Proto Labs, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited financial statements; comparisons are with the corresponding 2019 periods. Proto Labs provides digital manufacturing of custom parts through injection molding, CNC machining, 3D printing and sheet metal fabrication.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $106.6 million | $115.9 million | $221.7 million | $229.4 million |
| Gross profit / margin | $52.5 million / 49.2% | $60.2 million / 52.0% | $110.6 million / 49.9% | $119.1 million / 51.9% |
| Operating income / margin | $14.4 million / 13.5% | $19.6 million / 16.9% | $31.2 million / 14.1% | $39.0 million / 17.0% |
| Net income / diluted EPS | $12.6 million / $0.47 | $16.2 million / $0.60 | $26.6 million / $0.99 | $31.7 million / $1.17 |
| Cash from operations | Not separately stated | Not separately stated | $53.4 million | $54.9 million |
Q2 revenue fell 8.1% year over year, while net income declined 22.0%. For the first half, revenue fell 3.4% and net income declined 16.1%. Lower volume and the fixed cost base contributed to the margin contraction.
At June 30, 2020, cash and cash equivalents were $98.0 million, short- and long-term marketable securities totaled $77.3 million, current assets were $213.0 million, and total assets were $698.4 million. Current liabilities were $51.1 million and total liabilities $97.2 million; the balance sheet reports no borrowings. Shareholders’ equity was $601.2 million. Cash declined $27.2 million from year-end 2019.
First-half investing cash outflow was $65.3 million, including $33.3 million for property, equipment and other capital assets and $29.0 million of net purchases of marketable securities. Financing cash outflow was $15.2 million, including $14.7 million of share repurchases. No off-balance-sheet arrangements were reported.
Material changes and operating trends
- Management attributed lower revenue primarily to COVID-19-related economic uncertainty and reduced customer order activity. Unique product developers and engineers served fell 18.2% in Q2 and 5.9% in the first half.
- Q2 revenue by product line: injection molding rose 4.4% to $57.9 million; CNC machining fell 26.0% to $28.8 million; 3D printing fell 6.7% to $14.2 million; and sheet metal fell 14.7% to $4.7 million.
- Q2 revenue declined in all reported regions: United States 4.7%, Europe 20.1%, and Japan 21.3%. Europe’s decline excluding currency effects was 18.1%; currency reduced Q2 revenue by $0.4 million and first-half revenue by $0.9 million.
- Q2 cost of revenue fell 2.8%, less than the revenue decline. Cost-saving measures reduced labor and marketing costs, while equipment and facility costs remained a source of pressure. Q2 operating expenses fell 6.3%; R&D expense increased 5.9%.
Outlook, risks and unusual items
- Management provided no numerical revenue or earnings guidance. It expects long-term growth in customers served but said the duration and financial effects of the pandemic and recovery are difficult to predict. It expects continued investment in technology and personnel over the longer term.
- All global manufacturing operations remained open, and the company was deemed an essential business. It implemented safety measures and monitored product availability and customer and supplier impacts.
- The company increased its bad-debt reserve by $0.9 million as of June 30 in anticipation of economic slowdown exposure. Management warned that prolonged weak results or other indicators could require impairment charges on goodwill, intangible or tangible assets.
- The CARES Act resulted in a $2.6 million reduction in income taxes payable and a corresponding increase in deferred tax liabilities. The company also deferred employer Social Security tax deposits for Q2 through Q4 2020, with payment beginning in 2021.
- Foreign-currency exposure is not hedged with forward contracts or currency borrowings. Management said a hypothetical 10% adverse currency move could materially affect results of operations, though it generally would not materially affect financial position.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It did not believe pending legal proceedings were expected to have a material adverse effect.
Important facts for investors to verify
- Whether customer activity and order volumes recover, particularly in CNC machining and international markets, and whether revenue declines persist.
- Whether gross margin stabilizes as facility and equipment costs interact with revenue volume and product mix.
- Cash generation and capital spending, including the pace of investment in property and equipment and marketable securities.
- The adequacy of the increased bad-debt reserve and whether prolonged economic weakness triggers asset impairments.
- Tax effects of CARES Act provisions and deferred payroll taxes, and the potential effect of foreign-exchange movements.