UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________



FORM 10‑Q



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



For the quarterly period ended September 30, 2016



OR



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

For the transition period from ____________to____________



Commission File No. 001-34220

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3D SYSTEMS CORPORATION

(Exact name of Registrant as specified in its Charter)

_______________  _____________________________



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

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act.) Yes ☐ No ☒



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of Common Stock, par value $0.001, outstanding as of October 26, 2016:  112,359,693



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3D SYSTEMS CORPORATION

Quarterly Report on Form 10-Q for the

Quarter and Nine Months Ended September 30, 2016



TABLE OF CONTENTS







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PART I — FINANCIAL INFORMATION



Item 1.  Financial Statements.



3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS





See accompanying notes to condensed consolidated financial statements.



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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)











See accompanying notes to condensed consolidated financial statements.



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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)















See accompanying notes to condensed consolidated financial statements.

 

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)



















See accompanying notes to condensed consolidated financial statements.



 

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3D SYSTEMS CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

(In thousands, except per share information)



(1)  Basis of Presentation



The accompanying unaudited condensed consolidated financial statements include the accounts of 3D Systems Corporation and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”).



In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the quarter and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year.



The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates and assumptions.



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



Recent Accounting Pronouncements



In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). With the objective of reducing the existing diversity in practice, ASU 2016-15 addresses eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principal.  ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017. The amendments should be applied retrospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-15 on its financial statements.



No other new accounting pronouncements, issued or effective during the third quarter of 2016, have had or are expected to have a significant impact on the Company’s consolidated financial statements.



(2)  Inventories



Components of inventories, net, as of September 30, 2016 and December 31, 2015 were as follows:



During the third quarter of 2016, the Company recorded an inventory reserve of $10,723 in connection with the discontinuation of certain products as a result of the Company’s recently updated strategy. No reserves in connection with the discontinuation of certain products were recorded for the nine months ended September 30, 2015.







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(3)  Property and Equipment



Property and equipment, net, as of September 30, 2016 and December 31, 2015 were as follows:





Depreciation and amortization expense on property and equipment was $6,176 and $18,386 for the quarter and  nine months ended September 30, 2016, respectively, compared to $5,908 and $15,308 for the quarter and  nine months ended September 30, 2015, respectively.



For the nine months ended September 30, 2016, the Company recognized impairment charges of $7,069 on property and equipment, net. No impairment charges were recognized for the nine months ended September 30, 2015.



(4)  Intangible Assets



Intangible assets, net, other than goodwill, as of September 30, 2016 and December 31, 2015 were as follows:



Amortization expense related to intangible assets was $8,857 and $26,536 for the quarter and nine months ended September 30, 2016, respectively, compared to $15,843 and $47,840 for the quarter and nine months ended September 30, 2015, respectively.



Annual amortization expense for intangible assets is expected to be $35,193,  $32,143,  $26,971,  $21,635 and $16,941 for the years ending 2016, 2017, 2018, 2019, and 2020, respectively.

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(5)  Accrued and Other Liabilities



Accrued liabilities as of September 30, 2016 and December 31, 2015 were as follows:



Other liabilities as of September 30, 2016 and December 31, 2015 were as follows:





(6)  Hedging Activities and Financial Instruments



The Company conducts business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, the Company is subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, the Company endeavors to match assets and liabilities in the same currency on its balance sheet and those of its subsidiaries in order to reduce these risks. When appropriate, the Company enters into foreign currency contracts to hedge exposures arising from those transactions. The Company has elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging,” and therefore, all gains and losses (realized or unrealized) are recognized in “Interest and other expense, net” in the condensed consolidated statements of operations and comprehensive income (loss). Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid expenses and other current assets or in accrued liabilities on the condensed consolidated balance sheet.

  

There were no foreign currency contracts outstanding as of September 30, 2016 or December 31, 2015.    



For the quarter and nine months ended September 30, 2016, the condensed consolidated statements of operations includes a foreign currency transaction loss of $1,123 and a gain of $340, respectively, compared to a gain of $126 and a loss of $1,641 for the quarter and nine months ended September 30, 2015, respectively.



For the quarter and nine months ended September 30, 2016,  the total impact of foreign currency translation on accumulated other comprehensive loss reflects gains of $4,260 and $5,499, respectively, compared to losses of $9,075 and $15,315 for the quarter and nine months ended September 30, 2015, respectively.

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(7) Borrowings



Credit Facility



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

  

The Credit Agreement is guaranteed by certain of the Company’s material domestic subsidiaries (the “Guarantors”). From time to time, the Company may be required to cause additional material domestic subsidiaries to become Guarantors under the Credit Agreement. 

  

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

  

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

  

The Credit Agreement contains customary representations, warranties, covenants and default provisions for a Credit Facility of this type, including, but not limited to, financial covenants, limitations on liens and the incurrence of debt, covenants to preserve corporate existence and comply with laws and covenants regarding the use of proceeds of the Credit Facility. The financial covenants include a maximum consolidated total leverage ratio, which is the ratio of consolidated total funded indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization expense), as defined in the Credit Agreement, of 3.00 to 1.00, and a minimum interest coverage ratio, which is the ratio of consolidated EBITDA to cash interest expense, of 3.50 to 1.00.  The Company is only required to be in compliance with the financial covenants as of the end of any fiscal quarter in which there are any loans outstanding at any time during such fiscal quarter. Based on the Company’s current results of operations and financial covenants set forth in the Credit Agreement, availability at September 30, 2016 would be approximately $150,000. Future results may impact availability.

  

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

  

There was no outstanding balance on the Credit Facility as of September 30, 2016 or December 31, 2015.



Capitalized Lease Obligations



The Company’s capitalized lease obligations primarily include a lease agreement that was entered into during 2006 with respect to the Company’s corporate headquarters located in Rock Hill, SC. Capitalized lease obligations decreased to $8,362 at September 30, 2016 from $8,716 at December 31, 2015, due to the normal scheduled timing of payments.



(8)  Stock-based Compensation Plans



Effective May 19, 2004, the Company adopted its 2004 Incentive Stock Plan, as further amended and restated on February 3, 2015 (the “2004 Stock Plan”), and its 2004 Restricted Stock Plan for Non-Employee Directors, as further amended and restated on April 1, 2013 (the “Director Plan”). On May 19, 2015, the Company’s stockholders approved the 2015 Incentive Plan of 3D Systems Corporation (the “2015 Plan” and, together with the 2004 Stock Plan, the “Incentive Plans”).

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The 2004 Stock Plan authorizes shares of restricted stock, restricted stock units, stock appreciation rights and the grant of options to purchase shares of the Company’s common stock.  The 2004 Stock Plan also designates measures that may be used for performance awards.



The Director Plan authorizes shares of restricted stock for non-employee directors of the Company.



The 2015 Plan authorizes shares of restricted stock, restricted stock units, stock appreciation rights, cash incentive awards and the grant of options to purchase shares of the Company’s common stock. The 2015 Plan also designates measures that may be used for performance awards. 

  

Generally, awards granted prior to November 13, 2015 become fully-vested on the three-year anniversary of the grant date and awards granted on or after November 13, 2015 will vest one third each year over three years.  



The Company records stock-based compensation expense in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). Stock-based compensation expense for the quarters and nine months ended September 30, 2016 and 2015 was as follows:











Restricted Stock



Stock award activity for the nine months ended September 30, 2016 and 2015 was as follows:







During the nine months ended September 30, 2016, the Company awarded certain employees restricted stock under the 2015 Plan, included in the activity above, that vests under specified market conditions. Each employee was generally awarded two equal tranches of market condition restricted stock that immediately vests when the Company’s common stock trades at either $30 or $40 per share for ninety consecutive calendar days.  



At September 30, 2016, there was $5,624 of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards with market conditions, which the Company expects to recognize over the remaining weighted-average vesting period of four years.



At September 30, 2016, there was $34,859 of unrecognized pre-tax stock-based compensation expense related to all other non-vested restricted stock award shares and units, which the Company expects to recognize over the remaining weighted-average vesting period of 1.5 years.

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Stock Options



The Company estimates the fair value of stock options with market conditions using a binomial lattice Monte Carlo simulation model. The weighted-average fair value and the assumptions used to measure fair value were as follows:







Stock option activity for the nine months ended September 30, 2016 was as follows:







During the nine months ended September 30, 2016, the Company awarded certain employees market condition stock options under the 2015 Plan, included in the activity above, that vest under specified market conditions. Each employee was generally awarded two equal tranches of market condition stock options that immediately vest when the Company’s common stock trades at either $30 or $40 per share for ninety consecutive calendar days.  At September 30, 2016, there was $15,213 of unrecognized pre-tax stock-based compensation expense related to non-vested stock options with market conditions, which the Company expects to recognize over the remaining weighted-average vesting period of four years.











(9)  Loss Per Share



The Company presents basic and diluted loss per share amounts. Basic loss per share is calculated by dividing net loss attributable to 3D Systems Corporation by the weighted average number of common shares outstanding during the applicable period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common and common equivalent shares outstanding during the applicable period. The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding for the quarter and nine months ended September 30, 2016 and 2015:





The calculation for weighted average outstanding diluted loss per share excludes stock options with an exercise price that exceeds the average market price of shares during the period. In addition to unexercised stock options, there was an immaterial number of additional shares issuable upon the vesting of restricted stock units that were excluded from the diluted share calculations because they were anti-dilutive.

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(10)  Fair Value Measurements



ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs that may be used to measure fair value:





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



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









The Company did not have any transfers of assets and liabilities between Level 1,  Level 2 and Level 3 of the fair value measurement hierarchy during the quarter and nine months ended September 30, 2016. In addition to the assets and liabilities included in the above table, certain of our assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes goodwill and other intangible assets measured at fair value for impairment assessment, in addition to redeemable noncontrolling interests. For additional discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Estimates” in our Form 10-K.

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(11)  Income Taxes



For the quarter and nine months ended September 30, 2016, the Company recorded a benefit of  $2,214 and a provision of $665, respectively, resulting in effective tax rates of 9.4% of benefit and 1.5% of expense,  respectively, compared to tax rates of 9.8% and 25.7% of benefit for the quarter and nine months ended September 30, 2015, respectively. The difference in the effective tax rates is primarily attributable to valuation allowances that the Company recorded in the fourth quarter of 2015 in the United States and certain foreign jurisdictions, as well as an adjustment that was recorded during the third quarter of 2016 in connection with completion of the Company’s tax returns, which resulted in a tax benefit.



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



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



(12)  Segment Information



The Company operates in one reportable business segment. The Company conducts its business through various offices and facilities located throughout the Asia Pacific region (Australia, China, India, Japan and Korea), Europe (Belgium, France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom), Israel, Latin America (Brazil, Mexico and Uruguay), Russia and the United States. The Company has historically disclosed summarized financial information for the geographic areas of operations as if they were segments in accordance with ASC 280, “Segment Reporting.” Financial information concerning the Company’s geographical locations is based on the location of the selling entity. Such summarized financial information concerning the Company’s geographical operations is shown in the following tables: