3D Systems - 10-Q quarterly report FY

 

 

(Exact Name of Registrant as Specified in Its Charter)

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

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

 

 

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

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, 2009.

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, 2010 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 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 earnings per share information.

The Company has evaluated subsequent events from the date of the condensed consolidated balance sheet through the date the financial statements were issued. During this period, the acquisition of Provel S.r.l. was a significant, non-recognized event. There were no other recognizable subsequent events identified. See Note 15 for a description of subsequent events.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) 2009-13, “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force,” to provide amendments to the criteria in Subtopic 609-24 of the Accounting Standards Codification (“Codification”) for separating consideration into multiple-deliverable revenue arrangements. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of each specific deliverable, which includes vendor-specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available or estimated selling price if neither VSOE nor third party evidence is available. ASU 2009-13 also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This Update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010, with early adoption permitted. The Company is currently evaluating the impact of ASU 2009-13 on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force.” This Update removes tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality from the scope of the software revenue guidance in Subtopic 985-605 of the Codification. Additionally, ASU 2009-14 provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software that is not essential to the product’s functionality. ASU 2009-14 requires the same expanded disclosures that are included within ASU 2009-13. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010, with early adoption permitted. A company is required to adopt the amendments in both ASU 2009-13 and ASU 2009-14 in the same period using the same transition method. The Company is currently evaluating the impact of ASU 2009-14 on its consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This Update is intended to provide financial statement users with additional information to assist them in assessing credit risk exposures and the adequacy of the allowance for credit losses. ASU 2010-20 is effective for interim and annual reporting periods ending on and after December 15, 2010. The impact of adoption of ASU 2010-20 by the Company is not expected to have a significant impact on its consolidated financial statements.

No other new accounting pronouncements issued or effective during the first nine months of 2010 have had or are expected to have an impact on the Company’s consolidated financial statements.

On February 16, 2010, the Company acquired the assets of Moeller Design and Development, Inc. (“Moeller Design”) in Seattle, Washington. Moeller Design is a provider of premium precision investment casting services and prototyping for aerospace and medical device applications. The Company acquired Moeller Design for its premium parts capabilities and to expand the geographic footprint of its 3Dproparts™ service to the West Coast. Moeller Design has been integrated into the Company’s 3Dproparts™ service. The fair value of the consideration paid for this acquisition was $3,600 and was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date. In addition, there was a gain from bargain purchase for $37. Of the $3,600 consideration, $1,000 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 1933.

In connection with the acquisition, the Company entered into a lease agreement with an entity whose managing member is the former owner of Moeller Design, pursuant to which the Company agreed to lease the facilities at which Moeller Design’s operations are conducted. The lease provides for an initial term of five years with renewal options for two successive five-year terms. The lease agreement includes an option for the Company to purchase the facility.

On April 6, 2010, the Company acquired the assets of Design Prototyping Technologies, Inc. (“DPT”) in Syracuse, New York. DPT is a provider of fast turnaround functional parts and prototypes. The Company acquired DPT to enhance its online offerings for its 3Dproparts™ service. DPT has been integrated into the Company’s 3Dproparts™ service. The fair value of the consideration paid for this acquisition was $3,600 and was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date. Of the $3,600 consideration, $600 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 1933.

In connection with the DPT acquisition, the Company entered into a lease agreement with an entity whose managing members are the former owners of DPT, pursuant to which the Company agreed to lease the facilities at which DPT’s operations are conducted. The lease provides for an initial term of approximately two years with renewal options for two-year and one-year successive terms, respectively. The lease agreement includes a right of first refusal with respect to the sale of the building.

On July 7, 2010, the Company acquired the assets of CEP S.A. and its affiliate, Protometal S.A. (collectively “CEP”), rapid prototyping and rapid manufacturing services providers located in Joué l’Abbé, France. The Company acquired CEP to augment and expand its 3Dproparts™ business in Europe. CEP has been integrated into the Company’s 3Dproparts™ service. The fair value of the consideration paid for this acquisition, net of cash acquired, was $3,465 and was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date. Of the $3,465 consideration, $2,086 was paid in cash, $1,064 was paid in shares of the Company’s common stock, and the remaining amount of $315 is due at a future date. These shares were issued in a private transaction exempt from registration under the Securities Act of 1933.

In connection with the CEP acquisition, the Company entered into lease agreements, pursuant to which the Company agreed to lease the facilities at which CEP’s operations are conducted. The leases current terms extend until December 31, 2011, at which point the Company has renewal options extending until 2020.

On September 16, 2010, the Company acquired the assets of Express Pattern, Inc. (“Express Pattern”) in Vernon Hills, Illinois. Express Pattern is a provider of rapid prototyping, direct patterns for investment casting and manufacturing services. The Company acquired Express Pattern as part of the Company’s continued expansion of its 3Dproparts™ service. Express Pattern serves defense, transportation, recreation and healthcare customers by delivering a comprehensive menu of the most advanced rapid casting, tooling and parts solutions. The fair value of the consideration paid for this acquisition was $1,650 and was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date. Of the $1,650 consideration, $250 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 1933.

Amounts related to the above acquisitions included in the Company’s unaudited condensed consolidated balance sheet at September 30, 2010 were as follows:

On October 5, 2010, the Company acquired the shares of Bits From Bytes Limited, a United Kingdom producer of 3D printers and printer kits located near Bristol, England. The Company is in the process of integrating Bits From Bytes. Based on the exchange rate at the date of acquisition, the fair value of the consideration paid for this acquisition was $2,383, of which $596 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 1933. Due to the timing of this acquisition, at the time of this filing the Company is in the process of allocating the fair value of assets purchased, liabilities assumed and other intangibles identified as of the acquisition date, with any excess to be recorded as goodwill. This transaction will be recorded in the fourth quarter of 2010.

Subject to the terms and conditions of the acquisition agreement, the sellers have the right to earn an additional amount of up to a maximum of approximately $16,651, based on the exchange rate at the date of acquisition, pursuant to an earn-out formula set forth in the acquisition agreement for a period of three years which commenced on October 1, 2010.

On October 12, 2010, the Company acquired the shares of Provel, S.r.l., an Italian provider of rapid protypting, tooling and manufacturing services located near Turin, Italy. The Company acquired Provel as part of its continued expansion of its 3Dproparts™ service in Europe. The Company is in the process of integrating Provel into its 3Dproparts™ service. Based on the exchange rate at the date of acquisition, the fair value of the consideration paid for this acquisition, net of cash acquired, was $13,252, of which $7,894 was paid in cash and $1,392 was paid in shares at closing, with a future installment of $3,966 due October 2011. The shares were issued in a private transaction exempt from registration under the Securities Act of 1933.

Subject to the terms and conditions of the acquisition agreement, the sellers have the right to earn an additional amount up to approximately $1,392, based on the exchange rate at the date of acquisition, pursuant to an earn-out formula set forth in the acquisition agreement, for a period of twelve months, which is expected to commence on February 1, 2011.

The fair value of consideration was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of June 30, 2010 and is preliminary. The Company expects to finalize the purchase price allocation in the fourth quarter of 2010 and at that time the final allocation may differ from the information presented in these unaudited condensed consolidated financial statements.

The table below represents a preliminary allocation of the total consideration to tangible and intangible assets and liabilities of Provel S.r.l., based upon the preliminary estimate of their respective values as of June 30, 2010:

Depreciation and software amortization expense on property and equipment for the quarter and nine months ended September 30, 2010 were $1,644 and $4,511, respectively, compared to $1,148 and $3,657 for the quarter and nine months ended September 30, 2009.

Intangible assets other than goodwill at September 30, 2010 and December 31, 2009 were as follows:

Amortization expense for intangible assets for the quarter and nine months ended September 30, 2010 were $282 and $844, respectively, compared to $174 and $684 for the quarter and nine months ended September 30, 2009. Annual amortization expense for intangible assets for 2010, 2011, 2012, 2013 and 2014 is expected to be $2,025, $3,901, $3,264, $2,594 and $2,149, respectively.

For the nine months ended September 30, 2010 and 2009, the Company capitalized $243 and $149, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries.

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. 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, 2010. The foreign currency contracts outstanding at December 31, 2009 expired at various times between January 6, 2010 and February 3, 2010.

At December 31, 2009, 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 September 30, 2010 and December 31, 2009 were as follows:

The total impact of foreign currency items on the condensed consolidated statements of operations for the quarter and nine months ended September 30, 2010 were gains of $681 and $140, respectively, compared to gains of $285 and $119, respectively, for the quarter and nine months ended September 30, 2009.

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 quarter and nine months ended September 30, 2010 and 2009 was as follows:

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, 2010 and 2009 were as follows:

Of the 72 shares of restricted stock awards granted in the nine months ended September 30, 2010 pursuant to the Company’s 2004 Incentive Stock Plan, none were awarded to executive officers of the Company. Additionally, of the 20 shares granted in the third quarter of 2010 under the 2004 Incentive Stock Plan, 10 remained subject to acceptance at September 30, 2010. In the first nine months of 2009, the Company granted restricted stock awards covering 219 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan, including 110 shares awarded to executive officers of the Company.

In the third quarter of 2010 the Company did not issue any shares of common stock pursuant to the Company’s 2004 Restricted Stock Plan for Non-Employee Directors. Stock compensation expense for directors totaled $0 and $257, for the quarter and nine months ended September 30, 2010, respectively, compared to $0 and $146, for the quarter and nine months ended September 30, 2009, respectively.

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 nine months ended September 30, 2010 and 2009:

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 nine months ended September 30, 2010 and 2009:

For the nine months ended September 30, 2010, average common shares for basic and diluted earnings per share were 23,010  and 23,302, respectively, and basic and diluted earnings per share were $0.44 and $0.43, respectively.

For the nine months ended September 30, 2009, average common shares for basic and diluted earnings per share were 22,504, and basic and diluted earnings per share were ($0.11).

ASC 820, “Fair Value Measurements,” 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 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:

For the Company, the above standard applies to cash equivalents and foreign exchange contracts. 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.

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 or nine months ended September 30, 2010.

In addition to the financial assets and liabilities included in the above table, certain of our non-financial assets and liabilities are to be 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 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 an 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, 2010 or December 31, 2009.

The Company’s effective tax rates were 5.0% and 7.0% for the quarter and nine months ended September 30, 2010, respectively, compared to 10.3% and (29.7%) for the quarter and nine months ended September 30, 2009, respectively. Tax expense relates primarily to income from non-U.S. operations.

Tax years 2006 to 2009 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, 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 (2004), Germany (2006), Japan (2004), Italy (2004), Switzerland (2004) and the United Kingdom (2006).

The Company operates in one reportable business segment in which it develops, manufactures and markets worldwide 3-D printing, rapid prototyping and manufacturing systems and related products and services designed to reduce the time it takes to produce three-dimensional objects and operates 3Dproparts™, a comprehensive service bureau that offers rapid prototyping and manufacturing services. 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 ASC 280, “Segment Reporting.”

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

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:

The Company leased office space and certain furniture and fixtures under various non-cancelable operating leases. Rent expense under operating leases was $203 and $309 for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010, rent expense under operating leases was $584 compared to $838 for the nine months ended September 30, 2009.

The Company has deferred purchase price obligations due to acquisitions. See Note 2 for details of acquisitions and related commitments.

On March 14, 2008, DSM Desotech Inc. filed a complaint, in an action titled DSM Desotech Inc. v. 3D Systems Corporation 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. On July 20, 2010, the Court issued a decision relating to the construction of the claims of the patents-in-suit following the Markman hearing held on September 16, 2009. In that decision, the Court generally adopted the claim constructions proposed by the Company. Discovery is proceeding on the claims pending in this case.

The Company has been pursuing patent infringement litigation against EnvisionTEC, Inc. and certain of its affiliated companies since 2005. In this litigation, the Company asserted that EnvisionTEC infringed the Company’s patents covering various three-dimensional solid imaging products and methods for creating physical three-dimensional models of an object and has sought injunctive relief and damages.  EnvisionTEC’s Perfactory machine and Vanquish machine (the Vanquish is now marketed as the PerfactoryXede and PerfactoryXtreme) are the two products accused of patent infringement.  On February 6, 2008 the Court issued Markman claim constructions that generally adopted the claim constructions proposed by the Company.  

A jury trial was held from September 21 to September 29, 2010.  Following that trial, the jury issued a verdict to the effect that EnvisionTEC’s Vanquish machine infringes one of 3D Systems’ patents, and the Court entered judgment on that verdict on October 7, 2010.  

The Company has not yet sought to enforce this judgment, but believes that it is entitled to an injunction as a result of the judgment entered by the Court.  The Company also intends to pursue claims for damages against EnvisionTEC.

On July 14, 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, that the Company’s subsidiary failed to satisfy certain alleged performance guarantees associated with the use of certain materials in two systems purchased from the Company in 2007. The plaintiff is seeking damages in excess of $1,600.

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.

On October 5, 2010, the Company acquired Bits From Bytes, Ltd. in a share purchase. Future revenue from this acquisition will be reported in Products revenue. See Note 2.

On October 12, 2010, the Company acquired Provel, S.r.l. in a share purchase. The Provel acquisition is significant to the Company’s financial statements. Future revenue from the this acquisition will be reported in Services revenue. See Note 2.

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.

We design, develop, manufacture, market and service 3D 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. We also operate 3Dproparts™, a comprehensive service bureau that offers our customers rapid prototyping and manufacturing services for the production of precision 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.

We have continued to execute on our strategy to grow our 3Dproparts™ service, through additional strategic acquisitions and by further expanding our distribution channel of 3D printing reseller partners.

In July 2010, we made our first 3Dproparts™ European acquisition, acquiring the assets of CEP S.A. and its affiliate, Protometal S.A. (collectively “CEP”), rapid prototyping and rapid manufacturing services providers located in Joué l’Abbé, France. We acquired CEP to augment and expand our 3Dproparts™ business in Europe.

In September 2010, we acquired the assets of Express Pattern, Inc. in Vernon Hills, Illinois. Express Pattern is a leading prototyper that serves defense, transportation, recreation and healthcare customers by delivering a comprehensive menu of advanced rapid casting, tooling and parts solutions as part of our continued expansion of our 3Dproparts™ service.

In October 2010, we expanded our 3Dproparts™ business in Europe, acquiring the shares of Provel S.r.l. located near Turin, Italy. Provel provides rapid prototyping, tooling and manufacturing services, specializing in stereolithography, selective laser sintering, rapid tooling and urethane casting.

In October 2010, as part of our strategy to accelerate 3D printer penetration and new products and channel expansion, we acquired Bits From Bytes Ltd. located near Bristol, England. Bits From Bytes is a maker of affordable 3D printers and printer kits that print real plastic parts from a variety of materials, including ABS, PLA, polypropylene, and polyethylene for educational, hobbyist, and professional applications.

Our operating activities generated $18.5 million of cash during the first nine months of 2010, of which we used $10.3 million to fund our strategic investing activities. In total, unrestricted cash increased $8.9 million in the first nine months of 2010, resulting in a balance of $33.8 million of unrestricted cash compared to $24.9 million of unrestricted cash at December 31, 2009.

During the third quarter of 2010 we reported improved revenue and profit as compared to the third quarter of 2009 as our worldwide business continued to expand. Revenue for the nine months ended September 30, 2010 increased 41.7% over 2009. This increase in revenue was led by a $16.4 million, or 93.3%, increase in sales of systems and other products together with a $6.4 million, or 18.0%, increase in materials sales, and a $9.1 million, or 39.0%, increase in services revenue year-over-year. Higher revenue coupled with a focus on continued cost containment, enabled us to achieve net income of $10.1 million for the first nine months of 2010, compared to a net loss of $2.5 million for the same period in 2009.

Materials sales for the third quarter of 2010 rose by $1.1 million from the third quarter of 2009 as revenue from materials was favorably impacted by continued expansion of systems installed over past periods. In addition, the higher production systems sales are typically accompanied by significant initial materials purchases to charge up new systems and commence production. Materials revenue increased compared to the third quarter of 2009 notwithstanding the fact that materials consumed by 3Dproparts™ were not included in our materials revenue line.

Revenue from services increased by $5.1 million to $12.8 million in the third quarter of 2010 from $7.7 million in the third quarter of 2009. Services revenue grew by $2.3 million in the third quarter of 2010 from $10.5 million in the second quarter of 2010.

For the third quarter of 2010 healthcare revenue made up 14%, or $6.0 million of our total revenue compared to 14%, or $4.5 million in the second quarter of 2010 and includes sales of systems, materials and services for the following applications: hearing aid, dental, medical device and other health-related applications.

Although system sales into these marketplaces can fluctuate from period to period, 58% of revenue from healthcare applications was from recurring revenue in the third quarter of 2010 compared to 73% in the second quarter of 2010.

Our higher gross profit in the third quarter and first nine months of 2010 arose primarily from our higher level of revenue coupled with continued cost containment. Our gross profit margin increased to 45.4% in the third quarter of 2010 from 44.5% in the third quarter of 2009 due to product mix and improvements in our cost structure.

Our operating expenses increased by $2.5 million in the third quarter of 2010 to $13.7 million from $11.2 million in the third quarter of 2009. The increase reflected higher selling, general and administrative expenses primarily related to the integration and operation of the acquisitions, compensation expense related to the sales of our products, as well as higher legal fees associated with the DSM Desotech litigation and the EnvisionTEC trial. We expect our SG&A expenses for the remainder of 2010 to be in the range of $11.0 to $12.0 million, and our research and development expenses to be in the range of $2.5 million to $3.0 million.

Our operating income for the third quarter of 2010 improved to $5.2 million from $1.1 million in the 2009 third quarter. This improvement in operating income arose from higher revenues and gross profit partially offset by higher operating expense, as discussed below.

Table 1 sets forth our change in revenue by class of product and service for the third quarter of 2010 compared to the third quarter of 2009:

We earn revenues from the sale of systems and other products, materials and services. On a consolidated basis, revenue for the third quarter of 2010 increased in each revenue category.

The increase in revenue from systems and other products that is due to volume for the third quarter of 2010 compared to the same quarter of 2009 was the result of higher sales of production systems and 3D printers. Revenue from systems and other products consisted of:

Due to the relatively high list price of certain systems, our customers’ purchasing decisions may have a long lead time; combined with the overall low unit volume of systems sales in any particular period, the acceleration or delay of orders and shipments of a small number of systems from one period to another can significantly affect revenue reported for our systems sales for the period involved. Revenue reported for systems sales in any particular period is also affected by revenue recognition rules prescribed by generally accepted accounting principles.

Revenue from materials was also helped by the improvement in production systems sales, which are typically accompanied by significant initial materials purchases to charge up new systems and commence production, and by the continued expansion of systems installed over past periods. Sales of integrated materials represented 32% of total materials revenue in the third quarter of 2010 compared to 30% in the third quarter of 2009. Materials revenue increased compared to the third quarter of 2009 notwithstanding the fact that materials consumed by 3Dproparts™ were not included in our materials revenue line.

The increase in services revenue reflects revenue from 3Dproparts™, which was introduced in the fourth quarter of 2009 to expand our paid parts services. Service revenue from 3Dproparts™ was $5.3 million, or 41.6% of total service revenue.

At September 30, 2010 our backlog was approximately $7.0 million, compared to backlogs of $1.4 million at December 31, 2009 and $1.7 million at September 30, 2009, respectively. Although production and delivery of our systems is generally not characterized by long lead times, the higher backlog at September 30, 2010 includes an order for multiple machines for future delivery. Additionally, 3Dproparts™ lead time and backlog depends on whether 3Dproparts™ orders are for rapid prototyping or longer-range production runs. The backlog at September 30, 2010 included $1.5 million of 3Dproparts™ orders.

In addition to changes in sales volumes, there are two other primary drivers of changes in revenues from one period to another: the combined effect of changes in product mix and average selling prices, sometimes referred to as price and mix effects, and the impact of fluctuations in foreign currencies.

As used in this Management’s Discussion and Analysis, the combined effect of changes in product mix and average selling prices relates to changes in revenue that are not able to be specifically related to changes in unit volume. Among these changes are changes in the product mix of our materials and our systems as the trend toward smaller, more economical systems has continued and the influence of new systems and materials on our operating results has grown. Our reporting systems are not currently configured to produce more quantitative information regarding the effect of price and mix changes on revenue.

Each geographic region contributed to our higher level of revenue in the third quarter of 2010. Table 2 sets forth the change in revenue by geographic area for the third quarter of 2010 compared to the third quarter of 2009: