Our printers utilize a wide range of proprietary print materials that we develop, blend and market. Our print materials range from real wax and plastic and composites to metal, nylon, and even edible materials. We augment and complement our own portfolio of engineered print materials with materials that we purchase from third parties under private label and distribution arrangements.

 

We also provide software and haptic and perceptual devices for creativity and design, including 3D digital design, scan-to-CAD, scan-to-print, reverse engineering, inspection, sculpting and medical modeling and simulation applications. Our products provide seamless integration for our customers’ entire workflow from 3D design to fabrication. 

 

To satisfy our customers’ entire design-to-manufacturing requirements, we also provide custom manufacturing services via Quickparts®, our on-demand cloud printed parts services. Through Quickparts, we offer a broad range of precision parts capabilities produced from a wide range of additive and traditional manufacturing processes and materials. 

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For our healthcare customers we also offer virtual surgical planning and medical modeling services, digitizing scanners, and simulation products. Our healthcare digital thread provides seamless workflow with a comprehensive portfolio of solutions to go from the training room to the operating room, enabling personalized medicine and improved healthcare procedures and results.

 

Our expertly integrated 3D products and services provide a seamless workflow through 3D design and fabrication, transforming the manner in which our customers design, develop and manufacture. We continue to develop new products and services and have expanded our technology platform and 3D ecosystem through internal developments, relationships with third parties and acquisitions. We maintain ongoing product development programs that are focused on providing our customers with the most comprehensive portfolio of 3D content-to-print solutions. We are focusing on expanding and enhancing our comprehensive menu of 3D printing centric solutions in areas that we believe represent significant growth opportunities for our business, including the aerospace, automotive, healthcare, education, and consumer marketplaces.

 

Recent Developments

 

In October 2014, we entered into a $150.0 million five-year revolving, unsecured credit facility with PNC Bank as Administrative Agent, and certain other lenders. The agreement comprises a revolving loan facility that provides for advances in the initial aggregate principal amount of up to $150.0 million. Subject to certain terms and conditions contained in the 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. 

 

In November 2014, we revealed several new products and design-to-manufacturing solutions at EuroMold 2014. The ProX 400 direct metal 3D printer is twice as fast as the ProX 300 and features a build area twice as large, and features several factory production enhancements. The ProXTM 800 enhances our SLA technology with new features for greater production efficiency, including revolutionary print head and material management systems, space-saving footprint and easy-to-use operator controls. The ProX 500 Plus builds on our existing ProX 500 by expanding the range of materials, increasing print speeds and providing a higher resolution output. We also introduced new high performance materials for the ProX 500 Plus: DuraForm® ProX™ GF, a glass-filled nylon material formulated for added stiffness and temperature resitance; DuraForm ProX AF+, an alloy-filled nylon with a realistic cast metal appearance, extreme tensile strength and high heat deflection properties; and DuraForm ProX EX, a Nylon material that provides exceptional impact strength, increased durability and remarkable flexibility. We also introduced new materials for the ProJet 1200 Micro-SLA 3D printer that expand applications for dental labs, jewelers, manufacturers, engineers and artists, adding FTX Cast, FTX Gold, FTX Silver, FTX Gray and FTX Clear. New materials showcased for the ProJet 5500X offer another level of versatility with tough, functional-grade, flexible elastomers in black and natural-translucent that result in parts that can be stretched, twisted, mashed and handled to withstand challenging applications without failure or tearing. We also introduced the Capture® Mini, a scan-based design and inspection system for small, precise parts, and 3DSPRINT™, a cloud and desktop-based platform that streamlines workflow by enabling collaboration, storage, access, file management, sharing and printing.

 

In November 2014, we entered into a definitive agreement to acquire all of the outstanding shares of Cimatron Ltd. (“Cimatron”), a leading provider of integrated 3D CAD/CAM software products and solutions for manufacturing. We completed the acquisition of Cimatron on February 9, 2015. The acquisition of Cimatron adds complementary technology, extends our sales coverage globally and multiplexes cross-selling opportunities.

 

In November 2014, we completed the acquisition of 70% of the outstanding shares of Robtec, creating 3D Systems Latin America. Headquartered in Sao Paulo, Brazil, Robtec is the largest Latin-American additive manufacturing service bureau and the leading 3D printing and scanning products distributor in the region. With key operations in Brazil, Argentina, Chile, Uruguay and Mexico, and well-established printer and scanner distribution activities, the addition of Robtec provides us with a strong Latin American presence and brings long-term relationships with leading aerospace and automotive companies, including Embraer, Siemens, Volkswagen, Fiat, CenPra, Visteon and Mercedes.

 

In January 2015, we announced the acquisition of botObjects and we launched the full-color Cube Pro C at CES. This is the first plastic jet printer that is capable of printing in full color. The Cube Pro C is part of our consumer portfolio and is ideal for classroom, home and the engineer’s desktop. The acquisition of botObjects closed in December 2014.

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At the International Consumer Electronics Show 2015 in January, we also showcased our new Touch™ haptic 3D stylus, the Ekocycle™ Cube® 3D printer and the CoCoJet™ 3D printer as well as apps, gaming platforms and a variety of lifestyle collections from fashion to food and entertainment. The Touch stylus comes with an OpenHaptics Software Developer Kit for digital design and virtual gaming and is an easy to use, powerful perceptual device that provides a virtual sculpting experience and is ideal for designers, artists, students, gamers and hobbyists. The Ekocycle prints in plastic from recycled post-consumer waste, and was launched in collaboration with The Coca-Cola Company and will.i.am. We are also leading the way in personalized, edible 3D printing and previewed the CoCoJet 3D printer that we are currently developing in collaboration with The Hershey Company, and launched a partnership with the Culinary Institute of America to advance 3D printing in the culinary arts through education, exploration, and experimentation. 

 

Products

 

We offer the most comprehensive range of 3D printers, materials, perceptual devices, scanners, software and simulators within the additive manufacturing industry.

 

3D Printers

 

Our 3D printers transform digital data input from any format generated by 3D design software, CAD software, or 3D scanning and sculpting devices, to printed parts using our integrated, engineered plastic, metal, nylon, rubber, wax and composite print materials.    

 

Our 3D printers convert our print materials into solid cross-sections, layer by layer, to print the desired fully fused objects, employing one of our proprietary print engines, which are discussed in more detail below. We offer printers capable of making multiple distinct parts at the same time, highly accurate geometries in a wide range of sizes and shapes with a variety of material performance characteristics.

 

SLA Printers

 

Our stereolithography 3D printers offers a wide range of capabilities, including size, speed, accuracy, throughput and surface finish in different formats and price points. Our SLA printers come in a variety of print formats and footprint sizes, from the desktop micro-SLA ProJet 1200 to our extra-large build volume ProX 950. Our SLA printers are designed to quickly and economically produce durable plastic parts with unprecedented surface smoothness, feature resolution, edge definition and tolerances that rival the accuracy of CNC-machined plastic parts.

 

Our SLA printers are used for a wide variety of applications, ranging from automotive, aerospace to consumer and entertainment and electronics to healthcare, including mass customization of orthodontics, hearing aids and surgical guides and kits.

 

SLS Printers

 

Our selective laser sintering 3D printers melt and fuse (sinter) powder-based, nylon and engineered plastic and composite print materials to produce very strong and durable parts. Customer uses of our SLS printers include functional test models and end-use parts, which enables our customers to create customized parts economically without tooling. The combination of print materials’ flexibility, part functionality and high throughput of our SLS print engine makes it well suited for rapid manufacturing of durable parts. Our SLS printers are used for applications in various industries, including aerospace, automotive, packaging, industrial machinery and medical devices. 

 

DM Printers

 

Our direct metal printing 3D printers produce chemically pure, fully dense metal parts, by sintering powders in a variety of different metals materials and ceramic materials. Our DM printers can process a wide range of materials, including powders with very fine granularity (less than 10 microns), enabling outstanding surface finish and resolution. We offer direct metal printers in several sizes, including our recently introduced ProX 400, which features the largest build area in its class. Customers use our ProX direct metal printers for dental, medical, aerospace and automotive applications.

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MJP Printers

 

Our multi-jet printing portfolio utilizes jetting head technology to deliver high quality, accurate and tough parts in plastics, wax, and engineered materials. These printers offer the capability to print in ultra-fine resolution for precision parts and to print multiple materials in a single part. Our MJP printers come with a five-year print head warranty and are designed to print high-definition, functional and durable parts for form, fit and function analysis, as well as patterns for casting. Our MJP printers are used for consumer goods, industrial design, medical, dental and jewelry applications.

 

CJP Printers

 

Our color jet printing solutions produce parts in plastic and ceramic-like materials using powder materials and binders. Our CJP printers produce parts in pixel-by-pixel full color, in the full range of colors. Our CJP printers are ideal for MCAD, architecture, design communication, education, art, consumer goods and medical modeling applications.

 

FTI Printers

 

Our film transfer imaging printers use light curing technology to print durable plastic parts with a smooth surface finish and true to design detail. Parts printed on these ProJet printers can be drilled, machined, painted and metal-plated after building and parts can be printed in six different colors. FTI printers are used in desktop printing and functional prototyping applications.

 

PJP Printers

 

Our plastic jet printing 3D printers utilize a proven, simple, clean and compact plastic extrusion print engine technology designed for office, home and classroom use. Our PJP printers are engineered to be accurate and affordable and are equipped with up to three compact precision print heads for multi-color, multi-material printing with quick material changeovers and multiple print modes available. PJP printers offer an easy to use interface, enabling fast, multi-color printing in a single build in PLA or ABS plastic or nylon. Our Cube 3D printer is certified kid-safe and offers a plug and play experience, including smart cartridges that include built in extruder nozzles for an easy and reliable consumer printing experience. Cube Pro offers a robust, climate controlled desktop 3D printer with a user friendly, intuitive experience. Our newest PJP printer, the Cube Pro C, is the first in its class to offer full color printing in PLA or ABS plastic. Our PJP printers are ideal for the engineer’s desktop as well as at home and in the classroom use.

 

Software

 

We offer proprietary software tools for an integrated, seamless digital workflow. We offer software packages and design tools for reverse engineering, inspection and haptic design packages, enabling our customers to open scan data directly in the CAD parametric environment, design in Voxel CAD and sculpt. We also offer intuitive packages designed for students and home users. With the acquisition of Cimatron in February 2015, a leading CAD/CAM provider, we now offer CAD and CAM software packages designed for the manufacturing industry. We also offer proprietary software and drivers embedded within our printers.

 

Other Products

 

We offer affordable 3D scanners and perceptual devices to democratize access to 3D content creation and enable seamless integration with our software and 3D printers. We offer scanners in a range of price points and capabilities from compact and ultra-precise professional scanners to affordable, intuitive scanners designed for the consumer and optimized for 3D printing. We also offer haptic devices that enable freeform sculpting and design, which are ideal for artists, designers and healthcare applications.

 

We also offer 3D virtual reality simulators for medical applications. These 3D simulators expand our healthcare digital thread to offer solutions from the training room all the way to the operating room. We also provide digitizing scanners for medical and mechanical applications.

 

Materials

 

As part of our integrated solutions approach, we blend, package and sell proprietary, consumable, engineered plastic, nylon, metal and composite materials under several leading brand names for use in our printers. We market our SLA materials under the Accura® brand, our SLS materials under the DuraForm, CastForm™ and LaserForm™ brands and materials for our MJP, CJP, FTI and micro-SLA printers under the VisiJet brand. We augment and complement our own portfolio of print materials with materials that we purchase from third parties under private label and distribution arrangements.

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With the exception of our direct metal printers, our currently offered printers have built-in intelligence that communicates vital processing and quality statistics in real time. For these printers, we furnish integrated print materials that are specifically designed for use in those printers and that are packaged in smart cartridges designed to enhance system functionality, up-time, materials shelf life and overall printer reliability, with the objective of providing our customers with a built-in quality management system and a fully integrated work flow solution.

 

We work closely with our customers to optimize the performance of our print materials in their applications. Our expertise in print materials formulation, combined with our process, software and equipment design strengths, enables us to help our customers select the print material that best meets their needs and obtain optimal cost and performance results. We also work with third parties to develop different types of print materials designed to meet the needs of our customers.

 

SLA Materials

 

We offer a variety of plastic-like performance characteristics and attributes designed to mimic specific, engineered, thermoplastic materials under the Accura® brand name. When used in our SLA printers, our proprietary liquid resins turn into a solid surface one layer at a time, and through an additive building process, all the layers bond and fuse to make a solid part. SLA print materials include general purpose as well as specialized materials and are ideal for fit and form testing, wind tunnel testing, casting, patterns and molds, show models and healthcare applications.  

 

To further complement and expand the range of materials we offer to our customers, we also distribute SLA materials under recognized third-party brand names.

 

SLS Materials

 

Our proprietary selective laser sintering materials and composites includes a range of rigid plastic, elastomeric and nylon materials as well as various composites of these ingredients. Our SLS printers have built-in versatility; therefore, the same printers can be used to process multiple materials.

 

Our DuraForm laser sintering materials include CastForm and LaserForm proprietary SLS materials. SLS materials are used to create durable, functional end-use parts, prototypes and durable patterns as well as assembly jigs and fixtures. They are also used to produce flexible parts, high-temperature resistant parts, patterns for investment casting, functional tooling such as injection molding tool inserts, and end-use parts for customized advanced manufacturing applications. 

 

Product designers and developers from major automotive, aerospace and consumer products companies use SLS parts extensively as functional test models, including in harsh test environment conditions. Aerospace and medical companies use our SLS printers to produce end-use parts directly, which enables them to create customized parts economically without tooling.  

 

DMP Materials

 

Our direct metal printing materials include very fine metal and ceramic powders. These materials include ceramics, stainless steels, tool steels, super alloys, non-ferrous alloys, precious metals and alumina. Our DMP printers and materials are used for chemically pure, fully dense, fine feature detail printing of end use parts and patterns in aerospace, automotive and healthcare applications. Super alloys are commonly used in parts of gas turbine engines that are subject to high temperatures and require high strength, high temperature creep resistance, phase stability and oxidation and corrosion resistance. Non-ferrous metals include aluminum and titanium. Precious metals such as gold, silver and platinum and exotic or rare metals such as cobalt, mercury or tungsten can also be processed.

 

VisiJet Print Materials

 

VisiJet print materials consist of a wide range of plastic, composite and wax materials, including durable materials that provide injection-molded like properties. VisiJet plastic materials are used in demanding, high end prototyping, casting and manufacturing applications. VisiJet wax print materials and special dissolvable support materials are ideal for direct casting applications such as custom jewelry manufacturing, dental crowns and bridge work and other casting and micro-casting applications.

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PJP Print Materials

 

Materials for use in our PJP 3D printers provide multi-color, durable, real plastic parts, including polylatic acid (PLA), acrylonitrile butadiene styrene (ABS) and polyamide (Nylon). These print materials are packaged in proprietary smart cartridges and offer a variety of properties, including tough polymer materials strong enough for car bumpers and biodegradable thermoplastics.

 

Services

 

Warranty, Maintenance and Training Services

 

We provide a variety of customer services and local application support and field support on a worldwide basis for our products. For our 3D printers and software, we provide these services and field support either directly or through a network of authorized resellers or other sources. We are continuing to expand our reseller channel for our consumer and professional 3D printers and software and to train our resellers to perform installation and maintenance services for our printers.  

 

The services and field support that we provide includes installation of new printers at customers’ sites, printer warranties, several maintenance agreement options and a wide variety of hardware upgrades, software updates and performance enhancement packages. We also provide services to assist our customers and resellers in developing new applications for our technologies, to facilitate the use of our technology for the customers’ applications, to train customers on the use of newly acquired printers and to maintain our printers at customers’ sites.

 

All our 3D printers are sold with maintenance support that generally covers a warranty period ranging from 90 days to one year. We generally offer service contracts that enable our customers to continue maintenance coverage beyond the initial warranty period. These service contracts are offered with various levels of support and are priced accordingly. We employ customer-support sales engineers in North America, South America, in several countries in Europe and in parts of the Asia Pacific region to support our worldwide customer base. As a key element of warranty and service contract maintenance, our service engineers provide regularly scheduled preventive maintenance visits to customer sites. We also provide training to our distributors and resellers to enable them to perform these services.

 

We distribute spare parts on a worldwide basis to our customers, primarily from locations in the U.S., South America, EMEA and Asia Pacific.

 

We also offer upgrade kits for certain of our printers that enable our existing customers to take advantage of new or enhanced printer capabilities; however, we have discontinued upgrade support for certain of our older legacy printers.

 

Quickparts Services

 

We provide an extensive suite of on-demand parts services through our Quickparts branded global network of fulfillment facilities. Our Quickparts service offers a broad range of precision plastic and metal parts service capabilities produced from a wide range of 3D printing and traditional materials using a variety of additive and traditional manufacturing processes. Customers may procure a complete range of precision parts services using a variety of finishing, molding and casting capabilities. In addition, preferred service providers and leading service bureaus can use our on-demand custom parts service as their comprehensive order-fulfillment center.  

 

Consumer Services

 

In addition to our consumer 3D printers, we offer Cubify, our online hosting and publishing platform providing simple-to-use content creation tools, content downloads, cloud printing services and licensing arrangements and hosting for third parties. In addition to Cubify, we also provide consumer services related to the entertainment industry through our Gentle Giant brand. We are continuing to expand our consumer offerings, including partnerships and open software development kit for developers and designers, expanded content and Cubify exclusive designs, and apps to create and modify 3D digital data.

 

Software Services

 

In addition to our software products, we offer customers post sale software maintenance, which includes updates and software support for our design, reverse engineering and inspection software packages.

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Healthcare Services

 

We provide healthcare services through our Medical Modeling, LayerWise and Simbionix brands. We provide modeling and design services, including virtual surgical planning (VSP™), printing and finishing of medical study models and devices, including surgical kits, implants and other personalized medical devices. We also provide service on our surgical simulators sold through Simbionix.

 

Global Operations

 

We operate in the Americas, Europe, the Middle East and the Asia Pacific regions, and distribute our products and services in those areas as well as to other parts of the world. Revenue in countries outside the U.S. accounted for 49.1%, 44.5% and 44.5% of consolidated revenue in the years ended December 31, 2014, 2013 and 2012, respectively.

 

In maintaining foreign operations, we expose our business to risks inherent in such operations, including currency fluctuations. Information on foreign exchange risk appears in Part I, Item 1A “Risk Factors”, Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” and Item 8, “Financial Statements and Supplementary Data,” of this Form 10‑K, which information is incorporated herein by reference.

 

Financial information about geographic areas, including revenue, long-lived assets, and cash balances, appears in Note 21 to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K, which information is incorporated herein by reference.

 

Marketing and Customers

 

Our sales and marketing strategy focuses on an integrated approach that is directed at providing 3D content-to-print solutions and services to meet a wide range of customer needs. This integrated approach includes the sales and marketing of our entire portfolio of products and services.

 

Our sales organization is responsible for the sale of all of our products and services on a worldwide basis and for the management and coordination of our growing network of authorized resellers. With the exception of our online channels and direct Quickparts salespersons, we sell our products and services primarily through resellers who are supported by our own experienced channel sales managers consisting of salespersons who work throughout the Americas, EMEA and Asia Pacific.  Our application engineers provide professional services through pre-sales and post-sales support and assist existing customers so that they can take advantage of our latest print materials and techniques to improve part quality and machine productivity. This group also leverages our customer contacts to help identify new application opportunities that utilize our proprietary processes and access to our Quickparts printing service. As of December 31, 2014, our worldwide sales, application and service staff consisted of 202 employees.

 

In certain areas of the world where we do not operate directly, we have appointed sales agents and distributors who are authorized to sell our products and services on our behalf. Certain of those agents and distributors also provide services to customers in those geographic areas.  

 

As a complement to our printers and materials sales, we maintain our Quickparts on demand parts service, a global network of parts printing service locations, which we sell through a direct sales team and our online platform. In addition to providing a comprehensive range of services to customers, Quickparts also provides relationship building and lead generation for future sales of our products.

 

Our consumer oriented 3D printers, scanners, software, content and services are available online through Cubify and through retail stores and distributors as well as through our reseller channel.

 

Our customers include major companies and small and midsize businesses in a broad range of industries, including manufacturers of automotive, aerospace, computer, electronic, defense, education, consumer, energy and healthcare products. Purchasers of our printers include original equipment manufacturers (OEM’s), government agencies, universities and other educational institutions, independent service bureaus and individual consumers.  No single customer accounted for more than 10 percent of our consolidated revenue for  the years ended December 31, 2014, 2013 or 2012.  

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Production and Supplies

 

We assemble our Cube and Cube Pro 3D printers, our ProJet 1000 through 7000 3D printers and other equipment at our Rock Hill, South Carolina facilities. Our ProJet x60 series of 3D printers are assembled at our Andover, Massachusetts location. Our Herndon, Virginia facility produces our Vidar digitizers as well as provides additional Cube 3D printers assembly. Our Simbionix branded 3D simulators are produced in our facility in Airport City, Israel. Our direct metals printers are produced in the U.S. and France.

 

We outsource certain production printer assembly and refurbishment activities to selected design and engineering companies and suppliers. These suppliers also carry out quality control procedures on our printers prior to their shipment to customers. As part of these activities, these suppliers have responsibility for procuring the components and sub-assemblies that are used in our printers. We purchase finished printers from these suppliers pursuant to forecasts and customer orders that we supply to them. While the outsourced suppliers of our printers have responsibility for the supply chain of the components for the printers they assemble, the components, parts and sub-assemblies that are used in our printers are generally available from several potential suppliers.

 

We produce print materials at our facilities in Andover, Massachusetts; Barberton, Ohio; Marly, Switzerland and Rock Hill, South Carolina. We also have arrangements with third parties who blend to our specifications certain print materials that we sell under our own brand names. As discussed above, we also purchase print materials from third parties for resale to our customers.

 

Our equipment assembly and print materials blending activities and certain research and development activities are subject to compliance with applicable federal, state and local provisions regulating the storage, use and discharge of materials into the environment. We believe that we are in compliance, in all material respects, with such regulations as currently in effect and that continued compliance with them will not have a material adverse effect on our capital expenditures, results of operations or consolidated financial position.

 

Research and Development

 

The 3D printing industry is experiencing rapid technological change. Consequently, we have ongoing research and development programs to develop new printers and print materials and to enhance our product lines as well as to improve and expand the capabilities of our printers, print materials and software. These include significant technology platform developments for products, materials and software. Our development efforts are often augmented by development arrangements with research institutions, customers, suppliers of material and hardware and the assembly and design firms that we have engaged to assemble our printers. From time to time, we also engage third party engineering companies and specialty print materials companies in specific development projects.

 

In addition to our internally developed technology platforms, we have acquired products or technologies developed by others by acquiring business entities that held ownership rights to the technologies. In other instances we have licensed or purchased the intellectual property rights of technologies developed by third parties through licensing agreements that may obligate us to pay a license fee or royalty, typically based upon a dollar amount per unit or a percentage of the revenue generated by such products. As noted below, the amount of such royalties was not material to our results of operations or consolidated financial position for the three-year period ended December 31, 2014.

 

Research and development expenses were $75.4 million, $43.5 million and $23.2 million in 2014, 2013 and 2012, respectively.

 

No software development costs from acquisitions were capitalized in 2014. We capitalized $0.3 million of software development costs from acquisitions in 2013. We did not capitalize any software development costs in 2012. See Note 6 to the Consolidated Financial Statements. 

 

Intellectual Property

 

We regard our technology platforms and materials as proprietary and seek to protect them through copyrights, patents, trademarks and trade secrets. At December 31, 2014 and 2013, we held 1,061 and 973 patents worldwide, respectively. At December 31, 2014, we also had 262 pending patent applications worldwide, including applications covering inventions contained in our recently introduced printers. The principal issued patents covering aspects of our various technologies will expire at varying times through the year 2027.

 

We are also a party to various licenses that have had the effect of broadening the range of the patents, patent applications and other intellectual property available to us.

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We have also entered into licensing or cross-licensing arrangements with various companies in the United States and in other countries that enable those companies to utilize our technologies in their products or that enable us to use their technologies in our products. Under certain of these licenses, we are entitled to receive, or we are obligated to pay, royalties for the sale of licensed products in the U.S. or in other countries. The amount of such royalties was not material to our results of operations or consolidated financial position for the three-year period ended December 31, 2014.

 

We believe that, while our patents and licenses provide us with a competitive advantage, our success depends primarily on our marketing, business development and applications know-how and on our ongoing research and development efforts. Accordingly, we believe the expiration of any of the patents, patent applications or licenses discussed above would not be material to our business or financial position.

 

Competition

 

We face competition from the development of new technologies or techniques not encompassed by the patents that we own or license and from the conventional technologies.

 

Our competitors also include other suppliers of 3D printers, print materials and software, including CAD design and scanning software, as well as suppliers of forming manufacturing solutions such as vacuum casting equipment. A number of companies currently sell print materials that compete with those we sell.  Numerous suppliers of these products operate both internationally and regionally, and many of them have well-recognized product lines that compete with us in a wide range of our product applications.

 

Competition for most of our 3D printers is based primarily on process know-how, product application know-how and the ability to provide a full range of products and services to meet customer needs. Accordingly, our ongoing research and development programs are intended to enable us to maintain technological leadership. Certain of the companies producing competing products or providing competing services are well established and may have greater financial resources than us.

 

Our competitors are also companies that manufacture machines that make, or use machines to make, models, prototypes, molds and small-volume to medium-volume manufacturing parts. These competitors include suppliers of CNC, suppliers of plastics molding equipment, including injection-molding equipment, suppliers of traditional machining, milling and grinding equipment, and businesses that use such equipment to produce models, prototypes, molds and manufacturing parts. These conventional machining, plastic molding and metal casting techniques continue to be the most common methods by which plastic and metal parts, models, functional prototypes and metal tool inserts are manufactured today.

 

We believe that our future success depends on our ability to enhance our existing products and services, introduce new products and services on a timely and cost-effective basis, meet changing customer needs, extend our core technologies to new applications and anticipate and respond to emerging standards, business models, service delivery methods and other technological changes.

 

Employees

 

At December 31, 2014, we had 2,136  full-time employees. Although some of our employees outside the U.S. are subject to local statutory employment and labor arrangements, none of our U.S. employees are covered by collective bargaining agreements. We have not experienced any material work stoppages and believe that our relations with our employees are satisfactory.

 

Available Information

 

Our website address is www.3DSystems.com.  The information contained on our website is neither a part of, nor incorporated by reference into, this Form 10-K. We make available free of charge through our website our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K,  amendments to those reports, and other documents that we file with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the public may read and copy materials we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330.

 

Several of our corporate governance materials, including our Code of Conduct, Code of Ethics for Senior Financial Executives and Directors, Corporate Governance Guidelines, the current charters of each of the standing committees of the Board of Directors and our corporate charter documents and by-laws are available on our website. 

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Executive and Other Officers

 

The information appearing in the table below sets forth the current position or positions held by each of our officers and his or her age as of February 1,  2015. All of our officers serve at the pleasure of the Board of Directors. There are no family relationships among any of our officers or directors.

 

We have employed each of the individuals in the foregoing table, other than Theodore A. Hull, Mark W. Wright and David R. Styka, for more than five years.

 

Mr. Hull assumed the role of Executive Vice President and Chief Financial Officer on November 4, 2014.  Mr. 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. Most recently, he served as Executive Vice President and Chief Financial Officer of Fusion-io, a provider of advanced flash storage solutions, from December 2013 until the company's purchase by SanDisk Corporation in July 2014. Mr. Hull served as Vice President, Finance at Cisco Systems, Inc. a manufacturer of IP networking products and services, from 2007 to September 2013. 

 

Mr. Wright assumed the role of Executive Vice President and Chief Operating Officer on October 27, 2014. Mr. Wright joins the Company after an 18-year career at EMC Corporation, a Fortune 500 provider of web-based computing systems and data storage products. Most recently, he served as Senior Vice President of Business Development and Operations – Lenovo, since April 2014. He served as the Chief Operating Officer, Flash Product Division from October 2012 to April 2014, served as Senior Vice President, Strategic Operations, IIP Division from January to October 2012, Senior Vice President, Business Operations, Unified Storage Division from January 2011 to January 2012 and Vice President, Operations and Business Transformation, Unified Storage Division from 2008 to January 2011.

 

Mr. Styka assumed the role of Vice President and Chief Accounting Officer on January 14, 2015. Mr. Styka joins the Company after serving as Vice President – Finance and Treasurer at Family Dollar Stores, Inc. a value retailer. At Family Dollar, Mr. Styka served as Vice President – Finance and Treasurer since April 2014, Vice President – Finance from March 2011 to April 2014, and Divisional Vice President – Tax and Inventory from July 2008 to March 2011. 

 

Item 1A. Risk Factors

 

Forward-Looking Statements 

 

Certain statements made in this Form 10-K 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 this Form 10-K 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 or projections expressed or implied by such forward-looking statements.

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In addition to the statements set forth below that explicitly describe risks and uncertainties to which our business and our financial condition and results of operations are subject, readers are urged to consider statements in future or conditional tenses or that include terms such as “believes,” “belief,” “expects,” “intends,” “anticipates” or “plans” that appear in this Form 10-K to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs, expectations and projections as to future events and trends affecting our business. Forward-looking statements are based upon our beliefs, assumptions and current expectations concerning future events and trends, using information currently available to us, and are necessarily subject to uncertainties, many of which are outside our control. We assume no obligation, and do not intend, to update these forward-looking statements, except as required by applicable law. The factors stated under the heading “Cautionary Statements and Risk Factors” set forth below, as well as other factors, could cause actual results to differ materially from those reflected or predicted in 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 that you read in this Form 10-K 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, financial condition, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or to individuals acting on our behalf are expressly qualified in their entirety by this discussion. You should specifically consider the factors identified in this Form 10-K, which would cause actual results to differ from those referred to in forward-looking statements.

 

Cautionary Statements and Risk Factors

 

The risks and uncertainties described below 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, results of operations and financial condition. If any of the risks described below or if any other risks and uncertainties not currently known to us or that we currently deem not to be material actually occurs, our business, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock.  

 

The risks discussed below also include forward‑looking statements that are intended to provide our current expectations with regard to those risks. There can be no assurance that our current expectations will be met, and our actual results may differ substantially from the expectations expressed in these forward‑looking statements.

 

We have made, and expect to continue to make, strategic acquisitions that may involve significant risks and uncertainties.  We may not realize the anticipated benefits of past or future acquisitions and integration of these acquisitions may disrupt our business and divert management.

 

We completed ten acquisitions in 2014. We also intend to continue to evaluate acquisition opportunities in the future in an effort to expand our business and enhance stockholder value. Acquisitions involve certain risks and uncertainties including:

 

 

 

 

 

 

 

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We have experienced rapid and significant growth in our operations, both organically and from acquisitions, and we intend to continue to grow. The adaptation of our infrastructure to our growth will require, among other things, continued development of our financial and management controls and management information systems, management of our sales channel, continued capital expenditures, the ability to attract and retain qualified management personnel and the training of new personnel. We cannot be sure that our infrastructure, systems, procedures, business processes and managerial controls will be adequate to support the significant growth in our operations. Any delays in, or problems associated with, implementing, or transitioning to, new or enhanced systems, procedures, or controls to accommodate and support the requirements of our business and operations and to effectively and efficiently integrate acquired operations may adversely affect our ability to meet customer requirements, manage our product inventory, and record and report financial and management information on a timely and accurate basis. These potential negative effects could prevent us from realizing the benefits of an acquisition transaction or other growth opportunity. In that event, our competitive position, revenues, revenue growth, results of operations and liquidity could be adversely affected, which could, in turn, adversely affect our share price and shareholder value.

 

We face significant competition in many aspects of our business, which could cause our revenue and gross profit margins to decline. Competition could also cause us to reduce sales prices or to incur additional marketing or production costs, which could result in decreased revenue, increased costs and reduced margins.

 

We compete for customers with a wide variety of producers of equipment and software for models, prototypes, other three-dimensional objects and end-use parts as well as producers of print materials and services for this equipment. Some of our existing and potential competitors are researching, designing, developing and marketing other types of competitive equipment and software, print materials and services. Certain of these competitors may have financial, marketing, manufacturing, distribution and other resources substantially greater than ours.

 

We also expect that future competition may arise from the development of allied or related techniques for equipment and print materials that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products, and from improvements to existing print materials and equipment technologies.

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Some of our patents have recently expired and others will expire in coming years. Upon expiration of those patents, our competitors may introduce products using the technology previously protected by the expired patents, which products may have lower prices than those of our products. To compete, we may need to reduce our prices for those products, which could adversely affect our revenues, margins and profitability. Additionally, the expiration of our patents could reduce barriers to entry into additive manufacturing, which could result in the reduction of our sales and earnings potential. If competitors using technology previously protected by our expired patents were to introduce products of inferior quality, our potential customers may view the technology negatively, which would have an adverse effect on our image and reputation and on our ability to compete with systems using other additive fabrication technologies.

 

We intend to continue to follow a strategy of continuing product development to enhance our position to the extent practicable. We cannot assure you that we will be able to maintain our current position in the field or continue to compete successfully against current and future sources of competition. If we do not keep pace with technological change and introduce new products, we may lose revenue and demand for our products. We also incur significant costs associated with the investment in our product development in furtherance of our strategy that may not result in increased revenue or demand for our products and which could negatively affect our operating results.

 

We believe that our future success may depend on our ability to deliver products that meet changing technology and customer needs.

 

Our business may be affected by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new standards and practices, any of which could render our existing products and proprietary technology obsolete. Accordingly, our ongoing research and development programs are intended to enable us to maintain technological leadership. We believe that to remain competitive we must continually enhance and improve the functionality and features of our products, services and technologies. However, there is a risk that we may not be able to:

 

 

 

 

 

 

Our balance sheet contains several categories of intangible assets totaling $841.1 million at December 31, 2014 that we could be required to write off or write down in the event of the impairment of certain of those assets arising from any deterioration in our future performance or other circumstances. Such write-offs or write-downs could adversely impact our future earnings and stock price, and our ability to obtain financing. 

 

At December 31, 2014, we had $589.5 million in goodwill capitalized on our balance sheet. Accounting Standards Codification (“ASC”) 350, “Intangibles – Goodwill and Other,” requires that goodwill and some long-lived intangibles be tested for impairment at least annually. In addition, goodwill and intangible assets are tested for impairment at other times as circumstances warrant, and such testing could result in write-downs of some of our goodwill and long‑lived intangibles. Impairment is measured as the excess of the carrying value of the goodwill or intangible asset over the fair value of the underlying asset. A key factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. Accordingly, we may, from time to time, incur impairment charges, which are recorded as operating expenses when they are incurred and would reduce our net income and adversely affect our operating results in the period in which they are incurred.

 

As of December 31, 2014, we had $251.6 million of other intangible assets, net, consisting of licenses, patents, and other intangibles that we amortize over time. Any material impairment to any of these items would result in a non-cash charge and would not impact our cash position or cash flows, but such a charge could adversely affect our results of operations and stockholders’ equity and could affect the trading price of our common stock in the period in which they are incurred.

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As discussed below, we completed several business acquisitions during 2014, 2013 and 2012. The majority of the acquisitions have resulted in our recording additional goodwill on our consolidated balance sheet. This goodwill typically arises because the purchase price for these businesses reflects a number of factors including the future earnings and cash flow potential of these businesses, the multiples to earnings, cash flow and other factors, such as prices at which similar businesses have been purchased by other acquirers, the competitive nature of the process by which we acquired the business, and the complementary strategic fit and resulting synergies these businesses bring to existing operations.

 

For additional information, see Notes 6 and 7 to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Estimates—Goodwill and other intangible and long-lived assets.”

 

Global economic, political and social conditions may harm our ability to do business, increase our costs and negatively affect our stock price.     

 

We are subject to global economic, political and social conditions that may cause customers to delay or reduce technology purchases due to economic downturns, volatility in fuel and other energy costs, difficulties in the financial services sector and credit markets, geopolitical uncertainties and other macroeconomic factors affecting spending behavior. We face risks that may arise from financial difficulties experienced by our suppliers, resellers or customers, including:

 

 

 

 

We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third party claims as a result of litigation or other proceedings.

 

In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights or disputes related to the validity or alleged infringement of third party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be costly and can be disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes.

 

Third-party intellectual property claims asserted against us could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from assembling or licensing certain of our products, subject us to injunctions restricting our sale of products, cause severe disruptions to our operations or the marketplaces in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements. In addition we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products. Any of these could seriously harm our business.

 

We may not be able to protect our intellectual property rights and confidential information, including our digital content, from third-party infringers or unauthorized copying, use or disclosure.

 

Although we defend our intellectual property rights and endeavor to combat unlicensed copying and use of our digital content and intellectual property rights through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. If our intellectual property becomes subject to piracy attacks, they may harm our business.

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Additionally, we endeavor to protect the secrecy of our digital content, confidential information and trade secrets. If unauthorized disclosure of our trade secrets occurs, we could potentially lose trade secret protection. The loss of trade secret protection could make it easier for third parties to compete with our products by copying previously confidential features, which could adversely affect our revenue and operating margins. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements. However there is a risk that our confidential information and trade secrets may be disclosed or published without our authorization, and in these situations it may be difficult and/or costly for us to enforce our rights.

 

If we cease to generate net cash flow from operations and if we are unable to raise additional capital, our financial condition could be adversely affected and we may not be able to execute our growth strategy.

 

We cannot assure you that we will continue to generate cash from operations or other potential sources to fund future working capital needs and meet capital expenditure requirements.

 

If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring or incurring additional debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to obtain additional capital or refinance any indebtedness will depend on, among other things, the capital markets, our financial condition at such time and the terms and conditions of any such financing or indebtedness. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

 

During 2014 we carried out one capital markets transaction and received $299.7 million of net proceeds. We also entered into a revolving, unsecured credit facility with PNC Bank, National Association, as Administrative Agent, and certain other lenders party thereto during 2014.  The Credit Agreement comprises a revolving loan facility that provides for advances in the initial aggregate principal amount of up to $150.0 million. From time-to-time we may seek access to additional external sources of capital to fund working capital needs, capital expenditures, acquisitions, and for other general corporate purposes. However, we cannot assure you that capital would be available from external sources such as bank credit facilities, debt or equity financings or other potential sources to fund any of those future needs. 

 

If our ability to generate cash flow from operations and our existing cash becomes inadequate to meet our needs, our options for addressing such capital constraints include, but are not limited to, (i) obtaining additional debt financing or increasing the limit on our current revolving credit facility, (ii) accessing the public capital markets, or (iii) delaying certain of our existing development projects. If it became necessary to obtain additional debt financing it is likely that such alternatives in the current market environment would be on less favorable terms than we have historically obtained, which could have an adverse impact on our consolidated financial position, results of operations or cash flows.

 

The lack of additional capital resulting from any inability to generate cash flow from operations or to raise equity or debt financing could force us to substantially curtail or cease operations and would, therefore, have an adverse effect on our business and financial condition. Furthermore, we cannot assure you that any necessary funds, if available, would be available on attractive terms or that they would not have a significantly dilutive effect on our existing stockholders. If our financial condition worsens and we become unable to attract additional equity or debt financing or enter into other strategic transactions, we could become insolvent or be forced to declare bankruptcy and we would not be able to execute our growth strategy.

 

The variety of products that we sell could cause significant quarterly fluctuations in our gross profit margins, and those fluctuations in margins could cause fluctuations in operating income or loss and net income or loss.

 

We continuously work to expand and improve our products, materials and services offerings, the number of geographic areas in which we operate and the distribution channels we use to reach various target product applications and customers. This variety of products, applications and channels involves a range of gross profit margins that can cause substantial quarterly fluctuations in gross profit and gross profit margins depending upon the mix of product shipments from quarter to quarter. Additionally, the introduction of new products or services may further heighten quarterly fluctuations in gross profit and gross profit margins due to manufacturing ramp-up and start-up costs. We may experience significant quarterly fluctuations in gross profit margins or operating income or loss due to the impact of the mix of products, channels or geographic areas in which we sell our products from period to period. In some quarters, it is possible that our financial performance could be below expectations of analysts and investors. If so, the price of our common stock may be volatile or decline and our cost of capital may increase.

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We derive a significant portion of our revenue from business conducted outside the U.S and are subject to the risks of doing business outside the U.S.

 

For the year ended 2014, 49.1% of our consolidated revenue is derived from customers in countries outside the U.S. There are many risks inherent in business activities outside the U.S. that, unless managed properly, may adversely affect our profitability, including our ability to collect amounts due from customers. While most of our operations outside the U.S. are conducted in highly developed countries, they could be adversely affected by:

 

 

 

 

 

 

 

 

 

 

 

 

 

These uncertainties may make it difficult for us and our customers to accurately plan future business activities and may lead our customers in certain countries to delay purchases of our products and services. More generally, these geopolitical, social and economic conditions could result in increased volatility in global financial markets and economies.

 

The consequences of terrorism or armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our market opportunities or our business. We are uninsured for losses and interruptions caused by terrorism, acts of war and similar events.

 

While the geographic areas outside the U.S. in which we operate are generally not considered to be highly inflationary, our foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated, for example, in U.S. dollars rather than their respective functional currencies.

 

Moreover, our operations are exposed to market risk from changes in interest rates and foreign currency exchange rates and commodity prices, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating and financing activities and, when we consider it to be appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

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We depend on our supply chain for components and sub-assemblies used in our 3D printers and other products and for raw materials used in our print materials. If these relationships were to terminate or be disrupted, our business could be disrupted while we located alternative suppliers and our expenses may increase.

 

We  have outsourced the assembly of certain of our printers to third party suppliers, we purchase components and sub-assemblies for our printers from third party suppliers, and we purchase raw materials that are used in our print materials, as well as certain of those print materials, from third party suppliers.

 

While there are several potential suppliers of the components, parts and sub-assemblies for our products, we currently choose to use only one or a limited number of suppliers for several of these components, including our lasers, print materials and certain jetting components. Our reliance on a single or limited number of suppliers involves many risks including:

 

 

 

 

 

While we believe that we can obtain all the components necessary for our products from other manufacturers, we require any new supplier to become “qualified” pursuant to our internal procedures, which could involve evaluation processes of varying durations. We generally have our printers and other products assembled based on our internal forecasts and the supply of raw materials, assemblies, components and finished goods from third parties, which are subject to various lead times.  In addition, at any time, certain suppliers may decide to discontinue production of an assembly, component or raw material that we use. Any unanticipated change in the sources of our supplies, or unanticipated supply limitations, could increase production or related costs and consequently reduce margins.

 

If our forecasts exceed actual orders, we may hold large inventories of slow-moving or unusable parts, which could have an adverse effect on our cash flow, profitability and results of operations. Inversely, we may lose orders if our forecast is low and we are unable to meet demand.

 

We have engaged selected design and manufacturing companies to assemble certain of our production printers. In carrying out these outsourcing activities, we face a number of risks, including:

 

 

 

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Our operations could suffer if we are unable to attract and retain key management or other key employees.

 

Our success depends upon the continued service and performance of our senior management and other key personnel. Our senior executive team is critical to the management of our business and operations, as well as to the development of our strategy. The loss of the services of one or more members of our senior executive team could delay or prevent the successful implementation of our growth strategy, or our commercialization of new applications for our systems or other products, or could otherwise adversely affect our ability to manage our company effectively and carry out our business plan. Members of our senior management team may resign at any time. High demand exists for senior management and other key personnel (including scientific, technical and sales personnel) in the 3D printing industry, and there can be no assurance that we will be able to retain such personnel. We experience intense competition for qualified personnel. While we intend to continue to provide competitive compensation packages to attract and retain key personnel, some of our competitors for these employees have greater resources and more experience, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees for our research and development and manufacturing operations, we may be unable to achieve the synergies expected from mergers and acquisitions that we may effect from time to time, or to develop and commercialize new products or new applications for existing products. Furthermore, possible shortages of key personnel, including engineers, in the regions surrounding our facilities could require us to pay more to hire and retain key personnel, thereby increasing our costs.

 

Our products and services may experience quality problems from time to time that can result in decreased sales and operating margin  and harm to our reputation.

 

We sell complex hardware and software products, materials and services that can contain design and manufacturing defects. Sophisticated software and applications, such  as those sold  by us, may contain “bugs” that can unexpectedly interfere with the software’s intended  operation. Defects may also occur  in components  and products we purchase from third parties.  There can  be  no assurance we will  be able  to detect  and fix all defects  in the hardware,  software, materials and services we sell. Failure  to  do  so could result  in lost revenue, significant warranty and other expenses and harm  to our reputation.

 

We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business reputation.

 

Products as complex as those we offer may contain undetected defects or errors when first introduced or as enhancements are released that, despite testing, are not discovered until after the product has been installed and used by customers. This could result in lost revenue, delayed marketplace acceptance of the product, claims from customers or others, damage to our reputation and business or significant costs to correct the defect or error.

 

We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, the nature and extent of these limitations vary from customer to customer. Their effect is subject to a variety of legal limitations and it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.

 

The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business reputation and failure to retain existing customers or to attract new customers.

 

We face risks in connection with changes in energy-related expenses.

 

We and our suppliers depend on various energy products in processes used to produce our products. Generally, we acquire products at market prices and do not use financial instruments to hedge energy prices. As a result, we are exposed to market risks related to changes in energy prices. In addition, many of the customers and industries to whom we market our products and services are directly or indirectly dependent upon the cost and availability of energy resources.

 

Our business and profitability may be adversely affected to the extent that our or our customers’ energy-related expenses increase, both as a result of higher costs of producing, and potentially lower profit margins in selling, our products and services and because increased energy costs may cause our customers to delay or reduce purchases of our products and services.

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We rely on our management information systems for inventory management, distribution, and other key functions. If our information systems fail to adequately perform these functions, or if we experience an interruption in their operation, our business and operating results could be adversely affected.

The efficient operation of our business is dependent on our management information systems. We rely on our management information systems: to, among other things, effectively manage our accounting and financial functions, including maintaining our internal controls; to manage our manufacturing and supply chain processes; and to maintain our research and development data. The failure of our management information systems to perform properly could disrupt our business and product development, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business and operating results to suffer. Although we take steps to secure our management information systems, including our computer systems, intranet and Internet sites, email and other telecommunications and data networks, the security measures we have implemented may not be effective and our systems may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including unauthorized access or security breaches, natural or man-made disasters, cyber-attacks, computer viruses, power loss, or other disruptive events. Our reputation and financial condition could be adversely affected if, as a result of a significant cyber event or otherwise, our operations are disrupted or shut down; our confidential, proprietary information is stolen or disclosed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we must dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.

 

Our common stock price has been and may continue to be volatile.

 

The market price of our common stock has experienced, and may continue to experience, considerable volatility. Between January 1, 2013 and December 31, 2014,  after giving effect to the three-for-two stock split in the nature of a 50% stock dividend that we distributed in February 2013, the trading price of our common stock has ranged from a low of $28.38 per share to a high of $96.42 per share.

 

Numerous factors could have a significant effect on the price of our common stock, including those described or referred to in this “Risk Factors” section of this Form 10-K, as well as, among other things:

 

 

 

 

 

 

 

 

 

The number of shares of common stock issuable in a stock offering, the issuance of restricted stock awards or the issuance of shares in connection with certain acquisitions or the conversion of the notes could dilute the ownership interest of existing stockholders and may affect the market price for our common stock.

 

We may issue additional securities, from time to time, as necessary to provide flexibility to execute our growth strategy.  We raised net proceeds of approximately  $299.7 million and $272.1 million through issuances of common stock in 2014 and 2013, respectively.

 

Our Certificate of Incorporation, as amended, authorizes our issuance of up to a total 220.0 million shares of common stock, of which 112.2 million shares have been issued or are otherwise currently reserved for issuance. Future issuances could have the effect of diluting our earnings per share as well as our existing stockholders’ individual ownership percentages and could lead to volatility in our common stock price.

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Additionally, subject to the limitations of our Certificate of Incorporation and applicable law, we are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The issuance of additional shares of our common stock in connection with future acquisitions or other issuances of our common stock or convertible securities, including outstanding options, may dilute the ownership interest of our common stockholders.

Sales of a substantial number of shares of our common stock or other equity-related securities in the public market could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.

 

Our business involves the use of hazardous materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business. 

 

Our business involves the blending, controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by us for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and our reputation may be harmed.

 

Regulations related to conflict-free minerals may cause us to incur additional expenses and may create challenges with our customers. 

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability regarding the use of “conflict” minerals mined from the Democratic Republic of Congo (the “DRC”) and adjoining countries. The SEC has established annual disclosure and reporting requirements for those companies who use “conflict” minerals sourced from the DRC and adjoining countries in their products. These requirements could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering conflict-free minerals, we cannot ensure that we will be able to obtain these conflict-free minerals in sufficient quantities or at competitive prices. Compliance with these requirements may also increase our costs, including costs that may be incurred in conducting due diligence procedures to determine the sources of certain minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. In addition, we may face challenges with our customers if we are unable to sufficiently verify the origins of the minerals used in our products.

 

Our Board of Directors is authorized to issue up to 5 million shares of preferred stock.

 

The Board of Directors is authorized to issue up to 5 million shares of preferred stock, none of which is currently issued or outstanding. The Board of Directors is authorized to issue these shares of preferred stock in one or more classes or series without further action of the stockholders and in that regard to determine the issue price, rights, preferences and privileges of any such class or series of preferred stock generally without any further vote or action by the stockholders. The rights of the holders of any outstanding series of preferred stock may adversely affect the rights of holders of common stock.  

 

Our ability to issue preferred stock gives us flexibility concerning possible acquisitions and financings, but it could make it more difficult for a third party to acquire a majority of our outstanding common stock. In addition, any preferred stock that is issued may have other rights, including dividend rights, liquidation preferences and other economic rights, senior to the common stock, which could have an  adverse effect on the market value of our common stock.

 

Certain provisions of Delaware law contain anti-takeover provisions that may make it more difficult to effect a change in our control.

 

Certain provisions of the Delaware General Corporation Law could delay or prevent an acquisition or change in control and the replacement of our incumbent directors and management, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares, possibly at a premium over the then market price of our common stock. One of these Delaware laws prohibits us from engaging in a business combination with any interested stockholder (as defined in the statute) for a period of three years from the date that the person became an interested stockholder, unless certain conditions are met.

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Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability. 

 

We are a U.S. based, multinational company subject to taxation in multiple U.S. and foreign tax jurisdictions. Our future effective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules and regulations in jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.

 

In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that we expect may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final determination of any examination will not have an adverse effect on our operating results and financial position. 

 

We are subject to U.S. and other anti-corruption laws, trade controls, economic sanctions, and similar laws and regulations. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation. 

 

Doing business on a worldwide basis requires us to comply with the laws and regulations of the U.S. government and various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners and investments. In particular, our operations are subject to U.S. and foreign anti-corruption and trade control laws and regulations, such as the Foreign Corrupt Practices Act (“FCPA”) and United Kingdom Bribery Act (the “Bribery Act”), export controls and economic sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), the State Department's Directorate of Defense Trade Controls (“DDTC”), and the Bureau of Industry and Security (“BIS”). As a result of doing business in foreign countries and with foreign customers, we are exposed to a heightened risk of violating anti-corruption and trade control laws and sanctions regulations.

 

As part of our business, we may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA’s prohibition on providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. In addition, the provisions of the Bribery Act  extend beyond bribery of foreign public officials and also apply to transactions with individuals that a government does not employ. Some of the international locations in which we operate lack a developed legal system and have higher than normal levels of corruption. Our continued expansion outside the U.S., including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of FCPA, OFAC or Bribery Act violations in the future.

 

As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S., these laws include the International Traffic in Arms Regulations (“ITAR”) administered by the DDTC, the Export Administration Regulations (“EAR”) administered by the BIS, and trade sanctions against embargoed countries and destinations administered by OFAC. The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called “dual use” items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. Any failures to comply with these laws and regulations could result in fines, adverse publicity and restrictions on our ability to export our products, and repeat failures could carry more significant penalties. 

 

Violations of anti-corruption and trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have established policies and procedures designed to assist our compliance with applicable U.S. and international anti-corruption and trade control laws and regulations, including the FCPA, the Bribery Act and trade controls and sanctions programs administered by OFAC, the DDTC and BIS, and have trained our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, and that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could have an adverse effect on our reputation, business, financial condition and results of operations. In addition, various state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business with sanctioned countries, persons and entities, which could adversely affect our reputation, business, financial condition and results of operations.

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Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

We occupy an 80,000 square foot headquarters, research and development and manufacturing facility in Rock Hill, South Carolina, which we lease pursuant to a lease agreement with Lex Rock Hill, LP. After its initial term ending August 31, 2021, the lease provides us with the option to renew the lease for two additional five-year terms as well as the right to cause Lex Rock Hill, LP, subject to certain terms and conditions, to expand the leased premises during the term of the lease, in which case the term of the lease would be extended. The lease is a triple net lease and provides for the payment of base rent of approximately $0.7 million annually from 2014 through 2020, with a  rent escalation in 2016 through 2021. Under the terms of the lease, we are obligated to pay all taxes, insurance, utilities and other operating costs with respect to the leased premises. Pursuant to the terms of the lease, we exercised the right to purchase the undeveloped land surrounding the leased premises in March 2011. We purchased this 11-acre parcel contiguous to our Rock Hill facility for future expansion and additional facility capacity to continue to expand in-house manufacturing activities for printers and print materials.

 

In addition, we own our Lawrenceburg, Tennessee production facility and lease various other facilities throughout the world. The table below summarizes those facilities greater than 10,000 square feet per location.  

 

 

Item 3. Legal Proceedings

 

For information relating to legal proceedings, see Note 22 to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K.

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Item 4. Mine Safety Disclosures

 

Not applicable.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

On May 26, 2011, we transferred the listing of our Common Stock to the New York Stock Exchange (“NYSE”) under the trading symbol “DDD.” Prior to that, our Common Stock was listed on The NASDAQ Global Market (“NASDAQ”) and traded under the symbol “TDSC.” The following table sets forth, for the periods indicated, the range of high and low prices of our common stock, $0.001 par value, as quoted on the NYSE, with ticker DDD. In addition, we completed a three-for-two stock split in the form of a 50% stock dividend, effective February 15, 2013, which is reflected in the prices in the table below.

 

 

 

As of February 18, 2015, our outstanding common stock was held by approximately 879  stockholders of record. This figure does not reflect the beneficial ownership of shares held in the nominee name.

 

Dividends

 

We do not currently pay, and have not paid, any dividends on our common stock, and we currently intend to retain any future earnings for use in our business. Any future determination as to the declaration of dividends on our common stock will be made at the discretion of the Board of Directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by the Board of Directors, including the applicable requirements of the Delaware General Corporation Law, which provides that dividends are payable only out of surplus or current net profits.

 

The payment of dividends on our common stock may be restricted by the provisions of credit agreements or other financing documents that we may enter into or the terms of securities that we may issue from time to time.  Currently, no such agreements or documents limit our declaration of dividends or payments of dividends, other than our $150 million five-year revolving, unsecured credit facility with PNC, which limits the amount of cash dividends that we may pay in any one fiscal year to $30.0 million.

 

Issuance of Unregistered Securities and Issuer Purchases of Equity Securities

 

On February 18, 2014, as part of the consideration for the acquisition of the business and assets of Digital PlaySpace, Inc., we issued 0.03 million unregistered shares of 3D Systems Corporation common stock to Digital Playspace, 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 $4.0 million, of which approximately $2.0 million was paid in cash and $2.0 million was paid in unregistered shares of the Company’s common stock.

 

On April 2, 2014, as part of the consideration for the acquisition of 100% of the shares of Medical Modeling Inc., we issued 0.3 million unregistered shares of 3D Systems Corporation common stock to the sellers of Medical Modeling Inc., each of whom represented to us that he 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 $69.0 million, of which approximately $51.5 million was paid in cash and $17.5 million was paid in unregistered shares of the Company’s common stock.

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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 0.09 million 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 $17.5 million, of which approximately $13.1 million was paid in cash and $4.4 million was paid in unregistered shares of the Company’s common stock.

 

We did not repurchase any of our equity securities during the year ended 2014, except for unvested restricted stock awards repurchased pursuant to our 2004 Incentive Stock Plan. See Note 14 to the Consolidated Financial Statements. For information regarding the securities authorized for issuance under our equity compensation plans, see “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Equity Compensation Plans” under Item 12. Also see Note 14 to the Consolidated Financial Statements.

 

Stock Performance Graph

 

The graph below shows, for the five years ended December 31, 2014, the cumulative total return on an investment of $100 assumed to have been made on December 31, 2009 in our common stock. For purposes of the graph, cumulative total return assumes the reinvestment of all dividends. The graph compares such return with those of comparable investments assumed to have been made on the same date in (a) the NYSE Composite Index,  (b) the S&P 500 Information Technology Index, and (c) the S&P Mid-Cap 400 Index, which are published market indices with which we are sometimes compared.

 

Although total return for the assumed investment assumes the reinvestment of all dividends on December 31 of the year in which such dividends were paid, we paid no cash dividends on our common stock during the periods presented.

 

Our common stock is listed on the NYSE (trading symbol: DDD). 

 

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*

 

*  $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

 

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Item 6. Selected Financial Data 

 

The selected consolidated financial data set forth below for the five years ended December 31, 2014 have been derived from our historical Consolidated Financial Statements. You should read this information together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the notes to the selected consolidated financial data and our Consolidated Financial Statements and the notes thereto for December 31, 2014 and prior years included in this Form 10-K.

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read together with the selected consolidated financial data and our Consolidated Financial Statements and notes thereto set forth in this Form 10-K. Certain statements contained in this discussion may constitute forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as discussed more fully in this Form 10-K. See “Forward-Looking Statements” and “Cautionary Statements and Risk Factors” in Item 1A.

 

The forward-looking information set forth in this Form 10-K is provided as of the date of this filing, and, except as required by law, we undertake no duty to update that information.

 

Overview

 

We provide the most advanced and comprehensive 3D digital design and fabrication solutions available today, including 3D printers, print materials and cloud-sourced custom parts. Our powerful ecosystem transforms entire industries by empowering professionals and consumers everywhere to bring their ideas to life using our vast material selection, including plastics, metals, ceramics and edibles.

 

Our leading personalized medicine capabilities include end-to-end simulation, training and planning, and printing of surgical instruments and devices for personalized surgery and patient specific medical and dental devices. Our democratized 3D digital design, fabrication and inspection products provide seamless interoperability and incorporate the latest immersive computing technologies. Our products and services disrupt traditional methods, deliver improved results and empower our customers to manufacture the future now.

   

Growth strategy

 

We are pursuing a growth strategy that focuses on strategic initiatives and near term significant growth opportunities in five key areas:

 

 

We anticipate the ongoing transition of 3D printing from the design and prototyping lab to the factory floor, and we plan to continue to invest in advanced manufacturing applications to enhance and accelerate that shift. In 2014, we launched several new industrial 3D printers with increased speeds, print capabilities, and build areas as well as introduced print materials with improved strength, temperature and durability, all geared towards demanding manufacturing and end-use part applications.

 

We are continuing development of our continuous, high speed fab-grade manufacturing printer platform with a modular, racetrack design and full color, photo-realistic polymer parts capabilities. This breakthrough product is designed for advanced manufacturing from consumer goods to automotive applications. 

 

In November 2014, we announced our acquisition of Cimatron, a leading CAD/CAM provider, to strengthen our 3D digital design and fabrication portfolio. The acquisition was completed on February 9, 2015. Cimatron adds designed-for-manufacturing CAD/CAM programs, expertise and resellers, which we intend to utilize across our portfolio of solutions and in the path to hybridization of additive and traditional manufacturing. 

 

During 2014, we also continued to expand our Quickparts service capabilities, expertise and global footprint, adding strategic acquisitions within the United States and Latin America.  

 

We enhanced our direct metal printing offering this year through internal developments, including the introduction of the ProX 400 direct metals printer, and the acquisition of LayerWise. LayerWise added a second proprietary printing technology and expanded the range of metals materials that we can use to print fully dense, chemically pure metal parts. We view metals as an open ended opportunity with immediate addressable markets within aerospace, automotive and healthcare.

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Healthcare is our fastest growing vertical and in 2014 we made significant investments in personalized medicine. Our acquisitions of Medical Modeling, Simbionix and LayerWise augmented our 3D healthcare portfolio and strengthened our capabilities in 3D printing enabled personalized surgery and patient specific medical and dental devices. These acquisitions expanded our healthcare digital thread from the training room to the operating room. We have appointed one of our senior executives to fully leverage these acquisitions through his expertise and leadership, to create a seamless workflow through the full range of personalized medicine opportunities.

 

We believe that continued development in print materials is critical to the continued advancement and penetration of 3D printing. To this end, we made significant advances in materials during 2014, including introducing ten new materials from plastics and flexible materials to high-performance and high temperature advanced materials. Along with new materials, we continue to add and enhance formulations and drive speed improvements, throughput and recyclability. In addition to internal research and development (“R&D”), we also acquired a specialties product line related to our materials business, providing us with vertical integration and a team of chemists and materials scientists to enable further 3D print materials innovation and advancement.

 

We believe that mainstreaming 3D printing and bringing it to mainstreet are important, both as a current market opportunity and to help drive awareness and longer term adoption of the technology. We have introduced plug and play consumer 3D printers, software, content creation tools and applications at lower price points with simple to use, intuitive formats along with curated collections of home, fashion, hobby and entertainment items. As part of this initiative, we are also partnering with educational organizations to bring 3D printers and curriculum to K-12 classrooms and labs, as well as libraries and museums. We believe that democratizing access to 3D printers will accelerate adoption and empowers today’s users with tomorrow’s design and manufacturing skills. 

 

We are working to accomplish our growth initiatives organically and, as opportunities arise, through selective acquisitions, including those we have already completed. We expect to be able to support organic growth by leveraging our comprehensive technology and solutions, core competencies and experienced management team to scale our business model. As with any growth strategy, there can be no assurance that we will succeed in accomplishing our strategic initiatives.

 

Summary of 2014 Financial Results

 

As discussed in greater detail below, revenue for the year ended 2014 increased from higher sales across all revenue categories.  Our revenue increased by 27.3% to $653.7 million in 2014, compared to  $513.4 million in 2013 and $353.6 million in 2012. These results reflected growth in demand for 3D printers and materials as well as healthcare products and services.

 

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 2014, our organic growth was 7.2% for the fourth quarter and 13.3% for the full year. In 2013, our organic growth was 34.3% for the fourth quarter and 29.4% for the full year.

 

Healthcare revenue includes sales of products, materials, and services for health-related applications, including simulation, training and planning, and printing of surgical instruments and medical and dental devices for personalized medicine. For the fourth quarter of 2014, healthcare revenue grew 96.0% and accounted for $42.8 million, or 22.8%, of our total revenue compared to $21.8 million, or 14.1%, in 2013. For the year ended 2014, healthcare revenue grew 80.3% and accounted for $129.3 million, or 19.8%, of our total revenue compared to $71.7 million, or 14.0%, in 2013.   

 

Consumer revenue includes sales of our Cube® series 3D printers and their related print materials, Sense 3D scanners and other products and services related to consumer products and retail channels. For the fourth quarter of 2014, consumer revenue was $15.0 million, or 8.0% of our total revenue, compared to $8.9 million or 5.8% of revenue, in the fourth quarter of 2013. For the year ended 2014, consumer revenue was $43.8 million, or 6.7% of our total revenue, compared to $34.8 million or 6.8% of revenue, in 2013.

 

Our gross profit for the year ended 2014 increased by 18.6%, to $317.4 million, from $267.6 million in 2013, after increasing from $181.2 million in 2012. Our higher gross profit for the year ended 2014 arose primarily due to our higher level of revenue from increases across products, materials, and services. Our gross profit margin percentage decreased to 48.6% in 2014 from 52.1% in 2013 and 51.2% in 2012, reflecting current sales mix and timing of sales, manufacturing ramp-up and transitions to new products and new product start-up costs. 

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Our total operating expenses for the year ended 2014 increased by 55.9%, to $291.1 million,  from $186.7 million in 2013,  reflecting a $72.5 million, or 50.6%, increase in selling, general and administrative expenses, primarily due to increased sales and marketing expenses, higher staffing due to our expanding portfolio and growing business and increased amortization expense. The increase also reflected a $31.9 million, or 73.4%, 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 decreased by $54.6 million to $26.3 million in 2014, compared to operating income of $80.9 million in 2013 and $60.6 million in 2012. This was primarily due to lower gross profit margin and higher operating expenses as discussed in more detail below.  

 

Our net income for 2014 included $73.9 million of non-cash expenses, which primarily consisted of depreciation and amortization and stock-based compensation, compared to $51.4 million of non-cash expenses in 2013, which primarily consisted of depreciation and amortization, stock-based compensation and a loss on convertible notes. The increase in non-cash expenses is primarily due to increased amortization from acquired intangibles and an increase in stock-based compensation. 

 

A number of actions or events occurred in 2014 that affected our liquidity and our balance sheet including the following:

 

 

 

 

 

Results of Operations for 2014, 2013 and 2012

 

Table 1 below sets forth revenue and percentage of revenue by class of product and service. 

 

Table 1

 

 

Consolidated revenue

 

On a consolidated basis, revenue for the year ended 2014 increased by $140.3 million, or 27.3%, compared to 2013, led by increased sales of products and aided by increased sales of materials and services as discussed in more detail below.

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At December 31, 2014 our backlog was approximately $46.5 million, compared to $28.6 million at December 31, 2013 and $11.4 million at December 31, 2012. Production and delivery of our printers is generally not characterized by long lead times, backlog is more dependent on timing of customers’ requested delivery. In addition, Quickparts services lead time and backlog depends on whether orders are for rapid prototyping or longer-range production runs. The December 31, 2014 backlog included a portion from each of our revenue categories, including $16.1 million of printer sales driven by demand for our design and manufacturing printers. The December 31, 2013 backlog included a portion from each of our revenue categories, but primarily consisted of $17.2 million of printer sales driven by demand for advanced manufacturing. The December 31, 2012 backlog included a portion from each of our revenue categories, including printer sales of $3.2 million. The backlog at December 31, 2014 includes $13.4 million of Quickparts orders, compared to $8.4 million at December 31, 2013 and $5.9 million at December 31, 2012.  

 

Revenue by class of product and service

 

2014 compared to 2013

 

Table 2 sets forth the change in revenue by class of product and service for 2014 compared to 2013.

 

Table 2 

 

 

We earn revenues from the sale of products, materials and services. 

 

The $55.7 million increase in revenue from products compared to 2013 is driven by increased demand for design and manufacturing printers and added healthcare products. Certain resellers may purchase stock inventory in the ordinary course of business. For the years ended 2014 and 2013, we estimate that revenue related to reseller inventory amounted to approximately 2% 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 a majority of our products, 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 $20.1 million and $20.6 million of products revenue in 2014 and 2013, respectively. 

 

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 $30.5 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 28.5% and represented 73.3% of total materials revenue for the year ended 2014, compared to 70.6% for 2013.  

 

The $54.1 million increase in service revenue primarily reflects the addition of Medical Modeling and Simbionix, coupled with growing Quickparts, consumer and software services.  Service revenue from Quickparts increased 21.1% to $122.4 million, or 57.9% of total service revenue, for 2014, compared to $101.1 million, or 64.2%, of total service revenue in the 2013 period. Software services contributed $15.2 million of revenue in 2014 compared to $8.2 million in 2013.

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In addition to changes in sales volumes, including the impact of revenue from acquisitions, there are two other primary drivers of changes in revenue 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 materials on our operating results has grown. 

 

2013 compared to 2012

 

Table 3 sets forth the change in revenue by class of product and service for 2013 compared to 2012.

 

Table 3

 

 

On a consolidated basis, revenue for the year ended 2013 increased by $159.8 million, or 45.2%, compared to 2012, primarily due to increased sales of printers, coupled with acquired software revenue.

 

The $100.8 million increase in revenue from products compared to the year ended 2012 is primarily due to increased printer unit sales volume for the year ended 2013, driven by increased demand for consumer and professional printers.

 

In addition to printers, the products category includes software products, perceptual and haptic devices and Vidar digitizers.  Software products contributed revenue of $20.6 million and $4.6 million in 2013 and 2012, respectively.

 

The $25.2 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 40.2% and represented 70.6% of total materials revenue for the year ended 2013, compared to 62.6% for 2012.  

 

The increase in service revenue primarily reflects revenue from Quickparts, coupled with the addition of software revenue. Service revenue from Quickparts was $101.1 million, or 64.2% of total service revenue, for the year ended 2013, compared to $79.2 million, or 64.1% of total service revenue for 2012. The addition of software services in 2013 contributed $8.2 million of revenue for the year. For the fourth quarter of 2013, revenue from Quickparts was $28.4 million, compared to $21.0 million in the fourth quarter of 2012. 

 

Revenue by geographic region

 

2014 compared to 2013

 

All geographic regions experienced higher levels of revenue in 2014 compared to 2013.  Table 4 sets forth the change in revenue by geographic area for 2014 compared to 2013:

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Table 4

 

 

Revenue from operations in the Americas for the year ended 2014 increased by $49.1 million, or 17.3%, to $333.9 million from $284.8 million in 2013. This increase was due primarily to higher volume, partially offset by the unfavorable combined effect of price and mix.

 

Revenue from operations outside the Americas for the year ended 2014 increased by $91.1 million, or 39.8%, to $319.7 million from $228.6 million in 2013 and comprised 48.9% of consolidated revenue in 2014 compared to 44.5% in 2013. The increase in revenue from operations outside the U.S., excluding the impact of foreign currency translation, was 41.5% for the year ended 2014 compared to 46.4% in 2013.  

 

Revenue from EMEA operations increased by $62.3 million, or 46.6%, to $196.1 million in 2014 from $133.8 million in 2013. This increase was due primarily to higher volume and favorable combined effect of price and mix and favorable impact of foreign currency translation.

 

Revenue from Asia Pacific operations increased by $28.7 million, or 30.4%, to $123.6 million in 2014 from $94.9 million in 2013. This increase was due primarily to higher volume, partially offset by the unfavorable combined effect of price and mix and the unfavorable impact of foreign currency translation.

 

2013 compared to 2012

 

All geographic regions experienced higher levels of revenue in 2013 compared to 2012.  

 

Table 5 sets forth the change in revenue by geographic area for 2013 compared to 2012.

 

Table 5

 

 

As shown in Table 5:

 

Revenue from operations in the Americas for the year ended 2013 increased by $88.4 million, or 45.0%, to $284.8 million from $196.4 million in 2012. This increase was due primarily to higher volume, partially offset by the unfavorable combined effect of price and mix.

 

Revenue from operations outside the U.S for the year ended 2013 increased by $71.4 million, or 45.4%, to $228.6 million from $157.2 million in 2012 and comprised 44.5% of consolidated revenue in 2013 compared to 44.5% in 2012. The increase in revenue from operations outside the U.S., excluding the impact of foreign currency translation, was 46.4% for the year ended 2013 compared to 45.0% in 2012. 

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Revenue from EMEA operations increased by $33.1 million, or 32.8%, to $133.8 million in 2013 from $100.7 million in 2012. This increase was due primarily to higher volume, partially offset by the unfavorable combined effect of price and mix.

 

Revenue from Asia Pacific operations increased by $38.4 million, or 67.9%, to $94.9 million in 2013 from $56.5 million in 2012. This increase was due primarily to higher volume, partially offset by the unfavorable combined effect of price and mix.

 

Gross profit and gross profit margins

 

Table 6 sets forth gross profit and gross profit margins for our products and services. 

 

Table 6

 

 

On a consolidated basis, gross profit for the year ended 2014 increased by $49.8 million, or 18.6%, to $317.4 million compared to $267.6 million and $181.2 million for 2013 and 2012, respectively. Gross profit margin for the year ended 2014 decreased 3.5 percentage points, from 52.1% in 2013 to 48.6% in 2014. 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 was $101.7 million for the year ended 2014 compared to $101.8 million in 2013 and the gross profit margin decreased by 8.8 percentage points in 2014 to 35.9%. Despite the addition of higher margin healthcare products and the contribution of software, gross profit margin decreased due to sales mix coupled with manufacturing expansion and residual new product start-up costs.

 

Gross profit for materials increased by 23.2% to $116.5 million in 2014 and the gross profit margin decreased 0.3 percentage points to 73.4% from 73.7% in 2013, primarily due to the mix of materials sold during the year.

 

Gross profit for services increased by 39.4% to $99.2 million compared to $71.2 million in 2013,  while the gross profit margin increased 1.7 percentage points to 46.9%. The increase in gross profit margin for services was primarily due to the addition of higher margin healthcare services and an increase in Quickparts gross profit margin, to 43.5% for the year ended 2014, compared to 42.9% in 2013.

 

Operating expenses

 

As shown in the table below, total operating expenses increased by $104.4 million, or 55.9%, to $291.1 million for the year ended 2014, after increasing to $186.7 million for 2013 from $120.6 million for 2012, and increased to 44.5% of revenue compared to 36.4% and 34.1% in 2013 and 2012, respectively. This increase consists of $72.5 million of higher selling, general and administrative expenses and $31.9 million of higher research and development expenses, both of which are discussed below.

 

Table 7

 

 

 

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2014 compared to 2013

 

 

 

Selling, general and administrative expenses increased by $72.5 million, or 50.6%, to $215.7 million for the year ended 2014, from $143.2 million in 2013. The $72.5 million increase in selling, general and administrative expenses in 2014 was primarily due to increased sales and marketing expenses and higher staffing due to our expanding portfolio and included a $34.9 million increase in salary, benefits and contract labor costs, an $18.7 million increase in amortization expense, a $3.7 million increase in bad debt expense, a $2.5 million increase in consulting fees, a $2.1 million increase in marketing expenses, a $1.5 million increase in legal expense and a $1.2 million increase in occupancy expense.

 

Depreciation and amortization increased $24.8 million, to $55.2 million for the year ended 2014, from $30.4 million in 2013. The increase in depreciation and amortization in 2014 and 2013 is primarily due to intangible assets from acquired businesses and additional capital equipment placed in service.  

 

Research and development expenses increased by 73.4%, to $75.4 million for the year ended 2014, from $43.5 million in 2013. The $31.9 million increase in 2014 was primarily driven by a $17.7 million increase in R&D salary and compensation expenses primarily due to talent expansion, a $4.8 million increase in supplies and materials in support of our accelerated new product developments and investments, a $2.2 million increase in outside consulting and outsourcing services and a $1.9 million increase in depreciation and amortization.

 

2013 compared to 2012

 

 

 

Selling, general and administrative expenses increased by $45.8 million, or 47.0%, to $143.2 million for the year ended 2013, from $97.4 million in 2012. The $45.8 million increase in selling, general and administrative expenses in 2013 was primarily driven by support of concentrated new product launches, channel expansion and training and included a $16.8 million increase in salary, benefits and contract labor costs, a $7.9 million increase in amortization expense, a $5.0 million increase in marketing expense, a $3.4 million increase in occupancy costs, a $2.6 million increase in travel expenses, a $1.9 million increase in bad debt expense, a $1.2 million increase in operating supplies expense and a $1.0 million increase in consultant fees.

 

Depreciation and amortization increased $9.2 million, to $30.4 million for the year ended 2013, from $21.2 million in 2012. The increase in depreciation and amortization in 2013 and 2012 is primarily due to intangible assets from acquired businesses and additional capital equipment placed in service.

 

Research and development expenses increased by 87.4%, to $43.5 million for the year ended 2013, from $23.2 million in 2012. The $20.3 million increase in 2013 was primarily driven by an $8.1 million increase in supplies and materials in support of our accelerated new product developments and investments, a $7.2 million increase in R&D salary and compensation expenses primarily due to talent expansion and a $2.0 million increase in outside consulting and outsourcing services.

 

Income from operations

 

Operating income decreased $54.6 million, to $26.3 million for the year ended 2014, compared to $80.9 million in 2013 and $60.6 million in 2012. The decrease in operating income was due to increased operating expenses that more than offset the increased revenue and gross profit. See “Gross profit and gross profit margins” and “Selling, general and administrative costs” above. The following table sets forth income from operations by geographic area for 2014, 2013 and 2012.

 

Table 8

 

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With respect to the Americas, in 2014, 2013 and 2012, the changes in operating income by geographic area reflected the same factors relating to our consolidated operating income that are discussed above.

 

The changes in operating income in our operations outside the Americas in each of 2014, 2013 and 2012 resulted primarily from changes in sales volume, transfer pricing and foreign currency translation.

 

Interest and other expenses, net

 

Interest and other expenses,  net,  which consisted primarily of foreign exchange loss,  amounted to  $8.9 million of net expense for the year ended 2014, compared to $16.9 million for 2013 and $17.3 million for 2012. For the year ended 2014, interest and other expense, net, primarily consisted of $5.7 million of foreign exchange loss, $3.2 million of other expense and $1.2 million of interest expense; partially offset by $1.3 million of interest and other income.

 

For the year ended 2013, interest and other expense, net included $3.4 million of interest expense, including $2.7 million of interest expense related to the 5.50% senior convertible notes, $14.1 million of other expense, primarily related to loss on conversion of convertible notes; partially offset by $1.4 million of interest and other income, including a gain that was deferred in a prior year and recognized upon settlement of a long-term note receivable, and $0.8 million of foreign exchange loss. 

 

Provision for income taxes 

 

We recorded a $5.4 million provision for income taxes for the year ended 2014 and a $19.9 million and $4.3 million provision for income taxes in 2013 and 2012, respectively. In 2014, this expense primarily reflects a $1.7 million U.S. tax expense and $3.7 million of tax expense in foreign jurisdictions. In 2013, this expense primarily reflects an $18.4 million U.S. tax expense and $1.5 million of tax expense in foreign jurisdictions. In 2012, this expense primarily reflects a $6.2 million expense related to the use of U.S. net operating losses against which the valuation allowance had been released during 2011; $2.8 million of tax expense in foreign jurisdictions; partially offset by a $5.4 million benefit due to the release of valuation allowances associated with U.S. deferred tax assets.

 

During 2014 and 2013, based upon our results of operations and expected profitability in the future, we concluded that it is more likely than not that all our deferred tax assets will be realized. As a result, in accordance with ASC 740, no valuation allowances have been recorded for 2014 and 2013. During 2012, based upon our results of operations and expected profitability in the future, we concluded that it is more likely than not that the remainder of our current U.S. deferred tax assets would be realized. As a result, in accordance with ASC 740, during 2012 we reversed $5.4 million of the valuation allowance related to $12.4 million of reserves, accruals and tax credits and to $7.6 million of net operating losses for state income tax purposes. The reversal of the valuation allowance resulted in a non-cash income tax benefit of $5.4 million, which resulted in a benefit of $0.10 per share.  

 

In 2012 we utilized U.S. net operating loss carryforwards, which had a full valuation allowance against them, to eliminate any U.S. federal income taxes and to significantly reduce U.S state taxes. These U.S. net operating loss carryforwards which had full valuation allowances against them were recognized in full in 2012. Their use does not impact income tax expense and income tax rate in 2013 or 2014.

 

Absent the use of these net operating loss carryforwards, income tax expense would have been $10.8 million and the income tax rate would have been 24.9% for the year ended 2012. Absent the combined impact of the use of these net operating loss carryforwards and the release of the valuation allowances in 2012, income tax expense would have been $16.2 million and the income tax rate would have been 37.3%.

 

Our $5.4 million expense for income taxes for the year ended December 31, 2014 decreased from 2013 principally due to decreased U.S. income in 2014.

 

Our $19.9 million expense for income taxes in 2013 increased from 2012 principally due to increased U.S. income in 2013 and to there being no tax benefit from utilizing net operating loss carryforwards against which valuation allowance had been released in 2012.  

 

For further discussion, see Note 20 to the Consolidated Financial Statements.

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Net income; net income available to 3D Systems common stockholders

 

Net income was $11.9 million, $44.1 million and $38.9 million, for the years ended 2014, 2013 and 2012.      

 

The principal reasons for our lower net income in 2014, which are discussed in more detail above, were a $49.8 million decrease in gross profit and $104.4 million higher operating expenses as a result of higher sales and marketing and R&D expense in support of concentrated new product launches and channel expansion and training.

 

The principal reasons for our higher net income in 2013 were a $159.8 million increase in revenue and an $86.4 million increase in gross profit, partially offset by $66.1 million higher operating expenses as a result of higher sales and marketing and R&D expense in support of concentrated new product launches and channel expansion and training.

 

Net income available to common stockholders was $11.6 million for 2014, $44.1 million for 2013 and $38.9 million for 2012.  On a per share basis, our basic and diluted net income per share available to common stockholders was $0.11, $0.45 and $0.48 in 2014, 2013 and 2012, respectively.  

 

For the years ended 2013 and 2012, the average outstanding diluted shares calculation excluded shares that may have been issued upon conversion of the outstanding senior convertible notes because the effect of their inclusion would have been anti-dilutive resulting in an increase to the net earnings per share. All senior convertible notes were converted in 2014.

 

In February 2013, we announced a three-for-two stock split, in the form of a stock dividend. Trading began on a split-adjusted basis on February 25, 2013.

 

For further discussion, see Notes 17 and 24 to the Consolidated Financial Statements.

 

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 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: 

 

Non-cash stock-based compensation expenses. We exclude the tax-effected stock-based compensation expenses from our operating expenses primarily because they are non-cash.

 

Amortization of intangibles. We exclude the tax-effected amortization of intangible assets from our cost of sales and operating expenses. The increase in recent periods is primarily in connection with acquisitions of businesses.

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Acquisition and severance expenses. We exclude the tax-effected charges associated with the acquisition of businesses and the related severance expenses from our operating expenses.

 

Non-cash interest expenses. We exclude tax-effected, non-cash interest expenses, primarily related to the amortization costs associated with our outstanding senior convertible notes, from interest and other expenses, net.  

 

Loss on convertible notes. We exclude the tax-effected, loss on conversion of convertible notes, from interest and other expenses, net.

 

Net (gain) loss on litigation and tax settlements. We exclude the tax-effected, net gain or loss on acquisitions and litigation settlements from other expenses, net.

 

Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

 

Table 9

 

 

 

(a) Tax effect is calculated quarterly, based on the actual tax rate for each quarter.

 

Liquidity and Capital Resources

 

Our cash flow from operations and the net proceeds from capital markets transactions in 2014 have enabled us to continue to execute our growth strategies, including our acquisitions in 2014. During 2014, we generated $51.1 million of cash from operations and utilized $345.4  million of cash to fund acquisitions.

 

Operating cash flow, a key source of our liquidity, was $51.1 million in 2014, an increase of $25.9 million, or 103.0%, as compared to $25.2 million in 2013.

 

Unrestricted cash and cash equivalents decreased by $21.4 million to $284.9 million at December 31, 2014 from $306.3 million at December 31, 2013 and $155.9 million at December 31, 2012.

 

We completed common stock offerings that resulted in $299.7 million,  $272.1 million and $106.9 million of net proceeds in 2014, 2013 and 2012, respectively.

 

Acquisitions constituted a $345.4 million use of cash in 2014, including the completion of ten acquisitions, as compared to a $162.3 million use of cash in 2013 for eleven acquisitions and a $183.7 million use of cash for the completion of nine acquisitions in 2012.

 

Our net working capital increased by $15.8 million to $432.2 million at December 31, 2014 from $416.4 million at December 31, 2013.

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For further discussion, see Cash flow and Lease obligations below.

 

We may issue additional securities from time to time as necessary to provide flexibility to execute our growth strategy.  We issued approximately 6.0 million shares of common stock, resulting in net proceeds of approximately $299.7 million in 2014 and approximately 8.6 million shares of common stock, resulting in approximately $272.1 million in 2013.

 

We have relied upon our unrestricted cash, cash flow from operations, capital markets transactions and borrowings from financial institutions 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 through the sales of equity or debt securities to the public or selected investors, by borrowing from financial institutions, selling assets or restructuring debt. There is no assurance, however, that funds will be available from these sources in the amounts or on terms acceptable to us.

 

Even though we may not need additional funds, we may still elect to issue additional equity or debt securities or enter into a credit facility for other reasons.  If we raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced.  In addition, the equity or debt securities that we may issue may have rights, preferences or privileges senior to those of our common stock.

 

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

 

A summary of the components of liquidity is shown below in Table 10.

 

Table 10

 

Cash flow

 

A summary of the components of cash flows is shown below in Table 11.

 

Table 11

 

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Cash flow from operations

 

2014 compared to 2013

 

For the year ended December 31, 2014, we generated $51.1 million of net cash from operating activities. This change in cash primarily consisted of our $11.9 million net income, $73.9 million of non-cash charges that were included in our net income and $34.8 million of cash used in net changes in operating accounts.  

 

The principal changes in non-cash items that favorably affected operating cash flow included $55.2 million of depreciation and amortization expense, $32.8 million of stock-based compensation, partially offset by a $24.6 million deferred tax benefit.

 

Changes in working capital that resulted in a source of cash included the following:

 

 

Changes in working capital that resulted in a use of cash included the following:

 

   

Accounts receivable, net increased as a result of the record revenues for 2014 and days sales outstanding increased to 83 days in 2014 from 79 days in 2013. With a greater portion of our revenue mix shifting to resellers and retailers, as part of our planned business model evolution, a larger portion of our sales are transacted on standard credit terms. The effect of this shift in our business model was exacerbated by the combined effect or the timing and concentration of orders during the last month of the quarter as a result of increasing demand, which has driven increases in both accounts receivable and days sales outstanding.

 

Inventories increased primarily due to our expanding product portfolio, acquired inventory, timing of new product launches and the timing of orders and delivery of finished goods materials and raw materials, which are purchased in large quantities. 

 

The increase in accounts payable is primarily related to the normal timing of our scheduled expense payments.

 

2013 compared to 2012

 

For the year ended December 31, 2013, we generated $25.2 million of net cash from operating activities. This change in cash primarily consisted of our $44.1 million net income, $51.4 million of non-cash charges that were included in our net income and $70.4 million of cash used in net changes in operating accounts. The principal changes in non-cash items that favorably affected operating cash flow included $30.4 million of depreciation and amortization expense, $11.3 million loss on conversion of convertible notes, partially offset by $9.9 million deferred tax benefit.

 

Changes in working capital that resulted in a source of cash included the following: 

 

 

Changes in working capital that resulted in a use of cash included the following:

 

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Accounts receivable, net increased as a result of the record revenues for 2013 and days sales outstanding increased to 79 days in 2013 from 72 days in 2012. Inventories increased primarily due to the implementation of new product launches and the timing of orders and delivery of finished goods materials and raw materials, which are purchased in large quantities.

 

Cash flow from investing activities

 

Net cash used in investing activities for the year ended 2014 increased to $375.4 million, from $173.8 million in 2013. In 2014, this consisted of $345.4 million related to acquisitions, $22.7 million of net purchases of property and equipment, $6.6 million in minority investments of less than 20% made through 3D Ventures, our venture investment initiative, in promising enterprises that we believe will benefit from or be powered by our technologies, and $0.8 million of additions to license and patent costs. See Notes 3, 5 and 6 to the Consolidated Financial Statements.

 

Net cash used in investing activities for the year ended 2013 decreased to $173.8 million, from $187.7 million in 2012. In 2013, this consisted of $162.3 million related to acquisitions, $7.0 million of net purchases of property and equipment, $1.6 million of additions to license and patent costs and $4.7 million in minority investments of less than 20% made through 3D Ventures, partially offset by $1.9 million of proceeds from the disposition of property and equipment. 

 

Capital expenditures were $22.7 million in 2014, $7.0 million in 2013 and $3.2 million in 2012. Capital expenditures in 2014, 2013 and 2012 primarily consisted of expenditures for tooling and printers associated with our new product development efforts, equipment to support our Quickparts service and leasehold improvements.  

 

As discussed below, we completed thirty acquisitions during 2014, 2013 and 2012. The majority of the acquisitions have resulted in the recording of goodwill. This goodwill typically arises because the purchase price for these businesses reflects a number of factors including the future earnings and cash flow potential of these businesses; the multiples to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers; the competitive nature of the process by which we acquired the business; and the complementary strategic fit and resulting synergies these businesses bring to existing operations. See Note 7 to the Consolidated Financial Statements.

 

2014 acquisitions

 

We acquired ten businesses in 2014 for cash consideration of $345.4 million, net of cash acquired, with an additional $24.6 million of consideration paid in the form of common stock. Five of the acquisitions were related to expanding our global Quickparts custom parts services, two of the acquisitions were related to accelerating our healthcare initiative, two of the acquisitions were related to building our 3D consumer and retail products and services, and one acquisition was related to our materials business. See Note 3 to the Consolidated Financial Statements.

 

2013 acquisitions

 

We acquired eleven businesses in 2013 for cash consideration of $162.3 million, net of cash acquired, with an additional $13.1 million of consideration paid in the form of common stock. Four of the acquisitions were related to accelerating our 3D printer penetration through new products and materials, three of the acquisitions were related to building our 3D consumer and retail products and services, two of the acquisitions were related to expanding our global Quickparts custom parts services and two acquisitions were related to reinventing the engineers’ desktop.

 

2012 acquisitions

 

We acquired nine businesses in 2012 for cash consideration of $183.7 million, net of cash acquired, with an additional $7.7 million of consideration paid in the form of common stock. Two of the acquisitions were related to Quickparts custom parts services, three were building blocks for our consumer growth initiative, two acquisitions were related to our printers business, one was related to healthcare solutions and one was related to our 3D authoring solutions initiative. In addition, we made deferred purchase payments of $0.4 million in connection with acquisitions completed in 2011.

 

Recent acquisition developments

 

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See Notes 3 and 25 to the Consolidated Financial Statements for a discussion of our recent acquisitions.

Cash flow from financing activities

 

We completed equity offerings netting $299.7 million, $272.1 million and $106.9 million of proceeds after deducting related expenses, for the years ended 2014, 2013 and 2012, respectively. See Note 3 to the Consolidated Financial Statements.

 

Net cash provided by financing activities increased to $308.6 million for the year ended 2014 from $298.7 million in 2013. Net cash provided by financing activities in 2012 was $112.6 million. The 2014 cash provided by financing activities primarily resulted from $299.7 million of net proceeds from the common stock issuance and $7.7 million of share-based payment arrangements. The 2013 cash provided by financing activities primarily resulted from the $272.1 million of net proceeds from the common stock issuance and $26.0 million of tax benefits from share-based payment arrangements. The 2012 cash provided by financing primarily resulted from the $106.9 million of net proceeds from the common stock issuance and $4.4 million of stock-based compensation proceeds.    

 

Off Balance Sheet Arrangements

 

We did not have any off balance sheet arrangements in existence at December 31, 2014.

 

Contractual Commitments

 

Our principal commitments at December 31, 2014 consisted of the capital lease on our Rock Hill facility, operating leases, earnouts on acquisitions and purchase obligations, which are discussed in greater detail below. Tables 12 and 13 below summarize our contractual obligations as of December 31, 2014.

 

Table 12

 

Debt and lease obligations

 

Debt

 

In November 2011, we 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. The net proceeds of the notes were used to fund the acquisition of Z Corp and Vidar and for general corporate purposes.

 

During the third quarter of 2014, the remaining $12.5 million of outstanding notes were converted, reflecting a loss of $1.8 million for the year ended December 31, 2014, compared to losses of $11.3 million and $7.0 million, respectively, for the years ended December 31, 2013 and 2012. As of December 31, 2014, there is no outstanding balance for the notes.

 

In October 2014, we entered into a $150.0 million five-year revolving, unsecured credit facility with PNC Bank, as Administrative Agent, and certain other lenders. The agreement comprises a revolving loan facility that provides for advances in the initial aggregate principal amount of up to $150.0 million. Subject to certain terms and conditions contained in the 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. As of December 31, 2014, there is no outstanding balance on the credit facility.

 

Leases

 

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.

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In accordance with ASC 840, “Leases,” we are considered an owner of the properties, therefore, we have recorded $9.4 million and $7.5 million at December 31, 2014 and 2013, respectively, as building in our consolidated balance sheet with a corresponding capitalized lease obligation in the liabilities section of the consolidated balance sheet. See Note 12 to the  Consolidated Financial Statements.

 

Our outstanding capitalized lease obligations at December 31, 2014 and December 31, 2013 were as follows:

 

Table 13

 

 

 

 

Capitalized lease obligations of $9.4 million at December 31, 2014 increased from $7.5 million at December 31, 2013 due to the acquired $2.3 million of capital lease obligations in connection with the LayerWise acquisition in the third quarter of 2014, primarily consisting of sale and leasebacks on laser-melting machines internally produced by LayerWise and used in their business, partially offset by scheduled payments of principal on capital lease installments.

 

We lease certain other facilities under non-cancelable operating leases expiring through 2024. The leases are generally on a net-rent basis, under which we pay taxes, maintenance and insurance. We expect leases that expire to be renewed or replaced by leases on other properties.  Rental expense for the years ended December 31, 2014, 2013 and 2012 was $10.4 million, $6.9 million and $5.0 million, respectively.  

 

Other contractual commitments

 

The Company has supply commitments for printer assemblies that total $56.6 million and $41.1 million at December 31, 2014 and 2013, respectively.

 

Certain of our acquisition purchase agreements contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total amount of liabilities recorded for these earnouts is $9.2 million at December 31, 2014 compared to $5.6 million at December 31, 2013. See Note 3 for details of acquisitions and related commitments. 

 

The minority interest shareholders of a certain subsidiary have the right to require the Company to acquire their ownership interest under certain circumstances pursuant to a contractual arrangement and the Company has a similar call option under the same contractual terms. The amount of consideration under the put and call rights is not a fixed amount, but rather is dependent upon various valuation formulas and on future events, such as revenue and gross margin performance of the subsidiary through the date of exercise, as described in Note 22.  Management estimates, assuming that the subsidiary owned by the Company at December 31, 2014, performs over the relevant future periods at their forecasted earnings levels, that these rights, if exercised, could require the Company, in future periods, to pay approximately $8.9 million to the owners of such rights to acquire such ownership interests in the relevant subsidiary. This amount has been recorded as redeemable noncontrolling interests on the balance sheet at December 31, 2014.

 

Indemnification

 

In the normal course of business we periodically enter into agreements to indemnify customers or suppliers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant. 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, we indemnify our directors and officers for certain events or occurrences while the director or officer is, or was, serving at our request in such capacity, subject to limited exceptions. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have directors and officers insurance coverage that may enable us to recover future amounts paid, subject to a deductible and to the policy limits.

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We 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 for trading or 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 Consolidated Statements of Income and Other Comprehensive Income.

 

Changes in the fair value of derivatives are recorded in interest and other expense, net, in our Consolidated Statements of Income and Other 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 Consolidated Balance Sheets.

 

The total impact of foreign currency related items on our Consolidated Statements of Income and Comprehensive Income was a loss of $5.7 million in 2014, a loss of $0.8 million in 2013, and a gain of $0.1 million in 2012.

 

Critical Accounting Policies and Significant Estimates 

 

The discussion and analysis of our results of operations and financial condition set forth in this Form 10-K is based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make critical accounting estimates that directly impact our Consolidated Financial Statements and related disclosures.

 

Critical accounting estimates are estimates that meet two criteria:

 

 

On an ongoing basis, we evaluate our estimates, including those related to stock-based compensation, revenue recognition, the allowance for doubtful accounts, income taxes, inventories, goodwill and other intangible and long-lived assets and contingencies. We base our estimates and assumptions on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The following paragraphs discuss the items that we believe are the critical accounting policies most affected by significant management estimates and judgments. Management has discussed and periodically reviews these critical accounting policies, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the Audit Committee of the Board of Directors.

 

Revenue recognition

 

Net revenue is derived primarily from the sale of products and services. The following revenue recognition policies define the manner in which we account for sales transactions.

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We recognize revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. We sell our products through our direct sales force and through authorized resellers. We recognize revenue on sales to resellers at the time of sale when the reseller has economic substance apart from us, and we have completed our obligations related to the sale.

 

We enter into sales arrangements that may provide for multiple deliverables to a customer. Sales of printers may include ancillary equipment, print materials, warranty on the equipment, training and installation. We identify all goods and/or services that are to be delivered separately under a sales arrangement and allocate revenue to each deliverable based on either vendor-specific objective evidence (“VSOE”) or if VSOE is not determinable then we use best estimated selling price (“BESP”) of each deliverable. We establish VSOE of selling price using the price charged for a deliverable when sold separately. The objective of BESP is to determine the price at which we would transact a sale if the deliverable was sold regularly on a stand-alone basis. We consider multiple factors including, but not limited to, market conditions, geographies, competitive landscape, and entity-specific factors such as internal costs, gross margin objectives and pricing practices when estimating BESP. Consideration in a multiple element arrangement is then allocated to the elements on a relative sales value basis using either VSOE or BESP for all the elements. We also evaluate the impact of undelivered items on the functionality of delivered items for each sales transaction and, where appropriate, defer revenue on delivered items when that functionality has been affected.  Functionality is determined to be met if the delivered products or services represent a separate earnings process.

 

Hardware

  

In general, revenues are separated between printers and other products, print materials, training services, maintenance services and installation services. The allocated revenue for each deliverable is then recognized based on relative fair values of the components of the sale, consistent within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605 Revenue Recognition.

  

Under our standard terms and conditions of sale, title and risk of loss transfer to the customer at the time product is shipped to the customer and revenue is recognized accordingly, unless customer acceptance is uncertain or significant obligations remain. We defer the estimated revenue associated with post-sale obligations that are not essential to the functionality of the delivered items, and recognize revenue in the future as the conditions for revenue recognition are met.

 

Software

 

We also market and sell software tools that enable our customers to capture and customize content using our printers, as well as reverse engineering and inspection software. The software does not require significant modification or customization. We apply the guidance in ASC 985-605, Software-Revenue Recognition (“ASC 985”) in recognizing revenue when software is more than incidental to the product or service as a whole based on fair value using vendor-specific objective evidence. Revenue from perpetual software licenses is recognized either upon delivery of the product or delivery of a key code which allows the customer to access the software. In instances where software access is provided for a trial period, revenue is not recognized until the customer has purchased the software at the expiration of the trial period. We use the residual method to allocate revenue to software licenses at the inception of the license term when VSOE of fair value for all undelivered elements, such as maintenance, exists and all other revenue recognition criteria have been satisfied.  In instances in which customers purchase post sale support, it is considered a separate element from the software and is deferred at the time of sale and subsequently amortized in future periods.

 

We also sell equipment with embedded software to our customers. The embedded software is not sold separately, it is not a significant focus of the marketing effort and we do not provide post-contract customer support specific to the software or incur significant costs that are within the scope of ASC 985. Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole such that ASC 985 is not applicable. Sales of these products are recognized in accordance with ASC 605.25, “Multiple-Element Arrangements.”

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Services

 

Printers include a warranty under which we provide maintenance for periods up to one year, as well as training, installation and non-contract maintenance services. We defer this portion of the revenue at the time of sale based on the relative fair value of these services. Deferred revenue is recognized ratably according to the term of the warranty. Costs associated with our obligations during the warranty period are expensed as incurred. After the initial warranty period, we offer these customers optional maintenance contracts. Deferred maintenance revenue is recognized ratably, on a straight-line basis, over the period of the contract, and costs associated with these contracts are recognized as incurred. Revenue from training, installation and non-contract maintenance services is recognized at the time of performance.

 

Quickparts sales are included within services revenue and revenue is recognized upon shipment or delivery of the parts, based on the terms of the sales arrangement. 

 

Terms of sale

 

Shipping and handling costs billed to customers for equipment sales and sales of print materials are included in product revenue in the consolidated statements of income and other comprehensive income. Costs we incur associated with shipping and handling are included in product cost of sales in the consolidated statements of income and other comprehensive income.

 

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

 

Our terms of sale generally require payment within 30 to 60 days after shipment of a product, although we also recognize that longer payment periods are customary in some countries where we transact business. To reduce credit risk in connection with printer sales, we may, depending upon the circumstances, require significant deposits prior to shipment and may retain a security interest in a system sold until fully paid. In some circumstances, we may require payment in full for our products prior to shipment and may require international customers to furnish letters of credit. For maintenance services, we either bill customers on a time-and-materials basis or sell customers service agreements that are recorded as deferred revenue and provide for payment in advance on either an annual or other periodic basis.

 

Allowance for doubtful accounts 

 

In evaluating the collectability of our accounts receivable, we assess a number of factors, including a specific customer’s ability to meet its financial obligations to us, such as whether a customer declares bankruptcy. Other factors include the length of time the receivables are past due and historical collection experience. Based on these assessments, we record a reserve for specific customers as well as a general reserve based on our historical experience for bad debts. If circumstances related to specific customers change, or economic conditions deteriorate such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided for in the Consolidated Financial Statements.

 

Our estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved.

 

First, we evaluate specific accounts where we have information that the customer may have an inability to meet their financial obligations (for example, aging over 90 days past due or bankruptcy). In these cases, we use our judgment, based on available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on historical collection and write-off experience.

 

Our estimate of the allowance for doubtful accounts for financing receivables is determined by evaluating specific accounts for which the borrower is past due more than 90 days, or for which we have information that the borrower may be unable to meet its financial obligations (for example, bankruptcy). In these cases, we  use judgment, based on the available facts and circumstances, and record a specific reserve for that borrower against amounts due to reduce the outstanding receivable balance to the amount that is expected to be collected. If there are any specific reserves, they are re-evaluated and adjusted as additional information is received that impacts the amount reserved.

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We also provide an allowance account for returns and discounts. This allowance is evaluated on a specific account basis. In addition, we provide a general reserve for all customers that have not been specifically identified based on historical experience.

 

Our bad debt expense increased to $8.7 million in 2014 from $5.0 million in 2013 and $3.0 million in 2012. The higher expense in 2014 was due to higher receivables related to increased revenue.    

 

Our allowance for doubtful accounts increased to $10.3 million, or 6.1% of outstanding accounts receivable, at December 31, 2014 from $8.1 million, or 6.2% of outstanding accounts receivable, at December 31, 2013. Our accounts receivable over 90 days past due increased to 16.7% in 2014 from 9.1% in 2013. We believe that our allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change and dependent upon events that may or may not occur and because the impact of recognizing additional allowances for doubtful accounts may be material to the assets reported on our balance sheet and in our results of operations.

 

Income taxes 

 

We and our domestic subsidiaries file a consolidated U.S. federal income tax return. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We provide for income taxes on those portions of our foreign subsidiaries’ accumulated earnings that we believe are not reinvested indefinitely in their businesses.

 

We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred income tax liabilities and assets at the end of each period are determined using enacted tax rates.

 

We record deferred income tax assets arising from temporary differences between recorded net income and taxable net income when and if we believe that future earnings will be sufficient to realize the tax benefit. We provide a valuation allowance for those jurisdictions and on those deferred tax assets where the expiration date of tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely.

 

Under the provisions of ASC 740, “Income Taxes,” (“ASC 740”) a valuation allowance is required to be established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred income tax asset will not be realized. ASC 740 provides that an important factor in determining whether a deferred income tax asset will be realized is whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred income tax asset.

 

We believe that our estimate of deferred income tax assets and our maintenance of a valuation allowance against such assets are critical accounting estimates because they are subject to, among other things, an estimate of future taxable income in the U.S. and in other non-U.S. tax jurisdictions, which are susceptible to change and dependent upon events that may or may not occur, and because the impact of our valuation allowance may be material to the assets reported on our balance sheet and in our results of operations.

 

The determination of our income tax provision is complex because we have operations in numerous tax jurisdictions outside the U.S. that are subject to certain risks that ordinarily would not be expected in the U.S. Tax regimes in certain jurisdictions are subject to significant changes, which may be applied on a retroactive basis. If this were to occur, our tax expense could be materially different than the amounts reported.

 

We periodically estimate the probable tax obligations using historical experience in tax jurisdictions and our informed judgment. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to, or further interpretations of, regulations. Income tax expense is adjusted in the period in which these events occur, and these adjustments are included in our Consolidated Statements of Income and Other Comprehensive Income. If such changes take place, there is a risk that our effective tax rate may increase or decrease in any period.

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Inventories    

 

Inventories are stated at the lower of cost or net realizable value, cost being determined predominantly on the first-in, first-out method.  Reserves for inventories are provided based on historical experience and current product demand. Our inventory reserve was $6.7 million at December 31, 2014, compared with $4.3 million at December 31, 2013.  We evaluate the adequacy of these reserves quarterly. Our determination of the allowance for inventory reserves is subject to change because it is based on management’s current estimates of required reserves and potential adjustments.

 

We believe that the allowance for inventory obsolescence is a critical accounting estimate because it is susceptible to change and dependent upon events that may or may not occur and because the impact of recognizing additional obsolescence reserves may be material to the assets reported on our balance sheet and in our results of operations.

 

Goodwill and other intangible and long-lived assets

 

We evaluate long-lived assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

 

The annual impairment testing required by ASC 350, “Intangibles – Goodwill and Other,” (“ASC 350”) requires us to use our judgment and could require us to write down the carrying value of our goodwill and other intangible assets in future periods. As required by ASC 350, we have allocated goodwill to identifiable geographic reporting units, which are tested for impairment using a two-step process detailed in that statement. See Notes 6 and 7 to the Consolidated Financial Statements. The first step requires comparing the fair value of each reporting unit with our carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not required to be performed and no impairment charge is required to be recorded. If that fair value does not exceed the carrying amount, we must perform the second step, which requires an allocation of the fair value of the reporting unit to all assets and liabilities of that unit as if the reporting unit had been acquired in a purchase business combination and the fair value of the reporting unit was the purchase price. The goodwill resulting from that purchase price allocation is then compared to the carrying amount with any excess recorded as an impairment charge.

 

Goodwill set forth on the Consolidated Balance Sheet as of December 31, 2014 arose from acquisitions carried out in 2014, 2013, 2012, 2011, 2010, 2009, and in years prior to 2007. Goodwill arising from acquisitions prior to 2007 was allocated to geographic reporting units based on the percentage of SLS printers then installed by geographic area. Goodwill arising from acquisitions since 2009 was allocated to geographic reporting units based on geographic dispersion of the acquired companies’ sales or capitalization at the time of their acquisition. 

 

Pursuant to the requirements of ASC 350, we are required to perform a valuation of each of our three geographic reporting units annually, or upon significant changes in our business environment. We conducted our annual impairment analysis in the fourth quarter of 2014. To determine the fair value of each reporting unit we utilized discounted cash flows, using five years of projected unleveraged free cash flows and terminal EBITDA earnings multiples. The discount rates used for the analysis reflected a weighted average cost of capital based on industry and capital structure adjusted for equity risk premiums and size risk premiums based on market capitalization. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. We also considered the current trading multiples of comparable publicly-traded companies and the historical pricing multiples for comparable merger and acquisition transactions that have occurred in the industry. Under each fair value measurement methodology considered, the fair value of each reporting unit exceeded its carrying value; accordingly, no goodwill impairment adjustments were recorded on our Consolidated Balance Sheet.  

 

The control premium that a third party would be willing to pay to obtain a controlling interest in 3D Systems Corporation was considered when determining fair value. In addition, factors such as the performance of competitors were also considered.

 

Management concluded that there was a reasonable basis for the excess of the estimated fair value of the geographic reporting units over its market capitalization.

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The estimated fair value of the three geographic reporting units incorporated judgment and the use of estimates by management. Potential factors requiring assessment include a further or sustained decline in our stock price, variance in results of operations from projections, and additional acquisition transactions in the industry that reflect a lower control premium. Any of these factors may cause us to re-evaluate goodwill during any quarter throughout the year. If an impairment charge was to be taken for goodwill it would be a non-cash charge and would not impact our cash position or cash flows; however such a charge could have a material impact to equity and the Consolidated Statement of Income and Comprehensive Income.

 

There was no goodwill impairment for the years ended December 31, 2014, 2013 or 2012.

 

We will evaluate the fair value of long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” if events transpire to indicate potential impairment.  No impairment loss was recorded for the periods presented.

 

Determining the fair value of a reporting unit, intangible asset or a long-lived asset is judgmental and involves the use of significant estimates and assumptions. Management bases its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.

 

Stock-based compensation

 

ASC 718, “Compensation – Stock Compensation,” (“ASC 718”) requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions of ASC 718, stock-based compensation is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. See Note 14 to the Consolidated Financial Statements. 

 

Contingencies 

 

We account for contingencies in accordance with ASC 450, “Contingencies” (“ASC 450”). ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires us to use our judgment.

 

Non-GAAP Measures

 

In addition to our results determined in accordance with U.S. GAAP, management uses certain non-GAAP financial measures, which adjust net income and earnings per share, in assessing our operating performance. Management believes these non-GAAP financial measures of adjusted net income and adjusted earnings per share serve as useful measures in evaluating the overall performance of our business.

 

Management uses these non-GAAP financial measures to supplement our Consolidated Financial Statements presented on a GAAP basis to facilitate a better understanding of the impact that several significant, strategic acquisitions had on our ongoing financial results and other non-cash factors. 

 

These non-GAAP financial measures are not 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 measures as required in our public disclosures and reconciliations of our non-GAAP financial measures to our GAAP financial statements.

 

The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial performance or liquidity measures prepared in accordance with GAAP. The 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.

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As discussed in detail above, we report non-GAAP measures which adjust both net income and earnings per share by excluding the impact of acquisition and severance expenses, intangible amortization, non-cash interest expense, non-cash stock-based compensation, loss on convertible notes and net gain or loss on litigation and tax settlements. We provide the required reconciliation of GAAP net income and earnings per share to non-GAAP adjusted net income and adjusted earnings per share.  See Other Financial Information above.

 

Recent Accounting Pronouncements

 

See Note 2 to our Consolidated Financial Statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our Consolidated Financial Statements upon adoption.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from fluctuations in interest rates, foreign currency exchange rates, and commodity prices, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating and financing activities and, when we consider it to be appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

 

Interest rates

 

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents and revolving credit facility. We seek to minimize the risk to our cash and cash equivalents by investing cash in excess of our operating needs in short-term, high-quality instruments issued by highly creditworthy financial institutions, corporations or governments. With the amount of cash and cash equivalents and revolving credit facility that we maintained at December 31, 2014, a hypothetical interest rate change of 1 percentage point, or 100 basis points, would have a $1.3 million effect on our financial position and results of operations.

 

From time to time, we may use derivative financial instruments, including interest rate swaps, collars or options, to manage our exposure to fluctuations in interest rates. At December 31, 2014, we had no such financial instruments outstanding.

 

Foreign exchange rates

 

We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. 49.1% of our consolidated revenue is derived from sales outside the U.S. See “Business—Global Operations” above. This revenue is generated primarily from the operations of our foreign sales subsidiaries in their respective countries and surrounding geographic areas and the operations of our research and production subsidiary in Switzerland, and is denominated in each subsidiary’s local functional currency although certain sales are denominated in other currencies, rather than the local functional currency. These subsidiaries incur most of their expenses (other than intercompany expenses) in their local functional currencies. These currencies include Australian Dollars, Brazilian Real, British Pounds, Chinese Yuan, Euros, Indian Rupee,  Israeli Shekel, Japanese Yen, Mexican Peso, South Korean Won,  Swiss Francs and Uruguayan Peso.

 

The geographic areas outside the U.S. in which we operate are generally not considered to be highly inflationary. Nonetheless, these foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated in U.S. dollars rather than in their respective functional currencies. Our operating results, as well as our assets and liabilities, are also subject to the effects of foreign currency translation when the operating results, assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our Consolidated Financial Statements.

 

We and our subsidiaries 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 and our subsidiaries 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 U.S. balance sheet and those of our subsidiaries in order to reduce these risks. We also, when we consider it appropriate, enter into foreign currency contracts to hedge exposures arising from those transactions.

 

We do not hedge for trading or 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 Consolidated Statements of Income and Comprehensive Income.

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As noted above, we may use derivative financial instruments, including foreign exchange forward contracts and foreign currency options, to fix or limit our exposure to currency fluctuations.  We do not hedge our foreign currency exposures in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our consolidated net income or loss.

 

At December 31, 2014, a hypothetical change of 10% in foreign currency exchange rates would cause approximately a $32.0 million change in revenue in our Consolidated Statement of Income and Comprehensive Income assuming all other variables were held constant.

 

Commodity prices

 

We use various raw materials and energy products in conjunction with our printer assembly and print materials blending processes. Generally, we acquire such components at market prices and do not use financial instruments to hedge commodity prices. As a result, we are exposed to market risks related to changes in commodity prices of these components. At December 31, 2014, a hypothetical 10% change in commodity prices for raw materials would cause approximately a $1.0 million change to cost of sales in our Consolidated Statement of Income and Comprehensive Income.

 

Item 8. Financial Statements and Supplementary Data

 

Our Consolidated Financial Statements and the related notes, together with the Report of Independent Registered Public Accounting Firm thereon, are set forth below on pages F-1 through F-40 are incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    

Not applicable.

 

Item 9A. Controls and Procedures    

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) are controls and procedures that are designed to provide reasonable assurance that 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.

 

As of December 31, 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 Exchange Act pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. These controls and procedures were designed to provide reasonable assurance that 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 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 9A, management has concluded that our disclosure controls and procedures were effective as of December 31, 2014 to provide reasonable assurance that 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 management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

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Our internal control over financial reporting is supported by written policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that our receipts and expenditures are being made and recorded only in accordance with authorizations of our management and provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

In connection with the preparation of this Form 10-K, with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (“COSO”). Our assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.  

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

 

BDO USA, LLP, the independent registered public accounting firm who audited our Consolidated Financial Statements included in this Form 10-K, has issued a report on our internal control over financial reporting, which is included in Item 8 of this Form 10-K.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

     

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required in response to this Item will be set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders under the captions “Election of Directors,” “Corporate Governance Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Matters—Code of Conduct and Code of Ethics,” “Corporate Governance Matters—Corporate Governance and Nominating Committee,” and “Corporate Governance Matters—Audit Committee.” Such information is incorporated herein by reference. 

 

Item 11. Executive Compensation

 

The information in response to this Item will be set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders under the captions “Director Compensation,” “Executive Compensation,” “Corporate Governance Matters—Compensation Committee,” and “Executive Compensation—Compensation Committee Report.” Such information is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Except as set forth below, the information required in response to this Item will be set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management.” Such information is incorporated herein by reference.

 

Equity Compensation Plans

 

The following table summarizes information about the equity securities authorized for issuance under our compensation plans as of December 31, 2014. For a description of these plans, please see Note 14 to the Consolidated Financial Statements.

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Item 13. Certain Relationships and Related Transactions and Director Independence

 

The information required in response to this Item will be set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders under the captions “Corporate Governance Matters—Director Independence” and “Corporate Governance Matters – Related Party Transaction Policies and Procedures.” Such information is incorporated herein by reference.  

 

Item 14. Principal Accounting Fees and Services

 

The information in response to this Item will be set forth in our Proxy Statement for our 2015 Annual Meeting of Stockholders under the caption “Fees of Independent Registered Public Accounting Firm.” Such information is incorporated herein by reference.

 

PART IV

Item 15. Exhibits, Financial Statement Schedules  

 

 

*              Management contract or compensatory plan or arrangement

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant and in the capacities and on the dates indicated.