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PRLB > SEC Filings for PRLB > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for PROTO LABS INC

Form 10-Q for PROTO LABS INC


5-Aug-2014

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 and our Annual Report on Form 10-K for the year ended December 31, 2013.

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 Item 1A. "Risk Factors" of our Annual Report on Form 10-K as 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 additive-manufactured (3D printed), CNC-machined and 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 products currently include Fineline, which is our additive-manufacturing (3D printing) product line, Firstcut, which is our CNC machining product line, and Protomold, which is our molding product line.

Key Financial Measures and Trends

Revenue

The Company's operations are comprised of three geographic business units in the United States, Europe and Japan. Revenue within each of our business units is derived from our Fineline, Firstcut and Protomold product lines. Fineline revenue consists of sales of additive-manufactured custom parts, often referred to as 3D printed parts. Firstcut revenue consists of sales of CNC-machined custom parts. Protomold revenue consists of sales of custom molds and 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 acquisition in April 2014 of FineLine Prototyping, Inc. leading to the offering of Fineline additive manufacturing technologies, often times referred to as 3D printing,

? introducing our Firstcut product line 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 such as liquid silicon rubber (LSR) and metal injection molding (MIM).


Excluding product developers we gained through the acquisition of FineLine, during the three months ended June 30, 2014, we served approximately 8,200 unique product developers, an increase of 19% over the same period in 2013. Excluding product developers we gained through the acquisition of FineLine, during the six months ended June 30, 2014, we served approximately 12,100 unique product developers, an increase of 18% over the same period in 2013.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue consists primarily of raw materials, equipment depreciation, employee salaries, benefits, stock-based compensation, bonuses 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 pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.

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 additive-manufactured (3D printing), CNC-machined and 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 compensation, benefits, commissions, 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 compensation, 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 compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal services, amortization of intangibles and other related overhead. We expect general and administrative expense to increase on an absolute basis as we continue to grow and expand our operations.

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.

                              Three Months Ended June 30,                    Change                      Six Months Ended June 30,                      Change
(dollars in                                                                 $           %                                                             $          %
thousands)                   2014                     2013                                             2014                     2013

Revenue              $ 52,866       100.0 %   $ 39,749       100.0 %   $ 13,117       33.0 %   $ 98,940       100.0 %   $ 77,062       100.0 %   $ 21,878        28.4
Cost of revenue        20,183        38.2       14,896        37.5        5,287       35.5       37,233        37.6       28,930        37.5        8,303        28.7
Gross profit           32,683        61.8       24,853        62.5        7,830       31.5       61,707        62.4       48,132        62.5       13,575        28.2
Operating
expenses:
Marketing and
sales                   7,261        13.7        5,550        13.9        1,711       30.8       13,678        13.8       10,813        14.0        2,865        26.5
Research and
development             3,914         7.4        2,751         6.9        1,163       42.3        7,370         7.4        5,379         7.0        1,991        37.0
General and
administrative          5,534        10.5        3,923         9.9        1,611       41.1       10,237        10.4        7,917        10.3        2,320        29.3
Total operating
expenses               16,709        31.6       12,224        30.7        4,485       36.7       31,285        31.6       24,109        31.3        7,176        29.8
Income (expense)
from operations        15,974        30.2       12,629        31.8        3,345       26.5       30,422        30.8       24,023        31.2        6,399        26.6
Other income, net         (66 )      (0.1 )        116         0.3         (182 )        *           37         0.0          119         0.1          (82 )     (68.9 )
Income before
income taxes           15,908        30.1       12,745        32.1        3,163       24.8       30,459        30.8       24,142        31.3        6,317        26.2
Provision for
income taxes            4,952         9.4        4,134        10.4          818       19.8        9,401         9.5        7,244         9.4        2,157        29.8
Net income           $ 10,956        20.7 %   $  8,611        21.7 %   $  2,345       27.2 %   $ 21,058        21.3 %   $ 16,898        21.9 %   $  4,160        24.6 %

*Percentage change not meaningful

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

                                              Three Months Ended June 30,             Six Months Ended June 30,
(dollars in thousands)                         2014                   2013             2014               2013

Stock options and restricted stock       $          1,147         $        778     $      2,060       $      1,554
Employee stock purchase plan                          103                   93              188                182
Total stock-based compensation expense   $          1,250         $        871     $      2,248       $      1,736

Cost of revenue                          $             97         $         73     $        179       $        144
Operating expenses:
Marketing and sales                                   240                  151              435                301
Research and development                              268                  181              483                354
General and administrative                            645                  466            1,151                937
Total stock-based compensation expense   $          1,250         $        871     $      2,248       $      1,736


Comparison of Three Months Ended June 30, 2014 and 2013

Revenue

Revenue by product line and the related changes for the three months ended June 30, 2014 and 2014 were as follows:

                               Three Months Ended June 30,
                          2014                            2013                          Change
(dollars in                    % of Total                      % of Total
thousands)           $          Revenue              $          Revenue             $             %

Revenue
Protomold      $   36,255             68.6 %   $   27,924             70.3 %   $    8,331           29.8 %
Firstcut           14,478             27.4         11,825             29.7          2,653           22.4
Fineline            2,133              4.0              -                -          2,133          100.0

Total
revenue        $   52,866            100.0 %   $   39,749            100.0 %   $   13,117           33.0 %

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

                                Three Months Ended June 30,
                           2014                            2013                          Change
(dollars in                     % of Total                      % of Total
thousands)            $          Revenue              $          Revenue             $             %

Revenue
United States   $   39,966             75.6 %   $   30,106             75.7 %   $    9,860           32.8 %
International       12,900             24.4          9,643             24.3          3,257           33.8

Total revenue   $   52,866            100.0 %   $   39,749            100.0 %   $   13,117           33.0 %

Our revenue increased $13.1 million, or 33.0%, for the three months ended June 30, 2014 compared with the same period in 2013. This revenue growth was driven by a 32.8% increase in United States revenue, 33.8% increase in international revenue, 29.8% increase in Protomold revenue, 22.4% increase in Firstcut revenue and $2.1 million increase in revenue from the FineLine acquisition, in all cases for the three months ended June 30, 2014 compared with the same period in 2013.

Within our legacy Firstcut and Protomold product lines, our revenue growth in the three months ended June 30, 2014 was the result of increased number and spending of the product developers we served. During the three months ended June 30, 2014, excluding product developers who purchased Fineline products, we served approximately 8,200 unique product developers, an increase of 19.4% over the same period in 2013. Average revenue per product developer, excluding product developers who purchased Fineline products, also increased 6.9% during the three months ended June 30, 2014 compared to the same period in 2013.

Excluding revenue gained through the acquisition of FineLine, our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on trade show and marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was favorably impacted by $0.7 million in the three months ended June 30, 2014 compared to the same period in 2013 due to weakening of the United States dollar relative to certain foreign currencies, particularly the British Pound. The effect of pricing changes on revenue was immaterial for the three months ended June 30, 2014 compared to the same period in 2013.

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $5.3 million, or 35.5%, for the three months ended June 30, 2014 compared to the same period in 2013, which was faster than the rate of revenue increase of 33.0% for the three months ended June 30, 2014 compared to the same period in 2013. The increase in cost of revenue was due to raw material and production cost increases of $1.8 million to support increased sales volumes, equipment and facility-related cost increases of $0.7 million and an increase in direct labor headcount resulting in personnel and related cost increases of $2.8 million.

Gross Profit and Gross Margin. Gross profit increased to $32.7 million, or 61.8% of revenues, for the three months ended June 30, 2014 from $24.9 million, or 62.5% of revenues, for the three months ended June 30, 2013 due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of additional costs incurred related to the integration of FineLine and the move to our new facility in Plymouth, Minnesota.


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

Marketing and Sales. Marketing and sales expense increased $1.7 million, or 30.8%, for the three months ended June 30, 2014 compared to the same period in 2013 due primarily to an increase in headcount resulting in personnel and related cost increases of $1.3 million and marketing program cost increases of $0.4 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business. Marketing and sales expense as a percentage of revenue decreased to 13.7% for the three months ended June 30, 2014 from 14.0% during the same period in 2013, primarily due to the fixed nature of certain marketing and sales costs as well as focus on effective marketing spending as previously discussed.

Research and Development. Our research and development expense increased $1.2 million, or 42.3%, for the three months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $1.0 million and operating cost increases of $0.2 million.

General and Administrative. Our general and administrative expense increased $1.6 million, or 41.1%, for the three months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $0.7 million, stock-based compensation costs increases of $0.2 million, administrative cost increases of $0.1 million, intangible amortization expense cost increases of $0.1 and professional service cost increases of $0.5 million.

Other Income (Expense), net. Other income, net decreased $0.2 million for the three months ended June 30, 2014 compared to the same period in 2013 due to changes in foreign currency rates.

Provision for Income Taxes. Our effective tax rate of 31.1% for the three months ended June 30, 2014 decreased 1.3% when compared to 32.4% for the same period in 2013. The decrease in the effective tax rate is primarily due to an increase in tax benefit from the domestic manufacturing deduction projected for the tax year ending December 31, 2014. As a result of increased income attributable to the fluctuations described above, our income tax provision increased by $0.9 million to $5.0 million for the three months ended June 30, 2014 compared to our income tax provision of $4.1 million for the three months ended June 30, 2013.

Comparison of Six Months Ended June 30, 2014 and 2013



Revenue



Revenue by product line and the related changes for the six months ended June
30, 2014 and 2014 were as follows:




                                Six Months Ended June 30,
                          2014                            2013                          Change
(dollars in                    % of Total                      % of Total
thousands)           $          Revenue              $          Revenue             $             %

Revenue
Protomold      $   68,949             69.7 %   $   54,804             71.1 %   $   14,145           25.8 %
Firstcut           27,858             28.2         22,258             28.9          5,600           25.2
Fineline            2,133              2.1          -                -              2,133          100.0

Total
revenue        $   98,940            100.0 %   $   77,062            100.0 %   $   21,878           28.4 %


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

                                 Six Months Ended June 30,
                           2014                            2013                          Change
(dollars in                     % of Total                      % of Total
thousands)           $           Revenue              $          Revenue            . $            %

Revenue
United States   $   72,988             73.8 %   $   58,254             75.6 %   $   14,734           25.3 %
International       25,952             26.2         18,808             24.4          7,144           38.0

Total revenue   $   98,940            100.0 %   $   77,062            100.0 %   $   21,878           28.4 %

Our revenue increased $21.9 million, or 28.4%, for the six months ended June 30, 2014 compared with the same period in 2013. This revenue growth was driven by a 25.3% increase in United States revenue, 38.0% increase in international revenue, 25.8% increase in Protomold revenue, 25.2% increase in Firstcut revenue and $2.1 in revenue from the FineLine acquisition, in each case for the six months ended June 30, 2014 compared with the same period in 2013.

Within our legacy Firstcut and Protomold product lines, our revenue growth in the six months ended June 30, 2014 was the result of increased number and spending of the product developers we served. During the six months ended June 30, 2014, excluding product developers who purchased Fineline products, we served approximately 12,100 unique product developers, an increase of 18.4% over the same period in 2013. Average revenue per product developer, excluding product developers who purchased Fineline products, also increased 6.1% during the six months ended June 30, 2014 compared to the same period in 2013.

Excluding revenue gained through the acquisition of FineLine, our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on trade show and marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was favorably impacted by $1.1 million in the six months ended June 30, 2014 compared to the same period in 2013 due to the weakening of United States dollar relative to certain foreign currency, particularly the British Pound. The effect of pricing changes on revenue was immaterial for the six months ended June 30, 2014 compared to the same period in 2013.

Cost of Revenue, Gross Profit and Gross Margin

Cost of Revenue. Cost of revenue increased $8.3 million, or 28.7%, for the six months ended June 30, 2014 compared to the same period in 2013, which was slightly higher than the rate of revenue increase of 28.4% for the six months ended June 30, 2014. The increase in cost of revenue was due to raw material and production cost increases of $2.4 million to support increased sales volumes, equipment and facility-related cost increases of $1.3 million and an increase in direct labor headcount resulting in personnel and related cost increases of $4.6 million.

Gross Profit and Gross Margin. Gross profit increased to $61.7 million, or 62.4% of revenues, for the six months ended June 30, 2014 from $48.1 million, or 62.5% of revenues, for the six months ended June 30, 2013 due to increases in revenue offset by the cost of revenue as discussed above. Despite costs incurred related to the integration of FineLine and the move to our new facility in Plymouth, Minnesota, gross margins have remained similar in each of the six month periods ended June 30, 2014 and 2013.

Operating Expenses, Other Income (Expenses), Net and Provision for Income Taxes

Marketing and Sales. Marketing and sales expense increased $2.9 million, or 26.5%, for the six months ended June 30, 2014 compared to the same period in 2013 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.2 million and marketing program cost increases of $0.7 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business.

Research and Development. Our research and development expense increased $2.0 million, or 37.0%, for the six months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $1.6 million and operating cost increases of $0.4 million.


General and Administrative. Our general and administrative expense increased $2.3 million, or 29.3%, for the six months ended June 30, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $0.7 million, stock-based compensation costs increases of $0.2 million, administrative cost increases of $0.4 million, intangible amortization expense cost increases of $0.1 and professional service cost increases of $0.9 million.

Other Income (Expense), Net. Our other income, net decreased $0.1 million for the six months ended June 30, 2014 compared to the same period in 2013 due to foreign currency change decreases of $0.2 million, which were partially offset by investment interest income increases of $0.1 million.

Provision for Income Taxes. Our effective tax rate of 30.9% for the six months ended June 30, 2014 increased by 0.9% when compared to our effective tax rate of 30.0% for the same period in 2013. The increase in our effective tax rate is due primarily to the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013 and required that we recognize the federal portion of our 2012 research and development credit in the first quarter of 2013. Refer to Footnote 11 for additional information. As a result of the change in effective tax rate as well as increased income attributable to the fluctuations described above, our income tax provision increased by $2.2 million to $9.4 million for the six months ended June 30, 2014 compared to our income tax provision of $7.2 million for the six months ended June 30, 2013.

Liquidity and Capital Resources



Cash Flows


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