# Proto Labs Inc: Form 10-Q for the period ended Jun 30, 2019

- Company: [Proto Labs Inc](/companies/prlb.md) (CIK 1443669)
- Form: 10-Q
- Filed: 2019-07-30
- Accepted by EDGAR: Jul 30, 2019, 11:54 ET
- Period: 2019-06-30
- Accession: 0001437749-19-014903
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1443669/000143774919014903/prlb20190630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1443669/000143774919014903/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $115.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $229.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $55.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $110.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $60.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-01-01 to 2019-06-30 | $119.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-04-01 to 2019-06-30 | $8.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2019-01-01 to 2019-06-30 | $16.2m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $19.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | $39.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $4.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $8.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $16.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $31.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.60 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $1.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.60 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $1.18 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 27,041,422 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 27,113,328 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $54.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $34.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2019-01-01 to 2019-06-30 | $21.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $100.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $219.3m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $645.5m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $51.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $87.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-06-30 | $558.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,734 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, 2018.*

### 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 the world’s largest and fastest digital manufacturer of custom prototypes and on-demand production parts. We manufacture prototypes and low-volume production parts for companies 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, 3D printing and sheet metal fabrication to manufacture custom parts for our customers. 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 Injection Molding, CNC Machining, 3D Printing and Sheet Metal. We continually seek to expand the range of sizes and geometric complexity of the parts we can make with these 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.

### Injection Molding

Our Injection Molding product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of molds, which are then used to produce custom plastic and liquid silicone rubber injection-molded parts and over-molded and insert-molded injection-molded parts on commercially available equipment. Our Injection Molding product line works best for on-demand production, bridge tooling, pilot runs and functional prototyping. Our affordable aluminum molds and quick turnaround times help reduce design risk and limit overall production costs for product developers and engineers. 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 Protolabs’ Injection Molding product line for additional quantities. They do so to support pilot production for product testing, 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 requires limited annual quantity or because they need end-of-life production support. In 2017, we launched an on-demand manufacturing injection molding product offering. This product offering utilizes our existing processes, but is designed to fulfill the needs of customers with on-going production needs, typically in annual volumes of less than 10,000 parts.

### CNC Machining

Our CNC Machining product line uses commercially available CNC machines to offer milling and turning. CNC milling is a manufacturing process that cuts plastic and metal blocks into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. CNC turning with live tooling combines both lathe and mill capabilities to machine parts with cylindrical features from metal rod stock. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process.

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Quick-turn CNC machining works best for prototyping, form and fit testing, jigs and fixtures and functional components for end-use applications. The CNC Machining product line is well suited to produce small quantities, typically in the range of one to 1,000 parts.

### 3D Printing

Our 3D Printing product line includes stereolithography, selective laser sintering, direct metal laser sintering, Multi Jet Fusion and PolyJet processes, which offer 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. Industrial 3D Printing is best suited for functional prototypes, complex designs and end-use applications produced in small quantities, typically in the range of one to 50 parts.

### Sheet Metal

Our Sheet Metal product line includes quick-turn and e-commerce-enabled custom sheet metal parts, which provides customers with prototype and low-volume production parts. The rapid prototype sheet metal process is most often used when form, fit and function are all a priority. Our manufacturing process uses customer 3D CAD models uploaded by the product developer or engineer to fabricate quick-turn prototype sheet metal or short-run production parts. The Sheet Metal product line is well suited to produce quantities in the range of one to 500 parts.

### Key Financial Measures and Trends

### Revenue

Our operations are comprised of three geographic operating segments in the United States, Europe and Japan. Revenue is derived from our Injection Molding, CNC Machining, 3D Printing and Sheet Metal product lines. Injection Molding revenue consists of sales of custom injection molds and injection-molded parts. CNC Machining revenue consists of sales of CNC-machined custom parts. 3D Printing revenue consists of sales of 3D-printed parts. Sheet Metal revenue consists of sales of fabricated sheet metal custom parts. Our historical and current efforts to increase revenue have been directed at expanding the breadth of our product offerings, gaining new customers and selling to our existing customer base by increasing marketing and selling activities, including:

- expanding the breadth and scope of each of our product lines by adding more sizes and materials to our offerings;
- the introduction of our 3D Printing product line through our acquisition of FineLine in 2014;
- expanding 3D Printing to Europe through our acquisition of Alphaform in October 2015;
- the introduction of our Sheet Metal product line through our acquisition of RAPID in 2017; and
- continuously improving the usability of our product lines such as our web-centric applications.

During the three months ended June 30, 2019, we served 20,840 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 4.7% over the same period in 2018. During the six months ended June 30, 2019, we served 31,550 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 3.0% over the same period in 2018.

### 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 mix of revenue by product line and geography, pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, and foreign exchange rates.

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### 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, 3D-printed and sheet metal 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 and grow revenue.

*Research and development.* Research and development expense consists primarily of personnel and outside service costs related to the development of new processes and product lines, enhancement of existing product lines, development of software for internal use, maintenance of internally developed software, quality assurance and testing. Costs for internal use software are evaluated by project and capitalized where appropriate under ASC 350-40, *Intangibles — Goodwill and Other, Internal-Use Software*. We expect research and development expense to increase in the future as we seek to enhance and expand our product line offerings and supporting business systems.

*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.

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### 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 June 30, 2019 |  | 2018 |  | Change $% |  | Six Months Ended June 30, 2019 |  | 2018 |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $115,932 | 100.0 | $109,652 | 100.0 | $6,280 | 5.7 | $229,384 | 100.0 | $217,397 | 100.0 | $11,987 | 5.5 |
| Cost of revenue | 55,696 | 48.0 | 50,439 | 46.0 | 5,257 | 10.4 | 110,288 | 48.1 | 100,276 | 46.1 | 10,012 | 10.0 |
| Gross profit | 60,236 | 52.0 | 59,213 | 54.0 | 1,023 | 1.7 | 119,096 | 51.9 | 117,121 | 53.9 | 1,975 | 1.7 |
| Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |
| Marketing and sales | 19,285 | 16.6 | 17,557 | 16.0 | 1,728 | 9.8 | 37,862 | 16.5 | 34,129 | 15.7 | 3,733 | 10.9 |
| Research and development | 8,169 | 7.1 | 7,032 | 6.5 | 1,137 | 16.2 | 16,182 | 7.1 | 13,697 | 6.3 | 2,485 | 18.1 |
| General and administrative | 13,209 | 11.4 | 12,640 | 11.5 | 569 | 4.5 | 26,031 | 11.3 | 25,583 | 11.8 | 448 | 1.8 |
| Total operating expenses | 40,663 | 35.1 | 37,229 | 34.0 | 3,434 | 9.2 | 80,075 | 34.9 | 73,409 | 33.8 | 6,666 | 9.1 |
| Income from operations | 19,573 | 16.9 | 21,984 | 20.0 | (2,411) | (11.0) | 39,021 | 17.0 | 43,712 | 20.1 | (4,691) | (10.7) |
| Other income, net | 1,125 | 1.0 | 808 | 0.8 | 317 | 39.2 | 1,338 | 0.6 | 986 | 0.4 | 352 | 35.7 |
| Income before income taxes | 20,698 | 17.9 | 22,792 | 20.8 | (2,094) | (9.2) | 40,359 | 17.6 | 44,698 | 20.5 | (4,339) | (9.7) |
| Provision for income taxes | 4,532 | 3.9 | 4,478 | 4.1 | 54 | 2.2 | 8,682 | 3.8 | 8,333 | 3.8 | 349 | 4.2 |
| Net income | $16,166 | 14.0% | $18,314 | 16.7% | $(2,148) | (11.7)% | $31,677 | 13.8% | $36,365 | 16.7% | $(4,688) | (12.9)% |

Stock-based compensation expense included in the statements of operations data above for the three and six months ended June 30, 2019 and 2018 was as follows:

*(dollars in thousands)*

|  | Three Months Ended June 30, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Stock options and restricted stock | $3,193 | $2,534 | $5,972 | $4,688 |
| Employee stock purchase plan | 293 | 192 | 554 | 346 |
| Total stock-based compensation expense | $3,486 | $2,726 | $6,526 | $5,034 |
| Cost of revenue | $485 | $363 | $906 | $650 |
| Operating expenses: |  |  |  |  |
| Marketing and sales | 614 | 443 | 1,163 | 820 |
| Research and development | 503 | 376 | 926 | 690 |
| General and administrative | 1,884 | 1,544 | 3,531 | 2,874 |
| Total stock-based compensation expense | $3,486 | $2,726 | $6,526 | $5,034 |

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### Comparison of Three Months Ended June 30, 2019 and 2018

#### Revenue

Revenue by reportable segment and the related changes for the three months ended June 30, 2019 and 2018 were as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended June 30, 2019 $% of Total Revenue |  | 2018 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $91,149 | 78.6% | $86,354 | 78.8% | $4,795 | 5.6% |
| Europe | 20,940 | 18.1 | 20,213 | 18.4 | 727 | 3.6 |
| Japan | 3,843 | 3.3 | 3,085 | 2.8 | 758 | 24.6 |
| Total revenue | $115,932 | 100.0% | $109,652 | 100.0% | $6,280 | 5.7% |

Our revenue increased $6.3 million, or 5.7%, for the three months ended June 30, 2019 compared to the same period in 2018. By reportable segment, revenue in the United States increased $4.8 million, or 5.6%, for the three months ended June 30, 2019 compared to the same period in 2018. Revenue in Europe increased $0.7 million, or 3.6%, and revenue in Japan increased $0.8 million, or 24.6%, in each case for the three months ended June 30, 2019 compared to the same period in 2018.

Our revenue growth during the three months ended June 30, 2019 was the result of an increase in the volume and spend of product developers and engineers we served. During the three months ended June 30, 2019, we served 20,840 unique product developers and engineers, an increase of 4.7% over the same period in 2018.

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 result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $1.4 million during the three months ended June 30, 2019 compared to the same period in 2018 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.

Revenue by product line and the related changes for the three months ended June 30, 2019 and 2018 were as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended June 30, 2019 $% of Total Revenue |  | 2018 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Injection Molding | $55,457 | 47.8% | $51,586 | 47.0% | $3,871 | 7.5% |
| CNC Machining | 38,888 | 33.5 | 37,788 | 34.5 | 1,100 | 2.9 |
| 3D Printing | 15,266 | 13.2 | 13,248 | 12.1 | 2,018 | 15.2 |
| Sheet Metal | 5,472 | 4.7 | 6,309 | 5.8 | (837) | (13.3) |
| Other Revenue | 849 | 0.8 | 721 | 0.6 | 128 | 17.8 |
| Total revenue | $115,932 | 100.0% | $109,652 | 100.0% | $6,280 | 5.7% |

By product line, our revenue growth was driven by a 7.5% increase in Injection Molding revenue, a 2.9% increase in CNC Machining revenue, a 15.2% increase in 3D Printing revenue and a 17.8% increase in Other Revenue, which was partially offset by a 13.3% decrease in Sheet Metal, in each case for the three months ended June 30, 2019 compared to the same period in 2018.

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

*Cost of Revenue.* Cost of revenue increased $5.3 million, or 10.4%, for the three months ended June 30, 2019 compared to the same period in 2018, which was greater than the rate of revenue increase of 5.7% for the three months ended June 30, 2019 compared to the same period in 2018. The increase in cost of revenue resulted from the growth of the business, and was due to raw material and production cost increases of $0.8 million, an increase in direct labor headcount resulting in personnel and related cost increases of $3.0 million and equipment and facility-related cost increases of $1.5 million to support increased sales volumes.

*Gross Profit and Gross Margin.* Gross profit increased from $59.2 million in the three months ended June 30, 2018 to $60.2 million in the three months ended June 30, 2019 primarily due to an increase in revenue. Gross margin decreased from 54.0% in the three months ended June 30, 2018 to 52.0% in the three months ended June 30, 2019 due to investments in facilities and personnel to support future growth and the timing and mix of revenue, with the RAPID acquisition being the primary driver of the mix related impact.

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

*Marketing and Sales.* Marketing and sales expenses increased $1.7 million, or 9.8%, during the three months ended June 30, 2019 compared to the same period in 2018 due primarily to an increase in headcount resulting in personnel and related cost increases of $1.4 million as well as marketing program cost increases of $0.3 million.

*Research and Development.* Our research and development expenses increased $1.1 million, or 16.2%, during the three months ended June 30, 2019 compared to the same period in 2018 due to an increase in headcount resulting in personnel and related cost increases of $0.8 million, an increase in administrative and depreciation expenses of $0.2 million, as well as an increase in professional services costs of $0.1 million.

*General and Administrative.* Our general and administrative expenses increased $0.6 million, or 4.5%, during the three months ended June 30, 2019 compared to the same period in 2018 due to personnel and related cost increases of $0.3 million, stock based compensation cost increases of $0.4 million and administrative cost increases of $0.2 million, which were partially offset by a $0.3 million decrease in amortization cost driven by increased allocations to other expense categories.

*Other Income, net.* We recognized other income, net of $1.1 million for the three months ended June 30, 2019, an increase of $0.3 million compared to other income, net of $0.8 million for the three months ended June 30, 2018. Other income, net for the three months ended June 30, 2019 primarily consisted of $0.5 million in interest income on investments and a $0.5 million gain on foreign currency. Other income, net for the three months ended June 30, 2018 primarily consisted of $0.7 million gain on our sale of RAPID Wire & Cable, LLC and $0.4 million in interest income on investments, which was partially offset by a $0.3 million loss on foreign currency.

*Provision for Income Taxes.* Our effective tax rate of 21.9% for the three months ended June 30, 2019 increased 2.3% compared to 19.6% for the same period in 2018. The increase in the effective tax rate is primarily due to a decrease in tax benefits from the vesting of restricted stock and exercise of stock options. Our income tax provision of $4.5 million for the three months ended June 30, 2019 remained consistent compared to our income tax provision of $4.5 million for the three months ended June 30, 2018.

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### Comparison of Six Months Ended June 30, 2019 and 2018

#### Revenue

Revenue by reportable segment and the related changes for the six months ended June 30, 2019 and 2018 were as follows:

*(dollars in thousands)*

| Revenue | Six Months Ended June 30, 2019 $% of Total Revenue |  | 2018 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $178,960 | 78.0% | $170,521 | 78.4% | $8,439 | 4.9% |
| Europe | 42,194 | 18.4 | 40,158 | 18.5 | 2,036 | 5.1 |
| Japan | 8,230 | 3.6 | 6,718 | 3.1 | 1,512 | 22.5 |
| Total revenue | $229,384 | 100.0% | $217,397 | 100.0% | $11,987 | 5.5% |

Our revenue increased $12.0 million, or 5.5%, for the six months ended June 30, 2019 compared to the same period in 2018. By reportable segment, revenue in the United States increased $8.4 million, or 4.9%, for the six months ended June 30, 2019 compared to the same period in 2018. Revenue in Europe increased $2.0 million, or 5.1%, and revenue in Japan increased $1.5 million, or 22.5%, in each case for the six months ended June 30, 2019 compared to the same period in 2018.

Our revenue growth during the six months ended June 30, 2019 was the result of an increase in the volume and spend of product developers and engineers we served. During the six months ended June 30, 2019, we served 31,550 unique product developers and engineers, an increase of 3.0% over the same period in 2018.

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 result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $3.1 million during the six months ended June 30, 2019 compared to the same period in 2018 as a result of foreign currency movements, primarily the weakening of the British Pound and Euro relative to the United States Dollar.

Revenue by product line and the related changes for the six months ended June 30, 2019 and 2018 were as follows:

*(dollars in thousands)*

| Revenue | Six Months Ended June 30, 2019 $% of Total Revenue |  | 2018 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Injection Molding | $110,768 | 48.3% | $102,929 | 47.3% | $7,839 | 7.6% |
| CNC Machining | 76,760 | 33.5 | 74,519 | 34.3 | 2,241 | 3.0 |
| 3D Printing | 29,746 | 13.0 | 25,573 | 11.8 | 4,173 | 16.3 |
| Sheet Metal | 10,497 | 4.6 | 12,550 | 5.8 | (2,053) | (16.4) |
| Other Revenue | 1,613 | 0.6 | 1,826 | 0.8 | (213) | (11.7) |
| Total revenue | $229,384 | 100.0% | $217,397 | 100.0% | $11,987 | 5.5% |

By product line, our revenue growth was driven by a 7.6% increase in Injection Molding revenue, a 3.0% increase in CNC Machining revenue, a 16.3% increase in 3D Printing revenue, which was partially offset by a 16.4% decrease in Sheet Metal and an 11.7% decrease in Other Revenue, in each case for the six months ended June 30, 2019 compared to the same period in 2018.

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

*Cost of Revenue.* Cost of revenue increased $10.0 million, or 10.0%, for the six months ended June 30, 2019 compared to the same period in 2018, which was greater than the rate of revenue increase of 5.5% for the six months ended June 30, 2019 compared to the same period in 2018. The increase in cost of revenue resulted from the growth of the business, and was due to raw material and production cost increases of $1.1 million, an increase in direct labor headcount resulting in personnel and related cost increases of $6.1 million and equipment and facility-related cost increases of $2.8 million to support increased sales volumes.

*Gross Profit and Gross Margin.* Gross profit increased from $117.1 million in the six months ended June 30, 2018 to $119.1 million in the six months ended June 30, 2019 primarily due to an increase in revenue. Gross margin decreased from 53.9% in the six months ended June 30, 2018 to 51.9% in the six months ended June 30, 2019 due to investments in facilities and personnel to support future growth and the timing and mix of revenue, with the RAPID acquisition being the primary driver of the mix related impact.

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

*Marketing and Sales.* Marketing and sales expenses increased $3.7 million, or 10.9%, during the six months ended June 30, 2019 compared to the same period in 2018 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.9 million as well as marketing program cost increases of $0.8 million.

*Research and Development.* Our research and development expenses increased $2.5 million, or 18.1%, during the six months ended June 30, 2019 compared to the same period in 2018 due to an increase in headcount resulting in personnel and related cost increases of $2.0 million, as well as an increase in administrative and depreciation expenses of $0.5 million.

*General and Administrative.* Our general and administrative expenses increased $0.5 million, or 1.8%, during the six months ended June 30, 2019 compared to the same period in 2018 due to stock based compensation cost increases of $0.7 million and administrative cost increases of $0.7 million, which were partially offset by personnel and related cost decreases of $0.1 million, decreases in professional services costs of $0.3 million and a decrease in amortization cost of $0.5 million driven by increased allocations to other expense categories.

*Other Income, net.* We recognized other income, net of $1.3 million for the six months ended June 30, 2019, a $0.3 million increase compared to other income, net of $1.0 million for the six months ended June 30, 2018. Other income, net for the six months ended June 30, 2019 primarily consisted of $1.1 million in interest income on investments and a $0.1 million gain on foreign currency. Other income, net for the six months ended June 30, 2018 primarily consisted of $0.7 million gain on our sale of RAPID Wire & Cable, LLC and $0.6 million in interest income on investments, which was partially offset by $0.3 million loss on foreign currency.

*Provision for Income Taxes.* Our effective tax rate of 21.5% for the six months ended June 30, 2019 increased 2.9% compared to 18.6% for the same period in 2018. The increase in the effective tax rate is primarily due to a decrease in tax benefits from the vesting of restricted stock and exercise of stock options. Our income tax provision increased by $0.4 million to $8.7 million for the six months ended June 30, 2019 compared to our income tax provision of $8.3 million for the six months ended June 30, 2018.

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### Liquidity and Capital Resources

#### Cash Flows

The following table summarizes our cash flows during the six months ended June 30, 2019 and 2018:

*(dollars in thousands)*

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $54,888 | $59,317 |
| Net cash used in investing activities | (17,949) | (31,073) |
| Net cash used in financing activities | (21,585) | (1,694) |
| Effect of exchange rates on cash and cash equivalents | 135 | (652) |
| Net increase in cash and cash equivalents | $15,489 | $25,898 |

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#### 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 $100.5 million as of June 30, 2019, an increase of $15.5 million from December 31, 2018. 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 investing activity and repurchases of common stock.

#### Cash Flows from Operating Activities

Cash flows from operating activities were $54.9 million during the six months ended June 30, 2019 and primarily consisted of net income of $31.7 million, adjusted for certain non-cash items, including depreciation and amortization of $15.0 million, stock-based compensation expense of $6.5 million, deferred taxes of $1.6 million and changes in operating assets and liabilities and other items totaling $0.1 million. Cash flows from operating activities were $59.3 million during the six months ended June 30, 2018 and primarily consisted of net income of $36.4 million, adjusted for certain non-cash items, including depreciation and amortization of $12.7 million, stock-based compensation expense of $5.0 million, deferred taxes of $1.6 million, amortization of held-to-maturity securities of $0.3 million and gain on sale of business of $0.7 million.

Cash flows from operating activities decreased $4.4 million during the six months ended June 30, 2019 compared to the same period in 2018, primarily due to decreases in net income of $4.7 million and changes in operating assets and liabilities of $3.5 million driven by timing of cash receipts and payments, which were partially offset by increases in depreciation and amortization of $2.2 million driven by an increase in capital investments and an increase in stock-based compensation expense of $1.5 million.

#### Cash Flows from Investing Activities

Cash used in investing activities was $17.9 million during the six months ended June 30, 2019, consisting $34.1 million for the purchases of property, equipment and other capital assets, $9.0 million for purchases of marketable securities and $4.0 million for purchases of other assets and investments, which were partially offset by $29.2 million in proceeds from maturities of marketable securities.

Cash used in investing activities was $31.1 million during the six months ended June 30, 2018, consisting of $43.2 million for the purchases of property, equipment and other capital assets and $17.1 million for the purchases of marketable securities, and $0.1 million in cash used for acquisitions, which were partially offset by $29.0 million in proceeds from maturities of marketable securities and $0.3 million in proceeds from the sale of businesses.

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#### Cash Flows from Financing Activities

Cash used in financing activities was $21.6 million during the six months ended June 30, 2019, consisting of $21.4 million in repurchases of common stock and $2.4 million in purchases of shares withheld for tax obligations associated with equity transactions, which was partially offset by $2.2 million in proceeds from the exercise of stock options.

Cash used in financing activities was $1.7 million during the six months ended June 30, 2018, consisting of $5.0 million in payments on debt and $1.4 million in purchases of shares withheld for tax obligations associated with equity transactions, which was partially offset by $4.7 million in proceeds from the exercise of stock options.

### 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, 2018. See Note 8 to the Consolidated Financial Statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q for significant changes to the Company’s accounting policies as a result of adopting ASC 842.

### 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.

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## Market risk

As filed, 1,642 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 gains of $0.5 million and $0.1 million during the three and six months ended June 30, 2019, respectively. We recognized foreign currency losses of $0.3 million in each of the three and six months ended June 30, 2018, respectively. The changes in foreign exchange rates had a negative impact on consolidated revenue of $1.4 million for the three months ended June 30, 2019 and $3.1 million for the six months ended June 30, 2019 as compared to the same periods in 2018.

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## Controls and procedures

As filed, 1,440 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.

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## Risk factors

As filed, 2,062 characters.

Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. Except as presented below, there have been no material changes from the risk factors described in our Form 10-K.

***Political and economic uncertainty arising from the outcome of the United Kingdom’s referendum on its membership in the European Union could adversely affect our business and results of operations.***

On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the European Union (EU), commonly referred to as “Brexit.” The timing of the UK’s exit from the EU remains uncertain; the EU has extended the deadline for the UK to exit the EU until October 31, 2019. The terms of the withdrawal are subject to ongoing negotiation that has created significant uncertainty about the future relationship between the UK and the EU. It is possible that the level of economic activity in this region will be adversely impacted and that there will be increased regulatory and legal complexities, including those relating to tax, trade, security and employees. In addition, Brexit could lead to economic uncertainty, including significant volatility in global stock markets and currency exchange rates, which may adversely impact our business. To mitigate the potential impact of Brexit on the import and export of goods to and from the UK, the Company is establishing business processes with shipping entities, including obtaining Authorized Economic Operator certification. In addition, the Company is increasing inventory in the UK and EU in an effort to maintain inventory required to meet customer demand in the event of disruption in shipments. Although the specific terms and the timeframe of the negotiations are unknown, it is possible that these changes could adversely affect our business and results of operations.

Filed Jul 30, 2019.
Source: SEC EDGAR, the filing index for accession 0001437749-19-014903. Last ingested by Listed: Nov 4, 2026, 18:20 ET. No prices; not investment advice.