3D Systems Reports Operating Results


The decline in gross profit for the second quarter and first six months of 2006 was due primarily to the combined effects of lower revenue, the ERP system, supply chain and logistics disruptions that the company encountered and a $0.4 million charge that the company included in cost of sales in the second quarter of 2006 to reconcile differences in inventory recorded in its legacy systems to the inventory values in its new ERP system. Also in the second quarter of 2006 the company extended special accommodations to certain customers whose orders for products, services or repairs to systems were delayed by the disruptions the company encountered with its ERP system and logistics activities or who encountered stability issues with their equipment installations that the company was not able to quickly address as a result of resource constraints on its service organization.

                         Gross Profit Margins
                           ($ in millions)
----------------------------------------------------------------------
                                Second Quarter     First Six Months
                             -----------------------------------------
                             2006  2005 % Change  2006  2005 % Change
----------------------------------------------------------------------
Products                     $6.5 $10.4    (38%)  $18.1 $20.4    (11%)
   % Revenue                   33%   46%            41%   47%   
----------------------------------------------------------------------
Services                     $1.6  $3.9    (59%)   $4.0  $7.0    (43%)
    % Revenue                  19%   39%            22%   34%    
----------------------------------------------------------------------
Total                        $8.1 $14.3    (43%)  $22.1 $27.4    (19%)
    % Revenue                  29%   44%            36%   43%   
----------------------------------------------------------------------


Gross profit margin on products decreased to 33% in the second quarter of 2006 from 46% for the second quarter of 2005. Gross profit margin for products sold in the first six months of 2006 decreased to 41% from 47% for the first six months of 2005. The decrease in margins reflects higher warranty expense as a result of items previously discussed, special customer accommodations and higher freight costs. Margins were negatively impacted by lower revenue from higher margin systems.

Gross profit margin on services decreased to 19% of consolidated service revenue for the second quarter of 2006 from 39% of consolidated service revenue for the second quarter of 2005. Gross profit margin on services decreased to 22% of consolidated service revenue for the first six months of 2006 from 34% of consolidated service revenue for the first six months of 2005. Service margins continued to be impacted by the strains on resources related to installation, service and training that resulted in foregone service income from time and materials service activities. Service margins were also impacted by the lower sales of upgrades for older legacy systems, some of which the company has previously announced that it would no longer support.

                          Operating Expenses
                           ($ in millions)
----------------------------------------------------------------------
                               Second Quarter      First Six Months
                            ------------------------------------------
                             2006  2005 % Change  2006  2005 % Change
----------------------------------------------------------------------
SG&A                        $10.7  $9.9       8% $20.5 $18.6       10%
----------------------------------------------------------------------
R&D                          $3.0  $2.7      10%  $6.2  $5.4       16%
----------------------------------------------------------------------
Severance and restructuring  $2.3    NM      NM   $3.9    NM       NM
----------------------------------------------------------------------
Total                       $16.0 $12.6      27% $30.6 $24.0       28%
----------------------------------------------------------------------


Total operating expenses increased by $3.4 million or 27% to $16.0 million in the second quarter of 2006 compared to $12.6 million in the second quarter of 2005 and by $6.6 million or 28% to $30.6 million in the first six months of 2006 compared to $24.0 million in the first six months of 2005.

Operating expenses in the second quarter of 2006 amounted to 57% of revenue in that quarter compared to 38% of revenue in the second quarter of 2005. The increase in operating expenses as a percentage of revenue primarily reflects the company's lower level of revenue in the 2006 quarter. The increase in operating expenses was due primarily to $2.3 million of severance and restructuring costs related to the relocation of the company's headquarters to Rock Hill, South Carolina, which were generally in line with the company's previously announced expectations, $0.8 million of higher selling, general and administrative expenses, and $0.3 million of higher research and development expenses.

Operating expenses in the first six months of 2006, amounted to 50% of revenue in that period compared to 38% of revenue in the first six months of 2005. More than half of this increase in operating expenses related to $3.9 million of severance and restructuring costs, which were generally in line with the company's previously announced expectations, $1.9 million of higher selling, general and administrative expenses, and $0.8 million of higher research and development expenses.

The higher research and development expenses in each period related to the company's continuing high level of new product development work. The higher selling, general and administrative expenses in each period resulted mostly from higher consulting expenses primarily related to the company's ERP and relocation projects, higher bad debt expense, and equity compensation expense related to unvested options, partially offset by lower legal expenses.

As a result of the disruptions and adverse effects that it encountered in the second quarter of 2006, the company identified control deficiencies in its procedures for compiling and reconciling its financial records for the second quarter of 2006 and in its procedures for accounting for inventory that it believes constitute individually or in the aggregate a material weakness with respect to those matters. These control deficiencies, and the actions the company is taking diligently to remediate them, are discussed in greater detail in the Quarterly Report on Form 10-Q that the company filed with the SEC today.

"During the second quarter, we experienced a number of temporary challenges relating to the ERP implementation, the start-up of our recently outsourced logistics and warehousing activities, and the relocation of our operations, including the need to hire and train new employees who are not yet fully experienced with our new ERP system or fully familiar with our business," said Abe Reichental, 3D Systems' president and chief executive officer.

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