3D SYSTEMS CORP - Quarter Report: 2014 March (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10‑Q

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

 

For the quarterly period ended March 31, 2014

 

OR

 

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

For the transition period from ____________to____________

 

Commission File No. 001-34220

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3D SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

_______________  _____________________________

 

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

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

 

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

 

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

 

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

Shares of Common Stock, par value $0.001, outstanding as of April 23, 2014:  103,509,956

 

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3D SYSTEMS CORPORATION

Quarterly Report on Form 10-Q for the

Quarter Ended March 31, 2014

 

TABLE OF CONTENTS

 

 

 

 

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PART I. — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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3D SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

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3D SYSTEMS CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

(1)  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of 3D Systems Corporation and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2013.

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the quarter ended March 31, 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

 

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

 

(2) Acquisitions

 

The Company completed one acquisition in the first quarter of 2014, which is discussed below.

 

On February 18, 2014, the Company acquired the assets of Digital Playspace, Inc., an online platform that combines home design, gaming, and community sharing to deliver a 3D create-and-make experience for children, families and adults. The fair value of the consideration paid for this acquisition, net of cash acquired, was $4,000, of which $2,000 was paid in cash and $2,000 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 Digital Playspace, Inc. have been integrated into the Company’s consumer operations. 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 first quarter 2014 acquisitions. Factors considered in determination of goodwill include synergies, vertical integration and strategic fit for the Company.  

 

The acquisition completed in the first 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 March 31, 2014 as follows:

 

 

 

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Subsequent Acquisitions

 

On April 2, 2014, the Company acquired the outstanding shares and voting rights of Medical Modeling Inc. Based in Golden, Colorado, Medical Modeling, Inc. is a provider of personalized surgical treatments and patient specific medical devices, including virtual surgical planning and clinical transfer tools, using 3D modeling. The acquisition is not significant to the Company’s assets or operating results.

 

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. 

 

(3)  Inventories

 

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

 

 

(4)  Property and Equipment

 

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

 

 

Depreciation and amortization expense on property and equipment for the quarters ended March 31, 2014 and 2013 was $3,036 and $2,180, respectively.

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(5)  Intangible Assets

 

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

 

For the quarters ended March 31, 2014 and 2013, the Company capitalized $210 and $177, 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 quarters ended March 31, 2014 and 2013 was $9,204 and $3,812, respectively.

 

Annual amortization expense for intangible assets for 2014, 2015, 2016, 2017 and 2018 is expected to be $29,767, $23,754, $20,752, $17,799 and $13,094, respectively.

 

(6)  Accrued and Other Liabilities

 

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

 

 

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

 

 

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(7)  Hedging Activities and Financial Instruments

 

The Company conducts business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, the Company is subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss. When practicable, the Company endeavors to match assets and liabilities in the same currency on its balance sheet and those of its subsidiaries in order to reduce these risks. When appropriate, the Company enters into foreign currency contracts to hedge exposures arising from those transactions. The Company has elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, “Derivatives and Hedging,” and therefore, all gains and losses (realized or unrealized) are recognized in "Interest and other expense, net”  in the condensed consolidated statements of operations and comprehensive income. 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 March 31, 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 quarters ended March 31, 2014 and 2013 reflected losses of  $205 and  $965, respectively.

 

(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 unsecured indebtedness.  They are also senior in right of payment to any subordinated indebtedness that the Company may incur in the future. 

 

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 March 31, 2014 and December 31, 2013:  

 

 

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 quarter 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.

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(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 quarters ended March 31, 2014 and 2013 was as follows:

 

 

The number of shares of restricted common stock awarded and the weighted average fair value per share during the quarters ended March 31, 2014 and 2013 were as follows:

 

 

 

During the first quarter of 2014, the Company granted restricted stock awards covering 233 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan, of which 30 shares were awarded to executive officers of the Company and 114 shares remained subject to acceptance at March 31, 2014. During the first quarter of 2013, the Company granted restricted stock awards covering 228 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan, of which 24 shares were awarded to executive officers of the Company.

 

No shares of common stock pursuant to the Company’s 2004 Restricted Stock Plan were granted to Non-Employee Directors during the first quarter of  2014 or 2013.

 

(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 quarters ended March 31, 2014 and 2013:

 

 

 

(11)  Earnings Per Share

 

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

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The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares at March 31, 2014 and 2013:

 

 

 

 

For the quarter ended March 31, 2014, average common shares for basic and diluted earnings per share were 103,546 and basic and diluted earnings per share were $0.05. For the quarter ended March 31, 2013, average common shares for basic and diluted earnings per share were 91,822 and basic and diluted earnings per share were $0.06.

 

(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:

 

 

 

 

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:

 

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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 ended March 31, 2014.

 

The carrying value of the senior convertible notes as of March 31, 2014 and December 31, 2013 was $11,500 and $11,416, respectively, net of the unamortized discount. As of March 31, 2014 and December 31, 2013, the estimated fair value of the senior convertible notes was $12,242 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 identical 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 value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when impairment is recognized. The Company has not recorded any impairments related to such assets and has had no other significant non-financial assets or non-financial liabilities requiring adjustments or write-downs to fair value as of March 31, 2014 or December 31, 2013.

 

(13)  Income Taxes

 

The Company’s effective tax rate was 42.0%  and 21.1%  for the quarters ended March 31, 2014 and 2013, respectively.

 

During the first quarter of 2014, the Company recorded return-to-provision adjustments totaling $571 that are non-temporary in nature.

 

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

 

Tax years 2010 to 2013 are subject to examination by the U.S. Internal Revenue Service. The Company has utilized U.S. loss carryforwards causing the years 1997 to 2007 to be subject to examination. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in 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, and sales and services offices, including Quickparts services, operated by subsidiaries in Europe (France, 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:

 

 

 

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

 

 

 

 

Intercompany sales were as follows:

 

 

 

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

 

 

 

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(15)  Commitments and Contingencies

 

The Company leases office space under various non-cancelable operating leases. Rent expense under operating leases was $2,311 and $1,378 for the quarters ended March 31, 2014 and 2013, respectively.

 

The Company has supply commitments for printer assemblies that total $61,021 at March 31, 2014, compared to $41,091 at December 31, 2013.

 

For certain of the acquisitions, the Company is obligated for deferred purchase price commitments. At March 31, 2014 and December 31, 2013, these commitments totaled  $4,500, which are due through 2014. Certain of the Company’s recent acquisitions contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total liabilities recorded for these earnouts as of March 31, 2014 and December 31, 2013 was $10,015 and $5,578, respectively. See Note 2 for details of acquisitions and related commitments. 

 

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 stereolithography 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.  

 

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

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Indemnification

 

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

 

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

 

(16)  Accumulated Other Comprehensive Income  

 

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

 

 

 

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 March 31, 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 Events

 

On April 2, 2014, the Company acquired Medical Modeling Inc., a provider of personalized surgical treatments and patient specific medical devices, including virtual surgical planning and clinical transfer tools, using 3D modeling. See Note 2.

 

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. See Note 2.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

We are subject to a number of risks and uncertainties that may affect our future performance that are discussed in greater detail in the sections entitled “Forward-Looking Statements” and “Cautionary Statements and Risk Factors” at the end of this Item 2 and that are discussed or referred to in Item 1A of Part II of this Form 10-Q.

 

Business Overview

 

We are a leading global provider of 3D printing centric design-to-manufacturing solutions, including 3D printers, print materials and on-demand custom parts for professionals and consumers alike. Our materials include plastics, metals, ceramics and edibles. We also provide integrated 3D scan-based design, freeform modeling and inspection tools. 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 real parts, empowering customers to manufacture the future.

 

We derive our consolidated revenue primarily from the sales of our printers, the sales of the related print materials and services, the sales of our Quickparts brand on-demand parts services and the sales of perceptual devices and software.

 

Recent Developments 

 

In January, we announced several new consumer products at the 2014 International Consumer Electronics Show (“CES”), including six new 3D printers: The Cube® 3 3D printer, expected to be released during the second quarter of 2014, the CubePro™ 3D printer, expected to be released during the second quarter of 2014, the ChefJet™ and ChefJet Pro 3D printers, expected to be released during the second half of 2014, printing in real sugar and chocolate; the CeraJet™, ceramic 3D printer is expected to be released during the second half of 2014, and the CubeJet™ desktop, full-color 3D printer expected to be released during the second half of 2014. We also unveiled the Touch™, a haptic-based mouse for 3D sculpting and design, including software, which is expected for commercial shipment during the second quarter of 2014. We previewed the iSense, a 3D scanner used with the  iPad for physical photography and optimized for seamless 3D printing, which is expected to be available in the second quarter of 2014. At CES, we also showcased the 3DMe® Photobooth, an integrated physical photography pod to bring the 3DMe experience to retail floors and event spaces, which we expect to commercialize in the second quarter of 2014.

 

In January, we announced a partnership with Intel Corporation to mainstream the adoption of 3D scanning and 3D printing. We will provide a 3DS software development kit and software for Intel-powered tablet devices and Intel’s new RealSense 3D camera during the second half of 2014. Also in January, we announced a multi-year joint development agreement with The Hershey Company to explore and develop innovative manufacturing platforms and prosumer and consumer 3D printers in creating edible sweets and foods.

 

In February, we announced the acquisition of Digital PlaySpace, Inc. (“DPS”), an innovative digital play platform that connects brands and retailers with consumers around printable play activities with creativity and design through its two leading digital properties, DigitalDollhouse.com and Dreamhouse Designer, a Facebook social gaming app. The DPS platform combines home design, gaming, and community sharing to deliver a vivid 3D create-and-make experience. 

 

In April, we announced the acquisition of Medical Modeling Inc., a provider of personalized surgical treatments and patient specific medical devices, including virtual surgical planning and clinical transfer tools, using 3D modeling.  Based in Golden, Colorado, Medical Modeling utilizes 3D printing-centric personalized surgery and patient-specific medical device solutions with FDA-cleared manufacturing processes, providing assistance on several patient cases for surgical planning tools, implants 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. 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 creates a strategic Latin American sales and service platform to drive accelerated adoption of our entire design-to-manufacturing solutions, provides us with significant in-region additive manufacturing service bureau capabilities and expands our global Quickparts full service offerings reach and ability to deliver the latest advanced manufacturing solutions and capabilities.

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Results of Operations

 

Summary of 2014 financial results

 

During the first quarter of 2014, we reported improved revenue and gross profits as compared to the first quarter of 2013 as our worldwide businesses continued to expand, reflecting growth in overall printers demand and increased materials, software and service revenue. Revenue for the first quarter of 2014 increased by 44.7%, or $45.7 million, to $147.8 million compared to $102.1 million in the first quarter of 2013. Higher revenue offset by increased SG&A expenses, primarily due to increased sales and marketing expenses and higher staffing due to our expanding portfolio, and higher R&D expenses related to our portfolio expansion and diversification and accelerated new product developments, resulted in net income of $4.9 million for the first quarter of 2014, compared to net income of $5.9 million for the same period in 2013. 

 

Printers and other products revenue increased by $21.0 million, or 53%, from the first quarter of 2013, to $60.8 million, both organically and from acquired software products and acquired direct metal printers.

 

Print materials sales for the first quarter of 2014 were $40.4 million, an increase of $11.7 million, or 40.8%, from the first quarter of 2013 as revenue from materials was  favorably impacted by continued expansion of printers installed over past periods.   

 

Revenue from services increased by $13.0 million, or 38.5%, to $46.6 million in the first quarter of 2014 from $33.6 million in the same quarter in 2013. The increase in services revenue reflects increased revenue from our printer services and Quickparts services.   

 

We calculate organic growth by comparing last year’s total revenue for the period to 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. 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 first quarter of 2014, our organic growth was 28.1%  compared to 22.1% for the first quarter of 2013.

 

During the first quarter of 2014, healthcare solutions revenue increased 53.2% and made up 14.7%, or $21.7 million, of our total revenue compared to 13.9%, or $14.1 million, in the first quarter of 2013, primarily due to our increased penetration and growth in healthcare applications.  Healthcare solutions revenue includes sales of printers, print materials, and services for hearing aid, dental, personalized medical devices and other health-related applications.

 

Consumer solutions revenue includes sales of Cube® Sense 3D scanners, 3D printers and their related print materials and other products and services related to consumer products and retail channels. For the first quarter of 2014, consumer revenue grew 149.8%, organically and from acquired revenue, to  $9.7 million, or 6.5% of our total revenue, compared to $3.9 million, or 3.8% of revenue, in the first quarter of 2013.

 

Our gross profit in the first quarter of 2014 improved by $22.0 million, primarily due to our higher level of revenue from increases across all revenue categories, including increased revenue from our higher gross profit margin print materials and services. Our gross profit margin decreased to 51.1% in the first quarter of 2014 from 52.4% in the first quarter of 2013 primarily due to a change in revenue mix, including printers and other products growth continuing to outpace other categories, coupled with the expansion of manufacturing capacity.

 

Our total operating expenses increased by $30.0 million in the first quarter of 2014 to $66.0 million from $36.0 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 reflected a $10.7 million increase in research and development expenses related to our portfolio expansion,  accelerated new products developments, and the addition of the Wilsonville engineering team.

 

Our operating income for the first quarter of 2014 decreased to $9.5 million from $17.5 million in the same 2013 quarter. This decrease in operating income is due to lower gross profit margin and higher operating expenses as discussed below.

 

Our operating activities generated  $0.3 million of cash during the first three months of 2014, which is discussed in further detail below. We used $5.9 million to fund our strategic investing activities, including acquisition costs. Financing activities during the first three months of 2014 provided $5.9 million of cash. In total, our unrestricted cash balance at March 31, 2014 was $306.7 million compared to $306.3 million at December 31, 2013.

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First quarter comparison of revenue by class of product and service

 

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

 

Table 1

 

 

 

We earn revenues from the sale of printers and other products, print materials and services. On a consolidated basis, revenue for the first quarter of 2014 increased by $45.7 million, or 44.7%, compared to the first quarter of 2013 primarily due to increased sales of printers.

 

The $21.0 million increase in revenue from printers and other products compared to the first quarter of 2013 is primarily due to increased printer unit sales volume for the first quarter of 2014, driven by increased demand for design and manufacturing printers. Printers revenue increased $18.9 million, or 59.7%, compared to the first quarter of 2013. In connection with the rapid expansion of our professional and retail channels, certain resellers may purchase stock inventory in the ordinary course of business. For the first quarter of 2014, we estimate that revenue related to reseller inventory amounted to approximately 10% of total revenue, which is impacted by timing of sales, expansion of our reseller channel and the shift from a partially direct sales model to the reseller channel selling our entire portfolio of products and services which expanded the volume of transactions through the channel.  These transactions were reviewed for revenue recognition criteria and these sales met all the requirements of our revenue recognition policy. 

 

Other products revenue includes software products, perceptual and haptic devices, and Vidar digitizers. Other products revenue totaled $10.1 million for the first quarter of 2014, including $5.8 million of software products revenue, a 26.2% increase over 2013. Other products revenue for the first quarter of 2013 totaled $8.0 million, including $4.2 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 $11.7 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 48.1% to $29.4 million and represented 72.7% of total materials revenue in the first quarter of 2014 compared to 69.2% in the first quarter of 2013.  

 

The increase in services revenue primarily reflects revenue from our Quickparts solutions, coupled with printer services and consumer services. Service revenue from Quickparts grew 37.8% to $28.8 million, or 61.8% of total service revenue, for the first quarter of 2014, compared to $20.9 million, or 62.1%, of total service revenue in the 2013 period. Printer services revenue added $16.1 million of revenue in the first quarter of 2014 compared to $12.1 million in the first quarter of 2013. Services revenue from software was $3.2 million in the first quarter of 2014 compared to $0.8 million in the first quarter of 2013.

 

At March 31, 2014 our backlog was $28.8 million, compared to backlogs of $28.6 million at December 31, 2013 and $11.4 million at March 31,  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. In addition, Quickparts services lead time and backlog depends on whether orders are for rapid prototyping or longer-range production runs. The backlog at March 31, 2014 includes $8.3 million of Quickparts services orders, compared to $6.2 million at March 31,  2013.

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In addition to changes in sales volumes, including the impact of revenue from acquisitions, there are two other primary drivers of changes in 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 quarter revenue by geographic region

 

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

 

Table 2

 

Revenue from U.S. operations in the first quarter of 2014 increased by $10.8 million, or 19.0%, to $68.0 million from $57.2 million in the first 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 first quarter of 2014 increased by $34.8 million, or 77.5%, to $79.7 million from $44.9 million in the first quarter of 2013. Revenue from non-U.S. operations as a percent of total revenue was 54.0% and 44.0%, respectively, at March 31, 2014 and 2013. The increase in non-U.S. revenue, excluding the effect of foreign currency translation, was 71.9% in the first quarter of 2014 compared to  42.6% in the first quarter of 2013.

 

Revenue from European operations in the first quarter of 2014 increased by $19.0 million, or 66.4%, to $47.6 million from $28.6 million in the first quarter of 2013. This increase was due to a $12.7 million increase in volume, a $3.9 million favorable combined effect of price and mix, and a  $2.4 million favorable impact of foreign currency translation.

 

Revenue from Asia-Pacific operations in the first quarter of 2014 increased by $15.9 million, or 96.8%, to $32.2 million from $16.3 million in the first quarter of 2013, due primarily to a favorable $19.2 million increase in volume, partially offset by a $2.3 million unfavorable combined effect of price and mix and a $1.1 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 first quarters of 2014 and 2013:

 

Table 3

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On a consolidated basis, gross profit for the first quarter of 2014 increased by $22.0 million to $75.5 million from $53.5 million in the first quarter of 2013,  primarily as a result of higher sales from all revenue categories.

 

Consolidated gross profit margin in the first quarter of 2014 decreased by 1.3 percentage points to 51.1% from 52.4% for the 2013 quarter. The lower gross profit margin reflects a change in revenue mix with lower margin printers making up a higher portion of revenue.

 

Printers and other products gross profit for the first quarter of 2014 increased by $6.4 million, or 35.5%, to $24.2 million from $17.8 million in the 2013 quarter, due to higher revenue. Gross profit margin for printers and other products decreased by 5.1 percentage points to 39.8% from 44.9% in the 2013 quarter primarily due to an adverse mix of printers and other products coupled with manufacturing expansion.

 

Print materials gross profit for the first quarter of 2014 increased by $9.3 million, or 44.7%, to $30.2 million from $20.9 million in the 2013 quarter, and gross profit margin for print materials increased by 2.0 percentage points to 74.7% from 72.7% in the 2013 quarter primarily due to the favorable shift of the mix of materials towards higher gross profit margin consumer and professional print materials and integrated materials. 

 

Gross profit for services for the first quarter of 2014 increased by $6.3 million, or 42.8%, to $21.1 million from $14.8 million in the  2013 quarter and gross profit margin for services increased by 1.4 percentage points to 45.3% from 43.9% in the 2013 quarter. The increase in gross profit was due primarily to higher levels of revenue. The increase in the gross profit margin was due to the addition of software and a 1.4 percentage point increase in Quickparts gross profit margin to 41.5% for the first quarter of 2014 from 40.1% in the first quarter of 2013, primarily due to the mix of products.  Printer services has a gross profit margin of 52.1% for the first quarter of 2014, compared to 50.5% for the first quarter of 2013.

 

Operating expenses

 

As shown in Table 4, total operating expenses increased by $30.0 million, or 83.4%, to $66.0 million in the first quarter of 2014 from $36.0 million in the first quarter of 2013.  This increase was due to higher selling, general and administrative expenses and higher research and development expenses, both of which are discussed below.

 

Table 4

 

 

 

Selling, general and administrative expenses increased by $19.2 million to $48.7 million in the first quarter of 2014 compared to $29.5 million in the first quarter of 2013, and increased to 33.0% of revenue in 2014 compared to 28.9% for 2013.  The increase was due primarily to an $8.3 million increase in compensation costs due to increased staffing combined with a $5.4 million increase in amortization, a $0.9 million increase in consulting fees, a $0.6 million increase in travel expense and a $0.5 million increase in occupancy costs.

 

Research and development expenses increased by $10.7 million, or 165.0%, to $17.2 million in the first quarter of 2014 from $6.5 million in the first quarter of 2013.  This increase was primarily due to a $4.6 million increase in compensation expenses related to talent expansion, a $3.2 million increase in R&D materials related to new product development, a $0.4 million increase in rent and a $0.3 million increase in consulting fees.

 

Income from operations

 

Our income from operations of $9.5 million for the first quarter of 2014 decreased from $17.5 million in the first quarter of 2013. See Gross profit and gross profit margins and Operating expenses above.

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

 

Table 5

 

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 2014 and 2013 resulted primarily from changes in transfer pricing, which is a function of revenue levels. 

 

Interest and other expense, net

 

Interest and other expense, net was $1.0 million in the first quarter of 2014 compared with $10.1 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 first quarter of 2014 reflected a foreign exchange loss of $0.2 million. The $10.1 million of interest and other expense, net in the first quarter of 2013 primarily reflected the loss on conversion of convertible notes, which amounted to $5.7 million and the related interest, which amounted to  $1.4 million, of which $0.5 million represents non-cash amortization, and also reflected a foreign exchange loss of $1.0 million.

 

Provision for income taxes

 

We recorded an $3.6 million provision for income taxes in the first quarter of 2014 and a $1.6 million provision for income taxes in the first quarter of 2013. Our 2014 provision for income taxes reflects income taxes in U.S. and non-U.S. jurisdictions.  During the first quarter of 2014, we recorded return-to-provision adjustments totaling $0.6 million that are non-temporary in nature. Absent these adjustments, our provision for income taxes for the first quarter of 2014 would have been $3.0 million, or 35.3% of income.  The 2013 provision for income taxes primarily reflects income taxes in U.S. and non-U.S. jurisdictions, reduced by the reversal of ASC-740 provisions in non-US jurisdictions.

 

Net income

 

Net income attributable to the Company for the first quarter of 2014 decreased  $1.0 million to $4.9 million compared to $5.9 million in the first quarter of 2013.  The principal reasons for the decrease, which are discussed in more detail above, were:

 

• the $8.0 million decrease in operating income;  and

 

• the $2.0 million increase in our tax provision; partially offset by

 

• the $9.0 million decrease in interest and other expense.

 

For the quarter ended March 31, 2014, average common shares for basic and diluted earnings per share were 103.5 million and  basic and diluted earnings per share were $0.05. For the quarter ended March 31, 2013, average common shares for basic and diluted earnings per share were 91.8 million and basic and diluted earnings per share were $0.06.

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Other Financial Information

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

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Reconciliation of GAAP Net Income to Non-GAAP Financial Measures

Table 6

 

 

 

 

Financial Condition and Liquidity

 

Table 7

 

Our unrestricted cash and cash equivalents increased by $0.4 million to $306.7 million at March 31, 2014 from $306.3 million at December 31, 2013. We generated $0.3 million of cash from operating activities. Cash from operations consisted of $4.9 million of net income, including $13.9 million of non-cash charges and $18.5 million of cash used by net changes in operating accounts.  We used $5.9 million of cash in investing activities, including $2.1 million to fund acquisitions and other investing activities.  Cash from financing activities provided $5.9 million of cash.  See Cash flow and Capitalized lease obligations below. 

 

Cash and cash equivalents at March 31, 2014 includes $22.6 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 capital increased by $17.4 million to $433.8 million at March 31, 2014 from $416.4 million at December 31, 2013, primarily due to the factors discussed below.

 

Accounts receivable, net, increased by $9.9 million to $142.0 million at March 31, 2014 from $132.1 million at December 31, 2013. Gross accounts receivable increased by $11.4 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 as a result of increasing demand and meaningful contributions from new products, which have driven days sales outstanding to 86 days at March 31, 2014 from 79 days at December 31, 2013. Accounts receivable more than 90 days past due increased to 9.7% of gross receivables from 9.1% at December 31, 2013. 

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Inventories, net increased by $10.9 million to $86.0 million at March 31, 2014 from $75.1 million at December 31, 2013. This increase resulted primarily from a $7.2 million increase in finished goods inventory due to the timing of assembly production, sales and revenue recognition at quarter-end, which also impacts our backlog, and a  $5.1 million increase in raw materials inventory.  We maintained $4.7 million of inventory reserves at March 31, 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. 

 

Prepaid expenses and other current assets increased by $7.4 million to  $14.6 million at March 31, 2014 from $7.2 million at December 31, 2013. The increase is primarily due to a  $7.0 million increase in taxes, component costs and insurance.

 

Accounts payable increased by $4.7 million to $56.4 million at March 31, 2014 from $51.7 million at December 31, 2013. The increase is primarily related to the normal timing of our scheduled expense payments.

 

Accrued and other liabilities increased by $7.0 million to $35.4 million at March 31, 2014 from $28.4 million at December 31, 2013.  This increase is primarily due to a $6.9 million increase in accrued payroll and taxes.

 

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

 

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

 

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

 

Cash flow

 

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

 

Table 8

 

 

Cash flow from operating activities

 

For the three months ended March 31, 2014, our operating activities provided $0.3 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 three months ended March 31,  2013, our operating activities provided $6.4 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.

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Cash flow from investing activities

 

Net cash used in investing activities for the first three months of 2014 decreased to $5.9 million from $55.4 million for the first three months of 2013. This decrease was primarily due to $2.0 million of cash paid for acquisitions in the first three months of 2014 compared to $52.9 million paid for acquisitions in the 2013 period. Cash flow used in investing activities also includes minority investments of less than 20% made through 3D Ventures in promising enterprises that we believe will benefit from or be powered by our technologies and other investments or joint ventures. During the first three months of 2014, we invested $0.1 million in these enterprises and ventures.

 

Cash flow from financing activities

 

Net cash provided by financing activities increased to $5.9 million for the three months ended March 31, 2014 compared to $4.4 million in the 2013 period. Cash from financing activities for the first three months of 2014 was primarily from $5.4 million of tax benefits from share-based payment arrangements. Cash from financing activities for  the three months ended March 31,  2013 included $4.3 million of tax benefits from share-based payment arrangements,  $0.3 million of stock-based compensation proceeds, partially offset by $0.2 million of cash paid in lieu of fractional shares and 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, 2013. 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 thereof. The aggregate principal amount of these Notes then outstanding matures on December 15, 2016, unless earlier converted or repurchased in accordance with the terms of the Notes.

Conditions for conversion have been satisfied and the Notes are convertible. During the first quarter of 2014, Note holders did not convert any Notes, therefore, no loss on conversion was recognized in the first quarter of 2014.  During the first quarter of 2013, the Company recognized a $5.7 million loss on the conversion of $42.6 million aggregate principal amount of Notes, which converted into 3.0 million shares of common stock.

As of March 31, 2014, the aggregate amount of Notes outstanding was $12.5 million.

The Notes contain a number of covenants covering, among other things, payment of Notes, reporting, maintenance of existence 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 March 31, 2014. See Note 8 to the unaudited condensed consolidated financial statements. 

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 March 31, 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 March 31, 2014 and December 31, 2013 were as follows:

 

Table 9

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Other contractual arrangements

 

For certain of our recent acquisitions we are obligated for the payment of deferred purchase price totaling $4.5 million, due through 2014, compared to $4.5 million at December 31, 2013.  Certain of our recent acquisitions contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total amount of liabilities recorded for these earnouts at March 31, 2014 and December 31, 2013 was $10.0 million and $5.6 million, respectively. See Note 2 and Note 15 for details of acquisitions and related commitments. 

 

As of March 31, 2014, we have supply commitments related to printer assemblies that total $61.0 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 March 31, 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 $0.2 million loss for the three months ended March 31, 2014 and a  $1.0 million loss for the three months ended March 31,  2013 and a marginal change in other comprehensive income for the three months ended March 31, 2014 compared to a $3.2 million decrease in other comprehensive income for the first three months of 2013.

 

Recent Accounting Pronouncements

 

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

 

Critical Accounting Policies and Significant Estimates

 

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

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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.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

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

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Item 4.  Controls and Procedures.

 

Evaluation of disclosure controls and procedures

 

As of March 31, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. These controls and procedures were designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures. Based on this evaluation, including an evaluation of the rules referred to above in this Item 4, management has concluded that our disclosure controls and procedures were effective as of March 31, 2014 to provide reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures.

 

Changes in Internal Controls over Financial Reporting

 

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

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PART II — OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

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

 

Item 1A.  Risk Factors.

 

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

 

Item 6.  Exhibits.

 

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

 

 

 

 

 

*  Management contract or compensatory plan or arrangement.

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SIGNATURE

 

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

 

 

 

 

Date: April 29, 2014

 

 

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