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Table of Contents

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 June 30, 2018

 

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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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

Emerging growth company

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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: 27,027,044 shares of Common Stock, par value $0.001 per share, were outstanding at July 26, 2018.

 

 

 
 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements  

  

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
   

(Unaudited)

         

Assets

               

Current assets

               

Cash and cash equivalents

  $ 62,605     $ 36,707  

Short-term marketable securities

    57,619       57,424  

Accounts receivable, net of allowance for doubtful accounts of $982 and $757 as of June 30, 2018 and December 31, 2017, respectively

    55,928       51,503  

Inventory

    9,590       11,271  

Prepaid expenses and other current assets

    7,678       6,267  

Income taxes receivable

    -       1,832  

Total current assets

    193,420       165,004  

Property and equipment, net

    197,339       166,440  

Goodwill

    128,752       128,504  

Other intangible assets, net

    18,521       19,084  

Long-term marketable securities

    24,636       37,034  

Other long-term assets

    3,519       2,672  

Total assets

  $ 566,187     $ 518,738  
                 

Liabilities and shareholders' equity

               

Current liabilities

               

Accounts payable

  $ 20,038     $ 15,876  

Accrued compensation

    13,822       12,100  

Accrued liabilities and other

    9,885       8,408  

Short-term debt obligations

    -       5,000  

Income taxes payable

    637       2,371  

Total current liabilities

    44,382       43,755  

Long-term income taxes payable

   
2,181
2,181
      2,181  

Long-term deferred tax liabilities

    8,583       6,966  

Other long-term liabilities

    4,788       4,621  

Total liabilities

    59,934       57,523  
                 

Shareholders' equity

               

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of June 30, 2018 and December 31, 2017

    -       -  

Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 27,026,394 and 26,828,651 shares as of June 30, 2018 and December 31, 2017, respectively

    27       27  

Additional paid-in capital

    250,063       241,725  

Retained earnings

    262,522       224,697  

Accumulated other comprehensive loss

    (6,359 )     (5,234 )

Total shareholders' equity

    506,253       461,215  

Total liabilities and shareholders' equity

  $ 566,187     $ 518,738  

 

 

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

 

 

 

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Statements of Operations:

                               

Revenue

  $ 109,652     $ 82,040     $ 217,397     $ 162,207  

Cost of revenue

    50,439       35,671       100,276       70,565  

Gross profit

    59,213       46,369       117,121       91,642  

Operating expenses

                               

Marketing and sales

    17,557       14,630       34,129       27,617  

Research and development

    7,032       6,084       13,697       11,907  

General and administrative

    12,640       9,253       25,583       18,034  

Total operating expenses

    37,229       29,967       73,409       57,558  

Income from operations

    21,984       16,402       43,712       34,084  

Other income, net

    808       1,173       986       1,488  

Income before income taxes

    22,792       17,575       44,698       35,572  

Provision for income taxes

    4,478       5,489       8,333       11,286  

Net income

  $ 18,314     $ 12,086     $ 36,365     $ 24,286  
                                 

Net income per share:

                               

Basic

  $ 0.68     $ 0.46     $ 1.35     $ 0.91  

Diluted

  $ 0.67     $ 0.45     $ 1.34     $ 0.91  
                                 

Shares used to compute net income per share:

                               

Basic

    26,972,990       26,541,978       26,925,673       26,554,262  

Diluted

    27,274,882       26,649,152       27,232,215       26,710,217  
                                 

Comprehensive Income (net of tax)

                               

Comprehensive income

  $ 14,796     $ 14,250     $ 35,240     $ 27,635  

 

 

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

 

 

 

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 30,

 
   

2018

   

2017

 
                 

Operating activities

               

Net income

  $ 36,365     $ 24,286  

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

               

Depreciation and amortization

    12,749       8,700  

Stock-based compensation expense

    5,034       3,958  

Deferred taxes

    1,620       1,608  

Gain on sale of businesses

    (671 )     -  

Amortization of held-to-maturity securities

    276       592  

Other

    7       77  

Changes in operating assets and liabilities:

               

Accounts receivable

    (2,648 )     (6,914 )

Inventories

    389       175  

Prepaid expenses and other

    (1,059 )     (775 )

Income taxes

    133       1,769  

Accounts payable

    4,408       2,534  

Accrued liabilities and other

    2,714       3,417  

Net cash provided by operating activities

    59,317       39,427  
                 

Investing activities

               

Purchases of property and equipment

    (43,194 )     (13,301 )

Cash used for acquisitions, net of cash acquired

    (90 )     -  
Proceeds from sale of businesses     284       -  

Purchases of marketable securities

    (17,129 )     (20,037 )

Proceeds from maturities of marketable securities

    29,056       25,194  

Purchases of other assets and investments

    -       (514 )

Net cash used in investing activities

    (31,073 )     (8,658 )
                 

Financing activities

               

Payments on debt

    (5,000 )     -  

Proceeds from exercises of stock options and other

    3,306       3,791  

Repurchases of common stock

    -       (4,410 )

Net cash used in financing activities

    (1,694 )     (619 )

Effect of exchange rate changes on cash and cash equivalents

    (652 )     251  

Net increase in cash and cash equivalents

    25,898       30,401  

Cash and cash equivalents, beginning of period

    36,707       68,795  

Cash and cash equivalents, end of period

  $ 62,605     $ 99,196  

 

 

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

 

 

 

Note 1 – Basis of Presentation

 

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, 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. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements 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, 2017 as filed with the Securities and Exchange Commission (SEC) on February 23, 2018.

 

The accompanying Consolidated Balance Sheet as of December 31, 2017 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 23, 2018 as referenced above.

 

 

 

Note 2 – Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

During the first quarter of 2018, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606). 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 has adopted the new revenue standard using the modified retrospective approach. The Company manufactures parts that have no alternative use to the Company since the parts are custom made to specific customer orders, and the Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For those manufactured parts that meet these two criteria, the Company will recognize revenue over time. The transition adjustment recorded was an increase of $1.5 million to the Company’s retained earnings balance as of January 1, 2018.

 

During the first quarter of 2018, the Company adopted ASU 2017-09, Compensation – Stock Compensation, which is intended to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance to a change to the terms or conditions of a share-based payment award. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of the future adoption of this standard on its consolidated financial statements, but because the Company owns a majority of its buildings and significant assets, it does not expect the impact to be material. 

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill. This guidance will be effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact of future adoption of this guidance on its consolidated financial statements, but does not expect the impact to be material.

 

 

 

Note 3 – Revenue

 

The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2017. Significant changes to the Company’s accounting policies as a result of adopting Accounting Standards Codification (ASC) 606 are discussed below:

 

Revenue Recognition

 

The Company provides quality prototyping and on-demand manufacturing services at unprecedented speeds. As a result, the majority of revenue recognized in a reporting period is based on completed, invoiced contracts. The Company accounts for revenue in accordance with ASC 606, which the Company adopted on January 1, 2018, using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605. The Company recorded a net increase of $1.5 million to its retained earnings balance on January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact of adopting ASC 606 was to decrease revenue by $0.2 million and decrease cost of revenue by $0.1 million for the three months ended June 30, 2018, and to decrease accounts receivable by $0.2 million and increase inventory by $0.1 million as of June 30, 2018. For the six months ended June 30, 2018 the impact of adopting ASC 606 was to increase revenue by $0.1 million and increase cost of revenue by $0.1 million, as well as increase accounts receivable by $2.7 million and decrease inventory by $1.2 million as of June 30, 2018, which includes the transition adjustment of $1.5 million noted above.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. The majority of the Company’s CNC machining, 3D printing, and sheet metal contracts have a single performance obligation. The majority of the Company’s injection molding contracts have multiple performance obligations including one obligation to produce the mold and a second obligation to produce parts. For injection molding contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price based on the price charged to customers.

 

The Company manufactures parts that have no alternative use to the Company since the parts are custom made to specific customer orders, and the Company believes there is a legally enforceable right to payment for performance completed to date on these manufactured parts. For manufactured parts that meet these two criteria, the Company will recognize revenue over time. Revenue is recognized over time using the input method based on time in production to measure progress toward satisfying performance obligations.

 

Revenue by geographic region for the three and six months ended June 30, 2018 and 2017 was as follows:

 

             
   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue:

                               

United States

  $ 86,354     $ 63,353     $ 170,521     $ 123,529  

Europe

    20,213       16,131       40,158       33,130  

Japan

    3,085       2,556       6,718       5,548  

Total revenue

  $ 109,652     $ 82,040     $ 217,397     $ 162,207  
                                 

 

 

Revenue by product line for the three and six months ended June 30, 2018 and 2017 was as follows:

 

             
   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue:

                               

Injection Molding

  $ 51,586     $ 46,792     $ 102,929     $ 94,708  

CNC Machining

    37,788       24,180       74,519       46,152  

3D Printing

    13,248       10,873       25,573       20,958  

Sheet Metal

    6,309       -       12,550       -  

Other Revenue

    721       195       1,826       389  

Total revenue

  $ 109,652     $ 82,040     $ 217,397     $ 162,207  
                                 

 

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within marketing and sales expenses. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

 

 

 

Note 4 – 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 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. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied.

 

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

 

             
   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

(in thousands, except share and per share amounts)

 

2018

   

2017

   

2018

   

2017

 

Net income

  $ 18,314     $ 12,086     $ 36,365     $ 24,286  
                                 

Basic - weighted-average shares outstanding:

    26,972,990       26,541,978       26,925,673       26,554,262  

Effect of dilutive securities:

                               

Employee stock options and other

    301,892       107,174       306,542       155,955  

Diluted - weighted-average shares outstanding:

    27,274,882       26,649,152       27,232,215       26,710,217  

Net income per share:

                               

Basic

  $ 0.68     $ 0.46     $ 1.35     $ 0.91  

Diluted

  $ 0.67     $ 0.45     $ 1.34     $ 0.91  
                                 

 

 

 

 Note 5 – Goodwill and Other Intangible Assets

 

There were no changes in the carrying amount of Goodwill during the three months ended June 30, 2018. The changes in the carrying amount of goodwill during the six months ended June 30, 2018 were as follows: 

 

       

(in thousands)

 

Six Months Ended

June 30, 2018

 

Balance as of the beginning of the period

  $ 128,504  

Goodwill acquired during the period

    248  

Balance as of the end of the period

  $ 128,752  
         

 

The Company adjusted goodwill by $0.2 million during the six months ended June 30, 2018 as a result of the final working capital adjustment for the acquisition of RAPID in November 2017.

 

Intangible Assets other than goodwill at June 30, 2018 and December 31, 2017 were as follows:

 

 

                         
   

June 30, 2018

   

December 31, 2017

   

Useful

   

Weighted Average

 

(in thousands)

 

Gross

   

Accumulated

Amortization

   

Net

   

Gross

   

Accumulated Amortization

   

Net

   

Life (in

years)

   

Useful Life

Remaining (in years)

 

Intangible Assets with finite lives:

                                                               

Marketing assets

  $ 930     $ (387 )   $ 543     $ 930     $ (341 )   $ 589     10.0     5.8  

Non-compete agreement

    270       (198 )     72       270       (190 )     80     2.0 - 5.0     4.5  

Trade secrets

    250       (208 )     42       250       (183 )     67     5.0     0.8  

Trade names

    1,080       (270 )     810       1,080       -       1,080     2.0     1.5  

Software technology

    9,229       (445 )     8,784       8,229       -       8,229     10.0     9.5  

Customer relationships

    10,070       (1,800 )     8,270       10,070       (1,031 )     9,039     6.0 - 9.0     5.3  

Total intangible assets

  $ 21,829     $ (3,308 )   $ 18,521     $ 20,829     $ (1,745 )   $ 19,084                  
                                                                 

 

Amortization expense for intangible assets was $0.8 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and $1.6 million and $0.3 million for the six months ended June 30, 2018 and 2017, respectively.

 

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

 

       

(in thousands)

 

Estimated

Amortization Expense

 

Remaining 2018

  $ 1,581  

2019

    3,128  

2020

    2,571  

2021

    2,571  

2022

    2,571  

Thereafter

    6,099  

Total estimated amortization expense

  $ 18,521  
         

 

 

 

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 that 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.

 

The following table summarizes financial assets as of June 30, 2018 and December 31, 2017 measured at fair value on a recurring basis: 

 

             
   

June 30, 2018

   

December 31, 2017

 

(in thousands)

 

Level 1

   

Level 2

   

Level 3

   

Level 1

   

Level 2

   

Level 3

 

Financial Assets:

                                               

Cash and cash equivalents

                                               

Money market mutual fund

  $ 8,366     $ -     $ -     $ 3,034     $ -     $ -  

Total

  $ 8,366     $ -     $ -     $ 3,034     $ -     $ -  
                                                 

 

 

 

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. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of June 30, 2018 and December 31, 2017:

 

 

       
   

June 30, 2018

 

(in thousands)

 

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair Value

 

U.S. municipal securities

  $ 18,013     $ -     $ (58 )   $ 17,955  

Corporate debt securities

    34,346       -       (157 )     34,189  

U.S. government agency securities

    24,674       -       (178 )     24,496  

Certificates of deposit/time deposits

    3,968       -       (38 )     3,930  

Commercial paper

    1,254       -       (0 )     1,254  

Total marketable securities

  $ 82,255     $ -     $ (431 )   $ 81,824  
                                 

 

 

       
   

December 31, 2017

 

(in thousands)

 

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair Value

 

U.S. municipal securities

  $ 28,364     $ -     $ (104 )   $ 28,260  

Corporate debt securities

    29,806       -       (128 )     29,678  

U.S. government agency securities

    32,320       -       (199 )     32,121  

Certificates of deposit/time deposits

    3,968       -       (32 )     3,936  

Total marketable securities

  $ 94,458     $ -     $ (463 )   $ 93,995  
                                 

 

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, commercial paper and certificates of deposit 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. In reaching this conclusion, the Company considered the credit quality of the issuers of the debt securities as well as the Company’s intent 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 June 30, 2018 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.

 

       
   

June 30,

 

(in thousands)

 

2018

 

Due in one year or less

  $ 57,619  

Due after one year through five years

    24,636  

Total marketable securities

  $ 82,255  
         

 

 

 

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 consisted of the following as of the dates indicated:

 

             
   

June 30,

   

December 31,

 

(in thousands)

 

2018

   

2017

 

Raw materials

  $ 9,382     $ 9,767  

Work in process

    712       1,998  

Total inventory

    10,094       11,765  

Allowance for obsolescence

    (504 )     (494 )

Inventory, net of allowance

  $ 9,590     $ 11,271  
                 

 

 

 

Note 9 – Stock-Based Compensation

 

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan 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 a variable number of shares of the Company’s common stock each offering period 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 with a single purchase period 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 $2.7 million and $2.2 million for the three months ended June 30, 2018 and 2017, respectively, and $5.0 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the six months ended June 30, 2018:

 

               
           

Weighted-

 
           

Average

 
   

Stock Options

   

Exercise Price

 

Options outstanding at December 31, 2017

    399,397     $ 51.14  

Granted

    34,386       109.91  

Exercised

    (108,941 )     37.04  

Forfeited

    (17,077 )     61.30  

Options outstanding at June 30, 2018

    307,765     $ 62.14  
                 

Exercisable at June 30, 2018

    168,243     $ 49.52  
                 

 

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 period from four to five years, 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.

 

The weighted-average grant date fair value of options that were granted during the six months ended June 30, 2018 was $49.76.

 

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the six months ended June 30, 2018 and 2017:

 

       
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Risk-free interest rate

  2.52 - 3.07%     2.24%  

Expected life (years)

  6.25     6.50  

Expected volatility

  41.95 - 42.22%     44.68%  

Expected dividend yield

  0%     0%  
             

 

As of June 30, 2018, there was $4.4 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 3.3 years.

 

Restricted Stock

 

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from four to five years, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date. 

 

The following table summarizes restricted stock activity during the six months ended June 30, 2018:

 

               
           

Weighted-

 
           

Average

 
           

Grant Date

 
   

Restricted

   

Fair Value

 
   

Stock

   

Per Share

 

Restricted stock at December 31, 2017

    334,608     $ 63.29  

Granted

    103,818       115.20  

Restrictions lapsed

    (83,390 )     62.84  

Forfeited

    (21,969 )     62.28  

Restricted stock at June 30, 2018

    333,067     $ 79.64  
                 

 

As of June 30, 2018, there was $25.1 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 3.5 years. 

 

Performance Stock

 

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 150 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment.

 

 

The following table summarizes performance stock activity during the six months ended June 30, 2018: 

 

               
           

Weighted-

 
           

Average

 
           

Grant Date

 
   

Performance

   

Fair Value

 
   

Stock

   

Per Share

 

Performance stock at December 31, 2017

    25,707     $ 58.35  

Granted

    20,006       105.75  

Restrictions lapsed

    -       -  

Performance change

    6,427       58.35  

Forfeited

    -       -  

Performance stock at June 30, 2018

    52,140     $ 76.54  
                 

 

As of June 30, 2018, there was $2.9 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.3 years. 

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the six months ended June 30, 2018 and 2017:

 

       
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Risk-free interest rate

  1.48 - 2.06%     0.59% - 0.97%  

Expected life (months)

  6.00     6.00  

Expected volatility

  24.49 - 31.50%     34.51% - 39.51%  

Expected dividend yield

  0%     0%  
             

 

 

Note 10 – Accumulated Other Comprehensive Loss

 

Other comprehensive income (loss) is comprised entirely of foreign currency translation adjustments. The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and six months ended June 30, 2018 and 2017:

 

             
   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Foreign currency translation adjustments

                               

Balance at beginning of period

  $ (2,841 )   $ (9,568 )   $ (5,234 )   $ (10,753 )

Other comprehensive income (loss) before reclassifications

    (3,518 )     2,164       (1,125 )     3,349  

Amounts reclassified from accumulated other comprehensive loss

    -       -       -       -  

Net current-period other comprehensive income (loss)

    (3,518 )     2,164       (1,125 )     3,349  

Balance at end of period

  $ (6,359 )   $ (7,404 )   $ (6,359 )   $ (7,404 )
                                 

 

 

 

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 June 30, 2018 and 2017, the Company recorded an income tax provision of $4.5 million and $5.5 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded an income tax provision of $8.3 million and $11.3 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 June 30, 2018 was 19.6 percent compared to 31.2 percent in the same period of the prior year. The effective tax rate decreased by 11.6 percent for the three months ended June 30, 2018 when compared to the same period in 2017 primarily due to the impact of tax reform and benefits from the vesting of restricted stock and the exercise of stock options. The effective income tax rate for the six months ended June 30, 2018 was 18.6 percent compared to 31.7 percent in the same period of the prior year. The effective tax rate decreased by 13.1 percent for the six months ended June 30, 2018 when compared to the same period in 2017 primarily due to the impact of tax reform and benefits from the vesting of restricted stock and the exercise of stock options.

 

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax-deferred and creates new taxes on certain foreign-sourced earnings. The Company has applied the guidance in ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, when accounting for the enactment-date effects of the Act. As of June 30, 2018, the Company had not completed its accounting for the tax effects of the Act, as the Company is in the process of analyzing certain aspects of the Act, obtaining information, and refining its calculations of the Act's impact. There have been no material measurement period adjustments made during the three and six months ended June 30, 2018 related to the provisional amounts recorded and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017. The Company expects to complete the accounting for the tax effects of the Act during 2018.

 

The effective income tax rate for the three and six months ended June 30, 2018 differs from the U.S. federal statutory rate of 21.0 percent due primarily to the mix of income earned in domestic and foreign tax jurisdictions and deductions for which the Company qualifies.

 

The Company had reserves against unrecognized tax benefits totaling $4.4 million at June 30, 2018 and $4.2 million at December 31, 2017, 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.

 

 

Note 12 – Segment Reporting

 

The Company’s reportable segments are based on the internal reporting used by the Company’s Chief Executive Officer, who is the chief operating decision maker (CODM), to assess operating performance and make decisions about the allocation of resources. The Corporate Unallocated and Japan category includes non-reportable segments, as well as research and development and general and administrative costs that the Company does not allocate directly to its operating segments.

 

Intercompany transactions primarily relate to intercontinental activity and have been eliminated and are excluded from the reported amounts. The difference between income from operations and pre-tax income relates to foreign currency-related gains and losses and interest income on cash balances and investments, which are not allocated to business segments. 

 

Revenue and income from operations by reportable segment for the three and six months ended June 30, 2018 and 2017 were as follows:

 

             
   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue:

                               

United States

  $ 86,354     $ 63,353     $ 170,521     $ 123,529  

Europe

    20,213       16,131       40,158       33,130  

Japan

    3,085       2,556       6,718       5,548  

Total revenue

  $ 109,652     $ 82,040     $ 217,397     $ 162,207  
                                 

 

 

             
   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Income from Operations:

                               

United States

  $ 30,459     $ 25,723     $ 60,532     $ 50,069  

Europe

    4,022       2,335       7,401       6,375  

Corporate Unallocated and Japan

    (12,497 )     (11,656 )     (24,221 )     (22,360 )

Total Income from Operations

  $ 21,984     $ 16,402     $ 43,712     $ 34,084  
                                 

 

Total long-lived assets at June 30, 2018 and December 31, 2017 were as follows:

 

             
   

June 30,

   

December 31,

 

(in thousands)

 

2018

   

2017

 

Total long-lived assets:

               

United States

  $ 156,831     $ 125,308  

Europe

    33,194       33,691  

Japan

    7,314       7,441  

Total Assets

  $ 197,339     $ 166,440  
                 

 

 

 

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, 2017.

 

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 service. This service 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.

 

 

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 200 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 internationally 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, 2018, we served 19,198 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 18.7% over the same period in 2017. During the six months ended June 30, 2018, we served 28,598 unique product developers and engineers who purchased our products through our web-based customer interface, an increase of 17.9% over the same period in 2017. The information does not include customers who do not utilize our web-based interface; these customers are principally related to our recent acquisitions.

 

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.

 

 

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 recent acquisitions and 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. All of our internal research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our product line offerings 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. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States. As a result, many provisions will affect our tax rate in future years. Some provisions, such as the reduction to the U.S. corporate tax rate from 35% to 21%, beginning in 2018, will reduce our effective tax rate in future years. Other provisions taken in isolation, such as the elimination of the Domestic Production Activities Deduction, will likely result in an increase to our tax rate. Overall, we anticipate our effective tax rate will be lower in 2018 and beyond than in recent periods based on the current tax laws.

 

 

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. 

 

                         
   

Three Months Ended June 30,

   

Change

   

Six Months Ended June 30,

   

Change

 

(dollars in thousands)

 

2018

   

2017

   

$

   

%

   

2018

   

2017

   

$

   

%

 

Revenue

  $ 109,652     100.0     $ 82,040     100.0 %   $ 27,612     33.7     $ 217,397     100.0     $ 162,207     100.0     $ 55,190     34.0  

Cost of revenue

    50,439     46.0       35,671     43.5       14,768     41.4       100,276     46.1       70,565     43.5       29,711     42.1  

Gross profit

    59,213     54.0       46,369     56.5       12,844     27.7       117,121     53.9       91,642     56.5       25,479     27.8  

Operating expenses:

                                                                                   

Marketing and sales

    17,557     16.0       14,630     17.8       2,927     20.0       34,129     15.7       27,617     17.0       6,512     23.6  

Research and development

    7,032     6.5       6,084     7.4       948     15.6       13,697     6.3       11,907     7.3       1,790     15.0  

General and administrative

    12,640     11.5       9,253     11.3       3,387     36.6       25,583     11.8       18,034     11.1       7,549     41.9  

Total operating expenses

    37,229     34.0       29,967     36.5       7,262     24.2       73,409     33.8       57,558     35.4       15,851     27.5  

Income from operations

    21,984     20.0       16,402     20.0       5,582     34.0       43,712     20.1       34,084     21.1       9,628     28.2  

Other income, net

    808     0.8       1,173     1.4       (365 )   (31.1 )     986     0.4       1,488     0.9       (502 )   (33.7 )

Income before income taxes

    22,792     20.8       17,575     21.4       5,217     29.7       44,698     20.5       35,572     22.0       9,126     25.6  

Provision for income taxes

    4,478     4.1       5,489     6.7       (1,011 )   (18.4 )     8,333     3.8       11,286     7.0       (2,953 )   (26.2 )

Net income

  $ 18,314     16.7 %   $ 12,086     14.7 %   $ 6,228     51.5 %   $ 36,365     16.7 %   $ 24,286     15.0 %   $ 12,079     49.7 %
                                                                                     

 

 Stock-based compensation expense included in the statements of operations data above for the three and six months ended June 30, 2018 and 2017 was as follows:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(dollars in thousands)

 

2018

   

2017

   

2018

   

2017

 

Stock options and restricted stock

  $ 2,534     $ 2,077     $ 4,688     $ 3,643  

Employee stock purchase plan

    192       164       346       315  

Total stock-based compensation expense

  $ 2,726     $ 2,241     $ 5,034     $ 3,958  
                                 

Cost of revenue

  $ 363     $ 237     $ 650     $ 434  

Operating expenses:

                               

Marketing and sales

    443       338       820       607  

Research and development

    376       279       690       501  

General and administrative

    1,544       1,387       2,874       2,416  

Total stock-based compensation expense

  $ 2,726     $ 2,241     $ 5,034     $ 3,958  

 

 

Comparison of Three Months Ended June 30, 2018 and 2017

 

Revenue

 

Revenue by reportable segment and the related changes for the three months ended June 30, 2018 and 2017 were as follows:

 

                       
   

Three Months Ended June 30,

                 
   

2018

   

2017

   

Change

 

(dollars in thousands)

 

$

   

% of Total

Revenue

   

$

   

% of Total

Revenue

   

$

   

%

 

Revenue

                                               

United States

  $ 86,354       78.8 %   $ 63,353       77.2 %   $ 23,001       36.3 %

Europe

    20,213       18.4       16,131       19.7       4,082       25.3  

Japan

    3,085       2.8       2,556       3.1       529       20.7  

Total revenue

  $ 109,652       100.0 %   $ 82,040       100.0 %   $ 27,612       33.7 %
                                                 

 

Our revenue increased $27.6 million, or 33.7%, for the three months ended June 30, 2018 compared to the same period in 2017. By reportable segment, revenue in the United States increased $23.0 million, or 36.3% for the three months ended June 30, 2018 compared to the same period in 2017. Revenue growth in the United States was partially attributable to the acquisition of RAPID in November 2017. Revenue in Europe increased $4.1 million, or 25.3%, and revenue in Japan increased $0.5 million, or 20.7%, in each case for the three months ended June 30, 2018 compared to the same period in 2017.

  

Our revenue growth during the three months ended June 30, 2018 was the result of an increase in the volume of the product developers and engineers we served through our web-based customer interface and the acquisition of RAPID. During the three months ended June 30, 2018, we served 19,198 unique product developers and engineers through our web-based customer interface, an increase of 18.7% over the same period in 2017. The information does not include customers who do not utilize our web-based interface; these customers are principally related to our recent acquisitions.

 

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 positively impacted by $1.5 million during the three months ended June 30, 2018 compared to the same period in 2017 as a result of foreign currency movements, primarily the strengthening of the British Pound relative to the Dollar.

 

Revenue by product line and the related changes for the three months ended June 30, 2018 and 2017 were as follows:

 

                       
   

Three Months Ended June 30,

                 
   

2018

   

2017

   

Change

 

(dollars in thousands)

  $    

% of Total

Revenue

    $    

% of Total

Revenue

    $    

%

 

Revenue

                                               

Injection Molding

  $ 51,586       47.0 %   $ 46,792       57.0 %   $ 4,794       10.2 %

CNC Machining

    37,788       34.5       24,180       29.5       13,608       56.3  

3D Printing

    13,248       12.1       10,873       13.3       2,375       21.8  

Sheet Metal

    6,309       5.8       -       -       6,309       *  

Other Revenue

    721       0.6       195       0.2       526       *  

Total revenue

  $ 109,652       100.0 %   $ 82,040       100.0 %   $ 27,612       33.7 %
                                                 

*Percentage change not meaningful

 

By product line, our revenue growth was driven by a 10.2% increase in Injection Molding revenue, a 56.3% increase in CNC Machining revenue and a 21.8% increase in 3D Printing revenue, as well as a $0.5 million increase in Other Revenue, in each case for the three months ended June 30, 2018 compared to the same period in 2017. Revenue growth in our CNC Machining, Sheet Metal and Other product lines was partially attributable to the acquisition of RAPID in November 2017.

 

 

Cost of Revenue, Gross Profit and Gross Margin

 

Cost of Revenue. Cost of revenue increased $14.8 million, or 41.4%, for the three months ended June 30, 2018 compared to the same period in 2017, which was faster than the rate of revenue increase of 33.7% for the three months ended June 30, 2018 compared to the same period in 2017. The increase in cost of revenue resulted from the growth of the business, including via the RAPID acquisition, and was due to raw material and production cost increases of $4.3 million, an increase in direct labor headcount resulting in personnel and related cost increases of $8.1 million and equipment and facility-related cost increases of $2.4 million to support increased sales volumes.

 

Gross Profit and Gross Margin. Gross profit increased from $46.4 million in the three months ended June 30, 2017 to $59.2 million in the three months ended June 30, 2018 primarily due to an increase in revenue. Gross margin decreased from 56.5% in the three months ended June 30, 2017 to 54.0% in the three months ended June 30, 2018 due to the timing and mix of revenue, with the RAPID acquisition being the primary driver of the reduction in gross margin.

 

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

 

Marketing and Sales. Marketing and sales expenses increased $2.9 million, or 20.0%, during the three months ended June 30, 2018 compared to the same period in 2017 due primarily to an increase in headcount resulting in personnel and related cost increases of $2.7 million as well as marketing program cost increases of $0.2 million.

 

Research and Development. Our research and development expenses increased $0.9 million, or 15.6%, during the three months ended June 30, 2018 compared to the same period in 2017 due to an increase in headcount resulting in personnel and related cost increases of $1.1 million, which was partially offset by a decrease in operating costs of $0.2 million.

 

General and Administrative. Our general and administrative expenses increased $3.4 million, or 36.6%, during the three months ended June 30, 2018 compared to the same period in 2017 due to an increase in headcount resulting in personnel and related cost increases of $1.0 million, stock based compensation cost increases of $0.2 million, amortization cost increases of $0.7 million and administrative cost increases of $1.5 million.

  

Other Income, net. We recognized other income, net of $0.8 million for the three months ended June 30, 2018, a decrease of $0.4 million compared to other income, net of $1.2 million for the three months ended June 30, 2017. Other income, net for the three months ended June 30, 2018 primarily consisted of a $0.7 million gain on our sale of the 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. Other income, net for the three months ended June 30, 2017 primarily consisted of $0.5 million in interest income on investments, a $0.4 million favorable legal settlement and a $0.3 million gain on foreign currency.

 

Provision for Income Taxes. Our effective tax rate of 19.6% for the three months ended June 30, 2018 decreased 11.6% compared to 31.2% for the same period in 2017. The decrease in the effective tax rate is primarily due to the Tax Cuts and Jobs Act that went into effect in 2018 and benefits from the vesting of restricted stock and the exercise of stock options. Our income tax provision decreased by $1.0 million to $4.5 million for the three months ended June 30, 2018 compared to our income tax provision of $5.5 million for the three months ended June 30, 2017.

 

 

Comparison of Six Months Ended June 30, 2018 and 2017

 

Revenue

 

Revenue by reportable segment and the related changes for the six months ended June 30, 2018 and 2017 were as follows:

 

                       
   

Six Months Ended June 30,

                 
   

2018

   

2017

   

Change

 

(dollars in thousands)

 

$

   

% of Total

Revenue

   

$

   

% of Total

Revenue

   

$

   

%

 

Revenue

                                               

United States

  $ 170,521       78.4 %   $</