PRLB Proto Labs Inc

Quarterly Revenue Increases 15 Percent Year over Year to Record $78.2 Million

Proto Labs, Inc. (NYSE:PRLB), a leading online and technology-enabled, quick-turn, on-demand manufacturer, today announced financial results for the third quarter ended September 30, 2016.

Third Quarter 2016 Highlights include:

• Revenue for the third quarter of 2016 was $78.2 million, 15 percent above revenue of $67.8 million in the third quarter of 2015. Alphaform, the German company acquired in the fourth quarter of 2015, represented $4.0 million in revenue in the third quarter. Excluding this contribution, legacy revenue totaled $74.2 million, an increase of nine percent compared with the third quarter of 2015.
• Revenue from 3D printing was $9.9 million. Excluding Alphaform’s $2.0 million in 3D printing revenue, legacy 3D printing revenue was $7.9 million, an increase of 30 percent from the third quarter of 2015.
• The number of unique product developers and engineers served increased 14 percent to 14,271 from 12,541 in the third quarter a year ago.
• Net income for the third quarter of 2016 was $12.0 million, or $0.45 per diluted share. Non-GAAP net income, excluding the after-tax expense of stock compensation, amortization of intangibles, charges related to the exit of facilities and unrealized foreign currency gains, was $13.5 million, or $0.51 per diluted share. See “Non-GAAP Financial Measures” below.

“Our results continue to reflect solid demand and operational execution globally, including our operations in Germany,” said Vicki Holt, President and Chief Executive Officer. “Revenue was at the top end of our guidance and our EPS exceeded our estimates. We also continue to generate strong cash flow from operations.

“During the quarter, we improved gross margin on a sequential basis and managed our operating expenses while completing our moves in North Carolina and Japan. We accelerated the launch of our overmolding process and also launched 5-axis machining. These actions set us up to deepen our relationships with our customers and capitalize on the market opportunities.”

Additional Third Quarter 2016 Highlights include:

• Gross margin was 57.2 percent of revenue for the third quarter compared with 59.4 percent for the third quarter of 2015 and 56.4 in the second quarter of 2016. The 80 basis point sequential improvement in gross margin is attributable to improved margins at Alphaform and execution in our injection molding and CNC machining businesses.
• GAAP operating margin was 21.7 percent of revenue during the third quarter of 2016 compared to 25.7 percent for the third quarter of 2015. On a non-GAAP basis, operating margin was 25.0 percent for the third quarter of 2016. See “Non-GAAP Financial Measures” below.
• The Company generated cash from operations of $19.6 million during the third quarter. Cash and investments increased $11.3 million during the quarter to $175.6 million at September 30, 2016.

“Proto Labs is a business that helps companies and entrepreneurs get their products to market faster than their competition. The current trends in the market require companies to be more innovative and nimble as the internet of things, mass customization and quickly changing demands from consumers require accelerated product development. We are in a strong position to capitalize on this long term trend.

“There is uncertainty in the market right now due to the election in the United States and Brexit in Europe and that uncertainty is impacting the economy. Our business is not immune to that impact. While the current economic environment is challenging, we are focused on our internal processes, in both sales and operations, to position ourselves as economic conditions improve. We remain very optimistic about the outlook for Proto Labs. We are fortunate to serve a large, underpenetrated market with a unique value proposition, unsurpassed service and quality for customers, and the commitment and employee talent to successfully execute our strategy for profitable growth,” Ms. Holt concluded.

Non-GAAP Financial Measures

The company has included non-GAAP adjusted revenue growth that excludes the impact of changes in foreign currency exchange rates and legacy revenue excluding the revenue contribution from Alphaform from total revenues in this press release to provide investors with additional information regarding the company’s financial results. Management believes these metrics are useful in evaluating the underlying business trends and ongoing operating performance of the company.

The company has also included non-GAAP operating margin, adjusted for stock-based compensation expense, amortization expense, impairment on assets and charges related to the exit of facilities (collectively, “non-GAAP operating margin”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has also included non-GAAP net income, adjusted for stock-based compensation expense, amortization expense, unrealized foreign currency activity, impairment on assets and charges related to the exit of facilities (collectively, “non-GAAP net income”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has provided below a reconciliation of non-GAAP operating margin to operating margin and non-GAAP net income to net income, the most directly comparable measures calculated and presented in accordance with GAAP. Non-GAAP operating margins and non-GAAP net income are used by the company’s management and board of directors to understand and evaluate operating performance and trends and provide useful measures for period-to-period comparisons of the company’s business. Accordingly, the company believes that non-GAAP operating margin and non-GAAP net income provide useful information to investors and others in understanding and evaluating operating results in the same manner as our management and board of directors.

Conference Call

The company has scheduled a conference call to discuss its third quarter financial results today, October 27, 2016 at 8:30 a.m. ET. To access the call in the U.S. please dial 877-709-8150. Outside the U.S. please dial 201-689-8354. No participant code is required. A simultaneous webcast of the call will be available via the investor relations section of the Proto Labs website and the following link: http://edge.media-server.com/m/p/o7y5fsbx/lan/en. A replay will be available for 14 days following the call on the investor relations section of Proto Labs’ website.

About Proto Labs, Inc.

Proto Labs is the world’s fastest digital manufacturing source for custom prototypes and low-volume production parts. The technology-enabled company uses advanced 3D printing, CNC machining and injection molding technologies to produce parts within days. The result is an unprecedented speed-to-market value for product designers and engineers worldwide. Visit protolabs.com for more information.

Forward-Looking Statements

Statements contained in this press release 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. These statements involve known and unknown risks, uncertainties and other factors which may cause the results of Proto Labs to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in the “Risk Factors” section within reports filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on Proto Labs’ future results. The forward-looking statements included in this press release are made only as of the date hereof. Proto Labs cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, Proto Labs expressly disclaims any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

  Proto Labs, Inc. Condensed Consolidated Balance Sheets (In thousands)               September 30, December 31, 2016 2015 (Unaudited)

Assets

Current assets Cash and cash equivalents $ 68,218 $ 47,653 Short-term marketable securities 39,028 33,201 Accounts receivable, net 37,261 36,125 Inventory 9,930 9,771 Income taxes receivable - 6,028 Other current assets   5,392   5,224 Total current assets 159,829 138,002   Property and equipment, net 142,722 125,475 Long-term marketable securities 68,387 64,789 Goodwill 28,916 28,916 Other intangible assets, net 2,817 3,337 Other long-term assets   1,374   517 Total assets $ 404,045 $ 361,036  

Liabilities and shareholders' equity

Current liabilities Accounts payable $ 10,703 $ 13,643 Accrued compensation 10,330 9,993 Accrued liabilities and other 3,612 2,626 Income taxes payable   541  

-

Total current liabilities 25,186 26,262   Long-term deferred tax liabilities 4,247 4,240 Other long-term liabilities 3,795 2,889   Shareholders' equity   370,817   327,645

Total liabilities and shareholders' equity

$

404,045 $

361,036

                        Proto Labs, Inc. Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) (Unaudited)   Three Months Ended Nine Months Ended September 30, September 30,

2016

2015

2016

2015

Revenue Injection Molding (Protomold) $ 46,445 $ 41,971 $ 134,376 $ 119,521 CNC Machining (Firstcut) 21,781 19,833 60,510 54,788 3D Printing (Fineline) 9,850 6,038 28,059 16,038 Other   97   -   2,757   - Total revenue 78,173 67,842 225,702 190,347   Cost of revenue   33,448   27,517   99,077   77,218 Gross profit 44,725 40,325 126,625 113,129   Operating expenses Marketing and sales 11,787 10,027 34,182 28,383 Research and development 5,976 4,760 17,110 13,471 General and administrative   10,020   8,134   28,397   20,683

Total operating expenses

  27,783   22,921   79,689   62,537 Income from operations 16,942 17,404 46,936 50,592 Other income (expense), net   625   593   2,342   100 Income before income taxes 17,567 17,997 49,278 50,692 Provision for income taxes   5,585   5,615   15,943   16,171 Net income $ 11,982 $ 12,382 $ 33,335 $ 34,521   Net income per share:

Basic

$ 0.45 $ 0.47 $ 1.27 $ 1.33 Diluted $ 0.45 $ 0.47 $ 1.26 $ 1.31   Shares used to compute net income per share: Basic 26,416,041 26,083,405 26,334,738 25,952,451 Diluted 26,609,878 26,381,313 26,539,078 26,290,758                         Proto Labs, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)   Nine Months Ended September 30, 2016 2015 Operating activities Net income $ 33,335 $ 34,521 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,831 10,422 Stock-based compensation expense 5,260 4,515 Deferred taxes 495 (310 ) Excess tax benefit from stock-based compensation (1,965 ) (5,212 ) Amortization of held-to-maturity securities 881 936 Loss on impairment of assets 455 - Other (1,381 ) - Changes in operating assets and liabilities   6,266   (3,588 ) Net cash provided by operating activities   56,177   41,284   Investing activities Purchases of property and equipment (30,981 ) (27,259 ) Purchases of marketable securities (56,213 ) (42,674 ) Proceeds from sales and maturities of marketable securities   45,907   40,899 Net cash used in investing activities   (41,287 )   (29,034 )   Financing activities Payments on debt - (107 ) Acquisition-related contingent consideration (400 ) (1,400 ) Proceeds from exercises of stock options and other 4,168 5,165 Excess tax benefit from stock-based compensation   1,965   5,212 Net cash provided by financing activities   5,733   8,870 Effect of exchange rate changes on cash and cash equivalents   (58 )   (318 ) Net increase in cash and cash equivalents 20,565 20,802 Cash and cash equivalents, beginning of period   47,653   43,329 Cash and cash equivalents, end of period $ 68,218 $ 64,131                             Proto Labs, Inc. Reconciliation of GAAP to Non-GAAP Net Income per Share (In thousands, except share and per share amounts) (Unaudited)   Three Months Ended Nine Months Ended September 30, September 30,

2016

2015

2016

2015

Non-GAAP net income, adjusted for stock-based compensation expense, amortization expense, unrealized (gain) loss on foreign currency, acquisition costs, impairment on assets and charges related to the exit of facilities

GAAP net income $ 11,982 $ 12,382 $ 33,335 $ 34,521 Add back: Stock-based compensation expense 1,719 1,606 5,260 4,515 Amortization expense 163 186 520 559 Impairment on assets - - 455 - Facilities-related charges 731 - 1,150 - Acquisition costs - 648 - 648 Unrealized (gain) loss on foreign currency   (330 )   (407 )   (1,460 )   211 Total adjustments 2   2,283   2,033   5,925   5,933 Income tax benefits on adjustments1   (743 )   (708 )   (2,054 )   (1,851 ) Non-GAAP net income $ 13,522 $ 13,707 $ 37,206 $ 38,603     Non-GAAP net income per share: Basic $ 0.51 $ 0.53 $ 1.41 $ 1.49 Diluted $ 0.51 $ 0.52 $ 1.40 $ 1.47   Shares used to compute non-GAAP net income per share: Basic 26,416,041 26,083,405 26,334,738 25,952,451 Diluted 26,609,878 26,381,313 26,539,078 26,290,758                   1 For the three months ended September 30, 2016 and 2015, income tax effects were calculated reflecting an effective GAAP tax rate of 31.8% and 31.2%, respectively, and an effective non-GAAP tax rate of 31.9% and 31.6%, respectively. For the nine months ended September 30, 2016 and 2015, income tax effects were calculated reflecting an effective GAAP tax rate of 32.4% and 31.9%, respectively, and an effective non-GAAP tax rate of 32.6% and 31.8%, respectively. The difference between our GAAP and non-GAAP tax rate for the three and nine months ended September 30, 2016 was primarily due to the tax effect of stock-based compensation expense, amortization expense, unrealized gain on foreign currency, impairment on assets and charges related to the exit of facilities. The difference between our GAAP and non-GAAP tax rate for the three and nine months ended September 30, 2015 was primarily due to stock-based compensation expense, amortization expense, unrealized (gain) loss on foreign currency and acquisition costs.   2 Stock-based compensation expense, amortization expense, unrealized (gain) loss on foreign currency, acquisition costs, impairment on assets and charges related to the exit of facilities were included in the following GAAP consolidated statement of operations categories:   Three Months Ended Nine Months Ended September 30, September 30,

2016

2015

2016

2015

Cost of revenue $ 558 $ 136 $ 999 $ 378 Marketing and sales 250 288 741 796 Research and development 310 335 1,084 964 General and administrative 1,495 1,681 4,561 3,584 Other income (expense), net   (330 )   (407 )   (1,460 )   211 Total adjustments $ 2,283 $ 2,033 $ 5,925 $ 5,933          

Proto Labs, Inc.

Reconciliation of GAAP to Non-GAAP Operating Margin (In thousands) (Unaudited)   Three Months Ended Nine Months Ended September 30, September 30,

2016

2015

2016

2015

Revenue $ 78,173 $ 67,842 $ 225,702 $ 190,347 Income from operations   16,942   17,404   46,936   50,592 GAAP operating margin 21.7% 25.7% 20.8% 26.6% Add back: Stock-based compensation expense 1,719 1,606 5,260 4,515 Amortization expense 163 186 520 559 Impairment on assets - - 455 - Facilities-related charges 731 - 1,150 - Acquisition costs   -   648   -   648 Total adjustments   2,613   2,440   7,385   5,722

Non-GAAP income from operations adjusted for stock-based compensation expense, amortization expense, impairment on assets, facilities-related charges and acquisition costs

$ 19,555 $ 19,844 $ 54,321 $ 56,314 Non-GAAP operating margin 25.0% 29.3% 24.1% 29.6%                      

Proto Labs, Inc.

Comparison of GAAP to Non-GAAP Revenue Growth (In thousands) (Unaudited)                 Three Months Ended % Change Nine Months Ended % Change September 30, % Constant September 30, % Constant

2016

2015

Change Currencies1

2016

2015

Change Currencies1 Revenues United States $ 59,574 $ 54,408 9.5 % 9.5 % $ 169,364 $ 154,107 9.9 % 9.9 % Europe 15,610 11,297 38.2 % 44.7 % 48,518 30,161 60.9 % 65.7 % Japan   2,989   2,137

39.9

% 17.3 %   7,820   6,079 28.6 % 14.8 % Total Revenue $ 78,173 $ 67,842 15.2 % 15.6 % $ 225,702 $ 190,347 18.6 % 18.9 %                                

 

1 Revenue growth for the three- and nine-month periods ended September 30, 2016 has been recalculated using 2015 foreign currency exchange rates in effect during comparable periods to provide information useful in evaluating the underlying business trends excluding the impact of changes in foreign currency exchange rates.                                     Three Months Ended % Change Nine Months Ended % Change September 30,

%

Constant September 30,

%

Constant

2016

2015

Change2

Currencies2

2016

2015

Change2

Currencies2

Revenues United States $ 59,574 $ 54,408 9.5 % 9.5 % $ 169,364 $ 154,107 9.9 % 9.9 % Europe 11,629 11,297 2.9 % 9.5 % 34,871 30,161 15.6 % 20.4 % Japan   2,989   2,137 39.9 % 17.3 %   7,820   6,079 28.6 % 14.8 % Total Revenue $ 74,192 $ 67,842 9.4 % 9.7 % $ 212,055 $ 190,347 11.4 % 11.7 %                                   2 Revenue growth for the three- and nine-month periods ended September 30, 2016 has been recalculated to exclude revenue earned from our acquisition of Alphaform, and using 2015 foreign currency exchange rates in effect during comparable periods to provide information useful in evaluating the underlying business trends excluding the impact of changes in foreign currency exchange rates.     Proto Labs, Inc. Revenue by Geography - Based on Shipping Location (In thousands) (Unaudited)         Three Months Ended Nine Months Ended September 30, September 30,

2016

2015

2016

2015

Revenues Domestic United States $ 55,677 $ 50,214 $ 158,095 $ 144,357 International Europe 15,610 11,297 48,518 30,161 Japan 2,989 2,137 7,820 6,079 United States   3,897   4,194   11,269   9,750 Total international   22,496   17,628   67,607   45,990 Total revenue $ 78,173 $ 67,842 $ 225,702 $ 190,347

 

    Proto Labs, Inc. Product Developer Information (Unaudited)         Three Months Ended Nine Months Ended September 30, September 30, 2016 2015 2016 2015 Unique product developers and engineers served 14,271 12,541 26,528 22,633   Note: the data above does not include product developers and engineers who purchased products attributable to our acquisition of Alphaform during the periods presented.  

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Proto Labs, Inc.Investor Relations:John Way, 763-479-7726john.way@protolabs.comorJenifer Kirtland, 408-656-9496jkirtland@evcgroup.comorMedia Relations:Bill Dietrick, 763-479-7664bill.dietrick@protolabs.com