Proto Labs, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Proto Labs provides on-demand injection molding, CNC machining and 3D printing services through an e-commerce-driven manufacturing model.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $88.1 million | $78.2 million | $250.3 million | $225.7 million |
| Gross profit / margin | $49.3 million / 56.0% | $44.7 million / 57.2% | $141.0 million / 56.3% | $126.6 million / 56.1% |
| Operating income / margin | $19.4 million / 22.0% | $16.9 million / 21.7% | $53.5 million / 21.3% | $46.9 million / 20.8% |
| Net income / margin | $13.2 million / 15.0% | $12.0 million / 15.3% | $37.5 million / 14.9% | $33.3 million / 14.8% |
| Diluted EPS | $0.49 | $0.45 | $1.40 | $1.26 |
- Revenue growth: 12.7% in Q3 and 10.9% year to date. Q3 CNC machining grew 24.7%, 3D printing 12.7%, and injection molding 6.5%. U.S. and Europe revenue rose 13.3% and 15.9% in Q3, respectively; Japan declined 15.7%.
- Cash flow: Nine-month operating cash flow was $59.0 million, versus $58.1 million. Investing used $10.6 million, including $24.2 million of property and equipment purchases, partly offset by marketable-security maturities. Financing provided $1.3 million, including $5.7 million from option exercises and $4.4 million of share repurchases.
- Liquidity and balance sheet: September 30 cash and equivalents were $119.3 million; marketable securities totaled $108.6 million ($53.2 million short-term and $55.4 million long-term). Current assets were $234.8 million and current liabilities $35.8 million. Total liabilities were $47.7 million. The balance sheet presents no borrowings or debt balance.
Material changes and drivers
- Q3 revenue growth was attributed primarily to more customers using the web interface and increased sales and marketing activity. The company served 16,909 unique developers and engineers through that interface, up 18.5% year over year; the nine-month count was 31,307, up 18.0%.
- Q3 gross margin declined 1.2 percentage points as cost of revenue grew 16.0%, faster than revenue, reflecting production costs, labor and capacity costs, and revenue timing and mix. For the first nine months, gross margin improved 0.2 points; management cited productivity improvements.
- Marketing and sales expense rose 17.5% in Q3 and 21.3% year to date, largely from staffing. Nine-month CNC machining and 3D printing growth was 21.2% and 14.3%, while injection molding grew 7.3%. Other revenue fell 72.9% year to date, primarily reflecting the exit from the European resin resale business.
- Foreign exchange had mixed effects: it added $0.4 million to international revenue in Q3 but reduced it by $1.4 million year to date. Other income declined year over year, primarily because of lower foreign-exchange gains.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expects cost of revenue to increase in dollars but remain relatively constant as a share of revenue; it anticipates continued investment in personnel, sales and marketing, and technology, with related operating expenses expected to increase. It expects the effective tax rate to remain relatively constant.
- Foreign currency is a key exposure. The company does not hedge with forward contracts or currency borrowings; it says a hypothetical 10% adverse exchange-rate change could materially affect operating results, though it generally would not materially affect financial position.
- The company reported $4.0 million of reserves for unrecognized tax benefits at quarter-end. It reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- Revenue-recognition standard adoption was expected in 2018 using the modified retrospective method. The company preliminarily expected no material financial-statement impact, while noting its assessment was ongoing. It also reported a favorable $0.4 million legal settlement in nine-month other income.
Important facts for investors to verify
- Whether customer and revenue growth continues, particularly in CNC machining and 3D printing, and whether Japan’s Q3 decline persists.
- Whether Q3 gross-margin pressure reverses as volume, product mix, labor costs and capacity utilization evolve.
- How operating expenses and capital investment develop alongside management’s stated growth plans.
- The eventual quantified effect and disclosures for adoption of the new revenue-recognition standard.
- Foreign-exchange sensitivity, tax reserves and the pace of any further repurchases under the authorized program of up to $50 million through December 31, 2021.