Proto Labs, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Proto Labs is an e-commerce-driven digital manufacturer of custom injection-molded, CNC-machined and 3D-printed parts for prototyping and short-run production. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $82.0M | $75.0M | $162.2M | $147.5M |
| Gross profit / margin | $46.4M / 56.5% | $42.2M / 56.4% | $91.6M / 56.5% | $81.9M / 55.5% |
| Operating income / margin | $16.4M / 20.0% | $14.9M / 19.8% | $34.1M / 21.1% | $30.0M / 20.3% |
| Net income / margin | $12.1M / 14.7% | $10.7M / 14.3% | $24.3M / 15.0% | $21.4M / 14.5% |
| Diluted EPS | $0.45 | $0.40 | $0.91 | $0.80 |
- Cash flow: First-half operating cash flow was $39.4M, versus $38.5M. Investing cash outflow was $8.7M, including $13.3M of property and equipment purchases; financing cash outflow was $0.6M. Cash increased $30.4M to $99.2M. Operating cash flow less capital expenditures was approximately $26.1M.
- Liquidity and balance sheet: At June 30, cash and cash equivalents were $99.2M and marketable securities totaled $117.7M ($48.3M short-term and $69.4M long-term). Current assets were $204.9M and current liabilities $31.1M. Total liabilities were $43.8M and shareholders’ equity $410.8M. The balance sheet does not show a debt line; the filing text does not provide a separate debt balance.
- Other measures: First-half stock-based compensation was $4.0M. The effective tax rate was 31.2% for Q2 and 31.7% for the first half, below the respective 2016 rates of 32.9% and 32.7%.
Material changes versus prior periods
- Revenue grew 9.4% in Q2 and 9.9% in the first half. Management attributed growth chiefly to more customers served through its web interface and increased sales and marketing activity. Unique web-interface customers increased 18.8% in Q2 and 19.3% in the first half.
- U.S. revenue rose 14.5% in Q2 and 12.5% in the first half. Europe revenue fell 6.6% in Q2 but was up 0.7% for the first half; Japan grew 8.3% and 14.8%, respectively. Currency movements, primarily the stronger U.S. dollar versus the British pound, reduced international revenue by $0.9M in Q2 and $1.9M in the first half.
- Q2 product-line revenue growth was 4.5% for Injection Molding, 21.8% for CNC Machining and 19.5% for 3D Printing. First-half growth was 7.7%, 19.2% and 15.1%, respectively. Other revenue declined following the exit from European resin resale; the company also discontinued Metal Injection Molding and Magnesium Thixomolding in 2016.
- Gross margin improved 0.1 percentage point in Q2 and 1.0 point in the first half. Management cited manufacturing productivity improvements; cost of revenue grew more slowly than revenue.
- Marketing and sales expense increased 27.7% in Q2 and 23.3% in the first half, primarily from personnel costs. General and administrative expense declined 8.6% and 1.9%, respectively, partly because 2016 included costs related to exiting manufacturing processes and facility moves.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects cost of revenue to increase in dollars but remain relatively constant as a share of revenue, and expects continued investment in personnel, marketing, technology and product development to increase operating expenses.
- Q2 other income included a favorable $0.4M legal settlement. First-half other income was $1.5M, down from $1.7M, primarily because of lower foreign-currency gains, partly offset by the settlement and higher investment interest income.
- Foreign-currency exposure affects revenue, costs, assets and liabilities. The company does not hedge with forward contracts or currency borrowings; it cautions that a hypothetical 10% adverse currency move could materially affect operating results, though it generally would not materially affect financial position.
- The company reported no material change to previously disclosed risk factors. It said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
- The company adopted share-based payment accounting guidance in Q1 2017, changing tax-benefit accounting and cash-flow classification. It was evaluating the forthcoming revenue-recognition standard, expected to adopt using the modified retrospective approach, and did not expect a material effect on revenue timing or amount based on its review to date.
Important facts for investors to verify
- Whether customer growth and strong CNC Machining and 3D Printing growth continue, and whether weaker Q2 European revenue recovers.
- Whether productivity gains sustain gross-margin improvement as labor, capacity and other operating costs rise.
- The effect of currency movements on international revenue and earnings, given the company’s unhedged exposure.
- The composition, maturity and credit exposure of the $117.7M held-to-maturity securities portfolio, including the reported temporary unrealized losses.
- Future capital spending, share repurchases under the authorized program of up to $50M through December 31, 2021, and the absence of a separately stated debt balance.
- Any subsequent quantified impact from adoption of the new revenue-recognition standard and the outcome of tax reserves for unrecognized benefits, which totaled $4.0M at June 30, 2017.