Proto Labs Reports Financial Results for the Third Quarter 2016

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 adjustments ¹		(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		Currencies ¹		2016		2015		Change		Currencies ¹
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		Change ²		Currencies ²		2016		2015		Change ²		Currencies ²
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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