3D SYSTEMS CORP (DDD) FY 2022 MD&A

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

The following discussion and analysis should be read together with our consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. Certain statements contained in this discussion may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as discussed more fully in this Form 10-K. See “Risk Factors” in Part I, Item 1A and “Forward-Looking Statements”. All amounts are in thousands, except share and per share amounts, or as otherwise indicated.

For discussion related to the results of operations and changes in financial condition for fiscal 2021 compared to fiscal 2020, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2021 Form 10-K. Our fiscal 2021 Form 10-K was filed with the SEC on March 1, 2022.

Business Overview

3D Systems Corporation (“3D Systems” or the “Company” or “we,” "our" or “us”) 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 and Oceania region (collectively referred to as “APAC”). We provide comprehensive 3D printing and digital manufacturing solutions, including 3D printers for plastics and metals, materials, software, and digital design tools. Our solutions support advanced applications in two key industry verticals: Healthcare Solutions and Industrial Solutions. We have over 35 years of experience and expertise, which have proven vital to our development of an ecosystem and end-to-end digital workflow solutions that enable customers to optimize product designs, transform workflows, bring innovative products to market and drive new business models.

The Company has two reportable segments, Healthcare Solutions and Industrial Solutions.

Overview and Strategy

In May 2020, our Chief Executive Officer and President, Dr. Jeffrey Graves, was hired. Dr. Graves undertook an initial assessment of the Company and developed the purpose statement to be the leader in enabling additive manufacturing solutions for applications in growing markets that demand high reliability products. He announced a four-phased plan to enable this vision: reorganize into two key industry verticals (Healthcare Solutions and Industrial Solutions), restructure to gain efficiencies, divest non-core assets, and invest for future growth.

As part of our strategic plan, we have organized into two key verticals. This structure allows us to align our application-oriented approach with deep industry and customer knowledge. Our two key verticals span a range of industries. Healthcare Solutions includes dental, medical devices, personalized health services and regenerative medicine. Our Industrial Solutions vertical includes aerospace, defense, transportation and general manufacturing. We architect solutions specific to customers’ needs through a combination of materials, hardware platforms, software, professional services and advanced manufacturing – creating a path to integrating additive manufacturing into traditional production environments. As a result, manufacturers achieve design freedom, increase agility, scale production and improve overall total cost of operation. Our technologies and process knowledge enable hundreds of thousands of production parts to be made through additive manufacturing each day.

In conjunction with our four-phased plan, we completed our initial restructuring efforts in the second quarter of 2021. Cost reduction efforts included reducing the number of facilities and examining every aspect of our manufacturing and operating costs. However, given the current macroeconomic challenges, we continue to look for ways to manage costs. In the second quarter of 2022, we notified one of our printer assembly outsourcing partners of our intent to terminate the manufacturing services arrangement and in-source our printer assembly and production process, as we believe this is an opportunity to improve customer delivery and reduce costs. The exit agreement was finalized in July 2022 and resulted in a $1.7 million exit fee that we paid in the third quarter of 2022, as well as the purchase of $23.9 million of inventory and $0.4 million of fixed assets from the assembly manufacturer. Part of the inventory purchased was prepaid during previous quarters for $8.9 million, resulting in a net payment of $17.1 million in July 2022.

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Divestitures (see Note 4 to the Consolidated Financial Statements for further details)

In conjunction with our four-phased plan, we divested parts of our business that did not align with our strategic focus on additive manufacturing. The divestitures were completed in 2021, with net proceeds totaling $451.2 million. In January 2021, we sold Cimatron Ltd., which operated our Cimatron integrated CAD/CAM software for the tooling business and its GibbsCAM CNC programming software business. In August 2021, we sold our Simbionix line of surgical simulators. In September 2021, we sold our On Demand Manufacturing ("ODM") business. These divestitures represent the completion of our planned divestitures of non-core assets as part of the strategic plan noted above.

Acquisitions/Investments (See Note 3 to the Consolidated Financial Statements for further details)

The last phase of the plan is to invest in growth. Once the restructuring phase and the divestitures of non-core assets were complete, the Company made several acquisitions and investments.

On October 4, 2022, we completed the acquisition of dp polar, a German-based designer and manufacturer of the industry’s first additive manufacturing system designed for true high-speed mass production of customized components, for $26.7 million, of which $19.6 million was paid in cash and the remainder was paid via the issuance of the Company’s common stock. An additional payment of $2.2 million via the issuance of 249,865 shares of the Company’s common stock is possible upon the continued employment of a certain key individual from dp polar through October 4, 2024. Central to dp polar’s patented continuous printing process is a large-scale, segmented, rotating print platform that eliminates the start/stop operations of virtually all additive manufacturing platforms. With dp polar’s technology and patented polar coordinate control, the print heads remain stationary above the rotating platform, providing a continuous print process. The acquisition’s near-term impact on the Company’s results of operations and cash flows is expected to be dilutive.

On April 1, 2022, we completed the acquisition of 93.75% of Kumovis for an all-cash purchase price of $37.7 million. $3.6 million of the purchase price is deferred for up to fifteen months from the closing date. Kumovis, which is part of the Healthcare Solutions segment, utilizes polyether ether keton or “PEEK” materials, which have properties that lend it to many medical applications, including many implant applications, that fit into our personalized healthcare solutions operations. The acquisition’s near-term impact on the Company’s results of operations and cash flows is expected to be dilutive.

On April 1, 2022, we completed the acquisition of 100% of Titan for an all-cash purchase price of $39.0 million. Titan, which is part of the Industrial Solutions segment, is a pellet-based extrusion platform that addresses customer applications requiring large build volumes, superior performance, and improved productivity at significantly lower cost. We believe the acquisition of Titan will open up new markets in the Industrial Solutions segment. The acquisition’s near-term impact on the Company’s results of operations and cash flows is expected to be dilutive.

In March 2022, the Saudi Arabian Industrial Investments Company ("Dussur") and 3D Systems signed an agreement to form a joint venture intended to expand the use of additive manufacturing within the Kingdom of Saudi Arabia and surrounding geographies, including the Middle East and North Africa. The joint venture is to enable the development of Saudi Arabia's domestic additive manufacturing production capabilities, consistent with the Kingdom’s ‘Vision 2030,’ which is focused on diversification of the economy and long-term sustainability. Once the joint venture is formed, 3D Systems will own approximately 49% and is committed to an initial investment of about $6.5 million, of which $3.4 million has been deposited in an escrow account and is reported as restricted cash within other assets on the balance sheet as of December 31, 2022. Use of the amount deposited in escrow is limited to funding the Company's initial investment in the joint venture, and such amount is expected to be deposited into a bank account of the joint venture for use in its operations or to pay outstanding liabilities upon legal formation. Additional future investments are contingent upon the achievement of certain milestones by the joint venture. The impact on the Company’s financial position, results of operations and cash flows is not expected to be material other than the cash outflow(s) related to the initial and contingent investments.

In March 2022, we made a $10.0 million investment for an approximate 26.6% ownership interest in Enhatch, the developer of the Intelligent Surgery Ecosystem. We simultaneously entered into a collaboration and supply agreement with Enhatch. We also obtained warrants to purchase additional shares of Enhatch and the right to purchase, in the future, the remaining shares of Enhatch that 3D Systems does not own if certain revenue targets are achieved. Enhatch's Intelligent Surgery Ecosystem provides technologies which streamline and scale the design and delivery of patient-specific medical devices by automating the process. Incorporating these capabilities into 3D Systems’ workflow for patient-specific solutions, which includes advanced software, expert treatment planning services, custom implants, instrumentation design, and industry-leading production processes, will help more efficiently meet the growing demand for personalized medical devices.

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During the third quarter of 2022, the Company recorded an impairment charge of $2.8 million related to the carrying value of its investment in Enhatch. This impairment charge was the result of lower than projected revenues recognized by Enhatch during the quarter, as well as a reduction to near-term forecasted revenues due to a delay in receiving certain regulatory approvals. In addition, the carrying value of the Enhatch warrants, which are required to be recorded at their fair value as of the end of each quarter, was reduced from $0.3 million to $0.2 million. The Company has recorded the impairment charge related to its Enhatch investment, as well as the change in the value of the Enhatch warrants, within interest and other income (expense), net on the statement of operations for the year ended December 31, 2022.

On December 1, 2021, we acquired Volumetric for $40.2 million. Additional payments of up to $355.0 million are possible upon (1) the attainment of seven non-financial milestones, each of which requires achievement prior to either December 31, 2030 or December 31, 2035, and (2) the continued employment of certain key individuals from Volumetric. Volumetric’s mission is to develop the ability to manufacture human organs using bioprinting methods and the underlying technologies required to create these highly complex biological structures. With this acquisition, we expanded our capabilities and capacity in 3D printing related to bio-printing and regenerative medicine. Combining 3D Systems' regenerative medicine group with Volumetric’s highly complementary skill sets of biological expertise and cellular engineering is expected to accelerate our core regenerative medicine strategies which include the bio-printing of human organs, additional non-organ applications and bio-printing technologies for research labs. The acquisition’s near-term impact on the Company's results of operations and cash flows has been dilutive. Volumetric's operating results are reported in the Healthcare Solutions segment.

On November 1, 2021, we acquired Oqton for $187.8 million. Oqton is a software company that creates an intelligent, cloud-based MOS platform tailored for flexible production environments that increasingly utilize a range of advanced manufacturing and automation technologies, including additive manufacturing solutions, in their production workflows. The cloud-based solution leverages the Industrial Internet of Things, artificial intelligence, and machine learning technologies to deliver a solution for customers to automate their digital manufacturing workflows, scale their operations and enhance their competitive position. The Oqton acquisition will allow the Company to expand its existing additive manufacturing software suite to the entire additive industry. Oqton's operating results are reported in the Industrial Solutions segment and the acquisition’s impact on the Company’s financial position, results of operations and cash flows has been dilutive.

In May 2021, we purchased Allevi, Inc. to expand regenerative medicine initiatives into medical and pharmaceutical research and development laboratories. Additionally, in June 2021, we closed the acquisition of a German software firm, Additive Works GmbH (“Additive”). Additive expands the simulation capabilities for rapid optimization of industrial-scale 3D printing processes. The purchase price for both acquisitions, individually and combined, and the impacts to the Company’s financial position, results of operations and cash flows are not material.

COVID-19 Pandemic

Our offices are currently open and business travel has resumed, with safety measures in place and in accordance with local guidance. However, we continue to monitor and review guidance from international and domestic authorities regarding COVID-19 and remain committed to protecting our employees, delivering for our customers, and supporting our communities. If the COVID-19 pandemic resurges, governmental authorities may reimpose health and safety requirements that could restrict or prevent normal business activities. Refer to “Risk Factors” in Part I, Item 1A for a discussion of the risks to our business if the COVID-19 pandemic was to resurge.

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Background

We earn revenue from the sale of products and services through our Healthcare Solutions and Industrial Solutions segments. The product categories include 3D printers and corresponding materials, healthcare simulators (which was divested in third quarter of 2021), digitizers, software licenses, 3D scanners and haptic devices. The majority of materials used in our 3D printers are proprietary. The services category includes maintenance contracts and services on 3D printers and simulators, software maintenance, software as a service subscriptions, on-demand solutions (which was divested in the third quarter of 2021) and healthcare solutions services.

Given the relatively high price of certain 3D printers and a corresponding lengthy selling cycle, as well as 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 materially affect reported revenue in any given period.

In addition to changes in sales volumes, there are three other primary drivers of changes in revenue from one period to another: (1) divestitures, (2) the combined effect of changes in product mix and average selling prices and (3) 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, divestitures or foreign exchange.

Summary of Financial Results for the Years Ended December 31, 2022 and 2021

Consolidated revenue

Total consolidated revenue for the year ended December 31, 2022 decreased $77.6 million or 12.6% to $538.0 million, compared to $615.6 million for the same period last year, primarily driven by divestitures of non-core businesses and the negative impacts of foreign exchange, partially offset by higher sales volumes. Revenue from divested businesses for the year ended December 31, 2021 was $71.7 million, foreign exchange negatively impacted revenue in the year ended December 31, 2022 by $24.1 million, and higher sales volumes resulted in a $17.0 million increase in revenue.

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Consolidated gross profit

Gross profit for the year ended December 31, 2022 decreased $49.5 million, or 18.8%, to $214.2 million, compared to $263.8 million for the same period last year. Gross profit margin for the year ended December 31, 2022 and 2021 was 39.8% and 42.8%, respectively. The decrease in gross profit is primarily a result of divestitures of $33.5 million, cost inflation, and supply chain pressures.

Consolidated selling, general and administrative expense

Selling, general and administrative ("SG&A") expense for the year ended December 31, 2022 increased $16.5 million, or 7.2%, to $244.2 million, compared to $227.7 million for the same period last year. SG&A expense was impacted by the Company’s acquisitions of Titan, Kumovis, and dp polar during fiscal year 2022, as well as the Company's acquisitions of Volumetric and Oqton during the fourth quarter of 2021, each of which was consolidated for the full year ended December 31, 2022. Collectively, these acquisitions resulted in the recognition of incremental SG&A expense of $28.7 million for fiscal year 2022. This increase in SG&A expense due to acquisitions was partially offset by a $22.9 million decrease in SG&A expense driven by the Company’s divestitures of Simbionix and ODM during fiscal year 2021.

The primary drivers of the $16.5 million increase in SG&A expense for fiscal year 2022 – inclusive of the $5.8 million net increase due to the impacts of the Company’s recent acquisitions and divestitures – include:

Corporate litigation and settlement costs increased during fiscal year 2022 primarily due to non-recurring settlement accruals related to various compliance and litigation matters discussed in Note 23 to the consolidated financial statements included in Item 8 of this Form 10-K, as well as the incremental legal costs incurred to address those compliance and litigation matters.

The expense attributable to the Volumetric earnout increased during fiscal year 2022 due to the recognition of a full year of expense in fiscal year 2022 versus a partial year of expense in fiscal year 2021, as the acquisition of Volumetric occurred on December 2021.

Amortization expense increased during fiscal year 2022 due to the recognition of a partial year of amortization related to intangible assets resulting from the fiscal year 2022 acquisitions and the recognition of a full year of amortization related to intangible assets resulting from the fiscal year 2021 acquisitions.

Compensation and other labor costs decreased during fiscal year 2022 primarily due to lower incentive compensation consisting of bonuses and stock-based compensation.

Other drivers of the increase in total SG&A expense for fiscal year 2022 include increased marketing, travel, software and hardware costs.

Consolidated research and development expense

Research and development ("R&D") expense for the year ended December 31, 2022 increased $17.9 million, or 25.9%, to $87.1 million, as compared to $69.2 million for the same period last year. R&D expense was impacted by the Company’s acquisitions of Titan, Kumovis, and dp polar during fiscal year 2022, as well as the Company's acquisitions of Volumetric and Oqton during the fourth quarter of 2021, each of which was consolidated for the full year ended December 31, 2022. Collectively, these acquisitions resulted in the recognition of incremental R&D expense of $11.4 million for fiscal year 2022. This increase in R&D expense due to acquisitions was partially offset by a $6.9 million decrease in R&D expense driven by the Company’s divestiture of Simbionix during fiscal year 2021.

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The primary drivers of the $17.9 million increase in R&D expense for fiscal year 2022 – inclusive of the $4.5 million net increase due to the impacts of the Company’s recent acquisitions and divestitures – include:

The increases during fiscal year 2022 for compensation and other labor costs and operating supplies are primarily due to expenses from acquired businesses with significant R&D activities, partly offset by the absence of expenses from the divestiture of Simbionix.

Consolidated operating loss

Our operating loss for the year ended December 31, 2022 was $117.0 million, compared to a $33.1 million operating loss for the same period last year, due to lower gross profit and higher SG&A and R&D expenses as discussed above.

Results of Operations for 2022 and 2021

Segments income statements

The following table sets forth our operating results by segment for the years ended December 31, 2022 and 2021:

(a) - General corporate expense, net includes expenses not specifically attributable to our segments for functions such as human resources, finance, legal and information technology, including salaries, benefits, and other related costs, company-wide incentive compensation and stock-based compensation.

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Revenue

The following table sets forth our revenue by segment for the years ended December 31, 2022 and 2021:

For the year ended December 31, 2022, Healthcare Solutions revenue decreased $45.2 million, or 14.8%, to $261.0 million, as compared to $306.2 million for the same period last year primarily due to divestitures, the negative impacts of foreign exchange, and lower sales volumes in the dental market, partially offset by higher volumes and favorable sales price/mix in other markets. For the years ended December 31, 2022 and 2021, products revenue from Healthcare Solutions contributed $179.4 million and $217.7 million, respectively. The decreased products revenue in Healthcare Solutions is primarily due to the impact of divestitures of $23.0 million, and lower sales volumes in the dental market, partially offset by higher volumes and favorable sales price/mix in other markets. For the years ended December 31, 2022 and 2021, services revenue from Healthcare Solutions contributed $81.6 million and $88.4 million, respectively. The decreased services revenue in Healthcare Solutions is primarily due to the impact of divestitures of $8.8 million, partially offset by favorable sales price/mix.

For the year ended December 31, 2022, Industrial Solutions revenue decreased $32.4 million, or 10.5%, to $277.0 million as compared to $309.5 million in the same period last year primarily due to divestitures and the negative impacts of foreign exchange partially offset by higher sales volumes. For the years ended December 31, 2022 and 2021, products revenue from Industrial Solutions contributed $216.0 million and $211.0 million, respectively. The increased Industrial Solutions products revenue was primarily due to higher sales volumes, partially offset by the negative impact of foreign exchange. For the years ended December 31, 2022 and 2021, services revenue from Industrial Solutions contributed $61.1 million and $98.5 million, respectively. The decreased services revenue in Industrial Solutions is primarily due to divestitures and the negative impacts of foreign exchange partially offset by higher sales volumes.

The following table sets forth changes in our products and services revenue for the years ended December 31, 2022 and 2021.

For the year ended December 31, 2022, the decrease in products revenue was due to divestitures, and the negative impacts of foreign exchange, partially offset by higher sales volumes and favorable sales price/mix. The decrease in services revenue was due to divestitures and the negative impact of foreign exchange, partially offset by higher sales volumes.

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Gross profit and gross profit margins

The following table sets forth our gross profit and gross profit margins by segment:

For the year ended December 31, 2022, Healthcare Solutions gross profit and gross profit margin decreased compared to the same period last year primarily due to lower sales volumes in the dental market, divestitures of $16.7 million and inflationary cost pressures.

For the year ended December 31, 2022, Industrial Solutions gross profit decreased compared to the same period last year primarily due to divestitures of $16.8 million and inflationary cost pressures, partially offset by an increase in sales volumes.

The following table sets forth our products and services gross profit and gross profit margins for the years ended December 31, 2022 and 2021.

For the year ended December 31, 2022, the decrease in products and services gross profit and gross profit margin compared to the same period last year is primarily a result of divestitures of $33.5 million, lower sales volumes in the dental market and inflationary cost pressures partially offset by higher sales volumes in non-dental markets.

Operating expenses

The following table sets forth our operating expenses by segment for the years ended December 31, 2022 and 2021:

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(a) Segment operating expenses exclude expenses not specifically attributable to our segments for functions such as human resources, finance, legal and information technology, including salaries, benefits, and other related costs, company-wide incentive compensation and stock-based compensation.

For the year ended December 31, 2022, Healthcare Solutions' operating expenses increased by $6.6 million compared to the same period last year. The increase was primarily due to the continued investments in growth initiatives. The impact of acquisitions was materially offset by divestitures.

For the year ended December 31, 2022, Industrial Solutions' operating expenses increased by $13.2 million primarily due to a $18.9 million related to acquisitions and continued investments in growth initiatives, partially offset by the impact of divestitures of $8.4 million.

For the year ended December 31, 2022, Corporate operating expenses increased by 14.7 million compared to the same period last year. This increase was primarily driven by an increase of $19.9 million attributable to legal costs and the accrual of estimated settlements, an increase of $5.9 million of amortization expense attributable to the Company's fiscal year 2021 and fiscal year 2022 acquisitions, and an increase of $5.0 million attributable to consulting and other professional services costs. The primary offset to the increases in Corporate operating expenses was a $21.1 million decrease in incentive compensation costs that are not allocated to the Company's reportable segments.

Interest and other (expense) income, net

The following table sets forth the components of interest and other (expense) income, net for the years ended December 31, 2022 and 2021.

For the year ended December 31, 2022, foreign exchange (loss) gain, net, as compared to the same period last year, reported a loss due to the strengthening of the U.S. Dollar relative to the Euro, British Pound and other currencies, which negatively impacted non-U.S. Dollar denominated assets held by U.S. Dollar functional currency entities and U.S. Dollar liabilities held by non-U.S. Dollar functional currency entities.

For the year ended December 31, 2022, interest income (expense), net increase as compared to the same period last year due to net interest earned on short-term investments made using the cash proceeds from the 2021 divestitures and convertible debt issuance, partially offset by non-cash interest expense related to the convertible notes.

For the year ended December 31, 2022, other income decreased, as compared to the same period last year, due to: (1) the $2.8 million impairment loss related to the Company’s investment in Enhatch being recognized during the year ended December 31, 2022 and (2) the gain on sale of ODM of $38.5 million, the gain on sale of Simbionix of $273.8 million and the gain on sale of Cimatron of $38.5 million being recognized during the year ended December 31, 2021.

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Net (loss) income

The following table sets forth the net (loss) income for the years ended December 31, 2022, and 2021.

We recorded a $2.1 million tax provision and a $2.5 million tax benefit for the years ended December 31, 2022 and 2021, respectively.

In 2022, our provision reflected $0.4 million in U.S. tax benefit and $2.5 million of tax expense in foreign jurisdictions. In 2021, our provision reflected $6.6 million in U.S. tax benefit and $4.1 million of tax expense in foreign jurisdictions.

During 2022 and 2021, we concluded that it is more likely than not that our deferred tax assets will not be realized in certain jurisdictions, including the U.S. and certain foreign jurisdictions; therefore, we have a valuation allowance recorded against our deferred tax assets on our consolidated balance sheets totaling $100.7 million and $91.2 million as of December 31, 2022 and 2021, respectively.

For further discussion, regarding our provision/benefit for income taxes see Note 2 and Note 22 to the consolidated financial statements in Item 8 of this Form 10-K.

The net loss attributable to 3D Systems for the year ended December 31, 2022, as compared to the net income attributable to 3D Systems for the year ended December 31, 2021, was primarily driven by an increase in our loss from operations and the 2021 gains on the divestitures of Cimatron, ODM and Simbionix, as previously discussed.

Liquidity and Capital Resources

The following table sets forth the net liquidity and capital resources at December 31, 2022, and 2021.

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We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments and accounts payable turns. Our cash requirements, excluding acquisitions, primarily consist of funding working capital and capital expenditures.

At December 31, 2022, cash and cash equivalents and short-term investments totaled $568.7 million and decreased $220.9 million since December 31, 2021. This decrease resulted primarily from cash paid for acquisitions and other investments of $103.7 million, cash used in operations of $70.0 million, capital expenditures of $20.9 million, and taxes paid related to net-share settlement of equity awards of $10.9 million.

At December 31, 2021, cash and cash equivalents totaled $789.7 million and increased $705.3 million since December 31, 2020. The higher cash balance resulted from proceeds of $421.1 million from the Cimatron, ODM, and Simbionix divestitures, $446.5 million of proceeds from the issuance of convertible notes, and $48.1 million of cash flow from operations, partially offset by $21.4 million for repayments of debt, $18.8 million for capital expenditures, $139.7 million for current acquisitions, $12.6 million related to net settlement of stock-based compensation, and $6.3 million of payments related to previously purchased non-controlling interests. Cash flow from operations was negatively impacted by withholding taxes of $6.6 million related to the Cimatron divestiture.

We expect that cash flow from operations, cash and cash equivalents, short-term investments, and other sources of liquidity, such as issuing equity or debt securities subject to market conditions, will be available and sufficient to meet all foreseeable cash requirements.

Cash held outside the U.S. at December 31, 2022 was $58.4 million, or 15.0% of total cash and cash equivalents, compared to $62.7 million, or 7.9% of total cash and cash equivalents at December 31, 2021. As our previously unremitted earnings have been subjected to U.S. federal income tax, we expect any repatriation of these earnings to the U.S. would not incur significant federal and state taxes. However, these dividends are subject to foreign withholding taxes that are estimated to result in the Company incurring tax costs in excess of the cost to obtain cash through other means. Cash equivalents are comprised of funds held in money market instruments and are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments. We strive to minimize our credit risk by investing primarily in investment grade, liquid instruments and limit exposure to any one issuer depending upon credit quality. See “Cash flow” discussion below.

The changes that make up the other components of working capital not discussed above resulted from 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, acquisitions and divestitures.

Cash flow

Cash flow from operations

For the year ended December 31, 2022, cash used in operating activities was $70.0 million and cash provided by operating activities for the year ended December 31, 2021 was $48.1 million. The $118.1 million decrease in cash flow from operating activities during the year ended December 31, 2022, as compared to the prior year, is primarily due to the $84.0 million increase in losses from operations and the $49.6 million increase in working capital (excluding cash, cash equivalents and short-term investments). The higher working capital primarily related to an increase in inventory balances to manage supply chain challenges and as a result of the purchase of $23.9 million of inventory from a contract manufacturer in connection with our decision to terminate the manufacturing services arrangement. In addition, there was a decrease in accrued liabilities primarily due to lower incentive compensation accruals, partially offset by a reduction in accounts receivable due to lower revenue.

Cash provided by operating activities for the year ended December 31, 2021 was $48.1 million. Working capital used cash of $0.7 million for the year ended December 31, 2021. For the year ended December 31, 2021, working capital changes related to cash inflows were a decrease in inventory and an increase in accounts payable, partially offset by an increase in accounts receivable, and prepaid expenses and other current assets, and a decrease in deferred revenue, and other liabilities.

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Cash flow from investing activities

For the year ended December 31, 2022, cash used in investing activities was $308.4 million compared to $260.6 million of cash provided by investing activities for the year ended December 31, 2021. The investing cash outflows in 2022 included investments of $384.4 million of excess cash in short-term investments offset by $200.3 million proceeds from the sales and maturities of such investments, the cash used for acquisitions of $103.7 million, and capital expenditures of $20.9 million.

For the year ended December 31, 2021, cash provided by investing activities was $260.6 million, which included $421.5 million of proceeds from the sales of businesses, partially offset by cash used for acquisitions and other investments of $139.7 million and capital expenditures of $18.8 million.

Cash flow from financing activities

For the year ended December 31, 2022, the cash flow used in financing activities was $13.8 million primarily due to taxes paid related to the net-share settlement of equity awards of $10.9 million and the $2.3 million payment for the acquisition of a non-controlling interest.

For the year ended December 31, 2021, the cash flow provided by financing activities was $405.8 million due to net cash proceeds from the issuance of the convertible note of $446.5 million, the repayment of the remaining balance of the outstanding 5-year $100.0 million secured term loan facility of $21.4 million, the taxes paid related to net-share settlement of equity awards of $12.6 million and the payment for the acquisition of a non-controlling interest of $6.3 million.

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.

Material Cash Requirements

The Company's material cash requirements consist of the following contractual and other obligations:

Indebtedness

At December 31, 2022, we had $460 million of outstanding 0% convertible notes which mature in November of 2026. Management may consider pursuing additional long-term financing when it is appropriate in light of cash requirements for operations or other strategic opportunities, which could result in higher financing costs.

Purchase Commitments

We have purchase commitments under legally enforceable agreements for goods and services with defined terms as to quantity, price and timing of delivery.

Leases

The Company had operating and financing lease obligations (inclusive of interest) of $65.3 million at December 31, 2022, primarily related to real estate and equipment leases, of which approximately $11.6 million in payments are expected over the next twelve months. Additionally, at December 31, 2022, the Company had $33.4 million in lease obligations for which the leases have not commenced as the facilities are under construction by the landlord. For more information on the Company's leases, refer to Note 7 to the consolidated financial statements in Item 8 of this Form 10-K.

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Dussur

In March 2022, we and the Saudi Arabian Industrial Investments Company ("Dussur") signed an agreement to form a joint venture intended to expand the use of additive manufacturing within the Kingdom of Saudi Arabia and surrounding geographies, including the Middle East and North Africa. The joint venture is to enable the development of Saudi Arabia's domestic additive manufacturing production capabilities, consistent with the Kingdom’s ‘Vision 2030,’ which is focused on diversification of the economy and long-term sustainability. Once the joint venture is formed, 3D Systems will own approximately 49% and is committed to an initial investment of about $6.5 million, of which $3.4 million has been deposited in an escrow account and is reported as restricted cash within other assets on the balance sheet as of December 31, 2022. Use of the amount deposited in escrow is limited to funding the Company's initial investment in the joint venture, and such amount is expected to be deposited into a bank account of the joint venture for use in its operations or to pay outstanding liabilities upon legal formation. Additional future investments are contingent upon achievement of certain milestones by the joint venture. The impact on the Company’s financial position, results of operations and cash flows is not expected to be material other than the cash outflow(s) related to the initial and contingent investments.

Sources of Funding to Satisfy Material Cash Requirements

The Company believes that it has the financial resources needed to meet its cash requirements. Cash requirements for periods beyond the next twelve months will depend, among other things, on the Company’s profitability and its ability to manage working capital requirements. The Company may also borrow from various sources as described above.

Other Contractual Commitments

Convertible Note

We were in compliance with all covenants of the outstanding 0% convertible notes due November 2026 as of December 31, 2022.

Indemnification

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

To the extent permitted under Delaware law, we indemnify our directors and officers for certain events or occurrences while the director or officer is, or was, serving at our request in such capacity, subject to limited exceptions. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have directors’ and officers’ insurance coverage that may enable us to recover future amounts paid, subject to a deductible and to the policy limits.

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 U.S. balance sheet and those of our subsidiaries in order to reduce these risks. We also, when we consider it appropriate, enter into foreign currency contracts to hedge exposures arising from those transactions. We had $0 and $43.0 million in notional foreign exchange contracts outstanding as of December 31, 2022 and 2021, respectively. The fair value of these contracts was not material. We have 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 consolidated statements of operations and comprehensive income (loss). Depending on the fair value at the end of the reporting period, derivatives are recorded either in prepaid and other current assets or in accrued liabilities in the consolidated balance sheets.

We do not hedge for trading or speculative purposes, and our foreign currency contracts are generally short-term in nature, typically maturing in 90 days or less. See Note 15 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion.

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Critical Accounting Policies and Significant Estimates

We prepare our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses, gains and losses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in our accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between our estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.

See Note 2 to the consolidated financial statements in Item 8 of this Form 10-K for a summary of significant accounting policies.

Revenue recognition

Revenue is recognized for the amount of consideration we expect to receive in exchange for products or services when control of those promised products or services is transferred to customers, which generally occurs when the goods have been shipped or delivered to the customer, risk of loss has transferred to the customer, and we have a present right to payment.

We enter into contracts that include various combinations of products and services that are generally capable of being distinct and are accounted for as separate performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation in a contract. For the majority of items, we estimate SSP using historical transaction data. We use 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 is not sold separately, we determine the SSP using information that may include market conditions and other observable inputs.

In some circumstances, we have 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, we may use information such as the size of the customer and geographic region in determining the SSP. The determination of SSP is an ongoing process, and information is reviewed regularly in order to ensure SSP reflects the most current information or trends.

The nature of our marketing incentives may lead to consideration that is variable. Judgment is exercised at contract inception to determine the expected value of the contract and resulting transaction price. Ongoing assessments are performed to determine if updates are needed to the original estimates.

See Note 2 and Note 5 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion.

Allowance for doubtful accounts

In evaluating the collectability of our accounts receivable, we assess a number of factors, including specific customers’ abilities to meet their financial obligations to us, the length of time receivables are past due, historical collection experience, current economic conditions, and reasonable and supportable forecasts. Based on these assessments, we may record a reserve for specific customers, as well as a general reserve and allowance for returns and discounts. If circumstances related to specific customers change, or economic conditions deteriorate such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided for in the consolidated financial statements.

We evaluate specific accounts for which we believe a customer may have an inability to meet their financial obligations (for example, aging over 90 days past due or bankruptcy). In these cases, we use our judgment, based on available facts and circumstances, and record a specific reserve for that customer to reduce the receivable to an amount we expect to collect. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved.

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Income taxes

We are subject to income taxes in the U.S. and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.

The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities which may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for income taxes.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost being determined using standard costing, which approximates the first-in, first-out method.

The inventory reserve is a critical estimate as there is rapid technological change in our industry impacting the market for our products and there is significant judgment in estimating the amount of spare parts to keep on hand to service previously sold printers for periods of up to 10 or more years.

See Note 8 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion.

Business combinations and purchase accounting

We apply purchase accounting to transactions that meet the definition of business combinations. When applying purchase accounting, we are required to estimate the fair value of the assets acquired and liabilities assumed in a business combination as of the acquisition date, for which the Company engages a third-party valuation specialist to assist. The application of purchase price accounting oftentimes results in the identification and valuation of intangible assets that may not have been previously recognized on the balance sheet of the acquired company. The amount of purchase price paid in excess of the net assets acquired is recorded as goodwill.

The fair values of acquired assets and assumed liabilities are estimated in accordance with accounting standards which define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Management must apply judgment when identifying the intangible assets acquired as part of a business combination, as well as when determining the appropriate valuation technique to be applied to all acquired assets and assumed liabilities. Management also must make significant estimates and assumptions when determining the inputs for inclusion in the related valuation models. The fair values of the net assets acquired are determined primarily using Level 3 inputs (inputs that are unobservable to the marketplace participant).

The most significant estimates and assumptions relate to the determination of (1) the fair values of identified intangible assets (e.g., developed technology, trade names) and (2) the period and pattern of amortization for intangible assets that are assigned a definite life. The fair values of acquired intangible assets primarily have been determined based on projected cash flows attributable to the operations of the acquiree. The projected cash flows include various assumptions, including estimated revenue growth rates, operating margins, R&D expenditures, capital expenditures, royalty rates, and appropriate risk-adjusted discount rates used to discount the projected cash flows. The usage of different assumptions would result in the assignment of different fair values to the acquired identifiable intangible assets and the resulting assignment of purchase consideration to goodwill. Similarly, changes in the planned usage of the acquired identifiable intangible assets and/or their estimated economic lives, if any, could impact the recoverability of the assets and/or amortization period and expense attributable to the assets in the future.

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Goodwill & other long-lived assets, including intangible assets

We review long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We assess the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived asset over its estimated fair value, as determined by discounted projected cash flows.

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. We review goodwill for impairment annually and, between annual impairment assessments, when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances may include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. The test for goodwill impairment compares the fair value of each of reporting unit to its respective carrying value. The process requires a significant level of estimation and use of judgment by management, particularly to estimate the fair value of our reporting units.

We estimate the fair value of our reporting units based primarily on the discounted projected cash flows of the underlying operations, which requires us to make assumptions about estimated cash flows, including long-term revenue and expense forecasts, profit margins, discount rates and terminal growth rates. We developed these assumptions based on the market risks unique to each reporting unit.

We conducted our annual goodwill impairment test for the years ended December 31, 2022 and 2021 as of November 30, 2022 and 2021, respectively, and concluded there was no goodwill impairment.

Regenerative Medicine earnout payments and performance-based stock units

In connection with the acquisition of Volumetric on December 1, 2021, the Company could be required to pay up to $355.0 million in earnout payments to Volumetric’s former owners (“Sellers”) based upon the achievement of up to seven non-financial milestones. Each of the non-financial milestones, which individually triggers a specific earnout payment if achieved prior to an agreed upon date of either December 31, 2030 or December 31, 2035, is based upon specific advances in regenerative medicine related to lungs or tissue organs. For each milestone, payment is only due to the extent that the Sellers continue to be employed by the Company at the time that a milestone is achieved. As the earnout payments require the continued employment of Volumetric’s Sellers, the Company recognizes each individual earnout payment as compensation expense over the period commencing on the date that the related milestone is deemed probable of achievement through the anticipated date of achievement.

In addition, the Company has granted performance-based stock units (“PSUs”) with vesting terms that are based upon four individually-measured, non-financial milestones to other employees who work on advancements in regenerative medicine related to lungs and tissue organs. The PSUs associated with each individual milestone are recognized as compensation expense over the period commencing on the date that the respective milestone is deemed probable of being met through the anticipated date of achievement.

As the milestones that trigger the Volumetric earnout payments and the vesting of the PSUs are (1) based upon scientific and technological advancements that are expected to require multiple years of R&D to achieve and (2) subject to significant known and unknown risks and uncertainties, management must apply significant assumptions and judgment at each balance sheet date to assess both the probability of achievement and expected timing of achievement. A change in management’s assumptions or estimates regarding the probability and/or timing of achievement of a milestone in connection with management’s quarterly reassessment can materially impact the amount of compensation expense recognized for the respective and future periods as follows:

•A change in assumptions that results in a milestone first being deemed probable of achievement will result in the recognition of incremental compensation expense in the Company’s consolidated statement of operations;

•A change in assumption regarding the timing of achievement of a milestone will result in the acceleration or deceleration of the recognition of future compensation expense, as well as the potential recognition of an expense catch-up or reversal adjustment in the period of change; and/or

•A change in assumption that results in a milestone no longer being deemed probable of achievement will result in a full reversal of previously recognized expense.

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The Company is currently recognizing compensation expense based upon the assumed achievement of one Volumetric earnout payment milestone for which the potential amount due to the Sellers will be $65 million and one PSU milestone for which the aggregate grant date fair value of the outstanding and unvested awards is $4.5 million. Achievement of each milestone is anticipated to occur as of the end of fiscal year 2025. As of December 31, 2022, unrecognized compensation expense attributable to the Volumetric earnout payment and PSUs deemed probable of being earned was $47.8 million and $3.4 million, respectively. Changes in management’s assumptions regarding the probability and/or timing of achievement of these respective milestones could directly affect the amount of future compensation expense recognized for the reasons described above.

In addition, the Company has not commenced the recognition of compensation expense related to (1) $290 million of Volumetric earnout payments and (2) outstanding PSUs with an aggregate grant date fair value of $13.6 million because the related milestones were not deemed probable of achievement as of December 31, 2022. Changes to management’s assumptions regarding the probability and/or timing of achievement of these remaining milestones could significantly increase the amount of compensation expense recognized by the Company.

Loss contingencies

We record an estimated loss from a contingency when information indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies requires us to use our judgment and the ultimate resolution of our exposure related to these matters may change as further facts and circumstances become known.

See Note 23 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion.

Recent Accounting Pronouncements

See Note 2 to the consolidated financial statements in Item 8 of this Form 10-K for a discussion of recent accounting pronouncements.