Proto Labs, Inc. — Q2 2013 Form 10-Q
Business context and period. Proto Labs provides online, quick-turn CNC machining (Firstcut) and injection molding (Protomold) for prototypes and short-run production. This unaudited report covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $39.75 | $29.95 | $77.06 | $59.92 |
| Gross profit / margin | $24.85 / 62.5% | $17.71 / 59.1% | $48.13 / 62.5% | $35.44 / 59.1% |
| Operating income / margin | $12.63 / 31.8% | $7.47 / 24.9% | $24.02 / 31.2% | $15.10 / 25.2% |
| Net income | $8.61 | $5.15 | $16.90 | $9.93 |
| Diluted EPS | $0.33 | $0.20 | $0.66 | $0.42 |
| Operating cash flow | Not separately stated | Not separately stated | $19.45 | $11.50 |
Revenue grew 32.7% in Q2 and 28.6% for the first half. In Q2, Protomold revenue increased 30.2% and Firstcut 39.0%; U.S. revenue rose 31.4% and international revenue 36.9%. The company served about 6,900 unique product developers in Q2, up 22%, while average revenue per developer increased 8%. For the first half, developers served rose 21% to about 10,200 and average revenue per developer grew 6%.
Cost of revenue grew more slowly than sales, supporting a 3.4 percentage-point gross-margin improvement. Management attributed this mainly to higher equipment utilization and refined manufacturing processes. Operating expenses rose 19.3% in Q2 and 18.6% for the first half, below revenue growth. First-half R&D expense rose 32.5%, reflecting increased headcount, operating costs and outside development services.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $35.45; short- and long-term marketable securities totaled $84.50. Together these were approximately $119.95.
- Current assets were $96.64 and current liabilities $10.89. Total debt obligations were $0.42, including $0.18 current; total liabilities were $15.17.
- First-half operating cash flow was $19.45; investing cash outflow was $29.10, including $6.07 of property and equipment purchases and net investment in marketable securities; financing cash inflow was $8.63. Cash declined $1.31 to $35.45.
- Cash from financing included a $5.93 excess tax benefit on stock-based compensation and $2.87 from option exercises. The same $5.93 tax benefit was deducted in the operating cash-flow reconciliation, so its classification materially affected reported cash-flow subtotals.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects cost of revenue to rise in dollars but remain relatively steady as a percentage of revenue, and anticipates continued investment in personnel, technology, marketing and R&D. It also expects G&A costs to increase as the company expands and meets public-company requirements.
- Foreign exchange reduced international revenue by approximately $0.5 in Q2 and $0.8 for the first half versus 2012. The company reported no currency hedges and said a hypothetical 10% adverse currency move was not expected to materially affect results.
- The first-half effective tax rate was 30.0%, down from 32.4%, partly because the 2012 federal R&D credit was recognized after its 2013 extension; the reported benefit was $0.3. Q2 effective tax rates were 32.4% and 32.6%, respectively.
- Unrealized losses on held-to-maturity securities were considered temporary; management stated it intended to hold them to maturity and recover principal. Unrecognized tax benefits were $0.4, with no material change anticipated over the next 12 months.
- The filing reports no material change to previously disclosed risk factors, no litigation expected to have a material adverse effect, and effective disclosure controls. It reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales growth and margin gains persist as capacity expands and operating costs rise.
- How the $5.93 excess tax benefit and related cash-flow presentation affect comparisons of operating cash generation.
- The composition, maturities and market-value sensitivity of the $84.50 marketable-securities portfolio.
- Exposure to foreign exchange movements, given international operations and the absence of hedging.
- Potential dilution from equity compensation: weighted-average diluted shares increased year over year, and unrecognized option compensation was $8.5 over an expected weighted-average 2.9 years.