Proto Labs, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Proto Labs provides online, quick-turn custom manufacturing through injection molding, CNC machining, and 3D printing. Results are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $75.0 million | $64.0 million | $147.5 million | $122.5 million |
| Gross profit / margin | $42.2 million / 56.4% | $37.6 million / 58.7% | $81.9 million / 55.5% | $72.8 million / 59.4% |
| Operating income / margin | $14.9 million / 19.8% | $17.3 million / 27.1% | $30.0 million / 20.3% | $33.2 million / 27.1% |
| Net income | $10.7 million | $11.7 million | $21.4 million | $22.1 million |
| Diluted EPS | $0.40 | $0.44 | $0.80 | $0.84 |
- Q2 revenue grew 17.2% year over year; six-month revenue grew 20.4%. Growth reflected more customers served and the October 2015 Alphaform acquisition.
- Q2 product-line revenue: injection molding $44.8 million (+12.1%); CNC machining $19.9 million (+6.8%); 3D printing $9.1 million (+66.9%). International revenue rose 57.5% in Q2, including $4.8 million from Alphaform; U.S. revenue rose 5.2%.
- Operating expenses rose 35.6% in Q2, faster than revenue, with general and administrative expense up 60.6%. Management cited staffing, integration, administrative costs, and investment in growth. Q2 net income declined 8.5% despite revenue growth.
- Six-month operating cash flow was $36.6 million, versus $27.8 million in 2015. Investing cash outflow was $32.0 million, including $22.4 million of property and equipment purchases; financing cash inflow was $5.2 million. Cash increased $9.7 million to $57.3 million.
- At June 30, cash and cash equivalents were $57.3 million and marketable securities totaled $106.9 million. Current assets were $148.4 million versus current liabilities of $23.7 million. Total liabilities were $31.2 million; the balance sheet reports no debt outstanding.
Material changes and management commentary
- Gross margin fell 2.3 percentage points in Q2 and 3.9 points for the first half. The filing attributes the decline primarily to Alphaform integration, added manufacturing capacity, foreign-exchange effects, and accelerated facility depreciation.
- Unique product developers and engineers served, excluding Alphaform customers, increased 14.4% in Q2 and 17.7% for the first half. Average revenue per such customer decreased 4.1% and 4.4%, respectively.
- Management expects cost of revenue to rise in dollars but remain relatively constant as a percentage of revenue; it expects continued investment and increases in operating expenses, including sales and marketing, R&D, and G&A. The filing provides no numerical revenue or earnings guidance.
- The company plans to vacate and move into new U.S. and Japan facilities in 2016, with approximately $0.5 million of additional accelerated depreciation in cost of revenue and approximately $0.2 million in administrative expense expected through year-end.
- Proto Labs decided to discontinue Metal Injection Molding and Magnesium Thixomolding and exit the non-core resin resale business. These activities together represented about 1.8% of Q2 revenue and 2.1% of first-half revenue. The decision resulted in a $0.5 million asset impairment charge.
- Other income included foreign-currency gains of $0.8 million in Q2 and $1.2 million for the first half. Management warns that currency movements can materially affect operating results; it does not hedge this exposure. A hypothetical 10% adverse exchange-rate change was assessed as potentially material to results of operations, though generally not to financial position.
- The filing identifies Brexit-related uncertainty as a risk to operations and results. It reports no litigation expected to have a material adverse effect and no material changes to other previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth and 3D-printing momentum persist, particularly after separating Alphaform’s contribution from organic growth.
- Whether the lower gross margin and faster operating-expense growth improve as Alphaform integration and capacity investments progress.
- Actual costs and operational effects of facility moves and the discontinued manufacturing processes and resin resale business.
- Exposure to foreign currencies and Brexit-related developments, as well as the timing and impact of new accounting standards under evaluation.