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PRLB > SEC Filings for PRLB > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for PROTO LABS INC

Form 10-Q for PROTO LABS INC


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Statements contained in this report regarding matters that are not historical or current facts are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors which may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in the "Risk Factors" section of the final prospectus relating to our IPO dated February 23, 2012, as filed with the SEC, as well as in our subsequent reports filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

Overview

We are a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection-molded custom parts for prototyping and short-run production. We provide "Real Parts, Really Fast" to product developers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets. Our primary manufacturing services currently include Firstcut, which is our CNC machining service, and Protomold, which is our plastic injection molding service.

Key Financial Measures and Trends

Revenue

The Company's operations are comprised of three geographically-based operating segments in the United States, Europe and Japan included in the reportable segments of United States, Europe, and Other. Revenue within these segments is derived from our Firstcut and Protomold services. Firstcut revenue consists of sales of CNC machined custom parts. Protomold revenue consists of sales of custom injection molds and injection-molded parts. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities, offering additional services such as the introduction of our Firstcut service in 2007, expanding internationally such as the opening of our Japanese plant in 2009, improving the usability of our services such as our web-centric applications, and expanding the breadth and scope of our products such as by adding more sizes and materials to our offerings. During the nine months ended September 30, 2012, we sold our services to approximately 4,400 customer companies from our existing customer base, an increase of 34% over the comparable period in 2011, and to approximately 2,250 new customer companies gained during the nine months ended September 30, 2012, an increase of 15% over the comparable period in 2011.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue consists primarily of raw materials, employee salaries, bonuses, benefits, stock-based compensation, equipment depreciation and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.

We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our pricing, our sales volume, our manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates. Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories and our operating maturity in these markets. We believe that over time and with growth and maturity of our international business, gross margins will be generally consistent through all our markets.


Table of Contents

Operating Expenses

Operating expenses consist of marketing and sales, research and development and general and administrative. Personnel-related costs are the most significant component of the marketing and sales, research and development and general and administrative expense categories.

Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection-molded custom parts for prototyping and short-run production. For us to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.

Marketing and sales. Marketing and sales expense consists primarily of employee salaries, commissions, bonuses, benefits, stock-based compensation, marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base.

Research and development. Research and development expense consists primarily of employee salaries, bonuses, benefits, stock-based compensation, depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our service offerings.

General and administrative. General and administrative expense consists primarily of employee salaries, bonuses, benefits, stock-based compensation, professional service fees related to accounting, tax and legal, and other related overhead. We expect general and administrative expense to increase on an absolute basis and as a percentage of revenue as we continue to grow and expand our operations and develop the infrastructure necessary to operate as a public company. These expenses will include increased audit and legal fees, costs of compliance with securities and other regulations, implementation costs for compliance with the provisions of the Sarbanes-Oxley Act, investor relations expense and higher insurance premiums.

Other Income (Expense), net

Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances and investments, and interest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates. Our interest expense will vary based on borrowings and interest rates.

Provision for Income Taxes

Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases and our effective tax rate to remain relatively constant.

Results of Operations

The following table sets forth a summary of our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods.


Table of Contents
                                                          Three Months Ended                                                           Nine Months Ended
                                                            September 30,                             Change                             September 30,                              Change
(dollars in thousands)                              2012                      2011                 $          %                 2012                       2011                 $            %
Revenue                                     $ 32,454       100.0 %    $ 26,915       100.0 %    $ 5,539       20.6 %    $ 92,375        100.0 %    $ 73,302       100.0 %    $ 19,073        26.0 %
Cost of revenue                               12,760        39.3        10,305        38.3        2,455       23.8        37,242         40.3        28,251        38.5         8,991        31.8

Gross profit                                  19,694        60.7        16,610        61.7        3,084       18.6        55,133         59.7        45,051        61.5        10,082        22.4
Operating expenses:
Marketing and sales                            4,442        13.7         4,000        14.9          442       11.1        13,440         14.5        11,139        15.2         2,301        20.7
Research and development                       2,561         7.9         1,304         4.8        1,257       96.4         6,622          7.2         3,639         5.0         2,983        82.0
General and administrative                     3,118         9.6         3,038        11.3           80        2.6        10,394         11.3         8,297        11.3         2,097        25.3

Total operating expenses                      10,121        31.2         8,342        31.0        1,779       21.3        30,456         33.0        23,075        31.5         7,381        32.0

Income from operations                         9,573        29.5         8,268        30.7        1,305       15.8        24,677         26.7        21,976        30.0         2,701        12.3
Other income (expense), net                      314         1.0            21         0.1          293          *           (90 )       (0.1 )          18         0.0          (108 )         *

Income before income taxes                     9,887        30.5         8,289        30.8        1,598       19.3        24,587         26.6        21,994        30.0         2,593        11.8
Provision for income taxes                     3,185         9.8         2,801        10.4          384       13.7         7,957          8.6         7,252         9.9           705         9.7

Net income                                  $  6,702        20.7 %    $  5,488        20.4 %    $ 1,214       22.1 %    $ 16,630         18.0 %    $ 14,742        20.1 %    $  1,888        12.8 %

* Not meaningful

Stock-based compensation expense included in the statements of operations data above is as follows:

                                                  Three months ended September 30,                  Nine months ended September 30,
(dollars in thousands)                            2012                       2011                     2012                      2011
Stock options and grants                     $           584            $           331         $           1,993           $        742
Employee stock purchase plan                             158                         -                        369                     -

Total stock-based compensation expense       $           742            $           331         $           2,362           $        742


Cost of revenue                              $           103            $            19         $             248           $         58
Operating expenses:
Marketing and sales                                      117                         60                       300                    154
Research and development                                 142                         69                       346                    206
General and administrative                               380                        183                     1,468                    324

Total stock-based compensation expense       $           742            $           331         $           2,362           $        742

Comparison of Three Months Ended September 30, 2012 and 2011

Revenue

Revenue by product line and the related changes for the three months ended
September 30, 2012 and 2011 were as follows:



                                      Three Months Ended September 30,
                                    2012                            2011                       Change
                                       % of  Total                     % of  Total
(dollars in thousands)      $            Revenue            $            Revenue            $          %
Revenue
Protomold                $ 23,458              72.3 %    $ 19,951              74.1 %    $ 3,507       17.6 %
First Cut                   8,996              27.7         6,964              25.9        2,032       29.2

Total revenue            $ 32,454             100.0 %    $ 26,915             100.0 %    $ 5,539       20.6 %


Table of Contents

Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:

                                      Three Months Ended September 30,
                                    2012                            2011                       Change
                                       % of  Total                     % of  Total
(dollars in thousands)      $            Revenue            $            Revenue            $          %
Revenue
United States            $ 24,807              76.4 %    $ 19,434              72.2 %    $ 5,373       27.6 %
International               7,647              23.6         7,481              27.8          166        2.2

Total revenue            $ 32,454             100.0 %    $ 26,915             100.0 %    $ 5,539       20.6 %

Our revenue increased $5.5 million, or 20.6%, for the three months ended September 30, 2012 compared to the same period in 2011. Our revenue growth was driven by a 27.6% increase in U.S. revenue, a 2.2% increase in international revenue, a 17.6% increase in Protomold revenue and a 29.2% increase in Firstcut revenue, in each case for the three months ended September 30, 2012 compared to the same period in 2011. Our revenue increases were primarily driven by greater spending on marketing and increases in sales personnel. The effect of pricing changes on revenue was immaterial for the three months ended September 30, 2012 compared to the same period in 2011.

Revenue by reportable segment is summarized as follows:

                                      Three Months Ended September 30,
                                    2012                            2011                       Change
                                       % of  Total                     % of  Total
(dollars in thousands)      $            Revenue            $            Revenue            $           %
Revenue
United States            $ 25,582              78.8 %    $ 20,287              75.4 %    $ 5,295        26.1 %
Europe                      5,771              17.8         5,790              21.5          (19 )      (0.3 )
Other                       1,101               3.4           838               3.1          263        31.4

Total revenue            $ 32,454             100.0 %    $ 26,915             100.0 %    $ 5,539        20.6 %

For our United States segment, revenue increased $5.3 million, or 26.1%, for the three months ended September 30, 2012 compared to the same period in 2011. Our United States revenue increase was primarily driven by greater spending on marketing and increases in sales personnel.

Revenue for our Europe segment was relatively flat for the three months ended September 30, 2012 compared to the same period in 2011. Our recent revenue growth in Europe has been tempered by economic uncertainty in the region.

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $2.5 million, or 23.8%, for the three months ended September 30, 2012 compared to the same period in 2011 due to raw material and production cost increases of $0.8 million to support increased sales volumes, equipment and facility-related cost increases of $0.4 million and an increase in direct labor headcount resulting in personnel and related cost increases of $1.3 million.

Gross Profit and Gross Margin. Gross profit increased due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of increases in direct labor personnel and a slight decline in equipment utilization, which resulted from the increase in capacity related to capital equipment acquisition.


Table of Contents

Operating Expenses, Other Income (Expense), net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expense increased $0.4 million, or 11.1%, for the three months ended September 30, 2012 compared to the same period in 2011 due primarily to an increase in headcount resulting in personnel and related costs.

Research and Development. Our research and development expense increased $1.3 million, or 96.4%, for the three months ended September 30, 2012 compared to the same period in 2011 due to an increase in headcount resulting in personnel and related cost increases of $0.3 million, operating cost increases of $0.3 million and professional services of $0.7 million for outside consulting services.

General and Administrative. Our general and administrative expense increased $0.1 million, or 2.6%, for the three months ended September 30, 2012 compared to the same period in 2011 due primarily to stock-based compensation increases of $0.2 million offset by a reduction of personnel related costs of $0.1 million.

Other Income (Expense), net. Other income, net increased $0.3 million for the three months ended September 30, 2012 compared to the same period in 2011 due to changes in foreign currency rates.

Provision for Income Taxes. Our income tax provision increased $0.4 million to $3.2 million while our effective tax rate decreased to 32.2% for the three months ended September 30, 2012 compared to our income tax provision of $2.8 million and effective tax rate of 33.8% for the three months ended September 30, 2011. The decrease in effective tax rate is primarily attributable to an increase in the deduction for domestic manufacturing activities we are eligible to take in the current year.

Segment Income from Operations

Income from operations by segment and the related changes for the three months
ended September 30, 2012 and 2011 were as follows:



                                                        Three Months Ended September 30,
                                                     2012                              2011                         Change
                                                       % of  Segment                     % of  Segment
(dollars in thousands)                      $             Revenue             $             Revenue             $            %
Income from operations:
United States                            $ 8,362                 32.7 %    $ 6,701                 33.0 %    $ 1,661         24.8 %
Europe                                     1,995                 34.6        2,104                 36.3         (109 )       (5.2 )
Other                                       (784 )              (71.2 )       (537 )              (64.1 )       (247 )      (46.0 )

Total income from operations             $ 9,573                 29.5 %    $ 8,268                 30.7 %    $ 1,305         15.8 %

Income from operations for the United States segment increased $1.7 million, or 24.8%, and as a percentage of segment revenue decreased to 32.7% from 33.0%, in each case for the three months ended September 30, 2012 compared to the same period in 2011. Income from operations for the United States segment increased due to a 26.1% increase in revenue offset by increased costs as previously discussed.

Income from operations for the Europe segment decreased $0.1 million, or 5.2%, and as a percentage of segment revenue decreased to 34.6% from 36.3%, in each case for the three months ended September 30, 2012 compared to the same period in 2011. Income from operations for the Europe segment decreased due to a consistent level of revenue impacted by increased operating costs for the three months ended September 30, 2012 compared to the same period in 2011.


Table of Contents

Comparison of Nine Months Ended September 30, 2012 and 2011

Revenue

Revenue by product line and the related changes for the nine months ended
September 30, 2012 and 2011 were as follows:



                                     Nine Months Ended September 30,
                                   2012                           2011                       Change
                                       % of Total                     % of Total
(dollars in thousands)      $           Revenue            $           Revenue            $           %
Revenue
Protomold                $ 66,697             72.2 %    $ 55,087             75.2 %    $ 11,610       21.1 %
First Cut                  25,678             27.8        18,215             24.8         7,463       41.0

Total revenue            $ 92,375            100.0 %    $ 73,302            100.0 %    $ 19,073       26.0 %

Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:

                                     Nine Months Ended September 30,
                                   2012                           2011                       Change
                                       % of Total                     % of Total
(dollars in thousands)      $           Revenue            $           Revenue            $           %
Revenue
United States            $ 69,887             75.7 %    $ 54,723             74.7 %    $ 15,164       27.7 %
International              22,488             24.3        18,579             25.3         3,909       21.0

Total revenue            $ 92,375            100.0 %    $ 73,302            100.0 %    $ 19,073       26.0 %

Our revenue increased $19.1 million, or 26.0%, for the nine months ended September 30, 2012 compared to the same period in 2011. Of this growth, approximately $5.5 million was attributable to sales to approximately 4,400 existing customer companies, and approximately $13.6 million was attributable to sales to approximately 2,250 new customer companies gained during the nine months ended September 30, 2012. Our overall revenue growth was driven by a 27.7% increase in U.S. revenue, a 21.0% increase in international revenue, a 21.1% increase in Protomold revenue and a 41.0% increase in Firstcut revenue, in each case for the nine months ended September 30, 2012 compared to the same period in 2011. Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel. The effect of pricing changes on revenue was immaterial for the nine months ended September 30, 2012 compared to the same period in 2011.


Table of Contents

Revenue by reportable segment is summarized as follows:

                                     Nine Months Ended September 30,
                                   2012                           2011                       Change
                                       % of Total                     % of Total
(dollars in thousands)      $           Revenue            $           Revenue            $           %
Revenue
United States            $ 72,652             78.6 %    $ 57,510             78.5 %    $ 15,142       26.3 %
Europe                     16,305             17.7        13,941             19.0         2,364       17.0
Other                       3,418              3.7         1,851              2.5         1,567       84.7

Total revenue            $ 92,375            100.0 %    $ 73,302            100.0 %    $ 19,073       26.0 %

For our United States segment, revenue increased $15.1 million, or 26.3%, for the nine months ended September 30, 2012 compared to the same period in 2011. Of this growth, approximately $6.9 million was attributable to sales to approximately 3,350 existing customer companies, and approximately $8.2 million was attributable to sales to approximately 1,375 new customer companies gained during the nine months ended September 30, 2012. Our United States revenue increase was primarily driven by greater spending on marketing and increases in sales personnel.

For our Europe segment, revenue increased $2.4 million, or 17.0%, for the nine months ended September 30, 2012 compared to the same period in 2011. This growth was attributable to approximately $4.1 million in sales to approximately 625 new customer companies gained during the nine months ended September 30, 2012, partially offset by a period-over-period decline of approximately $1.7 million in sales attributable to approximately 825 existing customer companies. Our Europe revenue increase was primarily driven by greater spending on marketing and increases in sales personnel.

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $9.0 million, or 31.8%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to raw material and production cost increases of $3.1 million to support increased sales volumes, equipment and facility-related cost increases of $1.4 million and an increase in direct labor headcount resulting in personnel and related cost increases of $4.5 million.

Gross Profit and Gross Margin. Gross profit increased due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased . . .

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