3D Systems - 10-Q quarterly report FY2011 Q2

 

 

(Exact Name of Registrant as Specified in Its Charter)

(803) 326-3900
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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 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, 2010.

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, 2011 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.

The Company’s Board of Directors approved a two-for-one stock split, effected in the form of a 100% stock dividend which was paid on May 18, 2011 to stockholders of record at the close of business on May 9, 2011. The Company’s stockholders received one additional share of common stock for each share of common stock owned. This did not change the proportionate interest that a stockholder maintained in the Company. All share and per share amounts set forth in this report, included earnings per share and the weighted average number of shares outstanding for basic and diluted earnings per share for each respective period have been adjusted to reflect the two-for-one stock split.

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, no material recognizable subsequent events were identified. See Note 2 and Note 15 for a description of subsequent events that are not significant to the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” ASU 2011-04 explains how to measure fair value and intends to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04 will become effective prospectively for interim and annual reporting periods beginning on or after December 15, 2011; early adoption is not permitted for public entities. The standard will become effective for the Company in January 2012. The Company is currently evaluating the impact of ASU 2011-04 on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, it requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 will become effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The standard will become effective for the Company in January 2012. The Company is currently evaluating the impact of ASU 2011-05 on its consolidated financial statements.

No other new accounting pronouncements issued or effective during the second quarter of 2011 have had or are expected to have an impact on the Company’s consolidated financial statements.

In addition to the acquisitions previously disclosed, the Company completed acquisitions in the second quarter of 2011, which are discussed below.

On April 13, 2011, the Company acquired the assets of Print3D Corporation (“Print3D”), a startup company that develops custom parts services for CAD users through advanced desktop tools that integrate directly into their design environment. Print3D operations have been integrated into the Company and future revenue will be included in services revenue. The fair value of the consideration paid for this acquisition, net of cash acquired, was $1,000 and was allocated to the assets purchased based on the estimated fair values at the date of acquisition, and is included in the table below which summarizes all acquisitions. Of the consideration, $750 was paid in cash and $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.

Subject to the terms and conditions of the acquisition agreement, the sellers have the right to earn an additional amount of up to approximately $8,925, pursuant to an earnout formula set forth in the acquisition agreement, for a period of thirty-six months, which commenced on June 1, 2011. As of June 30, 2011, an accrued liability was not recorded for the earnout.

On April 14, 2011, the Company acquired the assets of Sycode, a software development company based in India. Sycode specializes in providing plug-ins for all commercially available Computer Aided Design (“CAD”) packages. Sycode operations have been integrated into the Company and future revenue will be included in printers and other products revenue. The fair value of the consideration paid for this acquisition, net of cash acquired, was $500, all of which was paid in cash, and was allocated to the assets purchased based on the estimated fair values at the date of acquisition, and is included in the table below which summarizes all acquisitions.

On May 6, 2011, the Company acquired the assets of The3dStudio.com, Inc (“3dStudio”), a provider of 3D and 2D digital media libraries, offering resources and expert support through a vibrant online marketplace exchange for consumers and professionals. The3dStudio.com operations have been integrated into the Company and included in services revenue. The fair value of the consideration paid for this acquisition, net of cash acquired, was $2,500 and was allocated to the assets purchased and liabilities assumed based on the estimated fair values at the date of acquisition, and is included in the table below which summarizes all acquisitions. Of the consideration, $1,875 was paid in cash and $625 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.

On May 12, 2011, the Company acquired the shares of Freedom Of Creation (“FOC”), based in the Netherlands, a provider of printable collections of innovative and practical 3D content, including products commercialized by fashion and design labels. FOC operations have been integrated into the Company and included in services revenue. The fair value of the consideration paid for this acquisition, net of cash acquired, was $2,286 and was allocated to the assets purchased and liabilities assumed based on the estimated fair values at the date of acquisition, and is included in the table below which summarizes all acquisitions. Of the consideration, $1,133 was paid in cash and $1,167 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.

The amounts related to the acquisitions of these businesses were allocated to the assets acquired and the liabilities assumed and included in the Company’s condensed consolidated balance sheet at June 30, 2011 as follows:

These acquisitions were not significant, either individually or in aggregate; therefore, no pro forma financial information is provided for these acquisitions.

On July 19, 2011, the Company acquired the assets of Alibre, Inc., a provider of 3D design productivity solutions. The Company is in the process of integrating Alibre. The fair value of consideration paid for the acquisition, net of cash acquired, was $3,650, all of which was paid in cash, and will be allocated to the assets purchased and liabilities assumed based on the estimated fair values at the date of acquisition. Due to the timing of this acquisition, at the time of this filing 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 the printers and other products and services revenue categories. The Alibre acquisition is not significant to the Company’s financial statements.

Components of inventories, net at June 30, 2011 and December 31, 2010 were as follows:

Property and equipment, net at June 30, 2011 and December 31, 2010 were as follows:

Depreciation and amortization expense on property and equipment for the quarter and six months ended June 30, 2011 was $1,480 and $3,049, respectively, compared to $1,579 and $2,867 for the quarter and six months ended June 30, 2010.

Intangible assets other than goodwill at June 30, 2011 and December 31, 2010 were as follows:

For the six months ended June 30, 2011 and 2010, the Company capitalized $211 and $192, respectively, of costs incurred to acquire, develop and extend patents in the United States and various other countries.

Amortization expense for intangible assets for quarter and six months ended June 30, 2011 was $1,111 and $1,951, respectively, compared to $339 and $562 for the quarter and six months ended June 30, 2010.

Annual amortization expense for intangible assets for 2011, 2012, 2013, 2014 and 2015 is expected to be $4,607; $4,095; $4,076; $4,069 and $3,954, respectively.

Accrued liabilities at June 30, 2011 and December 31, 2010 were as follows:

Other liabilities at June 30, 2011 and December 31, 2010 were as follows:

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 (income), 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 June 30, 2011 or December 31, 2010.

The total foreign currency impact on the condensed consolidated statements of operations and comprehensive income for the quarter and six months ended June 30, 2011 were gains of $56 and $611, respectively, compared to losses of $217 and $541, respectively, for the quarter and six months ended June 30, 2010.

The Company records share-based compensation expense in selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. The 2010 data below has been adjusted to reflect the two-for-one stock split, in the nature of a stock dividend, that the Company completed during the second quarter of 2011.

Share-based compensation expense for the quarter and six months ended June 30, 2011 and 2010 was as follows:

The number of shares of restricted common stock awarded and the weighted average fair value per share during the quarter and six months ended June 30, 2011 and 2010 were as follows:

In the six months ended June 30, 2011, the Company granted restricted stock awards covering 154 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan. Of the 154 shares granted in the six months ended June 30, 2011, 10 shares were awarded to executive officers of the Company. Additionally, of the 62 shares granted in the second quarter of 2011, 42 remained subject to acceptance at June 30, 2011. In the first six months of 2010, the Company granted restricted stock awards covering 104 shares of common stock pursuant to the Company’s 2004 Incentive Stock Plan, none of which were awarded to executive officers of the Company.

In the second quarters of 2011 and 2010, the Company issued a total of 16 shares and 36 shares, respectively, of common stock pursuant to the Company’s 2004 Restricted Stock Plan for Non-Employee Directors. Stock compensation expense for directors totaled $300 for the quarter and six months June 30, 2011, compared to $257 for the quarter and six months ended June 30, 2010.

Effective April 1, 2011, the Board of Directors amended the 2004 Restricted Stock Plan for Non-Employee Directors to limit the value of any award of shares made to an eligible director to $50 valued on the date of the award.

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 six months ended June 30, 2011 and 2010:

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.

The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares for the quarter and six months ended June 30, 2011 and 2010:

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:

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.

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

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 six months ended June 30, 2011.

In addition to the financial assets and liabilities 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 June 30, 2011 or December 31, 2010.

The Company’s effective tax rates were (69.4)% and (29.4)% for the quarter and six months ended June 30, 2011, respectively, compared to 8.3% and 9.2% for the quarter and six months ended June 30, 2010, respectively.

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. During the second quarter of 2011, based upon recent results of operations and expected profitability in the future, the Company concluded that it is more likely than not that a portion of the U.S. net deferred tax assets will be realized. As a result, in accordance with ASC 740, 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. The Company has a valuation allowance remaining on its U.S. net deferred tax assets of $23,759.

Tax years 2007 to 2010 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 2003. 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 (2006), Japan (2005), Italy (2005), Switzerland (2005) and the United Kingdom (2007).

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, Italy, the Netherlands and the United Kingdom) and in Asia-Pacific (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:

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

Intercompany sales are as follows:

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

The Company leases office space and certain furniture and fixtures under various non-cancelable operating leases. Rent expense under operating leases was $649 and $1,269 for the quarter and six months ended June 30, 2011, respectively, compared to $437 and $840 for the quarter and six months ended June 30, 2010, respectively.

As of June 30, 2011, the Company has supply commitments with third party assemblers for printer assemblies for 2011 that total $13,301.

For certain of our recent acquisitions, the Company is obligated for the payment of deferred purchase price totaling $10,919, all of which is due in 2011, based upon the exchange rate at the date of acquisition. Certain of these acquisitions also contain earnout provisions under which the sellers of the acquired businesses can earn additional amounts. The total liabilities recorded for these earnouts as of June 30, 2011 was $3,297 and is included in other liabilities. 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 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 stereolithography machines. The complaint further asserted that the Company is infringing on two of DSM Desotech’s patents relating to stereolithography machines. DSM Desotech subsequently filed two amendments to its complaint in which it reasserted its original causes of action or asserted additional causes of action. The Company filed answers to DSM Desotech’s complaints in which, among other things, it denied the material allegations of the complaints. 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.

Fact discovery regarding the claims pending in this case concluded January 31, 2011, and this case remains in the pre-trial stage.

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 vigorously contesting all the claims asserted by DSM Desotech.

The Company has been pursuing patent infringement litigation against EnvisionTec, Inc. and certain of its related 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.

A jury trial was held in September 2010. Following that trial, the jury issued a verdict to the effect that EnvisionTec’s Vanquish machines infringe one of the Company’s patents, and the Court entered judgment on that verdict on October 7, 2010. On March 10, 2011, the Court issued a second amended judgment to the effect that EnvisionTec’s Perfactory and Vanquish machines infringe one patent and its Vanquish machines infringe a second patent.

On April 7, 2011, EnvisionTec filed a Notice of Appeal with the United States Court of Appeals for the Federal Circuit. The Company filed a motion to dismiss that appeal on April 25, 2011, and the parties are awaiting a decision on the motion. The Company 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 printers purchased from the Company in 2007.

The plaintiff is seeking damages in excess of $1,600. The Company intends to continue to vigorously contest the claims asserted by MSK K.K.

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 matters will not have a material effect on the Company’s consolidated results of operations or consolidated financial position.

On July 19, 2011, the Company acquired Alibre, Inc. Future revenue from this acquisition will be reported in printers and other products and services revenue categories. The Alibre acquisition is not significant to the Company’s financial statements. 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 are a global provider of three-dimensional (“3D”) content-to-print solutions including personal, professional and production 3D printers, print materials, on-demand custom parts services and creative content development, design productivity tools and curation services and downloads. 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 consist of our 3Dproparts™ and Quickparts^® brands, we 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.

Our consolidated revenue is derived 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.

In 2011, we have continued to execute on our strategic initiatives, including growing our custom parts services, through additional acquisitions and accelerating personal and professional 3D printer penetration by expanding our distribution channel of reseller partners. We began to execute on our initiative to build 3D consumer content products and services.

In April, we acquired Sycode, a software development company, based in Goa, India, that specializes in providing plug-ins for all commercially available CAD packages. We acquired Sycode as a step towards building 3D professional and consumer content tools and as part of our India expansion plan.

In April, we acquired Print3D, a startup company with desktop tools and utilities that provide custom parts services including instant quotes and orders directly from customers’ computers.

In April, the Company’s Board of Directors declared a two-for-one split of the Company’s common stock and on May 18, 2011, each stockholder of record at the close of business on May 9, 2011 received one additional share for every outstanding share held on the record date. Trading began on a split-adjusted basis on May 19, 2011.

In May, we acquired The3dStudio.com, a leading provider of 3D and 2D digital media libraries, offering resources and expert support through a vibrant online marketplace exchange for consumers and professionals alike. We acquired The3dStudio.com as a step in our consumer initiative towards building a 3D content exchange.

In May, we acquired Freedom of Creation (“FOC”), a recognized leader for printable collections of innovative and practical 3D content, based in the Netherlands. FOC’s body of work includes products commercialized by leading fashion and design labels and the FOC Collection.

In May, we launched the new BfB™ 3000 plus, which features a desktop fit and easy to use, intuitive, familiar user interface.

In May, we announced the availability of Accura^® CastPro™, a new print material engineered to meet the manufacturing requirements of QuickCast™ patterns used for the production of investment castings. Accura^® CastPro™ printed patterns are accurate, dimensionally stable, and have low thermal expansion characteristics. Accura^® CastPro™ has been used in full production at 3Dproparts™, delivering QuickCast™ patterns for foundry casting in a variety of metals.

In May, we migrated from the NASDAQ under the ticker symbol “TDSC” to the New York Stock Exchange and began trading under the ticker symbol “DDD” on May 26, 2011.

In July, we acquired Alibre, Inc. (“Alibre”), a leading provider of affordable 3D design productivity solutions, based in Richardson, Texas. Alibre delivers a powerful suite of full parametric CAD solutions that are easy to own and simple to use for makers and designers alike.

Our operating activities generated $6.2 million of net cash in the first six months of 2011, which is discussed in greater detail below. We used $29.2 million to fund our strategic investing activities, including acquisitions of businesses. Financing activities during the six months ended June 30, 2011 provided $64.0 million of cash, including $62.1 million from our common stock offering. We finished the period with $79.0 million of unrestricted cash compared to $37.3 million of unrestricted cash at December 31, 2010.

During the second quarter of 2011 we reported increases in revenue and profit results compared to the second quarter of 2010 as our worldwide business continued to expand. Revenue for the second quarter of 2011 improved by 56.9% to $55.1 million from $35.1 million for the second quarter of 2010. Revenue increased across all classes of products and services, led by a $5.5 million, or 51.7%, increase in printers sales. Higher revenue, coupled with cost containment, together with the partial release of our valuation allowance on deferred tax assets, enabled us to achieve net income of $13.4 million for the second quarter of 2011, compared to $2.7 million in the same period of 2010. Revenue for the six months ended June 30, 2011 increased 54.3% to $103.0 million from $66.8 million in 2010, and net income increased 324.7% to $20.2 million from $4.8 million for 2010 for primarily the same reasons.

Print materials sales for the second quarter of 2011 rose by $2.4 million from the second quarter of 2010 from continued expansion of printers installed over past periods and increased revenue from integrated materials.

Revenue from services improved by $12.0 million to $22.5 million in the second quarter of 2011 from $10.5 million in the second quarter of 2010. This increase in services revenue reflects revenue from our custom parts services and increased revenue from printer service components, both from organic growth and acquisitions. Service revenue from custom parts services was $14.2 million, or 62.9% of total services revenue for the second quarter of 2011.

For the second quarter of 2011, healthcare revenue was $6.5 million, or 12% of our total revenue, compared to $4.9 million, or 14%, in the second quarter of 2010. Healthcare solutions revenue includes sales of printers, print materials, and services for hearing aid, dental, medical device and other health-related applications. Although printer sales into these marketplaces can fluctuate from period to period due to timing, 64% of revenue from healthcare applications was from recurring revenue in the second quarter of 2011 compared to 73% in the second quarter of 2010.

Our higher gross profit in the second quarter and first six months of 2011 arose primarily from our higher level of revenue coupled with cost containment. Our gross profit margin increased to 45.7% in the second quarter of 2011 from 45.4% in the second quarter of 2010 due to increased revenue and overhead absorption, partially offset by lower margin personal and professional printers making up a higher percentage of printer sales, an unfavorable mix of production printers and custom parts services making up a higher percentage of revenue at a lower margin.

Our total operating expenses increased by $4.7 million in the second quarter of 2011 to $17.2 million from $12.5 million in the 2010 quarter. The increase reflected higher selling, general and administrative expenses primarily related to higher commissions, staffing from our acquisitions, restructuring costs and increased legal expenses associated with litigation and acquisitions. We expect to continue to manage expenses and drive down our costs where possible without impairing our ability to operate and service our customers. We expect our SG&A expenses for the remainder of 2011 to be in the range of $29.0 to $32.0 million, and our research and development expenses to be in the range of $6.0 million to $7.0 million.

Our operating income for the second quarter of 2011 increased to $8.0 million from $3.4 million in the 2010 quarter. This improvement in operating income resulted from higher revenues and gross profit, partially offset by higher operating expenses, as further discussed below.

Table 1 sets forth our change in revenue by class of product and service for the second quarter of 2011 compared to the second quarter of 2010:

We earn revenues from the sale of printers and other products, print materials, and services. On a consolidated basis, revenue for the second quarter of 2011 increased by $20.0 million, or 56.9%, compared to the second quarter of 2010 as a result of the factors discussed below. Our organic growth rate was 25.0% for the second quarter of 2011.

The increase in revenue from printers and other products that is due to volume for the second quarter of 2011 compared to the same quarter of 2010 was the result of higher sales of production and personal and professional printers. Revenue from printers and other products consisted of:

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

Revenue from print materials was higher as a result of continued expansion of printers installed over past periods and an 80.0% increase in integrated print materials revenue. Sales of integrated print materials represented 54% of total materials revenue in the second quarter of 2011 compared to 35% in the second quarter of 2010.

The increase in services revenue reflects revenue from our custom parts services and increased revenue from printer service components, both from organic growth and acquisitions. Service revenue from custom parts services was $14.2 million, or 62.9%, of total service revenue for the second quarter of 2011.

At June 30, 2011 our backlog was $7.4 million, compared to backlogs of $7.6 million at December 31, 2010 and $5.2 million at June 30, 2010. Production and delivery of our printers is generally not characterized by long lead times. During the second quarter of 2011, we delivered the remaining printers related to the order received in the third quarter of 2010 for multiple production printers. Additionally, custom parts services lead time and backlog depend on whether orders are for rapid prototyping or longer-range production runs. The backlog at June 30, 2011 includes $4.2 million of custom parts services 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 price and mix effects relate 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, lower-priced printers has continued and the influence of new printers and print materials on our operating results has grown.

Each geographic region contributed to our higher level of revenue in the second quarter of 2011. Table 2 sets forth the change in revenue by geographic area for the second quarter of 2011 compared to the second quarter of 2010:

Revenue from U.S. operations increased by $11.2 million or 64.4% to $28.6 million in 2011 from $17.4 million in the second quarter of 2010. The increase was due to higher volume partially offset by the unfavorable combined effect of price and mix due to the higher proportion of sales from personal and professional printers.

Revenue from non-U.S. operations for the second quarter of 2011 increased by $8.8 million or 49.4% to $26.5 million from $17.7 million for the second quarter of 2010. Revenue from non-U.S. operations as a percent of total revenue was 48.1% and 50.5%, respectively, for the second quarters of 2011 and 2010. The increase in non-U.S. revenue, excluding the effect of foreign currency translation, was 36.0% in the second quarter of 2011.

Revenue from European operations increased by $5.3 million, or 39.9%, to $18.6 million from $13.3 million in the prior year period. This increase was due to a $2.3 million increase in volume, a $2.2 million favorable impact of foreign currency translation and a $0.7 million favorable combined effect of price and mix.

Revenue from Asia-Pacific operations increased by $3.5 million, or 77.8%, to $8.0 million from $4.5 million in the prior year period due primarily to a favorable $3.0 million increase in volume, a $0.3 million favorable impact of combined price and mix and a $0.2 million favorable impact of foreign currency translation.

Table 3 sets forth gross profit and gross profit margin for our products and services for the second quarters of 2011 and 2010: