Proto Labs, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Proto Labs provides digital manufacturing of custom prototypes and on-demand production parts using injection molding, CNC machining, 3D printing and sheet metal fabrication.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $113.5 million | $107.7 million | +5.3% |
| Gross profit / margin | $58.9 million / 51.9% | $57.9 million / 53.7% | Margin down 1.8 percentage points |
| Operating income / margin | $19.4 million / 17.1% | $21.7 million / 20.2% | Income down 10.5% |
| Net income / diluted EPS | $15.5 million / $0.57 | $18.1 million / $0.66 | Net income down 14.1% |
| Cash from operations | $18.0 million | $26.1 million | Down $8.1 million |
At March 31, cash and cash equivalents were $85.4 million and marketable securities totaled $53.3 million. Current assets were $202.8 million versus current liabilities of $41.4 million. The filing shows no debt balance; operating lease liabilities totaled $12.1 million. Cash decreased only $0.3 million from year-end to $85.4 million. Purchases of property and equipment and other capital assets were $12.7 million; operating cash flow less those purchases was approximately $5.3 million.
Changes and operating drivers
- Revenue growth reflected higher customer volume: 20,573 unique product developers and engineers served, up 9.3% year over year. Reported revenue was negatively affected by $1.7 million of foreign-exchange movements.
- By product line, injection molding revenue rose 7.7% to $55.3 million, CNC machining rose 3.1% to $37.9 million, and 3D printing rose 17.5% to $14.5 million. Sheet metal fell 19.5% to $5.0 million.
- Gross margin declined primarily because of revenue timing and mix, with the RAPID acquisition and a U.S. CNC facility relocation cited as the main factors. Cost of revenue increased 9.5%, faster than revenue, including higher direct labor and facility/equipment costs.
- Marketing and sales expense rose 12.1% and R&D rose 20.2%, largely reflecting headcount and growth investments. Net income was also pressured by a higher effective tax rate, 21.1% versus 17.6%, primarily due to fewer tax benefits from equity awards.
- Operating cash flow fell mainly from lower net income and timing changes in operating assets and liabilities, including annual incentive payments. The company repurchased 157,716 shares for $17.3 million during the quarter.
Outlook, risks and notable items
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects cost of revenue to rise in dollars, while remaining relatively constant as a share of revenue, and anticipates continued investment in personnel, technology, marketing and R&D, with related expenses expected to increase.
- Foreign-currency exposure is unhedged. Management says a hypothetical 10% adverse currency move could materially affect operating results, though it generally would not materially affect financial position. Q1 foreign-currency losses were $0.4 million.
- Brexit-related uncertainty is identified as a risk. The company described plans to prepare shipping processes, pursue Authorized Economic Operator certification and increase UK and EU inventory to mitigate potential disruption.
- Adoption of ASC 842 added $13.1 million of operating lease assets and liabilities at January 1, 2019; it did not materially affect income, equity or cash flows. Comparative periods were not retrospectively adjusted.
- The company reported no litigation expected to have a material adverse effect and no material changes to other risk factors beyond the Brexit update. Management concluded disclosure controls were effective.
Investor facts to verify
- Whether customer growth and stronger 3D-printing and injection-molding demand can offset continued weakness in sheet metal.
- Whether gross margin stabilizes after the acquisition-related mix and facility relocation effects, and how ongoing hiring and investment affect operating leverage.
- How currency movements and Brexit-related trade or shipping disruption affect international revenue, costs and margins.
- Whether operating cash generation remains sufficient to fund capital spending and share repurchases; the filing reports $16.1 million remaining under the repurchase authorization at quarter-end.
- How lease obligations, equity compensation and the higher effective tax rate evolve in subsequent periods.