Proto Labs, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Proto Labs provides digitally enabled custom manufacturing, including injection molding, CNC machining, 3D printing and sheet metal fabrication. All dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Change | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|---|
| Revenue | $117.5 | $115.4 | +1.8% | $346.8 | $332.8 |
| Gross profit / margin | $59.6 / 50.8% | $62.4 / 54.1% | Margin down 3.3 pp | $178.7 / 51.5% | $179.5 / 53.9% |
| Operating income / margin | $21.3 / 18.2% | $25.0 / 21.7% | Income down 15.0% | $60.3 / 17.4% | $68.7 / 20.6% |
| Net income | $16.8 | $20.9 | Down 19.8% | $48.5 | $57.3 |
| Diluted EPS | $0.62 | $0.77 | Down $0.15 | $1.79 | $2.10 |
| Operating cash flow | Not provided separately | Not provided separately | $83.8 | $85.0 |
- Revenue mix and customers: Q3 revenue growth reflected a 3.3% increase in unique customers served to 21,471, but average spend per customer declined as customers purchased a mix with lower average order sizes. Q3 3D Printing revenue rose 14.8%; Sheet Metal fell 18.2%. For the first nine months, 3D Printing rose 15.8% and Sheet Metal fell 17.0%.
- Cash flow and investment: Nine-month capital asset purchases were $46.2; investing cash outflow was $13.2, including marketable-security purchases and maturities. Financing cash outflow was $33.5, primarily reflecting $33.5 of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $121.6 and marketable securities totaled $33.4 at September 30, 2019. Current assets were $229.6 versus current liabilities of $54.8. No debt balance is reported at quarter-end; the company reported no debt payments in 2019, compared with $5.0 paid in the first nine months of 2018.
- Other balance-sheet items: Total assets were $654.9 and shareholders’ equity was $564.1. Adoption of lease accounting added $13.1 of operating lease assets and liabilities at January 1, 2019; quarter-end operating lease liabilities were $12.4.
Material changes and management commentary
- Q3 cost of revenue increased 9.1%, outpacing revenue growth, due to materials and production costs, direct labor, and equipment and facility costs. Management attributed lower gross margin to revenue mix and timing, with the RAPID acquisition a primary mix factor, plus repair, maintenance and production-supply spending.
- For the first nine months, revenue increased 4.2%, while cost of revenue rose 9.7%; gross profit declined slightly and operating income fell 12.3%. Marketing and sales expense rose 8.9% and R&D expense rose 16.0%, principally reflecting increased headcount and related costs.
- Management expects cost of revenue to rise in dollars and remain relatively constant as a share of revenue, and anticipates continued investment in technology and personnel, with operating expenses expected to increase. The filing provides no specific numerical revenue or earnings guidance.
- Foreign exchange movements reduced revenue by $0.9 in Q3 and $3.9 for the first nine months versus the comparable periods. The company does not hedge foreign currency exposure; it said a hypothetical 10% adverse currency move could materially affect operating results, though it generally would not materially affect financial position.
- The company reduced its Sheet Metal offering’s exposure to complex, non-scalable work. Brexit-related uncertainty was identified as a risk; the company was preparing shipping processes and increasing UK and EU inventory to mitigate potential disruption.
- The company reported no litigation expected to have a material adverse effect. It repurchased $12.1 of shares in Q3 and had $49.9 remaining under its $100 million authorization, which runs through December 31, 2023.
Most important facts for investors to verify
- Whether gross-margin pressure from product mix, acquired operations, and manufacturing investment persists or eases.
- Whether customer growth converts into higher average spend and stronger revenue growth, particularly in Sheet Metal and CNC Machining.
- How foreign exchange, Brexit-related shipping or trade changes, and the company’s unhedged currency exposure affect results.
- Whether planned technology, staffing and facility investment delivers growth without further margin deterioration.
- The pace and price of future repurchases, and the cash requirements of capital spending and operating leases.