# Proto Labs Inc: Form 10-Q for the period ended Sep 30, 2017

- Company: [Proto Labs Inc](/companies/prlb.md) (CIK 1443669)
- Form: 10-Q
- Filed: 2017-10-31
- Accepted by EDGAR: Oct 31, 2017, 14:58 ET
- Period: 2017-09-30
- Accession: 0001437749-17-017948
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1443669/000143774917017948/prlb20171018_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1443669/000143774917017948/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $38.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2017-01-01 to 2017-09-30 | $109.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2017-07-01 to 2017-09-30 | $49.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2017-01-01 to 2017-09-30 | $141.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $5.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2017-01-01 to 2017-09-30 | $17.8m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | $19.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | $53.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $6.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $17.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $13.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | $37.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.49 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $1.40 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.50 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $1.41 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 26,802,034 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 26,716,553 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-01-01 to 2017-09-30 | $59.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $24.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2017-01-01 to 2017-09-30 | $4.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-09-30 | $119.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $234.8m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $477.6m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $35.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $47.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-09-30 | $429.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,239 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, 2016.*

### 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 that 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 an e-commerce driven digital manufacturer of quick-turn, on-demand injection-molded, CNC-machined and 3D-printed custom parts for prototyping and short-run production. We provide “Real Parts, Really Fast” to product developers and engineers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. 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 in low volumes, and 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 Injection Molding, CNC Machining and 3D Printing. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these manufacturing processes, extend the variety of materials we are able to support and 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.

### Injection Molding

Our Injection Molding product line uses our proprietary 3D CAD-to-CNC machining technology for the automated design and manufacture of thermoplastic or liquid silicone injection molds, which are then used to produce custom injection-molded parts utilizing commercially available equipment. Our Injection Molding 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 low-volume production often come back to Proto Labs’ Injection Molding product line for additional quantities typically ranging up to 10,000 parts or more. They do so to support pilot production for product testing or 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, because demand for their product is unpredictable, or because they need end-of-life production support. These additional part orders typically occur on approximately half of the molds that we make, usually accounting for approximately half of our total Injection Molding revenue.

### CNC Machining

Our CNC Machining product line uses our proprietary 3D CAD-to-CNC machining technology on commercially available CNC machines to cut plastic or metal blocks or bars 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 CNC Machining product line is well suited to produce small quantities, typically in the range of one to 200 parts.

### 3D Printing

Our 3D Printing product line includes stereolithography (SL), selective laser sintering (SLS), direct metal laser sintering (DMLS), Multi Jet Fusion (MJF) and PolyJet processes, which offers customers a wide-variety of high-quality, precision rapid prototyping and low-volume production. These processes create parts with a high level of accuracy, detail, strength and durability. 3D Printing 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 conducted in three geographic operating segments 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 our United States and Europe markets is derived from our Injection Molding, CNC Machining and 3D Printing product lines. Revenue within our Japan market is derived from our Injection Molding and CNC Machining 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 3D Printing through our acquisition of FineLine Prototyping, Inc. in April 2014 and expanded through our acquisition of certain assets of Alphaform AG (Alphaform) in October 2015;
- improving the usability of our product lines such as our web-centric applications;
- 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) in Injection Molding and lathe-turned parts in CNC Machining;
- expanding the breadth of manufacturing capabilities, for example, by adding rapid overmolding and insert molding technology to our Injection Molding product line as well as PolyJet and Multi Jet Fusion technology to our 3D printing product line; and
- adding a suite of capabilities designed to address the on-demand needs of the low-volume, high-mix product segment.

During the three months ended September 30, 2017, we served 16,909 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 18.5% over the same period in 2016. During the nine months ended September 30, 2017, we served 31,307 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 18.0% over the same period in 2016. The information does not include 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface.

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

Cost of revenue consists primarily of raw materials, employee compensation, benefits, stock-based compensation, equipment depreciation, 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 currency exchange rates.

### 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 in each of these 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 injection-molded, CNC-machined, CNC-turned and 3D-printed custom parts for prototyping and low-volume production. In order 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 electronic, print and pay-per-click advertising, trade shows 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 and other related overhead. 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, net

Other income, net primarily consists of foreign currency-related gains and losses and interest income on cash balances and investments. 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.

### 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 we expect our effective tax rate to remain relatively constant.

### Results of Operations

The following table summarizes 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 September 30, 2017 |  | 2016 |  | Change $% |  | Nine Months Ended September 30, 2017 |  | 2016 |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $88,105 | 100.0% | $78,173 | 100.0% | $9,932 | 12.7 | $250,312 | 100.0% | $225,702 | 100.0% | $24,610 | 10.9 |
| Cost of revenue | 38,793 | 44.0 | 33,448 | 42.8 | 5,345 | 16.0 | 109,358 | 43.7 | 99,077 | 43.9 | 10,281 | 10.4 |
| Gross profit | 49,312 | 56.0 | 44,725 | 57.2 | 4,587 | 10.3 | 140,954 | 56.3 | 126,625 | 56.1 | 14,329 | 11.3 |
| Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |
| Marketing and sales | 13,846 | 15.7 | 11,787 | 15.1 | 2,059 | 17.5 | 41,463 | 16.6 | 34,182 | 15.1 | 7,281 | 21.3 |
| Research and development | 5,877 | 6.7 | 5,976 | 7.6 | (99) | (1.7) | 17,784 | 7.1 | 17,110 | 7.6 | 674 | 3.9 |
| General and administrative | 10,222 | 11.6 | 10,020 | 12.8 | 202 | 2.0 | 28,256 | 11.3 | 28,397 | 12.6 | (141) | (0.5) |
| Total operating expenses | 29,945 | 34.0 | 27,783 | 35.5 | 2,162 | 7.8 | 87,503 | 35.0 | 79,689 | 35.3 | 7,814 | 9.8 |
| Income from operations | 19,367 | 22.0 | 16,942 | 21.7 | 2,425 | 14.3 | 53,451 | 21.3 | 46,936 | 20.8 | 6,515 | 13.9 |
| Other income (expense), net | 291 | 0.3 | 625 | 0.8 | (334) | (53.4) | 1,779 | 0.7 | 2,342 | 1.0 | (563) | (24.0) |
| Income before income taxes | 19,658 | 22.3 | 17,567 | 22.5 | 2,091 | 11.9 | 55,230 | 22.0 | 49,278 | 21.8 | 5,952 | 12.1 |
| Provision for income taxes | 6,438 | 7.3 | 5,585 | 7.2 | 853 | 15.3 | 17,724 | 7.1 | 15,943 | 7.0 | 1,781 | 11.2 |
| Net income | $13,220 | 15.0% | $11,982 | 15.3% | $1,238 | 10.3% | $37,506 | 14.9% | $33,335 | 14.8% | $4,171 | 12.5% |

15

Stock-based compensation expense included in the statements of operations data above for the three and nine months ended September 30, 2017 and 2016 was as follows:

*(dollars in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Stock options and restricted stock | $2,063 | $1,553 | $5,706 | $4,820 |
| Employee stock purchase plan | 138 | 166 | 453 | 440 |
| Total stock-based compensation expense | $2,201 | $1,719 | $6,159 | $5,260 |
| Cost of revenue | $263 | $205 | $698 | $489 |
| Operating expenses: |  |  |  |  |
| Marketing and sales | 417 | 250 | 1,024 | 741 |
| Research and development | 295 | 309 | 796 | 1,084 |
| General and administrative | 1,226 | 955 | 3,641 | 2,946 |
| Total stock-based compensation expense | $2,201 | $1,719 | $6,159 | $5,260 |

### Comparison of Three Months Ended September 30, 2017 and 2016

#### Revenue

Revenue by reportable segment and the related changes for the three months ended September 30, 2017 and 2016 was as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended September 30, 2017 $% of Total Revenue |  | 2016 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $67,490 | 76.6% | $59,574 | 76.2% | $7,916 | 13.3% |
| Europe | 18,094 | 20.5 | 15,610 | 23.0 | 2,484 | 15.9 |
| Japan | 2,521 | 2.9 | 2,989 | 3.2 | (468) | (15.7) |
| Total revenue | $88,105 | 100.0% | $78,173 | 100.0% | $9,932 | 12.7% |

Our revenue increased $9.9 million, or 12.7%, for the three months ended September 30, 2017 compared to the same period in 2016. By reportable segment, revenue in the United States increased $7.9 million, or 13.3%, revenue in Europe increased $2.5 million, or 15.9%, and revenue in Japan decreased $0.5 million, or 15.7%, in each case for the three months ended September 30, 2017 compared to the same period in 2016.

Our revenue growth during the three months ended September 30, 2017 was the result of an increase in the volume of the product developers and engineers we served through our web-based customer interface. During the three months ended September 30, 2017, we served 16,909 unique product developers and engineers through our web-based customer interface, an increase of 18.5% over the same period in 2016. The information does not include certain 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface.

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 of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was positively impacted by $0.4 million during the three months ended September 30, 2017 when compared to the same period in 2016 as a result of foreign currency movements, primarily the strengthening of the Euro relative to the British Pound.

Revenue by product line and the related changes for the three months ended September 30, 2017 and 2016 was as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended September 30, 2017 $% of Total Revenue |  | 2016 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Injection Molding | $49,480 | 56.2% | $46,445 | 59.4% | $3,035 | 6.5% |
| CNC Machining | 27,166 | 30.8 | 21,781 | 27.9 | 5,385 | 24.7 |
| 3D Printing | 11,102 | 12.6 | 9,850 | 12.6 | 1,252 | 12.7 |
| Other Revenue | 357 | 0.4 | 97 | 0.1 | 260 | 268.0 |
| Total revenue | $88,105 | 100.0% | $78,173 | 100.0% | $9,932 | 12.7% |

By product line, our revenue growth was driven by a 6.5% increase in Injection Molding revenue, a 24.7% increase in CNC Machining revenue and a 12.7% increase in 3D Printing revenue, as well as a $0.3 million increase in Other Revenue in each case for the three months ended September 30, 2017 compared to the same period in 2016.

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

*Cost of Revenue.* Cost of revenue increased $5.3 million, or 16.0%, for the three months ended September 30, 2017 compared to the same period in 2016, which was faster than the rate of revenue increase of 12.7% for the three months ended September 30, 2017 compared to the same period in 2016. The increase in cost of revenue resulted from the growth of the business and was due to raw material and production cost increases of $1.9 million, 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 $0.3 million to support increased sales volumes.

*Gross Profit and Gross Margin.* Gross profit increased from $44.7 million, or 57.2% of revenue, in the three months ended September 30, 2016 to $49.3 million, or 56.0% of revenue, in the three months ended September 30, 2017. Gross profit increased primarily due to increases in revenue. Gross margin decreased due to the timing and mix of revenue, which impacted the increase in cost of revenue discussed above.

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

*Marketing and Sales.* Marketing and sales expenses increased $2.1 million, or 17.5%, during the three months ended September 30, 2017 compared to the same period in 2016 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.0 million as well as marketing program cost increases of $0.1 million.

*Research and Development.* Our research and development expenses decreased $0.1 million, or 1.7%, during the three months ended September 30, 2017 compared to the same period in 2016 due to general operating cost decreases of $0.1 million.

*General and Administrative.* Our general and administrative expenses increased $0.2 million, or 2.0%, during the three months ended September 30, 2017 compared to the same period in 2016 due to an increase in headcount resulting in personnel and related costs increase of $0.6 million and stock based compensation cost increases of $0.3 million, which were partially offset by decreases in administrative costs of $0.4 million and professional services cost decreases of $0.3 million. The decrease in administrative costs was due to expenses recorded in 2016 related to our decisions to vacate existing facilities and move to new facilities in the U.S. and Japan.

*Other Income, net.* We recognized other income, net of $0.3 million for the three months ended September 30, 2017, a decrease of $0.3 million compared to other income, net of $0.6 million for the three months ended September 30, 2016. Other income, net decreased primarily due to a decrease of $0.4 million in foreign currency gains, which were partially offset by an increase of $0.1 million in interest income on investments.

*Provision for Income Taxes.* Our effective tax rate of 32.8% for the three months ended September 30, 2017 increased 1.0% compared to 31.8% for the same period in 2016. The increase in the effective tax rate is primarily due to changes in taxable income in our geographic regions in the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016. Our income tax provision increased by $0.8 million to $6.4 million for the three months ended September 30, 2017 compared to our income tax provision of $5.6 million for the three months ended September 30, 2016.

### Comparison of Nine Months Ended September 30, 2017 and 2016

#### Revenue

Revenue by reportable segment and the related changes for the nine months ended September 30, 2017 and 2016 was as follows:

*(dollars in thousands)*

| Revenue | Nine Months Ended September 30, 2017 $% of Total Revenue |  | 2016 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $191,019 | 76.3% | $169,364 | 75.0% | $21,655 | 12.8% |
| Europe | 51,224 | 20.5 | 48,518 | 21.5 | 2,706 | 5.6 |
| Japan | 8,069 | 3.2 | 7,820 | 3.5 | 249 | 3.2 |
| Total revenue | $250,312 | 100.0% | $225,702 | 100.0% | $24,610 | 10.9% |

Our revenue increased $24.6 million, or 10.9%, for the nine months ended September 30, 2017 compared to the same period in 2016. By reportable segment, revenue in the United States increased $21.7 million, or 12.8%, revenue in Europe increased $2.7 million, or 5.6%, and revenue in Japan increased $0.2 million, or 3.2%, in each case for the nine months ended September 30, 2017 compared to the same period in 2016.

Our revenue growth during the nine months ended September 30, 2017 was the result of an increase in the volume of the product developers and engineers we served through our web-based customer interface. During the nine months ended September 30, 2017, we served 31,307 unique product developers and engineers through our web-based customer interface, an increase of 18.0% over the same period in 2016. The information does not include certain 3D Printing and Injection Molding customers resulting from the Alphaform acquisition who do not utilize our web-based interface.

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 of existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $1.4 million during the nine months ended September 30, 2017 when compared to the same period in 2016 as a result of foreign currency movements, primarily the strengthening of the United States Dollar relative to the British Pound.

Revenue by product line and the related changes for the nine months ended September 30, 2017 and 2016 was as follows:

*(dollars in thousands)*

| Revenue | Nine Months Ended September 30, 2017 $% of Total Revenue |  | 2016 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Injection Molding | $144,187 | 57.6% | $134,376 | 59.5% | $9,811 | 7.3% |
| CNC Machining | 73,318 | 29.3 | 60,510 | 26.8 | 12,808 | 21.2 |
| 3D Printing | 32,061 | 12.8 | 28,059 | 12.4 | 4,002 | 14.3 |
| Other Revenue | 746 | 0.3 | 2,757 | 1.3 | (2,011) | (72.9) |
| Total revenue | $250,312 | 100.0% | $225,702 | 100.0% | $24,610 | 10.9% |

By product line, our revenue growth was driven by a 7.3% increase in Injection Molding revenue, which includes headwind from our decision to discontinue MIM and Thixo manufacturing processes during the second quarter of 2016, a 21.2% increase in CNC Machining revenue and a 14.3% increase in 3D Printing revenue, as well as a $2.0 million decrease in Other Revenue driven by our decision in 2016 to exit our non-core resin resale business in Europe, in each case for the nine months ended September 30, 2017 compared to the same period in 2016.

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

*Cost of Revenue.* Cost of revenue increased $10.3 million, or 10.4%, for the nine months ended September 30, 2017 compared to the same period in 2016, which was slower than the rate of revenue increase of 10.9% for the nine months ended September 30, 2017 compared to the same period in 2016 reflecting the realization of productivity improvements. The net increase in cost of revenue resulted from the growth of the business and was due to raw material and production cost increases of $2.8 million, an increase in direct labor headcount resulting in personnel and related cost increases of $6.8 million and equipment and facility-related cost increases of $0.7 million to support increased sales volumes.

*Gross Profit and Gross Margin.* Gross profit increased from $126.6 million, or 56.1% of revenues, in the nine months ended September 30, 2016 to $141.0 million, or 56.3% of revenue, in the nine months ended September 30, 2017. Gross profit increased primarily due to increases in revenue and realization of manufacturing productivity improvements, partially offset by the volume- and mix-related increase in cost of revenue as discussed above.

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

*Marketing and Sales.* Marketing and sales expenses increased $7.3 million, or 21.3%, during the nine months ended September 30, 2017 compared to the same period in 2016 due primarily to an increase in headcount resulting in personnel and related cost increases of $7.1 million as well as marketing program cost increases of $0.2 million.

*Research and Development.* Our research and development expenses increased $0.7 million, or 3.9%, during the nine months ended September 30, 2017 compared to the same period in 2016 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, which were partially offset by a decrease in professional services cost of $0.1 million.

*General and Administrative.* Our general and administrative expenses decreased $0.1 million, or 0.5%, during the nine months ended September 30, 2017 compared to the same period in 2016 due to decreases in administrative costs of $1.7 million and professional services costs of $0.4 million, which were partially offset by an increase in headcount resulting in personnel and related cost increases of $1.3 million and stock based compensation cost increases of $0.7 million. The decrease in administrative costs was due to expenses recorded in 2016 related to our decisions to exit MIM and Thixo manufacturing processes and vacate existing facilities and move to new facilities in the U.S. and Japan.

*Other Income, net.* We recognized other income, net of $1.8 million for the nine months ended September 30, 2017, a decrease of $0.5 million when compared to other income, net of $2.3 million for the nine months ended September 30, 2016. Other income, net decreased primarily due to a $1.3 million decrease in foreign currency gains, which was partially offset by a $0.4 million favorable legal settlement and a $0.4 million increase in interest income on investments.

*Provision for Income Taxes.* Our effective tax rate of 32.1% for the nine months ended September 30, 2017 decreased 0.3% compared to 32.4% for the same period in 2016. The decrease in the effective tax rate is primarily due to changes in taxable income in our geographic regions in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Our income tax provision increased by $1.8 million to $17.7 million for the nine months ended September 30, 2017 compared to our income tax provision of $15.9 million for the nine months ended September 30, 2016.

### Liquidity and Capital Resources

#### Cash Flows

The following table summarizes our cash flows during the nine months ended September 30, 2017 and 2016:

*(dollars in thousands)*

|  | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $59,000 | $58,142 |
| Net cash used in investing activities | (10,625) | (41,287) |
| Net cash provided by financing activities | 1,339 | 3,768 |
| Effect of exchange rates on cash and cash equivalents | 774 | (58) |
| Net increase in cash and cash equivalents | $50,488 | $20,565 |

19

#### Sources of Liquidity

Historically, we have primarily financed our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $119.3 million as of September 30, 2017, an increase of $50.5 million from December 31, 2016. The increase in our cash was primarily due to cash generated through operations and proceeds from maturities of marketable securities, which were partially offset by repurchases of common stock and investing activity.

#### Cash Flows from Operating Activities

Cash flows from operating activities were $59.0 million during the nine months ended September 30, 2017 and primarily consisted of net income of $37.5 million, adjusted for certain non-cash items, including depreciation and amortization of $13.5 million, stock-based compensation expense of $6.2 million, deferred taxes of $0.7 million and amortization of held-to-maturity securities of $0.9 million. Cash flows from operating activities increased $0.9 million during the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to increases in net income of $4.2 million, depreciation and amortization of $0.7 million driven by an increase in capital investments, an increase in stock-based compensation expense of $0.9 million, an increase in deferred taxes of $0.2 million and an increase in other adjustments of $1.3 million primarily due to changes in foreign currency. These increases were partially offset by a decrease in loss on impairment of assets of $0.4 million and a decrease in changes in operating assets and liabilities of $6.0 million driven by general growth of the business and timing of cash receipts and payments.

Cash flows from operating activities of $58.1 million during the nine months ended September 30, 2016 and primarily consisted of net income of $33.3 million, adjusted for certain non-cash items, including depreciation and amortization of $12.8 million, stock-based compensation expense of $5.3 million, deferred taxes of $0.5 million, loss on impairment of assets of $0.5 million and amortization of held-to-maturity securities of $0.9 million, which were partially offset by other adjustments of $1.3 million.

#### Cash Flows from Investing Activities

Cash used in investing activities was $10.6 million during the nine months ended September 30, 2017, consisting of $24.2 million for the purchases of property and equipment, $20.0 million for the purchases of marketable securities and $0.5 million for the purchases of other investments, which were partially offset by $34.1 million in proceeds from maturities of marketable securities.

Cash used in investing activities was $41.3 million during the nine months ended September 30, 2016, consisting of $31.0 million for the purchases of property and equipment and $56.2 million for the purchases of marketable securities, which were partially offset by $45.9 million in proceeds from maturities of marketable securities.

#### Cash Flows from Financing Activities

Cash provided by financing activities was $1.3 million during the nine months ended September 30, 2017, consisting of proceeds from exercises of stock options of $5.7 million, which were partially offset by repurchases of common stock of $4.4 million.

Cash provided by financing activities was $3.7 million during the nine months ended September 30, 2016, consisting of proceeds from exercises of stock options of $4.1 million, which were partially offset by $0.4 million for acquisition-related contingent consideration payments.

### 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, 2016. There were no material changes in our significant accounting policies during the nine months ended September 30, 2017.

### 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.

## Market risk

As filed, 1,478 characters.

### 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 and incur production costs and operating expenses in British Pounds, Euros and Japanese Yen.

Our operating results and cash flows are adversely impacted when the United States Dollar appreciates relative to 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 assessed 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 losses of $0.1 million in the three months ended September 30, 2017 and foreign currency gains of $0.3 million in the nine months ended September 30, 2017, respectively. We recognized foreign currency gains of $0.4 million and $1.6 million in the three and nine months ended September 30, 2016, respectively.

## 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, 188 characters.

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, 2016.

Filed Oct 31, 2017.
Source: SEC EDGAR, the filing index for accession 0001437749-17-017948. Last ingested by Listed: Nov 4, 2026, 18:20 ET. No prices; not investment advice.