Proto Labs, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Proto Labs provides digital manufacturing services for custom prototypes and on-demand production parts, including injection molding, CNC machining, 3D printing and sheet metal fabrication. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Revenue | $115.4 | $88.1 | $332.8 | $250.3 |
| Gross profit / margin | $62.4 / 54.1% | $49.3 / 56.0% | $179.5 / 53.9% | $141.0 / 56.3% |
| Operating income / margin | $25.0 / 21.7% | $19.4 / 22.0% | $68.7 / 20.6% | $53.5 / 21.3% |
| Net income | $20.9 | $13.2 | $57.3 | $37.5 |
| Diluted EPS | $0.77 | $0.49 | $2.10 | $1.40 |
| Operating cash flow | Not separately stated | Not separately stated | $85.0 | $59.0 |
- Q3 revenue rose 31.0%; nine-month revenue rose 33.0%. Q3 net income increased 58.4%, and nine-month net income increased 52.8%.
- At September 30, cash and cash equivalents were $62.6, with $90.8 of marketable securities ($57.6 short-term and $33.2 long-term). Total cash and marketable securities were approximately $153.0. Current assets were $200.5 and current liabilities $49.4.
- The company had no short-term debt at September 30, after repaying $5.0 of debt during the first quarter. Total liabilities were $64.7.
- Nine-month investing cash outflow was $58.5, including $61.9 of property, equipment and other capital purchases; financing cash inflow was $0.2. Cash increased $25.9 from year-end 2017.
Material changes and drivers
- Growth reflected higher customer volumes, sales and marketing activity, and the November 2017 RAPID acquisition. Q3 unique web customers increased 23% to 20,792; the nine-month count increased 24% to 38,823.
- Q3 product-line revenue was $53.7 injection molding, $40.8 CNC machining, $13.8 3D printing and $6.5 sheet metal. CNC machining grew 50.4% year over year; sheet metal revenue reflects the RAPID business and had no comparable 2017 revenue.
- Gross margin declined 1.9 percentage points in Q3 and 2.4 points year to date. Management attributed the decline mainly to revenue timing and mix, with RAPID a primary factor. Cost of revenue grew faster than revenue, reflecting raw materials, direct labor, and equipment and facility costs.
- Operating expenses increased 24.8% in Q3 and 26.6% year to date, mainly due to headcount and growth-related costs; year-to-date general and administrative expense also included higher amortization and administrative costs.
- The effective tax rate declined to 17.6% in Q3 from 32.8%, and to 18.3% for nine months from 32.1%, primarily due to U.S. tax reform and tax benefits from equity award vesting and option exercises.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects operating expenses to rise with continued investment in technology, personnel, marketing, product offerings and global expansion. It expects cost of revenue to increase in dollars but remain relatively constant as a share of revenue.
- The company said it expected a lower effective tax rate under current tax laws. Accounting for the 2017 Tax Cuts and Jobs Act was not complete as of September 30; management expected to complete it during 2018.
- Foreign currency exposure is unhedged. Management said a hypothetical 10% adverse exchange-rate movement could materially affect operating results, though it generally would not materially affect financial position. Currency movements reduced international revenue by $0.2 in Q3 but increased it by $4.0 year to date.
- Other income for the nine months included a $0.7 gain from the sale of RAPID Wire & Cable; the period also included a $0.2 loss on an asset sale. Q3 other income included investment interest and a loss on an asset sale.
- Management reported no material changes to previously disclosed risk factors and did not expect pending ordinary-course legal matters to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, adding $1.5 to opening retained earnings. It increased Q3 revenue by $1.3 and cost of revenue by $0.6; prior-year comparisons were not restated.
Important facts for investors to verify
- How much of revenue growth came from organic demand versus RAPID, and whether customer growth converts into sustained sales.
- Whether gross margin stabilizes as product mix, acquisition integration and capacity utilization evolve.
- The returns and future cash-flow effects of the sharply higher capital spending, and the company’s continued ability to fund it internally.
- Potential sensitivity of results to foreign exchange movements and the final tax-reform accounting.
- The comparability effects of ASC 606 and the contribution of the RAPID-related sale gain to reported non-operating income.