# Proto Labs Inc: Form 10-Q/A for the period ended Mar 31, 2014

- Company: [Proto Labs Inc](/companies/prlb.md) (CIK 1443669)
- Form: 10-Q/A
- Filed: 2014-05-06
- Accepted by EDGAR: May 6, 2014, 15:33 ET
- Period: 2014-03-31
- Accession: 0001437749-14-008042
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1443669/000143774914008042/prlb20140506_10qa.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1443669/000143774914008042/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-01-01 to 2014-03-31 | $46.1m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-01-01 to 2014-03-31 | $17.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-01-01 to 2014-03-31 | $29.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2014-01-01 to 2014-03-31 | $3.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2014-01-01 to 2014-03-31 | $14.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-01-01 to 2014-03-31 | $4.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-01-01 to 2014-03-31 | $10.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.39 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.40 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-01-01 to 2014-03-31 | 26,091,069 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-01-01 to 2014-03-31 | $15.3m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2014-01-01 to 2014-03-31 | $9.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-03-31 | $44.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-03-31 | $110.7m | us-gaap:AssetsCurrent |
| Total assets | at 2014-03-31 | $246.2m | us-gaap:Assets |
| Current liabilities | at 2014-03-31 | $16.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-03-31 | $21.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-03-31 | $224.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,426 characters.

*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 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 injection molding service.

### 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 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 three months ended March 31, 2014, we served approximately 7,700 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 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 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 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.

*(dollars in thousands)*

|  | Three Months Ended March 31, 2014 |  | 2013 |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $46,074 | 100.0% | $37,313 | 100.0% | $8,761 | 23.5% |
| Cost of revenue | 17,050 | 37.0 | 14,034 | 37.6 | 3,016 | 21.5 |
| Gross profit | 29,024 | 63.0 | 23,279 | 62.4 | 5,745 | 24.7 |
| Operating expenses: |  |  |  |  |  |  |
| Marketing and sales | 6,417 | 13.9 | 5,263 | 14.2 | 1,154 | 21.9 |
| Research and development | 3,456 | 7.5 | 2,628 | 7.0 | 828 | 31.5 |
| General and administrative | 4,703 | 10.2 | 3,994 | 10.7 | 709 | 17.8 |
| Total operating expenses | 14,576 | 31.6 | 11,885 | 31.9 | 2,691 | 22.6 |
| Income from operations | 14,448 | 31.4 | 11,394 | 30.5 | 3,054 | 26.8 |
| Other income, net | 103 | 0.2 | 3 | - | 100 | \* |
| Income before income taxes | 14,551 | 31.6 | 11,397 | 30.5 | 3,154 | 27.7 |
| Provision for income taxes | 4,449 | 9.7 | 3,110 | 8.3 | 1,339 | 43.1 |
| Net income | $10,102 | 21.9% | $8,287 | 22.2% | $1,815 | 21.9% |

\* Percentage change not meaningful

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

*(dollars in thousands)*

|  | Three Months Ended March 31, 2014 | 2013 |
| --- | ---: | ---: |
| Stock options and restricted stock | $912 | $776 |
| Employee stock purchase plan | 86 | 89 |
| Total stock-based compensation expense | $998 | $865 |
| Cost of revenue | $82 | $71 |
| Operating expenses: |  |  |
| Marketing and sales | 195 | 150 |
| Research and development | 215 | 173 |
| General and administrative | 506 | 471 |
| Total stock-based compensation expense | $998 | $865 |

15

### Comparison of Three Months Ended March 31, 2014 and 2013

#### Revenue

The Company’s revenue is derived from its Protomold injection molding and Firstcut computer numerical control (CNC) services. Total revenue by service and the related changes for the three months ended March 31, 2014 and 2013 were as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended March 31, 2014 $% of Total Revenue |  | 2013 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Protomold | $32,694 | 71.0% | $26,880 | 72.0% | $5,814 | 21.6% |
| Firstcut | 13,380 | 29.0 | 10,433 | 28.0 | 2,947 | 28.2 |
| Total revenue | $46,074 | 100.0% | $37,313 | 100.0% | $8,761 | 23.5% |

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

*(dollars in thousands)*

| Revenue | Three Months Ended March 31, 2014 $% of Total Revenue |  | 2013 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $33,022 | 71.7% | $28,148 | 75.4% | $4,874 | 17.3% |
| International | 13,052 | 28.3 | 9,165 | 24.6 | 3,887 | 42.4 |
| Total revenue | $46,074 | 100.0% | $37,313 | 100.0% | $8,761 | 23.5% |

Our revenue increased $8.8 million, or 23.5%, for the three months ended March 31, 2014 compared with the same period in 2013. This revenue growth was driven by a 17.3% increase in United States revenue, 42.4% increase in international revenue, 21.6% increase in Protomold revenue and 28.2% increase in Firstcut revenue, in each case for the three months ended March 31, 2014 compared with the same period in 2013.

Our revenue growth in the three months ended March 31, 2014 was the result of increased volume and spending of the product developers we served. During the three months ended March 31, 2014, we served approximately 7,700 unique product developers, an increase of 18% over the same period in 2013. Average revenue per product developer also increased 4% during the three months ended March 31, 2014 compared to the same period in 2013.

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 $0.4 million in the three months ended March 31, 2014 compared to the same period in 2013 due to the strengthening of foreign currencies relative to the United States dollar. The effect of pricing changes on revenue was immaterial for the three months ended March 31, 2014 compared to the same period in 2013.

#### Cost of Revenue, Gross Profit and Gross Margin

*Cost of Revenue.* Cost of revenue increased $3.0 million, or 21.5%, for the three months ended March 31, 2014 compared to the same period in 2013, which was slightly slower than the rate of revenue increase of 23.5% for the three months ended March 31, 2014 compared to the same period in 2013. The increase in cost of revenue was due to raw material and production cost increases of $0.6 million to support increased sales volumes, equipment and facility-related cost increases of $0.6 million and an increase in direct labor headcount resulting in personnel and related cost increases of $1.8 million.

*Gross Profit and Gross Margin.* Gross profit increased to $29.0 million, or 63.0% of revenues, for the three months ended March 31, 2014 from $23.3 million, or 62.4% of revenues, for the three months ended March 31, 2013 due to increases in revenue offset by the cost of revenue as discussed above. Gross margin increased primarily as a result of efficiencies gained through higher equipment utilization and continually refined manufacturing processes.

#### Operating Expenses, Other Income, Net and Provision for Income Taxes

*Marketing and Sales.* Marketing and sales expense increased $1.2 million, or 21.9%, for the three months ended March 31, 2014 compared to the same period in 2013 due primarily to an increase in headcount resulting in personnel and related cost increases of $0.9 million and marketing program cost increases of $0.3 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 expense increased $0.8 million, or 31.5%, for the three months ended March 31, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $0.6 million and operating cost increases of $0.2 million.

*General and Administrative.* Our general and administrative expense increased $0.7 million, or 17.8%, for the three months ended March 31, 2014 compared to the same period in 2013 due to an increase in headcount resulting in personnel and related cost increases of $0.1 million, administrative cost increases of $0.2 million and professional service cost increases of $0.4 million. The increase in professional service costs is primarily attributable to compliance efforts in response to our first internal control audit under the requirements of Section 404 of the Sarbanes Oxley Act of 2002.

*Other Income, Net.* Other income, net increased $0.1 million for the three months ended March 31, 2014 compared to the same period in 2013 due to changes in foreign currency rates.

*Provision for Income Taxes.* Our effective tax rate of 30.6% for the three months ended March 31, 2014 increased by 3.3% when compared to our effective tax rate of 27.3% 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 three months ended March 31, 2013. Refer to Footnote 8 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 $1.3 million to $4.4 million for the three months ended March 31, 2014 compared to our income tax provision of $3.1 million for the three months ended March 31, 2013.

### Liquidity and Capital Resources

#### Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2014 and 2013:

*(dollars in thousands)*

|  | Three Months Ended March 31, 2014 | 2013 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $15,266 | $11,145 |
| Net cash used in investing activities | (15,687) | (25,323) |
| Net cash provided by financing activities | 1,512 | 5,594 |
| Effect of exchange rates on cash and cash equivalents | 71 | (246) |
| Net increase (decrease) in cash and cash equivalents | $1,162 | $(8,830) |

#### 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 and the use of bank loans. We had cash and cash equivalents of $44.2 million as of March 31, 2014, an increase of $1.2 million from December 31, 2013. The increase in our cash was primarily due to proceeds received from exercises of stock options.

#### Cash Flows from Operating Activities

Cash provided by operating activities was $15.3 million for the three months ended March 31, 2014. We had net income of $10.1 million, which included non-cash charges consisting of $2.1 million in depreciation, $1.0 million in stock-based compensation, $0.5 million in amortization of held-to-maturity securities and $0.1 million in deferred taxes, partially offset by $0.9 million of excess tax benefit on stock-based compensation. Other sources of cash in operating activities totaled $2.4 million, which included an increase in income taxes payable of $4.0 million and increase in accounts payable of $3.9 million, which were partially offset by an increase in accounts receivable of $3.5 million, decrease in accrued liabilities and other of $1.0 million, increase in prepaid expenses and other of $0.8 million and increase in inventory of $0.2 million. These operating cash increases in accounts receivable, accounts payable, inventories and other reflect increases in revenue and the growth of our business.

Cash provided by operating activities was $11.1 million for the three months ended March 31, 2013. We had net income of $8.3 million, which included noncash charges consisting of $1.7 million in depreciation, $0.9 million in stock-based compensation, $0.3 million in amortization of held-to-maturity securities and $0.1 million in deferred taxes, offset by $4.1 million of excess tax benefit on stock-based compensation. Other sources of cash in operating activities totaled $3.9 million, which included an increase in income taxes payable of $2.7 million, increase in accrued liabilities and other of $1.8 million, increase in accounts payable of $1.1 million and a decrease in prepaid expenses and other of $0.4 million, which were partially offset by an increase in accounts receivable of $1.9 million and increase in inventories of $0.2 million. These operating cash increases in accounts receivable, accounts payable, inventories and other reflect increases in revenue and the growth of our business.

#### Cash Flows from Investing Activities

Cash used in investing activities was $15.7 million for the three months ended March 31, 2014, consisting of $9.9 million for the purchase of property and equipment and $32.4 million for the purchase of marketable securities, which were partially offset by $26.6 million in proceeds from the maturities and call redemptions of marketable securities.

Cash used in investing activities was $25.3 million for the three months ended March 31, 2013, consisting of $2.5 million for the purchase of property and equipment and $41.1 million for the purchase of marketable securities, which were partially offset by $18.3 million in proceeds from the maturities and call redemptions of marketable securities.

#### Cash Flows from Financing Activities

Cash provided by financing activities was $1.5 million for the three months ended March 31, 2014, consisting of excess tax benefit on stock-based compensation of $0.9 million and $0.7 million in proceeds from exercises of stock options, which were partially offset by $0.1 million for payments of debt.

Cash provided by financing activities was $5.6 million for the three months ended March 31, 2013, consisting of excess tax benefit on stock-based compensation of $4.1 million and $1.6 million in proceeds from exercises of stock options, which were partially offset by $0.1 million for payments of debt.

### 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, 2013. There were no material changes in our significant accounting policies during the three months ended March 31, 2014.

### Recent Accounting Pronouncements

There have been no accounting pronouncements issued or adopted in the period that apply to, or impact, the financial reporting of the Company.

## Market risk

As filed, 830 characters.

### Foreign Currency Risk

As a result of our foreign operations, we have revenue and expenses, assets and liabilities that are denominated in foreign currencies. A number of our employees are located in Europe and Japan. Therefore, a portion of our payrolls and operating expenses are paid and incurred in the British Pound, Euro and Yen. Our operating results and cash flows are adversely impacted when the U.S. dollar depreciates relative to other foreign currencies. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk. Foreign currency risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on our results of operations.

## Controls and procedures

As filed, 1,436 characters.

### 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.

## Risk factors

As filed, 2,245 characters.

The risk factor discussed below updates 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, 2013.

**Our acquisition of FineLine Prototyping, Inc. presents risks to our business and could harm our operating results and financial condition.**

On April 23, 2014, we entered into a stock purchase agreement for the purchase of all of the outstanding shares of capital stock of FineLine Prototyping, Inc. At the closing, we paid cash consideration of $34 million to the sellers, which amount is subject to adjustment based on FineLine’s indebtedness and net working capital as of the closing date and FineLine’s expenses in connection with the transactions contemplated by the stock purchase agreement. The stock purchase agreement also provides that we will pay the sellers up to an additional $3 million if FineLine’s revenue for 2014 exceeds certain amounts and if certain milestones relating to the integration of FineLine’s and our businesses are achieved. FineLine provides additive manufacturing services. Our acquisition of FineLine subjects us to certain risks, including:

- We have not previously provided additive manufacturing services and the complexity of our operations therefore has increased, and we may not be able to maintain or grow the newly acquired portion of our business as quickly or significantly as anticipated, or at all;
- Integrating FineLine’s operations with our historic operations could divert management’s attention and cause our results of operations to suffer;
- We may be unable to integrate successfully FineLine’s business and realize the anticipated benefits of the acquisition;
- Our acquisition of FineLine includes significant goodwill, which could result in future impairment charges that would reduce our earnings;
- Our acquisition of FineLine and the integration of its business may involve unexpected costs, unexpected liabilities or unexpected delays; and
- Our acquisition of FineLine may harm relationships with FineLine’s customers, suppliers and employees.

Any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition.

Filed May 6, 2014.
Source: SEC EDGAR, the filing index for accession 0001437749-14-008042. Last ingested by Listed: Nov 4, 2026, 18:20 ET. No prices; not investment advice.