NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of 3D Systems Corporation and its subsidiaries
(collectively, the “Company”).
All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for
the year ended December 31, 2013
.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of
operations for the quarter
and six months
ended
June 30, 2014
are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates and assumptions.
Certain prior period amounts presented in the accompanying footnotes have been reclassified to conform to current year presentation.
All amounts presented in the accompanying footnotes are presented in thousands, except for per share information.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are trans
ferred to customers in amounts that reflect
the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five
-
step process to achieve this core principle and, in doing so,
may require
more judgment and estimates within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
(2) Acquisitions
The Company completed
one
acquisition in the second quarter of 2014, which is discussed below.
On April
2, 2014, the Company acquired
100%
of the outstanding shares and voting rights of Medical
Modeling Inc. Medical Modeling
Inc. is a provider of 3D printing-centric personalized surgical treatments and patient specific medical devices, including virtual surgical planning, personalized medical devices and clinical transfer tools.
The fair value of the consideration paid for this acquisition, net of cash acquired, was
$69,026
of which
$51,526
was paid in cash and
$17,500
was paid in shares of the Company’s stock. These shares were issued in a private transaction exempt from registration under the Securities Act of 1933. The
operations of Medical Modeling
Inc. have been integrated into the Company’s service revenues. The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed, based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill, and is included in the table below, which summarizes second quarter 2014 acquisitions. Factors considered in determination of goodwill include synergies, vertical integration and strategic fit for the Company.
The acquisition completed in the second quarter is not material relative to the Company’s assets or operating results; therefore, no proforma financial information is provided.
The Company’s purchase price allocation for the acquired company is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available. The amounts related to the acquisition are allocated to the assets acquired and the liabilities assumed and are included in the Company’s unaudited condensed consolidated balance sheet at June 30, 2014 as follows:
|
|
|
|
|
|
(in thousands)
|
2014
|
Fixed assets
|
$
|
2,737
|
Other intangible assets, net
|
|
34,300
|
Goodwill
|
|
44,181
|
Other assets, net of cash acquired
|
|
2,042
|
Liabilities
|
|
(14,234)
|
Net assets acquired
|
$
|
69,026
|
Subsequent Acquisitions
On
April 16, 2014
, the Company entered into a definitive agreement to acquire Robtec, an additive manufacturing service bureau and distributor of 3D printing and scanning products located in Sao Paulo, Brazil. Under the terms of the agreement, the Company will acquire
70%
of the shares of Robtec at closing and the remainder of the shares on the
fifth
anniversary of the closing.
The acquisition is expected to close in the second half of 2014.
On July 30, 2014, the Company entered into a definitive agreement to acquire Simbionix USA Corporation (“Simbionix”) for
$120
,000
in cash, subject to customary closing adjustments. Simbionix is a provider of proprietary, high definition, 3D virtual reality surgical simulation, training and educational products for personalized medicine. Simbionix is headquartered in Cleveland, Ohio and has a research and development center in Israel. Under the terms of the agreement, subject to customary closing conditions, the Company will acquire
100%
of the outstanding shares of Simbionix
.
(3) Inventories
Components of inventories, net at
June 30, 2014
and
December 31, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2014
|
|
2013
|
Raw materials
|
$
|
42,784
|
|
$
|
34,144
|
Work in process
|
|
2,031
|
|
|
3,050
|
Finished goods and parts
|
|
45,389
|
|
|
37,954
|
Inventories, net
|
$
|
90,204
|
|
$
|
75,148
|
(4) Property and Equipment
Property and equipment at
June 30, 2014
and December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2014
|
|
2013
|
|
Useful Life (in years)
|
Land
|
$
|
541
|
|
$
|
541
|
|
N/A
|
Building
|
|
9,315
|
|
|
9,315
|
|
25
|
Machinery and equipment
|
|
67,153
|
|
|
56,962
|
|
3-7
|
Capitalized software — ERP
|
|
3,970
|
|
|
3,872
|
|
5
|
Office furniture and equipment
|
|
3,916
|
|
|
3,586
|
|
5
|
Leasehold improvements
|
|
10,344
|
|
|
9,395
|
|
Life of lease
(a)
|
Rental equipment
|
|
626
|
|
|
—
|
|
5
|
Construction in progress
|
|
12,159
|
|
|
4,014
|
|
N/A
|
Total property and equipment
|
|
108,024
|
|
|
87,685
|
|
|
Less: Accumulated depreciation and amortization
|
|
(48,353)
|
|
|
(42,477)
|
|
|
Total property and equipment, net
|
$
|
59,671
|
|
$
|
45,208
|
|
|
|
(a)
|
|
Leasehold improvements are amortized on a straight-line basis over the shorter of (i) their estimated useful lives and (ii) the estimated or contractual life of the related lease.
|
Depreciation and amortization expense on propert
y and eq
uipment for the quarter and six
months
ended June 30, 2014
was
$
3,456
and $
6,492
, respectively, compared to $
2,251
and $
4,432
, respec
tively, for the quarter and six
months ended June 30, 2013.
(5) Intangible Assets
Intangible assets other than goodwill at
June 30, 2014
and December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
(in thousands)
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Useful Life (in years)
|
|
Weighted Average Useful Life Remaining (in years)
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
$
|
5,875
|
|
$
|
(5,875)
|
|
$
|
—
|
|
$
|
5,875
|
|
$
|
(5,875)
|
|
$
|
—
|
|
|
|
|
Patent costs
|
|
22,211
|
|
|
(7,195)
|
|
|
15,016
|
|
|
21,545
|
|
|
(5,960)
|
|
|
15,585
|
|
6
-
7
|
|
3
|
Acquired technology
|
|
44,591
|
|
|
(15,410)
|
|
|
29,181
|
|
|
30,095
|
|
|
(13,615)
|
|
|
16,480
|
|
5
-
10
|
|
5
|
Internally developed software
|
|
17,862
|
|
|
(13,583)
|
|
|
4,279
|
|
|
18,097
|
|
|
(12,863)
|
|
|
5,234
|
|
5
|
|
<1
|
Customer relationships
|
|
113,067
|
|
|
(28,021)
|
|
|
85,046
|
|
|
95,793
|
|
|
(18,283)
|
|
|
77,510
|
|
5
-
13
|
|
5
|
Non-compete agreements
|
|
21,010
|
|
|
(8,758)
|
|
|
12,252
|
|
|
16,848
|
|
|
(6,666)
|
|
|
10,182
|
|
3
-
11
|
|
3
|
Trade names
|
|
10,708
|
|
|
(3,459)
|
|
|
7,249
|
|
|
9,302
|
|
|
(2,211)
|
|
|
7,091
|
|
2
-
10
|
|
3
|
Other
|
|
23,668
|
|
|
(4,818)
|
|
|
18,850
|
|
|
11,598
|
|
|
(4,081)
|
|
|
7,517
|
|
<
1
-
7
|
|
2
|
Intangibles with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
5,910
|
|
|
—
|
|
|
5,910
|
|
|
2,110
|
|
|
—
|
|
|
2,110
|
|
N/A
|
|
N/A
|
Total intangible assets
|
$
|
264,902
|
|
$
|
(87,119)
|
|
$
|
177,783
|
|
$
|
211,263
|
|
$
|
(69,554)
|
|
$
|
141,709
|
|
<
1
-
13
|
|
4
|
For the six months ended June 30, 2014 and 2013, the Company capitalized $
382
and
$1,313
, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries.
Amortization expense for intangible assets for the quarter and six months ended June 30, 2014 was
$8,211
and
$17,414
, respectively, compared to
$5,084
and
$8,896
, respectively, for the quarter and six months ended June 30, 2013.
Annual amortization expense for intangible assets for 2014, 2015, 2016, 2017 and 2018 is expected to be
$33,517
,
$24,496
,
$21,784
,
$18,886
and
$14,024
, respectively.
(6) Accrued and Other Liabilities
Accrued liabilities at
June 30, 2014
and
December 31, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2014
|
|
2013
|
Compensation and benefits
|
$
|
14,700
|
|
$
|
13,197
|
Vendor accruals
|
|
5,691
|
|
|
5,449
|
Accrued professional fees
|
|
582
|
|
|
493
|
Accrued taxes
|
|
4,684
|
|
|
1,834
|
Royalties payable
|
|
810
|
|
|
750
|
Accrued interest
|
|
74
|
|
|
73
|
Accrued earnouts related to acquisitions
|
|
1,414
|
|
|
5,872
|
Accrued other
|
|
588
|
|
|
762
|
Total
|
$
|
28,543
|
|
$
|
28,430
|
Other liabilities at
June 30, 2014
and
December 31, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2014
|
|
2013
|
Defined benefit pension obligation
|
$
|
5,830
|
|
$
|
5,861
|
Long term tax liability
|
|
90
|
|
|
90
|
Long term earnouts related to acquisitions
|
|
8,706
|
|
|
4,206
|
Long term deferred revenue
|
|
5,038
|
|
|
4,218
|
Other long term liabilities
|
|
2,842
|
|
|
826
|
Total
|
$
|
22,506
|
|
$
|
15,201
|
(7) Hedging Activities and Financial Instruments
The Company conducts business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, the Company is subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, the Company endeavors to match assets and liabilities in the same currency on its balance sheet and those of its subsidiaries in order to reduce these risks. When appropriate, the Company enters into foreign currency contracts to hedge exposures arising from those transactions. The Company has elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, “Derivatives and Hedging,” and therefore, all gains and losses (realized or unrealized) are recognized in "Interest and other expense, net” in the condensed consolidated statements of operations and comprehensive income. Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid expenses and other current assets or in accrued liabilities on the condensed consolidated balance sheet.
There were
no
foreign currency contracts outstanding at
June 30, 2014
or
at
December 31, 2013
.
The total impact of foreign currency transactions on the condensed consolidated statements of operations and comprehensive income for the quarter and six months ended June 30, 2014 reflected a
loss
of
$1,140
and a
loss
of
$1,345
, respectively, compared to a
gain
of
$203
and a
loss
of
$762
, respectively, for the quarter and six months ended June 30, 2013.
(8) Borrowings
5.5% senior convertible notes and interest expense
In November 2011, the Company issued $
152,000
of 5.50% senior convertible notes due December 2016
.
These notes are senior unsecured obligations and rank equal in right of payment with all the Company’s existing and future senior unsecu
red indebtedness.
The notes accrue interest at the rate of
5.50
% per year
payable in cash semi-annually on June 15 and December 15 of each year
.
The following table summarizes the principal amounts and related unamortized discount on convertible notes at
June 30, 2014
and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2014
|
|
2013
|
Principal amount of convertible notes
|
$
|
12,540
|
|
$
|
12,540
|
Unamortized discount on convertible notes
|
|
(955)
|
|
|
(1,124)
|
Net carrying value
|
$
|
11,585
|
|
$
|
11,416
|
These notes are convertible into shares of the Company’s Common Stock at a conversion rate equivalent to
69.9032
shares of Common Stock per $
1
principal amount of notes, which represents a conversion rate of approximately $
14.31
per share of Common Stock. The conversion rate is subject to adjustment in certain circumstances as more fully set forth in the indenture covering the notes. Conditions for conversion have been satisfied and the notes are convertible.
No
notes were converted during the
first six months
of 2014.
The remaining notes are convertible into approximately
876
shares of common stock. In certain circumstances provided for in the indenture, the number of shares of common stock issuable upon conversion of the notes may be increased, and with it the aggregate principal amount of the notes. Unless earlier repurchased or converted, the notes will mature on
December 15, 2016
.
The notes were issued with an effective yield of
5.96
% based upon an original issue discount at
98.0
%. The net proceeds from the issuance of these notes, after deducting original issue discount and capitalized issuance costs of $
6,634
, amounted to $
145,366
. The capitalized issuance costs are being amortized to interest expense over the life of the notes, or realized upon conversion of the notes.
Upon certain terms and conditions, the Company may elect to satisfy its conversion obligation with respect to the notes by paying cash, in whole or in part, for specified aggregate principal amount of the notes. In the event of certain types of fundamental changes, the Company will increase the conversion rate by a number of additional shares, up to a maximum of
1,118
shares, which equates to a conversion price of approximately $
11.22
per share.
(9) Stock-based Compensation Plans
The Company records stock-based compensation expense in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Stock-based compensation expense for the quarter and six months ended June 30, 2014 and 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Restricted stock awards
|
$
|
8,362
|
|
$
|
3,125
|
|
$
|
15,638
|
|
$
|
5,346
|
The number of shares of restricted common stock awarded and the weighted average fair value per share during the quarter and six months ended June 30, 2014 and 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
|
2014
|
|
|
2013
|
(in thousands, except per share amounts)
|
|
Shares Awarded
|
|
Weighted Average Fair Value
|
|
|
Shares Awarded
|
|
Weighted Average Fair Value
|
Restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
Granted under the 2004 Incentive Stock Plan
|
|
143
|
|
$
|
50.31
|
|
|
68
|
|
$
|
46.84
|
Granted under the 2004 Restricted Stock Plan for Non-Employee Directors
|
|
17
|
|
|
49.26
|
|
|
12
|
|
|
48.43
|
Total restricted stock awards
|
|
160
|
|
$
|
50.20
|
|
|
80
|
|
$
|
47.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
|
2013
|
(in thousands, except per share amounts)
|
|
Shares Awarded
|
|
Weighted Average Fair Value
|
|
|
Shares Awarded
|
|
Weighted Average Fair Value
|
Restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
Granted under the 2004 Incentive Stock Plan
|
|
376
|
|
$
|
69.00
|
|
|
291
|
|
$
|
39.14
|
Granted under the 2004 Restricted Stock Plan for Non-Employee Directors
|
|
17
|
|
|
49.26
|
|
|
12
|
|
|
48.43
|
Total restricted stock awards
|
|
393
|
|
$
|
68.15
|
|
|
303
|
|
$
|
39.52
|
During
the six months ended June 30, 2014, the Company granted restricted stock awards covering
376
shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan. Of the
376
shares granted in the first six months of 2014,
30
shares were awarded to executive officers of the Company and
138
shares remained subject to acceptance at June 30, 2014. In the first six months of 2013, the Company granted restricted stock awards covering
291
shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan, of which
27
shares were awarded to executive officers of the Company.
In the first six months of 2014 and 2013, respectively, the Company granted
17
and
12
shares, respectively, of common stock pursuant to the Company’s 2004 Restricted Stock Plan for Non-Employee Directors. Stock compensation expense for Non-Employee Directors for the first six months of 2014 and 2013 was
$849
and
$600
, respectively.
(10) International Retirement Plan
The following table shows the components of net periodic benefit costs and other amounts recognized in the condensed consolidated statements of operations and comprehensive income for the
quarter
and six months
ended
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service cost
|
$
|
43
|
|
$
|
24
|
|
$
|
88
|
|
$
|
47
|
Interest cost
|
|
60
|
|
|
48
|
|
|
122
|
|
|
97
|
Total
|
$
|
103
|
|
$
|
72
|
|
$
|
210
|
|
$
|
144
|
(11) Earnings Per Share
The Company presents basic and diluted earnings per share (“EPS”) amounts. Basic EPS is calculated by dividing net income
attributable to 3D Systems Corporation
available to common stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted EPS is calculated by dividing net income by the weighted average number of common and common equivalent shares outstandin
g during the applicable period.
The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares at
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands, except per share amounts)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3D Systems Corporation – numerator for basic net earnings per share
|
$
|
2,125
|
|
$
|
9,343
|
|
$
|
7,002
|
|
$
|
15,226
|
Add: Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on 5.50% convertible notes (after-tax)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Numerator for diluted earnings per share
|
$
|
2,125
|
|
$
|
9,343
|
|
$
|
7,002
|
|
$
|
15,226
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – denominator for basic net earnings per share
|
|
106,407
|
|
|
96,248
|
|
|
104,985
|
|
|
94,047
|
Add: Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
5.50% convertible notes (after-tax)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Denominator for diluted earnings per share
|
|
106,407
|
|
|
96,248
|
|
|
104,985
|
|
|
94,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
0.02
|
|
$
|
0.10
|
|
$
|
0.07
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense excluded from diluted earnings per share calculation
(a)
|
$
|
206
|
|
$
|
511
|
|
$
|
362
|
|
$
|
1,508
|
5.50% Convertible notes shares excluded from diluted earnings per share calculation
(a)
|
|
876
|
|
|
1,925
|
|
|
876
|
|
|
2,852
|
|
(a)
|
|
Average outstanding diluted earnings per share calculation excludes shares that may be issued upon conversion of the outstanding senior convertible notes since the effect of their inclusion would have been anti-dilutive.
|
For the quarter ended June 30, 2014, average common shares for basic and diluted earnings per share were
106,407
and basic and diluted earnings per share were
$0.02
. For the quarter ended June 30, 2013, average common shares for basic and diluted earnings per share were
96,248
and basic and diluted earnings per share were
$0.10
.
For the six months ended June 30, 2014, average common shares for basic and diluted earnings per share were
104,985
, and basic and diluted earnings per share were
$0.07
. For the six months ended June 30, 2013, average common shares for basic and diluted earnings per share were
94,047
and basic and diluted earnings per share were
$0.16
.
(12) Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs that may be used to measure fair value:
|
·
|
|
Level 1
- Quoted prices in active markets for identical assets or liabilities;
|
|
·
|
|
Level 2
- Observable inputs other than Level 1 prices, such as quoted prices fo
r similar assets or liabilities,
quoted prices
in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
·
|
|
Level 3
- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
For the Company, the above standard applies to cash equivalents and senior convertible notes. The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2014
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
(a)
|
$
|
493,539
|
|
$
|
—
|
|
$
|
—
|
|
$
|
493,539
|
|
(a)
|
|
Cash equivalents include funds held in money market instruments and are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments and are included in cash and cash equivalents in the consolidated balance sheet.
|
The Company did not have any transfers of
assets
and
liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy during the
quarter
and six months
ended
June 30, 2014
.
The carrying value of the senior convertible notes as of
June 30, 2014
and
December 31, 2013
was $
11,585
and $
11,416
, respectively, ne
t of the unamortized discount.
As of
June 30, 2014
and
December 31, 2013
, the estimated fair value of the senior convertible notes was $
12,142
and $
12,035
, respectively, based on quoted market prices. The Company determined the fair value of the convertible notes utilizing transactions in the listed markets for ide
ntical or similar liabilities.
As such, the fair value of the senior convertible notes is considered Level 2.
In addition to the financial assets included in the above table, certain of our non-financial assets and liabilities are to be initially measured at fair v
alue on a non-recurring basis.
This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair valu
e for an impairment assessment.
In general, non-financial assets and liabilities including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only
when impairment is recognized.
The Company has
not
recorded any impairments related to such assets and has had no other significant non-financial assets or non-financial liabilities requiring adjustments or write-downs to fair value as of
June 30, 2014
or
December 31, 2013
.
(13) Income Taxes
The Company’s effective tax rates were
24.0%
and
37.5%
for the quarter and six months ended June 30, 2014, respectively, compared to
33.9%
and
29.5
% for the quarter and six months ended June 30, 2013.
The Company has not provided for any taxes on the unremitted earnings of its foreign subsidiaries, as the Company intends to permanently reinvest all such earnings outside of the U.S. We believe a calculation of the deferred tax liability associated with these undistr
ibuted earnin
gs is impracticable
.
Tax years
2010
to
2013
are
subject to examination by the U.S. Internal Revenue Service.
The Company has utilized U.S. loss carryforwards causing the years
1997
to
2007
to be subject to examination
. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in France (
2011
), Germany (
2011
), Japan (
2007
), Italy (
2009
), Switzerland (
2008
), the United Kingdom (
2009
), the Netherlands (
2007
), Australia (
2009
), Korea (
2008
), India (
2012
), and China (
2013
).
(14) Segment Information
The Company operates in one reportable business segment. The Company conducts its business through subsidiaries in the United States, a subsidiary in Switzerland that operates a research and production facility, subsidiaries in France that operate a manufacturing facility and sales and service offices, and sales and services offices operated by subsidiaries in Europe (Germany, the United Kingdom, Italy and the Netherlands) and in Asia-Pacific (Australia, China, India, Japan and Korea). The Company has historically disclosed summarized financial information for the geographic areas of operations as if they were segments in accordance with ASC 280, “Segment Reporting.” Financial information concerning the Company’s geographical locations are based on the location of the selling entity
.
Summarized financial information concerning the Company’s geographical operations is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Revenue from unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
78,895
|
|
$
|
67,870
|
|
$
|
146,927
|
|
$
|
125,023
|
Germany
|
|
|
19,562
|
|
|
13,286
|
|
|
43,387
|
|
|
25,197
|
Other Europe
|
|
|
22,453
|
|
|
18,569
|
|
|
46,192
|
|
|
35,238
|
Asia Pacific
|
|
|
30,602
|
|
|
21,062
|
|
|
62,764
|
|
|
37,408
|
Total
|
|
$
|
151,512
|
|
$
|
120,787
|
|
$
|
299,270
|
|
$
|
222,866
|
The Company’s revenue from unaffiliated customers by type w
as
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Printers and other products
|
|
$
|
61,948
|
|
$
|
54,190
|
|
$
|
122,701
|
|
$
|
93,913
|
Materials
|
|
|
38,036
|
|
|
29,275
|
|
|
78,477
|
|
|
58,004
|
Services
|
|
|
51,528
|
|
|
37,322
|
|
|
98,092
|
|
|
70,949
|
Total revenue
|
|
$
|
151,512
|
|
$
|
120,787
|
|
$
|
299,270
|
|
$
|
222,866
|
Intercompany sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2014
|
|
|
Intercompany Sales to
|
(in thousands)
|
|
United States
|
|
Germany
|
|
Other Europe
|
|
Asia Pacific
|
|
Total
|
United States
|
|
$
|
—
|
|
$
|
9,925
|
|
$
|
4,710
|
|
$
|
3,450
|
|
$
|
18,085
|
Germany
|
|
|
446
|
|
|
—
|
|
|
1,350
|
|
|
—
|
|
|
1,796
|
Other Europe
|
|
|
10,932
|
|
|
548
|
|
|
676
|
|
|
891
|
|
|
13,047
|
Asia Pacific
|
|
|
331
|
|
|
(15)
|
|
|
—
|
|
|
521
|
|
|
837
|
Total
|
|
$
|
11,709
|
|
$
|
10,458
|
|
$
|
6,736
|
|
$
|
4,862
|
|
$
|
33,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2013
|
|
|
Intercompany Sales to
|
(in thousands)
|
|
United States
|
|
Germany
|
|
Other Europe
|
|
Asia Pacific
|
|
Total
|
United States
|
|
$
|
—
|
|
$
|
4,658
|
|
$
|
4,234
|
|
$
|
1,075
|
|
$
|
9,967
|
Germany
|
|
|
386
|
|
|
—
|
|
|
447
|
|
|
—
|
|
|
833
|
Other Europe
|
|
|
5,292
|
|
|
674
|
|
|
1,097
|
|
|
93
|
|
|
7,156
|
Asia Pacific
|
|
|
347
|
|
|
261
|
|
|
67
|
|
|
167
|
|
|
842
|
Total
|
|
$
|
6,025
|
|
$
|
5,593
|
|
$
|
5,845
|
|
$
|
1,335
|
|
$
|
18,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
|
|
|
Intercompany Sales to
|
(in thousands)
|
|
United States
|
|
Germany
|
|
Other Europe
|
|
Asia Pacific
|
|
Total
|
United States
|
|
$
|
—
|
|
$
|
20,862
|
|
$
|
9,657
|
|
$
|
5,796
|
|
$
|
36,315
|
Germany
|
|
|
855
|
|
|
—
|
|
|
2,828
|
|
|
—
|
|
|
3,683
|
Other Europe
|
|
|
20,975
|
|
|
1,878
|
|
|
1,008
|
|
|
1,446
|
|
|
25,307
|
Asia Pacific
|
|
|
813
|
|
|
(15)
|
|
|
—
|
|
|
1,203
|
|
|
2,001
|
Total
|
|
$
|
22,643
|
|
$
|
22,725
|
|
$
|
13,493
|
|
$
|
8,445
|
|
$
|
67,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2013
|
|
|
Intercompany Sales to
|
(in thousands)
|
|
United States
|
|
Germany
|
|
Other Europe
|
|
Asia Pacific
|
|
Total
|
United States
|
|
$
|
—
|
|
$
|
10,441
|
|
$
|
7,838
|
|
$
|
2,199
|
|
$
|
20,478
|
Germany
|
|
|
704
|
|
|
—
|
|
|
1,806
|
|
|
—
|
|
|
2,510
|
Other Europe
|
|
|
9,223
|
|
|
957
|
|
|
1,175
|
|
|
124
|
|
|
11,479
|
Asia Pacific
|
|
|
872
|
|
|
641
|
|
|
67
|
|
|
422
|
|
|
2,002
|
Total
|
|
$
|
10,799
|
|
$
|
12,039
|
|
$
|
10,886
|
|
$
|
2,745
|
|
$
|
36,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All revenue between geographic areas is recorded at prices that provide for an allocation of profit (loss) between entities. Income from operations
,
assets
, and cash
for each geographic area w
as
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(7,036)
|
|
$
|
11,643
|
|
$
|
(9,066)
|
|
$
|
22,912
|
Germany
|
|
|
451
|
|
|
(318)
|
|
|
648
|
|
|
343
|
Other Europe
|
|
|
2,124
|
|
|
235
|
|
|
4,525
|
|
|
2,001
|
Asia Pacific
|
|
|
9,455
|
|
|
5,476
|
|
|
18,522
|
|
|
9,793
|
Subtotal
|
|
|
4,994
|
|
|
17,036
|
|
|
14,629
|
|
|
35,049
|
Inter-segment elimination
|
|
|
(632)
|
|
|
(240)
|
|
|
(750)
|
|
|
(734)
|
Total
|
|
$
|
4,362
|
|
$
|
16,796
|
|
$
|
13,879
|
|
$
|
34,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in thousands)
|
2014
|
|
2013
|
Assets:
|
|
|
|
|
|
United States
|
$
|
1,240,270
|
|
$
|
870,208
|
Germany
|
|
45,563
|
|
|
38,685
|
Other Europe
|
|
116,516
|
|
|
120,562
|
Asia Pacific
|
|
74,021
|
|
|
68,401
|
Total
|
$
|
1,476,370
|
|
$
|
1,097,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in thousands)
|
2014
|
|
2013
|
Cash and cash equivalents:
|
|
|
|
|
|
United States
|
$
|
546,730
|
|
$
|
286,377
|
Germany
|
|
3,591
|
|
|
3,441
|
Other Europe
|
|
10,386
|
|
|
8,915
|
Asia Pacific
|
|
9,555
|
|
|
7,583
|
Total
|
$
|
570,262
|
|
$
|
306,316
|
(15) Commitments and Contingencies
The Company leases office space under various non-cancelable operating leases. Rent expense under operating leases was $
2,598
and
$4,910
for the quarter and six months ended June 30, 2014 compared to
$1,440
and
$2,818
for the quarter and
six
months ended
June
30, 201
3
.
The Comp
any has supply commitments
for printer assemblies that total $
65,621
at
June 30, 2014
, compared to $
41,091
at
December 31, 2013
.
Certain of the Company’s
acquisitions contain earnout provisions under which the sellers of the acquired businesse
s can earn additional amounts.
The total liabilities recorded for these earnouts as of
June 30, 2014
and
December 31, 2013
was $
10,120
and $
5,578
, respectively.
Litigation
In 2008, DSM Desotech Inc. filed a complaint, which it has subsequently amended, in an action titled
DSM Desotech Inc. v. 3D Systems Corporation and 3D Systems, Inc.
in the United States District Court for the Northern District of Illinois (Eastern Division) asserting that the Company engaged in anticompetitive behavior with respect to resins used in certain of its stereoli
thography machines.
The complaint further asserted that the Company infringed upon
two
of DSM Desotech’s patents relating to stereolithography machines
.
On January 31, 2013, the Court granted the Company summary judgment for all
seven
of the counts alleging anticompetitive behavior. On February 28, 2013, the parties filed a stipulation of dismissal of the remaining counts, and the Court dismissed those counts in connection with the settlement of these portions of the litigation. On March 29, 2013, DSM Desotech filed a notice of appeal to the United States Court of Appeals for the Federal Circuit regarding the Court’s granting of summary judgment in favor of the Company on all seven counts of alleged anticompetitive behavior. On April 18, 2014, the Federal Circuit affirmed the grant of
summary judgment for all
seven
counts, dismissing all remaining claims asserted by DSM Desotech
. DSM Desotech took no further action in response to the Federal Circuit's decision in favor of the Company, and the case has completely concluded.
On November 20, 2012, the Company filed a complaint in an action titled
3D Systems, Inc. v. Formlabs, Inc. and Kickstarter, Inc.
in the United States District Court for the District of South Carolina (Rock Hill Division) asserting that Formlabs’ and Kickstarter’s sales of the Form 1 3D printer infringed
on
one
of the Company’s patents relating to stereolithography machines. Formlabs and Kickstarter filed a motion to dismiss or transfer venue on February 25, 2013, and the Company filed a first amended complaint on March 8, 2013. On May 8, 2013, the Court granted the parties’ joint motion to stay the case until September 3, 2013 to enable the parties to c
ontinue settlement discussions.
On November 8, 2013, the Company voluntarily dismissed the South Carolina complaint and filed a new complaint in the United States District Court for the Southern District of New York asserting that Formlabs’ sales of the Form 1 3D printer infringed
on
eight
of the Company’s patents relating to stereolithography machines. On December 20, 2013, Formlabs filed a motion to dismiss
the
Company’s claims of indirect and willful infringement, and
the
Company filed a memorandum in opposition on January 6, 2014. Formlabs filed a reply on January 16,
2014. The Court ruled on the motion to dismiss on May 12, 2014, granting in part and dismissing in part Formlabs’ motion. The Company filed a first amended complaint on May 16, 2014, and Formlabs filed its answer on June 2, 2014. The Company intends to pursue claims for damages against Formlabs
.
The Company is also involved in various other legal matters incidental to its business. The Company believes, after consulting with counsel, that the disposition of these other legal matters will not have a material effect on our consolidated results of operations or consolidated financial position.
Indemnification
In the normal course of business the Company periodically enters into agreements to indemnify customers or suppliers against claims of intellectual property infringement made by
first
parties arising from the use of the Company’s products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, the Company indemnifies directors and officers for certain events or occurrences while the director or officer is, or was
, serving
at the Company’s request in such capacity,
subject to limited exceptions.
The maximum potent
ial amount of future payments the Company
could be required to make under these indemnification obligations is unlimited; however, the Company has directors and officers insurance coverage that may enable the Company to recover future amounts paid, subject to a deductible and the policy limits. There is no assurance that the policy limits will be sufficient to cover all damages, if any.
(16) Accumulated Other Comprehensive Income
The changes in the balances of accumulated other comprehensive income by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Foreign currency translation adjustment
|
|
Defined benefit pension plan
|
|
Liquidation of Non-US Entity
|
|
|
Total
|
Balance at December 31, 2013
|
$
|
6,692
|
|
$
|
(1,076)
|
|
$
|
173
|
|
$
|
5,789
|
Other comprehensive income
|
|
1,632
|
|
|
45
|
|
|
—
|
|
|
1,677
|
Balance at June 30, 2014
|
$
|
8,324
|
|
$
|
(1,031)
|
|
$
|
173
|
|
$
|
7,466
|
The amounts presented above
are included
in other comprehensive income and
are
net of taxes.
For additional information about foreign currency translation, see Note 7. For additional information about the pension plan, see Note 10.
(17) Noncontrolling
Interest
As of
June 30, 2014
, the Company owned
95%
of the capital and voting rights of Phenix Systems
, a global provider of direct metal selective laser sintering 3D printers based in Riom, France. Phenix’s operating results are included in these
condensed
consolidated financial statements. In accordance with ASC 810, “Consolidation,” the carrying value of the noncontrolling interest is reported in the
condensed
consolidated balance sheets as a separate component of equity and
condensed
consolidated net income has been
adjusted to report the net income
attributable
to the noncontrolling interest.
(18
) Subsequent Event
On July 30, 2014, the Company entered into a definitive agreement to acquire Simbionix USA Corporation (“Simbionix”) for
$120,000
in cash, subject to customary closing adjustments. Simbionix is a provider of proprietary, high definition, 3D virtual reality surgical simulation, training and educational products for personalized medicine. Simbionix is headquartered in Cleveland, Ohio and has a research and development center in Israel. Under the terms of the agreement, subject to customary closing conditions, the Company will acquire
100%
of the outstanding shares of Simbionix.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”).
We are subject to a number of risks and uncertainties that may affect our future performance that are discussed in greater detail in the sections entitled “Forward-Looking Statements” and “Cautionary Statements and Risk Factors” at the end of this Item 2 and that are discussed or referred to in Item 1A of Part II of this Form 10-Q.
Business Overview
We are a leading global provider of 3D printing centric design-to-manufacturing solutions, including 3D printers, print materials and on-demand custom parts for professionals and consumers alike. Our materials include plastics, metals, ceramics and edibles. We also provide integrated 3D scan-based design, freeform modeling and inspection tools and an integrated 3D planning and printing digital thread for personalized surgery and patient specific medical devices. Our products and services replace and complement traditional methods and reduce the time and cost of designing new products by printing real parts directly from digital input. These solutions are used to rapidly design, create, communicate, prototype or produce functional parts and assemblies, empowering customers to manufacture the future
.
We derive our consolidated revenue primarily from the sale
s
of our printers, the sale
s
of the related print materials
and services, the sales of our Quickparts brand on-demand parts services and the sales of
percept
ual devices and software
.
Recent Developments
In April, we continued to broaden and enhance our 3D printing ecosystem and expanded our 3D printing digital thread with the acquisition of Medical Modeling Inc. Medical Modeling
utilizes 3D printing-centric personalized surgery and patient-specific medical device
solutions with FDA-cleared manufacturing processes to provide surgical planning tools, surgical guides and kits, and other design services
.
In April, we entered into a definitive agreement to acquire Robtec, an additive manufacturing service bureau and distributor of 3D printing and scanning products in Sao Paulo, Brazil with locations in Chile, Argentina, Uruguay and Mexico. The closing of the acquisition is subject to customary closing conditions and not yet completed. Under the terms of the agreement, we will acquire 70% of the shares of Robtec at closing and the remainder of the shares on the fifth anniversary of the closing. This acquisition will create a strategic Latin American sales and service platform to drive accelerated adoption of our entire design-to-manufacturing solutions, provide us with significant in-region additive manufacturing service bureau capabilities and expand our global Quickparts full service offerings reach and ability to deliver the latest advanced manufacturing solutions and capabilities
.
During the second quarter, we continued to expand our global reseller network, adding major distributors including ScanSour
ce, Inc, Konica Minolta and Can
on Marketing Japan, to enhance our presence in North America, Europe, Latin America and Asia-Pacific
.
We also enhanced our education offerings, resources and partnerships in conjunction with the launch of our MAKE.DIGITAL initiative. With this initiative, our goal is to promote and advance digital literacy in K-12 STEAM education, by equipping and empowering students with 3D design, scanning and printing skills. We also announced partnerships with organizations such as First Teams, The Albert Einstein Distinguished Educator Fellows, the U.S. Department of Education, Level Up Village, CityX Project and others.
In May, we completed an offering of 6.0 million shares of common stock in an underwritten public offering. The offering raised approximately $299.7 million of cash proceeds, net of offering expenses.
In June, we announced the Ekocycle™ Cube
®
3D printer, a collaboration with Ekocycle, a brand launched by The Coca-Cola Company and
will.i.am, our Chief Creative Officer. The
Ekocycle Cube uses a new full durability filament made in part from post-consumer recycled PET plastic bottles.
In June,
we leased an additional 0.2 million
square foot manufacturing facility in Rock Hill, SC to further expand
our manufacturing capacity and capabilities
.
Results of Operations
Summary of 2014
financial results
During the
second quarter
of 2014,
we reported improved revenue
as compared to the
second quarter
of
2013
as our worldwide businesses continued to expand
,
reflecting growth in design and manufacturing printers
demand and increased materials, software and service revenue
. R
evenue for the
second quarter
of 201
4
increased
by
25.4%
, or $
30.7
million, to $
151.5
million compared to
$
120.8
million in
the
second quarter
of
2013
.
Higher revenue offset by increased
SG&A
expenses
,
primarily due to increased sales an
d marketing expenses and additional
staffing due to our expanding portfolio
and acquisitions
,
and
higher R&D expenses
related to our portfolio expansion and diversificat
ion,
new product
developments
and acquisitions
,
resulted in net income of
$2.1
million for the
second quarter
of 2014
, compared to net income of
$9.3
million for the same period in
2013
.
Printers and other products revenue
increased
by $
7.8
million
, or
14.4
%, from
the
second quarter
of
2013
, to
$61.9
million,
driven by expanding use and rising demand for our design and manufacturing printers
.
Print materials sales for the
second quarter
of 2014
were
$38.0
million, an increase
of
$8.8
million
, or
29.8
%,
from the
second quarter
of
2013
as revenue from materials wa
s impacted by
continued expansion of printers installed over past periods.
Revenue from services
increased
by
$14.2
million
, or
38.1
%,
to
$51.5
million in the
second quarter
of 2014
from
$37.3
million in the same quarter in
2013
. The increase
in services revenue reflects increased revenue
from our Quickparts, printer and software services and the addition of Medical Modeling 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 12 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 and organic growth is calculated based on our prior year total revenue. In the
second quarter
of 2014, our organic growth was
10.0
%
compared to
30.1%
for the
second quarter
of 2013.
For the six months ended June 30, 2014 and 2013, our organic growth was
18.3%
and 26.2%, respectively.
Healthcare revenue includes sales of printers, print materials, and services for hearing aid, dental,
personalized
medical device
s
and other health-related applications.
For
the
second quarter
of 2014
, healthcare
revenue
increased
45.8
%
and
made
up
18.2%
, or
$27.5
million, of our total revenue compared to
15.6%
, or
$18.9
million, in the
second quarter
of
2013
, primarily due to our increased penetration and growth in healthcare
applications and the addition of Medical Modeling
.
During the
first six months
of 2014, healthcare revenue
increased
49.0%
and made up
16.4%
, or
$49.1
million, of our total revenue compared to
14.8%
, or
$33.0
million, in the
2013 period.
Consumer revenue includes sales of Cube
®
3D printers and their related print
materials, Sense 3D scanners and other products
and services
related to consumer products and retail channels
. For the
second quarter
of 2014
, cons
umer
revenue
decreased
13.6%
to
$
7.4
million, or
4.9
% of our total revenue,
compared to $
8.5
million, or
7.0
%
of
total
revenue
,
in the
second quarter
of
2013
.
The decrease was primarily driven by delayed orders as customers awaited the availability of announced new products.
During the first six months of 2014
, consumer
solutions
revenue
increased
37.5%
, to
$17.0
million, or
5.7%
of
total revenue, compared to
$12.4
million, or
5.6
% of
total
revenue, in the 2013 period
, driven by expanded consumer offerings and increasing demand
.
Our gross profit in the
second quarter
of 201
4
improved
by $
9.8
million,
primarily
due to
our higher level of revenue
from increases
across all revenue categories.
Our gross profit margin
decreased
to
47.8%
in the
second quarter
of 2014
from
51.8
%
in the
second quarter
of
2013
,
reflecting current sales mix and timing of
sales, availability of new products, absorption of legacy product costs and manufacturing expansion costs
.
Our total operating expenses
increased
by
$22.2
million in the
second quarter
of 2014
,
to
$68.0
million
,
from
$45.8
million in the same
2013
quarter. The increase reflected higher selling, general and administrative expenses primarily due to
increased sales and marketing expenses and higher staffing due to our expanding portfolio
.
The increase also re
flects
a
n
$8.1
million increase in research and development expenses related to
our portfolio expansion
,
accelerated new products developments
,
and the addition of the engineering team in Wilsonville, Oregon
.
Our operating income for the
second quarter
of 201
4 decreased to $4.4
million
from
$16.8
million in the
same
2013
quarter. This decrease
in operating income
is due to
lower gross profit margin and
higher operating expenses
as
discussed in more detail below
.
Our operating activities
generated
$
19.3
millio
n of cash during the first six
months of 2014, which is discussed in further detail below. We
used
$63.2
million to fund our strategic investing activities, including acquisition costs. Financing activities during the first
six
months of 2014
generated
$307.5
million of cash
, primarily
due to proceeds from our equity raise in the second quarter
. In total, our unrestricted cash balance at
June 30, 2014
was
$570.3
million compared to
$306.3
million at December 31, 2013.
Second quarter
comparison of revenue by class of product and service
Table 1 sets forth our change in revenue by class of product and service
s
for the
second quarter
of 201
4
compared to the
second quarter
of
2013
:
Table 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Printers and Other Products
|
|
Print Materials
|
|
Services
|
|
Totals
|
Revenue – 2nd quarter 2013
|
|
$
|
54,190
|
|
44.9
|
%
|
|
$
|
29,275
|
|
24.2
|
%
|
|
$
|
37,322
|
|
30.9
|
%
|
|
$
|
120,787
|
|
100
|
%
|
Change in revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core products and services
|
|
|
1,587
|
|
2.9
|
|
|
|
5,482
|
|
18.7
|
|
|
|
8,594
|
|
23.0
|
|
|
|
15,663
|
|
12.9
|
|
New products and services
|
|
|
7,352
|
|
13.6
|
|
|
|
4,814
|
|
16.4
|
|
|
|
4,951
|
|
13.3
|
|
|
|
17,117
|
|
14.2
|
|
Price/Mix
|
|
|
(1,869)
|
|
(3.4)
|
|
|
|
(2,133)
|
|
(7.3)
|
|
|
|
—
|
|
—
|
|
|
|
(4,002)
|
|
(3.3)
|
|
Foreign currency translation
|
|
|
688
|
|
1.3
|
|
|
|
598
|
|
2.0
|
|
|
|
661
|
|
1.8
|
|
|
|
1,947
|
|
1.6
|
|
Net change
|
|
|
7,758
|
|
14.4
|
|
|
|
8,761
|
|
29.8
|
|
|
|
14,206
|
|
38.1
|
|
|
|
30,725
|
|
25.4
|
|
Revenue – 2nd quarter 2014
|
|
$
|
61,948
|
|
40.9
|
%
|
|
$
|
38,036
|
|
25.1
|
%
|
|
$
|
51,528
|
|
34.0
|
%
|
|
$
|
151,512
|
|
100
|
%
|
We earn revenues from the sale of printers and other products, print materials and services. On a consolidated basis, revenue for the
second quarter
of 2014
increased
by $
30.7
million, or
25.4%
, compared to the
second quarter
of
2013
, reflecting increases in all classes of product and service.
The $
7.8
million
increase
in revenue from printers and other products compared to the
second quarter
of
2013 is driven by increased demand for design and manufacturing printers, including acquired direct metal printers
. Printers revenue
increased
$6.3
million, or
14.0%
, compared to the
second quarter
of
2013
. In connection with the expansion of our p
ro
fessional and retail channels, c
ertain resellers may purchase stock inventory in the ordinary course of business. For the
second quarter
of 201
4
,
we estimate that revenue related to reseller inventory amounted t
o approximately
8
% of total revenue
, which is impacted by timing of sales, expansion of our reseller channel and the
recent
shift from a partially direct sales model to the reseller channel selling our entire
portfolio, which
expanded the volume of transactions through the channel
.
Other products revenue includes software products
, perceptual
and haptic devices,
and Vidar digitizers. Other products revenue
totaled $
10.3
million for the
second quarter
of 2014
, including
$4.5
million of software products revenue
, a
n
18.1
%
increase
over 2013
, primarily from demand for our new perceptual devices and software products
. Other products revenue for the
second quarter
of 2013 totaled
$8.8
million
, including
$5.0
million of software revenue.
Due to the relatively high price of certain
professional
printers and a corresponding lengthy selling cycle and relatively low unit volume of the higher priced
professional
printer sales in any particular period, a shift in the timing and concentration of orders and shipments of a few printers from one period to another can significantly affect reported revenue in any given period. Revenue reported for printers sales in any particular period is also affected by
timing of
revenue recognition
under
rules prescribed by generally accepted accounting principles.
The $
8.8
million
increase
in revenue from print materials was aided by the improvement in printers sales and by the continued expansion of printers installed over past periods. Sales of integrated materials
increased
34.9
%
to $
27.0
million
and
represented
71.0%
of total materials revenue in the
second quarter
of 201
4
compared to
68.4
%
in the
second quarter
of
2013
.
The
increase
in service
s
revenue primarily
reflects increased revenue from our Quickparts solutions and the addition of Medical Modeling services, coupled with growing consumer and software services
. Service revenue from Quickparts
increased
21.6
% to
$28.8
million, or
56.0%
of total service revenue,
for the
second quarter
of 2
014
,
compared to
$23.7
million, or
63.5%
, of total service revenue in the
2013
period.
Services revenue from software
added
$3.2
million
in the
second quarter
of 2014 compared to $
1.9
million
in the
second quarter
of 2013
.
At
June 30, 2014
our backlog was $
31.9
million, compared to backlogs of
$28.6
million at
December 31, 2013
and
$18.0
million at
June 30
,
2013
.
Production and delivery of our printers is generally not characterized by long lead times, backlog is more dependent on timing of customers’ requested
delivery.
Currently, demand for direct metals printers outstrips our manufacturing capacity and delayed commercial shipment of new consumer products with a rising consumer order book contributed to a higher backlog
.
Backlog at June 30, 2014 includes $
23.1
million of
printers, primarily due to production, metal and consumer printer orders
.
In addition, Quickparts services lead time and backlog depends on whether orders are for rapid prototyping or longer-range production runs
. The backlog at
June 30, 2014
includes
$7.2
million of Quickparts services orders, compared to
$8.4
million at
June 30
,
2013
.
In addition to changes in sales volumes, including the impact of revenue from acquisitions, there are two other primary drivers of changes in revenues from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and the impact of fluctuations in foreign currencies.
As used in this Management’s Discussion and Analysis, the price and mix effects relate to changes in revenue that are not able to be specifically related to changes in unit volume. Among these changes are changes in the product mix of our materials and our printers as the trend toward smaller, lower-priced printers has continued and the influence of new printers and print materials on
our operating results has grown.
Change in
second quarter
revenue by geographic region
Each geographic region contributed to our higher level of revenue in
the
second quarter
of 201
4
. Table 2 sets forth the change in revenue by geographic area for the
second quarter
of 201
4
compared to the
second quarter
of
2013
:
Table 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
U.S.
|
|
Europe
|
|
Asia-Pacific
|
|
Total
|
Revenue – 2nd quarter 2013
|
|
$
|
67,870
|
|
56.2
|
%
|
|
$
|
31,855
|
|
26.4
|
%
|
|
$
|
21,062
|
|
17.4
|
%
|
|
$
|
120,787
|
|
100
|
%
|
Change in revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
11,678
|
|
17.2
|
|
|
|
8,056
|
|
25.3
|
|
|
|
13,046
|
|
61.9
|
|
|
|
32,780
|
|
27.1
|
|
Price/Mix
|
|
|
(653)
|
|
(1.0)
|
|
|
|
(59)
|
|
(0.2)
|
|
|
|
(3,290)
|
|
(15.6)
|
|
|
|
(4,002)
|
|
(3.3)
|
|
Foreign currency translation
|
|
|
—
|
|
—
|
|
|
|
2,163
|
|
6.8
|
|
|
|
(216)
|
|
(1.0)
|
|
|
|
1,947
|
|
1.6
|
|
Net change
|
|
|
11,025
|
|
16.2
|
|
|
|
10,160
|
|
31.9
|
|
|
|
9,540
|
|
45.3
|
|
|
|
30,725
|
|
25.4
|
|
Revenue – 2nd quarter 2014
|
|
$
|
78,895
|
|
52.1
|
%
|
|
$
|
42,015
|
|
27.7
|
%
|
|
$
|
30,602
|
|
20.2
|
%
|
|
$
|
151,512
|
|
100
|
%
|
Revenue from U.S. operations in the
second quarter
of 201
4
increased
by $
11.0
million, or
16.2%
, to
$78.9
million
from
$67.9
million in the
second quarter
of
2013
. The increase was due to higher volume, partially offset by the unfavorable combined effect of price and mix.
Revenue from non-U.S. operations in the
second quarter
of 201
4
increased
by
$19.7
million, or
37.2%
, to
$72.6
million from
$52.9
million in
the
second quarter
of
2013
. Revenue from non-U.S. operations as a percent of total revenue was
47.9%
and
43.8%
, respectively, at
June 30, 2014
and
2013
. The increase in non-U.S. revenue, excluding the effect of foreign currency translation, was
33.2%
in the
second quarter
of 201
4
compared t
o
44.0
%
in the
second quarter
of
2013
.
Revenue from European operations
in the
second quarter
of 2014
increased
by
$10.1
million, or
31.9%
, to
$42.0
million from
$31.9
million in the
second quarter
of 2013
. This
increase
was due to a
$8.1
million
increase
in volume,
a
$2.2
million
favorable
impact of foreign currency translation, partially offset by
a
$0.1
million
unfavorable
combined effect of price and mix
.
Revenue from Asia-Pacific operations
in the
second quarter
of 2014
increased
by
$9.5
million, or
45.3%
, to
$30.6
million from
$21.1
million in the
second quarter
of 2013,
due primarily to
a favorable
$13.0
million
increase
in volume, partially offset by a
$3.3
million
unfavorable
combined effect of price and mix and a
$0.2
million
unfavorable
impact of foreign currency translation.
Gross profit and gross profit margins
Table 3 sets forth gross profit and gross profit margins for our products and services for the
second quarter
s of 201
4
and
2013
:
Table 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
2014
|
|
2013
|
(Dollars in thousands)
|
Gross Profit
|
|
Gross Profit Margin
|
|
Gross Profit
|
|
Gross Profit Margin
|
Printers and other products
|
$
|
22,134
|
|
35.7
|
%
|
|
$
|
24,701
|
|
45.6
|
%
|
Print materials
|
|
26,618
|
|
70.0
|
|
|
|
21,548
|
|
73.6
|
|
Services
|
|
23,646
|
|
45.9
|
|
|
|
16,334
|
|
43.8
|
|
Total
|
$
|
72,398
|
|
47.8
|
%
|
|
$
|
62,583
|
|
51.8
|
%
|
On a consolidated basis, gross profit for the
second quarter
of 201
4
increased
by $
9.8
million to
$72.4
million from
$62.6
million in the
second quarter
of
2013
,
primarily as a result of
higher sales from all revenue categories.
Consolidated gross profit margin in the
second quarter
of 201
4
decreased
by
4.0
percentage points to
47.8%
from
51.8
%
for the
2013
quarter.
The lower gross profit margin reflects
a change in
revenue
mix with a higher portion of revenue from lower margin products, both overall and within
categories
,
as well as manufacturing expansion costs, availability of new products and absorption of legacy product costs
.
Printers
and other products gross profit for the
second quarter
of 201
4
decreased
by $
2.6
million, or
10.4
%,
to
$22.1
million from
$24.7
million in
the
2013
quarter
. G
ross profit margin for printers
and other products
decreased
by
9.9
percentage points to
35.7%
from
45.6
%
in the
2013
quarter
primarily
due to an unfavorable mix of printers and other products coupled with
manufacturing expansion, residual new product start up costs and a write down on inventory of legacy products.
Print materials gross profit for the
second quarter
of 201
4
increased
by
$5.1
million, or
23.5%
, to
$26.6
million from
$21.5
million in
the
2013
quarter, and gross profit margin for
print materials
decreased
by
3.6
percentage points to
70.0%
from
73.6
%
in the
2013
quarter
primarily due to the mix of materials sold during the quarter.
Gross profit for services for the
second quarter
of 201
4
increased
by
$7.3
million, or
44.8%
, to
$23.6
million from
$16.3
million in
th
e
2013
quarter
. G
ross prof
it margin for services
increased
by
2.1
percentage points to
45.9%
from
43.8%
in the
2013
quarter.
The
increase
in the gross profit margin was due to
the addition
of acquired higher margin medical services, a higher software contribution and
a
n
increase
in Quickparts gross profit margin to
43.1%
for the
second quarter
of 201
4
from
41.6
% in the
second quarter
of
2013
.
Operating expenses
As shown in Table 4, total operating expenses
increased
by $
22.2
million, or
48.6%
, to
$68.0
million in the
second quarter
of 201
4
from
$45.8
million in the
second quarter
of
2013
.
This
increase
was due to higher selling, general and administrative expenses and higher
research and development expenses,
both of
which
are
discussed
below.
Table 4
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
2014
|
|
2013
|
(Dollars in thousands)
|
Amount
|
|
% Revenue
|
|
Amount
|
|
% Revenue
|
Selling, general and administrative expenses
|
$
|
50,322
|
|
33.2
|
%
|
|
$
|
36,189
|
|
30.0
|
%
|
Research and development expenses
|
|
17,714
|
|
11.7
|
|
|
|
9,598
|
|
7.9
|
|
Total operating expenses
|
$
|
68,036
|
|
44.9
|
%
|
|
$
|
45,787
|
|
37.9
|
%
|
Selling,
general and administr
ative expenses
increased
by $
14.1
million to
$50.3
million in the
second quarter
of 201
4
compared to
$36.2
million in the
second quarter
of
2013
, and
increased
to
33.2%
of revenue in 201
4
compared to
30.0%
for
2013
.
The
increase
was due primarily to a
$7.8
million
increase
in
compensation costs due to
increased staffing
,
a
$3.1
million
increase
in amortization
, a
$0.8
million
increase
in
bad debts expense
, a
$0.7
million
increase
in
consultant fees
and
a
$0.7
million
increase
in
marketing
costs.
Research and development expenses
increased
by
$8.1
million, or
84.6%
, to
$17.7
million in the
second quarter
of 201
4
from
$9.6
million in the
second quarter
of
2013
.
This
increase
was primarily due to a
$4.0
million
increase
in compensation expenses
related to
talent expansion
, a
$1.5
million
increase
in R&D materials
related to new product development
, a $
0.6
million
increase
in
consulting fees
,
a
$0.5
million
increase
in
depreciation expense
and a $0.4 million increase in facility costs
.
Income from operations
Our income from operations of $
4.4
million for the
second quarter
of 201
4
decreased
from
$16.8
million in
the
second quarter
of
2013
. See
Gross
p
rofit and gross profit margins
and
Operating expense
s
above.
The following table sets forth operating income by geographic area for the
second quarter
of 201
4
compared to
2013
:
Table 5
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
(Dollars in thousands)
|
2014
|
|
2013
|
Income (loss) from operations
|
|
|
|
|
|
United States
|
$
|
(7,036)
|
|
$
|
11,643
|
Germany
|
|
451
|
|
|
(318)
|
Other Europe
|
|
2,124
|
|
|
235
|
Asia Pacific
|
|
9,455
|
|
|
5,476
|
Subtotal
|
|
4,994
|
|
|
17,036
|
Inter-segment elimination
|
|
(632)
|
|
|
(240)
|
Total
|
$
|
4,362
|
|
$
|
16,796
|
With respect to the U.S., in 201
4
and
2013
, the changes in operating income by geographic area reflected the same factors discussed above in
Gross profit and gross profit margins
and
Operating expenses
.
As most of our operations outside the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside the U.S. in 201
4
and
2013
resulted primarily from changes in transfer pricing
,
which is a function of revenue levels.
Interest and other expense, net
Interest and other expense, net was $
1.5
million in the
second quarter
of 201
4
compared with
$2.7
million in the
2013
quarter. The
lower
interest and other expense
is
primarily
due to lower
interest
expense
related to
conversions
of
the senior convertible notes. Interest and other expense, net in the
second quarter
of 201
4
reflected a foreign exchange
loss
of
$1.1
million. The
$2.7
million of interest and other expense, net in the
second quarter
of
2013
primarily reflected the
loss on conversion of convertible notes
, which amounted to
$3.5
million and
the related interest
, which amounted to
$0.8
million
, of which
$0.3
million represents non-cash amo
rtization,
partially offset by $1.1 million of interest income and
a foreign exchange
gain
of
$0.2
million.
Provision for income taxes
We recorded a
$
0.7
million provision for income taxes in the
second quarter
of 201
4
and a
$4.8
million provision for income taxes in the
second quarter
of
2013
. Our 201
4
provision for income taxes reflects income taxes in U.S. and non-U.S
. jurisdictions
. The
201
3
provision for income taxes primarily reflects
income taxes in U.S. and non-U.S. jurisdictions, reduced by the reversal of ASC-740 provisions in non-US jurisdictions
.
Net income
N
et income
attributable to the Company
for the
second quarter
of 201
4
decreased
$
7.2
million to
$2.1
million compared to
$9.3
million in the
second quarter
of
2013
. The principal reasons for the
decrease
, which are discussed in more detail above, were:
• the
$12.4
million
decrease
in operating
income
; partially offset by
• the
$4.1
million
decrease
in our ta
x provision and
• the
$1.2
million
decrease
in interest and other expense.
For the quarter ended
June 30, 2014
, average common shares for basic and diluted earnings per share were
106.4
million and basic and diluted earnings per share were
$0.02
. For the
quarter ended
June 30
, 2013
, average common shares for basic and diluted earnings per share were
96.2
million and basic and diluted earnings per share were
$0.10
.
Results of Operations – Six Months Comparison
Six months comparison of revenue by class of product and service
The table below sets forth our change in revenue by class of product and service for the first six months of 2014 compared to the first six months of 2013:
Table 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Printers and Other Products
|
|
Print Materials
|
|
Services
|
|
Total
|
Revenue – six months 2013
|
|
$
|
93,913
|
|
42.1
|
%
|
|
$
|
58,004
|
|
26.0
|
%
|
|
$
|
70,949
|
|
31.9
|
%
|
|
$
|
222,866
|
|
100
|
%
|
Change in revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core products and services
|
|
|
6,041
|
|
6.4
|
|
|
|
8,735
|
|
15.1
|
|
|
|
17,905
|
|
25.2
|
|
|
|
32,681
|
|
14.7
|
|
New products and services
|
|
|
22,514
|
|
24.0
|
|
|
|
13,393
|
|
23.1
|
|
|
|
8,299
|
|
11.7
|
|
|
|
44,206
|
|
19.8
|
|
Price/Mix
|
|
|
(1,091)
|
|
(1.2)
|
|
|
|
(2,584)
|
|
(4.5)
|
|
|
|
—
|
|
—
|
|
|
|
(3,675)
|
|
(1.6)
|
|
Foreign currency translation
|
|
|
1,324
|
|
1.4
|
|
|
|
929
|
|
1.6
|
|
|
|
939
|
|
1.3
|
|
|
|
3,192
|
|
1.4
|
|
Net change
|
|
|
28,788
|
|
30.6
|
|
|
|
20,473
|
|
35.3
|
|
|
|
27,143
|
|
38.2
|
|
|
|
76,404
|
|
34.3
|
|
Revenue – six months 2014
|
|
$
|
122,701
|
|
41.0
|
%
|
|
$
|
78,477
|
|
26.2
|
%
|
|
$
|
98,092
|
|
32.8
|
%
|
|
$
|
299,270
|
|
100
|
%
|
We earn revenues from the sale of printers and other products, print materials and services. On a consolidated basis, revenue for the fi
rst six months of 2014
increased
by
$76.4
million, or
34.3
%
, compared to the first six months of 2013
led by increased sales of printers and aided by increased sales of materials and services.
The
$
28.8
million
increase
in revenue from printers and other products compared to the first six mo
nths of 2013 is primarily
driven by increased demand for design and manufacturing printers, including acquired direct metal printers
. Printers revenue
increased
$25.3
million, or
32.8%
, compared to the first six months of 2013.
Other products revenue includes software products, perceptual and haptic devices, and Vidar digitizers. Other products revenue totaled
$
20.3
million for the first six months of 2014, including
$9.0
million of software p
roducts revenue, a
21.0%
increase
over 2013. Other products revenue for the first six months of 2013 totaled
$16.8
million, including
$9.2
million of software revenue.
Due to the relatively high price of certain
professional
printers and a corresponding lengthy selling cycle and relatively low unit volume of the higher priced
professional
printer sales in any particular period, a shift in the timing and concentration of orders and shipments of a few printers from one period to another can significantly affect reported revenue in any given period. Revenue reported for printers sales in any particular period is also affected by
timing of
revenue recognition
under
rules prescribed by generally accepted accounting principles.
The
$
20.5
million
increase
in revenue from print materials was aided by the improvement in printers sales and by the continued expansion of printers installed over past periods. Sales of integrated materials
increased
41.4%
to
$56.4
million and represented
71.9%
of total materials revenue for the first six months of 2014 compared to
68.8
%
for the first six months of 2013.
The
increase
in services revenue primarily reflects revenue from our Quickparts
solutions and addition of Medical Modeling services, coupled with consumer and printer services growth
. Service revenue from Quickparts
increased
29.2%
to
$57.6
million, or
58.8%
of total service revenue,
for the
first six months
of 2
014, compared to
$44.6
million, or
62.9%
, of total service revenue in the
2013
period.
Se
rvices revenue from software added
$6.0
million in the
first six months
of 2014 compared to
$2.7
million
in the
first six months
of 2013.
In addition to changes in sales volumes, including the impact of revenue from acquisitions, there are two other primary drivers of changes in revenues from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and the impact of fluctuations in foreign currencies.
As used in this Management’s Discussion and Analysis, the price and mix effects relate to changes in revenue that are not able to be specifically related to changes in unit volume. Among these changes are changes in the product mix of our materials and our printers as the trend toward smaller, lower-priced printers has continued and the influence of new printers and print materials on our operating results has grown.
Change in first six months revenue by geographic region
Each geographic region contributed to our higher level of revenue in first six months of 2014. Table 7 sets forth the change in revenue by geographic area for the first six months of 2014 compared to the first six months of 2013:
Table 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
U.S.
|
|
Europe
|
|
Asia-Pacific
|
|
Total
|
Revenue – six months 2013
|
|
$
|
125,023
|
|
56.1
|
%
|
|
$
|
60,435
|
|
27.1
|
%
|
|
$
|
37,408
|
|
16.8
|
%
|
|
$
|
222,866
|
|
100
|
%
|
Change in revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
23,821
|
|
19.1
|
|
|
|
20,800
|
|
34.4
|
|
|
|
32,266
|
|
86.3
|
|
|
|
76,887
|
|
34.5
|
|
Price/Mix
|
|
|
(1,917)
|
|
(1.5)
|
|
|
|
3,827
|
|
6.3
|
|
|
|
(5,585)
|
|
(14.9)
|
|
|
|
(3,675)
|
|
(1.6)
|
|
Foreign currency translation
|
|
|
—
|
|
—
|
|
|
|
4,517
|
|
7.5
|
|
|
|
(1,325)
|
|
(3.5)
|
|
|
|
3,192
|
|
1.4
|
|
Net change
|
|
|
21,904
|
|
17.6
|
|
|
|
29,144
|
|
48.2
|
|
|
|
25,356
|
|
67.9
|
|
|
|
76,404
|
|
34.3
|
|
Revenue – six months 2014
|
|
$
|
146,927
|
|
49.1
|
%
|
|
$
|
89,579
|
|
29.9
|
%
|
|
$
|
62,764
|
|
21.0
|
%
|
|
$
|
299,270
|
|
100
|
%
|
Revenue from U.S. operations in the first six months of 2014
increased
by
$21.9
million, or
17.6%
, to
$146.9
million from $125.0 million in the first six months of 2013. The
increase
was due to
higher
volume, partially offset by the unfavorable combined effect of price and mix.
Revenue from non-U.S. operations in the first six months of 2014
increased
by
$54.5
million, or
55.7%
, to
$152.3
million from $97.8 million for the first six months of 2013. Revenue from non-U.S. operations as a percent of total revenue was
50.9%
and 43.9%, respectively, for the first six months of 2014 and 2013. The
increase
in non-U.S. revenue, excluding the effect of foreign currency translation, was
51.1%
for the first six months of 2014 compared t
o
43.4
%
for the first six months of 2013.
Revenue from European operations in the first six months of 2014
increased
by
$29.2
million, or
48.2%
, to
$89.6
million from
$60.4
million in the first six months of 2013. This
increase
was due to a
$20.8
million
increase
in volume, a
$4.5
million
favorable
impact of foreign currency translation,
and a
$3.8
million
favorable
combined effect of price and mix
.
Revenue from Asia-Pacific operations in the first six months of 2014
increased
by
$25.4
million, or
67.9%
, to
$62.8
million from
$37.4
million in the first six months of 2013,
due primarily to
a favorable
$32.3
million
increase
in volume, partially offset by a
$5.6
million
unfavorable
combined effect of price and mix and a
$1.3
million
unfavorable
impact of foreign currency translation.
Gross profit and gross profit margins
Table 8 sets forth gross profit and gross profit margin for our products and services for the first six months of 2014 and 2013:
Table 8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
(Dollars in thousands)
|
Gross Profit
|
|
Gross Profit Margin
|
|
Gross Profit
|
|
Gross Profit Margin
|
Printers and other products
|
$
|
46,296
|
|
37.7
|
%
|
|
$
|
42,530
|
|
45.3
|
%
|
Print materials
|
|
56,834
|
|
72.4
|
|
|
|
42,426
|
|
73.1
|
|
Services
|
|
44,740
|
|
45.6
|
|
|
|
31,104
|
|
43.8
|
|
Total
|
$
|
147,870
|
|
49.4
|
%
|
|
$
|
116,060
|
|
52.1
|
%
|
On a consolidated basis, gross profit for the first six months of 2014
increased
by
$31.8
million to
$147.9
million from
$116.1
million in the first six months of 2013,
primarily as a result of
higher sales from all revenue categories.
Consolidated gross profit margin in the
first six months
of 201
4
decreased
by
2.7
percentage points to
49.4%
from
52.1
%
for the
2013
period
.
The lower gross profit margin reflects a change in revenue
mix, with lower margin products making up a higher portion of
revenue, combined with manufacturing expansion costs, new product start-up costs and absorption of legacy product costs
.
Printers
and other products gross profit for the
first six months
of 201
4
increased
by
$3.8
million, or
8.9%
,
to
$46.3
million from
$42.5
million in
the
2013
period
, due to higher revenue. G
ross profit margin for printers
and other products
decreased
by
7.6
percentage points to
37.7%
from
45.3
%
in the
2013
period
primarily
due to an unfavorable mix of lower margin products making up a higher portion of revenue coupled with manufacturing expansion
and residual new product start
-
up costs and a write down on inventory of legacy products.
Print materials gross profit for the
first six months
of 201
4
increased
by
$14.4
million, or
34.0%
, to
$56.8
million from
$42.4
million in
the
2013
period
, and gross profit margin for
print materials
decreased
by
0.7
percentage points to
72.4%
from
73.1
%
in the
2013
period due to the mix of materials sold during the
period
.
Gross profit for services for the
first six months
of 2014
increased
by
$13.6
million, or
43.8%
, to
$44.7
million from
$31.1
million in th
e
2013
period
and gross prof
it margin for services
increased
by
1.8
percentage points to
45.6%
from 43.8%
in the
2013
period
.
The
increase
in the gross profit margin was due to the addition
of higher margin Medical Modeling services, higher software contribution
and a
n
increase
in Quickparts gross profit margin to
42.3%
for the
first six months
of 2014 from
41.5%
in the
first six months
of
2013
.
Operating expenses
As shown in Table 9, total operating expenses
increased
by
$52.3
million, or
63.9%
, to
$134.0
million in the first six months of 2014 from
$81.7
million in the first six months of 2013. This
increase
was due to
higher
selling, general and administrative expenses and
higher
research and development expenses, both of which are discussed below.
Table 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
(Dollars in thousands)
|
Amount
|
|
% Revenue
|
|
Amount
|
|
% Revenue
|
Selling, general and administrative expenses
|
$
|
99,042
|
|
33.1
|
%
|
|
$
|
65,643
|
|
29.5
|
%
|
Research and development expenses
|
|
34,949
|
|
11.7
|
|
|
|
16,102
|
|
7.2
|
|
Total operating expenses
|
$
|
133,991
|
|
44.8
|
%
|
|
$
|
81,745
|
|
36.7
|
%
|
Selling,
general and administr
ative expenses
increased
by
$33.4
million to
$99.0
million in the
first six months
of 2014 compared to
$65.6
million in the
first six months
of 2013, and
increased
to
33.1%
of revenue in 201
4
compared to
29.5%
for 2013.
The
increase
was due primarily to a
$16.1
million
increase
in
compensation costs due to
increased s
taffing,
a
n
$8.5
million
increase
in amortization
, a
$1.6
million
increase
in consulting fees, a
$0.9
million
increase
in
marketing
expense
s
and a
$0.7
million
increase
in occupancy costs.
Research and development expenses
increased
by
$18.8
million, or
117.0%
, to
$34.9
million in the
first six months
of 2014 from
$16.1
million in the
first six months
of 2013.
This
increase
was primarily due to a
$8.5
million
increase
in compensation expenses
related to
talent expansion, a
$3.1
million
increase
in R&D materials related to new product development, a
$0.9
million
increase
in consulting fees
and a
$0.8
million
increase
in depreciation expense
.
Income from operations
Our income from operations of $
13.9
million for the first six months of 2014
decreased
from
$34.3
million in the first six months of 2013. See
Gross profit and gross profit margins
and
Operating expenses
above.
The following table sets forth operating income by geographic area for the first six months of 2014 compared to 2013:
Table 10
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(Dollars in thousands)
|
2014
|
|
2013
|
Income (loss) from operations
|
|
|
|
|
|
United States
|
$
|
(9,066)
|
|
$
|
22,912
|
Germany
|
|
648
|
|
|
343
|
Other Europe
|
|
4,525
|
|
|
2,001
|
Asia Pacific
|
|
18,522
|
|
|
9,793
|
Subtotal
|
|
14,629
|
|
|
35,049
|
Inter-segment elimination
|
|
(750)
|
|
|
(734)
|
Total
|
$
|
13,879
|
|
$
|
34,315
|
|
|
|
|
|
|
With respect to the U.S., in 2014 and 2013, the changes in operating income by geographic area reflected the same factors discussed above in
Gross profit and gross profit margins
and
Operating expenses
.
As most of our operations outside the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside the U.S. in 201
4
and
2013
resulted primarily from changes in transfer pricing
,
which is a function of revenue levels.
Interest and other expense, net
Interest and other expense, net was $
2.5
million in the
first six months
of 201
4
compared with
$12.7
million in the
2013
period
. The
lower
interest and other expense
is
primarily
due to lower
interest
expense
related to
conversions
of
the senior convertible notes. Interest and other expense, net in the
first six months
of 201
4
primarily
reflected a foreign exchange
loss
of
$1.3
million
and interest expense of $0.8 million
. The
$12.7
million of interest and other expense, net in the
first six months
of
2013
primarily reflected the
loss on conversion of convertible notes
, which amounted to
$9.3
million and the related interest, which amounted to
$2.2
million
, of which
$0.8
million represents non-cash amo
rtization,
and also reflected a foreign exchange
loss
of
$0.8
million.
Provision for income taxes
We recorded a $
4.3
million provision for income taxes in the
first six months of 2014 and a $6.4
million provision for income taxes in the
first six months
of
2013
. Our 201
4
provision for income taxes reflects income taxes in U.S. and non-U.S
. jurisdictions
. The
201
3
provision for income taxes primarily reflects
income taxes in U.S. and non-U.S. jurisdictions, reduced by the reversal of ASC-740 provisions in non-US jurisdictions.
Net income
Net income attributable to the Company for the first six months of 2014
decreased
$8.2
million to
$7.0
million compared to
$15.2
million in the first six months of 2013. The principal reasons for the
decrease
, which are discussed in more detail above, were:
• the
$20.4
million
decrease
in operating income
; partially offset by
• the
$10.2
million
decrease in interest and other expense
and
• the $2.1 million decrease in our provision for income tax
es
.
For
the six months ended June 30, 2014, average common shares for basic and diluted earnings per share were
105.0
million and basic and diluted earnings per share were
$0.07
. For the six months ended June 30, 2013, average common shares for basic and diluted earnings per share were
94.0
million and basic and diluted earnings per share were
$0.16
.
Other Financial Information
In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, management believes non-GAAP financial measures
,
which adjust net income and earnings per share are useful to investors in evaluating our operating performance.
We use non-GAAP financial measures of adjusted net income and adjusted earnings per share to supplement our
unaudited condensed c
onsolidated
f
inancial
s
tatements 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 s
tock-based compensation expenses
. We exclude the tax-effected stock-based compensation expenses
from 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.
|
|
·
|
|
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 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 loss on litigation
and tax
settlements
.
We exclude the tax-effected
net gain or loss on acquisitions and litigation settlements from
interest and other expense
, net.
|
Reconciliation of GAAP Net Income to Non-GAAP Financial Measures
Table
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands, except per share amounts)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
GAAP net income attributable to 3D Systems Corporation
|
|
$
|
2,125
|
|
|
$
|
9,343
|
|
|
$
|
7,002
|
|
|
$
|
15,226
|
Cost of sales adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
70
|
|
|
|
66
|
|
|
|
135
|
|
|
|
125
|
Operating expense adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
8,141
|
|
|
|
5,018
|
|
|
|
17,269
|
|
|
|
8,771
|
Acquisition and severance expenses
|
|
|
2,405
|
|
|
|
2,504
|
|
|
|
3,395
|
|
|
|
4,702
|
Non-cash stock-based compensation expense
|
|
|
8,363
|
|
|
|
3,125
|
|
|
|
15,639
|
|
|
|
5,346
|
Interest and other expense adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash interest expense
|
|
|
98
|
|
|
|
285
|
|
|
|
194
|
|
|
|
753
|
Loss on convertible notes
|
|
|
—
|
|
|
|
3,538
|
|
|
|
—
|
|
|
|
9,253
|
Net loss on litigation and tax settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
Tax effect
|
|
|
(4,579)
|
|
|
|
(4,928)
|
|
|
|
(11,952)
|
|
|
|
(8,375)
|
Non-GAAP net income
|
|
$
|
16,623
|
|
|
$
|
18,951
|
|
|
$
|
31,682
|
|
|
$
|
37,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP basic and diluted earnings per share
|
|
$
|
0.16
|
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
|
$
|
0.40
|
Financial Condition and Liquidity
Table
12
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2014
|
|
December 31, 2013
|
Cash and cash equivalents
|
|
$
|
570,262
|
|
$
|
306,316
|
Working capital
|
|
$
|
692,668
|
|
$
|
416,399
|
Total stockholders’ equity attributable to 3D Systems Corporation
|
|
$
|
1,284,767
|
|
$
|
932,646
|
Our unrestricted cash and cash equivalents
increased
by
$264.0
million to
$570.3
million at
June 30, 2014
from
$306.3
million at
December 31, 2013
. We
generated
$19.3
million of
cash
from
operating activities
. Cash from operations
consist
ed
of
$7.1
million
of
net
income, including
$30.4
million of non-cash
charges and
$18.2
million of cash
used
by net
changes in operating accounts.
We
used
$63.2
million of cash in investing activities
, including $
53.5
million to fund acquisitions and other investing activities
.
Cash from fi
nancing activities
provided
$307.5
million of cash
, including $299.7 million of net proceeds from our common stock offering c
ompleted in May
2014
.
See
Cash flow
and
C
apitalized lease obligation
s
below.
Cash and cash equivalents at
June 30, 2014
includes $
23.5
million of cash held overseas, compared to
$19.9
million at
December 31, 2013
. Cash held overseas is used in our foreign operations for working capital purposes and is considered to be permanently invested; consequently, we have not provided for any taxes on repatriation.
Cash equivalents comprise funds held in money market instruments and are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments. We minimize our credit risk by investing primarily in investment grade, liquid instruments and limit exposure to any one issuer depending on credit quality.
Our net working c
apital
increased
by $
276.3
million to
$692.7
million at
June 30, 2014
from
$416.4
million at
December 31, 2013
, primarily due to the factors discussed below.
Accounts receivable, net,
increased
by
$5.3
million to
$137.4
million at
June 30, 2014
from
$132.1
million at
December 31, 2013
. Gross accounts receivable
increased
by
$8.3
million from
December 31, 2013
. With a greater portion of our revenue mix shifting to resellers and retailers, as part of our planned business model, a larger proportion of our sales are transacted on standard credit terms. This shift in our business model was exacerbated by the combined effect of the timing and concentration of orders during the
last month of the
quarter a
s a result of increasing demand and
meaningful contributions from new products
, which have
driven days sales outstanding to
83
days
at
June 30, 2014
from
79
days at
December 31, 2013
. A
ccounts receivable more than 9
0 days past due
increased
to
13.4%
of gross
receivables from
9.1
% at
December 31, 2013
.
Inventories, net
increased
by
$15.1
million to
$90.2
million at
June 30, 2014
from
$75.1
million at
December 31, 2013
. This
increase
resulted
primarily fro
m
a
n
$8.6
million
increase
in raw materials inventory
and
a
$7.4
million
increase
in finished goods inventory due to the timing of
assembly production,
sales and revenue recognition at quarter-end,
which
all
also impacts our backlog, and
a one-time write down of inventory of legacy products
.
We maintained
$7.1
million of inventory reserves at
June 30, 2014
and
$4.3
million of such reserves at
December 31, 2013
.
The majority of our inventory consists of finished goods, including printers, print materials and service parts. Inventory also consists of raw materials and spare parts for the in-house assembly and support service for consumer
and professional 3D printers.
We outsource the assembly and refurbishment of production printers; therefore, we generally do not hold in inventory most parts for production printer assembly or refurbishment.
Accounts pa
yable
increased
by
$13.7
million to
$65.4
million at
June 30, 2014
from
$51.7
million at
December 31, 2013
. The
increase
is
primarily related to the normal timing of our scheduled expense payments
.
Prepaid expenses and other current assets
increased
by
$6.9
million to
$14.1
million at
June 30, 2014
from
$7.2
million at
December 31, 2013
.
This
increase
is primarily due to
prepaid materials
and insurance.
The changes in the
first
six
months of 2014
that make up the other components of working capital not discussed above arose in the ordinary course of business.
Differences between the amounts of working capital item changes in the cash flow statement and the balance sheet changes for the corresponding items are primarily the result of foreign currency translation adjustments.
We have relied on our unrestricted cash
,
cash flow from operations
and capital markets transactions to meet our cash requirements for working capital, capital expenditures and acquisitions; h
owever, it is possible that we may need to raise additional funds to finance our activities beyond the next twelve months or to consummate significant acquisitions of other businesses, assets, products or technologies. If needed, we may be able to raise such funds by issuing equity or debt securities to the public or selected investors, or by borrowing from financial institutions
, selling assets or restructuring debt
.
Cash flow
The table below summarizes the cash provided by or used in operating activities, investing activities and financing activities, as well as the effect of changes in foreign currency exchange rates on cash, for the
first
six
months of 2014
and
2013
.
Table
13
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
(Dollars in thousands)
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
19,330
|
|
$
|
3,395
|
Cash used in investing activities
|
|
|
(63,173)
|
|
|
(90,881)
|
Cash provided by financing activities
|
|
|
307,466
|
|
|
281,642
|
Effect of exchange rate changes on cash
|
|
|
323
|
|
|
(760)
|
Net increase in cash and cash equivalents
|
|
$
|
263,946
|
|
$
|
193,396
|
Cash flow from operating activities
For the
six
months ended
June 30, 2014
, our operating activities
provided
$19.3
million of net cash
. This
source
of cash consisted primarily of net income plus the effects of non-cash items and changes in working capital, which are described above
.
Our cash from operations fluctuates from quarter to quarter due to the timing of transactions and receipts and payments of cash
.
For the
six
months ended
June 30
,
2013
, our operating activities
provided
$3.4
million of net cash. This
source
of cash consisted
primarily of net income plus the effects of non-cash items and changes in working capital.
Cash flow from investing activities
Net cash
used
in investing activities for
the
first
six
months of 2014
decreased
to
$63.2
million from
$90.9
million for the
first
six
months of 201
3
. This
decrease
was primarily due to
$53.5
million
of cash paid for acquisitions in the
first
six
months of 2014
compared to
$86.2
million paid for acquisitions in the
2013
period.
Cash flow
used
in investi
ng activities also includes minority
investments
of less than 20%
made
through 3D Ventures
in promising enterprises that
we believe
will benefit from or be powered by our technologies
and other investments or joint ventures
. During the
first
six
months of 2014
, w
e invested $
0.3
million in these
enterprises
and ventures
.
Cash flow from financing activities
Net cash
provided
by financing activities
increased
to
$307.5
million for the
six
months ended
June 30, 2014
compared to
$281.6
million in the
2013
period. C
ash from financing activities for
the
first
six
months of 2014
primarily
included $299.7
million net proceeds from a common stock offering and
$6.4
million of
tax benefits from share-based payment arrangements
. C
ash from financing activities for
t
he
six
months ended
June 30
,
2013
included
$272.1 million net proceeds from a common stock offering, $9.4
million of tax benefits from share-based payment arrangements,
$0.4
million of stock-based compensation proceeds, partially offset by
$0.2 million of cash paid in lieu of fractional shares and
$0.1 million of
capital lease payments.
Contractual commitments and off-balance sheet arrangements
Debt
In November 2011, we issued 5.50% Senior Convertible Notes due 2016 (“the Notes”) in an aggregate principal amount of $152.0 million. The Notes bear interest at a fixed rate of 5.50% per annum, payable June 15 and December 15 of each year while they are outstanding, beginning June 15,
201
2
. The net proceeds of the Notes were used to fund the acquisition of Z Corp and Vidar and for general corporate purposes.
Adjusted for the 3-for-2 stock split completed in February 2013, the Notes have a
conversion rate of
69
.
9032
shares of Common Stock per $1,000 principal amount of Notes, which amounts to a conversion price of $
14.31
per common share.
Upon conversion, the Company has the option to
pay
cash or
issue
Common Stock, or a combination th
ereof.
The aggregate principal amount of these Notes then outstanding matures on December 15, 2016, unless earlier converted or repurcha
sed in accordance with the terms of the Notes.
Conditions for conversion have been satisfied and the Notes are convertible. During the
second quarter and
six months
ended June 30,
201
4,
Note holders
did not convert any
Notes,
therefore, no loss on conversion was recognized in the
first six months of 2014.
During the
second quarter
and six months ended
June 30,
2013,
Note holders converted $20.8 million and $63.4 million aggregate principal amount of Notes, respectively, which converted into 1.5 million shares and 4.4 million shares of common stock, respectively. During the second quarter and six months ended
June 30,
2013,
the Company recognized a loss on the conversion of
these notes of $3.5
million
and $9.3
million
, respectively.
As of
June 30, 2014
, the aggregate amount of Notes outstanding was $
12.5
million.
The Notes contain a number of covenants covering, among other things, payment of
N
otes, reporting, maintenance of e
xistence and payment of taxes.
Failure to comply with these covenants, or any other event of default, could result in acceleration of the principal amount and accrued and unpaid interest on the
Notes.
We were in compliance with all covenants as of
June 30, 2014
.
See Note
8
to the
unaudited condensed c
onsolidated
f
inancial
s
tatements.
Capitalized lease obligations
Our capitalized lease obligations
, which primarily
relate to
a
lease agreement that we entered into during 2006 with respect to our Rock Hill facility
,
which covers the facility itself
,
decreased
to
$7.4
million at
June 30, 2014
from
$7.5
million at
December 31, 2013
primarily due to scheduled payments of principal on capital lease installments
.
Our outstanding capitalized lease obligations carrying values at
June 30, 2014
and
December 31, 2013
were as follows:
Table
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2014
|
|
December 31, 2013
|
Capitalized lease obligations:
|
|
|
|
|
|
|
Current portion of capitalized lease obligations
|
|
$
|
194
|
|
$
|
187
|
Capitalized lease obligations, long-term portion
|
|
|
7,181
|
|
|
7,277
|
Total capitalized lease obligations
|
|
$
|
7,375
|
|
$
|
7,464
|
O
ther contractual arrangements
Certain of our recent acquisitions contain earnout provisions under which the sellers of the acquired businesse
s can earn additional amounts.
The total amount of liabilities recorded for these earnouts at
June 30, 2014
and
December 31, 2013
was
$10.1
million and
$5.6
million, respectively.
As of
June 30, 2014
, we have supply commitments related to printer assemblies that to
tal $
65.6
million compared to
$41.1
million at
December 31, 2013
.
Off-balance sheet arrangements
We have no off-balance sheet arrangements and do not utilize any “structured debt,” “special purpose,” or similar unconsolidated entities for liquidity or financing purposes.
Financial instruments
We conduct business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, we are subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, we endeavor to match assets and liabilities in the same currency on our balance sheet and those of our subsidiaries in order to reduce these risks. We also, when we consider it to be appropriate, enter into foreign currency contracts to hedge exposures arising from those transactions.
We do not hedge or trade for speculative purposes, and our foreign currency contracts are generally short-term in nature, typically maturing in 90 days or less. We have elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, “Derivatives and Hedging,” and therefore, we recognize all gains and losses (realized or unrealized) in interest and other expense, net in our unaudited condensed consolidated statements of operations and comprehensive income.
There were no foreign exchange contracts at
June 30, 2014
or
December 31, 2013
.
See Note 7 of the unaudited condensed consolidated financial statements.
Changes in the fair value of derivatives are recorded in interest and other
expense, net, in our unaudited condensed consolidated statements of operations and comprehensive income. Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid and other current assets or in accrued liabilities in our unaudited condensed consolidated balance sheets.
The total impact of foreign currency related items on our unaudited condensed consolidated statements of operations and comprehensive income was a $
1.3
million
loss
for the
six
months ended
June 30, 2014
and
a
$0.8
million
loss
for the
six
months ended
June 30
,
2013
and a
$
1.7
million increase
in other comprehensive
income for the
six
months ended
June 30, 2014
compared to a $
5.7
million
decrease
in other comprehensive income
for the
first
six
months of 201
3
.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our
unaudited
condensed consolidated financial statements, see Note
1
to the unaudited condensed consolidated financial statements.
Critical Accounting Policies and Significant Estimates
For a discussion of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Estimates” in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
Forward-Looking Statements
Certain statements made in this Form 10-Q that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the cautionary statements and risk factors set forth below as well as other statements made in the Form 10-Q that may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.
In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in future or conditional tenses or that include terms such as “believes,” “belief,” “expects,” “intends,” “anticipates” or “plans” to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations as to future events and trends affecting our business. Forward-looking statements are based upon management’s current expectations concerning future events and trends and are necessarily subject to uncertainties, many of which are outside of our control. The factors stated under the heading “Cautionary Statements and Risk Factors” set forth below and those described in our other SEC reports, including our Form 10-K for the year ended
December 31, 2013
, as well as other factors, could cause actual results to differ materially from those reflected or predicted in forward-looking statements.
Any forward-looking statements are based on management’s beliefs and assumptions, using information currently available to us. We assume no obligation, and do not intend, to update these forward-looking statements.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from those reflected in or suggested by forward-looking statements. Any forward-looking statement you read in this Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified or referred to in this Form 10-Q and our other SEC reports, including our Form 10-K for the year ended
December 31, 2013
, which would cause actual results to differ from those referred to in forward-looking statements.
Cautionary Statements and Risk Factors
We recognize that we are subject to a number of risks and uncertainties that may affect our future performance. The risks and uncertainties described in Item 1A in our Form 10-K for the year ended
December 31, 2013
are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem not to be material also may impair our business operations. If any of these risks actually occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. The risks discussed in Item 1A in our Form 10-K for the year ended
December 31, 2013
also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.