I
tem
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, 2015
.
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 a leading online and technology-enabled manufacturer of quick-turn, on-demand 3D printed, CNC-machined and injection-molded custom parts for prototyping and low-volume production. We provide “Real Parts, Really Fast” to product developers and engineers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe custom parts manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts. 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 (Protomold), CNC Machining (Firstcut) and 3D Printing (Fineline). We continually seek to expand the range of size and geometric complexity of the parts we can make with these manufacturing 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 (
Protomold
)
Our Injection Molding (Protomold) product line uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of thermoplastic, metal, or liquid silicone injection molds, which are then used to produce custom injection-molded parts on commercially available equipment. Our Injection Molding (Protomold) product line is used for prototype, on-demand and low-volume production. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need low-volume production often come back to Proto Labs’ Injection Molding product line for additional quantities typically ranging up to 10,000 parts or more. They do so to support pilot production while their tooling for high-volume production is being prepared, because they need on-demand manufacturing due to disruptions in their manufacturing process, because their product will only be released in a limited quantity, or because they need end-of-life production support. These additional part orders typically occur on approximately half of the molds that we make, typically accounting for approximately half of our total Injection Molding (Protomold) revenue.
CNC Machining (
Firstcut
)
Our CNC Machining (Firstcut) product line uses commercially available CNC machines to cut plastic or metal blocks or bars into one or more custom parts based on the 3D CAD model uploaded by the product developer or engineer. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturing process. The CNC Machining (Firstcut) product line is well suited to produce small quantities, typically in the range of one to 200 parts.
3D Printing (
Fineline
)
Our 3D Printing (Fineline) includes stereolithography (SL), selective laser sintering (SLS) and direct metal laser sintering (DMLS) processes, which offers customers a wide-variety of high-quality, precision rapid prototyping and low volume production. These processes create parts with a high level of accuracy, detail, strength and durability. 3D Printing is well suited to produce small quantities, typically in the range of one to 50 parts.
Key Financial Measures and Trends
Revenue
The Company’s operations are conducted in three geographic markets consisting of the United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers and engineers are located. Revenue within each of our United States and Europe markets is derived from our Injection Molding (Protomold), CNC Machining (Firstcut) and 3D Printing (Fineline) product lines. Revenue within our Japan market is derived from our Injection Molding (Protomold) and CNC Machining (Firstcut) product lines. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by:
|
●
|
increasing marketing and selling activities;
|
|
●
|
introducing our CNC Machining (Firstcut) product line in 2007;
|
|
●
|
expanding internationally, including the opening of our Japanese plant in 2009;
|
|
●
|
offering additional product lines such as 3D Printing (Fineline), through our acquisition of FineLine Prototyping, Inc. (FineLine) in April 2014 and expanded through our acquisition of certain assets, including shares of select subsidiaries, of Alphaform AG (Alphaform) in October 2015;
|
|
●
|
improving the usability of our product lines such as our web-centric applications; and
|
|
●
|
expanding the breadth and scope of our products, for example, by adding more sizes and materials to our offerings such as liquid silicone rubber (LSR).
|
Excluding product developers and engineers gained through the acquisition of Alphaform,
we served 13,519 unique product developers and engineers during the three months ended June 30
, 2016,
an increase of 14.4% over the same period in 2015. We served 20,240 unique product developers and engineers during the six months ended June 30, 2016, an increase of 17.7% over the same period in 2015.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists primarily of raw materials, employee compensation, benefits, stock-based compensation, equipment depreciation, facilities costs and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.
We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our pricing, sales volume and manufacturing costs, the costs associated with increasing production capacity, the mix between sales by product line, the mix between domestic and foreign revenue sources, and foreign 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 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, on-demand 3D printed, CNC-machined, CNC-turned and injection-molded 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 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 product line offerings.
General and administrative.
General and administrative expense consists primarily of employee compensation, benefits, stock-based compensation, professional service fees related to accounting, tax and legal and other related overhead. We expect general and administrative expense to increase in the future as we continue to grow and expand as a global organization.
Other Income (Expense),
N
et
Other income (expense), 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
I
ncome
T
axes
Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases and we expect our effective tax rate to remain relatively constant.
Results of Operations
The following table summarizes our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Change
|
|
|
Six Months Ended June 30,
|
|
|
Change
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
$
|
74,961
|
|
|
|
100.0
|
%
|
|
$
|
63,969
|
|
|
|
100.0
|
%
|
|
$
|
10,992
|
|
|
|
17.2
|
%
|
|
$
|
147,529
|
|
|
|
100.0
|
%
|
|
$
|
122,505
|
|
|
|
100.0
|
%
|
|
$
|
25,024
|
|
|
|
20.4
|
%
|
Cost of revenue
|
|
|
32,715
|
|
|
|
43.6
|
|
|
|
26,419
|
|
|
|
41.3
|
|
|
|
6,296
|
|
|
|
23.8
|
|
|
|
65,629
|
|
|
|
44.5
|
|
|
|
49,701
|
|
|
|
40.6
|
|
|
|
15,928
|
|
|
|
32.0
|
|
Gross profit
|
|
|
42,246
|
|
|
|
56.4
|
|
|
|
37,550
|
|
|
|
58.7
|
|
|
|
4,696
|
|
|
|
12.5
|
|
|
|
81,900
|
|
|
|
55.5
|
|
|
|
72,804
|
|
|
|
59.4
|
|
|
|
9,096
|
|
|
|
12.5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
11,453
|
|
|
|
15.2
|
|
|
|
9,502
|
|
|
|
14.8
|
|
|
|
1,951
|
|
|
|
20.5
|
|
|
|
22,395
|
|
|
|
15.2
|
|
|
|
18,356
|
|
|
|
15.0
|
|
|
|
4,039
|
|
|
|
22.0
|
|
Research and development
|
|
|
5,816
|
|
|
|
7.8
|
|
|
|
4,397
|
|
|
|
6.9
|
|
|
|
1,419
|
|
|
|
32.3
|
|
|
|
11,134
|
|
|
|
7.5
|
|
|
|
8,711
|
|
|
|
7.1
|
|
|
|
2,423
|
|
|
|
27.8
|
|
General and administrative
|
|
|
10,126
|
|
|
|
13.5
|
|
|
|
6,304
|
|
|
|
9.9
|
|
|
|
3,822
|
|
|
|
60.6
|
|
|
|
18,377
|
|
|
|
12.5
|
|
|
|
12,549
|
|
|
|
10.2
|
|
|
|
5,828
|
|
|
|
46.4
|
|
Total operating expenses
|
|
|
27,395
|
|
|
|
36.5
|
|
|
|
20,203
|
|
|
|
31.6
|
|
|
|
7,192
|
|
|
|
35.6
|
|
|
|
51,906
|
|
|
|
35.2
|
|
|
|
39,616
|
|
|
|
32.3
|
|
|
|
12,290
|
|
|
|
31.0
|
|
Income from operations
|
|
|
14,851
|
|
|
|
19.8
|
|
|
|
17,347
|
|
|
|
27.1
|
|
|
|
(2,496
|
)
|
|
|
(14.4
|
)
|
|
|
29,994
|
|
|
|
20.3
|
|
|
|
33,188
|
|
|
|
27.1
|
|
|
|
(3,194
|
)
|
|
|
(9.6
|
)
|
Other income (expense), net
|
|
|
1,092
|
|
|
|
1.5
|
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
1,128
|
|
|
|
*
|
|
|
|
1,717
|
|
|
|
1.2
|
|
|
|
(493
|
)
|
|
|
(0.4
|
)
|
|
|
2,210
|
|
|
|
*
|
|
Income before income taxes
|
|
|
15,943
|
|
|
|
21.3
|
|
|
|
17,311
|
|
|
|
27.1
|
|
|
|
(1,368
|
)
|
|
|
(7.9
|
)
|
|
|
31,711
|
|
|
|
21.5
|
|
|
|
32,695
|
|
|
|
26.7
|
|
|
|
(984
|
)
|
|
|
(3.0
|
)
|
Provision for income taxes
|
|
|
5,252
|
|
|
|
7.0
|
|
|
|
5,625
|
|
|
|
8.8
|
|
|
|
(373
|
)
|
|
|
(6.6
|
)
|
|
|
10,358
|
|
|
|
7.0
|
|
|
|
10,556
|
|
|
|
8.6
|
|
|
|
(198
|
)
|
|
|
(1.9
|
)
|
Net income
|
|
$
|
10,691
|
|
|
|
14.3
|
%
|
|
$
|
11,686
|
|
|
|
18.3
|
%
|
|
$
|
(995
|
)
|
|
|
-8.5
|
%
|
|
$
|
21,353
|
|
|
|
14.5
|
%
|
|
$
|
22,139
|
|
|
|
18.1
|
%
|
|
$
|
(786
|
)
|
|
|
-3.6
|
%
|
|
* Percentage change not meaningful
|
Stock-based compensation expense included in the statements of operations data above is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Stock options and restricted stock
|
|
$
|
1,663
|
|
|
$
|
1,436
|
|
|
$
|
3,267
|
|
|
$
|
2,655
|
|
Employee stock purchase plan
|
|
|
146
|
|
|
|
131
|
|
|
|
274
|
|
|
|
254
|
|
Total stock-based compensation expense
|
|
$
|
1,809
|
|
|
$
|
1,567
|
|
|
$
|
3,541
|
|
|
$
|
2,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
154
|
|
|
$
|
132
|
|
|
$
|
284
|
|
|
$
|
243
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
213
|
|
|
|
271
|
|
|
|
491
|
|
|
|
507
|
|
Research and development
|
|
|
480
|
|
|
|
336
|
|
|
|
774
|
|
|
|
630
|
|
General and administrative
|
|
|
962
|
|
|
|
828
|
|
|
|
1,992
|
|
|
|
1,529
|
|
Total stock-based compensation expense
|
|
$
|
1,809
|
|
|
$
|
1,567
|
|
|
$
|
3,541
|
|
|
$
|
2,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Three Months Ended
June 30
,
2016 and 2015
Revenue
Revenue by product line and the related changes for the three months ended June 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
(dollars in thousands)
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Injection Molding (Protomold)
|
|
$
|
44,762
|
|
|
|
59.7
|
%
|
|
$
|
39,932
|
|
|
|
62.4
|
%
|
|
$
|
4,830
|
|
|
|
12.1
|
%
|
CNC Machining (Firstcut)
|
|
|
19,854
|
|
|
|
26.5
|
|
|
|
18,585
|
|
|
|
29.1
|
|
|
|
1,269
|
|
|
|
6.8
|
|
3D Printing (Fineline)
|
|
|
9,099
|
|
|
|
12.1
|
|
|
|
5,452
|
|
|
|
8.5
|
|
|
|
3,647
|
|
|
|
66.9
|
|
Other
|
|
|
1,246
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,246
|
|
|
|
100.0
|
|
Total revenue
|
|
$
|
74,961
|
|
|
|
100.0
|
%
|
|
$
|
63,969
|
|
|
|
100.0
|
%
|
|
$
|
10,992
|
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic region, based on the billing location of the end customer, for the three months ended June 30, 2016 and 2015 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
(dollars in thousands)
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
51,852
|
|
|
|
69.2
|
%
|
|
$
|
49,298
|
|
|
|
77.1
|
%
|
|
$
|
2,554
|
|
|
|
5.2
|
%
|
International
|
|
|
23,109
|
|
|
|
30.8
|
|
|
|
14,671
|
|
|
|
22.9
|
|
|
|
8,438
|
|
|
|
57.5
|
|
Total revenue
|
|
$
|
74,961
|
|
|
|
100.0
|
%
|
|
$
|
63,969
|
|
|
|
100.0
|
%
|
|
$
|
10,992
|
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased $11.0 million, or 17.2%, for the three months ended June 30, 2016 compared to the same period in 2015. By geographic region, this revenue growth was driven by a 5.2% increase in United States revenue and a 57.5% increase in international revenue, which includes $4.8 million in revenue from our acquisition of Alphaform in October 2015, in each case for the three months ended June 30, 2016 compared to the same period in 2015.
By product line, this revenue growth was driven by a 12.1% increase in Injection Molding (Protomold) revenue, a 6.8% increase in CNC Machining (Firstcut) revenue, and a 66.9% increase in 3D Printing (Fineline) revenue, in each case for the three months ended June 30, 2016 compared to the same period in 2015.
Alphaform revenue by product line includes $1.4 million in Injection Molding (Protomold) revenue, $2.1 million in 3D Printing (Fineline) revenue and $1.3 million of Other revenue, in each case for the three months ended June 30, 2016.
Our revenue growth during the three months ended June 30, 2016 was the result of an increase in the volume of the product developers and engineers we served as well as revenue gained through our acquisition of Alphaform. During the three months ended June 30, 2016, excluding product developers and engineers gained through the acquisition of Alphaform, we served 13,519 unique product developers and engineers, an increase of 14.4% over the same period in 2015. Average revenue per product developer or engineer, excluding product developers and engineers gained through the acquisition of Alphaform, decreased 4.1% during the three months ended June 30, 2016 when compared to the same period in 2015.
Our revenue increases were primarily driven by increases in sales personnel and marketing activities and revenue earned as a result of our acquisition of Alphaform in October 2015. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer prospects to support sales activity.
During the second quarter of 2016, we made the decision to discontinue offering two manufacturing processes within our Injection Molding (Protomold) product lines, including Metal Injection Molding (MIM) and Magnesium Thixomolding (Thixo), as well as exit our non-core resin resale business, which was acquired from Alphaform in October 2015. MIM, Thixo and resin resale in aggregrate represented approximately 1.8% of revenue during the three months ended June 30, 2016.
International revenue was not materially impacted by foreign currency movements for the three months ended June 30, 2016 compared to the same period in 2015. The effect of pricing changes on revenue was negligible for the three months ended June 30, 2016 compared to the same period in 2015.
Cost of
R
evenue,
G
ross
P
rofit and
G
ross
M
argin
Cost of
R
evenue.
Cost of revenue increased $6.3 million, or 23.8%, for the three months ended June 30, 2016 compared to the same period in 2015, which was faster than the rate of revenue increase of 17.2% for the three months ended June 30, 2016 compared to the same period in 2015. The increase in cost of revenue resulted from the growth of the business, including the Alphaform acquisition, and was due to raw material and production cost increases of $2.0 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $3.0 million and equipment and facility-related cost increases of $1.3 million, which included $0.1 million of accelerated depreciation of leasehold assets. We expect additional expense related to the accelerated depreciation of leasehold assets of approximately $0.5 million through the end of 2016 resulting from our plans to vacate existing facilities and move into new facilities in the U.S. and Japan in 2016.
Gross Profit and
Gross Margin.
Gross profit increased from $37.6 million, or 58.7% of revenues, in the three months ended June 30, 2015 to $42.2 million, or 56.4% of revenue, in the three months ended June 30, 2016 primarily due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of additional costs incurred related to the integration of Alphaform as well as increases in investments of additional manufacturing capacity, the impact of fluctuations in foreign currency exchange rates and accelerated depreciation of leasehold assets.
Operating Expenses, Other Income (Expense), net and Provision for Income Taxes
Marketing and
Sales.
Marketing and sales expenses increased $2.0 million, or 20.5%, during the three months ended June 30, 2016 compared to the same period in 2015 due primarily to an increase in headcount resulting in personnel and related cost increases of $1.3 million and marketing program cost increases of $0.7 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs that have proven to be the most effective in growing our business.
Research and Development.
Our research and development expenses increased $1.4 million, or 32.3%, during the three months ended June 30, 2016 compared to the same period in 2015 due to an increase in headcount resulting in personnel and related cost increases of $1.1 million, operating cost increases of $0.2 million and professional services cost increases of $0.1 million.
General and Administrative.
Our general and administrative expenses increased $3.8 million, or 60.6%, during the three months ended June 30, 2016 compared to the same period in 2015 due to an increase in headcount resulting in personnel and related cost increases of $1.5 million, stock-based compensation cost increases of $0.1 million, professional services cost increases of $0.4 million and administrative cost increases of $1.8 million. The administrative costs in the three months ended June 30, 2016, include asset impairment charges of $0.5 million as a result of our decision to discontinue MIM and Thixo manufacturing processes as noted above, and accelerated depreciation and facilities-related charges of $0.3 million resulting from our plans to vacate existing facilities and move into new facilities in the U.S. and Japan in 2016. As a result of our decision to vacate facilities, we expect additional administrative expense related to the accelerated depreciation of leasehold assets of approximately $0.2 million through the end of 2016.
Other Income (Expense),
net.
We recognized other income, net of $1.1 million for the three months ended June 30, 2016, an increase of $1.1 million when compared to other expense, net for the three months ended June 30, 2015. Other income, net included $0.8 million in foreign currency exchange gains for the three months ended June 30, 2016 compared to $0.2 million in foreign currency exchange losses in the same period of the prior year. The increase was
primarily due to the amount of foreign-currency denominated cash balances abroad and movements in underlying exchange rates at the end of the period.
Provision for Income Taxes.
Our effective tax rate of 32.9% for the three months ended June 30, 2016 increased 0.4% when compared to 32.5% for the same period in 2015. The increase in the effective tax rate is primarily due to changes in domestic deductions for which the company qualifies in the quarter ended June 30, 2016 when compared to the quarter ended June 30, 2015. As a result of a decrease in income before income taxes, our income tax provision decreased by $0.3 million to $5.3 million for the three months ended June 30, 2016 compared to our income tax provision of $5.6 million for the three months ended June 30, 2015.
Comparison of Six
Months Ended
June 30
,
2016 and 2015
Revenue
Revenue by product line and the related changes for the six months ended June 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
(dollars in thousands)
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Injection Molding (Protomold)
|
|
$
|
87,931
|
|
|
|
59.6
|
%
|
|
$
|
77,550
|
|
|
|
63.3
|
%
|
|
$
|
10,381
|
|
|
|
13.4
|
%
|
CNC Machining (Firstcut)
|
|
|
38,729
|
|
|
|
26.3
|
|
|
|
34,955
|
|
|
|
28.5
|
|
|
|
3,774
|
|
|
|
10.8
|
|
3D Printing (Fineline)
|
|
|
18,209
|
|
|
|
12.3
|
|
|
|
10,000
|
|
|
|
8.2
|
|
|
|
8,209
|
|
|
|
82.1
|
|
Other
|
|
|
2,660
|
|
|
|
1.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,660
|
|
|
|
100.0
|
|
Total revenue
|
|
$
|
147,529
|
|
|
|
100.0
|
%
|
|
$
|
122,505
|
|
|
|
100.0
|
%
|
|
$
|
25,024
|
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage change not meaningful
|
Revenue by geographic region, based on the billing location of the end customer, for the six months ended June 30, 2016 and 2015 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
(dollars in thousands)
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
102,419
|
|
|
|
69.4
|
%
|
|
$
|
94,143
|
|
|
|
76.8
|
%
|
|
$
|
8,276
|
|
|
|
8.8
|
%
|
International
|
|
|
45,110
|
|
|
|
30.6
|
|
|
|
28,362
|
|
|
|
23.2
|
|
|
|
16,748
|
|
|
|
59.1
|
|
Total revenue
|
|
$
|
147,529
|
|
|
|
100.0
|
%
|
|
$
|
122,505
|
|
|
|
100.0
|
%
|
|
$
|
25,024
|
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue increased $25.0 million, or 20.4%, for the six months ended June 30, 2016 compared to the same period in 2015. By geographic region, this revenue growth was driven by an 8.8% increase in United States revenue and a 59.1% increase in international revenue, which includes $9.7 million in revenue from our acquisition of Alphaform in October 2015, in each case for the six months ended June 30, 2016 compared to the same period in 2015.
By product line, this revenue growth was driven by a 13.4% increase in Injection Molding (Protomold) revenue, a 10.8% increase in CNC Machining (Firstcut) revenue, and a 82.1% increase in 3D Printing (Fineline) revenue, in each case for the six months ended June 30, 2016 compared to the same period in 2015.
Alphaform revenue by product line includes $2.4 million in Injection Molding (Protomold) revenue, $4.6 million in 3D Printing (Fineline) revenue and $2.7 million of Other revenue, in each case for the six months ended June 30, 2016.
Our revenue growth during the six months ended June 30, 2016 was the result of increased volume of the product developers and engineers we served as well as revenue gained through our acquisition of Alphaform. During the six months ended June 30, 2016, excluding product developers and engineers gained through the acquisition of Alphaform, we served 20,240 unique product developers and engineers, an increase of 17.7% over the same period in 2015. Average revenue per product developer or engineer, excluding product developers and engineers gained through the acquisition of Alphaform, decreased 4.4% during the six months ended June 30, 2016 when compared to the same period in 2015.
Our revenue increases were primarily driven by increases in sales personnel and marketing activities and revenue earned as a result of our acquisition of Alphaform in October 2015. Our sales personnel focus on gaining new customer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on marketing activities that have proven to result in the greatest number of customer prospects to support sales activity.
During the second quarter of 2016, we made the decision to discontinue offering two manufacturing processes within our Injection Molding (Protomold) product lines, including MIM and Thixo, as well as exit our non-core resin resale business, which was acquired from Alphaform in October 2015. MIM, Thixo, and resin resale in aggregate represented approximately 2.1% of revenue during the six months ended June 30, 2016.
International revenue was negatively impacted by $0.4 million in foreign currency movements for the six months ended June 30, 2016 compared to the same period in 2015. The effect of pricing changes on revenue was negligible for the six months ended June 30, 2016 compared to the same period in 2015.
Cost of
R
evenue,
G
ross
P
rofit and
G
ross
M
argin
Cost of
R
evenue.
Cost of revenue increased $15.9 million, or 32.0%, for the six months ended June 30, 2016 compared to the same period in 2015, which was faster than the rate of revenue increase of 20.4% for the six months ended June 30, 2016 compared to the same period in 2015. The increase in cost of revenue resulted from the growth of the business including the Alphaform acquisition, and was due to raw material and production cost increases of $5.5 million to support increased sales volumes, an increase in direct labor headcount resulting in personnel and related cost increases of $7.9 million and equipment and facility-related cost increases of $2.5 million, which includes $0.1 million of accelerated depreciation of leasehold assets. We expect additional expense related to the accelerated depreciation of leasehold assets of approximately $0.5 million through the end of 2016 resulting from our plans to vacate existing facilities and move into new facilities in the U.S. and Japan in 2016.
Gross Profit and
Gross Margin.
Gross profit increased from $72.8 million, or 59.4% of revenues, in the six months ended June 30, 2015 to $81.9 million, or 55.5% of revenue, in the six months ended June 30, 2016 primarily due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of additional costs incurred related to the integration of Alphaform as well as increases in investments of additional manufacturing capacity and the impact of fluctuations in foreign currency exchange rates.
Operating Expenses, Other Income (Expense), net and Provision for Income Taxes
Marketing and Sales.
Marketing and sales expenses increased $4.0 million, or 22.0%, during the six months ended June 30, 2016 compared to the same period in 2015 due primarily to an increase in headcount resulting in personnel and related cost increases of $3.2 million and marketing program cost increases of $0.8 million. The increase in marketing program costs is the result of our focus and concentration on funding those programs that have proven to be the most effective in growing our business.
Research and Development.
Our research and development expenses increased $2.4 million, or 27.8%, during the six months ended June 30, 2016 compared to the same period in 2015 due to an increase in headcount resulting in personnel and related cost increases of $2.0 million, operating cost increases of $0.2 million and professional services cost increases of $0.2 million.
General and Administrative.
Our general and administrative expenses increased $5.8 million, or 46.4%, during the six months ended June 30, 2016 compared to the same period in 2015 due to an increase in headcount resulting in personnel and related cost increases of $2.4 million, stock-based compensation cost increases of $0.5 million, professional services cost increases of $0.7 million and administrative cost increases of $2.2 million. The administrative costs in the six months ended June 30, 2016, include asset impairment charges of $0.5 million as a result of our decision to discontinue MIM and Thixo manufacturing processes as noted above, and accelerated depreciation and facilities-related charges of $0.3 million resulting from our plans to vacate existing facilities and move into new facilities in the U.S. and Japan in 2016. As a result of our decision to vacate facilities, we expect additional administrative expense related to the accelerated depreciation of leasehold assets of approximately $0.2 million through the end of 2016.
Other Income (Expense), net.
We recognized other income, net of $1.7 million for the six months ended June 30, 2016, an increase of $2.2 million when compared to other expense, net $0.5 million for the six months ended June 30, 2015. Other income, net included $1.2 million in foreign currency exchange gains for the six months ended June 30, 2016 compared to $0.8 million in foreign currency exchange losses in the same period of the prior year. The increase was
primarily due to the amount of foreign-currency denominated cash balances abroad and movements in underlying exchange rates at the end of the period.
Provision
for Income Taxes
.
Our effective tax rate of 32.7% for the six months ended June 30, 2016 increased 0.4% when compared to 32.3% for the same period in 2015. The increase in the effective tax rate is primarily due to changes in domestic deductions for which the company qualifies in the quarter ended June 30, 2016 when compared to the quarter ended June 30, 2015. As a result of a decrease in income before income taxes, our income tax provision decreased by $0.2 million to $10.4 million for the six months ended June 30, 2016 compared to our income tax provision of $10.6 million for the six months ended June 30, 2015.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows during the six months ended June 30
, 2016 and 2015:
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Net cash provided by operating activities
|
|
$
|
36,562
|
|
|
$
|
27,833
|
|
Net cash used in investing activities
|
|
|
(31,961
|
)
|
|
|
(16,997
|
)
|
Net cash provided by financing activities
|
|
|
5,245
|
|
|
|
2,119
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(168
|
)
|
|
|
40
|
|
Net increase in cash and cash equivalents
|
|
$
|
9,678
|
|
|
$
|
12,995
|
|
|
|
|
|
|
|
|
|
|
Sources of Liquidity
Historically, we have primarily financed our operations and capital expenditures through cash flow from operations. We had cash and cash equivalents of $57.3 million as of June 30, 2016, an increase of $9.6 million from December 31, 2015. The increase in our cash was primarily due to cash generated through operations and, to a lesser extent, proceeds from exercises of stock options and purchases through our employee stock purchase plan, which were partially offset by investing activity.
Cash Flows from Operating Activities
Cash flows from operating activities were $36.6 million during the six months ended June 30, 2016 and primarily consisted of net income of $21.4 million, adjusted for certain non-cash items, including depreciation and amortization of $8.1 million, stock-based compensation expense of $3.5 million, deferred taxes of $0.4 million, loss on impairment of assets of $0.5 million and amortization of held-to-maturity securities of $0.6 million, which were partially offset by excess tax benefit from stock-based compensation expense of $1.9 million and other adjustments of $1.1 million. Cash flows from operating activities increased $8.7 million during the six months ended June 30, 2016 compared to the same period in 2015 primarily due to increases in depreciation and amortization of $1.2 million driven by an increase in capital investments, stock-based compensation expense of $0.6 million driven by an increase in equity activity and loss on impairment of assets of $0.5 million driven by the decision to exit certain product lines, and changes in operating assets and liabilities of $9.3 million driven by general growth of the business. These increases were partially offset by a decrease in net income of $0.8 million and an increase in excess tax benefits of $1.0 million, as well as other adjustments of $1.1 million primarily related to unrealized gains on the translation of foreign currency denominated cash.
Cash flows from operating activities of $27.8 million during the six months ended June 30, 2015 primarily consisted of net income of $22.1 million, adjusted for certain non-cash items, including depreciation and amortization of $6.9 million, stock-based compensation expense of $2.9 million, deferred taxes of $0.6 million and amortization of held-to-maturity securities of $0.6 million, which were partially offset by excess tax benefit from stock-based compensation expense of $1.0 million.
Cash Flows from Investing Activities
Cash used in investing activities was $32.0 million during the six months ended June 30, 2016, consisting of $22.4 million for the purchases of property and equipment and $38.3 million for the purchases of marketable securities, which were partially offset by $28.7 million in proceeds from maturities of marketable securities.
Cash used in investing activities was $17.0 million during the six months ended June 30, 2015 consisting of $15.7 million for the purchases of property and equipment and $25.4 million for the purchases of marketable securities, which were partially offset by $24.1 million in proceeds from maturities and call redemptions of marketable securities.
Cash Flows from Financing Activities
Cash provided by financing activities was $5.2 million during the six months ended June 30, 2016, consisting of proceeds from exercises of stock options of $3.7 million and $1.9 million in excess tax benefit on stock-based compensation, which were partially offset by $0.4 million for acquisition-related contingent consideration payments.
Cash provided by financing activities was $2.1 million for during the six months ended June 30, 2015, consisting of proceeds from exercises of stock options of $2.2 million and $1.0 million in excess tax benefit on stock-based compensation, which were partially offset by $1.0 million for payments of acquisition-related contingent consideration and $0.1 million for payments of debt.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Critical Accounting Policies and Use of Estimates
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. There were no material changes in our significant accounting policies during the six months ended June 30, 2016.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2 to the consolidated financial statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.