Proto Labs, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Amounts are in U.S. dollars.
Business context and reporting period
Proto Labs provides digital manufacturing services for custom prototypes and low-volume production, including injection molding, CNC machining, 3D printing and sheet metal fabrication. On January 22, 2021, it acquired 3D Hubs, an online manufacturing platform connecting customers with a global network of manufacturing partners. 3D Hubs contributed $5.8 million of Q1 revenue; its results are included from the acquisition date.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $116.1 million | $115.1 million | +0.9% |
| Gross profit / gross margin | $55.3 million / 47.6% | $58.1 million / 50.5% | Margin down 2.9 percentage points |
| Operating income / margin | $4.3 million / 3.7% | $16.8 million / 14.6% | Income down 74.7% |
| Net income | $3.7 million | $14.0 million | Down 73.5% |
| Diluted earnings per share | $0.13 | $0.52 | Down $0.39 |
| Cash from operating activities | $6.4 million | $22.4 million | Down $16.0 million |
Revenue by product line: injection molding $56.4 million (+2.9%); CNC machining $36.7 million (−3.1%); 3D printing $17.2 million (+8.1%); sheet metal $5.2 million (−7.6%). United States revenue rose 1.1%, Europe rose 3.2%, and Japan fell 14.6%. International revenue benefited by $1.6 million from currency movements.
Operating cash flow was $6.4 million; investing cash outflow was $90.1 million, including $127.7 million of net cash used for the 3D Hubs acquisition, partly offset by marketable-security proceeds. Financing cash outflow was $0.4 million. Cash and cash equivalents ended the quarter at $43.8 million, versus $127.6 million at year-end; marketable securities totaled $49.4 million. Current assets were $158.5 million and current liabilities $59.8 million.
The filing reports no conventional borrowings. Reported obligations include operating and finance lease liabilities totaling approximately $16.6 million and $10.0 million of acquisition contingent consideration at fair value. The 3D Hubs agreement permits up to $52.8 million of additional contingent consideration, subject to performance targets.
Material changes versus the prior comparable period
- Revenue was nearly flat, but gross margin declined from 50.5% to 47.6%, primarily due to revenue mix; cost of revenue rose 6.6%, faster than revenue.
- Operating expenses increased 23.7% to $51.1 million. General and administrative expense included $2.5 million of 3D Hubs transaction costs; research and development spending also rose with Protolabs 2.0 system-related resources and the acquisition.
- Net income and operating cash flow fell substantially. Operating cash flow was affected by lower earnings and timing changes in operating assets and liabilities.
- Cash fell principally because of the acquisition. Marketable securities were sold to help fund it; remaining securities were reclassified as available-for-sale.
- The company served 22,605 unique product developers and engineers, up 8.3%; excluding 3D Hubs, the number declined 6.8%.
Outlook, commentary, risks and unusual items
Management expects long-term growth in customers served, but said COVID-19-related economic uncertainty and restrictions continued to hinder customer development and commercialization projects, making near-term conditions difficult to predict. It expects cost of revenue to increase in dollars but remain relatively constant as a share of revenue, and anticipates continued investment in technology and personnel, with operating expenses expected to rise. Management expects the effective tax rate to remain consistent with current tax laws; no specific revenue or earnings guidance was provided.
Foreign-exchange movements can affect results; the company does not hedge this exposure. Management said a hypothetical 10% adverse exchange-rate change could materially affect operating results, though it generally would not materially affect financial position. The company recorded a $0.5 million foreign-currency loss in Q1 2021. The 3D Hubs purchase-price allocation remains preliminary, including $275.4 million of goodwill, which is not tax-deductible. No material change to previously disclosed risk factors was reported, and management said no pending litigation was expected to have a material adverse effect.
Disclosure controls were assessed as effective. Implementation of Protolabs 2.0 did not materially affect internal control over financial reporting.
Important facts for investors to verify
- Whether the 3D Hubs acquisition delivers expected customer growth and integration benefits, and how the preliminary purchase-price allocation changes when finalized.
- Whether the decline in legacy customer developers and the pressure on gross margin persist after the acquisition-related effects.
- Whether operating cash flow recovers and cash and securities remain adequate for investment needs and contingent acquisition payments.
- How continued Protolabs 2.0, personnel and technology spending affects operating expenses and profitability.
- How COVID-19 conditions, foreign-exchange movements and performance-based contingent consideration affect future results.