Greetings and welcome to the 3D Systems Third Quarter 2020 Conference Call and Webcast. This conference is being recorded. It is now my pleasure to introduce your host, Melanie Solomon, Investor Relations for 3D Systems. Thank you. You may begin.

Thanks, Jesse. Good afternoon, and welcome to 3D Systems conference call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to pose questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2019. Now I'm pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Thanks, Melanie. Let me start by saying thank you all for joining our call this morning. I hope everyone is bearing up well and staying healthy in these stressful times. While the challenges of the COVID virus continue, I'm very proud of our employees for balancing so well their needs and those of their families with the commitments we've made to our customers. As businesses become more efficient in dealing with the effects of the COVID-19 pandemic, and as the economies around the world begin to open, we're pleased to see rising demand across the markets we serve. We're hopeful that these trends continue as we move through our fourth quarter, and this momentum is sustained in the new year. On our last call, which was my first since joining the company in late May, we talked about the importance of clarifying our strategic purpose and how it would drive our actions moving forward. As a reminder, our 3D Systems purpose statement is as follows: we are the leaders in enabling additive manufacturing solutions for applications in growing markets that demand high-reliability products. We developed this purpose statement to provide the strategic focus needed in order to simplify our operations to improve our operating efficiencies while prioritizing our investments to deliver greater value to our customers. These actions will lead to improved profitability in the short term while enhancing growth and margin expansion in the future. Having defined our purpose statement, we moved rapidly forward in our transformation journey, which can be described very simply in four phases of activity: reorganize, restructure, divest, and invest. We're moving forward on each phase with parallel efforts, and I'd like now to update you on our progress with each. Let's begin with reorganization. As we briefly touched on last quarter, one of our first actions was to reorganize the company to focus on two key market verticals, healthcare and industrial. Within healthcare, our primary focus is on dental applications, medical devices, medical simulation, and virtual surgical planning. Industrials include aerospace, defense, automotive, and durable goods applications. These growth markets all place a premium on performance and reliability for key components, have engineering and technology cultures that seek innovation as a way to deliver value to their customers and processes that tend to be highly controlled or regulated. As our company has an established strong foundation in these markets, our goal in this reorganization is to focus our full efforts on the acceleration of our customers' adoption of additive manufacturing for specific application solutions within their new product offerings. With our exceptional technology portfolio that encompasses hardware, software, and materials, our application engineers are uniquely positioned with tools and expertise needed to support our customers and their adoption of additive manufacturing, while our global service team supports their ongoing needs in the field. It's a unique and winning combination that we believe will enable exciting growth and profitability in the years ahead. As validation of our capability to deliver this value, you need look no further than our current success. Today, our technologies are delivering over 500,000 production components for our customers each day, translating to over 180 million components on an annual basis, a number that dwarfs all other competitors in this industry. It's this foundation that we will build upon moving forward with an intense focus on our customers' success in adopting this exciting manufacturing technology on a much greater scale each year. With the appointment of our two business unit leaders this quarter, along with our new Chief Financial Officer, Jagtar Narula, who I'm very pleased to welcome to our call today, our management team is complete and we're fully focused on executing our game plan. Having described our reorganization, let me now update you on our restructuring efforts, which we introduced in our last earnings call. Our expectation is that we will deliver $100 million of cost savings on a run-rate basis by the end of 2021. We also stated that $60 million of the savings would be achieved by the end of 2020. I'm pleased to tell you that we're on track to deliver to our plan. Actions being taken include a combination of restructuring our workforce, consolidating real estate and facilities, and optimizing nonemployee spend. In executing these plans, our leadership team created a set of operating principles to guide their efforts, which included a high-level prioritizing employee safety and ethics each day, working as one team, always acting with customer success in mind, being bold and decisive in our decision-making, and focusing on quality in all aspects of our business. These operating principles help ensure that we're moving forward rapidly through our restructuring efforts while ensuring the long-term success of our customers, partners, and employees. With the focus embodied in our purpose statement in parallel to the reorganization and restructuring efforts, we were able to identify certain assets that were no longer core to the company and begin the process of divestiture. As a result of these efforts, earlier this week, I was pleased to announce the sale of our Cimatron and GibbsCAM software businesses for $65 million. These businesses were focused on subtractive technologies rather than additive manufacturing, and while highly valuable to their customers, were not core to our future additive manufacturing business. The proceeds from this sale will further strengthen our balance sheet, leaving us in a net cash position, and will be used in the completion of our restructuring efforts and for investment in future growth initiatives. We expect to continue divestiture efforts over the next several quarters. Jagtar will comment further on our plans for the balance sheet and specifically around our plans for the ATM equity program in a few moments. However, let me add that with the prospect of further divestitures of noncore assets in the next few quarters, we'll be evaluating, in parallel, investment opportunities to enhance the growth and profitability of our core businesses. As with our divestiture actions, any investments we make will follow a rigorous and disciplined process, with an unwavering goal of creating shareholder value in this increasingly exciting industry. We'll keep you updated on our plans and progress in future earnings calls. With that, I'd like to end my opening comments with examples of how our focus and expertise is bringing value to our customers and delivering exciting new growth opportunities for the company. As many of you know, the pandemic has changed the operating environment for organizations around the world, and there's a keen interest in the application of additive manufacturing to create a more flexible and versatile supply chain. In healthcare, this is especially true for hospitals, as illustrated in our recent experience with the Veterans Health Administration. The VA is the country's largest integrated healthcare system, providing healthcare through 1,255 facilities for over 9 million veterans each year. Earlier this month, we were extremely proud to be awarded a multimillion-dollar contract to help the VA establish an additive manufacturing production capability for medical devices. As a part of this program, 3D Systems will establish the required workflows, medical-grade quality systems and regulatory approvals, deploy our additive manufacturing printers, and then fully train and staff the operations. This turnkey capability will be operational by the end of 2021, after which the VA can independently produce medical devices for their own in-network use. The pilot application is COVID nasal swabs, which we're enabling with our SLS platform and medical-grade nylon powder, which will be followed by several other medical device applications. The experience gained with VA and other early adopters positions us well to support other hospital systems in the future. While we enjoy the business opportunities we see ahead, the best part of this is the fact that we get to support the wonderful mission of the VA and the critical support it provides to our veterans, all while allowing what our team at 3D Systems does best. Next, let's turn to technology. Enabling our applications progress in both of our business units are our continuing technological breakthroughs in hardware, software, and material systems. As an example, a year ago, we announced a new $15 million program sponsored by the U.S. Army to create the world's largest, fastest, most precise metal printer. This groundbreaking nine-laser system, which builds upon our newly expanded DMP family of printers, will be able to manufacture aerospace-quality components using a broad range of high-temperature and lightweight aerospace alloys for a range of advanced flight and ground vehicle applications. In spite of the challenges of COVID this past year, we've made substantial progress in the program, successfully completing our first test print in late October. We'll be sharing more updates on this program and the exciting applications that are enabled by it in the near future. With that, let me turn the call over to Jagtar, who will now describe our results for the third quarter and our current market outlook. Jagtar?

Thanks, Jeff. Good morning, everyone. For the third quarter, we reported revenue of $135.1 million, a decrease of 13% compared to the third quarter of 2019, and an increase of 21% compared to the second quarter of this year as we saw a rebound in customer activity from the worst of the pandemic-related shutdown. We reported a loss of $0.61 per share in the third quarter compared to a loss of $0.15 in the third quarter of 2019. Included in the third quarter 2020 net loss was a $48.3 million pretax noncash goodwill impairment charge. This impairment charge was identified in connection with the interim goodwill impairment test that was necessitated by certain triggering events associated with the decline of the company's share price ultimately due to the impact of the business and economic environment from the COVID-19 pandemic. The impairment charge will not result in any cash expenditures and will not affect the company's cash position, liquidity, availability, or covenant test under our senior secured term loan facility and our senior secured revolving credit facility. Turning to non-GAAP results. We reported a non-GAAP loss of $0.03 per share in the third quarter of 2020 compared to $0.04 per share in the third quarter of 2019. Consistent with our new strategic focus announced last quarter, we are now discussing revenue by market, healthcare, and industrial. Revenue from healthcare increased 6.1% year-over-year to $59.8 million, driven by stronger sales in the dental market following closures in the first half of the year related to the pandemic. Industrial sales decreased 23.8% year-over-year to $75.3 million, with decreases in all products, materials, and services across all geographies due primarily to the pandemic and associated reduced level of customer activity. On a sequential quarter-over-quarter basis, we saw strong revenue improvement of approximately 20% in both of our vertical businesses. Now we turn to gross margin. We reported gross profit margin of 43.4% in the third quarter of 2020 compared to 43.3% in the third quarter of 2019. Our gross margins were impacted due to lower absorption of overhead caused by the lower volume in Q3 2020 versus the third quarter of 2019, offset by our initial cost reduction activities. Many of the restructuring actions we are taking will further help strengthen our gross profit margins over the coming quarters. Operating expenses for the quarter were $126.2 million on a GAAP basis, an increase of 59.4% compared to the third quarter of 2019, including a 1.4% increase in SG&A expenses and a 9.9% decrease in R&D expenses. Also included in operating expenses is the goodwill impairment charge that I mentioned previously. Excluding this goodwill impairment charge, operating expenses for the quarter decreased 1.6% or $1.3 million to $77.9 million compared to $79.2 million for the third quarter of 2019. Importantly, our non-GAAP operating expenses in the third quarter were $58.8 million, a 15.2% decrease from the third quarter of the prior year. The primary differences between GAAP and non-GAAP operating expenses is the exclusion of the aforementioned goodwill impairment, $11.9 million in restructuring charges as well as amortization of intangibles and stock-based compensation, consistent with our historical GAAP to non-GAAP adjustments. Now let's turn to the cash flow statement and balance sheet. We ended the quarter with $75.3 million of cash and cash equivalents. Cash on hand has decreased $58 million since the beginning of the year. We used $26.5 million for debt repayments, $32.6 million for operations, which includes nearly $24 million used for inventories, $12.5 million for one-time payments made in the first quarter of 2020 to purchase noncontrolling interest and $11 million for capital expenditures, partially offset by proceeds of $25 million from the issuance of common stock. Our term loan is now $22 million, so our net cash position at quarter end was $54 million. We have a $100 million revolver that was undrawn as of September 30, 2020, and has $31 million of availability based upon terms of the agreement. Let me make a quick comment on inventories. We have seen the cash used in inventories go up nearly $24 million so far this year. As the market rapidly turned down in the first half of the year due to the pandemic, we were unable to slow down our inventory additions fast enough due to committed lead times with our contract manufacturers and suppliers. With these adjustments now made, our sales now strengthening and a strong focus on sales forecasting, we expect inventory improvements as we exit the year. Finally, let me end my remarks with a comment on our at-the-market equity program, which we announced last quarter. At the time, with COVID raging and the economic impact highly uncertain, we believe the ATM program was a necessary risk abatement needed to ensure support for our restructuring initiatives and to provide financial flexibility during highly uncertain times. Under this program, in the third quarter, we issued $25 million of common stock, leaving $125 million still available to us on the program if needed. However, with the improved business environment, progress in our restructuring efforts and the cash generated from the Q3 stock sales, we do not anticipate additional sales under the ATM program in Q4. Furthermore, as we announced earlier this week, we have signed an agreement to divest our Cimatron and GibbsCAM software businesses, and our expectations are that this deal will close in Q4. We announced a $65 million purchase price and expect price adjustments of approximately $5 million for liabilities that we are transferring to the buyer. In addition, we expect about $10 million to $15 million of taxes, primarily for distributions of cash between our foreign entities and the parent that have built up over time. The final net cash number will be around $45 million to $50 million. This transaction will leave us in a net cash position on our balance sheet. Therefore, following the closure of the sale of Cimatron and GibbsCAM and the receipt of proceeds therefrom, we plan to evaluate the continued need for the ATM program and may very well elect to terminate it altogether. With that, I'll turn the call back now to Jeff. Jeff?

Thanks, Jagtar. So to summarize, I'm very pleased with the progress we're making on our transformation and the strategic realignment of our company. Our reorganization is complete, our leadership team of seasoned professionals is in place, our restructuring efforts continue and we're on track to deliver $60 million in run-rate cost savings by the end of 2020. We continue to see demand returning as the economy opens up from the effects of the pandemic. As a result, while the risk related to COVID will continue for some time, we anticipate continued strengthening of the business moving forward. I want to thank our employees, customers and stakeholders for their loyalty and dedication during these challenging times. With continued focus and strong execution, we look forward to emerging from this period stronger than ever and excited about a very bright future ahead. And with that, we'll now open the floor for questions. Operator?

Our first question comes from Greg Palm with Craig-Hallum.

Great. I guess just kind of starting with the quarter, obviously, it exceeded a lot of our expectations but materials segment specifically bounced back really hard, I mean, almost to pre-COVID levels which surprises us given, I think, many of your customers are still kind of gradually ramping back operations. So what drove the sizable increase relative to Q2?

I believe it's quite clear. Customers responded quickly when the COVID shutdown happened a few quarters ago, which led to a depletion of inventories. As their production levels increase, they need to source materials. The supply chain was significantly affected, but there was a solid recovery. Some industries, like dentistry, reopened after being shut down. We were happy with this strong rebound and expect our customers to increasingly utilize the assets they had acquired earlier to produce parts. We were satisfied with that.

Yes. Okay. Good. And I guess in a normal year, usually, you'd see a seasonal bump in revenue, and I'm talking across the company in Q4 from Q3. I mean taking out the impact of the expected divestiture. I mean I know and really this year is anything but normal, but do you still see ongoing improvement in the top line? What are you seeing thus far in October?

Yes, Greg, I hope this is the most unusual year I ever experience. I believe that normal seasonality will still occur. However, the opening and closing in different parts of the world makes it very unpredictable. Generally, we continue to see improvement in the markets. Companies have adapted remarkably to this COVID environment by being innovative in logistics and supply chain. While the initial shutdown had a significant impact, they have become much more skilled at handling logistical challenges and delivering products. As long as demand remains and they continue to want to increase production, we see ongoing improvement. I expect to see some seasonal patterns that you've historically noticed continue. It's just such an unusual year with COVID, so I cannot predict if it will amplify or dampen the patterns based on the past. Nonetheless, I am encouraged to see that the world is getting gradually better. That's the best I can share with you.

No. Okay. That's helpful. And I know given that level of revenue, if we assume sequential strength in December versus September, I'm assuming that puts you at a level that was probably higher than what you were expecting last quarter when you talked about being net income or adjusted net income profitable exiting the year. So on top of that new level of revenue and given what we know about the progress of the restructuring, I mean, do you expect to report profitability in Q4 then?

Well, we're not going to provide guidance, Greg, due to the market's volatility. That's the way the math would work directionally. However, I would advise caution when predicting the impact of COVID, as it remains unpredictable. Demand continues to increase, and if we can ship, we would anticipate an increase in volumes. So, that's how the math aligns. But again, I don't think we can reliably comment on a quarter-by-quarter basis as the pandemic continues to unfold.

Our next question comes from the line of Ananda Baruah with Loop Capital Markets.

And yes, congrats on the progress, no doubt. Just a couple for me. Jeff, are you able, aside from dentistry, to get visibility to sort of which end markets may be improving more quickly than other end markets, both from a hardware and supplies perspective?

Ananda, there's a lot of variability, but I was really pleased about dentistry. At the peak of the pandemic shutdown, it had really come to a halt. I'm sure everyone knows that when they go to the dentist, you just couldn't see anyone. Now that's opening back up, which is great. What I am particularly pleased about is the rest of the healthcare market. Portions of that were also shut down, including orthopedic areas and other operations considered nonessential, which led people to postpone those. However, we saw a significant strengthening in the healthcare market across virtually all of our customer base, and we were really pleased. While you might have anticipated the resurgence in dentistry due to pent-up demand, I would say we experienced a nice broad recovery in healthcare overall. The year-over-year growth of 6% to 7% was fantastic, in addition to the sequential quarterly growth we discussed. In this environment, we are very pleased with that, and I think it bodes well for our focus on healthcare in the future. It's a great market to be in.

What is the current status of the industrial markets? It seems like it's not contributing much at the moment, so that may still be something we need to address. Is that correct?

Both healthcare and industrial sectors have seen a sequential increase of about 20%, slightly over that mark for each. However, it's important to note that industrial started from a much lower point and remains down year-over-year, so while it's encouraging to see improvement, there is still a significant distance to cover. You could view the situation either positively or negatively, but the truth is, there is still a long way to go, which can be somewhat discouraging. Despite having declined significantly, there is ample potential for growth ahead. On the other hand, the healthcare sector is performing strongly. I appreciate the markets we operate in and our strong positioning with key customers in both sectors, and I feel optimistic about the future of both.

Okay. Great. Regarding the divestitures, can you share any insights on the context of the opportunities that might be available? The company made several acquisitions a number of years ago, and they are currently at different stages of integration. Any insights you can provide on the potential opportunities that you may be exploring would be appreciated.

Ananda, it's challenging to provide much more detail on that. I can share that once we publicly stated our focus on additive manufacturing, we received significant interest in several of these assets. This situation allowed us to take a step back and ensure we run effective processes to secure good value for our shareholders from any divestments. However, we must be careful, as these assets were acquired for specific reasons. We need to be deliberate about what we decide to sell. I'm not in a position to comment on specific expectations, and valuations will ultimately depend on how buyers perceive the future of the business and any synergies they may bring. I apologize for any frustration this may cause, but we genuinely want to approach this thoughtfully. Now, with this first divestiture, which was the most evident due to its focus on subtractive technology, we are in a better position to carefully consider our next steps regarding what to divest and the process to undertake.

Yes, any context is helpful. I have a quick follow-up on the same question. Jeff, regarding the opportunity set for your evaluations, are there any assets that you would consider, saying that for the right price, you would proceed with? I understand that the answer is generally yes, but what I'm really asking is whether it's mostly about divesting assets that don't fit because they could be a distraction. Or do you have some gray area assets that you would consider selling for the right price?

I would say that there's not much ambiguity in our evaluation. We identify certain businesses and think that, in the long term, they don’t align with our strategic direction. It's important to note that these are solid businesses; they're just not aligned with our core focus. For that reason, we believe there may be better fit owners who can continue to invest in their growth. While they are good businesses, we're quite clear about the noncore aspects. There has been a slight increase in ambiguity as some of these groups engage in various activities and have shifted their focus more toward the core, yet some elements remain noncore. Separating these noncore elements can be challenging because a potential buyer is also concerned about value. We want to be careful in how we approach this process. Overall, our purpose is clear: we will emphasize additive manufacturing and specific applications, which we believe is where we can excel. Therefore, over time, we will consider divesting assets that lie outside this focus.

Our next question comes from the line of Sarkis Sherbetchyan with B. Riley FBR.

So just wanted to kind of follow up on the last line of questioning. If we kind of look at the other parts of the business that could be divested, right, because they no longer fit the strategic direction you're going in. I guess from a very high level, like what's the magnitude of sales and potentially associated P&L expenses that could come out of 3D Systems' P&L, assuming all is said and done?

The answer may be frustrating, but it really depends on which businesses or parts of businesses we choose to divest. It's quite similar to the previous question, and it's challenging for us to provide a specific target regarding size or timing. I apologize for this, but we want to approach the separation from the company thoughtfully. Currently, we're not in a position to guide you on what those divestitures will be or their anticipated impacts. The best we can do is to convey the direction we're heading.

Okay. No worries. I guess if we can maybe focus on the Cimatron and GibbsCAM software businesses for a second. Maybe if you can disclose what the financial profile of those businesses were, right? And then also maybe talk about the multiples received for those businesses?

Sure. So the Cimatron and GibbsCAM revenue is around $35 million to $40 million. It's been declining high-single-digit to low-double-digit rates annually. The direct costs associated with the business that we'll be transferring to the buyer are around $20 million to $25 million. There's also some small level of corporate overhead-type costs that we'll look to evaluate, but it's largely not material. So you can think of it as the $35 million to $40 million revenue declining $20 million to $25 million of costs.

And is the $20 million to $25 million in cost out contemplated in the run rate savings that you guys have communicated to achieve in the next 18 months?

No. No. No, that's not contemplated in that.

And I guess just kind of moving on. Jeff, you mentioned sales improving and some expected continued strength. Maybe what's kind of the more specific tangible drivers to support this comment? I know it's a difficult environment, but just anything that we can kind of hang our hat on and take going forward?

It's interesting. If you examine the markets we've been involved in pre-COVID and up to now, there is a general strengthening. In healthcare, for instance, medical devices are doing well, and dentistry has certainly returned to growth, which is a positive for us. The demand for virtual surgical planning is now greater than ever, particularly as surgeons return to their practices and focus on patient care. We are excited about these growing areas. The latest addition to our healthcare business, which we announced yesterday, involves the VA. This is a clear illustration of how organizations are reevaluating their supply chains, especially hospital systems that experienced shortages during the COVID crisis, particularly with PPE and respirators. As we move forward, these systems are seeking to establish more responsive supply chains to meet urgent patient care needs. The VA has proactively engaged us to implement a comprehensive production-capable system across several of their hospitals to supply medical devices on a short-term basis. This will enhance their flexibility and capacity to address medical device demands. This is a new market for us, and we believe we are well-equipped to meet these needs with our range of printer hardware, FDA-approved materials, and software systems tailored for this environment, in addition to our understanding of the necessary quality systems. I am optimistic about our traditional healthcare markets as they grow once again. The expansion into supply chains and hospital systems presents a significant opportunity for further incremental growth. Similarly, on the industrial side, we can anticipate foundational responses, especially in ground transportation, such as cars and electric vehicles, as companies will look to boost their sales. They were greatly affected by supply chain disruptions, which were primarily shifted to low-cost countries and faced significant challenges during COVID. Now, the resurgence in sales and overall demand is apparent. Alongside this, there is a push for more flexible supply chains, which could open exciting markets for us. The aerospace industry, however, is currently struggling due to COVID ramifications, but we hope for a recovery in the next couple of years, as it often leads in adopting new manufacturing approaches. I believe I have covered a broad overview, but I am earnest about each of these sectors. There are historical demands and trends, along with the pressing need for localized flexible supply chains to address global disruptions. Overall, I anticipate an encouraging period of rising demand for our entire industry. Does that help?

That's certainly helpful. Yes. Yes. One more for me and I'll hop back in the queue. You mentioned as you're going through the divestiture process, you're kind of also looking to enhance investments in growth. I just want to get your sense for, looking at your portfolio position, are there any opportunities either in materials or maybe new processes to kind of build or buy? And what I'm getting to is, it sounds like the fiber or composite market is also pretty interesting from an additive perspective. Are you considering any investments in that direction? Do you have anything in your portfolio that can help bridge the gap? I just want to kind of understand the opportunity set there.

Yes. So I would say to the answer to the last part first. Yes, we have probably the broadest range in the industry of hardware, software and material systems, and we're very proud of that. And we can bring application solutions to our customers, I think, better and faster than anybody in the world, and that's what we're going to really focus on going forward. Now to keep that stream going, we have to make key investments in technology, whether it's organic or inorganic, we really need to. So we're constantly evaluating and talk a lot about our material systems. We have great hardware systems, and we continue to launch new hardware platforms, materials or what customers actually use and turn into components. So we want to make sure we stay really fresh on and at the leading edge of the range of materials we can put through our platforms. We have a great team in place, particularly on the polymer side, to leverage the technology and grow. So those areas for investment are really ripe, and we'll continue to put money in those areas. Periodically, we will launch new platform, new hardware platforms to stay current on those. And that's really around speed and efficiency, and in the case of aerospace, some enhanced high-temperature capability, multi-materials capability, things like that. And then on the software side, we have a great suite of software around both our plastics and metals capability, which allows customers to, not only print with high precision, but faster and faster each day. And that really comes together through our centers of excellence and our application engineers who were very, very focused on because those are the guys that bring it home for customers and define workflows that customers can use. So I think for it to be competitive in this industry, you need to have all three capabilities: hardware, software and materials. And the better you bring that together in applications, the more successful you're going to be in the industry.

Our next question comes from the line of Brian Drab with William Blair.

Cimatron, that was a software business that was running over 80% gross margin before it was acquired by 3D. Is that the kind of level of gross margin that, that business was running at? Can you talk about that?

Yes. Yes. Of the $20 million to $25 million of cost that I mentioned associated with that business, I'd say about 10% of that, 10% to 15% hit the cost of goods sold line.

Okay. Do you think that among the 52 acquisitions made between 2009 and 2015, Cimatron is the largest one to consider for divestment? Are there other significant acquisitions in that group?

No, there are other assets we could potentially sell, possibly larger ones. We just need to navigate the process. There was significant interest in the Cimatron assets, which were indeed valuable but not aligned with our core focus. They were primarily centered on subtractive technologies, and under our ownership, we weren't planning to invest in that area. As a result, it became a declining business for us, although those assets are excellent for another owner who can be proud of them, and I believe they have a bright future ahead. We kept some team members involved in additive manufacturing, particularly the software side, which made the divestiture more complex. It was encouraging to receive such interest, and we worked diligently to make the deal, enhancing our balance sheet and increasing our flexibility for the future. While this may not be the largest asset we could sell, we will evaluate each opportunity individually along with the timing and necessary processes. I hope this is helpful. Ultimately, I think the divestiture was beneficial, freeing up resources for us to invest in our core business.

Our next question comes from Jim Ricchiuti with Needham & Company.

I just realized you're not in a position really to talk a whole lot about the top line in Q4 just given all the moving parts. I'm just wondering if you can give any help to us in terms of how we might think about non-GAAP operating expense and, particularly, we don't know the timing of Cimatron. But any help you can give?

Yes. Sure. So regarding the timing of Cimatron closing, we expect that to happen in Q4, but we think it will be later in Q4. So I think it will be a smaller impact to kind of changes in our OpEx number. Regarding how I think about OpEx, right, so we're going through this restructuring program. I'd say we've got half the cost out now. We want to exit the year with a $60 million cost savings run rate that will tell you that we got to get the other half of that $60 million out in Q4. Think about the OpEx line, I'd say about 70% of that $60 million savings hits the OpEx line. So if you think about we're halfway done, you get the other half in Q4, ramping to that $60 million, 70% of it hits OpEx. I think that, that gives you some perspective of what we'd expect the OpEx number to be.

Okay. Can you provide any details regarding the sequential improvement you observed in the product revenue line? Are there any specific trends you are noticing?

Sorry, you're breaking up a little bit, but I think you were asking about the sequential revenue…

Improved...

Revenue. Yes, improvement.

In the product side. And what I'm trying to get to is, any particular areas within the product portfolio where you're seeing some improved demand?

I would say it was quite broad-based. We observed this across our product line in materials, printers, and software, indicating a widespread recovery in revenue. Specifically, in our printer category, we noted improvement in both plastics and metals. Overall, it was a comprehensive recovery on the revenue front.

Our next question will come from Paul Coster with JPMorgan.

Jagtar, I'm trying to get to a sort of decent EBITDA number. And I'm just wondering with the write-downs, what happens to sort of D&A moving forward? Perhaps you can kind of give us some sense of what the run rate is now.

Yes. So our depreciation run rate has been about $25 million. I think it will reduce a few million dollars, but it will move a little bit, but it won't be significantly different.

Okay. And do you expect any sort of restructuring charges in the fourth quarter, cash, noncash?

Yes, we do. So we're expecting about $9 million of restructuring charges. $6 million of that we're expecting on the cash side, another $3 million noncash.

Okay. And then I assume that the Cimatron business was in the industrial segment or which was it?

Yes. Yes, that was the industrial segment.

Okay. And that obviously, given subject to closing, probably doesn't start to impact the revenues until the beginning of '21?

Yes. That's a fair assumption. We're expecting a, call it, mid-December close.

Were there any synergies between the Cimatron software and product, raw material sales?

Not that I'm aware of.

No. It was a completely different customer base, Paul. So not really. As I mentioned, we did keep a small number of software design engineers that we're working on software for our additive system. So whatever synergy we had with owning the business, we kept those resources in with our parent company. And what the buyer was really interested in were the subtractive resources.

Got you. And Jeff, I want to go back to your opening statement. I may have misheard, but I think you said something about 500,000 objects being created every day using 3D printers. So I don't know if it's your printers or all printers or whatever. But perhaps you can just elaborate on that. But the main question is, are the objects getting bigger? Or are they getting smaller? In other words, I'm sort of trying to understand what the implication is in terms of material quantity.

Yes, that’s an interesting question regarding the size. To clarify, our technology, specifically 3D Systems technology, is used to produce 500,000 components daily, and I aim to be conservative with these numbers. This figure refers to our printers, materials, and software, without including any additional applications. These are solid components being manufactured with our core technologies each day. It's worth noting that while the entire industry is expanding, we are seeing this significant output from our established base. This equates to about 180 million components annually produced with our technology, which allows us to build a substantial experience base and supports our service team in maintaining and operating the machines effectively. Regarding size, we are focusing on optimizing our software to allow for denser packing of components in the machines, thus enhancing customer efficiency. As for whether components are physically getting smaller, it's challenging to identify a clear trend. There’s an increasing number of small items being produced, but our newest larger machines are capable of manufacturing substantial components, particularly in the industrial sector. For instance, our latest metal printer can create parts measuring 0.5 meters by 0.5 meters, and customers are utilizing titanium and other materials for these larger pieces. It’s an exciting time, but I can’t provide further insights on the sizes of the parts being produced other than the improved efficiency resulting from denser packing of smaller items in the printers.

Our next question comes from the line of Wamsi Mohan with Bank of America.

I was wondering if you can comment on the trajectory of gross margins given all the puts and takes and particularly, some of this inventory drawdown that you're talking about that should happen here in the fourth quarter. Can you give us some color on how we should think about this trajectory?

Certainly. Let me discuss gross margins. In Q3, if I compare the product line with the services line, the product line experienced a slight year-over-year decline. This was influenced by two main factors: lower volumes compared to last year and the impact of cost restructuring actions, which offset each other, resulting in a marginal decrease but remaining largely flat. Conversely, the services line showed year-over-year growth, primarily due to improvements in our parts manufacturing and field services, along with reduced labor and parts costs. As for inventories, we wrapped up the quarter with $127 million, an increase of $24 million from this time last year. We've taken various steps to enhance collaboration between our sales forecasting and supply chain teams to improve flexibility. We anticipate that by the end of the year, inventory turnover will return to historical rates, allowing us to reduce inventory back to our traditional levels.

Okay. And as a follow-up, Jeff, as you think about this divestiture process, do you have a rough timeline in mind to sort of completing all the divestitures that you view as noncore? Is this going to be something that we think is a two-quarter phenomena or 2021 phenomena? Or does it get stretched out longer depending on sort of what the appetite is from a buyer perspective?

I would advise against viewing this as just a two-quarter occurrence. We will continue to assess and work on various aspects throughout 2021 due to several considerations, and these matters require time. It's important to maintain disciplined processes. The motivation for shorter timelines usually stems from employee concerns and potential disruptions. We aim to minimize internal uncertainty and progress efficiently. At the same time, we want to ensure that we execute our strongest processes effectively. This means we'll be looking at developments throughout 2021 in a systematic manner, and we’ll keep you informed as decisions are made and as we reach conclusions. Regarding your first question about gross margins, I’m pleased that our reorganization and focus are facilitating growth in markets that appreciate the value of additive manufacturing, which typically commands higher gross margins. These markets emphasize the capability and quality of components, such as those in healthcare, which often feature better margins. Jagtar mentioned the short-term comparisons and various factors affecting gross margins quarter-to-quarter. Despite facing lower demand in the industrial sector compared to last year, we managed to maintain gross margins by reducing costs effectively. Looking ahead, I have confidence in our current business segments, as they generally offer higher gross margins. Additionally, as our service team becomes more established and sophisticated, leveraging their expertise is likely to further enhance gross margins. Overall, it’s a positive environment for us, focused on high-value areas, and I anticipate that this trend will continue in upcoming quarters.

So Jeff, just if I could follow up on the comment. I mean is there any consideration or any thinking around separating out the attach of materials to printers as in allowing it being more of an open systems-based approach as opposed to a closed systems-based approach from a material perspective? I mean if I heard your gross margin comments, I mean, it sounds like that wouldn't really change. But just wanted to see if you had any thoughts on if the business model was going to have a bigger change in your mind.

I understand it's a great question, and it's one that we and our competitors approach differently. We find significant value in linking materials and printers together. In many of our systems, we can provide additional value by customizing materials for specific printers and applications. This is why we focus heavily on applications. Selling materials alongside printers is not just about financial gain; it allows us to offer much greater value to our customers. If we reach a point where the materials we offer through a printer are indistinguishable from others on the market, we wouldn't link them. However, as long as we can provide unique value that customers appreciate and are willing to pay for by customizing materials to specific printers, it benefits both our customers and our business. This is the type of work we plan to focus on more in the future.

Our next question comes from Kenny Vallace with Berenberg Capital Markets.

Obviously, you've covered a lot here, but I just wanted to hit on the direct metal printers. Any updates on the commercial launch from earlier this spring? It's kind of briefly mentioned in the comments. But how are you thinking about the market opportunity there? And what does competition kind of look like, particularly as the recovery kind of comes into play in 2021?

Yes, we are positive about the potential of metal printers. This market is expected to be significant, with various technologies being employed. Our printers excel with aerospace materials and other challenging materials that require strict atmosphere control, and we have large printers for this purpose. For instance, aerospace companies are looking to manufacture flight components using sensitive high-temperature materials, and having the best atmosphere is crucial for optimal part production. We have leveraged this technology in our printers. Moving forward, we are focused on enhancing speed and quality, as well as expanding the range of materials, including the ability to integrate multiple materials into one printer. This presents a challenge for us. Overall, the metal sector shows promising growth, and our platforms are receiving good feedback. The 350 model has been in production and remains in high demand across various markets. The 500 model is newer, and we are beginning shipments while building our installed base to better understand customer experiences at a broader level. We foresee increasing demand for it as well. I don’t want to exaggerate its impact, but the future in metals looks very promising, and we aim to be fully involved. Many customers are looking to transition between plastics and metals based on their manufacturing needs, so we are committed to providing a variety of technologies for them.

Awesome. As a quick follow-up, would you highlight metal as a particularly interesting area for investment given the divestments and the increased cash flow?

No, I wouldn't specifically say metals. Plastics have a vast potential. When we look at the different types of plastics, we're mainly focused on industrial applications, which includes healthcare as well. These materials serve as useful devices and components for machines or medical applications. The transition between metal and plastic varies frequently. I am very excited about metals and equally enthusiastic about plastics. There was also a previous question I didn't address regarding reinforced or blended plastics. I believe they have a significant future, whether it involves carbon fiber or carbon-reinforced materials, with more alloys or blends being produced through printers. Therefore, I remain optimistic about both sectors. I appreciate both and our customers do too.

For our last question, we'll take a follow-up from Greg Palm with Craig-Hallum.

I guess one of the questions I've been getting from investors is sort of the pathway to organic growth. And I guess the assets you're divesting are the majority that you're looking to divest shrinking in revenue similar to Cimatron. I don't know if you can confirm that. And then as we think about healthcare, I mean, by our math, that's a segment that actually has been growing pretty consistently on an organic basis over the years. I mean is that something you can expect to continue going forward?

Yes, absolutely. The company has had many exciting opportunities, but we were trying to do too much and underinvesting in several areas. The assets we sold, like GibbsCAM and Cimatron, illustrate this point. Under proper ownership, those markets still have potential, but they were shrinking for us because we couldn't invest adequately. Once we established our purpose statement and committed to investing in additive technology, it became clear that we needed to divest those assets to focus on growth. Our healthcare customer base is outstanding, and we're doing excellent work with leading healthcare companies. However, their demand extends into areas where we haven't been able to invest because we were spread too thin. As we divest non-core segments, we're focusing on successful areas, with healthcare as a prime example. Specifically, medical devices and surgical planning are promising fields, and our new initiatives with the VA will be a significant area of focus in our sales, marketing, and technology efforts due to the growth potential there. The industry is expanding, and as a result, we anticipate our growth as well. Our immediate goal is to become profitable, eliminate non-core activities, reduce costs, and generate cash to reinvest in our core business for further growth. You will see our conversations increasingly shift towards growth as we progress into 2021.

Yes. Okay. And then just to be clear on the gross margin trajectory. I mean so the divestiture of Cimatron, that will take out some pretty high-margin business. I assume on the flip side, there's probably divestitures that you're looking at that are lower margin, so maybe that can offset that. But Jagtar, I mean, I think you mentioned restructuring efforts and the impact to gross margins going forward. I mean do you have an internal target over the next year where we could go from here?

So what we've said is, right, $60 million of run-rate cost savings exiting this year, $100 million in total by the end of next year, right? So if you think about 30% of that roughly is on the cost of goods sold line, that probably gives you some perspective on where we expect gross margins to end up.

Okay. But even with the divestiture of Cimatron, that would certainly put some upward pressure on gross margins just by that math, right?

Yes. That's fair. I mean that is a high-margin business.

This concludes our question-and-answer session. I'll now turn the floor back over to Melanie Solomon for additional closing comments.

Thank you all for joining us today and for your continued support of 3D Systems. A replay of this webcast will be available after the call on the Investor Relations section of our website. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.