Proto Labs, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. Proto Labs provides digitally enabled custom prototyping and on-demand manufacturing, including injection molding, CNC machining, 3D printing, and sheet metal fabrication. Comparisons are with 2017; 2018 results reflect adoption of ASC 606, while prior periods were not restated.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $109.7 million | $82.0 million | $217.4 million | $162.2 million |
| Gross profit / margin | $59.2 million / 54.0% | $46.4 million / 56.5% | $117.1 million / 53.9% | $91.6 million / 56.5% |
| Operating income / margin | $22.0 million / 20.0% | $16.4 million / 20.0% | $43.7 million / 20.1% | $34.1 million / 21.1% |
| Net income | $18.3 million | $12.1 million | $36.4 million | $24.3 million |
| Diluted EPS | $0.67 | $0.45 | $1.34 | $0.91 |
- Q2 revenue rose 33.7% and net income rose 51.5%; six-month revenue rose 34.0% and net income rose 49.7%. Lower effective tax rates materially supported earnings growth: 19.6% in Q2 and 18.6% for the half, versus 31.2% and 31.7%, respectively.
- Q2 revenue growth included CNC machining (+56.3%), 3D printing (+21.8%), injection molding (+10.2%), and $6.3 million of sheet-metal revenue. CNC, sheet metal, and other revenue growth was partly attributable to the November 2017 RAPID acquisition. The company served 19,198 web-interface customers in Q2, up 18.7% year over year.
- Q2 gross margin fell 2.5 percentage points, primarily due to revenue timing and mix and the RAPID acquisition. Cost of revenue increased 41.4%, faster than revenue, reflecting materials, labor, and capacity costs. Operating margin was unchanged at 20.0%.
- For the six months, operating cash flow was $59.3 million, versus $39.4 million. Investing cash outflow was $31.1 million, including $43.2 million of property and equipment purchases; financing cash outflow was $1.7 million, including repayment of $5.0 million of debt.
- At June 30, cash and cash equivalents were $62.6 million and marketable securities totaled $82.3 million. Current assets were $193.4 million and current liabilities $44.4 million. No short-term debt remained; the company said it repaid its acquisition-related credit-facility borrowing during Q1. Total liabilities were $59.9 million.
Changes, outlook, and risks
- Growth was broad across geographies and product lines; U.S. revenue was up 36.3% in Q2. Foreign exchange added approximately $1.5 million to Q2 international revenue and $4.2 million for the first half. Management reported foreign-currency losses of $0.3 million for both the quarter and half-year and does not hedge this exposure; a hypothetical 10% adverse exchange-rate move could materially affect operating results.
- Management expects cost of revenue to rise in dollars but remain relatively constant as a share of revenue, and expects operating expenses to increase as it invests in personnel, marketing, technology, and product expansion. No specific revenue or earnings guidance was provided.
- The Tax Cuts and Jobs Act lowered the U.S. federal corporate rate, contributing to lower 2018 effective tax rates. The company had not completed its accounting for the Act and expected to complete it during 2018. It also adopted ASC 606 using the modified-retrospective method, recording a $1.5 million opening retained-earnings increase; reported-period effects were described as small.
- Other notable items included a $0.7 million gain on the sale of RAPID Wire & Cable, LLC, partly included in other income. Management said there were no material changes to previously disclosed risk factors and no litigation expected to have a material adverse effect. Disclosure controls were considered effective.
Important facts for investors to verify
- How much of reported growth reflects underlying demand versus RAPID, foreign exchange, and the newly reported sheet-metal business.
- Whether gross-margin pressure eases as acquisition mix, production costs, and capacity investments evolve.
- Expected returns and timing from the substantial capital spending, and continued cash generation after investment needs.
- Final tax-law accounting and the sustainability of the lower effective tax rate, including stock-award-related tax benefits.
- Exposure to unhedged foreign currencies and any subsequent changes in tax, legal, or other disclosed risks.