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3D Systems Corp. Q3 2010 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for 3D Systems Corporation, covering the period ended September 30, 2010. The company designs, develops, and markets 3D printing, rapid prototyping, and manufacturing systems, materials, and services. It also operates 3Dproparts, a service bureau for rapid prototyping and manufacturing. The company operates globally with significant presence in the U.S., Europe, and Asia-Pacific.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 50.0% in Q3 2010 and 41.7% for the nine-month period compared to 2009. Growth was driven by a 93.3% increase in systems and other products sales and a 39.0% increase in services revenue.
• Profitability Turnaround: The company returned to profitability, reporting net income of $10.1 million for the first nine months of 2010, compared to a net loss of $2.5 million in the same period in 2009.
• Acquisition Activity: Significant expansion of the 3Dproparts service occurred through four acquisitions in 2010 (Moeller Design, DPT, CEP, and Express Pattern), contributing to revenue and service volume.
• Operating Expenses: SG&A expenses increased by $2.6 million in Q3 2010 due to higher compensation costs from acquisitions and increased legal fees related to ongoing litigation. R&D expenses decreased slightly.
• Geographic Performance: Non-U.S. revenue grew 51.2% in Q3 2010, with Europe and Asia-Pacific showing strong volume increases.

Guidance, Outlook, and Risks

• Outlook: Management expects SG&A expenses for the remainder of 2010 to range between $11.0 million and $12.0 million, and R&D expenses between $2.5 million and $3.0 million.
• Backlog: Backlog increased to approximately $7.0 million as of September 30, 2010, up from $1.4 million at year-end 2009, including a significant order for multiple machines.
• Subsequent Acquisitions: Post-period acquisitions of Bits From Bytes (UK) and Provel S.r.l. (Italy) were announced, with total consideration exceeding $15 million. These are expected to further expand product lines and service capabilities.
• Legal Risks:
  • DSM Desotech: Ongoing litigation alleging anticompetitive behavior and patent infringement; damages claimed exceed $40 million.
  • EnvisionTEC: A jury verdict in October 2010 found EnvisionTEC infringed on 3D Systems' patents; the company intends to pursue damages and injunctive relief.
  • MSK K.K.: A Japanese subsidiary faces a lawsuit regarding performance guarantees, with damages sought in excess of $1.6 million.
• Market Risk: The company is exposed to foreign exchange rate fluctuations, though it attempts to match assets and liabilities in the same currency.

Investor Verification Checklist

• Acquisition Integration: Verify the financial impact and integration progress of the four 2010 acquisitions and the two subsequent acquisitions (Bits From Bytes, Provel).
• Legal Exposure: Monitor the status of the DSM Desotech and EnvisionTEC litigation, as potential damages or injunctions could materially affect operations.
• Revenue Mix: Assess the sustainability of the shift toward higher-margin systems sales versus lower-margin service revenue from 3Dproparts.
• Cash Utilization: Track cash burn related to acquisitions and capital expenditures against the $33.8 million cash balance.
• Foreign Currency Impact: Evaluate the sensitivity of future earnings to exchange rate fluctuations, given the significant non-U.S. revenue base.