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UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

 

FORM 10-Q

(Mark One)

☑		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2015

or

☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                        to

 

Commission File Number: 001-35435

 

 

Proto Labs, Inc.

(Exact name of registrant as specified in its charter)

Minnesota		41-1939628
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
5540 Pioneer Creek Drive
Maple Plain, Minnesota		55359
(Address of principal executive offices)		(Zip Code)

 

(763) 479-3680

(Registrant’s telephone number, including area code)

 

                   Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

____________________________________________

 

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                ☑Yes ☐No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                      ☑Yes ☐No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer☑				Accelerated filer ☐
Non-accelerated filer☐		(Do not check if a smaller reporting company)		Smaller reporting company☐

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☑No

 

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,163,402 shares of Common Stock, par value $0.001 per share, were outstanding at October 28, 2015.

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Proto Labs, Inc.

TABLE OF CONTENTS

 

Item		Description		Page
PART I
1.		Financial Statements		3
2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		14
3.		Quantitative and Qualitative Disclosures about Market Risk		22
4.		Controls and Procedures		23
PART II
1.		Legal Proceedings		24
1A.		Risk Factors		24
2.		Unregistered Sales of Equity Securities and Use of Proceeds		24
3.		Defaults Upon Senior Securities		24
4.		Mine Safety Disclosures		24
5.		Other Information		24
6.		Exhibits		24

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

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The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

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The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Proto Labs, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

Proto Labs, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

   

 

 

 

Proto Labs, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

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, 2014.

 

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 most recent 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, quick-turn, on-demand manufacturer of custom parts for prototyping and short-run production. We manufacture parts for product developers and engineers worldwide who are under increasing pressure to bring their finished products to market faster than their competition. We utilize injection molding, computer numerical control (CNC) machining and additive manufacturing to manufacture custom parts for our customers.

 

We believe custom parts 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. Our customers conduct nearly all of their business with us over the Internet. We target our products to the millions of product developers and engineers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets.

 

Our primary manufacturing product lines currently include Protomold, which is our injection molding product line, Firstcut, which is our CNC machining product line, and Fineline, which is our additive-manufactured (3D printing) product line. We continually seek to expand the range of size and geometric complexity of the parts we can make with these manufacturing processes, to extend the variety of materials we are able to support and to identify additional manufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers and engineers.

 

Protomold

 

Our Protomold product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of thermoplastic, metal, or liquid silicone injection molds, which are then used to produce custom injection-molded parts on commercially available equipment. Our Protomold product line is used for prototype, on-demand and short-run production. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need short-run production often come back to Protomold for additional quantities typically ranging up to 100,000 parts or more. They do so to support pilot production while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product will only be released in a limited quantity, or because they need end-of-life production support. These additional part orders typically occur on approximately half of the molds that we make, typically accounting for approximately half of our total Protomold revenue.

 

Firstcut

 

Our Firstcut product line uses commercially available CNC machines to cut plastic or metal bars and blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process. The Firstcut product line is well suited to produce small quantities, typically in the range of one to 200 parts.

 

 

 

 

Fineline

 

Our Fineline additive manufacturing product line, often referred to as 3D printing, includes stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) processes, which offer customers a wide-variety of high-quality, precision rapid prototyping. These processes create parts with a high level of accuracy, detail, strength and durability. The Fineline product line is well suited to produce small quantities, typically in the range of one to 50 parts.

 

Key Financial Measures and Trends

 

Revenue

 

The Company’s operations are comprised of three geographic business units in the United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers and engineers are located. Revenue within each of our United States and Europe business units is derived from our Protomold, Firstcut and Fineline product lines. Revenue within our Japan business unit is derived from our Protomold and Firstcut product lines. 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 product lines such as our Fineline additive manufacturing technologies, often times referred to as 3D printing, which we added via the acquisition of FineLine Prototyping, Inc. (FineLine) in April 2014;

●

introducing our Firstcut product line in 2007;

●

expanding internationally, including the opening of our Japanese plant in 2009;

●

improving the usability of our product lines such as our web-centric applications; and

●

expanding the breadth and scope of our products, for example by adding more sizes and materials to our offerings such as liquid silicone rubber (LSR) and metal injection molding (MIM).

 

During the three months ended September 30, 2015, we served approximately 12,500 unique product developers and engineers, an increase of 24% over the same period in 2014. During the nine months ended September 30, 2015, we served approximately 22,600 unique product developers and engineers, an increase of 29% over the same period in 2014. These product developers and engineers are served under all our product lines, including Fineline, which we added via our acquisition of FineLine Prototyping, Inc. in April 2014.

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of revenue consists primarily of raw materials, equipment depreciation, employee compensation, benefits, stock-based compensation, facilities costs 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, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between sales by product line, 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, available capacity 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.

 

Operating Expenses

 

Operating expenses consist of marketing and sales, research and development and general and administrative expenses. 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, on-demand additive-manufactured (3D printing), CNC-machined, CNC-turned 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 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 product line 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 and other related overhead. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.

 

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.

 

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		Three Months Ended September 30,																Change								Nine Months Ended September 30,																Change
(dollars in thousands)		2015								2014								$				%				2015								2014								$				%
Revenue		$	67,842				100.0	%		$	54,574				100.0	%		$	13,268				24.3	%		$	190,347				100.0	%		$	153,514				100.0	%		$	36,833				24.0	%
Cost of revenue			27,517				40.6				21,492				39.4				6,025				28.0				77,218				40.6				58,725				38.3				18,493				31.5
Gross profit			40,325				59.4				33,082				60.6				7,243				21.9				113,129				59.4				94,789				61.7				18,340				19.3
Operating expenses:
Marketing and sales			10,027				14.7				7,351				13.5				2,676				36.4				28,383				14.9				21,029				13.7				7,354				35.0
Research and development			4,760				7.0				4,555				8.3				205				4.5				13,471				7.1				11,925				7.8				1,546				13.0
General and administrative			8,134				12.0				5,733				10.5				2,401				41.9				20,683				10.9				15,970				10.4				4,713				29.5
Total operating expenses			22,921				33.7				17,639				32.3				5,282				29.9				62,537				32.9				48,924				31.9				13,613				27.8
Income from operations			17,404				25.7				15,443				28.3				1,961				12.7				50,592				26.6				45,865				29.9				4,727				10.3
Other income (expense), net			593				0.9				(56	)			(0.1	)			649				*				100				0.1				(19	)			(0.0	)			119				*
Income before income taxes			17,997				26.6				15,387				28.2				2,610				17.0				50,692				26.7				45,846				29.9				4,846				10.6
Provision for income taxes			5,615				8.3				5,003				9.2				612				12.2				16,171				8.5				14,404				9.4				1,767				12.3
Net income		$	12,382				18.3	%		$	10,384				19.0	%		$	1,998				19.2	%		$	34,521				18.1	%		$	31,442				20.5	%		$	3,079				9.8	%

 

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* Percentage change not meaningful

 

 

 

 

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

 

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		Three Months Ended September 30,								Nine Months Ended September 30,
(dollars in thousands)		2015				2014				2015				2014
Stock options and restricted stock		$	1,483			$	1,192			$	4,138			$	3,252
Employee stock purchase plan			123				121				377				309
Total stock-based compensation expense		$	1,606			$	1,313			$	4,515			$	3,561
Cost of revenue		$	136			$	103			$	378			$	282
Operating expenses:
Marketing and sales			288				250				796				685
Research and development			335				287				964				770
General and administrative			847				673				2,377				1,824
Total stock-based compensation expense		$	1,606			$	1,313			$	4,515			$	3,561

 

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Comparison of Three Months Ended September 30, 2015 and 2014

 

Revenue

 

Revenue by product line and the related changes for the three months ended September 30, 2015 and 2014 were as follows:

 

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		Three Months Ended September 30,
		2015								2014								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
Protomold		$	41,971				61.9	%		$	35,655				65.3	%		$	6,316				17.7	%
Firstcut			19,833				29.2				15,549				28.5				4,284				27.6
Fineline			6,038				8.9				3,370				6.2				2,668				79.2
Total revenue		$	67,842				100.0	%		$	54,574				100.0	%		$	13,268				24.3	%

 

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Revenue by geographic region, based on the billing location of the end customer, for the three months ended September 30, 2015 and 2014 is summarized as follows:

 

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		Three Months Ended September 30,
		2015								2014								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
United States		$	50,214				74.0	%		$	40,822				74.8	%		$	9,392				23.0	%
International			17,628				26.0				13,752				25.2				3,876				28.2
Total revenue		$	67,842				100.0	%		$	54,574				100.0	%		$	13,268				24.3	%

 

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Our revenue increased $13.3 million, or 24.3%, for the three months ended September 30, 2015 compared to the same period in 2014. By geographic region, this revenue growth was driven by a 23.0% increase in United States revenue and a 28.2% increase in international revenue. By product line, this revenue growth was driven by a 17.7% increase in Protomold revenue, 27.6% increase in Firstcut revenue and 79.2% increase in Fineline revenue in each case for the three months ended September 30, 2015 compared to the same period in 2014.

 

Our revenue growth during the three months ended September 30, 2015 was the result of increased volume of the product developers and engineers we served. During the three months ended September 30, 2015, we served approximately 12,500 unique product developers and engineers, an increase of 24% over the same period in 2014. Average revenue per product developer or engineer was consistent during the three months ended September 30, 2015 when compared to the same period in 2014.

 

 

 

 

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 marketing activities that have proven to result in the greatest number of customer prospects to support sales activity.

 

International revenue was negatively impacted by $2.1 million for the three months ended September 30, 2015 compared to the same period in 2014 due to the strengthening of the United States dollar relative to the British Pound and Japanese Yen, as well as the strengthening of the British Pound relative to the Euro. The effect of pricing changes on revenue was immaterial for the three months ended September 30, 2015 compared to the same period in 2014.

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of Revenue. Cost of revenue increased $6.0 million, or 28.0%, for the three months ended September 30, 2015 compared to the same period in 2014, which was faster than the rate of revenue increase of 24.3% for the three months ended September 30, 2015 compared to the same period in 2014. The increase in cost of revenue was due to raw material and production cost increases of $2.8 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $3.1 million and equipment and facility-related cost increases of $0.1 million.

 

Gross Profit and Gross Margin. Gross profit increased from $33.1 million, or 60.6% of revenues, in the three months ended September 30, 2014 to $40.3 million, or 59.4% of revenue, in the three months ended September 30, 2015 primarily due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of increases in investments of additional manufacturing capacity and the impact of fluctuations in foreign currency exchange rates.

 

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

 

Marketing and Sales. Marketing and sales expenses increased $2.7 million, or 36.4%, during the three months ended September 30, 2015 compared to the same period in 2014 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.3 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.

 

Research and Development. Our research and development expenses increased $0.2 million, or 4.5%, during the three months ended September 30, 2015 compared to the same period in 2014 due to an increase in headcount resulting in personnel and related cost increases of $0.7 million, partially offset by professional services cost decreases of $0.5 million.

 

General and Administrative. Our general and administrative expenses increased $2.4 million, or 41.9%, during the three months ended September 30, 2015 compared to the same period in 2014 due to an increase in headcount resulting in personnel and related cost increases of $0.8 million, stock-based compensation cost increases of $0.2 million, administrative cost increases of $0.6 million, professional services cost increases of $0.2 million and $0.6 million in costs related to our acquisition of Alphaform.

 

Other Income (Expense), net. Other expense, net decreased $0.6 million during the three months ended September 30, 2015 compared to the same period in 2014 due to changes in foreign currency rates.

 

Provision for Income Taxes. Our effective tax rate of 31.2% for the three months ended September 30, 2015 decreased 1.3% when compared to 32.5% for the same period in 2014. The decrease in the effective tax rate is primarily due to an increased benefit from domestic tax credits realized in the quarter ended September 30, 2015 when compared to the quarter ended September 30, 2014. As a result of an increase in income before income taxes, our income tax provision increased by $0.6 million to $5.6 million for the three months ended September 30, 2015 compared to our income tax provision of $5.0 million for the three months ended September 30, 2014.

 

 

 

 

Comparison of Nine Months Ended September 30, 2015 and 2014

 

Revenue

 

Revenue by product line and the related changes for the nine months ended September 30, 2015 and 2014 were as follows:

 

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		Nine Months Ended September 30,
		2015								2014								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
Protomold		$	119,521				62.8	%		$	104,604				68.1	%		$	14,917				14.3	%
Firstcut			54,788				28.8				43,407				28.3				11,381				26.2
Fineline			16,038				8.4				5,503				3.6				10,535				*
Total revenue		$	190,347				100.0	%		$	153,514				100.0	%		$	36,833				24.0	%

 

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* Percentage change not meaningful

 

Revenue by geographic region, based on the billing location of the end customer, for the nine months ended September 30, 2015 and 2014 is summarized as follows:

 

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		Nine Months Ended September 30,
		2015								2014								Change
(dollars in thousands)		$				% of Total Revenue				$				% of Total Revenue				$				%
Revenue
United States		$	144,357				75.8	%		$	113,810				74.1	%		$	30,547				26.8	%
International			45,990				24.2				39,704				25.9				6,286				15.8
Total revenue		$	190,347				100.0	%		$	153,514				100.0	%		$	36,833				24.0	%

 

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Our revenue increased $36.8 million, or 24.0%, for the nine months ended September 30, 2015 compared to the same period in 2014. By geographic region, this revenue growth was driven by a 26.8% increase in United States revenue and a 15.8% increase in international revenue. By product line, this revenue growth was driven by a 14.3% increase in Protomold revenue and a 26.2% increase in Firstcut revenue, in each case for the nine months ended September 30, 2015 compared to the same period in 2014, as well as $10.5 million in Fineline revenue related to the FineLine acquisition completed in the second quarter of 2014.

 

Our revenue growth during the nine months ended September 30, 2015 was the result of increased volume of the product developers and engineers we served. During the nine months ended September 30, 2015, we served approximately 22,600 unique product developers and engineers, an increase of 29% over the same period in 2014. Average revenue per product developer or engineer decreased 4.0% during the nine months ended September 30, 2015 when compared to the same period in 2014.

 

In addition to 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 marketing activities that have proven to result in the greatest number of customer prospects to support sales activity.

 

International revenue was negatively impacted by $6.1 million for the nine months ended September 30, 2015 compared to the same period in 2014 due to the strengthening of the United States dollar relative to the British Pound and Japanese Yen, as well as the strengthening of the British Pound relative to the Euro. The effect of pricing changes on revenue was immaterial for the nine months ended September 30, 2015 compared to the same period in 2014.

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of Revenue. Cost of revenue increased $18.5 million, or 31.5%, for the nine months ended September 30, 2015 compared to the same period in 2014, which was faster than the rate of revenue increase of 24.0% for the nine months ended September 30, 2015 compared to the same period in 2014. The increase in cost of revenue was due to raw material and production cost increases of $7.2 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $9.4 million and equipment and facility-related cost increases of $1.9 million.

 

 

 

 

Gross Profit and Gross Margin. Gross profit increased from $94.8 million, or 61.7% of revenues, in the nine months ended September 30, 2014 to $113.1 million, or 59.4% of revenue, in the nine months ended September 30, 2015 primarily due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of an increase in expense attributable to recent manufacturing capacity expansion, and the impact of fluctuations in foreign currency exchange rates.

 

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

 

Marketing and Sales. Marketing and sales expenses increased $7.3 million, or 35.0%, during the nine months ended September 30, 2015 compared to the same period in 2014 due primarily to an increase in headcount resulting in personnel and related cost increases of $6.0 million and marketing program cost increases of $1.3 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 expenses increased $1.5 million, or 13.0%, during the nine months ended September 30, 2015 compared to the same period in 2014 due to an increase in headcount resulting in personnel and related cost increases of $2.7 million and operating cost increases of $0.3 million, which were partially offset by professional services cost decreases of $1.5 million.

 

General and Administrative. Our general and administrative expenses increased $4.7 million, or 29.5%, during the nine months ended September 30, 2015 compared to the same period in 2014 due to an increase in headcount resulting in personnel and related cost increases of $2.8 million, stock-based compensation costs increases of $0.6 million, intangible amortization expense increases of $0.2 million, administrative cost increases of $0.7 million and $0.6 million in costs related to our acquisition of Alphaform, which were partially offset by a decrease in professional services costs of $0.2 million. Amortization expenses relate to intangible assets acquired in the purchase of FineLine in April 2014.

 

Other Income (Expense), net. Other expense, net decreased $0.1 million during the nine months ended September 30, 2015 compared to the same period in 2014 due to changes in interest income on investments.

 

Provision for Income Taxes. Our effective tax rate of 31.9% for the nine months ended September 30, 2015 increased 0.5% when compared to 31.4% for the same period in 2014. The increase in the effective tax rate is primarily due to changes in the mix of projected income earned in domestic and foreign tax jurisdictions for the tax year ending December 31, 2015. As a result of the increase in our effective tax rate combined with increased income attributable to the fluctuations described above, our income tax provision increased by $1.8 million to $16.2 million for the nine months ended September 30, 2015 compared to our income tax provision of $14.4 million for the nine months ended September 30, 2014.

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes our cash flows during the nine months ended September 30, 2015 and 2014:

 

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		Nine Months Ended September 30,
(dollars in thousands)		2015				2014
Net cash provided by operating activities		$	41,284			$	40,004
Net cash used in investing activities			(29,034	)			(55,234	)
Net cash provided by financing activities			8,870				6,540
Effect of exchange rates on cash and cash equivalents			(318	)			(81	)
Net increase (decrease) in cash and cash equivalents		$	20,802			$	(8,771	)

 

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Sources of Liquidity

 

Historically we have financed our operations and capital expenditures primarily through cash flow from operations and, to a lesser extent, lease financing. We had cash and cash equivalents of $64.1 million as of September 30, 2015, an increase of $20.8 million from December 31, 2014. The increase in our cash was primarily due to cash generated through operations and, to a lesser extent, proceeds from exercises of stock options and purchases through our employee stock purchase plan, which were partially offset by investing activity.

 

 

 

 

Cash Flows from Operating Activities

 

Cash flows from operating activities of $41.3 million during the nine months ended September 30, 2015 primarily consisted of net income of $34.5 million, adjusted for certain non-cash items, including depreciation and amortization of $10.4 million, stock-based compensation expense of $4.5 million and amortization of held-to-maturity securities of $0.9 million, which were partially offset by deferred taxes of $0.3 million and excess tax benefit from stock-based compensation expense of $5.2 million. Cash flows from operating activities increased $1.3 million during the nine months ended September 30, 2015 compared to the same period in 2014 due to increases in net income of $3.1 million, depreciation and amortization of $2.7 million and stock-based compensation expense of $1.0 million, which were partially offset by a decrease in amortization of held-to-maturity securities of $0.3 million, an increase in excess tax benefits of $0.8 million, changes in operating assets and liabilities of $3.6 million and deferred taxes of $0.8 million.

 

Cash flows from operating activities of $40.0 million during the nine months ended September 30, 2014 consisted of net income of $31.4 million, adjusted for certain non-cash items, including depreciation and amortization of $7.7 million, stock-based compensation expense of $3.6 million, amortization of held-to-maturity securities of $1.2 million and deferred taxes of $0.5 million, which were partially offset by $4.4 million of excess tax benefit on stock-based compensation.

 

Cash Flows from Investing Activities

 

Cash used in investing activities was $29.0 million during the nine months ended September 30, 2015, consisting of $27.2 million for the purchases of property and equipment and $42.7 million for the purchases of marketable securities, which were partially offset by $40.9 million in proceeds from maturities and call redemptions of marketable securities.

 

Cash used in investing activities was $55.2 million during the nine months ended September 30, 2014, consisting of $35.9 million for the purchases of property and equipment, $33.9 million for the payments on business acquisitions and $47.3 million for the purchases of marketable securities, which were partially offset by $61.9 million in proceeds from maturities, sales and call redemptions of marketable securities.

 

Cash Flows from Financing Activities

 

Cash provided by financing activities was $8.9 million during the nine months ended September 30, 2015, consisting of proceeds from exercises of stock options of $5.2 million and $5.2 million in excess tax benefit on stock-based compensation, which were partially offset by $1.4 million for payments of acquisition-related contingent consideration and $0.1 million for payments of debt.

 

Cash provided by financing activities was $6.5 million for the nine months ended September 30, 2014, consisting of proceeds from exercises of stock options of $3.9 million and $4.4 million in excess tax benefit on stock-based compensation, which were partially offset by $1.0 million for payments of debt and $0.8 million for payments of acquisition-related contingent consideration.

 

Off-Balance Sheet Arrangements

 

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

 

Critical Accounting Policies and Use of Estimates

 

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. There were no material changes in our significant accounting policies during the nine months ended September 30, 2015.

 

Recent Accounting Pronouncements

 

For information on recent accounting pronouncements, see Note 2 to the consolidated financial statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Currency Risk

 

As a result of our foreign operations, we have revenue, expenses, assets and liabilities that are denominated in foreign currencies. We generate revenue in British Pounds, Euro and Japanese Yen. Our production costs are incurred in British Pounds and Japanese Yen. A number of our employees are located throughout Europe and in Japan. Therefore, a portion of our payrolls and operating expenses are incurred and paid in British Pounds, Euro and Japanese Yen.

 

Our operating results and cash flows are adversely impacted when the United States dollar appreciates relative to other foreign currencies. Additionally, our operating results and cash flows are adversely impacted when the British Pound appreciates relative to the Euro. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign currency exchange rates.

 

We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be quantified by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. We recognized foreign currency income of $0.4 million and foreign currency loss of $0.4 million in the three and nine months ended September 30, 2015, respectively. We recognized foreign currency losses of $0.2 million and $0.4 million in the three and nine months ended September 30, 2014, respectively.

 

 

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures are effective and provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of these financial statements, we do not believe we are party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. 

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors we previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

No matters to disclose.

 

Item 3. Defaults Upon Senior Securities

 

No matters to disclose.

 

Item 4. Mine Safety Disclosures

 

No matters to disclose.

 

Item 5. Other Information

 

No matters to disclose.

  

Item 6. Exhibits

 

The following documents are filed as part of this report:

 

Exhibit Number			Description of Exhibit
3.1(1)			Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.
3.2(2)			Amended and Restated By-Laws of Proto Labs, Inc.
3.3(3)			Articles of Amendment to Third Amended and Restated Articles of Incorporation of Proto Labs, Inc. dated May 20, 2015
10.1			2012 Long-Term Incentive Plan, as amended August 5, 2015
31.1			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1			Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document
(1)	Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012, and incorporated by reference herein.
(2)	Previously filed as Exhibit 3.4 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission on February 13, 2012, and incorporated by reference herein.
(3)	Previously filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-35435), filed with the Commission on May 21, 2015, and incorporated by reference herein.

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Proto Labs, Inc.
Date: November 3, 2015		/s/ Victoria M. Holt
		Victoria M. Holt
		President and Chief Executive Officer (Principal Executive Officer)

 

Date: November 3, 2015		/s/ John A. Way
		John A. Way
		Chief Financial Officer (Principal Financial Officer)

 

 

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