Proto Labs, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial figures are in millions unless noted. Proto Labs provides digital manufacturing services including injection molding, CNC machining, 3D printing and sheet metal fabrication. Results include 3D Hubs from its January 22, 2021 acquisition.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $123.0 | $106.6 | $239.2 | $221.7 |
| Gross profit / margin | $56.6 / 46.0% | $52.5 / 49.2% | $112.0 / 46.8% | $110.6 / 49.9% |
| Operating income | $16.1 | $14.4 | $20.4 | $31.2 |
| Net income | $12.9 | $12.6 | $16.6 | $26.6 |
| Diluted EPS | $0.47 | $0.47 | $0.60 | $0.99 |
| Operating cash flow | Not stated separately | Not stated separately | $20.7 | $53.4 |
Q2 operating margin was 13.1%, compared with 13.5% a year earlier. For the first half, operating margin was 8.5%, down from 14.1%. First-half operating cash flow less purchases of property, equipment and other capital assets was negative $3.2 million.
At June 30, cash and cash equivalents were $41.9 million and marketable securities totaled $47.0 million. Current assets were $167.5 million versus current liabilities of $62.4 million. Total liabilities were $117.3 million; the filing reports finance lease liabilities but no conventional borrowings. Cash declined $85.7 million from year-end, mainly reflecting the Hubs acquisition and capital spending.
Changes and notable items
- Q2 revenue rose 15.5% year over year, including $8.9 million from Hubs. Excluding Hubs, U.S. revenue increased 4.5% and Europe increased 21.6%, as reported by management. Six-month revenue rose 7.9%, including $14.7 million from Hubs.
- Q2 CNC Machining revenue increased 44.6% and 3D Printing increased 27.6%; Injection Molding was nearly flat. First-half growth was led by CNC Machining and 3D Printing.
- Gross margin declined in both comparison periods, primarily due to revenue mix. Cost of revenue grew faster than revenue in Q2.
- First-half net income and operating income declined despite revenue growth, reflecting lower margins and higher operating expenses. Marketing and sales, R&D, and G&A costs increased; R&D growth included costs expensed after the Protolabs 2.0 system entered service.
- Hubs was acquired for $294.1 million: $127.4 million net cash consideration and $166.7 million in shares. Up to a further $52.8 million may be payable based on fiscal 2021 and 2022 performance. The purchase-price allocation remained preliminary at quarter-end; acquisition goodwill was $281.8 million.
- A $7.8 million decrease in the estimated fair value of Hubs contingent consideration was recorded as a reduction of operating expense in Q2, benefiting reported operating income. The liability was $5.6 million at June 30.
Outlook, risks and controls
No numerical revenue or earnings guidance is provided. Management expects long-term growth in customers served, but says COVID-19-related economic uncertainty makes near-term conditions difficult to predict. It expects absolute cost of revenue and operating expenses to increase, and gross margin to fluctuate with business mix. Management expects the effective tax rate to remain broadly consistent under current tax laws.
Foreign exchange movements affect international results; the company does not hedge currency exposure and says a hypothetical 10% adverse currency change could materially affect operating results, though it would generally not materially affect financial position. Management reported disclosure controls as effective and no material change in internal control over financial reporting. Certain Hubs controls were excluded from the assessment while integration continued; excluded Hubs amounts represented approximately 4% of consolidated assets excluding goodwill and 6% of six-month revenue. The company reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth persists, particularly given Hubs’ contribution and favorable foreign-exchange effects.
- Whether gross margins recover as product, geographic and partner-manufacturing mix changes.
- Hubs integration, the final purchase-price allocation, and performance-based contingent payments.
- Cash generation and working-capital trends: first-half operating cash flow fell year over year, and accounts receivable increased substantially from year-end.
- Exposure to currency movements, COVID-19-related demand uncertainty, and continued investment and expense growth.