Proto Labs, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Proto Labs provides on-demand manufacturing of custom prototypes and low-volume production parts through injection molding, CNC machining, 3D printing and sheet metal fabrication.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $115.1 million | $113.5 million; up 1.5% |
| Gross profit / margin | $58.1 million / 50.5% | $58.9 million / 51.9% |
| Operating income / margin | $16.8 million / 14.6% | $19.4 million / 17.1% |
| Net income | $14.0 million | $15.5 million; down 9.8% |
| Diluted EPS | $0.52 | $0.57 |
| Operating cash flow | $22.4 million | $18.0 million |
Cost of revenue rose 4.4%, faster than revenue, primarily due to higher direct-labor and wage costs and equipment and facility expenses. Operating expenses increased 4.7% to $41.3 million: higher research and development and general and administrative spending more than offset lower marketing and sales expense. Other income was $1.1 million, including investment interest and a foreign-currency gain. The effective tax rate was 21.8%, versus 21.1%.
Revenue mix and material changes
- By geography, U.S. revenue increased 2.6% to $90.1 million; Europe fell 2.2% to $20.8 million and Japan fell 3.2% to $4.2 million. Europe would have grown 0.9% excluding foreign-exchange effects. Currency movements reduced international revenue by $0.6 million.
- By product line, 3D Printing grew 10.1% to $15.9 million and Sheet Metal grew 12.4% to $5.6 million. Injection Molding declined 1.0% to $54.8 million; CNC Machining was essentially flat at $37.9 million.
- The company served 20,876 unique product developers and engineers, up 1.5% year over year. Management attributed revenue growth principally to customer volume, sales staffing and marketing activity.
Liquidity, capital allocation and balance sheet
At March 31, cash and cash equivalents were $91.9 million, down $33.3 million from year-end. Short- and long-term marketable securities totaled $75.3 million, bringing cash and marketable securities to approximately $167.1 million. Operating cash flow was $22.4 million; investing activities used $43.4 million, including $37.6 million of securities purchases and $13.4 million of capital expenditures; financing activities used $12.1 million, including $11.2 million of share repurchases. The filing reports no borrowings or conventional debt; reported liabilities include operating leases and deferred taxes. Total liabilities were $90.4 million and shareholders’ equity was $587.7 million.
The company repurchased 161,460 shares for approximately $12.0 million during the quarter. Its repurchase authorization totaled $100 million through December 31, 2023, with $37.9 million remaining at quarter-end.
Outlook, risks and unusual items
- COVID-19 was identified as a significant source of uncertainty. The company said it was deemed an essential business and global manufacturing operations remained open, while order activity in each region was affected by the pandemic. The duration and financial impact were unknown.
- Management increased the bad-debt reserve by $0.9 million in anticipation of economic slowdown exposure. It warned that weaker results or other developments could require impairment charges on goodwill, intangible or tangible assets.
- The CARES Act tax provision reduced income taxes payable by $2.6 million and increased deferred tax liabilities by the same amount.
- Management expected cost of revenue to increase in dollars but remain relatively steady as a share of revenue, and anticipated continued investment in technology and personnel. It expected the effective tax rate to remain consistent under current tax laws. The filing provides no quantified revenue or earnings guidance.
- Foreign-exchange exposure is unhedged. Management stated that a hypothetical 10% adverse currency move could materially affect results of operations, though it generally would not materially affect financial position. No material litigation was identified; the company said disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-19-related order weakness, customer credit risk and any resulting bad-debt or asset-impairment charges develop beyond the quarter-end estimates.
- Whether gross-margin pressure from labor, facilities, revenue mix and capacity investment persists.
- How cash generation and spending evolve, including capital expenditures, securities investments and continued share repurchases.
- Whether foreign-exchange movements and the geographic mix affect reported growth and profitability.
- The collectability and maturity profile of receivables and marketable securities, and the potential effect of tax-related estimates and unrecognized tax benefits.