3D SYSTEMS CORPORATION

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2012 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No D SYSTEMS CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 333 THREE D SYSTEMS CIRCLE ROCK HILL, SOUTH CAROLINA (Address of Principal Executive Offices) (Zip Code) (803) (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 No 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 ( 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 No 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 Accelerated filer Non-accelerated filer (Do not check if smaller reporting company) 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 No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

2 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 No 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 October 19, 2012: 57,040,024

3 3D SYSTEMS CORPORATION Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2012 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 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 Item 4. Controls and Procedures 34 PART II OTHER INFORMATION 35 Item 1. Legal Proceedings 35 Item 1A. Risk Factors 35 Item 6. Exhibits 35 Exhibit Exhibit Exhibit Exhibit

4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. (in thousands, except par value) 3D SYSTEMS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) See accompanying notes to condensed consolidated financial statements. 3 September 30, 2012 December 31, 2011 ASSETS Current assets: Cash and cash equivalents $ 183,931 $ 179,120 Accounts receivable, net of allowance for doubtful accounts of $5,155 (2012) and $3,019 (2011) 69,750 51,195 Inventories, net of reserves of $3,824 (2012) and $2,542 (2011) 41,281 25,283 Prepaid expenses and other current assets 2,570 2,241 Current deferred income taxes 3,969 3,528 Restricted cash Total current assets 301, ,380 Property and equipment, net 34,187 29,594 Intangible assets, net 96,902 54,040 Goodwill 220, ,651 Long term deferred income taxes 636 3,195 Other assets, net 6,814 7,114 Total assets $ 660,518 $ 462,974 LIABILITIES AND EQUITY Current liabilities: Current portion of capitalized lease obligations $ 159 $ 163 Accounts payable 26,730 25,911 Accrued and other liabilities 33,636 16,816 Customer deposits 2,755 3,398 Deferred revenue 15,935 12,735 Total current liabilities 79,215 59,023 Long term portion of capitalized lease obligations 7,494 7,609 Convertible senior notes, net 123, ,107 Deferred income tax liability 22,091 3,666 Other liabilities 11,667 6,781 Total liabilities 244, ,186 Commitments and Contingencies Stockholders equity: Preferred stock, authorized 5,000 shares, none issued Common stock, $0.001 par value, authorized 120,000 shares; 57,376 (2012) and 50,975 (2011) issued Additional paid-in capital 408, ,542 Treasury stock, at cost: 343 (2012) and 324 shares (2011) (228) (214) Accumulated earnings (deficit ) 5,498 (22,531) Accumulated other comprehensive income 3,132 2,940 Total stockholders equity 416, ,788 Total liabilities and stockholders equity $ 660,518 $ 462,974

5 3D SYSTEMS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) Quarter Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) Revenue: Products $ 59,551 $ 33,248 $ 161,223 $ 95,002 Services 30,981 24,290 90,839 65,561 Total revenue 90,532 57, , ,563 Cost of sales: Products 26,729 16,010 73,621 45,732 Services 16,924 13,765 49,741 38,667 Total cost of sales 43,653 29, ,362 84,399 Gross profit 46,879 27, ,700 76,164 Operating expenses: Selling, general and administrative 22,900 15,100 70,898 42,224 Research and development 5,543 3,872 15,397 9,737 Total operating expenses 28,443 18,972 86,295 51,961 Income from operations 18,436 8,791 42,405 24,203 Interest and other expense, net 2, , Income before income taxes 16,269 8,137 33,816 23,738 Provision for (benefit of) income taxes 2, ,787 (3,677) Net income $ 13,517 $ 7,220 $ 28,029 $ 27,415 Other comprehensive income Unrealized gain (loss) on pension obligation $ (6) $ (5) $ 1 $ Foreign currency translation gain (loss) 2,016 (2,873) 191 (250) Comprehensive income $ 15,527 $ 4,342 $ 28,221 $ 27,165 Net income per share basic $ 0.24 $ 0.14 $ 0.53 $ 0.55 Net income per share diluted $ 0.24 $ 0.14 $ 0.52 $ 0.54 See accompanying notes to condensed consolidated financial statements. 4

6 3D SYSTEMS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (in thousands) Cash flows from operating activities: Net income $ 28,029 $ 27,415 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (benefit of) deferred income taxes 2,941 (4,833) Depreciation and amortization 15,804 7,402 Non-cash interest on convertible notes 2,923 Provision for bad debts 2, Stock-based compensation 3,656 1,827 (Gain) loss on the disposition of property and equipment and investments (631) 82 Loss on conversion of convertible debt 1,245 Changes in operating accounts: Accounts receivable (11,270) (2,568) Inventories (10,582) (5,000) Prepaid expenses and other current assets 237 (293) Accounts payable (4,488) (4,777) Accrued liabilities 14, Customer deposits (1,347) 608 Deferred revenue 815 (1,106) Other operating assets and liabilities 12 (940) Net cash provided by operating activities 44,011 18,783 Cash flows from investing activities: Purchases of property and equipment (1,902) (2,295) Additions to license and patent costs (535) (305) Cash paid for acquisitions, net of cash assumed (148,278) (44,830) Net cash used in investing activities (150,715) (47,430) Cash flows from financing activities: Proceeds from issuance of common stock 106,890 62,054 Proceeds from exercise of stock options and restricted stock, net 4,582 2,378 Repayment of capital lease obligations (121) (172) Restricted cash (189) Net cash provided by financing activities 111,351 64,071 Effect of exchange rate changes on cash 164 (156) Net increase in cash and cash equivalents 4,811 35,268 Cash and cash equivalents at the beginning of the period 179,120 37,349 Cash and cash equivalents at the end of the period $ 183,931 $ 72,617 Supplemental Cash Flow Information: Interest payments $ 5,114 $ 418 Income tax payments 1, Non-cash items: Transfer of equipment from inventory to property and equipment, net(a) 2,228 2,721 Transfer of equipment to inventory from property and equipment, net(b) (1,365) 779 Stock issued for acquisitions of businesses 7,103 3,042 Stock issued for conversions of 5.50% senior convertible notes 11,250 (a) (b) Inventory is transferred from inventory to property and equipment at cost when the Company requires additional machines for training, demonstration or short-term rentals. In general, an asset is transferred from property and equipment, net into inventory at its net book value when the Company has identified a potential sale for a used machine. The machine is removed from inventory upon recognition of the sale. See accompanying notes to condensed consolidated financial statements. 5

7 (In thousands, except par value) Shares 3D SYSTEMS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EQUITY (Unaudited) Common Stock Treasury Stock Par Value $0.001 Additional Paid In Capital Shares Amount Accumulated Deficit Accumulated Other Comprehensive Income Total Stockholders Equity Balance at December 31, ,975 $ 51 $274, $ (214) $ (22,531) $ 2,940 $ 254,788 Exercise of stock options 962 (a) 4,133 4,133 Issuance (repurchase) of restricted stock, net 474 (a) (14) 449 Issuance of common stock 4, , ,890 Issuance of stock for acquisitions 278 (a) 7,103 7,103 Issuance of stock for 5.50% senior convertible notes ,249 11,250 Stock-based compensation expense 3,656 3,656 Net income 28,029 28,029 Gain on pension plan unrealized 1 1 Foreign currency translation adjustment Balance at September 30, ,376 $ 57 $408, $ (228) $ 5,498 $ 3,132 $ 416,490 (a) Amounts not shown due to rounding. See accompanying notes to condensed consolidated financial statements. 6

8 3D SYSTEMS CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation The accompanying unaudited 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 unaudited 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 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, 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 nine months ended September 30, 2012 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 those estimates and assumptions. Certain prior period amounts presented in the accompanying footnotes have been reclassified to conform to current year presentation. All amounts presented in the accompanying footnotes are presented in thousands, except for per share information. 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, the Company closed the acquisition of Tim The Innovative Modelmakers B.V. ( TIM ) and INUS Technology, Inc., known as Rapidform. See Note 2 and Note 16 for a description of subsequent events. Recent Accounting Pronouncements In July 2012, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ), Intangibles Goodwill and Other (Topic 350). ASU is intended to simplify the testing of intangible assets for impairment by permitting an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of indefinite-lived intangible assets is less than its carrying amount. If an entity determines on the basis of the qualitative factors this is the case, then it is required to perform the currently prescribed two-step impairment test described in Topic 350. ASU will become effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not anticipate that this amendment will have a significant impact on the company s consolidated financial statements. No new accounting pronouncements, issued or effective during the third quarter of 2012, have had or are expected to have a significant impact on the Company s consolidated financial statements. (2) Acquisitions The Company completed an acquisition in the third quarter of 2012, which is discussed below. On July 23, 2012, the Company acquired the shares of Viztu Technologies, Inc. ( Viztu ). Viztu is the developer of Hypr3D, an online platform that allows anyone to turn their pictures and videos into printable 3D creations. Viztu s operations have been integrated into the Company and are included in services revenue. The fair value of the consideration paid for this acquisition, net of cash acquired, was $1,000, of which $500 was paid in cash and $500 was paid in shares of the Company s common stock. These shares were issued in a private transaction exempt from registration under the Securities Act of The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed, based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill, and is included in the table below which summarizes third quarter 2012 acquisitions. The Viztu acquisition is not significant to the Company s financial statements. 7

9 Subject to the terms and conditions of the acquisition agreement, the seller has the right to earn an additional amount, of up to a maximum of $1,000, pursuant to an earnout formula over a four-year period as set forth in the acquisition agreement. As of September 30, 2012, an accrued liability of approximately $81 was recorded for the earnout. The earnout was determined to be acquisition consideration and therefore is reflected as part of goodwill. The Company s purchase price allocations for the acquired company is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available. The amounts related to the acquisition of this business were allocated to the assets acquired and the liabilities assumed and included in the Company s condensed consolidated balance sheet at September 30, 2012 as follows: (in thousands) 2012 Fixed assets $ Intangible assets 1,166 Other liabilities, net of cash acquired and assets assumed (166) Net assets acquired $1,000 Subsequent acquisitions In October 2012, the Company acquired the shares of TIM The Innovative Modelmakers B.V. ( TIM ), a full service provider of on-demand custom parts services, located in the Netherlands. The fair value of the consideration paid for this acquisition, net of cash acquired, was $1,369, based on the exchange rate of the Euro at the date of acquisition, of which $801 was paid in cash and $568 was paid in shares of the Company s common stock. These shares were issued in a private transaction exempt from registration under the Securities Act of Due to the timing of this acquisition, the Company is in the process of allocating the fair values of the assets purchased, liabilities assumed and other intangibles identified as of the acquisition date, with any excess to be recorded as goodwill. The Company plans to integrate TIM into its European on-demand parts services and future revenue from this acquisition will be reported in services revenue. The TIM acquisition is not significant to the Company s financial statements. In October 2012, the Company acquired the shares of INUS Technology, Inc., a developer of scan-to-cad and inspection software tools, known as Rapidform ( Rapidform ). Rapidform is located in Seoul, South Korea. The fair value of the consideration paid for this acquisition, net of cash acquired, was $35,000, all of which was paid in cash. Due to the timing of this acquisition, the Company is in the process of allocating the fair values of the assets purchased, liabilities assumed and other intangibles identified as of the acquisition date, with any excess to be recorded as goodwill. Future revenue from this acquisition will be reported in printers and other products revenue. The Rapidform acquisition is not significant to the Company s financial statements. (3) Inventories Components of inventories, net at September 30, 2012 and December 31, 2011 were as follows: (in thousands) Raw materials $21,578 $ 8,797 Work in process 1, Finished goods and parts 22,166 18,422 Total cost 45,105 27,825 Less: reserves (3,824) (2,542) Inventories, net $41,281 $25,283 8

10 (4) Property and Equipment Property and equipment at September 30, 2012 and December 31, 2011 were as follows: (in thousands) Depreciation and amortization expense on property and equipment for the quarter and nine months ended September 30, 2012 were $2,151 and $6,285, respectively, compared to $1,547 and $4,596, respectively, for the quarter and nine months ended September 30, (5) Intangible Assets Intangible assets other than goodwill at September 30, 2012 and December 31, 2011 were as follows: For the nine months ended September 30, 2012 and 2011, the Company capitalized $535 and $305, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries. Amortization expense for intangible assets for the quarter and nine months ended September 30, 2012 was $3,079 and $9,519, respectively, compared to $855 and $2,806 for the quarter and nine months ended September 30, Annual amortization expense for intangible assets for 2012, 2013, 2014, 2015 and 2016 is expected to be $12,545, $12,090, $11,974, $10,765 and $9,624, respectively. 9 Useful Life (in years) Land $ 541 $ 541 N/A Building 9,204 9, Machinery and equipment 46,431 36, Capitalized software ERP 3,174 3,141 5 Office furniture and equipment 3,283 3,138 5 Leasehold improvements 6,532 5,996 Life of lease Rental equipment Construction in progress N/A Total property and equipment 70,188 59,829 Less: Accumulated depreciation and amortization (36,001) (30,235) Total property and equipment, net $ 34,187 $ 29,594 (1) Leasehold improvements are amortized on a straight-line basis over the shorter of (i) their estimated useful lives and (ii) the estimated or contractual life of the related lease. (in thousands) Gross Accumulated Amortization Net Gross Accumulated Amortization Net Intangible assets with finite lives: Licenses $ 5,875 $ (5,875) $ $ 5,875 $ (5,875) $ Patent costs 20,091 (13,989) 6,102 16,379 (13,846) 2,533 Acquired technology 26,234 (11,437) 14,797 11,015 (10,345) 670 Internally developed software 17,847 (11,064) 6,783 17,847 (9,983) 7,864 Customer relationships 56,865 (6,171) 50,694 32,974 (1,798) 31,176 Non-compete agreements 11,717 (3,280) 8,437 8,976 (1,890) 7,086 Trade names 4,362 (574) 3,788 1,951 (180) 1,771 Other 6,355 (2,824) 3,531 1,986 (1,746) 240 Intangibles with indefinite lives: Trademarks 2,770 2,770 2,700 2,700 Total intangible assets $152,116 $ (55,214) $96,902 $99,703 $ (45,663) $54,040 (1)

11 (6) Accrued and Other Liabilities Accrued liabilities at September 30, 2012 and December 31, 2011 were as follows: (in thousands) Compensation and benefits $21,613 $ 7,036 Vendor accruals 2,118 1,640 Accrued professional fees Accrued taxes 4,309 3,500 Royalties payable Accrued interest 2, Earnouts and deferred payments related to acquisitions 1,497 1,384 Accrued other 825 1,678 Total $33,636 $16,816 Other liabilities at September 30, 2012 and December 31, 2011 were as follows: (in thousands) Defined benefit pension obligation $ 3,855 $3,884 Long-term tax liability Earnouts and deferred payments related to acquisitions 6,531 1,898 Other long-term liabilities Total $11,667 $6,781 (7) 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 elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging, and therefore, all gains and losses (realized or unrealized) are recognized in Interest and other expense, net in the condensed consolidated statements of operations and comprehensive income. 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. There were no foreign currency contracts outstanding at September 30, 2012 or December 31, The total impact of foreign currency transactions on the condensed consolidated statements of operations and comprehensive income for the quarter and nine months ended September 30, 2012 reflected gains of $653 and $138, respectively, compared to a loss of $575 and a gain of $36, respectively, for the quarter and nine months ended September 30, (8) Borrowings 5.5% senior convertible notes and interest expense In November 2011, the Company issued $152,000 of 5.50% senior convertible notes due December These notes are senior unsecured obligations and rank equal in right of payment with all the Company s existing and future senior unsecured indebtedness. They are also senior in right of payment to any subordinated indebtedness that the Company may incur in the future. The notes accrue interest at the rate of 5.50% per year payable in cash semi-annually on June 15 and December 15 of each year. 10

12 The following table summarizes the principal amounts and related unamortized discount on convertible notes at September 30, 2012 and December 31, 2011: (in thousands) Principal amount of convertible notes $140,500 $152,000 Unamortized discount on convertible notes (16,939) (20,893) Net carrying value $123,561 $131,107 These notes are convertible into shares of the Company s Common Stock at an initial conversion rate equivalent to shares of Common Stock per $1 principal amount of notes, which represents an initial conversion rate of approximately $21.46 per share of Common Stock. The conversion rate is subject to adjustment in certain circumstances as more fully set forth in the indenture covering the notes. Conditions for conversion have been satisfied and the notes are convertible. During the third quarter of 2012 note holders converted $11,500 aggregate principal amount of notes, which converted into 536 shares of common stock. The Company recognized a $1,245 loss on conversion of these notes in other expense, net. If converted, the aggregate principal amount of the notes then outstanding may be settled in cash, shares of common stock, or a combination thereof, at the Company s election. Subject to the terms of the indenture, holders may convert their notes at any time. The number of shares of common stock that the notes are convertible into is approximately 6,548. In certain circumstances provided for in the indenture, the number of shares of common stock issuable upon conversion of the notes may be increased, and with it the aggregate principal amount of the notes. Unless earlier repurchased, redeemed or converted, the notes will mature on December 15, The notes were issued with an effective yield of 5.96% based upon an original issue discount at 98.0%. The net proceeds from the issuance of these notes, after deducting original issue discount and capitalized issuance costs of $6,634, amounted to $145,366. The capitalized issuance costs are being amortized to interest expense over the life of the notes, or realized upon conversion of the notes. Upon certain terms and conditions, the Company may elect to satisfy its conversion obligation with respect to the notes by paying cash, in whole or in part, for specified aggregate principal amount of the notes. In the event of certain types of fundamental changes, the Company will increase the conversion rate by a number of additional shares, up to a maximum of 8,348 shares, which equates to a conversion price of approximately $16.83 per share. (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 and comprehensive income. Stock-based compensation expense for the quarter and nine months ended September 30, 2012 and 2011 was as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) Restricted stock awards $ 1,176 $ 593 $ 3,656 $ 1,827 The number of shares of restricted common stock awarded and the weighted average fair value per share during the quarter and nine months ended September 30, 2012 and 2011 were as follows: (in thousands, except per share amounts) Restricted stock awards: Shares Awarded 11 Quarter Ended September 30, Weighted Average Shares Weighted Average Fair Value Awarded Fair Value Granted under the 2004 Incentive Stock Plan 80 $ $ Granted under the 2004 Restricted Stock Plan for Non-Employee Directors Total restricted stock awards 80 $ $ 22.65

13 (in thousands, except per share amounts) Restricted stock awards: Shares Awarded Nine Months Ended September 30, Weighted Average Shares Weighted Average Fair Value Awarded Fair Value Granted under the 2004 Incentive Stock Plan 237 $ $ Granted under the 2004 Restricted Stock Plan for Non-Employee Directors Total restricted stock awards 248 $ $ In the nine months ended September 30, 2012, the Company granted restricted stock awards covering 237 shares of common stock pursuant to the Company s 2004 Incentive Stock Plan. Of the 237 shares granted in the first nine months of 2012, 13 of the shares were awarded to executive officers of the Company. Additionally, of the 237 shares granted in the first nine months of 2012, 4 remained subject to acceptance at September 30, In the first nine months of 2011, the Company granted restricted stock awards covering 198 shares of common stock pursuant to the Company s 2004 Incentive Stock Plan; 10 of which were awarded to executive officers of the Company. In the first nine months of 2012 and 2011, respectively, the Company granted 11 shares and 16 shares, respectively, of common stock pursuant to the Company s 2004 Restricted Stock Plan for Non-Employee Directors. Stock compensation expense for Non-Employee Directors for the first nine months of 2012 and 2011 was $300 and $300, respectively. (10) 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 and comprehensive income for the quarter and nine months ended September 30, 2012 and 2011: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) Service cost $ 18 $ 28 $ 55 $ 85 Interest cost Total $ 47 $ 59 $ 148 $ 180 (11) Earnings Per Share The Company presents basic and diluted earnings per share ( EPS ) amounts. Basic EPS is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted EPS is calculated by dividing net income by the weighted average number of common and common equivalent shares outstanding during the applicable period. 12

14 The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares at September 30, 2012 and 2011: (1) Quarter Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) Numerator: Net income numerator for basic net earnings per share $ 13,517 $ 7,220 $ 28,029 $ 27,415 Add: Effect of dilutive securities Interest expense on 5.50% convertible notes (after-tax)(1) Stock options and other equity compensation Numerator for diluted earnings per share $ 13,517 $ 7,220 $ 28,029 $ 27,415 Denominator: Weighted average shares denominator for basic net earnings per share 55,935 50,450 52,689 49,455 Add: Effect of dilutive securities Stock options and other equity compensation , % convertible notes (after-tax)(1) Denominator for diluted earnings per share 56,564 51,402 53,473 50,475 Earnings per share Basic $ 0.24 $ 0.14 $ 0.53 $ 0.55 Diluted $ 0.24 $ 0.14 $ 0.52 $ 0.54 Interest expense excluded from diluted earnings per share calculation (1) $ 2,508 $ 7, % Convertible notes shares excluded from diluted earnings per share calculation (1) 6,548 5,303 Average outstanding diluted earnings per share calculation excludes shares that may be issued upon conversion of the outstanding senior convertible notes since the effect of their inclusion would have been anti-dilutive. For the quarter ended September 30, 2012, average common shares for basic and diluted earnings per share were 55,935 and 56,564, respectively, and basic and diluted earnings per share were both $0.24. For the quarter ended September 30, 2011, average common shares for basic and diluted earnings per share were 50,450 and 51,402 respectively, and basic and diluted earnings per share were each $0.14. For the nine months ended September 30, 2012, average common shares for basic and diluted earnings per share were 52,689 and 53,473, respectively, and basic and diluted earnings per share were $0.53 and $0.52, respectively. For the nine months ended September 30, 2011, average common shares for basic and diluted earnings per share were 49,455 and 50,475 respectively, and basic and diluted earnings per share were $0.55 and $0.54, respectively. (12) Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures, 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. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable 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; or 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. For the Company, the above standard applies to cash equivalents and senior convertible notes. 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. 13

15 Assets and liabilities measured at fair value on a recurring basis are summarized below: Fair Value Measurements as of September 30, 2012 (in thousands) Level 1 Level 2 Level 3 Total Description Cash equivalents (1) $ 136,805 $ $ $ 136,805 (1) Cash equivalents include funds held in money market instruments and are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments and are included in cash and cash equivalents in the consolidated balance sheet. The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the quarter and nine months ended September 30, The carrying value of the senior convertible notes as of September 30, 2012 and December 31, 2011 was $123,561 and $131,107, respectively, net of the unamortized discount. As of September 30, 2012 and December 31, 2011, the estimated fair value of the senior convertible notes was $141,570 and $149,615, respectively, based on quoted market prices. The Company determined the fair value of the convertible notes utilizing transactions in the listed markets for identical or similar liabilities. As such, the fair value of the senior convertible notes is considered Level 2. In addition to the financial assets included in the above table, certain of our non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when impairment is recognized. The Company has not recorded any impairments related to such assets and has had no other significant non-financial assets or non-financial liabilities requiring adjustments or write-downs to fair value as of September 30, 2012 or December 31, (13) Income Taxes The Company s effective tax rates were 16.9% and 17.1% for the quarter and nine months ended September 30, 2012, respectively, compared to 11.3% and (15.5%) for the quarter and nine months ended September 30, 2011, respectively. The Company has utilized a portion of its U.S. net deferred tax assets, against which there is a valuation allowance, in determining its effective tax rate for The remainder of its U.S. net deferred assets, against which there are valuation allowances, has been offset by the recognition of deferred income tax liabilities from the acquisitions of Z Corp, Vidar, My Robot Nation, Bespoke and Viztu. These acquisitions resulted in recognizing $502 of deferred income tax assets and $18,393 of deferred income tax liabilities. In conjunction with the Company s ongoing review of its actual results and anticipated future earnings, the Company assesses the possibility of releasing the valuation allowance remaining on its U.S. net deferred tax assets. There were no releases of the valuation allowance on deferred tax assets during the first nine months of 2012; however, the Company s effective tax rate has been reduced as a result of the use of U.S. net deferred tax assets against which there is a valuation allowance. During the first nine months ended September 30, 2011, the Company reversed $17,000 of the valuation allowance applied to U.S. net deferred tax assets. The reversal of the valuation allowance resulted in a non-cash income tax benefit of $6,221, which resulted in a benefit of 12 cents per share for the first nine months of As of September 30, 2012, the Company has a valuation allowance remaining on its U.S. net deferred tax assets of $9,253. As a result of the exercise of stock options during the third quarter, the Company will have the benefit of an excess deduction of $31,049, which will be recorded to additional paid-in capital when the Company realizes a reduction in its current taxes payable. Tax years 2008 to 2011 remain subject to examination by the U.S. Internal Revenue Service. The Company has utilized a portion of its U.S. loss carryforwards covering the years 1997 through Should the Company utilize any of its remaining losses, which date back to 2003, these 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 (2005), Germany (2007), Japan (2006), Italy (2006), Switzerland (2006), the United Kingdom (2008), the Netherlands (2006), India (2011) and Australia (2007). 14

16 (14) Segment Information The Company operates in one reportable business segment. The Company conducts its business through subsidiaries in the United States, a subsidiary in Switzerland that operates a research and production facility, and sales and services offices, including custom parts services, operated by subsidiaries in Europe (France, Germany, the United Kingdom, Italy and the Netherlands) and in Asia-Pacific (Australia, China and Japan). The Company has historically disclosed summarized financial information for the geographic areas of operations as if they were segments in accordance with ASC 280, Segment Reporting. Summarized financial information concerning the Company s geographical operations is shown in the following tables: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) Revenue from unaffiliated customers: United States $ 48,828 $ 31,679 $ 141,498 $ 83,165 Germany 11,608 8,288 28,927 23,330 Other Europe 13,991 12,061 42,036 33,701 Asia Pacific 16,105 5,510 39,601 20,367 Total $ 90,532 $ 57,538 $ 252,062 $ 160,563 The Company s revenue from unaffiliated customers by type was as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) Printers and other products $ 34,069 $ 14,791 $ 84,859 $ 44,519 Materials 25,482 18,457 76,364 50,483 Services 30,981 24,290 90,839 65,561 Total revenue $ 90,532 $ 57,538 $ 252,062 $ 160,563 Intercompany sales were as follows: Quarter Ended September 30, 2012 Intercompany Sales to (in thousands) United States Germany Other Europe Asia Pacific Total United States $ $ 5,577 $ 3,065 $ 802 $ 9,444 Germany Other Europe 3, ,934 Asia Pacific Total $ 3,935 $ 5,655 $ 3,682 $ 831 $14,103 Quarter Ended September 30, 2011 Intercompany Sales to (in thousands) United States Germany Other Europe Asia Pacific Total United States $ $ 3,968 $ 2,270 $ 681 $ 6,919 Germany 8 1,063 1,071 Other Europe 3, ,531 Asia Pacific Total $ 3,532 $ 3,968 $ 3,340 $ 681 $11,521 15

17 Nine Months Ended September 30, 2012 Intercompany Sales to (in thousands) United States Germany Other Europe Asia Pacific Total United States $ $ 8,270 $ 6,004 $ 1,539 $15,813 Germany 128 1, ,338 Other Europe 6, ,974 Asia Pacific Total $ 6,833 $ 8,329 $ 7,176 $ 1,838 $24,176 Nine Months Ended September 30, 2011 Intercompany Sales to (in thousands) United States Germany Other Europe Asia Pacific Total United States $ $11,265 $ 6,222 $ 2,812 $20,299 Germany 118 2,466 2,584 Other Europe 9, ,416 Asia Pacific Total $ 9,514 $11,266 $ 8,707 $ 2,812 $32,299 All revenue between geographic areas is recorded at prices that provide for an allocation of profit (loss) between entities. Income from operations and assets for each geographic area was as follows: Quarter Ended September 30, Nine Months Ended September 30, (in thousands) Income from operations: United States $ 11,601 $ 5,840 $ 24,607 $ 12,975 Germany Other Europe 793 1,247 4,225 3,880 Asia Pacific 5,909 1,556 12,528 6,327 Subtotal 18,436 8,801 42,309 24,167 Inter-segment elimination (10) Total $ 18,436 $ 8,791 $ 42,405 $ 24,203 September 30, December 31, (in thousands) Assets: United States $ 539,294 $ 346,350 Germany 21,123 20,285 Other Europe 76,703 71,202 Asia Pacific 23,398 25,137 Total $ 660,518 $ 462,974 (15) Commitments and Contingencies The Company leases office space under various non-cancelable operating leases. Rent expense under operating leases was $1,217 and $3,553 for the quarter and nine months ended September 30, 2012, respectively, compared to $652 and $1,921 for the quarter and nine months ended September 30, 2011, respectively. As of September 30, 2012, the Company has supply commitments with third party assemblers for printer assembly at September 30, 2012 that total $13,062, compared to $9,146 at September 30, For certain of the acquisitions, the Company is obligated for deferred purchase price commitments totaling $1,885, which are due in 2012 and Certain of our recent acquisitions contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total liabilities recorded for these earnouts as of September 30, 2012 was $6,143. As of September 30, 2011, the Company had recorded $5,158 of liabilities for earnouts related to acquisitions. See Note 2 for details of acquisitions and related commitments. 16

18 Litigation The Company had been pursuing patent infringement litigation against EnvisionTEC, Inc. and certain of its related companies since During the third quarter of 2012, the parties settled the dispute and the litigation has been dismissed. In 2010, MSK K.K., a Japanese company, filed a complaint against the Company s Japanese subsidiary in the Tokyo District Court asserting, among other things, various contract claims associated with two laser sintering machines purchased from the Company s Japanese subsidiary in During the third quarter of 2012, the parties settled the dispute and the litigation has been dismissed. In 2008, DSM Desotech Inc. filed a complaint, which it has subsequently amended, in an action titled DSM Desotech Inc. v. 3D Systems Corporation and 3D Systems, Inc. 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 certain of its stereolithography machines. The complaint further asserted that the Company is infringing upon two of DSM Desotech s patents relating to stereolithography machines. The Company filed answers to DSM Desotech s complaint in which, among other things, the Company denied the material allegations of DSM Desotech s complaint. In 2010, the Court issued a decision relating to the construction of the claims of the patents-in-suit following a Markman hearing held in In that decision, the Court generally adopted the claim constructions that the Company proposed. Fact discovery, including expert discovery, regarding the claims pending in this case concluded in The Company filed motions for summary judgment in December 2011 that seek rulings in its favor on all of DSM Desotech s claims in the litigation. As of the date of this Form 10-Q, the Court had ruled on only one of the four motions, denying the Company s motion. The Company understands that DSM Desotech estimates the damages associated with its claims to be in excess of $40,000. The Company intends to continue to vigorously contest all the claims asserted by DSM Desotech. The Company is also involved in various other legal matters incidental to its business. The Company believes, after consulting with counsel, that the disposition of these other legal matters will not have a material effect on our consolidated results of operations or consolidated financial position. Indemnification In the normal course of business the Company periodically enters into agreements to indemnify customers or suppliers against claims of intellectual property infringement made by third parties arising from the use of the Company s products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. To the extent permitted under Delaware law, the Company indemnifies directors and officers for certain events or occurrences while the director or officer is, or was serving, at the Company s request in such capacity, subject to limited exceptions. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, the Company has directors and officers insurance coverage that may enable the Company to recover future amounts paid, subject to a deductible and the policy limits. There is no assurance that the policy limits will be sufficient to cover all damages, if any. (16) Subsequent Events In October 2012, the Company acquired the shares of TIM The Innovative Modelmakers B.V. ( TIM ). TIM, located in the Netherlands, is a full service provider of on-demand custom parts services. The Company plans to integrate TIM into its European ondemand parts services and future revenue from this acquisition will be reported in services revenue. The TIM acquisition is not significant to the Company s financial statements. See Note 2. In October 2012, the Company acquired the shares of INUS Technology, Inc., located in Korea, a developer of scan-to-cad and inspection software tools, known as Rapidform ( Rapidform ). Future revenue from this acquisition will be reported in printers and other products revenue. The Rapidform acquisition is not significant to the Company s financial statements. See Note 2. 17

19 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q ( 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 Form 10-Q. Business Overview We are a global provider of three-dimensional ( 3D ) content-to-print solutions including 3D printers, print materials, ondemand custom parts services and creative content development, design productivity tools and curation services and downloads for professionals and consumers alike. Our integrated solutions enable complex three-dimensional objects to be produced directly from 3D digital data without tooling, greatly reducing the time and cost required to produce prototypes or customized production parts. Through our custom parts services, which consists of our 3Dproparts and Quickparts brands, we also supply a wide variety of custom-made plastic and metal parts as well as assembly and production jigs, fixtures and casting patterns in different finishes and colors through a growing network of custom parts service locations. We derive our consolidated revenue primarily from the sale of our printers, the sale of the related print materials used by the printers to produce solid objects and the provision of printer services and custom parts services to our customers. Recent Developments We have continued to execute on our strategic initiatives, including growing our on-demand custom parts services, accelerating personal, professional and production 3D printer penetration by expanding our distribution channel of reseller partners, continuing to expand our healthcare solutions offerings and continuing to execute on our initiative to build 3D consumer content products and services. We also recently announced a new 3D authoring solutions growth initiative, which is to combine scan-data capture, mesh processing, auto-surfacing and CAD modeling into a single platform. During the third quarter, we announced the immediate availability of our new ProJet D printer. The ProJet 5000 is a large format professional 3D printer designed for production durability and productivity, in a compact, quiet, easy-to-use format. It prints at speeds twice as fast as the previous version and offers the highest resolution available in its class. In connection with our consumer solutions initiative, we acquired Viztu Technologies, the developer of Hypr3D, an online platform that allows anyone to turn their pictures and videos into printable 3D creations. We have integrated Viztu into our consumer solutions products and services. We also launched Cubify Invent, the first 3D design tool developed specifically with 3D printing in mind, empowering users to easily turn ideas into reality, and several new Cubify apps for game-like creation of personalized 3D printed items. In support of our on-demand parts initiative, we acquired TIM The Innovative Modelmakers B.V. ( TIM ) in October. TIM is a full service provider of on-demand custom parts services located in the Netherlands. During October, in connection with our new 3D authoring growth initiative, we acquired INUS Technology, Inc., a global provider of 3D scan-to-cad and inspection software tools known as Rapidform ( Rapidform ). Rapidform is located in Seoul, South Korea and we plan to integrate it into our printers and other products revenue. Also in October, we launched a new material, VisiJet Jewel, formulated for high volume jewelry production. VisiJet Jewel enables manufacturers worldwide to produce master models for cost effective direct casting of jewelry with detail, accuracy and quality, and the high contrast provided by the material enables detailed visual inspection of designs and patterns. Results of Operations Summary of 2012 financial results Our operating activities generated $44.0 million of cash during the first nine months of 2012, which is discussed in further detail below. We used $150.7 million to fund our strategic investing activities, including acquisition of businesses. Financing activities during the first nine months of 2012 provided $111.4 million of cash. In total, our unrestricted cash balance at September 30, 2012 was $183.9 million compared to $179.1 million at December 31,