3D Systems 10-K 2011
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 001-34220
333 Three D Systems Circle
Rock Hill, SC 29730
(Address of principal executive offices and zip code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the registrant on June 30, 2010 was $229,220,266. For purposes of this computation, it has been assumed that the shares beneficially held by directors and officers of the registrant were held by affiliates. This assumption is not to be deemed an admission by these persons that they are affiliates of the registrant.
The number of outstanding shares of the registrants common stock as of February 9, 2011 was 23,438,659.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrants definitive proxy statement for its 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
3D SYSTEMS CORPORATION
Annual Report on Form 10-K for the
Year Ended December 31, 2010
Table of Contents
3D Systems Corporation (3D Systems or the Company) is a holding company that operates through subsidiaries in the United States, Europe and the Asia-Pacific region. We design, develop, manufacture, market and service a comprehensive portfolio of 3D printers and related products, print materials and services. We are a leading global provider of 3D content-to-print solutions including personal, professional and production 3D printers, print materials and custom parts services. Our expertly integrated rapid prototyping and manufacturing solutions reduce the time and cost of designing new products by printing real parts directly from digital data. These solutions are used to design, communicate, prototype and produce functional end-use parts.
Customers use our proprietary printers and print services to produce physical objects from digital data that was created using commonly available computer-aided design software, often referred to as CAD software, or other digital-capture devices such as scanners. The ability to print functional parts from digital data enables our customers to harness complete freedom of geometrical creation to design and build detailed prototypes or production parts quickly and efficiently without a significant investment in expensive tooling, greatly reducing the time and cost required to produce prototypes or to customize production parts.
Our extensive portfolio of 3D printers is based on six unique print engines that employ proprietary, additive layer printing processes designed to meet our customers most demanding design, prototyping, testing, tooling and production requirements. Our principal print engines include stereolithography or SLA® printers, selective laser sintering or SLS® printers, multi-jet modeling (MJMtm) printers, film transfer imaging (FTI) printers, selective laser melting (SLM) printers and plastic jet printers (PJP). We believe that our 3D printer solutions and services enable our customers to develop and manufacture better quality, higher functionality, new products faster and more economically than with traditional methods.
Our product development efforts are focused on providing our customers with an expanded portfolio of 3D content-to-print solutions targeting their entire design-to-manufacturing requirements from rapid prototyping services to on-site office, model-shop and production floor printers. We are focusing on developing a comprehensive menu of affordable to own and operate 3D printing solutions to address applications in the education, transportation, recreation, healthcare and consumer products marketplaces, which we believe represent significant growth opportunities for our business.
We continue to develop new printers, print materials and custom parts services and have expanded our technology platform through internal development efforts and through acquisitions. Our 3D content-to-print solutions are used by our customers to replace, displace or complement traditional design-to-manufacturing solutions including 2D plotters and wide-format printers, CNC machining centers and a wide variety of other traditional machine-tool and molding alternatives.
In rapid manufacturing applications, our printers are used to manufacture end-use parts that have the appearance and performance of high-quality injection-molded parts. Customers who adopt our rapid manufacturing solutions avoid the significant costs of complex set-ups and changeovers and eliminate the costs and lead times associated with conventional tooling methods or labor intensive craftsmanship. Rapid manufacturing enables our customers to produce optimized designs because they can design for function, unconstrained by normal design-for-manufacture considerations.
In communication and design applications, our printers are used to produce three-dimensional objects, primarily for visualizing and communicating concepts, various design applications and other applications, including supply chain management and functional models.
In rapid prototyping applications, our printers are used to quickly and efficiently generate product-concept models, functional prototypes to test form, fit and function, master patterns and expendable patterns for urethane and investment casting that are often used for evaluating product designs and short-run production.
We provide expertly integrated solutions consisting of printers, print materials, software tools and a variety of related customer services. Our extensive solutions portfolio enables us to offer our customers a cost effective way to transform the manner in which they design, develop and manufacture their products.
All our 3D printers employ one of the above-mentioned print engines: SLA®, SLS®, SLM, MJMtm, FTI and PJP. Our 3D printers convert data input from CAD software or 3D scanning and sculpting devices to printed plastic or metal parts using our proprietary engineered plastic, metal and composite print materials. Production printers include our SLA® and SLS® printers, formerly referred to as large-frame systems. Personal and professional printers were previously referred to as 3D Printers. The personal printers category includes our V-Flash® and BfBtm printers, while professional printers includes our Project printer series. The detail and classification of revenue remains the same as in prior years, only our naming conventions have changed.
We develop, blend and market a wide range of proprietary print materials that mimic the performance of engineered plastics, composites and metals. We augment and complement our own portfolio of print materials with materials that we purchase from third parties under private label and distribution arrangements.
We provide our customers a comprehensive suite of proprietary software tools that are embedded within our printers and pre-sale and post-sale services, ranging from applications development to installation, warranty and maintenance services. We also provide a comprehensive suite of printed parts services through our 3Dpropartstm global network of print shops. 3Dpropartstm offers a broad range of precision plastic and metal parts service capabilities produced from a wide range of print and traditional materials using a variety of additive and traditional manufacturing processes.
Production 3D Printer Solutions
Stereolithography, or SLA®, printers convert our engineered print materials and composites into solid cross-sections, layer by layer, to print the desired fully fused objects. Our SLA® printers are capable of making multiple distinct parts at the same time and are designed to produce highly accurate geometries in a wide range of sizes and shapes with a variety of material performance characteristics.
Stereolithography parts are known for their fine feature detail, resolution and surface quality. Product designers, engineers and marketers in many manufacturing companies throughout the world use our SLA® printers for a wide variety of applications, ranging from short production runs of end-use products to producing prototypes for automotive, aerospace and various consumer and electronic applications.
Our SLA® printers are capable of rapidly producing tools, fixtures, jigs and end-use parts, including parts for dental, hearing aid, jewelry and motor-sports applications. They are also designed for uses such as building functional models that enable users to share ideas and evaluate concepts, perform form, fit and function tests on working assemblies and build expendable patterns for metal casting.
Our family of SLA® printers offers a wide range of capabilities, including size, speed, accuracy, throughput and surface finish in different formats and price points. Our iProtm SLA® printers come in a variety of print formats designed to quickly and economically produce durable plastic parts with unprecedented surface smoothness, feature resolution, edge definition and tolerances that rival the accuracy of CNC-machined plastic parts. Our iProtm family of SLA® printers includes the iProtm 8000 and iProtm 9000, production stereolithography printers capable of printing ultra-high-definition parts made from our integrated portfolio of proprietary Accura® Plastics. We also offer the Vipertm, a smaller format SLA® printer that delivers lower throughput, but is capable of printing precision ultra-high resolution parts.
Our selective laser sintering, or SLS®, printers convert our proprietary engineered print materials and composites by melting and fusing (sintering) these print materials into solid cross-sections, layer-by-layer, to
produce finished parts. SLS® printers can create parts from a variety of proprietary engineered plastic powders and are capable of processing multiple parts in a single build session.
Customer uses of our SLS® printers include functional test models and end-use parts, which enable our customers to create customized parts economically without tooling. The combination of print materials flexibility, part functionality and high throughput of our SLS® print engine makes it well suited for rapid manufacturing of durable parts for applications in various industries, including aerospace, automotive, packaging, machinery and motor-sports applications.
Our family of SLS® printers comes in a variety of print formats and degrees of automation and includes our line of sProtm 60, 140 and 230 SLS® printers. Our SLS® production printers are designed to enable our customers to mass customize and produce high-quality, end-use parts, patterns, fixtures and tools consistently and economically from our proprietary engineered plastics, on site and on demand.
We offer the Sinterstation® Protm SLM direct metal sintering printer through a private label arrangement with a third party supplier. These printers come in two print formats and are capable of producing fully-dense direct metal parts from a variety of metal powders, including stainless steel, chrome cobalt, titanium and tool steel.
Professional 3D Printer Solutions
Our expanding line of professional printers is ideal for use in engineering design environments for product development, marketing communication groups, within engineering schools and other educational institutions and for custom manufacturing such as jewelry and dental laboratory direct-casting applications. Our range of professional printers is based on our proprietary MJMtm print engine.
Our professional printers readily accept digital input from either a 3D CAD station or a scanned 3D image, converting this input data, one slice thickness at a time, to print a solid part, one layer at a time. These printers offer superior finished surfaces, no geometry limitations, plug-and-play installation, point-and-print functionality and best-in-class part resolution in a variety of price points and print materials.
Our family of professional printers consists of several ProJettm models, including the Projettm 3000, Projettm 3000 Plus, Projettm 5000 and Projettm 6000, our first crossover 3D printer bringing SLA® print technology together with MJMtm utility and usability. Our professional printers are designed to print high-definition, functional and durable models for form, fit and function analysis, including certain models that are capable of ultra-fine resolution for precision dental and jewelry applications.
Personal 3D Printer Solutions
Our personal 3D printer solutions can print ready-to-use, three-dimensional parts within hours at home, school or office workstations. These cost-effective kits and printers enable designers, engineers, hobbyists and students to imagine, design and produce ideas at their desks.
Our V-Flash® personal printer utilizes our proprietary FTI technology. V-Flash® prints durable plastic parts with a smooth surface finish and true to design detailed features. V-Flash® is an affordable 3D printer and is easy to set up and operate. Parts printed on our V-Flash® printer can be drilled, machined, painted and metal-plated after building.
Our Bits From Bytes (BfBtm) personal printers and kits utilize PJP technology. PJP is a proven, simple clean, compact and quiet print engine technology designed for office, home and classroom use. PJP features an open design that is easy to use and maintain. Our family of BfBtm printers are designed and engineered to be simple, accurate and robust. They are equipped with up to three compact precision print heads for print speed and accuracy and fast material changeovers.
Our BfBtm 3000 personal printer is a desktop printer with a large print area. The BfBtm 3000 is able to be equipped with up to three print heads and is affordable to own and operate. Our BfBtm Rapmantm is a personal
printer kit that customers self-assemble. The Rapmantm is designed for the education and hobbyist marketplaces because the assembly of the printer enables a hands-on learning opportunity.
3D Software Tools
As part of our comprehensive and integrated printer solutions, we offer embedded proprietary part-preparation software. This software is designed to enhance the interface between our customers 3D data and our printers. 3D data is converted within our proprietary software so the image can be viewed, rotated and scaled, and model structures can be added. The software then generates the information that is used by the printer to create solid objects. From time to time, we also work with third parties to develop complementary software for our printers.
3D Print Materials
As part of our integrated approach, we blend, market, sell and distribute consumable, engineered plastic and metal materials and composites under several proprietary brand names for use in all our printers. We market our stereolithography materials under the Accura® brand, our selective laser sintering materials under the DuraForm®, CastFormtm and LaserFormtm brands, and materials for our professional printers under the VisiJet® brand.
Our most recent printers have built-in intelligence that communicates vital processing and quality statistics in real time to the printers. For these printers, we furnish print materials that are specifically designed for use in those printers and that are packaged in smart cartridges designed to enhance system functionality, up-time, materials shelf life and overall printer reliability, with the objective of providing our customers with a built-in quality management system.
We work closely with our customers to optimize the performance of our print materials in their applications. Our expertise in print materials formulation, combined with our process, software and equipment-design strengths, enable us to help our customers select the print material that best meets their needs and to obtain optimal cost and performance results from the material. We also work with third parties to develop different types and varieties of print materials designed to meet the needs of our customers.
SLA® Print Materials and Composites
Our family of proprietary stereolithography materials and composites, marketed under the Accura® brand, offers a variety of plastic-like performance characteristics and attributes designed to mimic specific, engineered, thermoplastic materials. When used in our SLA® printers, our proprietary liquid resins turn into a solid surface one layer at a time, and through an additive building process all the layers bond and fuse to make a solid part.
Our portfolio of Accura® stereolithography materials includes general purpose as well as specialized materials and composites that offer our customers the opportunity to choose the material that is best suited for the parts and models that they intend to produce. To further complement and expand the range of materials we offer to our customers, we also distribute SLA® materials under recognized third-party brand names.
SLS® Print Materials and Composites
Our family of proprietary selective laser sintering materials and composites includes a range of rigid plastic, elastomeric and metal materials as well as various composites of these ingredients. Our SLS® printers have built-in versatility; therefore, the same printers can be used to process multiple materials.
Our DuraForm® laser sintering materials include CastFormtm and LaserFormtm proprietary SLS® materials. SLS® materials are used to create functional end-use parts, prototypes and durable patterns as well as assembly jigs and fixtures. They are also used to produce flexible, rubber-like parts such as shoe soles, gaskets and seals; patterns for investment casting; functional tooling such as injection molding tool inserts; and end-use parts for customized rapid manufacturing applications.
Examples of rapid manufacturing parts produced by our customers using our SLS® printers include air ducts for military aircraft and engine cowling parts for unmanned aerial vehicles. Product designers and developers from major automotive, aerospace and consumer products companies use DuraForm® parts extensively as functional test models, including in harsh test environment conditions. Aerospace and medical companies use our SLS® printers to produce end-use parts directly, which enables them to create customized parts economically without tooling. Parts made from DuraForm® and LaserFormtm materials are cost effective and can compete favorably with traditional manufacturing methods, especially where part complexity is high.
Visijet® Print Materials
Our family of VisiJet® print materials includes part-building materials and compatible disposable support materials that are used in the modeling process and facilitate an easily melted support removal process. These print materials are sold to our customers packaged in proprietary smart cartridges designed for our professional 3D printers. Our proprietary VisiJet® print materials are ideal for study models and form, fit and function engineering studies. VisiJet® wax print materials and special dissolvable support materials are used for direct casting applications such as custom jewelry manufacturing, dental crowns and bridge work and other casting and micro-casting applications.
BfBtm Print Materials
Our family of print materials for use in the BfBtm 3000 includes polylatic acid (PLA), acrylonitrile butadiene styrene (ABS), polypropylene (PP), high density polyethylene (HDPE), low density polyethylene (LDPE), and unplasticised polyvinyl chloride (uPVC). These print materials offer a variety of properties, including tough polymer materials for car bumpers, tough and flexible polymers for face masks or containers, and chemical and solvent resistant materials for fuel tanks, snowboards and water pipes.
Warranty, Maintenance and Training Services
We provide a variety of comprehensive customer services and local application support and field support on a worldwide basis for all our stereolithography and selective laser sintering 3D printers. For our personal and professional 3D printers, we provide these services and field support either directly or through a network of authorized resellers or other sources. We are continuing to build a reseller channel for our line of personal and professional 3D printers and to train our resellers to perform installation and service for those printers. We have also entered into arrangements with selected outside service providers to augment our service capabilities for each of our lines of equipment.
The services and field support that we provide includes installation of new printers at the customers site, printer warranties, several maintenance agreement options and a wide variety of hardware upgrades, software updates and performance enhancement packages. We also provide services to assist our customers and resellers in developing new applications for our technologies, to facilitate the use of our technology for the customers applications, to train customers on the use of newly acquired printers and to maintain our printers at customers sites.
New personal, professional and production printers are sold with maintenance support that generally covers a warranty period ranging from 90 days to one year. We offer service contracts that enable our customers to continue maintenance coverage beyond the initial warranty period. These service contracts are offered with various levels of support and are priced accordingly. We employ customer-support sales engineers in North America, several countries in Europe and in parts of the Asia-Pacific region to support our worldwide customer base. As a key element of warranty and service contract maintenance, our service engineers provide regularly scheduled preventive maintenance visits to customer sites. We also provide training to our distributors and resellers to enable them to perform these services.
We distribute spare parts on a worldwide basis to our customers, primarily from locations in the U.S. and Europe.
We also offer upgrade kits for certain of our printers that enable our existing customers to take advantage of new or enhanced system capabilities; however, we have discontinued upgrade support for certain of our older legacy printers.
3D Custom Parts Services
3D Systems launched 3Dpropartstm, a rapid prototyping and printed parts service, in October 2009. The Company is expanding its 3Dpropartstm service by bringing together the widest range of production and additive grade print materials and the latest additive and traditional manufacturing systems to deliver to its customers the broadest available range of precision plastic and metal parts and assemblies. Since the launch of 3Dpropartstm, the Company has acquired eight service providers in the U.S. and Europe and expanded capacity as required. Through our 3Dpropartstm service, we supply finished parts to our customers through a global network of printed parts service locations. Customers may procure a complete range of precision plastic and metal parts services provided using a variety of finishing, molding and casting capabilities utilizing both traditional and additive processes. In addition, preferred service providers and leading service bureaus can use 3Dpropartstm as their comprehensive order-fulfillment center.
We operate in North America, Europe and the Asia-Pacific region, and distribute our products and services in those areas as well as to other parts of the world. Revenue in countries outside the U.S. accounted for 54.7%, 56.6% and 60.6% of consolidated revenue in the years ended December 31, 2010, 2009 and 2008, respectively.
In maintaining foreign operations, our business is exposed to risks inherent in such operations, including currency fluctuations. Information on foreign exchange risk appears in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K (Form 10-K), which information is incorporated herein by reference.
Financial information about geographic areas, including revenue and long-lived assets, appears in Note 22 to the Consolidated Financial Statements in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K, which information is incorporated herein by reference.
Our sales and marketing strategy focuses on an integrated approach that is directed to providing printers, print materials and services to meet a wide range of customer needs, including traditional prototyping, 3D printing and rapid manufacturing. This integrated approach includes the sales and marketing of our parts service, either as an adjunct to a customers in-house use of additive technologies or to the much broader audience of users who do not have dedicated production or professional 3D printers.
Our sales organization is responsible for the sale of our products on a worldwide basis and for the management and coordination of our growing network of authorized resellers. Our direct sales force consists of salespersons who work throughout North America, Europe and in parts of the Asia-Pacific region. Our application engineers provide professional services through pre-sales support and assist existing customers so that they can take advantage of our latest print materials and techniques to improve part quality and machine productivity. This group also leverages our customer contacts to help identify new application opportunities that utilize our proprietary processes and access to our parts printing service, 3Dpropartstm. As of December 31, 2010, our worldwide sales, application and service staff consisted of 159 employees.
We sell production printers and our related print materials and services through our direct sales organization, which is supported by our dedicated sales, service and application engineers worldwide. In certain areas of the world where we do not operate directly, we have appointed sales agents, resellers and distributors who are authorized to sell our production printers and the print materials used in them on our behalf. Certain of those agents, resellers and distributors also provide services to customers in those geographic areas.
Our personal and professional printers and our related print materials and services are sold worldwide directly and through a network of authorized distributors and resellers who are managed and directed by a dedicated team of sales channel managers.
As a complement to our printers and print materials sales, we have our 3Dpropartstm service, a global network of parts printing service locations. 3Dpropartstm is designed to provide our customers a single source for all of their design-to-manufacturing needs. Through our 3Dpropartstm service, we offer access to a wide range of additive and traditional manufacturing technologies, our full line of available print materials from plastics to metals and our project management and finishing capabilities through 24/7 on-line quoting and secure ordering.
Our customers include major companies in a broad range of industries, including manufacturers of automotive, aerospace, computer, electronic, defense, education, consumer, medical and dental products. Purchasers of our printers include original equipment manufacturers, or OEMs, government agencies and universities that generally use our printers for research activities, and independent service bureaus that provide rapid prototyping and manufacturing services to their customers. No single customer accounted for more than 10 percent of our consolidated revenue in the years ended December 31, 2010, 2009 or 2008.
We outsource certain equipment assembly and refurbishment activities to several selected design and engineering companies and suppliers. These suppliers also carry out quality control procedures on our printers prior to their shipment to customers. As part of these activities, these suppliers have responsibility for procuring the components and sub-assemblies that are used in our printers. This has reduced our need to procure or maintain inventories of raw materials, work-in-process and spare parts related to our equipment assembly and maintenance activities. We purchase finished printers from these suppliers pursuant to forecasts and customer orders that we supply to them. While the outsourced suppliers of our printers have responsibility for the supply chain of the components for the printers they assemble, the components, parts and sub-assemblies that are used in our printers are generally available from several potential suppliers.
We assemble certain professional 3D printers and other equipment at our Rock Hill, South Carolina facility, enabling us to better utilize our facility, plan production and lower costs. Our BfBtm printers are assembled at our facility in Clevedon, England.
We produce certain print materials at our facilities in Marly, Switzerland and Rock Hill, South Carolina. We also have arrangements with third parties who blend to our specifications certain print materials that we sell under our own brand names. As discussed above, we also purchase print materials from third parties for resale to our customers.
Our equipment assembly and print materials blending activities and certain research and development activities are subject to compliance with applicable federal, state and local provisions regulating the storage, use and discharge of materials into the environment. We believe that we are in compliance with such regulations as currently in effect in all material respects and that continued compliance with them will not have a material adverse effect on our capital expenditures, results of operations or consolidated financial position.
The 3D printer industry is characterized by rapid technological change. Consequently, we have an ongoing program of research and development to develop new printers and print materials and to enhance our product lines as well as to improve and expand the capabilities of our printers and related software and print materials. This includes all significant technology platform developments for SLA®, SLS®, SLM, MJMtm, FTI and PJP printers and print materials. Our development efforts are augmented by development arrangements with research institutions, customers, suppliers of material and hardware and the assembly and design firms that we have engaged to assemble our printers. We also engage third party engineering companies and specialty print materials companies in specific development projects from time to time.
In addition to our internally developed technology platforms, we acquired products or technology developed by others by purchasing the stock or business assets of the business entity that held ownership rights to the technology. In other instances we have licensed or purchased the intellectual property rights of technologies developed by third parties through licensing agreements that may obligate us to pay a license fee or royalty, typically based upon a dollar amount per unit or a percentage of the revenue generated by such products.
Research and development expenses were $10.7 million, $11.1 million and $15.2 million in 2010, 2009 and 2008, respectively.
We capitalized $1.2 million of software development costs in 2010 from acquisitions. We did not capitalize any software development costs in 2009 or 2008. See Note 6 to the Consolidated Financial Statements.
We regard our technology platforms and materials as proprietary and seek to protect them through copyrights, patents, trademarks and trade secrets. At December 31, 2010, we held 354 patents worldwide. At that date, we also had 148 pending patent applications worldwide, including applications covering inventions contained in our recently introduced printers. The principal issued patents covering aspects of our various technologies will expire at varying times through 2027.
We are also a party to various licenses that have had the effect of broadening the range of the patents, patent applications and other intellectual property available to us.
We have also entered into licensing or cross-licensing arrangements with various companies in the United States and in other countries that enable those companies to utilize our technology in their products or that enable us to use their technologies in our products. Under certain of these licenses, we are entitled to receive, or we are obligated to pay, royalties for the sale of licensed products in the U.S. or in other countries. The amount of such royalties was not material to our results of operations or consolidated financial position for the three-year period ended December 31, 2010.
We believe that, while our patents and licenses provide us with a competitive advantage, our success depends primarily on our marketing, business development and applications know-how and on our ongoing research and development efforts. Accordingly, we believe the expiration of any of the patents, patent applications or licenses discussed above would not be material to our business or financial position.
We face competition from the development of new technologies or techniques not encompassed by the patents that we own or license, from the conventional machining, plastic molding and metal casting techniques discussed above and from improvements to existing technologies, such as CNC and rotational molding.
Competition for most of our 3D printers is based primarily on process know-how, product application know-how and the ability to provide a full range of products and services to meet customer needs. Competition is also based upon innovations in 3D printing, rapid prototyping and rapid manufacturing printers and print materials. Accordingly, our ongoing research and development programs are intended to enable us to maintain technological leadership. Certain of the companies producing competing products or providing competing services are well established and may have greater financial resources.
Our principal competitors are companies that manufacture machines that make, or use machines to make, models, prototypes, molds and small-volume to medium-volume manufacturing parts. These include suppliers of computer numerically controlled machines and machining centers, commonly known as CNC, suppliers of plastics molding equipment, including injection-molding equipment, suppliers of traditional machining, milling and grinding equipment, and businesses that use such equipment to produce models, prototypes, molds and small-volume to medium-volume manufacturing parts. These conventional machining, plastic molding and
metal casting techniques continue to be the most common methods by which plastic and metal parts, models, functional prototypes and metal tool inserts are manufactured.
Our competitors also include other suppliers of stereolithography, laser sintering and other 3D printers and print materials as well as suppliers of alternative additive manufacturing solutions such as vacuum casting equipment. A number of companies currently sell print materials that compete with those we sell, and there are a wide number of suppliers of maintenance services for the equipment that we sell. Numerous suppliers of these products operate both internationally and regionally, and many of them have well-recognized product lines that compete with us in a wide range of our product applications.
Competition in the parts printing service business is highly fragmented, with most of the services suppliers operating on a local level.
We believe that our future success depends on our ability to enhance our existing products and services, introduce new products and services on a timely and cost-effective basis, meet changing customer needs, extend our core technologies to new applications and anticipate and respond to emerging standards, business models, service delivery methods and other technological changes.
At December 31, 2010, we had 484 full-time employees. Although some of our employees outside of the U.S. are subject to local statutory employment and labor arrangements, none of our U.S. employees are covered by collective bargaining agreements. We have not experienced work stoppages and believe that our relations with our employees are satisfactory.
Our website address is www.3DSystems.com. The information contained on our website is neither a part of, nor incorporated by reference into, this Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, and other documents that we file with the Securities and Exchange Commission (SEC), as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC.
Several of our corporate governance materials, including our Code of Conduct, Code of Ethics for Senior Financial Executives and Directors, Corporate Governance Guidelines, the current charters of each of the standing committees of the Board of Directors and our corporate charter documents and by-laws are also available on our website.
The information appearing in the table below sets forth the current position or positions held by each of our officers and his or her age as of February 1, 2011. All of our officers serve at the pleasure of the Board of Directors. There are no family relationships among any of our officers or directors.
We have employed each of the individuals in the foregoing table other than Mr. Gregoire and Ms. Lewis for more than five years.
Mr. Gregoire joined us on April 25, 2007 as Vice President and Chief Financial Officer. Previously, he was employed by Infor Global Solutions, Inc., an international software company, as Vice President of Finance since 2006 with responsibility for its Datastream Systems and Customer Relationship Management division. Mr. Gregoire previously served as Corporate Controller of Datastream Systems Inc., a software company, from 2005 until it was acquired by Infor Global Solutions, Inc. in March 2006. For more than three years prior to 2005, Mr. Gregoire served as Director of Accounting and Financial Analysis of Paymentech, L.P., an international credit card processing company.
Ms. Lewis joined us as Vice President Global Marketing on October 15, 2009 and was elected an officer of the company in May 2010. Since 2006 she was Chief Executive Officer of Desktop Factory, Inc., a venture financed technology start-up focused on the development and delivery of a low cost 3D printer. For more than three years prior to 2006, Ms. Lewis served as Senior Vice President, Marketing for IKON Office Solutions, a global office copying/printing/imaging and related services company.
Certain statements made in this Form 10-K that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the cautionary statements and risk factors set forth below as well as other statements made in this Form 10-K that may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.
In addition to the statements set forth below that explicitly describe risks and uncertainties to which our business and our financial condition and results of operations are subject, readers are urged to consider statements in future or conditional tenses or that include terms such as believes, belief, expects, intends, anticipates or plans that appear in this Form 10-K to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations as to future events and trends affecting our business. Forward-looking statements are based upon our beliefs, assumptions and current expectations concerning future events and trends, using information currently available to us, and are necessarily subject to uncertainties, many of which are outside our control. We assume no obligation, and do
not intend, to update these forward-looking statements, except as required by applicable law. The factors stated under the heading Cautionary Statements and Risk Factors set forth below, as well as other factors, could cause actual results to differ materially from those reflected or predicted in forward-looking statements.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from those reflected in or suggested by forward-looking statements. Any forward-looking statement that you read in this Form 10-K reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or to individuals acting on our behalf are expressly qualified in their entirety by this discussion. You should specifically consider the factors identified in this Form 10-K, which would cause actual results to differ from those referred to in forward-looking statements.
The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem not to be material also may impair our business operations, results of operations and financial condition. If any of the risks described below or if any other risks and uncertainties not currently known to us or that we currently deem not to be material actually occurs, our business, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock.
The risks discussed below also include forward-looking statements that are intended to provide our current expectations with regard to those risks. There can be no assurance that our current expectations will be met, and our actual results may differ substantially from the expectations expressed in these forward-looking statements.
Global economic, political and social conditions may harm our ability to do business, increase our costs and negatively affect our stock price.
We believe that we are emerging from a global recession that caused failures of financial institutions and led to government intervention in the United States, Europe and other regions of the world. The prospects for economic growth in the United States and other countries remain uncertain, and may cause customers to further delay or reduce technology purchases due to continued softness in the real estate and mortgage markets or other markets, volatility in fuel and other energy costs, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors affecting spending behavior. The global recession had an adverse impact on the sales of our products in 2008 and 2009 leading to longer sales cycles, slower adoption of new technologies and increased price competition. Given the continued uncertainty concerning the pace of growth in the global economy, we face risks that may arise from financial difficulties experienced by our suppliers, resellers or customers, including:
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third party claims as a result of litigation or other proceedings.
In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights or disputes related to the validity or alleged infringement of third party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be costly and can be disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes.
Third party intellectual property claims asserted against us could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from assembling or licensing certain of our products, subject us to injunctions restricting our sale of products, cause severe disruptions to our operations or the marketplaces in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements. In addition we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products. Any of these could seriously harm our business.
We have made, and expect to continue to make, strategic acquisitions that may involve significant risks and uncertainties. We may not realize the anticipated benefits of past or future acquisitions and integration of these acquisitions may disrupt our business and divert management.
We completed seven acquisitions in 2010, one of which was considered significant in accordance with the rules and regulations of the SEC. We intend to continue to evaluate acquisition opportunities in the future in an effort to expand our business and enhance stockholder value. Acquisitions involve certain risks and uncertainties including:
If we are unable to generate net cash flow from operations and if we are unable to raise additional capital, our financial condition could be adversely affected.
In 2010, our unrestricted cash and short-term investments increased by $12.4 million to $37.3 million at December 31, 2010 from $24.9 million at December 31, 2009. During 2010, 2009 and 2008, net cash provided by (used in) operations was $31.8 million, $7.7 million and $(3.5) million, respectively. We cannot assure you that we will continue to generate cash from operations or other potential sources to fund future working capital needs and meet capital expenditure requirements.
As of December 31, 2010 we had no outstanding debt on our balance sheet. From time-to-time we may seek access to external sources of capital to fund working capital needs, capital expenditures, acquisitions and for other general corporate purposes. However, we cannot assure you that capital would be available from external sources such as bank credit facilities, debt or equity financings or other potential sources to fund future operating costs, debt-service obligations and capital requirements.
The global financial crisis affecting the banking system and financial markets has resulted in a tightening of credit markets, lower levels of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. As a consequence, credit markets tightened significantly such that the ability to raise new capital has become more challenging and more expensive. If our ability to generate cash flow from operations and our existing cash is inadequate to meet our needs, our options for addressing such capital constraints include, but are not limited to, (i) obtaining a revolving credit facility from bank lenders, (ii) accessing the public capital markets, or (iii) delaying certain of our existing development projects. If it became necessary to obtain additional debt financing it is likely that such alternatives in the current market environment would be on less favorable terms than we have historically obtained, which could have a material adverse impact on our consolidated financial position, results of operations or cash flows.
The lack of additional capital resulting from any inability to generate cash flow from operations or to raise equity or debt financing could force us to substantially curtail or cease operations and would, therefore, have a material adverse effect on our business and financial condition. Furthermore, we cannot assure you that any necessary funds, if available, would be available on attractive terms or that they would not have a significantly dilutive effect on our existing stockholders. If our financial condition worsens and we become unable to attract additional equity or debt financing or enter into other strategic transactions, we could become insolvent or be forced to declare bankruptcy.
The variety of products that we sell could cause significant quarterly fluctuations in our gross profit margins, and those fluctuations in margins could cause fluctuations in operating income or loss and net income or loss.
We continuously work to expand and improve our product offerings, including our printers, print materials and services, the number of geographic areas in which we operate and the distribution channels we use to reach various target product applications and customers. This variety of products, applications and channels involves a range of gross profit margins that can cause substantial quarterly fluctuations in gross profit and gross profit margin depending upon the mix of product shipments from quarter to quarter. We may experience significant quarterly fluctuations in gross profit margins or operating income or loss due to the impact of the mix of products, channels or geographic areas in which we sell our products from period to period. In some quarters, it is possible that results could be below expectations of analysts and investors. If so, the price of our common stock may be volatile or decline.
We believe that our future success may depend on our ability to deliver products that meet changing technology and customer needs.
Our business may be affected by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new standards and practices, any of which could render our existing products and proprietary technology and printers obsolete. Accordingly, our ongoing research and development programs are intended to enable us to maintain technological leadership. We believe that to remain competitive we must continually
enhance and improve the functionality and features of our products, services and technologies. However, there is a risk that we may not be able to:
We derive a significant portion of our revenue from business conducted outside the U.S and are subject to the risks of doing business outside the U.S.
Over 50 percent of our consolidated revenue is derived from customers in countries outside the U.S. There are many risks inherent in business activities outside the U.S. that, unless managed properly, may adversely affect our profitability, including our ability to collect amounts due from customers. While most of our operations outside the U.S. are conducted in highly developed countries, they could be adversely affected by:
These uncertainties may make it difficult for us and our customers to accurately plan future business activities and may lead our customers in certain countries to delay purchases of our products and services. More generally, these geopolitical, social and economic conditions could result in increased volatility in global financial markets and economies.
The consequences of terrorism or armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our market opportunities or our business. We are uninsured for losses and interruptions caused by terrorism, acts of war and similar events.
While the geographic areas outside the U.S. in which we operate are generally not considered to be highly inflationary, our foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated, for example, in U.S. dollars rather than their respective functional currencies.
Moreover, our operations are exposed to market risk from changes in interest rates and foreign currency exchange rates and commodity prices, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating and financing activities and, when we consider it to be appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
We face significant competition in many aspects of our business, which could cause our revenue and gross profit margins to decline. Competition could also cause us to reduce sales prices or to incur additional marketing or production costs, which could result in decreased revenue, increased costs and reduced margins.
We compete for customers with a wide variety of producers of equipment for models, prototypes, other three-dimensional objects and end-use parts as well as producers of print materials and services for this equipment. Some of our existing and potential competitors are researching, designing, developing and marketing other types of competitive equipment, print materials and services. Many of these competitors have financial, marketing, manufacturing, distribution and other resources substantially greater than ours.
We also expect that future competition may arise from the development of allied or related techniques for equipment and print materials that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products, and from improvements to existing print materials and equipment technologies.
We intend to continue to follow a strategy of continuing product development to enhance our position to the extent practicable. We cannot assure you that we will be able to maintain our current position in the field or continue to compete successfully against current and future sources of competition. If we do not keep pace with technological change and introduce new products, we may lose revenue and demand for our products.
We depend on a limited number of suppliers for components and sub-assemblies used in our 3D printers and for raw materials used in our print materials. If these relationships were to terminate, our business could be disrupted while we locate an alternative supplier and our expenses may increase.
We have outsourced the assembly of certain of our printers to third party suppliers, we purchase components and sub-assemblies for our printers from third party suppliers, and we purchase raw materials that are used in our print materials, as well as certain of those print materials, from third party suppliers.
While there are several potential suppliers of the components, parts and sub-assemblies for our products, we currently choose to use only one or a limited number of suppliers for several of these components, including our lasers, print materials and certain jetting components. Our reliance on a single or limited number of suppliers involves many risks including:
While we believe that we can obtain all the components necessary for our products from other manufacturers, we require any new supplier to become qualified pursuant to our internal procedures, which could involve evaluation processes of varying durations. We generally have our printers assembled based on our internal forecasts and the supply of raw materials, assemblies, components and finished goods from third parties, which are subject to various lead times. In addition, at any time, certain suppliers may decide to discontinue production of an assembly, component or raw material that we use. Any unanticipated change in the sources of our supplies, or unanticipated supply limitations, could increase production or related costs and consequently reduce margins.
If our forecasts exceed actual orders, we may hold large inventories of slow-moving or unusable parts, which could have an adverse effect on our cash flow, profitability and results of operations.
We have engaged selected design and manufacturing companies to assemble certain of our equipment, including our production printers and certain personal and professional printers. In carrying out these outsourcing activities, we face a number of risks, including:
We and our suppliers depend on various energy products in processes used to produce our products. Generally, we acquire products at market prices and do not use financial instruments to hedge energy prices. As a result, we are exposed to market risks related to changes in energy prices. In addition, many of the customers and industries to whom we market our printers and print materials are directly or indirectly dependent upon the cost and availability of energy resources.
Our business and profitability may be materially and adversely affected to the extent that our or our customers energy-related expenses increase, both as a result of higher costs of producing, and potentially lower profit margins in selling, our products and print materials and because increased energy costs may cause our customers to delay or reduce purchases of our printers and print materials.
We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business reputation.
Products as complex as those we offer may contain undetected defects or errors when first introduced or as enhancements are released that, despite testing, are not discovered until after the product has been installed and used by customers. This could result in delayed marketplace acceptance of the product, claims from customers or others, damage to our reputation and business or significant costs to correct the defect or error.
We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, the nature and extent of these limitations vary from customer to customer, their effect is subject to a variety of legal limitations, and it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.
The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business reputation and cause us to fail to retain existing customers or to fail to attract new customers.
Historically, our common stock has been characterized by generally low daily trading volume, and our common stock price has been volatile.
The price of our common stock ranged from $10.50 to $34.30 per share during 2010. Factors that may have a significant impact on the market price of our common stock include:
The number of shares of common stock issuable in a stock offering, upon the exercise of outstanding stock options, the issuance of restricted stock awards or the issuance of shares in connection with acquisitions could dilute your ownership and negatively impact the market price for our common stock.
We have a registration statement on Form S-3 under which, among other things, we may issue up to $75 million of securities.
In addition, approximately 0.8 million shares of common stock were issuable upon the exercise of outstanding stock options at December 31, 2010, all of which were fully vested and remained exercisable at that date.
The Board of Directors is authorized to issue up to 5 million shares of preferred stock, of which 1 million shares have been authorized as Series A Preferred Stock. The Board of Directors is authorized to issue these shares of preferred stock in one or more classes or series without further action of the stockholders and in that regard to determine the issue price, rights, preferences and privileges of any such class or series of preferred stock generally without any further vote or action by the stockholders. The rights of the holders of any outstanding series of preferred stock may adversely affect the rights of holders of common stock.
Our ability to issue preferred stock gives us flexibility concerning possible acquisitions and financings, but it could make it more difficult for a third party to acquire a majority of our outstanding common stock. In addition, any preferred stock that is issued may have other rights, including dividend rights, liquidation preferences and other economic rights, senior to the common stock, which could have a material adverse effect on the market value of our common stock.
The stockholders rights plan adopted by the Board of Directors in 2008 may inhibit takeovers and may adversely affect the market price of our common stock.
Our Board of Directors approved the creation of our Series A Preferred Stock and adopted a stockholders rights plan pursuant to which it declared a dividend of one Series A Preferred Stock purchase right for each share of our common stock held by stockholders of record as of the close of business on December 22, 2008. The preferred share purchase rights attach to any additional shares of common stock issued after December 22, 2008. Presently these rights are not exercisable and trade with the shares of our common stock. Under the rights plan, these rights generally become exercisable only if a person or group acquires or commences a tender or exchange offer for 15 percent or more of our common stock. If the rights become exercisable, each right permits its holder to purchase one one-hundredth of a share of Series A Preferred Stock for the exercise price of $55.00 per right. The rights plan also contains customary flip-in and flip-over provisions such that if a person or group acquires beneficial ownership of 15 percent or more of our common stock, each right will permit its holder, other than the acquiring person or group, to purchase shares of our common stock for a price equal to the quotient obtained by dividing $55.00 per right by one-half of the then current market price of our common stock. In addition, if, after a person acquires such ownership, we are later acquired in a merger or similar transaction, each right will permit its holder, other than the acquiring person or group, to purchase shares of the acquiring corporations stock for a price equal to the quotient obtained by dividing $55.00 per right by one-half of the then current market price of the acquiring companys common stock, based on the market price of the acquiring corporations stock prior to such merger.
The stockholders rights plan and the associated Series A Preferred Stock purchase rights may discourage a hostile takeover and prevent our stockholders from receiving a premium over the prevailing market price for the shares of our common stock.
Various provisions of Delaware law may inhibit changes in control not approved by our Board of Directors and may have the effect of depriving our stockholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover.
One of these Delaware laws prohibits us from engaging in a business combination with any interested stockholder (as defined in the statute) for a period of three years from the date that the person became an interested stockholder, unless certain conditions are met.
Our balance sheet contains several categories of intangible assets totaling $77.3 million at December 31, 2010 that we could be required to write off or write down in the event of the impairment of certain of those assets arising from any deterioration in our future performance or other circumstances. Such write-offs or write-downs could adversely impact our future earnings and stock price, our ability to obtain financing and affect our customer relationships.
At December 31, 2010, we had $59.0 million in goodwill capitalized on our balance sheet. Accounting Standards Codification (ASC) 350, Intangibles Goodwill and Other, requires that goodwill and some long-lived intangibles be tested for impairment at least annually. In addition, goodwill and intangible assets are tested for impairment at other times as circumstances warrant, and such testing could result in write-downs of some of our goodwill and long-lived intangibles. Impairment is measured as the excess of the carrying value of the goodwill or intangible asset over the fair value of the underlying asset. A key factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. Accordingly, we may, from time to time, incur impairment charges, which are recorded as operating expenses when they are incurred and would reduce our net income and adversely affect our operating results in the period in which they are incurred.
As of December 31, 2010, we had $18.3 million of other intangible assets, net consisting of licenses, patents, and other intangibles that we amortize over time. Any material impairment to any of these items could adversely affect our results of operations and could affect the trading price of our common stock in the period in which they are incurred.
As discussed below, we completed several business acquisitions during 2009 and 2010. With one exception, the acquisitions have resulted in the recognition of goodwill. This goodwill typically arises because the purchase price for these businesses reflects a number of factors including the future earnings and cash flow potential of these businesses; the multiples to earnings, cash flow and other factors, such as prices at which similar businesses have been purchased by other acquirers; the competitive nature of the process by which we acquired the business; and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
For additional information, see Notes 6 and 7 to the Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Significant Estimates Goodwill and other intangible and long-lived assets.
Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.
We are a U.S. based, multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our future effective tax rates could be adversely affected by changes in statutory tax rates, or interpretation of, tax rules and regulations in jurisdictions in which we do business, changes in the amount of revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.
In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service (IRS), and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to
be reasonable; however, there is no assurance that the final determination of any examination will not have an adverse effect on our operating results and financial position.
We own office and printed parts service facilities in Lawrenceburg, Tennessee and lease the remainder of our operating facilities, which are general purpose facilities.
We occupy an 80,000 square foot headquarters and research and development facility in Rock Hill, South Carolina, which we lease pursuant to a lease agreement with KDC-Carolina Investments 3, LP. After its initial term ending August 31, 2021, the lease provides us with the option to renew the lease for two additional five-year terms as well as the right to cause KDC, subject to certain terms and conditions, to expand the leased premises during the term of the lease, in which case the term of the lease would be extended. The lease is a triple net lease and provides for the payment of base rent of approximately $0.8 million in 2011 and $0.7 million annually from 2012 through 2020, including a rent escalation in 2016, and $0.5 million in 2021. Under the terms of the lease, we are obligated to pay all taxes, insurance, utilities and other operating costs with respect to the leased premises. The lease also grants us the right to purchase the leased premises and undeveloped land surrounding the leased premises on terms and conditions described more particularly in the lease.
We own 35,000 square feet of office and printed parts service facilities in Lawrenceburg, Tennessee at which we perform a broad range of printed parts services.
We lease 30,000 square feet of office and printed parts service facilities in Seattle, Washington, which we utilize in our 3Dpropartstm business. We lease approximately 22,000 square feet of office and printed parts service facilities in Pinerolo, Italy, which is used in our 3Dpropartstm business. We lease an 11,000 square foot advanced research and development facility in Valencia, California. We also lease a 9,000 square foot general-purpose facility in Marly, Switzerland at which we blend print materials and composites. We also lease various sales and service offices in France, Germany, the United Kingdom, Italy and Japan as well as various other facilities used in our 3Dpropartstm business in the U.S. and France.
We believe that the facilities described above are adequate to meet our needs for the foreseeable future.
On March 14, 2008, DSM Desotech Inc. filed a complaint, as 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 we engaged in anticompetitive behavior with respect to resins used in large-frame stereolithography machines. The complaint further asserted that we are infringing upon two of DSM Desotechs patents relating to stereolithography machines.
Following a decision of the Court on our 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. We filed an answer to the second amended complaint on March 19, 2009 in which, among other things, we 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 that we proposed.
DSM Desotech filed a third amended complaint on November 30, 2010 in which it asserted additional causes of action, and we filed an answer in which, among other things, we denied the material allegations of the third amended complaint. Fact discovery regarding the claims pending in this case concluded January 31, 2011.
We understand that DSM Desotech estimates the damages associated with its claims to be in excess of $40 million. We intend to continue to vigorously contest all the claims asserted by DSM Desotech.
We have been pursuing patent infringement litigation against EnvisionTEC, Inc. and certain of its related companies since 2005. In this litigation, we asserted that EnvisionTEC infringed our patents covering various three-dimensional solid imaging products and methods for creating physical three-dimensional models of an object and have sought injunctive relief and damages. EnvisionTECs 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 we proposed.
A jury trial was held in September 2010. Following that trial, the jury issued a verdict to the effect that EnvisionTECs Vanquish machine infringes one of our patents, and the Court entered judgment on that verdict on October 7, 2010. The parties have filed respective motions for judgment as a matter of law seeking modifications of portions of the judgment. The Court has not yet ruled on the motions.
We have not yet sought to enforce this judgment, but believe we are entitled to an injunction as a result of the judgment entered by the Court. We also intend to pursue claims for damages against EnvisionTEC.
On July 14, 2010, MSK K.K., a Japanese company, filed a complaint against our Japanese subsidiary in the Tokyo District Court asserting, among other things, that our subsidiary failed to satisfy certain alleged performance guarantees associated with the use of certain materials in two printers purchased from us in 2007
The plaintiff is seeking damages in excess of $1.6 million. We intend to vigorously contest all the claims asserted by MSK K.K.
We are also involved in various other legal matters incidental to our business. We believe, 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.
The following table sets forth, for the periods indicated, the range of high and low prices of our common stock, $0.001 par value, as quoted on The NASDAQ Global Market. Our common stock trades under the symbol TDSC.
As of February 9, 2011, our outstanding common stock was held by approximately 461 stockholders.
We do not currently pay, and have not paid, any dividends on our common stock, and we currently intend to retain any future earnings for use in our business. Any future determination as to the declaration of dividends on our common stock will be made at the discretion of the Board of Directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by the Board of Directors, including the applicable requirements of the Delaware General Corporation Law, which provides that dividends are payable only out of surplus or current net profits.
The payment of dividends on our common stock may be restricted by the provisions of credit agreements or other financing documents that we may enter into or the terms of securities that we may issue from time to time.
Issuance of Unregistered Securities and Issuer Purchases of Equity Securities
During the fourth quarter of 2010, we issued 123,770 shares of our common stock in connection with the acquisitions of Bits From Bytes, Limited and Provel, S.r.l. These shares were issued in transactions intended to be exempt under the provisions and Regulation S and Section 4(2) of the Securities Act of 1933, as amended. See Note 3 to the Consolidated Financial Statements.
We did not repurchase any of our equity securities during the fourth quarter of 2010, except for unvested restricted stock awards repurchased pursuant to our 2004 Incentive Stock Plan. See Note 14 to the Consolidated Financial Statements.
Stock Performance Graph
The graph below shows, for the five years ended December 31, 2010, the cumulative total return on an investment of $100 assumed to have been made on December 31, 2005 in our common stock. For purposes of the graph, cumulative total return assumes the reinvestment of all dividends. The graph compares such return with those of comparable investments assumed to have been made on the same date in (a) the NASDAQ Composite Total Returns Index and (b) the S&P 500 Information Technology Index, which are published market indices with which we are sometimes compared.
Although total return for the assumed investment assumes the reinvestment of all dividends on December 31 of the year in which such dividends were paid, we paid no cash dividends on our common stock during the periods presented.
Our common stock is quoted on The NASDAQ Global Market (trading symbol: TDSC).
Assumes Initial Investment of $100
The selected consolidated financial data set forth below for the five years ended December 31, 2010 has been derived from our historical consolidated financial statements. You should read this information together with Managements Discussion and Analysis of Financial Condition and Results of Operations, the notes to the selected consolidated financial data, and our consolidated financial statements and the notes thereto for December 31, 2010 and prior years included in this Form 10-K.
The following discussion and analysis should be read together with the selected consolidated financial data and our consolidated financial statements and notes therefore set forth in this Form 10-K. Certain statements contained in this discussion may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as discussed more fully in this Form 10-K. See Forward-Looking Statements and Cautionary Statements and Risk Factors in Item 1A.
The forward-looking information set forth in this Form 10-K is provided as of the date of this filing, and, except as required by law, we undertake no duty to update that information.
We are a leading global provider of 3D content-to-print solutions including 3D personal, professional and production 3D printers, print materials and parts services. Our solutions enable complex three-dimensional plastic or metal parts to be produced directly from 3D digital data without tooling. Our products and print materials help to greatly reduce the time and cost required to produce prototypes or customized production parts. With our 3Dpropartstm service, we supply finished printed part services to our customers through a network of parts printing service locations. Our consolidated revenue is derived primarily from the sale of our printers, the sale of the related print materials and the sale of services, including revenue from our 3Dpropartstm parts service.
We are continuing to pursue a growth strategy that focuses on four strategic initiatives:
Build 3Dpropartstm global services. We believe that our ability to grow and expand 3Dpropartstm services through organic growth and acquisitions will enable us to impart the latest technology to customers
months or years in advance of customers abilities to invest in new printers. We view this as an opportunity to condition customers to the newest technologies and to build a brand experience and customer loyalty.
Accelerate 3D printer penetration. We believe that accelerating personal and professional 3D printer penetration through channel expansion and new products will provide a growing installed base to enable higher revenues from recurring sales of print materials and services.
Grow healthcare solutions revenues. We believe that by leveraging our core competencies in healthcare solutions applications and printing capabilities that we can grow revenue within this marketplace.
Build 3D content products and services. We believe that by providing the content products and services to enable consumers to select, design, customize and share digital 3D data we can introduce 3D printing capabilities and technologies to an expanded audience of new users and marketplaces.
We intend to accomplish this growth organically and, as opportunities present themselves, through selective acquisitions. As with any growth strategy, there can be no assurance that we will succeed in accomplishing our strategic initiatives.
Summary of 2010 Financial Results
As discussed in greater detail below, revenue for 2010 increased primarily due to higher sales across all revenue categories. Our revenue increased by 41.7% to $159.9 million in 2010 from $112.8 million in 2009, after having decreased from $138.9 million in 2008. These results reflected growth in demand for 3D printers, from a continued global economic recovery and increased demand in several key industries we serve, increased print material sales from a growing installed base, and higher service revenue from 3Dpropartstm and growth from acquisitions.
For 2010, healthcare solutions revenue accounted for 13.5%, or $21.6 million, of our total revenue and includes sales of printers, print materials and services for hearing aid, dental, medical device and other health-related applications.
Our gross profit for 2010 increased by 48.8% to $74.0 million from $49.7 million in 2009. Our higher gross profit for 2010 arose primarily from an increase in sales. Our gross profit margin percentage improved to 46.3% in 2010 from 44.1% in 2009. Gross profit margin benefited from higher overhead absorption and decreased drag from the initial commercialization of our V-Flash® printer, partially offset by increased sales of lower margin 3Dpropartstm and personal and professional 3D printer sales as a higher percentage of total sales.
Our total operating expenses increased by $6.4 million in 2010 from 2009, reflecting higher SG&A expense, primarily due to higher commissions, staffing from our acquisitions and increased legal expenses associated with ongoing litigation. 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 2011 to be in the range of $47.0 million to $50.0 million and our 2011 R&D expenses to be in the range of $11.5 million to $13.5 million.
For 2010, our operating income improved by $17.8 million to $20.9 million compared to operating income of $3.1 million in 2009. This was primarily due to higher revenue and the increase in our gross profit noted above, partially offset by higher operating expenses.
Our operating income for 2010 included $7.9 million of non-cash expenses, which primarily consisted of depreciation and amortization and stock-based compensation; compared to $8.5 million of non-cash expenses in 2009.
A number of actions or events occurred in 2010 that affected our liquidity and our balance sheet including the following:
Although global economic conditions are improving, the pace of economic recovery is uncertain and economic conditions could deteriorate in 2011 and lead to softness in demand. As previously disclosed, we expect the commercialization of our V-Flash® printer to negatively impact earnings per share for the first quarter of 2011 and for that negative impact to disappear during the second quarter of 2011.
Results of Operations for 2010, 2009 and 2008
Table 1 below sets forth revenue and percentage of revenue by class of product and service.
Consolidated revenue increased in 2010 due primarily to increased sales volume from printers and from 3Dpropartstm service revenue related to acquisitions. Revenue decreased in 2009 due to decreased volume across all sales categories as a result of the global economic recession. These changes are explained in greater detail in the Revenue by class of product and service and Revenue by geographic region sections below.
Due to the relatively high list price of certain production and professional printers, our customers purchasing decisions may have long lead times; 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 printers from one period to another can significantly affect revenue reported for our production printers for the period involved. Revenue reported for printer sales in any particular period is also affected by revenue recognition rules prescribed by generally accepted accounting principles.
At December 31, 2010 our backlog was approximately $7.6 million, compared to $1.4 million at December 31, 2009 and at December 31, 2008. Although production and delivery of our printers is generally not characterized by long lead times, the higher backlog at December 31, 2010 includes an order received in the third quarter of 2010 for multiple production printers, which have been partially delivered and includes additional production printers for future delivery. The December 2010 backlog also includes two large print materials orders placed at the end of 2010 for delivery in 2011 that amount to $0.8 million. Additionally, 3Dpropartstm lead time and backlog depends on whether 3Dpropartstm orders are for rapid prototyping or longer-range production runs. The backlog at December 31, 2010 includes $1.9 million of 3Dpropartstm orders.
Revenue by class of product and service
2010 compared to 2009
Sales volumes of new products and services increased by $20.2 million in 2010, while the volume of core products sold increased by $30.8 million compared to 2009. Table 2 sets forth the change in revenue by class of product and service for 2010 compared to 2009.
We earn revenue from the sales of printers and other products, print materials and services. On a consolidated basis, revenue for 2010 increased by 41.7% to $159.9 million from $112.8 million for 2009 as a result of higher volume with a shift in the mix of printers and other products toward lower priced personal and professional printers.
The increase in revenue from printers and other products for 2010 compared to 2009 was primarily the result of higher sales of professional printers as well as increased sales of production printers. Sales of printers consisted of:
Revenue from print materials was aided by the improvement in production printer sales, which are typically accompanied by significant initial materials purchases to charge up new printers and commence production, and the continued expansion of printers installed over the past periods. Sales of integrated materials represented 34% of total materials revenue in 2010, compared to 31% in 2009. Materials revenue increased compared to 2009 notwithstanding the fact that materials consumed by 3Dpropartstm were no longer included in our materials revenue line.
The increase in services revenue primarily reflects revenue from 3Dpropartstm, which was introduced in the fourth quarter of 2009 to expand our paid parts services, partially offset by a decrease in sales of printer upgrades. Service revenue from 3Dpropartstm was $18.3 million, or 39.2% of service revenue for 2010. Of the $18.3 million of 3Dpropartstm revenue, $10.3 million was from businesses acquired in 2010. For the fourth quarter of 2010, revenue from 3Dpropartstm was $6.8 million, or 13.3% of total fourth quarter revenue.
In addition to changes in sales volumes, there are two other primary drivers of changes in revenue 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 Managements 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 printers as the trend toward smaller, lower-priced printers has continued and the influence of new printers and materials on our operating results has grown.
2009 compared to 2008
As shown in Table 3, the $26.1 million decrease in consolidated revenue in 2009 compared to 2008 reflects the effect of a $10.8 million decrease in printer revenue, a $12.0 million decrease in materials and a $3.3 million decrease in services revenue in 2009. Sales of new products and services introduced within the last three years decreased by $11.8 million in 2009 and unit sales volume of legacy products declined by $2.5 million in 2009. Unfavorable price/mix effects decreased revenue by $7.9 million and unfavorable foreign currency translation effects decreased revenue by $3.9 million.
As set forth in Table 1 and Table 3:
Revenue by geographic region
2010 compared to 2009
All geographic regions experienced higher levels of revenue in 2010 compared to 2009. This was principally caused by continued economic recovery in 2010, which we believe led to higher levels of production printer sales. The continued volatility in foreign currencies led to increased negative impact of foreign currency translation for the European region, while a strengthening Japanese Yen resulted in a favorable foreign currency translation for the Asia-Pacific region. Table 4 sets forth the change in revenue by geographic area for 2010 compared to 2009:
As shown in Table 4:
2009 compared to 2008
Each geographic region experienced lower levels of revenue in 2009 compared to 2008. This was principally caused by continued weak economic conditions in 2009 which we believe led to lower levels of production printer sales, and in the case of Europe, the impact of volatility in currencies on foreign currency translation. Table 5 sets forth the change in revenue by geographic area for 2009 compared to 2008.
As shown in Table 5:
Gross profit margin improved in both 2010 and 2009. Table 6 sets forth gross profit and gross profit margin for our products and services.
To conform to our 2009 and 2010 presentation, we reclassified $0.4 million of foreign exchange gain in 2008, which had previously been included in product cost of sales, to interest and other expense, net in our
consolidated statements of operations. This had the effect of decreasing our previously reported gross profit and interest and other expense, net by $0.4 million for 2008. This also increased the operating loss for those years by the same amount.
On a consolidated basis, gross profit for 2010 increased by $24.2 million to $74.0 million compared to $49.7 million and $55.6 million for 2009 and 2008, respectively. The higher gross profit margin reflects improved overhead absorption due to higher sales from all revenue categories coupled with continued operational efficiencies. The 2010 gross profit margin was adversely affected by approximately 1.2 percentage points due to the previously disclosed negative impact on gross profit margin of sales of our V-Flash® printer.
Printers and other products gross profit increased by 172.9% to $21.4 million in 2010 from $7.8 million in 2009, while the gross profit margin improved by 13.3 percentage points in 2010 to 39.0%. This improvement in gross profit margin resulted from higher revenue and improved overhead absorption, partially offset by the negative impact of foreign currency exchange rates and the previously disclosed negative impact on margin of V-Flash® printer sales.
Gross profit for materials improved by 20.4% to $35.7 million, with the gross profit margin increasing 2.1 percentage points to 61.1% from 59.0% in 2009. This is primarily due to the increase in sales volume of materials, which was positively affected by the cumulative effect of higher levels of production system sales, resulting in improved overhead absorption over higher revenue.
Gross profit for services increased by 38.2% to $16.9 million compared to $12.2 million in 2009, while the gross profit margin declined by 2.1 percentage points to 36.1%. The improved gross profit is due to the increased revenue from acquired 3Dpropartstm services. The decline in gross profit margin for services is primarily due to lower levels of printer upgrades as well as higher 3Dpropartstm revenues in 2010, which had a lower gross profit margin of 21.1% during the initial quarters following acquisition, compared to 45.8% for the other components of service revenue.
As shown in Table 7, total operating expenses increased by $6.4 million, or 13.7%, to $53.1 million for 2010 after decreasing to $46.7 million for 2009 from $61.1 million for 2008, but decreased to 33.2% of revenue compared to 41.4% and 43.9% in 2009 and 2008, respectively. This increase consists of $6.8 million of higher selling, general and administrative expenses, partially offset by $0.4 million in lower research and development expenses, both of which are discussed below.
We expect our SG&A expenses in 2011 to be in the range of $47.0 million to $50.0 million and our 2011 R&D expenses to be in the range of $11.5 million to $13.5 million, without slowing down the rate of planned new product introductions.
Selling, general, and administrative costs
2010 compared to 2009
Selling, general and administrative expenses increased by $6.8 million or 19.1%, to $42.3 million in 2010 from $35.5 million in 2009 after decreasing by $10.4 million in 2009 from $45.9 million in 2008. As a
percentage of revenue, selling, general and administrative expenses were 26.5%, 31.5% and 33.0% in 2010, 2009 and 2008, respectively.
The $6.8 million increase in selling, general and administrative expenses in 2010 was primarily due to a $4.7 million increase in salary, benefits and contract labor costs. The majority of that was related to increased commissions on higher revenues and operating costs for newly acquired businesses. Additionally, SG&A expenses were impacted by a $2.2 million increase in litigation costs and a $0.5 million increase in marketing costs, partially offset by a $0.5 million lower franchise tax expense due to recognizing franchise tax credits.
Depreciation and amortization increased to $7.5 million in 2010 from $5.9 million in 2009, which decreased from $6.7 million in 2008. The increase in depreciation and amortization in 2010 was primarily due to additional capital equipment placed in service and intangibles acquired from 3Dpropartstm acquisitions, while the decrease in depreciation and amortization in 2009 was primarily due to lower levels of capital expenditures.
2009 compared to 2008
Selling, general and administrative expenses declined by $10.4 million, or 22.5%, to $35.5 million in 2009 from $45.9 million in 2008 after decreasing by $8.3 million in 2008 compared to $54.2 million in 2007. Selling, general and administrative expenses, as a percentage of revenue, were 31.5% and 33.0% in 2009 and 2008, respectively.
The $10.4 million decrease in selling, general and administrative expenses in 2009 was primarily due to a $4.8 million reduction in salary, benefits and contract labor costs; a $2.2 million decline in audit, tax and other accounting fees; a $0.9 million in reduced occupancy costs; and a $0.6 million of lower travel-related expenses; partially offset by $1.3 million of increased litigation costs.
Research and development expenses decreased by 3.6% to $10.7 million in 2010 and decreased 26.8% to $11.1 million in 2009 after an increase of 5.3% to $15.2 million in 2008. The decrease in 2010 was primarily due to a $0.3 million decrease in outside consulting services and a $0.1 million decrease in vendor and outside processing. The decrease in 2009 was principally due to a $2.4 million decrease in outside consulting services in 2009 and the reduction in costs for 2009 following commercialization of certain new products in 2008 and 2009.
Operating income increased $17.8 million to $20.9 in 2010 compared to $3.1 million in 2009 and an operating loss of $5.5 million in 2008. The increase in operating income was primarily due to increased revenue in all categories, which led to improved overhead absorption. In 2010 and 2009, operating income included the effect of the reclassification of foreign exchange gain (loss) discussed above and our lower revenue and gross profit were more than offset by our lower level of total operating expenses in 2009. See Gross profit and gross profit margins above.
The following table sets forth operating income (loss) from operations by geographic area for 2010, 2009 and 2008.
With respect to the U.S., in 2010, 2009 and 2008, the changes in operating income (loss) by geographic area reflected the same factors relating to our consolidated operating income (loss) that are discussed above.
As most of our operations outside the U.S. are conducted through sales and marketing subsidiaries, the changes in operating income in our operations outside the U.S. in each of 2010, 2009 and 2008 resulted primarily from changes in sales volume, transfer pricing and foreign currency translation. Operating income from our Asia-Pacific operations for 2009 includes a $0.5 million bad debt provision related to 2009 sales to our largest Japanese customer, which filed for court protection in February 2009. All amounts due from this customer, which emerged from reorganization in late 2009, have been fully reserved as of December 31, 2010, and all sales subsequent to the 2009 court protection filing have been on a cash basis.
Interest and other expenses, net
Interest and other expenses, net, which consists primarily of interest and other expense and foreign exchange gain or loss, amounted to $1.2 million of net expense for 2010. Interest and other expense, net amounted to $1.2 million and $0.4 million for 2009 and 2008, respectively. For 2010, interest and other expense, net included $862 of interest and other expenses and $319 foreign exchange loss compared to $1,056 interest and other expense and $104 foreign exchange loss for 2009. In 2008, interest and other expense was $771 and foreign exchange gain was $401. The 2009 increase resulted from lower interest income on investments in 2009 as we shifted our short-term investments into Treasury funds in September 2008, partially offset by reduced interest expense related to the redemption of the remaining outstanding industrial revenue bonds.
We recorded $0.2 million, $0.8 million and $0.3 million of provisions for income taxes in 2010, 2009 and 2008, respectively. In 2010, this provision primarily reflects $1.3 million of tax expense in foreign jurisdictions, partially offset by a $1.2 million release of valuation allowances associated with U.S. deferred tax assets.
During the fourth quarter of 2010, based upon our recent results of operations and expected profitability in the future, we concluded that it is more likely than not that a portion of our U.S. net deferred tax assets will be realized. As a result, in accordance with ASC 740, we reversed $3.0 million of the valuation allowance applied to the U.S. net deferred tax assets. The reversal of the valuation allowance resulted in a non-cash income tax benefit of $1.2 million, which resulted in a benefit of $0.05 per share.
In conjunction with our ongoing review of our actual results and anticipated future earnings, we will periodically reassess the possibility of releasing more of the valuation allowance currently in place on U.S. deferred tax assets. Based upon this assessment, a further release of the valuation allowance may occur
during 2011 or in subsequent years. The required accounting for the release could involve significant tax amounts and would impact earnings in the quarter in which it was deemed appropriate to release the reserve. At December 31, 2010, the U.S. valuation allowance was approximately $34.6 million.
In 2009 and 2008, these provisions primarily reflect tax expense associated with income taxes in foreign jurisdictions.
In 2010, we utilized U.S. net operating loss carryforwards, which had had a full valuation allowance against them, to eliminate any U.S. federal taxes and to significantly reduce U.S state taxes. Absent the use of these net operating loss carryforwards, income tax expense would have been $6.7 million and the income tax rate would have been 33.9%.
Our $0.2 million provision for income taxes in 2010 decreased from 2009 principally due to the $1.2 million favorable impact from the release of valuation allowances associated with U.S. deferred tax assets. This decrease was partially offset by a $0.5 million increase in tax expense due to increased foreign income.
Our $0.8 million provision for income taxes in 2009 increased from 2008 principally due to the absence in 2009 of the $1.2 million benefit in 2008 arising from the settlement of a foreign tax audit for the years 2000 through 2005. The impact of the absence of this benefit is offset by a $0.6 million decrease in tax expense due to the reduction in foreign income.
Our $0.3 million provision for income taxes in 2008 included a $1.2 million benefit arising from the settlement of a foreign tax audit for the years 2000 through 2005, as amounts owing under the settlement were less than the amounts we previously estimated. The settlement allowed us to recognize tax loss carryforwards, resulting in a $0.9 million increase in our foreign deferred tax asset. The benefit of the favorable tax settlement amounted to $0.05 per share.
A substantial portion of our deferred income tax assets results from available net operating loss carryforwards in the jurisdictions in which we operate. Certain of these net operating loss carryforwards for U.S. state income tax purposes begin to expire in 2011, and certain of them begin to expire in later years for foreign and U.S. federal income tax purposes.
See Note 21 to the Consolidated Financial Statements.
Net income (loss); net income (loss) available to 3D Systems common stockholders
In 2010 we generated net income of $19.6 million, compared to net income of $1.1 million in 2009 and a net loss of $6.2 million in 2008. The 2010 increase is attributed to increased revenue and gross profit, partially offset by an increase in operating expenses as described above.
The principal reasons for our higher net income in 2010, which are discussed in more detail above, were a $47.0 million increase in revenue and a $24.2 million increase in gross profit, partially offset by $6.4 million higher operating expenses as a result of higher commissions and operating costs of acquired companies.
The principal reasons for our net income in 2009, which are discussed in more detail above, were a $14.4 million reduction in operating expenses; partially offset by a $5.9 million decrease in gross profit; a $0.8 million increase in interest and other expense, net; and $0.5 million increase in the provision for income taxes.
Net income (loss) available to common stockholders was $19.6 million for 2010, $1.1 million for 2009 and ($6.2) million for 2008. On a per share basis, our basic net income per share available to the common stockholders was $0.85 in 2010 and our fully diluted net income per share available to common stockholders was $0.83. This is an improvement over our net income per share available to the common stockholders, on both a basic and fully diluted basis, of $0.05 per share in 2009 and ($0.28) per share in 2008.
The calculation of diluted income per share excludes options with an exercise price that exceeds the average market price of shares during the period, since the effect of their inclusion would have been anti-dilutive resulting in a reduction to the net earnings per share. For 2008, no dilutive securities were included in
the diluted weighted average shares since we reported a net loss for those periods and the effect of their inclusion would have been anti-dilutive resulting in reduction to the net loss per share. Stock options excluded from the average outstanding diluted shares calculation were 531 for 2008. See Note 18 to the Consolidated Financial Statements.
Our ability to generate cash flow from operations has enabled us to execute our growth strategies, including our acquisitions in 2010, while maintaining a debt-free balance sheet. During 2010, we generated $31.8 million of cash from operations and utilized $19.2 million of cash to fund acquisitions.
See Cash flow and Lease obligations below.
We filed a shelf registration statement, which became effective on April 23, 2010, under which we may issue, from time to time, up to $75.0 million of common stock, preferred stock, debt securities or warrants for debt or equity securities or units of such securities, in one or more offerings.
We have relied upon our unrestricted cash and cash flow from operations to meet our cash requirements for working capital, capital expenditures and investments. However, it is possible that we may need to raise additional funds to finance our activities beyond the next twelve months or to consummate significant acquisitions of other businesses, assets, products or technologies. If needed, we may be able to raise such funds through the sales of equity or debt securities to the public or selected investors, or by borrowing from financial institutions.
In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or enter into a credit facility for other reasons. However, we may not be able to obtain such funds on a timely basis or acceptable terms, if at all. If we raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we may issue may have rights, preferences or privileges senior to those of our common stock.
Cash equivalents comprise 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. We minimize our credit risk by investing primarily in investment grade, liquid instruments and limit exposure to any one issuer depending upon credit quality.
A summary of the components of cash flows is shown below in Table 10.
Cash flow from operations
2010 compared to 2009
For the year ended December 31, 2010, we generated $31.8 million of net cash from operating activities. This change in cash primarily consisted of our $19.6 million net income, $7.9 million of non-cash charges that were included in our net income and $4.4 million of cash provided by net changes in operating accounts.
The principal changes in non-cash items that favorably affected operating cash flow included $7.5 million of depreciation and amortization expense, $1.4 million of stock-based compensation expense, partially offset by $1.2 million deferred tax benefit.
Changes in working capital that resulted in a source of cash included the following:
Accounts payable increased as a result of higher payables from increased purchases of machines and print materials associated with higher revenues, increased litigation costs and vendor payables associated with the acquisitions in 2010. Accrued liabilities increased primarily due to higher accrued payroll and liabilities for earnouts related to acquired companies. Deferred revenue increased as a result of warranties associated with increased sales of machines.
Changes in working capital that resulted in a use of cash included the following:
Inventories increased primarily due to the timing of orders and delivery of finished goods materials and raw materials, which are purchased in large quantities. Accounts receivable increased as a result of the record revenues for the fourth quarter of 2010 and an increase in days sales outstanding from 60 days in 2009 to 64 days in 2010.
2009 compared to 2008
For the year ended December 31, 2009, we generated $7.7 million of net cash from operating activities. This change in cash primarily consisted of our $1.1 million net income and $8.5 million of non-cash charges that were included in our net income, partially offset by $1.9 million of cash consumed by net changes in operating accounts.
The principal changes in non-cash items that favorably affected operating cash flow included $5.9 million of depreciation and amortization expense, $1.2 million of stock-based compensation expense and $0.9 million of bad debt expense.
Changes in working capital that resulted in a source of cash included the following:
Changes in working capital that resulted in a use of cash included the following:
Net cash used in investing activities in 2010 increased to $20.8 million from $5.2 million in 2009. In 2010 this consisted of $19.2 million related to acquisitions and $1.6 million of net purchases of property and equipment and additions to license and patent costs. See Notes 3, 5 and 6 to the Consolidated Financial Statements.
Net cash used in investing activities in 2009 increased to $5.2 million from $2.7 million in 2008. In 2009 this consisted of $4.1 million related to acquisitions and $1.2 million related to purchases of property and equipment and additions to license and patent costs. See Notes 5 and 6 to the Consolidated Financial Statements.
Capital expenditures were $1.3 million in 2010, $1.0 million in 2009 and $5.8 million in 2008. Capital expenditures in 2010 primarily consisted of expenditures for tooling and printers associated with our new product development efforts and leasehold improvements and equipment to support our 3Dpropartstm service.
As discussed below, we completed several business acquisitions during 2009 and 2010. With one exception, the acquisitions have resulted in the recognition of goodwill. This goodwill typically arises because the purchase price for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses; the multiples to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers; the competitive nature of the process by which we acquired the business; and the complementary strategic fit and resulting synergies these businesses bring to existing operations. See Note 7 to the Consolidated Financial Statements.
We acquired seven businesses in 2010 for consideration of $17.9 million, net of cash acquired. Six of the acquisitions were related to 3Dpropartstm print services and one acquisition was related to personal 3D printers. In addition, in 2010 we made deferred payments of $1.3 million in connection with the 2009 acquisitions. See Note 3 to the Consolidated Financial Statements.
We acquired three businesses in 2009 for consideration of $4.1 million, net of cash acquired. Two of the acquisitions were related to 3Dpropartstm print services, and one acquisition was related to personal 3D printers.
Recent acquisition developments
Subsequent to our 2010 fiscal year-end, we utilized $5.6 million of cash in connection with the acquisition of National RP Support. See Notes 3 and 25 to the Consolidated Financial Statements.
Net cash provided by financing activities improved to $1.0 million in 2010 from $0.3 million in 2009. Net cash used by financing activities in 2008 was $1.4 million. The increase in 2010 resulted primarily from higher stock option exercise activity.
The change in 2009 resulted primarily from the release of restricted cash, partially offset by debt repayments and lower stock option exercise activity.
Contractual Commitments and Off-Balance Sheet Arrangements
Our principal contractual commitments consist of the capital leases on our Rock Hill facility, operating leases, deferred purchase price and earnouts on acquisitions and purchase obligations, which are discussed in greater detail below. Tables 11 and 12 below summarize our contractual obligations as of December 31, 2010.
Future contractual payments at December 31, 2010 are set forth below.
On February 8, 2006, we entered into a lease agreement with KDC-Carolina Investments 3, LP pursuant to which KDC constructed and leased to us an approximately 80,000 square foot building in Rock Hill, South Carolina. Under the terms of this lease, KDC agreed to lease the building to us for an initial 15-year term following completion. See Note 12 to the Consolidated Financial Statements. We took occupancy of the building in November 2006.
After its initial term, the lease provides us with the option to renew the lease for two additional five-year terms as well as the right to cause KDC, subject to certain terms and conditions, to expand the leased premises during the term of the lease, in which case the term of the lease would be extended. The lease is a triple net lease and provides for the payment of base rent of approximately $0.7 million annually from 2011 through 2020, including a rent escalation in 2016, and $0.8 million in 2021. Under the terms of the lease, we will be obligated to pay all taxes, insurance, utilities and other operating costs with respect to the leased premises.
The lease also grants us the right to purchase the leased premises and undeveloped land surrounding the leased premises on terms and conditions described more particularly in the lease.
In accordance with ASC 840, Leases, we are considered an owner of the property. Therefore, we have recorded $8.3 million and $8.5 million at December 31, 2010 and 2009, respectively, as building in our consolidated balance sheet with a corresponding capitalized lease obligation in the liabilities section of the consolidated balance sheet. See Note 12 to the consolidated financial statements.
Our outstanding capitalized lease obligations at December 31, 2010 and December 31, 2009 were as follows:
Capitalized lease obligations of $8.3 million at December 31, 2010 decreased from $8.5 million at December 31, 2009 primarily due to scheduled payments of principal on capital lease installments.
We lease certain other facilities under non-cancelable operating leases expiring through 2013. The leases are generally on a net-rent basis, under which we pay taxes, maintenance and insurance. We expect leases that expire to be renewed or replaced by leases on other properties. Rental expense for the years ended December 31, 2010, 2009 and 2008 was $2.0 million, $1.7 million and $1.9 million, respectively.
Other contractual commitments
As of December 31, 2010, we have supply commitments for first quarter of 2011 printer assembly that total $9.3 million.
For certain of our recent acquisitions, we are obligated for the payment of deferred purchase price totaling $3.7 million 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 amount of liabilities recorded for these earnouts is $3.3 million. See Note 3 for details of acquisitions and related commitments.
In the normal course of business we periodically enter into agreements to indemnify customers or suppliers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant. 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, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is, or was, serving at our request in such capacity, subject to limited exceptions. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have directors and officers insurance coverage that enables us to recover future amounts paid, subject to a deductible and the policy limits.
We do not utilize any structured debt, special purpose or similar unconsolidated entities for liquidity or financing purposes.
We conduct business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, we are 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, we endeavor to match assets and liabilities in the same currency on our balance sheet and those of our subsidiaries in order to reduce these risks. We also,
when we consider it to be appropriate, enter into foreign currency contracts to hedge exposures arising from those transactions.
We do not hedge for trading or speculative purposes, and our foreign currency contracts are generally short-term in nature, typically maturing in 90 days or less. We have elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging, and therefore, we recognize all gains and losses (realized or unrealized) in interest and other income (expense), net in our Consolidated Statements of Operations and Other Comprehensive Income (Loss).
There were no foreign exchange contracts outstanding at December 31, 2010. The net fair value of all foreign exchange contracts at December 31, 2009 reflected a nominal unrealized loss at December 31, 2009. The foreign currency contracts outstanding at December 31, 2009 expired at various times between January 6, 2010 and February 3, 2010. See Note 20 to the Consolidated Financial Statements.
Changes in the fair value of derivatives are recorded in interest and other income (expense), net, in our Consolidated Statements of Operations and Other Comprehensive Income (Loss). Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid and other current assets or in accrued liabilities in our Consolidated Balance Sheets.
The total impact of foreign currency related items on our Consolidated Statements of Operations and Comprehensive Income (Loss) was a $0.3 million loss for 2010, a $0.1 million loss for 2009 and a $0.4 million gain for 2008.
The discussion and analysis of our results of operations and financial condition set forth in this Form 10-K is based on our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make critical accounting estimates that directly impact our Consolidated Financial Statements and related disclosures.
Critical accounting estimates are estimates that meet two criteria:
On an ongoing basis, we evaluate our estimates, including those related to stock-based compensation, revenue recognition, the allowance for doubtful accounts, income taxes, inventories, goodwill and other intangible and long-lived assets and contingencies. We base our estimates and assumptions on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following paragraphs discuss the items that we believe are the critical accounting policies most affected by significant management estimates and judgments. Management has discussed and periodically reviews these critical accounting policies, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the Audit Committee of the Board of Directors.
Revenue from the sale of printers and related products and print materials is recognized upon shipment or when services are performed, provided that persuasive evidence of a sales arrangement exists, both title and risk of loss have passed to the customer and collection is reasonably assured. Persuasive evidence of a sales
arrangement exists upon execution of a written sales agreement or a signed purchase order that constitutes a fixed and legally binding commitment between us and the buyer. In instances where sales are made to an authorized reseller, the same criteria cited above is applied to determine the recognition of revenue. The resellers creditworthiness is evaluated prior to such sale. The reseller takes ownership of the related printers, products or materials and payment is not dependent upon the resellers sale to an end user.
Sales of our printers generally include equipment, a software license, a warranty on the equipment, training and installation. For arrangements with multiple deliverables, revenues are recognized based on an allocation of the total amount of the arrangement to the separate units of accounting based on fair value of vendor-specific objective evidence (VSOE), as determined by the price charged for the undelivered items when sold separately. We also evaluate the impact of undelivered items on the functionality of delivered items for each sales transaction and, where appropriate, defer revenue on delivered items when that functionality has been affected. Functionality is determined to be met if the delivered products or services represent a separate earnings process.
Revenue from services is recognized at the time of performance. Training revenue is recognized after training is complete, and installation revenue is recognized after the installation is accepted. We provide end-users with maintenance under a warranty agreement for up to one year and defer a portion of the revenue from the related printers sale at the time of sale based on the relative fair value of those services as determined by VSOE. After the initial warranty period, we offer these customers optional maintenance contracts. Deferred maintenance revenue is recognized ratably, on a straight-line basis, over the period of the contract.
We sell equipment with embedded software to our customers. The embedded software is not sold separately, it is not a significant focus of the marketing effort and we do not provide post-contract customer support specific to the software or incur significant costs that are within the scope of the FASB Accounting Standards Codification (ASC) 985, Software. Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole such that ASC 985 is not applicable. Sales of these products are recognized in accordance with ASC 605.25, Multiple-Element Arrangements.
Shipping and handling costs billed to customers for equipment sales are included in product revenue in the Consolidated Statement of Operations and Comprehensive Income (Loss). Costs we incur that are associated with shipping and handling are included in product cost of sales in the Consolidated Statement of Operations and Comprehensive Income (Loss).
Credit is extended, and creditworthiness is determined, based on an evaluation of each customers financial condition. New customers are generally required to complete a credit application and provide references and bank information to facilitate an analysis of creditworthiness. Customers with a favorable profile may receive credit terms based on that profile that differ from our general credit terms. Creditworthiness is considered, among other things, in evaluating our relationship with customers with past due balances.
Our terms of sale generally require payment within 30 to 60 days after shipment of a product although we also recognize that longer payment periods are customary in some countries in which we transact business. To reduce credit risk in connection with printers sales, we may, depending upon the circumstances, require significant deposits prior to shipment and may retain a security interest in a system sold until fully paid. In some circumstances, we may require payment in full for our products prior to shipment and may require international customers to furnish letters of credit. For services, we either bill customers on a time-and-materials basis or sell customers service agreements that are recorded as deferred revenue and provide for payment in advance on either an annual or other periodic basis.
In evaluating the collectability of our accounts receivable, we assess a number of factors, including a specific clients ability to meet its financial obligations to us, such as whether a customer declares bankruptcy. Other factors include the length of time the receivables are past due and historical collection experience.
Based on these assessments, we record a reserve for specific customers as well as a general reserve based on our historical experience for bad debts. If circumstances related to specific customers change, or economic conditions deteriorate such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided for in the Consolidated Financial Statements.
Our estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved.
First, we evaluate specific accounts where we have information that the customer may have an inability to meet our financial obligations (for example, aging over 90 days past due or bankruptcy). In these cases, we use our judgment, based on available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved.
Second, a general reserve is established for all customers based on historical collection and write-off experience.
Our estimate of the allowance for doubtful accounts for financing receivables is determined by evaluating specific accounts for which the borrower is past due more than 90 days, or for which it has information that the borrower may be unable to meet its financial obligations (for example, bankruptcy). In these cases, we use judgment, based on the available facts and circumstances, and record a specific reserve for that borrower against amounts due to reduce the outstanding receivable balance to the amount that is expected to be collected. If there are any specific reserves, they are re-evaluated and adjusted as additional information is received that impacts the amount reserved.
We also provide an allowance account for returns and discounts. This allowance is evaluated on a specific account basis. In addition, we provide a general reserve for all customers that have not been specifically identified based on historical experience.
Our bad debt expense decreased to $0.1 million in 2010 from $0.9 million in 2009; the higher expense in 2009 includes a provision for a large Japanese customer who filed for reorganization in February 2009. As of December 31, 2010, all amounts owed by this customer are fully reserved.
Our allowance for doubtful accounts increased to $2.0 million at December 31, 2010 from $1.8 million at December 31, 2009. This change resulted primarily from an increase in receivables over 90 days past due. We believe that our allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change and dependent upon events that may or may not occur and because the impact of recognizing additional allowances for doubtful accounts may be material to the assets reported on our balance sheet and in our results of operations.
We and our domestic subsidiaries file a consolidated U.S. federal income tax return. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We provide for income taxes on those portions of our foreign subsidiaries accumulated earnings that we believe are not reinvested indefinitely in their businesses.
We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred income tax liabilities and assets at the end of each period are determined using enacted tax rates.
We record deferred income tax assets arising from temporary differences between recorded net income and taxable net income when and if we believe that future earnings will be sufficient to realize the tax benefit.
We provide a valuation allowance for those jurisdictions and on those deferred tax assets where the expiration date of tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely.
Under the provisions of ASC 740, Income Taxes, a valuation allowance is required to be established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred income tax asset will not be realized. ASC 740 provides that an important factor in determining whether a deferred income tax asset will be realized is whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred income tax asset.
During the fourth quarter of 2010, based on our recent results of operations and our expected profitability in the future, we concluded that it is more likely than not that a portion of our U.S. net deferred tax asset will be realized. See Note 21 to the Consolidated Financial Statements.
We believe that our estimate of deferred income tax assets and our maintenance of a valuation allowance against such assets are critical accounting estimates because they are subject to, among other things, an estimate of future taxable income in the U.S. and in other non-U.S. tax jurisdictions, which are susceptible to change and dependent upon events that may or may not occur, and because the impact of our valuation allowance may be material to the assets reported on our balance sheet and in our results of operations. We intend to continue to assess our valuation allowance in accordance with the requirements of ASC 740.
The determination of our income tax provision is complex because we have operations in numerous tax jurisdictions outside the U.S. that are subject to certain risks that ordinarily would not be expected in the U.S. Tax regimes in certain jurisdictions are subject to significant changes, which may be applied on a retroactive basis. If this were to occur, our tax expense could be materially different than the amounts reported.
We periodically estimate the probable tax obligations using historical experience in tax jurisdictions and our informed judgment. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to, or further interpretations of, regulations. Income tax expense is adjusted in the period in which these events occur, and these adjustments are included in our Consolidated Statements of Operations and Other Comprehensive Income (Loss). If such changes take place, there is a risk that our effective tax rate may increase or decrease in any period.
Inventories are stated at the lower of cost or net realizable value, cost being determined predominantly on the first-in, first-out method. Reserves for inventories are provided based on historical experience and current product demand. Our inventory reserve was $2.2 million at December 31, 2010 compared with $2.7 million at December 31, 2009. We evaluate the adequacy of these reserves quarterly. Our determination of the allowance for inventory reserves is subject to change because it is based on managements current estimates of required reserves and potential adjustments.
We believe that the allowance for inventory obsolescence is a critical accounting estimate because it is susceptible to change and dependent upon events that may or may not occur and because the impact of recognizing additional obsolescence reserves may be material to the assets reported on our balance sheet and in our results of operations.
We evaluate long-lived assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
The annual impairment testing required by ASC 350, Intangibles Goodwill and Other, requires us to use our judgment and could require us to write down the carrying value of our goodwill and other intangible assets in future periods. As required by ASC 350, we have allocated goodwill to identifiable geographic reporting units, which are tested for impairment using a two-step process detailed in that statement. See Notes 6 and 7 to the Consolidated Financial Statements. The first step requires comparing the fair value of each reporting unit with our carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not required to be performed and no impairment charge is required to be recorded. If that fair value does not exceed the carrying amount, we must perform the second step, which requires an allocation of the fair value of the reporting unit to all assets and liabilities of that unit as if the reporting unit had been acquired in a purchase business combination and the fair value of the reporting unit was the purchase price. The goodwill resulting from that purchase price allocation is then compared to the carrying amount with any excess recorded as an impairment charge.
Goodwill set forth on the Consolidated Balance Sheet as of December 31, 2010 arose from acquisitions carried out in 2010 and 2009 and in years prior to 2007. Goodwill arising from acquisitions prior to 2009 was allocated to geographic reporting units based on the percentage of SLS® printers then installed by geographic area. Goodwill arising from acquisitions since 2009 was allocated to geographic reporting units based on geographic dispersion of the acquired companies sales at the time of their acquisition.
Pursuant to the requirements of ASC 350, we are required to perform a valuation of each of our three geographic reporting units annually, or upon significant changes in our business environment. We conducted our annual impairment analysis in the fourth quarter of 2010. To determine the fair value of each reporting unit we utilized discounted cash flows, using five years of projected unleveraged free cash flows and terminal EBITDA earnings multiples. The discount rates used for the analysis reflected a weighted average cost of capital based on industry and capital structure adjusted for equity risk premiums and size risk premiums based on market capitalization. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. We also considered the current trading multiples of comparable publicly-traded companies and the historical pricing multiples for comparable merger and acquisition transactions that have occurred in the industry. Under each fair value measurement methodology considered, the fair value of each reporting unit exceeded its carrying value; accordingly, no goodwill impairment adjustments were recorded on our Consolidated Balance Sheet.
The control premium that a third party would be willing to pay to obtain a controlling interest in 3D Systems Corporation was considered when determining fair value. In addition, factors such as the performance of competitors were also considered. Management concluded that there was a reasonable basis for the excess of the estimated fair value of the geographic reporting units over its market capitalization.
The estimated fair value of the three geographic reporting units incorporated judgment and the use of estimates by management. Potential factors requiring assessment include a further or sustained decline in our stock price, variance in results of operations from projections, and additional acquisition transactions in the industry that reflect a lower control premium. Any of these factors may cause us to re-evaluate goodwill during any quarter throughout the year. If an impairment charge were to be taken for goodwill it would be a non-cash charge and would not impact our cash position or cash flows, however such a charge could have a material impact to equity and the Consolidated Statement of Operations and Comprehensive Income (Loss).
There was no goodwill impairment for the years ended December 31, 2010, 2009 or 2008.
We will evaluate the fair value of long-lived assets in accordance with ASC 360, Property, Plant and Equipment if events transpire to indicate potential impairment. No impairment loss was recorded for the periods presented.
Determining the fair value of a reporting unit, intangible asset or a long-lived asset is judgmental and involves the use of significant estimates and assumptions. Management bases its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.
ASC 718, Compensation Stock Compensation, requires the recognition of the fair value of stock-based compensation. Under the fair value recognition provisions of ASC 718, stock-based compensation is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. See Note 14 to the Consolidated Financial Statements.
We account for contingencies in accordance with ASC 450, Contingencies. ASC 450 requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires us to use our judgment.
See Note 2 to our Consolidated Financial Statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our consolidated financial statements upon adoption.
We are exposed to market risk from fluctuations in interest rates, foreign currency exchange rates, and commodity prices, which may adversely affect our results of operations and financial condition. We seek to minimize these risks through regular operating and financing activities and, when we consider it to be appropriate, through the use of derivative financial instruments. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
Our exposure to market risk for changes in interest rates relates primarily to our cash and cash investments. We seek to minimize the risk to our cash and cash investments by investing cash in excess of our operating needs in short-term, high-quality instruments issued by highly creditworthy financial institutions, corporations or governments. With the amount of cash and cash equivalents that we maintained at December 31, 2010, a hypothetical interest rate change of 1 percentage point or 100 basis points would have a $0.4 million effect on our financial position and results of operations.
From time to time, we may use derivative financial instruments, including interest rate swaps, collars or options, to manage our exposure to fluctuations in interest rates. At December 31, 2010, we had no such financial instruments outstanding.
In December 2008, we sold our Grand Junction, Colorado facility for $5.5 million, consisting of $3.5 million of cash proceeds (before deducting closing costs) and a zero interest five-year promissory note from the buyer. The Company discounted the note receivable by $1.0 million, reducing the net gain on the sale to $0.6 million. In accordance with ASC 360.20 Real Estate Sales, the Company has not recognized this gain on the sale of its Grand Junction facility as of December 31, 2010. The carrying value of the long-term receivable, net of the discount and deferred gain is recorded in Other assets, net. None of the gain will be recognized until the earlier of (i) the sale of the property securing the note by the buyer, or (ii) repayment of the promissory note by the buyer.
The note is secured by (i) a guarantee from the principals of the entity that purchased the facility and (ii) a second deed of trust on the facility. There are no past due amounts outstanding on the note as of
December 31, 2010, and accordingly, the Company has not recorded an allowance for credit losses or impairment charges.
The fair value of fixed-rate financial instruments varies with changes in interest rates. Generally, the fair value of these fixed-rate instruments will increase as interest rates fall and decrease as interest rates rise. The carrying amount and estimated fair value of the Grand Junction note receivable at December 31, 2010 was $1.3 million and $1.4 million, respectively.
The fair value of the Grand Junction note receivable at December 31, 2010 was determined by evaluating the nature and terms of the instrument and considering prevailing economic and market conditions. The interest rate used to discount the contractual payments associated with the Grand Junction note receivable was 14.49%. This rate was derived by taking the risk-free interest rate for similar maturities and adding an estimated risk premium intended to reflect the credit risk. See Note 10 to the Consolidated Financial Statements. Such estimates are subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could significantly affect our estimates.
We transact business globally and are subject to risks associated with fluctuating foreign exchange rates. More than 50% of our consolidated revenue is derived from sales outside of the U.S. See Business Global Operations above. This revenue is generated primarily from the operations of our foreign sales subsidiaries in their respective countries and surrounding geographic areas and the operations of our research and production subsidiary in Switzerland, and is denominated in each subsidiarys local functional currency although certain sales are denominated in other currencies, including U.S. dollars or Euros, rather than the local functional currency. These subsidiaries incur most of their expenses (other than intercompany expenses) in their local functional currencies. These currencies include the Euro, British Pound, Swiss Franc and Japanese Yen.
The geographic areas outside the U.S. in which we operate are generally not considered to be highly inflationary. Nonetheless, these foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain intercompany transactions that are generally denominated in U.S. dollars rather than in their respective functional currencies. Our operating results as well as our assets and liabilities are also subject to the effects of foreign currency translation when the operating results, assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our Consolidated Financial Statements.
The total impact of foreign currency related items on our Consolidated Statements of Operations and Other Comprehensive Income (Loss) was a $0.3 million loss for 2010, a $0.1 million loss for 2009 and a $0.4 million gain for 2008. The unrealized effect of foreign currency translation that was recorded in stockholders equity as other comprehensive income was a $0.4 million gain in 2010, nominal in 2009 and a $1.0 million gain in 2008. At December 31, 2010, a hypothetical change of 10% in foreign currency exchange rates would cause an $8.7 million change in revenue in our Consolidated Statement of Operations and Comprehensive Income (Loss) assuming all other variables were held constant.
We and our subsidiaries conduct business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions. As a result, we and our subsidiaries are 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, we endeavor to match assets and liabilities in the same currency on our U.S. balance sheet and those of our subsidiaries in order to reduce these risks. We also, when we consider it to be appropriate, enter into foreign currency contracts to hedge exposures arising from those transactions.
We do not hedge for trading or speculative purposes, and our foreign currency contracts are generally short-term in nature, typically maturing in 90 days or less. We have elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging, and therefore, we recognize all gains and losses (realized or unrealized) in interest and other income (expense), net in our Consolidated Statements of Operations and Comprehensive Income (Loss).
The dollar equivalents of our foreign currency contracts and their related fair values as of December 31, 2010 and 2009 were as follows:
At December 31, 2009, the notional amount of these contracts at their respective settlement dates amounted to $1.6 million. These contracts related to purchases of inventory from third parties. The notional amount of the purchase contracts related to purchases aggregated CHF 1.6 million (equivalent to $1.6 million, respectively, at settlement date.)
The net fair value of all foreign exchange contracts reflected nominal unrealized losses at December 31, 2009. Changes in the fair value of derivatives are recorded in interest and other income (expense), net in our Consolidated Statements of Operations and Comprehensive Income (Loss). Depending on their fair value at the end of the reporting period, derivatives are recorded either in prepaid and other current assets or in accrued liabilities in our Consolidated Balance Sheet.
We are exposed to credit risk if the counterparties to such transactions are unable to perform their obligations. However, we seek to minimize such risk by entering into transactions with counterparties that are believed to be creditworthy financial institutions.
As noted above, we may use derivative financial instruments, including foreign exchange forward contracts and foreign currency options, to fix or limit our exposure to currency fluctuations. We do not hedge our foreign currency exposures in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our consolidated net income or loss.
We use various commodity raw materials and energy products in conjunction with our printer assembly and print materials blending processes. Generally, we acquire such components at market prices and do not use financial instruments to hedge commodity prices. As a result, we are exposed to market risks related to changes in commodity prices of these components. At December 31, 2010, a hypothetical 10% change in commodity prices for raw materials would cause approximately a $0.6 million change to cost of sales in our Consolidated Statement of Operations and Comprehensive Income (Loss).
Our Consolidated Financial Statements set forth below on pages F-1 through F-44 are incorporated herein by reference.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) are controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures.
As of December 31, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act.)) pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. These controls and procedures were designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures. Based on this evaluation, including an evaluation of the rules referred to above in this Item 9A, management has concluded that our disclosure controls and procedures were effective as of December 31, 2010 to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding required disclosures.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting is supported by written policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that our receipts and expenditures are being made and recorded only in accordance with authorizations of our management and provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
In connection with the preparation of this Form 10-K, with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2010.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
BDO USA, LLP, the independent registered public accounting firm who audited our consolidated financial statements included in this Form 10-K, has issued a report on our internal control over financial reporting, which is included in Item 8 of this Form 10-K.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The information required in response to this Item will be set forth in our Proxy Statement for our 2011 Annual Meeting of Stockholders under the captions Election of Directors, Corporate Governance Matters, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance Matters Code of Conduct and Code of Ethics, Corporate Governance Matters Corporate Governance and Nominating Committee, and Corporate Governance Matters Audit Committee. Such information is incorporated herein by reference.
The information in response to this Item will be set forth in our Proxy Statement for our 2011 Annual Meeting of Stockholders under the captions Director Compensation, Executive Compensation, Corporate Governance Matters Compensation Committee, and Executive Compensation Compensation Committee Report. Such information is incorporated herein by reference.
Except as set forth below, the information required in response to this Item will be set forth in our Proxy Statement for our 2011 Annual Meeting of Stockholders under the caption Security Ownership of Certain Beneficial Owners and Management. Such information is incorporated herein by reference.
The following table summarizes information about the equity securities authorized for issuance under our compensation plans as of December 31, 2010. For a description of these plans, please see Note 14 to the Consolidated Financial Statements.
The information required in response to this Item will be set forth in our Proxy Statement for our 2011 Annual Meeting of Stockholders under the captions Corporate Governance Matters Director Independence and Corporate Governance Matters Related Party Transaction Policies and Procedures. Such information is incorporated herein by reference.
The information in response to this Item will be set forth in our Proxy Statement for our 2011 Annual Meeting of Stockholders under the caption Fees of Independent Registered Public Accounting Firm. Such information is incorporated herein by reference.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
3D Systems Corporation
Abraham N. Reichental
President and Chief Executive Officer
Date: February 17, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant and in the capacities and on the dates indicated.
3D Systems Corporation
Index to Consolidated Financial Statements
To the Stockholders and Board of Directors
3D Systems Corporation
Rock Hill, South Carolina
We have audited 3D Systems Corporation and its subsidiaries (the Company) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 3D Systems Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, 3D Systems Corporation did maintain, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 3D Systems Corporation and its subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss), stockholders equity and cash flows for each of the three years in the period ended December 31, 2010 and our report dated February 17, 2011 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
BDO USA, LLP
Charlotte, North Carolina
February 17, 2011
To the Stockholders and Board of Directors of
3D Systems Corporation
Rock Hill, South Carolina
We have audited the accompanying consolidated balance sheets of 3D Systems Corporation and its subsidiaries (the Company) as of December 31, 2010 and 2009 and the related consolidated statements of operations and comprehensive income (loss), stockholders equity and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 3D Systems Corporation and its subsidiaries as of December 31, 2010 and 2009 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Criteria) and our report dated February 17, 2011 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
BDO USA, LLP
Charlotte, North Carolina
February 17, 2011
3D Systems Corporation
As of December 31, 2010 and 2009
See accompanying notes to consolidated financial statements.
3D Systems Corporation
Years Ended December 31, 2010, 2009 and 2008
See accompanying notes to consolidated financial statements.
3D Systems Corporation
Years Ended December 31, 2010, 2009 and 2008
Accumulated other comprehensive income of $4,958 consists of a cumulative unrealized gain on pension plan of $65 and foreign currency translation gain of $4,893.
See accompanying notes to consolidated financial statements.
3D Systems Corporation
Years Ended December 31, 2010, 2009 and 2008
See accompanying notes to consolidated financial statements.
3D Systems Corporation
The consolidated financial statements include the accounts of 3D Systems Corporation and all majority-owned subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. The Companys annual reporting period is the calendar year.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications include $401 of foreign exchange gain for the year ended December 31, 2008, that had previously been included in product cost of sales, to interest and other expense, net in the Companys consolidated statements of operations and other comprehensive income (loss). This had the effect of decreasing the Companys previously reported gross profit and interest and other expense, net for 2008 by $401 and of increasing operating loss by the same amounts. It did not affect any of the other line items on the Companys consolidated statements of operations and other comprehensive income (loss) for 2008.