See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements include the accounts of 3D Systems Corporation and

all majority-owned subsidiaries and entities in which a controlling interest is maintained (the “Company”). A non-controlling interest in a subsidiary is considered an ownership interest in a majority-owned subsidiary that is not attributable to the parent. The Company includes noncontrolling interests as a component of total equity in the condensed consolidated balance sheets and the net income (loss) attributable to noncontrolling interests are presented as an adjustment from net loss used to arrive at net loss attributable to 3D Systems Corporation in the condensed consolidated statements of operations and comprehensive loss. All significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”).

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the quarter and six months ended March 31,June 30, 2018 are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates and assumptions. Certain prior period amounts presented in the condensed consolidated financial statements and accompanying footnotes have been reclassified to conform to current year presentation. Beginning in 2018, the Company classifies standard product warranty revenue and related expenses within the "Products" line items of the Consolidated Statements of Operations.

All dollar amounts presented in the accompanying footnotes are presented in thousands, except for per share information.

initial adoption was recorded as a $576 decrease to the January 1, 2018 opening Accumulated Deficit balance and driven primarily by the timing of recognition related to marketing incentives. The effect of this adoption was immaterial to the Consolidated Financial Statements, and the Company does not expect a material effect to its Consolidated Financial Statements on an ongoing basis. Information for comparative periods has not been restated and continues to be reported under the previously applicable revenue accounting guidance ("ASC 605"). Had ASC 605 been applied to the first quartersix months of 2018, the Consolidated Statements of Operations and Comprehensive Loss would have shown increased Revenue and a decrease in Net Loss Attributable to 3D Systems Corporation of $46.$99. On the Consolidated Balance Sheets, Prepaid Expenses and Other Current Assets would have been $69 higher, Other Assets would have been $457 lower, Deferred Revenues would have been $73$89 higher and the Accumulated deficit would have increased by $530.$477.

No other new accounting pronouncements, issued or effective during 2018, have had or are expected to have a significant impact on the Company’s consolidated financial statements.

The Company accounts for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers,” which it adopted on January 1, 2018, using the modified-retrospective method. See Note 1 for further discussion of the adoption.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

At March 31,June 30, 2018, the Company had $157,531$130,966 of outstanding performance obligations. The Company expects to recognize approximately 9593 percent of its remaining performance obligations as revenue within the next twelve months, an additional 3 percent by the end of 2019 and the balance thereafter.

Revenue is recognized when control of the promised products or services is transferred to customers in an amount that reflects the consideration we expectthe Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Many of its contracts with customers include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price (“SSP”). Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. The amount of consideration we receivereceived and revenue we recognize varies withrecognized may vary based on changes in marketing incentives we offerincentive programs offered to our customers. OurThe Company's marketing incentivesincentive programs take many forms, including volume discounts, trade-in allowances, rebates and other discounts.

A majority of the Company’s revenue is recognized at the point in time when products are shipped or or services are delivered to customers. Please see below for further discussion.

Revenue from systemshardware and material sales is recognized when control has transferred to the customer which typically occurs when the goods have been shipped to the customer, risk of loss has transferred to the customer and the companyCompany has a present right to payment for the hardware. In limited circumstances when a systems sale includesprinter or other hardware sales include substantive customer acceptance provisions, revenue is recognized either when customer acceptance has been obtained, customer acceptance provisions have lapsed, or the companyCompany has objective evidence that the criteria specified in the customer acceptance provisions have been satisfied.

The Company also markets and sells software tools that enable our customers to capture and customize content using our printers, as well as reverse engineering and inspection software. These software licenses doSoftware does not require significant modification or customization and providethe license provides the customer with a right to use the software as it exists when made available. Revenue from these software licenses is recognized either upon delivery of the product or of a key code which allows the customer to download the software. Customers may purchase post sale support. Generally, the first year is included but subsequent years are optional. This optional support is considered a separate obligation from the software and is deferred at the time of sale and subsequently recognized ratably over future periods.

The Company offers training, installation and non-contract maintenance services for its products. Additionally, the Company offers extended warranties and maintenance contracts customers can purchase at their option. For optional warranty or maintenance contracts, revenue is deferred at the time of sale based on the stand-alone selling prices of these services and costs are expensed as incurred. Deferred revenue is recognized ratably over the term of the warranty or maintenance period on a straight-line basis. Revenue from training, installation and non-contract maintenance services is recognized at the time of performance of the service.

On demand manufacturing and healthcare service sales are included within services revenue and revenue is recognized upon shipment or delivery of the parts or performance of the service, based on the terms of the arrangement.

Shipping and handling activities are treated as fulfillment costs rather than as an additional promised service. The Company accrues the costs of shipping and handling when the related revenue is recognized. Costs incurred by the Company associated with shipping and handling are included in product cost of sales.

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

The Company’s terms of sale generally require payment within 30 to 60 days after shipment of a product, although the Company also recognizes that longer payment periods are customary in some countries where it transacts business. To reduce credit risk in connection with printer sales, the Company may, depending upon the circumstances, require significant deposits prior to shipment and may retain a security interest in a system sold until fully paid. In some circumstances, the Company may require payment in full for its products prior to shipment and may require international customers to furnish letters of credit. For maintenance services, the Company either bills customers on a time-and-materials basis or sells maintenance contracts that provide for payment in advance on either an annual or other periodic basis.

See Note 12 for additional information related to revenue by reportable segment and major lines of business.

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. For such arrangements, the Company allocates revenues to each performance obligation based on its relative SSP.

Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, the Company estimates SSP using historical transaction data. The Company uses a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when the product or service areis not sold separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

In some circumstances, the Company has more than one SSP for individual products and services due to the stratification of those products and services by customers, geographic region or other factors. In these instances, it may use information such as the size of the customer and geographic region in determining the SSP.

The determination of SSP is inan ongoing process and information is reviewed regularly in order to ensure SSPs reflectSSP reflects the most current information or trends.

Often, theThe nature of the Company’sCompany���s marketing incentives may lead to consideration that is variable. Judgment is exercised at contract inception to determine the most likely outcome of the contract and resulting transaction price. Ongoing assessments are performed to determine if updates are needed to the original estimatesestimates.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer deposits and deferred revenues (contract liabilities) on the Consolidated Balance Sheets. Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized at the time of invoicing, or unbilled receivables when revenue is recognized prior to invoicing. For most of the Company’s contracts, customers are invoiced when products are shipped or when services are performed resulting in billed accounts receivables where payment is generally required within 30 to 60 days. Unbilled receivables generally result from items being shipped where the customer has not been charged but for which revenue had been recognized. In the Company’s on-demandon demand manufacturing business, customers may be required to pay in full before work begins on their orders, resulting in customer deposits. The Company typically bills in advance for installation, training and maintenance contracts as well as extended warranties, resulting in deferred revenue. Changes in contract asset and liability balances were not materially impacted by any other factors for the period ended March 31,June 30, 2018.

The Company generally expenses sales commissions when incurred because the amortization period would have beenbe one year or less. These costs are recorded within selling, general and administrative expenses.

Components of inventories net, at March 31,June 30, 2018 and December 31, 2017 are summarized as follows:

Intangible assets, net, other than goodwill, at March 31,June 30, 2018 and December 31, 2017 are summarized as follows:

Amortization expense related to intangible assets was $8,067$7,836 and $8,832$15,903 for the quartersquarter and six months ended March 31,June 30, 2018, respectively, compared to $8,984 and $17,816 for the quarter and six months ended June 30, 2017, respectively.

Accrued liabilities at March 31,June 30, 2018 and December 31, 2017 are summarized as follows:

Other liabilities at March 31,June 30, 2018 and December 31, 2017 are summarized as follows:

The Company had $40,752$38,498 and $39,600 in notional foreign exchange contracts outstanding as of March 31,June 30, 2018 and December 31, 2017, respectively. The fair values of these contracts were not material.

The Company translates foreign currency balance sheets from each international businesses' functional currency (generally the respective local currency) to U.S. dollars at end-of-period exchange rates, and statements of earnings at average exchange rates for each period. The resulting foreign currency translation adjustments are a component of other comprehensive income (loss).

The Company does not hedge the fluctuation in reported revenue and earnings resulting from the translation of these international operations' results into U.S. dollars. The impact of translating the Company’s non-U.S. operations’ revenue and earnings into U.S. dollars was not material to the Company’s results of operations for the quarters ended March 31, 2018 and 2017.

As of March 31,June 30, 2018, the Company had a $150,000 revolving, unsecured credit facility (the “Credit Agreement”) with a syndicate of banks, to be used for general corporate purposes and working capital needs. The Credit Agreement is scheduled to expire in October 2019. The Credit Agreement includes provisions for the issuance of letters of credit and swingline loans and contains certain restrictive covenants, which include the maintenance of a maximum consolidated total leverage ratio. The Company was in compliance with those covenants at March 31,June 30, 2018 and December 31, 2017. There were no outstanding borrowings as of March 31,June 30, 2018.

The Company’s capitalized lease obligations primarily include a lease agreement that was entered into during 2006 with respect to the Company’s corporate headquarters located in Rock Hill, SC. The change in capitalized lease obligations, as presented in the Condensed Consolidated Balance Sheets, was due to the normal scheduled timing of payments.

The components of the Company’s pension cost recognized in the condensed consolidated statements of operations and comprehensive loss for the quartersquarter and six months ended March 31,June 30, 2018 and 2017 were as follows:

The Company computes basic loss per share using net loss attributable to 3D Systems Corporation and the weighted average number of common shares outstanding during the applicable period. Diluted loss per share incorporates the additional shares issuable upon assumed exercise of stock options and the release of restricted stock and restricted stock units, except in such case when their inclusion would be anti-dilutive.

For the quarters and six months ended March 31,June 30, 2018 and 2017, the effect of dilutive securities, including non-vested stock options and restricted stock awards/units, was excluded from the denominator for the calculation of diluted net loss per share because the Company recognized a net loss for the period and their inclusion would be anti-dilutive. Dilutive securities excluded were 4,3454,168 and 3,3964,167 for the quartersquarter and six months ended March 31,June 30, 2018, respectively, compared to 3,443 and 3,619 for the quarter and six months ended June 30, 2017, respectively.

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

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

The Company did not have any transfers of assets and liabilities between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy during the quarter and six months ended March 31,June 30, 2018.

In addition to the assets and liabilities included in the above table, certain of our assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes goodwill and other intangible assets measured at fair value for impairment assessment, in addition to redeemable noncontrolling interests. For additional discussion, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Estimates” in the Company’s Form 10-K.

For the quartersquarter and six months ended March 31,June 30, 2018, and 2017, the Company recorded expense of $1,954$2,539 and $1,041,$4,493, respectively, resulting in effective tax rates of 10.3%41.9% and 11.7%17.9%, respectively. For the quarter and six months ended June 30, 2017, the Company recorded expense of $2,067 and $3,108, respectively, resulting in effective tax rates of 34.9% and 21.0%, respectively. The difference between the statutory rate and the effective tax rate is driven from the impact of the change in valuation allowances that the Company has recorded in the US and other foreign jurisdictions for both quarters and six months ended March 31,June 30, 2018 and 2017. Additionally, for 2018, the Company settled a tax audit with the French tax authorities, which resulted in additional tax expense and also contributed to the difference between the statutory rate and the effective tax rate for the quarter and six months ended June 30, 2018.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code.  Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. As of December 31, 2017, the Company recorded provisional amounts, and additional work is still necessary for a more detailed analysis of the Company’s deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments.  Any subsequent adjustment to these amounts will be recorded in the quarter of 2018 when the analysis is complete.

As the Company’s previously unremitted earnings have now been subjected to U.S. federal income tax, any repatriation of these earnings to the U.S. would not be expected to incur significant additional taxes related to such amounts. We continue to assert that our foreign earnings are indefinitely reinvested in our overseas operations, but in light of the Act, we are continuing to evaluate our position on that assertion.

Tax years 2003 through 2017 remain subject to examination by the U.S. Internal Revenue Service, with most of the years open to examination due to the generation and utilization of various tax credits. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in Australia (2013), Belgium (2014), Brazil (2012), China (2014)(2015), France (2014), Germany (2013)(2014), India (2013), Israel (2013), Italy (2012), Japan (2012), Korea (2012), Mexico (2012), Netherlands (2012), Switzerland (2012), the United Kingdom (2016) and Uruguay (2012).

The Company leases certain of its facilities and equipment under non-cancelable operating leases. For the quartersquarter and six months ended March 31,June 30, 2018, and 2017, rent expense under operating leases was $4,267$4,212 and $3,682,$8,498, respectively, compared to $3,698 and $7,452 for the quarter and six months ended June 30, 2017, respectively.

Certain of the Company’s acquisition agreements contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total liability recorded for these earnouts at March 31,June 30, 2018 and December 31, 2017 was $2,556$2,135 and $5,115, respectively. See Note 5.

Owners of interests in a certain subsidiary have the right in certain circumstances to require the Company to acquire either a portion of or all of the remaining ownership interests held by them. The owners’ ability to exercise any such “put option” right is subject to the satisfaction of certain conditions, including conditions requiring notice in advance of exercise. In addition, these rights cannot be exercised prior to a specified exercise date. The exercise of these rights at their earliest contractual date would result in obligations of the Company to fund the related amounts in 2019.

Management estimates, assuming that the subsidiary owned by the Company at March 31,June 30, 2018, performs over the relevant future periods at its forecasted earnings levels, that these rights, if exercised, could require the Company, in future periods, to pay approximately $8,872 to the owners of such rights to acquire such ownership interests in the relevant subsidiary. This amount has been recorded as redeemable noncontrolling interests on the Consolidated Balance Sheet at March 31,June 30, 2018 and December 31, 2017. The ultimate amount payable relating to this transaction will vary because it is dependent on the future results of operations of the subject business.

The Company and certain of its former executive officers have been named as defendants in a consolidated putative stockholder class action lawsuit pending in the United States District Court for the District of South Carolina. The consolidated action is styled KBC Asset Management NV v. 3D Systems Corporation, et al., Case No. 0:15-cv-02393-MGL. The Amended Consolidated Complaint (the “Complaint”), which was filed on December 9, 2015, alleges that defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder by making false and misleading statements and omissions and that the former officers are control persons under Section 20(a) of the Exchange Act. The Complaint was filed on behalf of stockholders who purchased shares of the Company’s common stock between October 29, 2013, and May 5, 2015 and seeks monetary damages on behalf of the purported class. Defendants filed a motion to dismiss the Complaint in its entirety on January 14, 2016, which was denied by Memorandum Opinion and Order dated July 25, 2016 (the “Order”). Defendants filed a motion for reconsideration of the Order on August 4, 2016, which was denied by Order dated February 24, 2017. On September 28, 2017, the Court granted Lead Plaintiff’s Motion for Class Certification. On February 14, 2018, following mediation, the parties entered into a Stipulation of Settlement that provides for, among other things, payment of $50 million$50,000 by the Company’s insurance carriers and a mutual exchange of releases. The Stipulation of Settlement calls for a dismissal of all claims against the Company and the individual defendants with prejudice following Court approval, a denial by defendants of any wrongdoing, and no admission of liability. On February 15, 2018, Lead Plaintiff filed an Unopposed Motion for Preliminary Approval of Class Action Settlement. On February 21, 2018, the Court entered an Order Preliminarily Approving Settlement and Providing for Notice. The Court held a final approvalfairness hearing has been scheduledon June 25, 2018, and entered the Order and Final Judgment and Order Awarding Attorneys’ Fees on the same day. The time for Juneany party to appeal expired on July 25, 2018. A current liability of $50,000 was recorded for the agreed upon settlement amount and an offsetting receivable of $50,000 was recorded for related insurance proceeds.

Nine related derivative complaints have been filed by purported Company stockholders against certain of the Company’s former executive officers and members of its Board of Directors. The Company is named as a nominal defendant in all nine actions. The derivative complaints are styled as follows: (1) Steyn v. Reichental, et al., Case No. 2015-CP-46-2225, filed on July 27, 2015 in the Court of Common Pleas for the 16th Judicial Circuit, County of York, South Carolina (“Steyn”); (2) Piguing v. Reichental, et al., Case No. 2015-CP-46-2396, filed on August 7, 2015 in the Court of Common Pleas for the 16th Judicial Circuit, County of York, South Carolina (“Piguing”); (3) Booth v. Reichental, et al., Case No. 15-692-RGA, filed on August 6, 2015 in the United States District Court for the District of Delaware; (4) Nally v. Reichental, et al., Case No. 15-cv-03756-MGL, filed on September 18, 2015 in the United States District Court for the District of South Carolina (“Nally”); (5) Gee v. Hull, et al., Case No. BC-610319, filed on February 17, 2016 in the Superior Court for the State of California, County of Los Angeles (“Gee”); (6) Foster v. Reichental, et al., Case No. 0:16-cv-01016-MGL, filed on April 1, 2016 in the United States District Court for the District of South Carolina (“Foster”); (7) Lu v. Hull, et al., Case No. BC629730, filed on August 5, 2016 in the Superior Court for the State of California, County of Los Angeles (“Lu”); (8) Howes v. Reichental, et al., Case No. 0:16-cv-2810-MGL, filed on August 11, 2016 in the United States District Court for the District of South Carolina (“Howes”); and (9) Ameduri v. Reichental, et al., Case No. 0:16-cv-02995-MGL, filed on September 1, 2016 in the United States District Court for the District of South Carolina (“Ameduri”). Steyn and Piguing were consolidated into one action styled as In re 3D Systems Corp. Shareholder Derivative Litig., Lead Case No. 2015-CP-46-2225 in the Court of Common Pleas for the 16th Judicial Circuit, County of York, South Carolina. Gee and Lu were consolidated into one action styled as Gee v. Hull, et al., Case No. BC610319 in the Superior Court for the State of California, County of Los Angeles. Nally, Foster, Howes, and Ameduri were consolidated into one action in the United States District Court for the District of South Carolina with Nally as the lead consolidated case.

The derivative complaints allege claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment and seek, among other things, monetary damages and certain corporate governance actions.

 

All of the derivative complaints listed above have been stayed until 30 days after the earlier of the close of discovery or the deadline for appealing a dismissal in the KBC Asset Management NV securities class action.

The Company believes the claims alleged in the derivative lawsuits are without merit and intends to defend the Company and its officers and directors vigorously.

shareholder) and the subsequent employment of Mr. Barranco by the Company. The second lawsuit (“Barranco II”) is captioned

With regard to Barranco I, the Hawaii district court, on February 28, 2014, denied the Company’s motion to dismiss and its motion to transfer venue to South Carolina for the convenience of the parties. However, the Hawaii court recognized that the plaintiff’s claims are all subject to mandatory and binding arbitration in Charlotte, North Carolina. Because the Hawaii court was without authority to compel arbitration outside of Hawaii, the court ordered that the case be transferred to the district court encompassing Charlotte (the United States District Court for the Western District of North Carolina) so that court could compel arbitration in Charlotte. On April 17, 2014, Barranco I was transferred to the United States District Court for the Western District of North Carolina. Plaintiff filed a demand for arbitration on October 29, 2014. On December 9, 2014, the Company filed its answer to plaintiff’s demand for arbitration. On February 2, 2015, plaintiff filed an amended demand that removed Mr. Gregoire as a defendant from the matter, and on February 4, 2015 the Company filed its amended answer. The parties selected an arbitrator and arbitration took place in September 2015 in Charlotte, North Carolina.

On September 28, 2015, the arbitrator issued a final award in favor of Mr. Barranco with respect to two alleged breaches of contract and implied covenants arising out of the contract. The arbitrator found that the Company did not commit fraud or make any negligent misrepresentations to Mr. Barranco. Pursuant to the award, the Company iswas directed to pay approximately $11,282, which includes alleged actual damages of $7,254, fees and expenses of $2,318 and prejudgment interest of $1,710. The Company disagrees with the single arbitrator’s findings and conclusions and believes the arbitrator’s decision exceeds his authority and disregards the applicable law. As an initial response, the Company filed a motion for modification on September 30, 2015, based on mathematical errors in the computation of damages and fees. On October 16, 2015, the arbitrator issued an order denying the Company’s motion and sua sponte issuing a modified final award in favor of Mr. Barranco in the same above-referenced amounts, but making certain substantive changes to the award, which changes the Company believes were improper and outside the scope of his authority and the American Arbitration Association rules. On November 20, 2015, the Company filed a motion to vacate the arbitration award in the federal court in the United States District Court for the Western District of North Carolina. Claimants also filed a motion to confirm the arbitration award. A hearing was held on the motions on September 29, 2016 in federal court in the Western District of North Carolina. The court requested supplemental briefing by the parties, which briefs were filed on July 11, 2016.

On August 31, 2016, the court issued an order granting in part and denying in part Plaintiff’s motion to confirm the arbitration award and for judgment, entering judgment in the principal amount of the arbitration award and denying Plaintiff’s motion for fees and costs. The court denied the Company’s motion to vacate. On September 7, 2016, Plaintiff filed a motion to amend the judgment to include prejudgment interest. The Company opposed that motion and the parties submitted briefing. On September 28, 2016 the Company filed a motion to alter or amend the judgment. Plaintiff opposed the motion and the parties submitted briefing. On May 18, 2017, the court issued an opinion and order denying the Company’s motion to alter or amend and denying Plaintiff’s motion for prejudgment interest. On September 16, 2017, the Company filed a notice of appeal with the United States Court of Appeals for the Fourth Circuit. The appeal is pending. The Company filed its Opening Brief and the Joint Appendix on August 28, 2017. Plaintiff filed its Opening Brief on September 11, 2017. The Company filed its Reply Brief on September 25, 2017.

NotwithstandingOn May 31, 2018, the Company’s right to appeal, givenFourth Circuit affirmed the arbitrator’s decision by unpublished per curiam opinion. On June 14, 2018, the Company recorded an $11,282 expense provisiontimely filed Appellants’ Petition for this matterRehearing and Rehearing En Banc. On June 15, 2018 the Fourth Circuit issued a Stay of Mandate Under Fed. R. App. P. 41(d)(1). The Petition for Rehearing and Rehearing En Banc was subsequently denied and on August 1, 2018, the Fourth Circuit issued its mandate, thereby returning jurisdiction to the District Court and ending the stay. On August 2, 2018, the Company filed its Motion for Setoff of Judgment and Memorandum in Support of Motion for Setoff of Judgment. Plaintiff’s response is due August 16. Plaintiff agrees that setoff is appropriate, but contests the quarter ended September 30, 2015. The provision is subject to adjustment based onamount. On August 3, 2018, the ultimate outcomeCompany paid $9,127 of the Company’s appeal. If it is ultimately determined that money is owed following the full appellate process in federal court, the Company intends to fund any amounts to be paid from cash on hand. This amount has been classified as a current liability given the timeline of the appeals process.Judgment, net setoff.

With regard to Barranco II, the Hawaii district court, on March 17, 2014, denied the Company’s motion to dismiss and its motion to transfer venue to South Carolina. However, the Hawaii court dismissed Count II in plaintiff’s complaint alleging breach of the employment agreement. The Company filed an answer to the complaint in the Hawaii district court on March 31, 2014. On November 19, 2014, the Company filed a motion for summary judgment on all claims which was heard on January 20, 2015. On January 30, 2015, the court entered an order granting in part and denying in part the Company’s motion for summary judgment. The Order narrowed the plaintiff’s claim for breach of contract and dismissed the plaintiff’s claims for fraud and negligent

misrepresentation. As a result, Messrs. Reichental and Gregoire were dismissed from the lawsuit. The case was tried to a jury in May 2016, and on May 27, 2016 the jury found that the Company was not liable for either breach of contract or breach of the implied covenant of good faith and fair dealing. Additionally, the jury found in favor of the Company on its counterclaim against

As the prevailing party, the Company has moved for recovery of its fees and costs. The motion is pending beforeOn June 15, 2018, the court. Hawaii Court entered Findings and Recommendation to Grant in Part and Deny in Part Defendants 3D Systems Corporation and 3D System Inc.’s Motion for an Award of Attorneys’ Fees, whereby it recommended that 3D Systems be awarded $1,299 in attorneys’ fees, $349 for the amount of the prejudgment interest, and $72 in non-taxable costs.

On April 19, 2018, Barranco filed a post-trial motion seeking to amend the findings and judgment. The Company will opposeopposed that motion. On April 30, 2018, Barranco filed a combined Rule 50 Motion for Judgment as a Matter of Law on the Company’s counterclaim and Rule 50 Motion for a New Trial. The Company also opposed that Motion. On June 29, 2018, Barranco filed partial objections to the Fee Award Report and Recommendation. On July 9, 2018, the Company filed its Response opposing those partial objections. All post-trial motions are currently pending before the Court.

In October 2017 the Company received an administrative subpoena from the Bureau of Industry and Security of the Department of Commerce (“BIS”) requesting the production of records in connection with possible violations of U.S. export control laws, including with regard to its Quickparts.com, Inc. subsidiary. In addition, while collecting information responsive to the above-referencedabove referenced subpoena, the Company identified potential violations of the International Traffic in Arms Regulations (“ITAR”) administered by the Directorate of Defense Trade Controls of the Department of State (“DDTC”) and potential violations of the Export Administration Regulations administered by the Bureau of Industry and Security of the Department of Commerce.BIS. On February 12,June 8, 2018, the Company submitted voluntary disclosures to BIS and DDTC identifying numerous potentially unauthorized exports of technical data, which supplemented an initial notice of voluntary disclosure that the Company submitted to DDTC in which the Company identified certain potentially unauthorized exports of technical data.February 2018. The Company is continuing to conductconducting an internal review of its export control compliance risks, implementing associated compliance enhancements, and cooperating fully with DDTC and BIS, as well as the investigation, butU.S. Departments of Justice, Defense and Homeland Security. Although the Company cannot predict the ultimate resolution of this matter. Thethese matters, the Company expects to incur significant legal costs and other expenses in connection with responding to the U.S. government agencies.

In 2018, the Company implemented new compliance procedures to identify and prevent potential violations of export control laws. As a result of these inquiries.compliance enhancements, the Company identified an additional potential violation of the ITAR in June 2018, and the Company submitted a related initial notice of voluntary disclosure to DDTC in July 2018. As the Company continues to implement additional compliance enhancements, it may discover other potential violations of export control laws in the future. If the Company identifies any additional potential violations, the Company intends to submit voluntary disclosures to the relevant agencies and cooperate with such agencies on any related investigations.

If the U.S. government finds that the Company has violated one or more export control laws or trade sanctions, the Company could be subject to various civil or criminal penalties. By statute, these penalties can include but are not limited to fines, which by statute may be significant, denial of export privileges, and debarment from participation in U.S. government contracts; and anycontracts. Any assessment of penalties or other liabilities incurred in connection with these matters could also harm the Company’s reputation and customer relationships, create negative investor sentiment, and affect the Company’s share value. In connection with any resolution, the Company may also be required to undertake additional remedial compliance measures and program monitoring. The Company

cannot at this time predict when BIS and/or DDTCthe U.S. government agencies will conclude their investigations or determine an estimated cost, if any, or range of costs, for any penalties, fines or finesother liabilities to third parties that may be incurred upon resolution of this matter.in connection with these matters.

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 third parties arising from the use of the Company’s products. Historically, costs related to these indemnification provisions have not been significant, and the Company is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations.

 

To the extent permitted under Delaware law, the Company indemnifies its 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.

The amounts presented above are in other comprehensive loss and are net of taxes. For additional information about foreign currency translation, see Note 6.

As of March 31,June 30, 2018, the Company owned approximately 70% of the capital and voting rights of Robtec, a service bureau and distributor of 3D printing and scanning products in Brazil. Robtec was acquired on November 25, 2014.

As of March 31,June 30, 2018, the Company owned approximately 70% of the capital and voting rights of Easyway, a service bureau and distributor of 3D printing and scanning products in China. Approximately 65% of the capital and voting rights of Easyway were acquired on April 2, 2015, and an additional 5% of the capital and voting rights of Easyway were acquired on July 19, 2017 for $2.3 million.

This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 (the “Financial Statements”) 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” 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.

3D Systems Corporation (“3D Systems” or the “Company” or “we” or “us”) is a holding company incorporated in Delaware in 1993 that markets our products and services through subsidiaries in North America and South America (collectively referred to as “Americas”), Europe and the Middle East (collectively referred to as “EMEA”) and the Asia Pacific region (“APAC”). We provide comprehensive 3D printing solutions, including 3D printers, materials, software, on demand manufacturing services and digital design tools. Our solutions support advanced applications in a wide range of industries and key verticals including healthcare, aerospace, automotive and durable goods. Our precision healthcare capabilities include simulation, Virtual Surgical Planning (“VSP™”), and printing of medical and dental devices, models, surgical guides and instruments. Our experience and expertise have proven vital to our development of an ecosystem and end-to-end digital workflow which enable customers to optimize product designs, transform workflows, bring innovative products to market and drive new business models.

Customers can use our 3D solutions to design and manufacture complex and unique parts, eliminate expensive tooling, produce parts locally or in small batches and reduce lead times and time to market. A growing number of customers are shifting from prototyping applications to also using 3D printing for production. We believe this shift will be further driven by our continued advancement and innovation of 3D printing solutions that improve durability, repeatability, productivity and total cost of operations.

Summary of FirstSecond Quarter 2018 Financial Results

Total consolidated revenue for the quarter ended March 31,June 30, 2018 increased by 6.0%10.7%, or $9.5$17.1 million, to $165.9$176.6 million, compared to $156.4$159.5 million for the quarter ended March 31,June 30, 2017. These results reflect an increase in printers, materials, on demand manufacturing, services and healthcare and software revenue, as well as favorable foreign currency impact, as discussed further below.

Healthcare revenue includes sales of products, materials and services for healthcare-related applications, including simulation, training, planning, 3D printing of anatomical models, surgical guides and instruments and medical and dental devices. For the quarter ended March 31,June 30, 2018, healthcare revenue increased by 21.4%26.4%, to $52.4$61.4 million, and made up 31.6%34.7% of total revenue, compared to $43.2$48.5 million, or 27.6%30.4% of total revenue, for the quarter ended March 31,June 30, 2017. The increase in healthcare revenue is driven by growth in products, including printers and materials.

For the quarter ended March 31,June 30, 2018, total software revenue from products and services increased 12.9% to $23.0remained flat at $24.1 million, and made up 13.9%13.6% of total revenue, compared to $20.4$24.0 million, or 13.0%15.0% of total revenue, for the quarter ended March 31,June 30, 2017.

Gross profit for the quarter ended March 31,June 30, 2018 decreasedincreased by 2.9%6.8%, or $2.3$5.5 million, to $77.9$86.2 million, compared to $80.2$80.7 million for the quarter ended March 31,June 30, 2017. Gross profit margin for the quarters ended March 31,June 30, 2018 and 2017 was 46.9%48.8% and 51.3%50.6%, respectively.

Operating expenses for the quarter ended March 31,June 30, 2018 increased by 6.9%7.3%, or $6.1$6.4 million, to $95.4$93.9 million, compared to $89.3$87.5 million for the quarter ended March 31,June 30, 2017. Selling, general and administrative expenses for the quarter ended March 31,June 30, 2018 increased by 4.7%12.8%, or $3.1$8.1 million, to $69.5$71.2 million, compared to $66.4$63.1 million for the quarter ended March 31,June 30, 2017, predominantly due to our ongoingthe implementation of a market-based job architecture, increased marketing and advertising, investment in go-to-marketIT infrastructure, and IT infrastructure.higher legal expenses. Research and development expenses for the quarter ended March 31,June 30, 2018 increaseddecreased by 13.3%7.0%, or $3.0$1.7 million, to $25.9$22.7 million, compared to $22.9$24.4 million for the quarter ended March 31,June 30, 2017, predominantly dueas we have commercialized certain new products that were previously in development and continued to increased researchfocus and development, including investments to supportprioritize our planned 2018 product launches.ongoing investments.

Our operating loss for the quarter ended March 31,June 30, 2018 was $17.5$7.7 million, compared to an operating loss of $9.1$6.9 million for the quarter ended March 31,June 30, 2017.

For the quarters ended March 31,June 30, 2018 and 2017, we used $1.5generated $9.2 million and generated $19.4$18.6 million of cash from operations, respectively, as further discussed below. In total, our unrestricted cash balance at March 31,June 30, 2018 and December 31, 2017, was $121.6$119.3 million and $136.3 million, respectively.

The following table sets forth the changechanges in revenue by geographic region for the quarters ended March 31,June 30, 2018 and 2017.

Consolidated revenue increased 6.0%10.7%, predominantly driven by higher sales volumesvolume across all geographic regions, a favorable impact of mix and average selling price in the Americas and APAC regionsAsia Pacific region, and the favorable impact of foreign currencycurrency; offset by an unfavorable impact of mix and price in the EMEAAmericas and APAC regions, offset by a shift in product mix and average selling price across all geographicEMEA regions. The increase in sales volume is due to demand from healthcare and industrial customers. The shift in product mix and average selling price across all geographic regions is due to higher demand from healthcare customers as well as a range of customers across verticals. The shift in price/mix across the Americas and EMEA regions relates to the mix of sales, including higher sales of lower priced printer models which carry lower price points.models.

For the quarters ended March 31,June 30, 2018 and 2017, revenue from operations outside the U.S., including Latin America, EMEA was 51.3% and APAC, was 50.1% and 50.2%49.3% of total revenue, respectively.

We earn revenue from the sale of products, materials and services. The products category includes 3D printers, healthcare simulators and digitizers, software licenses, 3D scanners and haptic devices. The materials category includes a wide range of materials to be used with our 3D printers, the majority of which are proprietary, as well as acquired conventional dental materials. The services category includes maintenance contracts and services on 3D printers and simulators, software maintenance, on demand manufacturing solutions and healthcare services. Beginning in 2018, we have classified product warranty revenue and related expenses are included within the products category, and we have reclassified prior period amounts from services to products to conform to current year presentation.

Due to the relatively high price of certain 3D printers and a corresponding lengthy selling cycle and relatively low unit volume of the higher priced printers in any particular period, a shift in the timing and concentration of orders and shipments from one period to another can affect reported revenue in any given period. Revenue reported in any particular period is also affected by timing of revenue recognition under rules prescribed by U.S. generally accepted accounting principles (“GAAP”).

In addition to changes in sales volumes, and the impact of revenue from acquisitions, there are two other primary drivers of changes in revenue from one period to another: (1) the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and (2) 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.

Table 23