Proto Labs, Inc. — Q1 2018 Form 10-Q
Business and period: Proto Labs provides digital manufacturing services for custom prototypes and low-volume production parts, including injection molding, CNC machining, 3D printing and sheet metal fabrication. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $107.7 million | $80.2 million | +34.4% |
| Gross profit / margin | $57.9 million / 53.7% | $45.3 million / 56.5% | Margin down 2.8 percentage points |
| Operating income / margin | $21.7 million / 20.2% | $17.7 million / 22.1% | Income +22.9% |
| Net income / diluted EPS | $18.1 million / $0.66 | $12.2 million / $0.46 | Net income +48.0% |
| Operating cash flow | $26.1 million | $18.8 million | +$7.4 million |
| Capital expenditures | $25.5 million | $7.8 million | +$17.7 million |
At March 31, cash and cash equivalents were $45.1 million and marketable securities totaled $84.1 million ($53.5 million short-term; $30.7 million long-term). Current assets were $174.6 million versus current liabilities of $41.9 million. The company had no short-term debt outstanding, having repaid $5.0 million during the quarter. Total liabilities were $56.2 million and shareholders’ equity was $487.7 million.
Material changes and drivers
- Revenue growth reflected higher customer activity, sales and marketing efforts, and the November 2017 RAPID acquisition. The company served 18,057 unique product developers and engineers through its web interface, up 22%.
- By product line, CNC machining revenue rose 67.2% to $36.7 million; injection molding rose 7.2% to $51.3 million; 3D printing rose 22.2% to $12.3 million; and sheet metal contributed $6.2 million, versus none reported in Q1 2017. RAPID contributed to growth in CNC machining, sheet metal and other revenue.
- U.S. revenue increased 39.9% to $84.2 million; Europe rose 17.3% to $19.9 million; Japan rose 21.4% to $3.6 million. Foreign currency movements added $2.7 million to international revenue year over year.
- Cost of revenue grew 42.8%, faster than sales, and gross margin fell to 53.7%. Management cited revenue timing and mix, raw-material and production costs, higher direct labor, and equipment and facility costs. Operating expenses increased 31.1%, including a 47.4% increase in general and administrative expense.
- The effective tax rate declined to 17.6% from 32.2%, primarily due to U.S. tax reform and benefits from stock-option exercises; net income growth also reflected the lower tax provision.
Cash flow, outlook and risks
Operating cash flow was $26.1 million. Investing activities used $15.4 million, including $25.5 million of property and equipment purchases, partly offset by marketable-security maturities. Financing activities used $2.7 million, including the $5.0 million debt repayment and $2.3 million of stock-option proceeds. Cash increased $8.4 million to $45.1 million.
No numerical revenue or earnings guidance was provided. Management expects cost of revenue to rise in absolute dollars, operating expenses to increase as the company invests in personnel, technology and growth, and the effective tax rate to be lower in 2018 and beyond under current tax law. It also expects increased international activity to heighten currency exposure. The company does not hedge that exposure; it said a hypothetical 10% adverse currency move could materially affect operating results, though it generally would not materially affect financial position.
ASC 606 was adopted using the modified retrospective method, increasing opening retained earnings by $1.5 million. For Q1, adoption increased revenue by $0.4 million and cost of revenue by $0.2 million; at quarter-end it increased accounts receivable by $2.9 million and decreased inventory by $1.3 million. The company had not completed its accounting for the Tax Cuts and Jobs Act and expected to complete it during 2018. It reported no material change in previously disclosed risk factors and did not believe pending ordinary-course legal matters would have a material adverse effect.
Important facts for investors to verify
- How much of reported growth, particularly in CNC machining and sheet metal, is attributable to RAPID versus organic demand.
- Whether gross margin can recover from 53.7% as production costs, revenue mix and acquisition integration evolve.
- Whether the elevated $25.5 million quarterly capital spending level continues and how it affects cash generation.
- The final tax-reform accounting and the sustainability of the 17.6% quarterly effective tax rate.
- Exposure to unhedged foreign currencies and the potential effect of adverse exchange-rate changes on results.