3D SYSTEMS CORP (DDD) FY 2021 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 the selected consolidated financial data and 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 “Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A. 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 2020 compared to fiscal 2019, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2020 Form 10-K, which was filed with the SEC on March 5, 2021.

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 and Industrial), 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 solution-oriented approach with deep industry and customer knowledge. Our two key verticals span a range of industries. Healthcare includes dental, medical devices, personalized health services and regenerative medicine. Our Industrial 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.

We completed our restructuring efforts in the second quarter of 2021. Cost reduction efforts have included reducing the number of facilities and examining every aspect of our manufacturing and operating costs.

Divestitures

In conjunction with our four-phased plan, we divested parts of our business that did not align with our strategic focus on additive manufacturing. 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, for $64.2 million. In August 2021 we sold our Simbionix line of surgical simulators for $305.0 million, and in September 2021 we sold our On Demand Manufacturing ("ODM") business for $82.0 million. All sale amounts are before customary closing adjustments.

We have now completed our planned divestitures of non-core assets and are focused on the strategic growth of our core additive manufacturing business.

Acquisitions

On November 1, 2021, we acquired Oqton, Inc. (“Oqton”), for $188.2 million, excluding customary closing adjustments. We paid $107.5 million in cash and issued 2,552,904 shares of the Company’s Common Stock. The acquisition’s near term impact on the Company’s results of operations and cash flows are expected to be dilutive. Oqton's operating results will be reported in the Industrial segment.

On December 1, 2021, we acquired Volumetric Biotechnologies, Inc. (“Volumetric”), for $40.2 million of which $24.8 million was paid in cash and the remainder was paid via the issuance of 720,022 shares of the Company's common stock. Additional payments of up to $355.0 million are possible which are linked to the attainment of several non-financial milestones through December 31, 2030 and 2035 and continued employment of certain key individuals from Volumetric. Any additional payments made will be paid approximately half in cash and half in shares of the Company’s common stock. The additional payments are considered compensation expense which will be recorded ratably from the time a milestone is deemed is probable of achievement to the estimated date of achievement. Any compensation expense recorded will be reversed if the milestone is no longer probable of achievement. Volumetric will be part of the Healthcare reporting unit and segment. The acquisition’s near-

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term impact on the Company's results of operations and cash flows are expected to be dilutive.

COVID-19 Pandemic Response

Our top priority is the health and safety of our employees and their families and communities, as we continue to manage our business through the COVID-19 pandemic. Throughout this past year, our leadership regularly reviewed and adapted our COVID-19 protocols based on evolving research and guidance. We have reopened our offices and begun business travel, with safety measures in place and in accordance with local guidance. Additionally, we implemented a hybrid-work program globally, providing more flexibility for employees to work remotely. We continue to monitor local transmission rates and regulatory guidance, and remain committed to protecting our employees, delivering for our customers, and supporting our communities. We are subject to vaccination and workplace safety protocols of the United States Federal Government Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors, and the COVID-19 Workplace Safety Guidance for Federal Contractors and Subcontractors issued by the Safer Federal Workforce Task Force. In support of a safe work environment, we have a vaccine policy for our U.S. employees, and a visitor policy to ensure those visiting our sites are taking the necessary health and safety precautions.

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2021 Summary

On August 5, 2020, we announced, in connection with the new strategic focus and organizational realignment, a restructuring plan intended to align our operating costs with current revenue levels and better position the Company for future sustainable and profitable growth. See Note 25 in Item 8 of this Form 10-K.

Total consolidated revenue for the year ended December 31, 2021 increased 10.5% or $58.4 million, despite divesting non-core businesses in 2021, to $615.6 million, compared to $557.2 million for the year ended December 31, 2020, driven by growth in the Healthcare segment.

Revenue from Healthcare increased 24.2% to $306.2 million for the year ended December 31, 2021, compared to $246.4 million for the year ended December 31, 2020, driven by strong demand for dental applications partly offset by the impact of 2021 divestitures. Industrial sales decreased 0.4% to $309.5 million for the year ended December 31, 2021, compared to $310.8 million for the year ended December 31, 2020, primarily due to the impact of 2021 divestitures, partly offset by continued strengthening of the economy in 2021.

Gross profit for the year ended December 31, 2021 increased by 18.1%, or $40.4 million, to $263.8 million, compared to $223.4 million for the year ended December 31, 2020. Gross profit margin for the years ended December 31, 2021 and 2020 was 42.8% and 40.1%, respectively. The increase in gross profit margin was primarily a result of prior year end of life inventory charges and cost optimization expenses, as well as better absorption of supply chain overhead in 2021 resulting from higher production.

Operating expenses for the year ended December 31, 2021 decreased by 13.3%, or $45.5 million, to $296.8 million, compared to $342.3 million for the year ended December 31, 2020 primarily due to significantly lower cost optimization expenses in 2021 and a goodwill impairment charge incurred in 2020, with no similar goodwill impairment in 2021. Selling, general and administrative ("SG&A") expenses for the year ended December 31, 2021 increased by 3.5%, or $7.8 million, to $227.7 million, compared to $219.9 million for the year ended December 31, 2020, primarily due to higher incentive compensation resulting from better than expected performance in 2021 compared to internal targets, a one-time $9.8 million bonus paid to Simbionix employees in connection with the divestiture, investments in the business, increase in stock compensation expenses, and expenses related to acquisitions, partially offset by a decrease in cost optimization expenses. Research and development ("R&D") expenses for the year ended December 31, 2021 decreased by 6.7%, or $5.0 million, to $69.2 million, compared to $74.1 million for the year ended December 31, 2020, primarily due to divestitures and cost savings from the prior year restructuring program. In 2020, we recorded a non-cash goodwill impairment charge of $48.3 million compared to no impairment charge in 2021. See Note 11 to the consolidated financial statements in Item 8 of this Form 10-K for additional discussion.

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Our operating loss for the year ended December 31, 2021 was $33.1 million, compared to an operating loss of $119.0 million for the year ended December 31, 2020. The lower loss was driven by higher revenue and gross profit dollars, benefits from the 2020 cost optimization plan, and the absence of a goodwill impairment charge and reduced cost optimization expenses in 2021, partly offset by higher net SG&A expenses as noted above.

Results of Operations for 2021 and 2020

Comparison of revenue

Current year revenue has improved as the prior year was negatively impacted by the effects of the COVID-19 pandemic, most severely during the first half of 2020, as many of our customers were shutdown or on a significantly reduced level of activity, partially offset by the impact of divestitures. Additionally, 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 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) the combined effect of changes in product mix and average selling prices, (2) the impact of fluctuations in foreign currencies and (3) the impact of business divested in 2021. 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, foreign exchange and divestitures.

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

The following table sets forth changes in revenue for the years ended December 31, 2021 and 2020.

Table 1

Total consolidated revenue increased 10.5%. In addition to changes in sales volumes, there are three 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, (2) the impact of fluctuations in foreign currencies and 3) the impact of businesses divested in 2021. 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, foreign exchange and divestitures. Recurring revenue, which includes service and materials, was $396.9 million and $381.6 million for the years ended December 31, 2021 and 2020, respectively. The increase in recurring revenue in 2021 was primarily due to an increase in material sales volume, partially offset by divestitures.

For the years ended December 31, 2021 and 2020, products revenue from Healthcare contributed $217.7 million and $159.6 million, respectively, and products revenue from Industrial contributed $211.0 million and $173.2 million, respectively. The higher products revenue in Healthcare was primarily due to continued strength in the dental market. The increased products revenue in Industrial was primarily due to higher volumes, favorable price/mix and foreign currency impact, partially offset by divestitures.

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Services revenue for the year ended December 31, 2021 decreased primarily due to divestitures, partially offset by the impact of less severe COVID restrictions in 2021 and the favorable impact of foreign currency translation. For the years ended December 31, 2021 and 2020, services revenue from Healthcare contributed $88.4 million and $86.9 million, respectively, and services revenue from Industrial contributed $98.5 million and $137.6 million, respectively. The higher services revenue in Healthcare was due to strong sales in medical devices, partially offset by divestitures. The lower services revenue in Industrial was due to divestitures, partially offset by the impact of less severe COVID restrictions in 2021.

For the years ended December 31, 2021 and 2020, revenue from operations outside the U.S. was 44.6% and 50.6% of total revenue, respectively.

Gross profit and gross profit margins

The following table sets forth gross profit and gross profit margins for the years ended December 31, 2021 and 2020.

Table 2

The increase in gross profit margin was primarily a result of prior year end of life inventory charges and cost optimization expenses, as well as better absorption of supply chain overhead in 2021 resulting from higher production, offset by the impact of divestitures. See Note 8 to the consolidated financial statements in Item 8 of this Form 10-K for additional discussion.

.Products gross profit increased primarily due to higher sales volume as well as significantly improved capacity utilization and the end-of-life inventory charge of $10.9 million recorded in 2020. Services gross profit decreased primarily due to the impact of divestitures.

Operating expenses

The following table sets forth the components of operating expenses for the years ended December 31, 2021 and 2020.

Table 3

SG&A expenses increased primarily due to higher incentive compensation resulting from better than expected performance in 2021 compared to internal targets, a one-time $9.8 million bonus paid to Simbionix employees in connection with the divestiture, investments in the business, increase in stock compensation expenses, and expenses related to acquisitions, partially offset by a decrease in cost optimization expenses. SG&A expenses for 2020 included $20.1 million of restructuring expenses related to our 2020 cost optimization program. See Note 25 to the consolidated financial statements for additional discussion regarding restructuring.

R&D expenses decreased primarily due to divestitures and cost savings from the prior year restructuring program.

For the year ended December 31, 2021, there were no impairment charges to goodwill. For the year ended December 31, 2020, we recorded a non-cash goodwill impairment charge of $48.3 million, related to the EMEA reporting unit, that was ultimately

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due to the negative impact on the business environment as a result of the COVID-19 pandemic. See Note 11 to the consolidated financial statements in Item 8 of this Form 10-K for additional discussion.

Loss from operations

The following table sets forth loss from operations for the years ended December 31, 2021, and 2020.

Table 4

The decrease in loss from operations for the year ended December 31, 2021, as compared to the prior year period, was primarily driven by an increase in revenue and gross profit, cost savings from the prior year cost optimization program, the absence of a goodwill impairment charge and reduced restructuring expenses related to our 2020 cost optimization program and divestitures, partly offset by higher stock and incentive compensation expenses, as previously discussed.

See “Comparison of Revenue,” “Gross profit and gross profit margins” and “Operating expenses” above.

Interest and other income (expense), net

The following table sets forth the components of interest and other income (expense), net, for the years ended December 31, 2021 and 2020.

Table 5

Foreign exchange gain (loss), net, for the year ended December 31, 2021, as compared to the prior year period, improved due to the favorable movements in the EUR/USD and GBP/USD exchanges rates.

Interest expense, net, decreased for the year ended December 31, 2021, as compared to the prior year period primarily due to lower interest expense due to the repayment of the 5-year $100 million senior secured term loan facility (the "Term Facility") in the first quarter of 2021 and interest income related to cash proceeds from the Cimatron, ODM, and Simbionix divestitures as well as our $460 million convertible notes offering. The year over year benefits for the year ended December 31, 2021 were partially offset by the realization of losses previously recognized in accumulated other comprehensive loss resulting from the termination of the interest rate swap in the first quarter of 2021.

Other income (expense), net, for the year ended December 31, 2021, as compared to the year ended December 31, 2020, increased primarily due to the $350.9 million gain on the divestitures of Cimatron, ODM and Simbionix, including an $8.9 million favorable foreign exchange gain related to the Cimatron and Simbionix divestitures.

Benefit and provision for income taxes

We recorded a $2.5 million tax benefit and a $6.2 million provision for income taxes for the years ended December 31, 2021 and 2020, respectively.

In 2021, our benefit reflected $6.6 million in U.S. tax benefit and $4.1 million of tax expense in foreign jurisdictions. In 2020, our provision reflected $1.8 million in U.S. tax expense and $4.4 million of tax expense in foreign jurisdictions.

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During 2021 and 2020, 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 $91.2 million and $123.1 million as of December 31, 2021 and 2020, respectively.

For further discussion, see Note 2 and Note 22 to the consolidated financial statements in Item 8 of this Form 10-K.

Net income (loss)

The following table sets forth the primary components of net income (loss) attributable to 3D Systems for the years ended December 31, 2021 and 2020.

Table 6

The net income for the year ended December 31, 2021, as compared to the net loss for year ended December 31, 2020, was primarily driven by a decrease in loss from operations and the gain on the divestitures of Cimatron, ODM and Simbionix, as previously discussed. See “Gross profit and gross profit margins”, “Operating expenses”, and Interest and other income (expense), net above.

Liquidity and Capital Resources

Table 7

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.

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At December 31, 2021, cash on hand which includes; cash and cash equivalents and restricted cash totaled $790.0 million, 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, 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, 2021 was $62.7 million, or 7.9% of total cash and cash equivalents, compared to $49.7 million, or 66.2% of total cash and cash equivalents, at December 31, 2020. 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

Cash provided by operating activities for the year ended December 31, 2021 was $48.1 million and cash used in operating activities for the year ended December 31, 2020 was $20.1 million.

Working capital used cash of $0.7 million for the year ended December 31, 2021 and used cash of $7.3 million for the year ended December 31, 2020. 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.

For the year ended December 31, 2020, drivers of working capital related to cash outflows were an increase in accounts receivable, inventory, and prepaid expenses and other current assets, and a decrease in accounts payable, partially offset by an increase in deferred revenue and customer deposits and accrued and other current liabilities.

Cash flow from investing activities

For the year ended December 31, 2021, cash flow provided from investing activities was $260.6 million compared to $11.7 million of cash used in investing activities for the year ended December 31, 2020. Cash inflows related to the net proceeds from the divestitures of Cimatron, ODM and Simbionix, partially offset by capital expenditures and payments related to current acquisitions. For the year ended December 31, 2020, the primary outflows of cash related to capital expenditures. Capital expenditures were $18.8 million and $13.6 million for the years ended December 31, 2021 and 2020, respectively.

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Cash flow from financing activities

Cash provided by financing activities was $405.8 million for the year ended December 31, 2021, while cash used in financing activities was $19.5 million for the year ended December 31, 2020. The primary inflow of cash for the year ended December 31, 2021 related to proceeds from the issuance of the convertible note partially offset by the repayment of the Term Facility, the settlements of stock-based compensation and payments related to previously purchased non-controlling interests. The primary outflow of cash for the year ended December 31, 2020 related to partial repayment of the Term Facility, payments related to previously purchased non-controlling interests, and settlements of stock-based compensation, partially offset by proceeds from the issuance of common stock.

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, 2021, we had $460,000 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 has operating and financing lease obligations of $69,849 at December 31, 2021, primarily related to real estate and equipment leases, of which approximately $11,000 in payments are expected over the next twelve months. Additionally, the Company has $31,108 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.

Sources of Funding to Satisfy Material Cash Requirements

The Company believes that it has the financial resources needed to meet its cash requirements and expects to have positive operating cash flow in 2022. 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 Note as of December 31, 2021.

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.

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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 balance sheet and those of our subsidiaries in order to reduce these risks. When appropriate, we enter into foreign currency contracts to hedge exposures arising from those transactions. We had $43.0 million and $101.8 million in notional foreign exchange contracts outstanding as of December 31, 2021 and 2020, 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.

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 the 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 these 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 and the effect on our financial statements.

Revenue recognition

Revenue is recognized when control of the promised products or services is transferred to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. A majority of our revenue is recognized at the point in time when products are shipped or services are delivered to customers.

We enter 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 our contracts with customers include multiple 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.

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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 and historical collection experience. 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. One customer represents significant concentration of credit risk, as they represent greater than 10% of our total accounts receivable.

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.

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 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.

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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 or when circumstances indicate that the likelihood of an impairment is greater than 50%. Such circumstances 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 the estimate of the fair value of our reporting units. Our reporting units are Healthcare and Industrial. Prior to January 1, 2021 our reporting units were the Americas, EMEA and APAC.

Long-lived assets (including ROU Assets) and amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

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 profit margins, long-term forecasts, discount rates and terminal growth rates. We developed these assumptions based on the market risks unique to each reporting unit.

As of December 31, 2021, we have approximately $0.6 million of goodwill that is deductible for tax purposes.

As of September 30, 2020, we experienced a triggering event due to a drop in our stock price, which ultimately had been negatively impacted by the business environment as a result of the COVID-19 pandemic, and performed a quantitative analysis for potential impairment of our goodwill and long-lived asset balances. Based on available information and analysis as of September 30, 2020, we determined the carrying value of the EMEA reporting unit exceeded its fair value and recorded a non-cash goodwill impairment charge of $48.3 million. We determined the fair value of the Americas and APAC reporting units exceeded their carrying values and the carrying value of our long-lived assets is recoverable for all reporting units.

Fair value was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to its present value, and a market approach. The valuation methodology and underlying financial information included in the Company's determination of fair value required significant judgments by management. The principal assumptions used in the Company's discounted cash flow analysis consisted of (a) the long-term projections of future financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate of multiples of various financial metrics of comparable companies.

We conducted our annual goodwill impairment test for the years ended December 31, 2021 and 2020 as of November 30, 2021 and 2020, respectively. There was no goodwill impairment for the year ended December 31, 2021. We had an immaterial amount of other long lived asset impairment charges for the year ended December 31, 2021.

Contingencies

We record an estimated loss from a contingency when information indicates that it is probable that an asset has been impaired or 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 recently issued accounting standards, including the expected dates of adoption and expected impact to the consolidated financial statements upon adoption.

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