Proto Labs, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited U.S. GAAP results. Proto Labs provides quick-turn custom molded, CNC-machined and additive-manufactured parts for prototyping and short-run production.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $52.9 million | $39.7 million | $98.9 million | $77.1 million |
| Revenue growth | 33.0% | — | 28.4% | — |
| Gross profit / margin | $32.7 million / 61.8% | $24.9 million / 62.5% | $61.7 million / 62.4% | $48.1 million / 62.5% |
| Operating income / margin | $16.0 million / 30.2% | $12.6 million / 31.8% | $30.4 million / 30.8% | $24.0 million / 31.2% |
| Net income / margin | $11.0 million / 20.7% | $8.6 million / 21.7% | $21.1 million / 21.3% | $16.9 million / 21.9% |
| Diluted EPS | $0.42 | $0.33 | $0.81 | $0.66 |
- Q2 revenue growth reflected higher Protomold revenue (+29.8%), Firstcut revenue (+22.4%) and $2.1 million from FineLine, acquired April 23. United States revenue rose 32.8% and international revenue 33.8%.
- For the first half, Protomold and Firstcut revenue increased 25.8% and 25.2%, respectively; FineLine contributed $2.1 million. International revenue grew 38.0%, including a favorable $1.1 million currency effect.
- Management attributed legacy product growth to more product developers and higher average spend. Excluding FineLine customers, unique product developers increased 19% in Q2 and 18% in the first half; average revenue per developer rose 6.9% and 6.1%, respectively.
- Operating cash flow was $26.0 million for the first half, versus $19.4 million a year earlier. Investing cash outflow was $48.5 million, including $31.6 million of property and equipment purchases and $33.9 million net cash for acquisitions. Cash and cash equivalents fell $20.2 million to $22.9 million.
- At June 30, cash and marketable securities totaled approximately $105.4 million; current assets were $86.7 million and current liabilities $21.3 million. Total debt obligations were approximately $0.3 million, including current and long-term portions.
Material changes and notable items
- FineLine added additive manufacturing capabilities, including stereolithography, selective laser sintering and direct metal laser sintering. Net cash consideration was $33.9 million; total purchase consideration, including contingent consideration initially valued at $3.0 million, was $36.9 million. The contingent liability was $2.6 million at quarter-end, with up to $3.0 million payable subject to revenue and integration milestones.
- FineLine-related goodwill was $28.9 million; acquired intangible assets were $4.6 million. Purchase-price allocation remained preliminary. FineLine’s post-acquisition results were not separately presented because management said their impact was not material.
- Q2 gross margin declined 0.7 percentage point year over year, which management attributed mainly to FineLine integration costs and the move to a new Plymouth, Minnesota facility. First-half gross margin was nearly unchanged.
- Operating expenses grew 36.7% in Q2, faster than revenue, with higher sales and marketing, R&D, and administrative costs. Management expects operating expenses and investment in technology and personnel to continue increasing.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management expects cost of revenue to rise in dollars but remain relatively constant as a share of revenue, and expects the effective tax rate to remain relatively constant.
- Risks identified include challenges integrating FineLine, unexpected costs or liabilities, customer or employee disruption, and potential impairment of acquisition goodwill. Foreign-currency exposure is unhedged; management said a hypothetical 10% adverse exchange-rate move would not materially affect results.
- The company reported no litigation expected to have a material adverse effect and no material changes in internal control. It is evaluating the impact and adoption approach for the new revenue-recognition standard, required beginning January 1, 2017.
Important facts for investors to verify
- Whether FineLine meets its 2014 revenue and integration milestones, and how its results and integration costs develop.
- Whether elevated capital spending and working-capital requirements affect cash generation; receivables increased and first-half property and equipment purchases were substantial.
- Whether revenue growth and customer spending remain strong while gross and operating margins recover from Q2 declines.
- The final FineLine purchase-price allocation, contingent consideration, and any subsequent goodwill or intangible-asset impairment indicators.
- Foreign-currency effects, given unhedged exposure and the favorable currency contribution to reported international growth.