Proto Labs, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar figures below are in millions unless stated otherwise. Proto Labs provides digital manufacturing services, including injection molding, CNC machining, 3D printing and sheet metal. Results include 3D Hubs, acquired January 22, 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Revenue | $125.3 | $107.5 | $364.5 | $329.2 |
| Gross profit / margin | $55.3 / 44.1% | $54.6 / 50.8% | $167.3 / 45.9% | $165.2 / 50.2% |
| Operating income / margin | $6.9 / 5.5% | $17.7 / 16.4% | $27.3 / 7.5% | $48.8 / 14.8% |
| Net income / diluted EPS | $4.8 / $0.17 | $14.7 / $0.55 | $21.5 / $0.77 | $41.3 / $1.54 |
| Cash from operations | Not separately presented | Not separately presented | $32.2 | $82.4 |
Liquidity and balance sheet: At September 30, cash and cash equivalents were $47.8, marketable securities totaled $36.1, and current assets and current liabilities were $172.1 and $56.1, respectively. No funded debt is reported; finance lease liabilities totaled approximately $2.1. Total assets were $930.3 and shareholders’ equity was $824.6.
For the first nine months, investing activities used $98.3, including $127.4 of net cash consideration for Hubs and $28.0 of capital expenditures, partly offset by net marketable-security proceeds. Financing activities used $13.8, including $13.0 of share repurchases. Cash declined $79.8 from year-end 2020.
Changes and drivers
- Q3 revenue rose 16.6%; $8.8 of Q3 revenue came from Hubs. Excluding Hubs, U.S. revenue grew 11.4%, while Europe declined 4.0%. Nine-month revenue grew 10.7%, including $23.5 from Hubs.
- Q3 revenue growth was led by CNC machining, up 31.8%; injection molding increased 8.3%, 3D printing 14.1%, and sheet metal 21.7%. CNC machining was also the strongest major product line for the nine-month period, up 22.2%.
- Gross margin fell 6.7 percentage points in Q3 and 4.3 points year to date. Management attributed the decline primarily to labor and material cost inflation and revenue mix. Cost of revenue grew faster than revenue.
- Operating income and net income decreased despite revenue growth. Operating expenses increased, including spending on personnel, marketing, research and development, and the acquired Hubs business. Q3 and year-to-date results also included $0.8 and $8.5, respectively, of reductions in the estimated Hubs contingent-consideration liability, recorded as expense credits.
- Operating cash flow decreased $50.2 year over year for the first nine months. The filing cites lower net income and cash-flow effects including accounts receivable timing; receivables increased $27.8 from year-end.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects cost of revenue to rise in absolute dollars and anticipates continued investment in technology and personnel, with higher operating expenses. It expects gross profit to increase in absolute dollars but says gross margin may vary with business mix. Management expects the effective tax rate to remain consistent with current tax laws.
- Management cited labor shortages, wage inflation, overtime and recruiting costs, as well as material-cost inflation and higher logistics costs. Foreign exchange is another exposure: the company does not hedge currency risk and said a hypothetical 10% adverse currency move could materially affect operating results, though it generally would not materially affect financial position.
- Hubs purchase consideration was $294.1, with up to an additional $52.8 payable subject to performance targets. The purchase-price allocation remained preliminary at September 30; acquired goodwill was $281.8 and was not tax deductible. The filing says the acquisition’s pro forma impact was not material.
- Management reported effective disclosure controls and no material change to internal control over financial reporting. Certain Hubs controls were excluded from the assessment; the excluded business represented approximately 4% of consolidated assets (excluding goodwill) and 6% of nine-month revenue.
- The company reported no litigation expected to have a material adverse effect and no material changes to the risk factors in its 2020 Form 10-K.
Investor verification points
- Assess whether revenue growth excluding Hubs can continue and whether lower average spend per customer, attributed to product mix and smaller average orders, persists.
- Track gross-margin recovery against continued labor, materials and logistics inflation, and the evolving mix of internal versus partner-manufactured work.
- Review operating cash generation and receivable collections, given the year-over-year decline in operating cash flow and the increase in accounts receivable.
- Verify final Hubs purchase accounting and contingent-payment outcomes against performance targets, and monitor integration and control remediation.
- Monitor cash and marketable securities after acquisition spending, capital investment and repurchases, along with unhedged foreign-currency exposure.