UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-34220

3D SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		95-4431352 (I.R.S. Employer Identification No.)
333 THREE D SYSTEMS CIRCLE ROCK HILL, SOUTH CAROLINA (Address of Principal Executive Offices)		29730 (Zip Code)

(803) 326-3900
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
			(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of Common Stock, par value $0.001, outstanding as of July 27, 2009: 22,625,137

 

 

3D SYSTEMS CORPORATION

Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 2009

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			34
PART II — OTHER INFORMATION			36
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 4. Submission of Matters to a Vote of Security Holders			36
Item 6. Exhibits			37
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		June 30,				December 31,
(in thousands, except par value)		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	24,029			$	22,164
Accounts receivable, net of allowance for doubtful accounts of $2,273 (2009) and $2,015 (2008)			16,214				25,276
Inventories, net of reserves of $3,061 (2009) and $3,156 (2008)			19,108				21,018
Prepaid expenses and other current assets			1,866				1,601
Deferred income tax assets			784				935
Restricted cash			107				3,309
Total current assets			62,108				74,303
Property and equipment, net			21,990				24,072
Intangible assets, net			3,236				3,663
Goodwill			47,880				48,010
Other assets, net			3,017				2,954
		$	138,231			$	153,002
LIABILITIES AND EQUITY
Current liabilities:
Industrial development bonds		$	—			$	3,085
Current portion of capitalized lease obligations			203				195
Accounts payable			11,414				17,133
Accrued liabilities			6,941				8,057
Customer deposits			587				1,136
Deferred revenue			8,107				9,418
Total current liabilities			27,252				39,024
Long-term portion of capitalized lease obligations			8,364				8,467
Other liabilities			3,364				3,277
Total liabilities			38,980				50,768
Commitments and contingencies			—				—
3D Systems stockholders’ equity:
Preferred Stock, authorized 5,000 shares, none issued			—				—
Common stock, $0.001 par value, authorized 60,000 shares; 22,698 (2009) and 22,424 (2008) issued			23				22
Additional paid-in capital			177,157				176,180
Treasury stock, at cost; 72 shares (2009) and 59 shares (2008)			(133	)			(120	)
Accumulated deficit			(81,958	)			(78,557	)
Accumulated other comprehensive income			4,158				4,709
Total 3D Systems stockholders’ equity			99,247				102,234
Noncontrolling interest			4				—
Total Equity			99,251				102,234
		$	138,231			$	153,002

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands, except per share amounts)		2009				2008				2009				2008
Revenue:
Products		$	17,584			$	27,713			$	33,073			$	50,478
Services			7,121				8,943				15,663				17,965
Total revenue			24,705				36,656				48,736				68,443
Cost of sales:
Products			9,443				15,510				17,380				27,963
Services			4,432				7,541				10,047				14,175
Total cost of sales			13,875				23,051				27,427				42,138
Gross profit			10,830				13,605				21,309				26,305
Operating expenses:
Selling, general and administrative			8,818				12,555				18,006				25,619
Research and development			2,855				3,578				5,753				7,175
Total operating expenses			11,673				16,133				23,759				32,794
Loss from operations			(843	)			(2,528	)			(2,450	)			(6,489	)
Interest and other expense (income), net			260				485				487				(171	)
Loss before income taxes			(1,103	)			(3,013	)			(2,937	)			(6,318	)
Provision for income taxes			210				310				460				696
Net loss			(1,313	)			(3,323	)			(3,397	)			(7,014	)
Less: Net income attributable to noncontrolling interest			4				—				4				—
Net loss attributable to 3D Systems		$	(1,317	)		$	(3,323	)		$	(3,401	)		$	(7,014	)
Net loss per share — basic and diluted		$	(0.06	)		$	(0.15	)		$	(0.15	)		$	(0.31	)

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended June 30,
(in thousands)		2009				2008
Cash flows from operating activities:
Net loss attributable to 3D Systems		$	(3,401	)		$	(7,014	)
Net income attributable to noncontrolling interest			4				—
Net loss			(3,397	)			(7,014	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Deferred income taxes			140				110
Depreciation and amortization			3,019				3,123
Provision for bad debts			879				287
Stock-based compensation			731				856
Gain on the disposition of property and equipment			(21	)			—
Changes in operating accounts:
Accounts receivable			7,725				4,404
Inventories			1,827				(7,589	)
Prepaid expenses and other current assets			(144	)			848
Accounts payable			(5,335	)			(1,616	)
Accrued liabilities			(1,161	)			(2,749	)
Customer deposits			(553	)			1,961
Deferred revenue			(1,448	)			(783	)
Other operating assets and liabilities			55				(219	)
Net cash provided by (used in) operating activities			2,317				(8,381	)
Cash flows used in investing activities:
Purchases of property and equipment			(654	)			(3,244	)
Additions to license and patent costs			(83	)			(230	)
Proceeds from disposition of property and equipment			26				—
Net cash used in investing activities			(711	)			(3,474	)
Cash flows provided by financing activities:
Restricted stock proceeds and stock options, net			232				1,091
Repayment of long-term debt			(96	)			(210	)
Repayment of short-term borrowings			(3,085	)			—
Restricted cash			3,204				—
Net cash provided by financing activities			255				881
Effect of exchange rate changes on cash			4				394
Net increase (decrease) in cash and cash equivalents			1,865				(10,580	)
Cash and cash equivalents at the beginning of the period			22,164				29,689
Cash and cash equivalents at the end of the period		$	24,029			$	19,109
Supplemental Cash Flow Information:
Interest payments		$	324			$	483
Income tax (receipts) payments			(480	)			408
Non-cash items:
Transfer of equipment from inventory to property and equipment, net(a)			47				3,944
Transfer of equipment to inventory from property and equipment, net(b)			230				1,518

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)

		Equity Attributable to 3D Systems Stockholders
		Common Stock																								Accumulated				Total				Equity
						Par				Additional																Other				3D Systems				Attributable to
						Value				Paid in				Treasury Stock								Accumulated				Comprehensive				Stockholders’				Noncontrolling				Total
(In thousands, except par value)		Shares				$0.001				Capital				Shares				Amount				Deficit				Income				Equity				Interest				Equity
Balance at December 31, 2008			22,424			$	22			$	176,180				59			$	(120	)		$	(78,557	)		$	4,709			$	102,234				—				102,234
Issuance (repurchase) of restricted stock, net			259				1				308				13				(13	)			—				—				296				—				296
Stock compensation expense			—				—	(a)			585				—				—				—				—				585				—				585
Exercise of stock options			15				—	(a)			84				—				—				—				—				84				—				84
Net (loss) gain			—				—				—				—				—				(3,401	)			—				(3,401	)			4				(3,397	)
Foreign currency translation adjustment			—				—				—				—				—				—				(551	)			(551	)			—				(551	)
Balance at June 30, 2009			22,698			$	23			$	177,157				72			$	(133	)		$	(81,958	)		$	4,158			$	99,247			$	4			$	99,251

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Net loss attributable to 3D Systems		$	(1,317	)		$	(3,323	)		$	(3,401	)		$	(7,014	)
Net income attributable to noncontrolling interest			4				—				4				—
Net loss			(1,313	)			(3,323	)			(3,397	)			(7,014	)
Other comprehensive loss:
Unrealized gain on pension obligation			10				—				—				9
Foreign currency translation adjustments			1,189				(749	)			(551	)			1,565
Comprehensive loss, net		$	(114	)		$	(4,072	)		$	(3,948	)		$	(5,440	)

See accompanying notes to condensed consolidated financial statements.

3D SYSTEMS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of 3D Systems Corporation and its subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2008.

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the quarter and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from these estimates and assumptions.

Certain prior period amounts have been reclassified to conform to their current year presentation. These reclassifications include $285 of foreign exchange loss for the quarter ended June 30, 2008, and $445 of foreign exchange gain for the six months ended June 30, 2008, that had previously been included in product cost of sales for the first two quarters of 2008, to interest and other expense (income), net in the Company’s condensed consolidated statements of operations. This had the effect of increasing the Company’s previously reported gross profit and interest and other expense (income), net for the second quarter of 2008 by $285 and of decreasing operating loss for that quarter by the same amount. For the six months ended June 30, 2008, this reclassification had the effect of decreasing the Company’s previously reported gross profit and interest and other expense (income) by $445 and of increasing operating loss for the period by the same amount. It did not affect any of the other line items on the Company’s condensed consolidated statements of operations for 2008.

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

The Company has evaluated subsequent events from the date of the condensed consolidated balance sheet through the date of the filing of this Form 10-Q. During this period, no material recognizable subsequent events were identified.

(2) Inventories

Components of inventories, net at June 30, 2009 and December 31, 2008 were as follows:

(in thousands)		2009				2008
Raw materials		$	1,622			$	1,635
Inventory held by assemblers			7				34
Work in process			104				146
Finished goods and parts			20,436				22,359
Total cost			22,169				24,174
Less: reserves			(3,061	)			(3,156	)
Inventories, net		$	19,108			$	21,018

Property and equipment at June 30, 2009 and December 31, 2008 were as follows:

										Useful Life
(in thousands, except years)		2009				2008				(in years)
Building		$	8,566			$	8,566				25
Machinery and equipment			26,334				27,492				3-5
Capitalized software — ERP			3,096				3,096				5
Office furniture and equipment			3,329				3,404				5
Leasehold improvements			7,310				7,567			Life of lease
Rental equipment			1,120				1,116				5
Construction in progress			1,031				298				N/A
Total property and equipment			50,786				51,539
Less: Accumulated depreciation and amortization			(28,796	)			(27,467	)
Total property and equipment, net		$	21,990			$	24,072

Depreciation and software amortization expense for the quarter and six months ended June 30, 2009 were $1,224 and $2,509, respectively, compared to $1,233 and $2,183, for the quarter and six months ended June 30, 2008. For each of the quarters and six months ended June 30, 2009 and 2008, the Company recognized software amortization expense of $134 and $269, respectively, for its capitalized enterprise resource planning (“ERP”) system.

(4) Intangible Assets

Intangible assets other than goodwill at June 30, 2009 and December 31, 2008 were as follows:

		June 30, 2009
		Gross Carrying				Accumulated
(in thousands)		Amount				Amortization				Net
Licenses		$	5,875			$	(5,338	)		$	537
Patent costs			16,124				(13,425	)			2,699
Other intangible assets			8,968				(8,968	)			—
Total		$	30,967			$	(27,731	)		$	3,236

		December 31, 2008
		Gross Carrying				Accumulated
(in thousands)		Amount				Amortization				Net
Licenses		$	5,875			$	(5,090	)		$	785
Patent costs			16,078				(13,341	)			2,737
Other intangible assets			8,968				(8,827	)			141
Total		$	30,921			$	(27,258	)		$	3,663

For the six months ended June 30, 2009 and 2008, the Company capitalized $83 and $230, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries.

Amortization expense related to licenses, patent costs and other intangible assets for the quarters and six months ended June 30, 2009 and 2008 was as follows:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Amortization expense:
Licenses		$	124			$	124			$	248			$	248
Patent costs			64				77				121				154
Other intangible assets			—				339				141				538
Total		$	188			$	540			$	510			$	940

Accrued liabilities at June 30, 2009 and December 31, 2008 were as follows:

(in thousands)		2009				2008
Compensation and benefits		$	2,982			$	2,239
Vendor accruals			927				1,880
Accrued professional fees			590				1,064
Accrued taxes			1,811				1,148
Royalties payable			154				297
Non-contractual obligation to repurchase inventory held by assemblers			7				34
Accrued interest			51				54
Accrued other			419				1,341
		$	6,941			$	8,057

Other liabilities at June 30, 2009 and December 31, 2008 were as follows:

(in thousands)		2009				2008
Defined benefit pension obligation		$	2,863			$	2,801
Other long-term liabilities			501				476
		$	3,364			$	3,277

The Company’s debt, excluding capitalized lease obligations, at June 30, 2009 and December 31, 2008 was $0 and $3,085, respectively, and at December 31, 2008 consisted of industrial development bonds related to the Grand Junction facility, which was sold in December 2008. The remaining bonds outstanding at December 31, 2008, plus accrued interest, were redeemed in January 2009. The interest rate on the bonds at December 31, 2008 was 1.28%.

The following provides for the components of interest and other expense (income), net:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Interest expense		$	162			$	261			$	321			$	468
Interest income			(10	)			(194	)			(11	)			(420	)
Foreign currency (gain) loss			44				285				166				(445	)
Other			64				133				11				226
Total		$	260			$	485			$	487			$	(171	)

In May 2009, the Company formed MQast, LLC (“MQast”), a joint venture with an unrelated third party. MQast is an online provider of rapid, high-quality complex metal parts. The Company maintains a 51% ownership interest in MQast, and MQast’s operating results are included in the condensed consolidated financial statements. In accordance with SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” the carrying value of the noncontrolling interest is reported in the condensed consolidated balance sheets as a separate component of equity, and both consolidated net loss and comprehensive loss have been adjusted to include the net income attributable to the noncontrolling interest.

(8) Hedging Activities and Financial Instruments

The Company conducts business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, the Company is 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, the Company endeavors to match assets and liabilities in the same currency on its balance sheet and those of its subsidiaries in order to reduce these risks. When appropriate, the Company enters into foreign currency contracts to hedge exposures arising from those transactions. The Company has not adopted hedge accounting under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivatives and Hedging Activities,” as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 161, and all gains and losses (realized or unrealized) are recognized in “Interest and other expense (income), net” in the condensed consolidated statements of operations.

At June 30, 2009 and December 31, 2008, these contracts included contracts for the purchase of currencies other than the U.S. dollar. The dollar equivalents of the foreign currency contracts and the related fair values as of June 30, 2009 and December 31, 2008 were as follows:

		Foreign Currency
		Purchase Contracts
(in thousands)		2009				2008
Notional amount		$	1,549			$	1,680
Fair value			1,539				1,699
Net unrealized (loss) gain		$	(10	)		$	19

The foreign currency contracts outstanding at June 30, 2009 expire at various times between July 8, 2009 and August 5, 2009. The foreign currency contracts outstanding at December 31, 2008 expired at various times between January 5, 2009 and February 11, 2009.

Changes in the fair value of derivatives are recorded in interest and other expense (income), net in the condensed consolidated statements of operations. Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid expenses and other current assets or in accrued liabilities on the condensed consolidated balance sheet.

The total impact of foreign currency items on the condensed consolidated statements of operations for the quarter and six months ended June 30, 2009 were losses of $(44) and $(166), respectively, compared to gains (losses) of $(285) and $445, respectively, for the quarter and six months ended June 30, 2008.

(9) Stock-based Compensation Plans

The Company records stock-based compensation expense in selling, general and administrative expenses in the condensed consolidated statements of operations. Stock-based compensation expense for the quarters and six months ended June 30, 2009 and 2008 was as follows:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Restricted stock awards		$	342			$	376			$	731			$	856
Total stock-based compensation expense		$	342			$	376			$	731			$	856

The number of shares of restricted common stock awarded and the weighted average fair value per share during the quarters and six months ended June 30, 2009 and 2008 were as follows:

		Quarter Ended June 30,
		2009								2008
						Weighted Average								Weighted Average
(in thousands, except per share amounts)		Shares Awarded				Fair Value				Shares Awarded				Fair Value
Restricted stock awards:
Granted under the 2004 Incentive Stock Plan			4			$	6.97				8			$	15.07
Granted under the 2004 Restricted Stock Plan for Non-Employee Directors			21				6.97				22				8.80
Total restricted stock awards			25			$	6.97				30			$	10.47

		Six Months Ended June 30,
		2009								2008
						Weighted Average								Weighted Average
(in thousands, except per share amounts)		Shares Awarded				Fair Value				Shares Awarded				Fair Value
Restricted stock awards:
Granted under the 2004 Incentive Stock Plan			182			$	6.81				8			$	15.07
Granted under the 2004 Restricted Stock Plan for Non-Employee Directors			21				6.97				24				9.24
Total restricted stock awards			203			$	6.83				32			$	10.70

Of the 182 shares of restricted stock awards granted in the six months ended June 30, 2009 pursuant to the Company’s 2004 Incentive Stock Plan, 100 shares were awarded to executive officers of the Company. The 4 shares granted in the second quarter of 2009 remained subject to acceptance at June 30, 2009.

In the second quarter of 2009 the Company issued a total of 21 shares of common stock pursuant to the Company’s 2004 Restricted Stock Plan for Non-Employee Directors. Stock compensation expense for directors totaled $146 for the quarter and six months ended June 30, 2009, compared to $194 and $221, respectively, for the quarter and six months ended June 30, 2008.

(10) Loss Per Share

The Company presents basic and diluted earnings (loss) per share (“EPS”) amounts. Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted EPS is calculated by dividing 3D Systems net income (loss) by the weighted average number of common and common equivalent shares outstanding during the applicable period. The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares for the quarters and six months ended June 30, 2009 and 2008:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands, except per share amounts)		2009				2008				2009				2008
Numerator:
3D Systems net loss – numerator for basic net loss per share		$	(1,317	)		$	(3,323	)		$	(3,401	)		$	(7,014	)
Add: Effect of dilutive securities
Stock options and other equity compensation			—				—				—				—
Numerator for dilutive net loss per share		$	(1,317	)		$	(3,323	)		$	(3,401	)		$	(7,014	)
Denominator:
Weighted average shares – denominator for basic net loss per share			22,515				22,351				22,442				22,339
Add: Effect of dilutive securities
Stock options and other equity compensation			—				—				—				—
Denominator for dilutive net loss per share			22,515				22,351				22,442				22,339
Loss per share
Basic and diluted		$	(0.06	)		$	(0.15	)		$	(0.15	)		$	(0.31	)

No dilutive securities were included in the diluted weighted average shares outstanding for the quarter and six months ended June 30, 2009 and 2008 because the effect of their inclusion would have been anti-dilutive; that is, they would have reduced net loss per share.

(11) Income Taxes

The Company used effective tax rates of (19.1%) and (15.7%) for the quarter and six months ended June 30, 2009, respectively, compared to (10.3%) and (11.0%) for the quarter and six months ended June 30, 2008. Tax expense relates primarily to income from foreign operations.

Tax years 2005 to 2008 remain subject to examination by the U.S. Internal Revenue Service. Should the Company utilize any of its remaining U.S. loss carry-forwards, which date from 1997, years 1997 through 2004 would be subject to examination. The Company files income tax returns (which are open to examination beginning in the year shown in parentheses) in France (2004), Germany (2006), Japan (2004), Italy (2004), Switzerland (2004) and the United Kingdom (2006).

(12) Segment Information

The Company operates in one reportable business segment in which it develops, manufactures and markets worldwide 3-D printing, rapid prototyping and manufacturing systems designed to reduce the time it takes to produce three-dimensional objects. The Company conducts its business through subsidiaries in the United States, a subsidiary in Switzerland that operates a research and production facility, sales and service offices operated by subsidiaries in the European Community (France, Germany, the United Kingdom and Italy) and Japan, and a branch office in Hong Kong. The Company has historically disclosed summarized financial information for the geographic areas of operations as if they were segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Summarized financial information concerning the Company’s geographical operations is shown in the following tables:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Revenue from unaffiliated customers:
United States		$	11,455			$	16,055			$	22,210			$	28,092
Germany			5,556				7,334				10,991				14,514
Other Europe			5,186				7,599				9,749				16,080
Asia Pacific			2,508				5,668				5,786				9,757
Total		$	24,705			$	36,656			$	48,736			$	68,443

The Company’s revenues from unaffiliated customers by type are as follows:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Systems and other products		$	5,882			$	11,487			$	10,741			$	19,329
Materials			11,702				16,226				22,332				31,149
Services			7,121				8,943				15,663				17,965
Total revenue		$	24,705			$	36,656			$	48,736			$	68,443

Intercompany sales are as follows:

		Quarter Ended June 30, 2009
		Intercompany Sales to
		United								Other				Asia
(in thousands)		States				Germany				Europe				Pacific				Total
United States		$	—			$	2,547			$	1,489			$	109			$	4,145
Germany			—				—				1,059				—				1,059
Other Europe			1,708				308				—				—				2,016
Asia Pacific			—				—				—				—				—
Total		$	1,708			$	2,855			$	2,548			$	109			$	7,220

		Quarter Ended June 30, 2008
		Intercompany Sales to
		United								Other				Asia
(in thousands)		States				Germany				Europe				Pacific				Total
United States		$	—			$	5,051			$	3,244			$	3,632			$	11,927
Germany			428				—				1,780				—				2,208
Other Europe			1,641				5				—				—				1,646
Asia Pacific			—				—				—				—				—
Total		$	2,069			$	5,056			$	5,024			$	3,632			$	15,781

		Six Months Ended June 30, 2009
		Intercompany Sales to
		United								Other				Asia
(in thousands)		States				Germany				Europe				Pacific				Total
United States		$	—			$	5,751			$	3,383			$	1,566			$	10,700
Germany			3				—				1,772				—				1,775
Other Europe			3,213				446				—				—				3,659
Asia Pacific			—				—				—				—				—
Total		$	3,216			$	6,197			$	5,155			$	1,566			$	16,134

		Six Months Ended June 30, 2008
		Intercompany Sales to
		United								Other				Asia
(in thousands)		States				Germany				Europe				Pacific				Total
United States		$	—			$	9,734			$	6,142			$	6,633			$	22,509
Germany			462				—				3,742				—				4,204
Other Europe			2,841				53				—				—				2,894
Asia Pacific			—				—				—				—				—
Total		$	3,303			$	9,787			$	9,884			$	6,633			$	29,607

All revenue between geographic areas is recorded at prices that provide for an allocation of profit (loss) between entities. Income (loss) from operations and assets for each geographic area are as follows:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Income (loss) from operations:
United States		$	(2,286	)		$	(3,510	)		$	(5,230	)		$	(7,966	)
Germany			262				279				370				478
Other Europe			288				631				707				1,079
Asia Pacific			364				(3	)			1,307				324
Subtotal			(1,372	)			(2,603	)			(2,846	)			(6,085	)
Inter-segment elimination			529				75				396				(404	)
Total		$	(843	)		$	(2,528	)		$	(2,450	)		$	(6,489	)

		June 30,				December 31,
(in thousands)		2009				2008
Assets:
United States		$	51,431			$	61,974
Germany			24,773				25,762
Other Europe			42,084				43,396
Asia Pacific			19,943				21,870
Total		$	138,231			$	153,002

On March 14, 2008, DSM Desotech Inc. filed a complaint, as amended, in an action titled DSM Desotech Inc. v. 3D Systems Corporation et al. in the United States District Court for the Northern District of Illinois (Eastern Division) asserting that the Company engaged in anticompetitive behavior with respect to resins used in large-frame stereolithography machines. The complaint further asserted that the Company is infringing on two of DSM Desotech’s patents relating to stereolithography machines. The Company understands that DSM Desotech estimates the damages associated with its claims to be in excess of $40,000.

Following a decision of the Court on the Company’s motion to dismiss the non-patent causes of the action, DSM Desotech filed a second amended complaint on March 2, 2009 in which it reasserted causes of action previously dismissed by the Court. The Company filed an answer to the second amended complaint on March 19, 2009 in which, among other things, it denied the material allegations of the second amended complaint. Discovery is proceeding on the claims pending in this case.

The Company intends to vigorously contest all of the claims asserted by DSM Desotech.

The Company is also involved in various other legal matters incidental to its business. The Company’s management believes, after consulting with counsel, that the disposition of these other legal matters will not have a material effect on the Company’s consolidated results of operations or consolidated financial position.

(14) Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 introduced a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities.

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

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

		Fair Value Measurements as of June 30, 2009
(in thousands)		Level 1				Level 2				Level 3				Total
Description
Cash equivalents(1)		$	20,785			$	—			$	—			$	20,785
Currency derivative contracts(1)			1,539				—				—				1,539
Total		$	22,324			$	—			$	—			$	22,324

The fair market values of Level 1 currency derivative contracts at June 30, 2009 and December 31, 2008 were as follows:

		Foreign Currency
		Purchase Contracts
(in thousands)		2009				2008
Notional amount		$	1,549			$	1,680
Fair value			1,539				1,699
Net unrealized (loss) gain		$	(10	)		$	19

In January 2009, the Company adopted FASB Staff Position No. 157-2 (“FSP FAS 157-2”) for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of FSP FAS 157-2 did not have a material impact on the Company’s consolidated financial statements.

(15) International Retirement Plan

The following table shows the components of net periodic benefit costs and other amounts recognized in the condensed consolidated statements of operations for the quarter and six months ended June 30, 2009 and 2008:

		Quarter Ended June 30,								Six Months Ended June 30,
(in thousands)		2009				2008				2009				2008
Service cost		$	23			$	23			$	47			$	46
Interest cost			22				17				44				35
Total		$	45			$	40			$	91			$	81

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2 which allowed companies to elect a one year deferral of adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” In March 2009, the FASB released Proposed Staff Position SFAS 157-e, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (“SFAS 157-e”), which provides additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS No. 157. SFAS 157-e would be effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009; however, it has not yet been issued by the FASB. In May 2009 the FASB released Proposed Staff Position SFAS 157-f, “Measuring Liabilities under FASB Statement No. 157” (“SFAS 157-f”), which provides guidance on the fair value measurement of liabilities under SFAS No. 157. SFAS 157-f will be effective for the first reporting period, including interim periods, beginning after its issuance, with earlier application permitted. The Company currently does not have any financial assets or liabilities that are valued in inactive or non-orderly markets, and as such are not currently impacted by the issuance of FSP FAS 157-3 or FSP FAS 157-4. The Company has adopted SFAS No. 157 as it relates to financial assets and liabilities as of January 1, 2008 and as it relates to nonfinancial assets and liabilities as of January 1, 2009, and the impact of the adoption was not significant. The Company is evaluating the impact of proposals SFAS 157-e and SFAS 157-f on its consolidated financial statements. See Note 14 to the condensed consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). This FSP amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair values of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The FSP also amends ABP Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 became effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the FSP for the period ended June 30, 2009, and the impact of the adoption was not significant; see Note 14 to the condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 became effective for the Company for the period ended June 30, 2009 and is to be applied prospectively. The impact of adoption was not significant. See Note 1 to the condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standard Codification™ (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles,” effective for interim and annual reporting periods ending after September 15, 2009. This statement replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the Codification as the source of authoritative accounting principles used in the preparation of financial statements in conformity with generally accepted accounting principles. The Codification does not replace or affect guidance issued by the SEC or its staff. After the effective date of this statement, all non-grandfathered non-SEC accounting literature not included in the Codification will be superseded and deemed non-authoritative.

This discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

We are subject to a number of risks and uncertainties that may affect our future performance that are discussed in greater detail in the sections entitled “Forward-Looking Statements” and “Cautionary Statements and Risk Factors” at the end of this Item 2 and that are discussed or referred to in Item 1A of Part II of this Quarterly Report on Form 10-Q.

Business Overview

We design, develop, manufacture, market and service 3-D printing, rapid manufacturing, and prototyping systems and related products and materials that enable complex three-dimensional objects to be produced directly from computer data without tooling, greatly reducing the time and cost required to produce prototypes or customized production parts.

Our consolidated revenue is derived primarily from the sale of our systems, the sale of the related materials used by the systems to produce solid objects and the provision of services to our customers.

Recent Developments

New product developments

During 2009, we have continued our new product development activities, resulting in the following, which were not material to our operating results:

•

In April 2009, we began offering the production of large one-piece SLA parts through our online Pro-Parts Marketplace. Through the Pro-Parts Marketplace, customers can obtain high-definition precision parts up to 60 inches (1500 mm) long that are produced on our new iPro™ 9000 XL SLA® Precision Centers. Producing very large high-definition precision parts in a single piece eliminates the labor intensity associated with the fixturing and assembly of sectioned pieces into a larger part as well as the dimensional inaccuracy that can result from the complex manufacturing of subassemblies.

•

In May 2009, we formed MQast, LLC through a joint venture with an unrelated third party which is a leading Rapid Prototyping and Manufacturing Service Provider. MQast, LLC is an online provider of rapid, high-quality, complex geometry metal parts, which utilizes MQast™ technology. These parts are ideally suited for aerospace, medical and automotive applications for functional testing, design verification and end-use for short-run production.

•

Also in May 2009, we launched our sPro™ 60 SLS® Centers. Expanding our line of sPro™ Centers, the sPro™ 60 SLS® family of new cost-saving production systems enables users to rapidly manufacture stable, durable plastic parts for demanding functional testing and end-use applications. sPro™ 60 SLS® Centers feature enhanced productivity within an optimized build volume, new CleanSweep™ IR sensor technology, the ability to process multiple materials and the flexibility to change materials quickly. Optional features include our ProScan™ digital imaging system and the AccuTemp™ thermal control system, which are designed for the most rigorous manufacturing applications. As part of our new sPro™ 60 SLS® product family, we also launched a new, affordable basic sPro™ 60 SLS® production system that offers unmatched value with the flexibility to upgrade to the more advanced sPro™ Production Centers.

•

We launched our V-Flash® Desktop Printer in May 2009, the first commercially available 3-D modeler priced under $10,000. The V-Flash® Printer delivers high-quality hard-plastic parts for enhanced design at an affordable price and low total cost of ownership. V-Flash® Printers combine the versatility typically found in more expensive 3-D printers with the convenience of an easy-to-use desktop printer. Its compact size, quiet operation, and network-ready connection makes V-Flash® Printers ideal for virtually any design job at a price virtually any business can afford.

Results of Operations

Summary of 2009 financial results

We generated $1.8 million of net cash in the first six months of 2009 and finished the period with $24.0 million of unrestricted cash compared to $22.2 million of unrestricted cash at December 31, 2008.

As discussed in greater detail below, revenue for the second quarter of 2009 declined by 33% to $24.7 million from $36.7 million for the second quarter of 2008, due to weak global demand, particularly in the automotive and consumer electronics sectors. Revenue was down across all classes of products and services, primarily reflecting the cumulative effect of the decline in large-frame systems sales that began in the first quarter of 2008. Revenue for the six months ended June 30, 2009 declined 29% to $48.7 million from $68.4 million in 2008, for primarily the same reasons.

Materials sales for the second quarter of 2009 declined by $4.5 million from the second quarter of 2008 as revenue from materials was adversely impacted by the significant reduction in large-frame systems sales, which are typically accompanied by significant initial materials purchases to charge up new systems and commence production, and decreased demand due to the downturn in the global economy.

We are encouraged, however, by the improved trend in systems and materials sales during the second quarter of 2009, which increased by $1.0 million (21%) and $1.1 million (10%), respectively, from first quarter 2009 levels.

Revenue from services fell by $1.8 million to $7.1 million in the second quarter of 2009 from $8.9 million in the same quarter of 2008 primarily as a result of a significant drop in maintenance and warranty revenue, which reflects the trailing 12-month cumulative effect of lower large-frame sales that began during the first quarter of 2008. Services revenue declined by $1.4 million in the second quarter of 2009 from $8.5 million in the first quarter of 2009, resulting from the continued effect of lower large-frame sales as well as a reduced volume of systems upgrades as compared with the first quarter of 2009.

Foreign currency translation had a $1.6 million unfavorable impact on revenue in the second quarter of 2009 compared to a $2.2 million favorable impact on revenue in the second quarter of 2008 as the U.S. dollar strengthened in 2009 against most major currencies, with the exception of the Japanese Yen.

Through our cost saving initiatives, in the aggregate, we were able to improve gross margin, reduce operating expenses and narrow our operating loss by $1.7 million.

Our gross profit improved modestly to $10.8 million in the second quarter of 2009 from $10.5 million in the first quarter of 2009, although it was down by $5.0 million compared to the first six months of 2008 primarily due to our lower level of revenue. Our cost of sales also fell due to a combination of lower sales and the initiatives undertaken in 2008 and the first and second quarters of 2009 to lower our cost of sales. Our gross profit margin increased to 43.8% in the second quarter of 2009 from 37.1% in the second quarter of 2008 as increased supply chain efficiencies, the elimination of certain third-party logistics costs in the U.S. and cost reductions in our field service organization more than offset lower overhead absorption over lower sales. These changes reflect the reclassifications of foreign exchange effects from cost of sales to interest and other expense (income), which are more fully described below under our discussions of “Gross profit and gross profit margins.”

Our operating expenses declined by $4.4 million in the second quarter of 2009 to $11.7 million from $16.1 million in the 2008 quarter. The decrease reflected lower selling, general and administrative expenses and lower research and development expenses consistent with our cost reduction initiatives. We expect our SG&A expenses for the remainder of 2009 to be in the range of $17 to $19 million, and our research and development expenses to be in the range of $5 million to $6 million.

Results of Operations – Second Quarter Comparisons

Second quarter comparison of revenue by class of product and service

Table 1 sets forth our change in revenue by class of product and service for the second quarter of 2009 compared to the second quarter of 2008:

Table 1

		Systems and
		Other
(Dollars in thousands)		Products								Materials								Services								Totals
Revenue – 2nd quarter 2008		$	11,487				31.3	%		$	16,226				44.3	%		$	8,943				24.4	%		$	36,656				100	%
Change in revenue:
Volume
Core products and services			(3,304	)			(28.8	)			(590	)			(3.6	)			(604	)			(6.8	)			(4,498	)			(12.3	)
New products and services			(1,939	)			(16.9	)			(2,644	)			(16.3	)			(695	)			(7.8	)			(5,278	)			(14.4	)
Price/Mix			(119	)			(1.0	)			(453	)			(2.8	)			—				—				(572	)			(1.5	)
Foreign currency translation			(243	)			(2.1	)			(837	)			(5.2	)			(523	)			(5.8	)			(1,603	)			(4.4	)
Net change			(5,605	)			(48.8	)			(4,524	)			(27.9	)			(1,822	)			(20.4	)			(11,951	)			(32.6	)
Revenue – 2nd quarter 2009		$	5,882				23.8	%		$	11,702				47.4	%		$	7,121				28.8	%		$	24,705				100.0	%