Attached files

file filename
EX-31 - EXHIBIT 31.1 - Proto Labs Incex31-1.htm
EX-31 - EXHIBIT 31.2 - Proto Labs Incex31-2.htm
EX-32 - EXHIBIT 32.1 - Proto Labs Incex32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Proto Labs IncFinancial_Report.xls


UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended September 30, 2014

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from                      to                     

 

Commission File Number: 001-35435

 

Proto Labs, Inc.

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-1939628

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

5540 Pioneer Creek Drive

 

 

Maple Plain, Minnesota

 

55359

(Address of principal executive offices)

 

(Zip Code)

 

(763) 479-3680

(Registrant’s telephone number, including area code)

 

                   Not Applicable

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

____________________________________________

 

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

 

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

 

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

 

Large accelerated filer☑

Accelerated filer ☐

Non-accelerated filer☐

(Do not check if a smaller reporting company)

Smaller reporting company☐

     

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 25,821,479 shares of Common Stock, par value $0.001 per share, were outstanding at October 31, 2014.

 



 
 

 

  

Proto Labs, Inc.

TABLE OF CONTENTS

 

         

Item

 

Description

 

Page

         

 

  PART I    

1.

 

Financial Statements

 

3

2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

15

3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

23

4.

 

Controls and Procedures

 

24

 

  PART II    

1.

 

Legal Proceedings

 

25

1A.

 

Risk Factors

 

25

6.

 

Exhibits

 

25

 

 
2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)  

             
             
   

September 30,

   

December 31,

 
   

2014

   

2013

 
   

(Unaudited)

         
Assets                
Current assets                

Cash and cash equivalents

  $ 34,268     $ 43,039  

Short-term marketable securities

    24,212       36,339  

Accounts receivable, net of allowance for doubtful accounts of $105 and $90 as of September 30, 2014 and December 31, 2013, respectively

    25,460       18,320  

Inventory

    5,705       5,166  

Prepaid expenses and other current assets

    4,278       3,569  

Income taxes receivable

    3,223       2,907  

Deferred tax assets

    452       455  
Total current assets     97,598       109,795  
Property and equipment, net     87,962       56,101  
Goodwill     28,916       -  
Other intangible assets, net     4,269       -  
Long-term marketable securities     60,449       64,023  
Other long-term assets     232       256  
Total assets   $ 279,426     $ 230,175  
                 
Liabilities and shareholders' equity                
Current liabilities                

Accounts payable

  $ 7,973     $ 6,455  

Accrued compensation

    8,154       6,196  

Accrued liabilities and other

    3,804       808  

Current portion of long-term debt obligations

    164       204  
Total current liabilities     20,095       13,663  
Long-term deferred tax liabilities     4,112       3,682  
Long-term debt obligations     42       159  
Other long-term liabilities     854       1,028  
Total liabilities     25,103       18,532  
                 
Shareholders' equity                

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2014 and December 31, 2013

    -       -  

Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 25,816,096 and 25,546,107 shares as of September 30, 2014 and December 31, 2013, respectively

    26       26  

Additional paid-in capital

    178,767       166,861  

Retained earnings

    77,290       45,847  

Accumulated other comprehensive income (loss)

    (1,760 )     (1,091 )
Total shareholders' equity     254,323       211,643  
Total liabilities and shareholders' equity   $ 279,426     $ 230,175  
                 

 

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

 

 
3

 

 

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited) 

             
             
   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Statements of Operations:

                               

Revenue

  $ 54,574     $ 42,008     $ 153,514     $ 119,070  

Cost of revenue

    21,492       16,053       58,725       44,983  

Gross profit

    33,082       25,955       94,789       74,087  

Operating expenses

                               
Marketing and sales     7,351       5,409       21,029       16,222  
Research and development     4,555       3,026       11,925       8,405  
General and administrative     5,733       4,118       15,970       12,035  
Total operating expenses     17,639       12,553       48,924       36,662  

Income from operations

    15,443       13,402       45,865       37,425  

Other income (expense), net

    (56 )     31       (19 )     149  

Income before income taxes

    15,387       13,433       45,846       37,574  

Provision for income taxes

    5,003       4,561       14,404       11,804  

Net income

  $ 10,384     $ 8,872     $ 31,442     $ 25,770  
                                 

Net income per share:

                               
Basic   $ 0.40     $ 0.35     $ 1.23     $ 1.03  
Diluted   $ 0.40     $ 0.34     $ 1.20     $ 1.00  
                                 

Shares used to compute net income per share:

                               
Basic     25,757,593       25,384,940       25,651,156       25,121,941  
Diluted     26,200,741       26,002,240       26,109,539       25,794,950  
                                 

Comprehensive Income (net of tax)

                               

Comprehensive income

  $ 9,011     $ 9,678     $ 30,773     $ 25,471  
                                 

 

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

   

 
4

 

 

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)  

       
       
   

Nine Months Ended

 
   

September 30,

 
   

2014

   

2013

 
                 
Operating activities                
Net income   $ 31,442     $ 25,770  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    7,696       5,528  

Stock-based compensation expense

    3,561       2,595  

Deferred taxes

    487       (61 )

Excess tax benefit from stock-based compensation

    (4,383 )     (8,198 )

Loss on disposal of property and equipment

    -       111  

Amortization of held-to-maturity securities

    1,194       1,007  

Changes in operating assets and liabilities:

               
Accounts receivable     (6,302 )     (2,242 )
Inventories     (339 )     (380 )
Prepaid expenses and other     (706 )     1,545  
Income taxes     4,032       6,099  
Accounts payable     1,414       1,564  
Accrued liabilities and other     1,908       1,562  
Net cash provided by operating activities     40,004       34,900  
                 
Investing activities                
Purchases of property and equipment     (35,928 )     (12,976 )
Acquisitions, net of cash acquired     (33,864 )     -  
Purchases of marketable securities     (47,338 )     (82,657 )
Proceeds from sales and maturities of marketable securities     61,896       50,663  
Net cash used in investing activities     (55,234 )     (44,970 )
                 
Financing activities                
Payments on debt     (1,005 )     (211 )
Acquisition-related contingent consideration     (800 )     -  
Proceeds from exercises of stock options and other     3,962       4,635  
Excess tax benefit from stock-based compensation     4,383       8,198  
Net cash provided by financing activities     6,540       12,622  
Effect of exchange rate changes on cash and cash equivalents     (81 )     71  
Net increase (decrease) in cash and cash equivalents     (8,771 )     2,623  
Cash and cash equivalents, beginning of period     43,039       36,759  
Cash and cash equivalents, end of period   $ 34,268     $ 39,382  
                 

 

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

 

 
5

 

 

Note 1 – Basis of Presentation

 

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Proto Labs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s statement of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission (SEC) on February 28, 2014.

 

The accompanying Consolidated Balance Sheet as of December 31, 2013 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form 10-K filed on February 28, 2014 as referenced above.

 

Note 2 – Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The Company is required to adopt the new pronouncement on January 1, 2017 using one of two retrospective application methods. The Company is evaluating the application method and the impact of this new standard on our financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The Company is required to adopt the new pronouncement for the annual period ending after December 15, 2016, with early adoption permitted. We believe the impact of ASU 2014-15 will not affect the Company.

 

There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s consolidated financial statements.

 

Note 3 – Business Combinations

 

On April 23, 2014, the Company acquired 100% of the outstanding shares of FineLine Prototyping, Inc. (“FineLine”) for $33.9 million net cash consideration, which was funded with cash available in the United States and the sale of $15.5 million of held-to-maturity securities. The shares of FineLine acquired through the Stock Purchase Agreement (“Agreement”) were initially issued in a private transaction exempt from the registration under the Securities Act of 1933 and the operations of FineLine will be integrated into the operations of the Company. Under the terms of the Agreement, the Company is obligated to make an additional cash payment of up to $3.0 million, contingent upon both the achievement of 2014 revenue goals and certain milestones relating to the integration of FineLine’s operations with the Company.

 

FineLine is based in Raleigh, North Carolina and is a leading producer of parts using additive manufacturing technologies, often times referred to as 3D printing. FineLine produces high-quality parts using stereolithography (SLA), selective laser sintering (SLS) and direct metal laser sintering (DMLS) technologies to customers in a wide variety of industries, including medical, aerospace, computer/electronics, consumer products and industrial machinery, among others. Along with Protomold and Firstcut, the Company will offer these technologies to its customers under the Fineline product name.

 

Consistent with the provisions of Accounting Standards Codification (ASC) 805, Business Combinations (ASC 805), the Company accrued the contingent payment on the date of acquisition after determining its fair value of $3.0 million in arriving at $36.9 million of total consideration, net of cash acquired. The contingent consideration liability is reflected in accrued liabilities and other as of September 30, 2014 and continues to be remeasured to fair value at each reporting period with changes in fair value reflected in the Consolidated Statements of Comprehensive Income. To date as of September 30, 2014, the Company has made payments of $0.8 million related to the attainment of milestones and as of September 30, 2014, the contingent consideration balance totaled $2.2 million.

 

 
6

 

 

The fair value of the consideration paid for this acquisition was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date, with any excess recorded as goodwill. The goodwill associated with the acquisition is deductible for tax purposes and represents the strategic and growth opportunities from strengthening the Company’s portfolio of rapid prototyping product offerings. The addition of additive manufacturing expands Proto Labs’ products to address a wider spectrum of need for the product developer. From concept models, to form and fit testing, to functional testing and short-run production, the acquisition of FineLine allows the Company to offer a broader range of quick-turn custom parts with speed, reliability and consistency.

 

The results of FineLine since the date of acquisition and pro forma disclosures of the consolidated results of the Company with the full year effects of FineLine have not been separately presented since the impact to the Company's results of operations was not material.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805. As of September 30, 2014, this allocation for FineLine remains preliminary as it relates to the valuation of certain working capital accounts, intangible assets and taxes. The preliminary allocation of the purchase price to assets acquired and liabilities assumed is as follows:  

         
         

(in thousands)

       

Assets acquired:

       

Current assets

  $ 1,248  

Intangible assets

    4,580  

Goodwill

    28,916  

Other long-term assets

    3,849  

Total assets acquired

    38,593  
         

Liabilities assumed:

       

Current liabilities

    1,729  

Total liabilities assumed

    1,729  

Net assets acquired

    36,864  
         

Cash paid

    34,468  

Cash acquired

    (604 )

Net cash consideration

    33,864  

Contingent consideration

    3,000  

Total purchase consideration

  $ 36,864  
         

 

Note 4 – Goodwill and Other Intangible Assets

 

The changes in the carrying amount of Goodwill for the nine months ended September 30, 2014 were as follows:  

       
       

(in thousands)

 

Nine Months Ended September 30, 2014

 

Balance as of the beginning of the period

  $ -  

Goodwill acquired during the period

    28,916  

Balance as of the end of the period

  $ 28,916  
         

 

 
7

 

 

Intangible assets other than Goodwill at September 30, 2014 and December 31, 2013 were as follows:  

                             
                             
   

September 30, 2014

   

December 31, 2013

                 

(in thousands)

 

Gross

   

Accumulated Amortization

   

Net

   

Gross

   

Accumulated Amortization

   

Net

   

Useful Life (in years)

    Weighted Average Useful Life Remaining (in years)  
Intangible Assets with finite lives:                                                                

Marketing assets

  $ 930     $ (39 )   $ 891     $ -     $ -     $ -       10.0       9.6  

Non-compete agreement

    190       (40 )     150       -       -       -       2.0       1.6  

Trade secrets

    250       (21 )     229       -       -       -       5.0       4.6  

Internally developed software

    680       (94 )     586       -       -       -       3.0       2.6  

Customer relationships

    2,530       (117 )     2,413       -       -       -       9.0       8.6  
Total intangible assets   $ 4,580     $ (311 )   $ 4,269     $ -     $ -     $ -                  
                                                                 

 

Amortization expense for intangible assets for the three and nine months ended September 30, 2014 was $0.2 million and $0.3 million, respectively. There was no amortization expense in the same periods of the prior year.

 

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets is as follows:  

       
       

(in thousands)

 

Estimated

Amortization Expense

 

Remaining 2014

  $ 186  

2015

    746  

2016

    682  

2017

    500  

2018

    424  

Thereafter

    1,731  

Total estimated amortization expense

  $ 4,269  
         

 

Note 5 – Net Income per Common Share

 

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options, restricted stock units and restricted stock awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan.

 

 
8

 

 

The table below sets forth the computation of basic and diluted net income per share:  

             
             
   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands, except share and per share amounts)

 

2014

   

2013

   

2014

   

2013

 
                                 

Net income

  $ 10,384     $ 8,872     $ 31,442     $ 25,770  
                                 

Basic - weighted-average shares outstanding:

    25,757,593       25,384,940       25,651,156       25,121,941  

Effect of dilutive securities:

                               
Employee stock options and other     443,148       617,300       458,383       673,009  

Diluted - weighted-average shares outstanding:

    26,200,741       26,002,240       26,109,539       25,794,950  

Net income per share:

                               
Basic   $ 0.40     $ 0.35     $ 1.23     $ 1.03  
Diluted   $ 0.40     $ 0.34     $ 1.20     $ 1.00  
                                 

 

Note 6 – Fair Value Measurements

 

ASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs.

 

A summary of financial assets as of September 30, 2014 and December 31, 2013 measured at fair value on a recurring basis follows:  

             
             
   

September 30, 2014

   

December 31, 2013

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Level 1

   

Level 2

   

Level 3

 
                                                 

Financial Assets:

                                               

Cash and cash equivalents

                                               
Money market mutual fund   $ 4,917     $ -     $ -     $ 5,524     $ -     $ -  
Total   $ 4,917     $ -     $ -     $ 5,524     $ -     $ -  
                                                 

 

 
9

 

 

Note 7 – Marketable Securities

 

The Company invests in short-term and long-term agency, municipal, corporate, commercial paper and other debt securities. The securities are categorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold these securities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of September 30, 2014 and December 31, 2013 is as follows:  

     
     
  September 30, 2014  

(in thousands)

 

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 
                                 

U.S. government agency securities

  $ 20,533     $ -     $ (48 )   $ 20,485  

Corporate debt securities

    28,452       9       (61 )     28,400  

Commercial paper

    1,999       -       -       1,999  

U.S. municipal securities

    28,268       54       (2 )     28,320  

Certificates of deposit/time deposits

    5,409       6       (12 )     5,403  

Total marketable securities

  $ 84,661     $ 69     $ (123 )   $ 84,607  
                                 

  

                         
                         
  December 31, 2013  

(in thousands)

 

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 
                                 

U.S. government agency securities

  $ 21,713     $ 2     $ (22 )   $ 21,693  

Corporate debt securities

    29,480       30       (20 )     29,490  

U.S. municipal securities

    44,474       49       (22 )     44,501  

Certificates of deposit/time deposits

    4,695       5       (8 )     4,692  

Total marketable securities

  $ 100,362     $ 86     $ (72 )   $ 100,376  
                                 

 

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1).  Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and commercial paper are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

 

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments to maturity and recover the full principal.

 

Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.

 

The September 30, 2014 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.  

       
       
   

September 30,

 

(in thousands)

 

2014

 
         

Due in one year or less

  $ 24,212  

Due after one year through five years

    60,449  

Total marketable securities

  $ 84,661  
         

 

 
10

 

 

Note 8 – Inventory

 

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

 

The Company’s inventory consists of the following:  

             
             
   

September 30,

   

December 31,

 

(in thousands)

 

2014

   

2013

 
                 

Raw materials

  $ 5,384     $ 4,875  

Work in process

    505       410  

Total inventory

    5,889       5,285  

Allowance for obsolescence

    (184 )     (119 )

Inventory, net of allowance

  $ 5,705     $ 5,166  
                 

 

Note 9 – Stock-Based Compensation

 

Under the 2012 Long-Term Incentive Plan (2012 Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan will have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant. 

 

Employee Stock Purchase Plan

 

The Company’s 2012 Employee Stock Purchase Plan (ESPP), allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods ending May 15 and November 15, respectively. At the end of each offering period, employees are able to purchase shares at 85 percent of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense was $1.4 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively, and $3.6 and $2.6 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Stock Options

 

A summary of stock option activity for the nine months ended September 30, 2014 is as follows:  

               
               
           

Weighted-

 
           

Average

 
   

Stock Options

   

Exercise Price

 
                 

Options outstanding at December 31, 2013

    1,143,250     $ 19.03  

Granted

    109,530       72.72  

Exercised

    (247,127 )     13.74  

Forfeited

    (6,619 )     26.13  

Options outstanding at September 30, 2014

    999,034     $ 26.18  
                 

Exercisable at September 30, 2014

    394,085     $ 15.46  
                 

 

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a five-year period beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable in full on the first anniversary of the grant date.

 

 
11

 

 

The weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2014 was $32.76.

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2014 and 2013, respectively:  

       
       
   

Nine Months Ended September 30,

 
   

2014

   

2013

 
                 

Risk-free interest rate

    0.43 - 2.14%       1.03 - 1.98%  

Expected life (years)

    2.00 - 6.50       5.50 - 6.50  

Expected volatility

    47.82 - 49.30%       49.36 - 53.54%  

Expected dividend yield

    0%       0%  
                 

 

As of September 30, 2014, there was $8.1 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 3.2 years.

 

Restricted Stock

 

Restricted stock includes non-vested shares issued pursuant to grants of restricted stock awards (RSA) and grants of restricted stock units (RSU). During the nine months ended September 30, 2014, the Company granted both RSA and RSU.

 

Non-vested restricted stock as of September 30, 2014 and changes during the nine months ended September 30, 2014 were as follows:  

               
               
           

Weighted-

 
           

Average

 
           

Grant Date

 
   

Restricted

   

Fair Value

 
   

Stock Awards

   

Per Share

 
                 

Nonvested restricted stock at December 31, 2013

    -     $ -  

Granted

    74,467       69.45  

Vested

    (798 )     62.68  

Forfeited

    -       -  

Nonvested restricted stock at September 30, 2014

    73,669     $ 69.52  
                 

 

As of September 30, 2014, there was $4.4 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 3.8 years.

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2014 and 2013, respectively:  

       
       
   

Nine Months Ended September 30,

 
   

2014

   

2013

 
                 

Risk-free interest rate

    0.01 - 0.11%       0.11 - 0.13%  

Expected life (months)

    6.00       6.00  

Expected volatility

    39.16 - 39.80%       53.14% - 53.32%  

Expected dividend yield

    0%       0%  
                 

 

 
12

 

 

Note 10 – Accumulated Other Comprehensive Income

 

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive income balances during the three and nine months ended September 30, 2014 and 2013, respectively:  

             
             
   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
(in thousands)  

2014

   

2013

   

2014

   

2013

 
                                 
Foreign currency translation adjustment, net of tax                                

Balance at beginning of period

  $ (387 )   $ (2,033 )   $ (1,091 )   $ (928 )

Other comprehensive income before reclassifications

    (1,373 )     806       (669 )     (299 )

Amounts reclassified from accumulated other comprehensive income

    -       -       -       -  

Net current-period other comprehensive income

    (1,373 )     806       (669 )     (299 )

Balance at end of period

  $ (1,760 )   $ (1,227 )   $ (1,760 )   $ (1,227 )
                                 

 

Note 11 Income Taxes

 

The Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For the three months ended September 30, 2014 and 2013 the Company recorded an income tax provision of $5.0 million and $4.6 million, respectively. For the nine months ended September 30, 2014 and 2013 the Company recorded an income tax provision of $14.4 million and $11.8 million, respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate for the three months ended September 30, 2014 was 32.5 percent compared with 34.0 percent in the same period of the prior year. The effective income tax rate for each of the nine months ended September 30, 2014 and 2013 was 31.4 percent.

 

The effective income tax rate for the three and nine months ended September 30, 2014 differs from the U.S. federal statutory rate of 35 percent due primarily to the mix of revenue earned in domestic and foreign tax jurisdictions and deductions for which the Company qualifies.

 

The Company had liabilities related to unrecognized tax benefits totaling $0.9 million at September 30, 2014 and $0.7 million December 31, 2013, all of which, if recognized, would affect the Company’s effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable as appropriate.

 

During the quarter ended September 30, 2014, the Company decreased its prior year uncertain tax positions by $0.4 million due to the expiration of the statutes of limitations on the Company’s 2010 federal income tax return.  Also, during the quarter ended September 30, 2014, the Company increased its prior year and current year uncertain tax positions by $0.4 million and $0.5 million, respectively.  The increase was due to certain tax positions not meeting the more-like-than-not standard for accounting for uncertain tax positions under the Company’s current facts and circumstances.

 

Based upon the information available as of September 30, 2014, the Company anticipates the amount of uncertain tax positions will change in the next twelve months; however, the change cannot be estimated.

 

 
13

 

 

Note 12 Revenue and Geographic Information

 

The Company’s revenue is derived from its Protomold molding, Firstcut computer numerical control (CNC) machining and Fineline additive manufacturing (3D printing) product lines. Total revenue by product line is as follows:  

             
             
   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
(in thousands)  

2014

   

2013

   

2014

   

2013

 
                                 
Revenue:                                

Protomold

  $ 35,655     $ 29,534     $ 104,604     $ 84,338  

Firstcut

    15,549       12,474       43,407       34,732  

Fineline

    3,370       -       5,503       -  

Total revenue

  $ 54,574     $ 42,008     $ 153,514     $ 119,070  
                                 

 

Revenue to external customers based on the billing location of the end user customer and long-lived assets by geographic region are as follows:  

             
             
   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
(in thousands)  

2014

   

2013

   

2014

   

2013

 
                                 
Revenue:                                

United States

  $ 40,822     $ 30,561     $ 113,810     $ 88,816  

International

    13,752       11,447       39,704       30,254  

Total revenue

  $ 54,574     $ 42,008     $ 153,514     $ 119,070  
                                 

  

             
             
   

September 30,

   

December 31,

 
(in thousands)  

2014

   

2013

 
                 
Long-lived assets:                

United States

  $ 73,082     $ 48,381  

International

    14,880       7,720  

Total long-lived assets

  $ 87,962     $ 56,101  
                 

 

 
14

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Forward-Looking Statements

 

Statements contained in this report regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors which may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K as filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

 

Overview

 

We are a leading online and technology-enabled manufacturer of quick-turn additive-manufactured (3D printed), CNC-machined and molded custom parts for prototyping and short-run production. We provide “Real Parts, Really Fast” to product developers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets. Our primary manufacturing products currently include Fineline, which is our additive-manufacturing (3D printing) product line, Firstcut, which is our CNC machining product line, and Protomold, which is our molding product line.

 

Key Financial Measures and Trends

 

Revenue

 

The Company’s operations are comprised of three geographic business units in the United States, Europe and Japan. Revenue within each of our business units is derived from our Fineline, Firstcut and Protomold product lines. Fineline revenue consists of sales of additive-manufactured custom parts, often referred to as 3D printed parts. Firstcut revenue consists of sales of CNC-machined custom parts. Protomold revenue consists of sales of custom molds and molded parts. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by:

 

 

increasing marketing and selling activities;

 

offering additional services such as the acquisition in April 2014 of FineLine Prototyping, Inc. leading to the offering of Fineline additive manufacturing technologies, often times referred to as 3D printing;

 

introducing our Firstcut product line in 2007;

 

expanding internationally such as the opening of our Japanese plant in 2009;

 

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

 

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

 

 
15

 

 

Excluding product developers we gained through the acquisition of FineLine, during the three months ended September 30, 2014, we served approximately 8,700 unique product developers, an increase of 19% over the same period in 2013. Excluding product developers we gained through the acquisition of FineLine, during the nine months ended September 30, 2014, we served approximately 15,900 unique product developers, an increase of 19% over the same period in 2013.

  

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of revenue consists primarily of raw materials, equipment depreciation, employee salaries, benefits, stock-based compensation, bonuses and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.

 

We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.

 

Operating Expenses

 

Operating expenses consist of marketing and sales, research and development and general and administrative. Personnel-related costs are the most significant component of the marketing and sales, research and development and general and administrative expense categories.

 

Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn additive-manufactured (3D printing), CNC-machined and molded custom parts for prototyping and short-run production. For us to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.

 

Marketing and sales. Marketing and sales expense consists primarily of employee compensation, benefits, commissions, stock-based compensation, marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base.

 

Research and development. Research and development expense consists primarily of employee compensation, benefits, stock-based compensation, depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our service offerings.

 

General and administrative. General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal services, amortization of intangibles and other related overhead. We expect general and administrative expense to increase on an absolute basis as we continue to grow and expand our operations.

 

Other Income (Expense), Net

 

Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances and investments, and interest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates. Our interest expense will vary based on borrowings and interest rates.

 

Provision for Income Taxes

 

Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases and our effective tax rate to remain relatively constant.

 

 
16

 

 

Results of Operations

 

The following table sets forth a summary of our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods.  

                         
                         
   

Three Months Ended September 30,

   

Change

   

Nine Months Ended September 30,

   

Change

 

(dollars in thousands)

 

2014

   

2013

    $     %    

2014

   

2013

    $      
                                                                                                 

Revenue

  $ 54,574       100.0 %   $ 42,008       100.0 %   $ 12,566       29.9 %   $ 153,514       100.0 %   $ 119,070       100.0 %   $ 34,444       28.9 %

Cost of revenue

    21,492       39.4       16,053       38.2       5,439       33.9       58,725       38.3       44,983       37.8       13,742       30.5  

Gross profit

    33,082       60.6       25,955       61.8       7,127       27.5       94,789       61.7       74,087       62.2       20,702       27.9  

Operating expenses:

                                                                                               
Marketing and sales     7,351       13.5       5,409       12.9       1,942       35.9       21,029       13.7       16,222       13.6       4,807       29.6  
Research and development     4,555       8.3       3,026       7.2       1,529       50.5       11,925       7.8       8,405       7.1       3,520       41.9  
General and administrative     5,733       10.5       4,118       9.8       1,615       39.2       15,970       10.4       12,035       10.1       3,935       32.7  
Total operating expenses     17,639       32.3       12,553       29.9       5,086       40.5       48,924       31.9       36,662       30.8       12,262       33.4  

Income from operations

    15,443       28.3       13,402       31.9       2,041       15.2       45,865       29.9       37,425       31.4       8,440       22.6  

Other income (expense), net

    (56 )     (0.1 )     31       0.1       (87 )     *       (19 )     -       149       0.1       (168 )     *  

Income before income taxes

    15,387       28.2       13,433       32.0       1,954       14.5       45,846       29.9       37,574       31.5       8,272       22.0  

Provision for income taxes

    5,003       9.2       4,561       10.9       442       9.7       14,404       9.4       11,804       9.9       2,600       22.0  

Net income

  $ 10,384       19.0 %   $ 8,872       21.1 %   $ 1,512       17.0 %   $ 31,442       20.5 %   $ 25,770       21.6 %   $ 5,672       22.0 %
                                                                                                 

* Percentage change not meaningful 

 

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

<
             
             
   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(dollars in thousands)

 

2014

   

2013

   

2014

   

2013

 
                                 

Stock options and restricted stock

  $ 1,192     $ 756     $ 3,252     $ 2,310  

Employee stock purchase plan

    121       103       309       285  

Total stock-based compensation expense

  $ 1,313     $ 859     $ 3,561     $ 2,595  
                                 

Cost of revenue

  $ 103     $ 89     $ 282     $ 233  

Operating expenses:

                               
Marketing and sales     250       154       685       455  
Research and development     287       201       770       555  
General and administrative     673       415       1,824       1,352  

Total stock-based compensation expense

  $ 1,313     $ 859     $ 3,561     $ 2,595