Proto Labs, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the same 2019 periods. Amounts are in U.S. dollars unless noted. Proto Labs provides digital manufacturing of custom prototypes and on-demand production parts through injection molding, CNC machining, 3D printing and sheet metal fabrication.
Financial results
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $107.5m | $117.5m | $329.2m | $346.8m |
| Gross profit / margin | $54.6m / 50.8% | $59.6m / 50.8% | $165.2m / 50.2% | $178.7m / 51.5% |
| Operating income / margin | $17.7m / 16.4% | $21.3m / 18.2% | $48.8m / 14.8% | $60.3m / 17.4% |
| Net income / net margin | $14.7m / 13.7% | $16.8m / 14.3% | $41.3m / 12.5% | $48.5m / 14.0% |
| Diluted EPS | $0.55 | $0.62 | $1.54 | $1.79 |
| Operating cash flow | Not presented by quarter | $82.4m | $83.8m |
- Cash and liquidity: September 30 cash and equivalents were $118.3m; marketable securities totaled $82.4m, for combined cash and securities of about $200.6m. Current assets were $231.1m and current liabilities $51.7m.
- Debt and leases: The filing reports no borrowings or conventional debt. Finance lease liabilities were $2.1m; operating lease liabilities totaled $11.3m.
- Cash flows and investment: Nine-month investing cash outflow was $77.7m, including $40.5m of property, equipment and other capital asset purchases and $34.2m net purchases of marketable securities. Financing cash outflow was $12.4m. Cash declined $7.0m from year-end 2019.
Material changes versus the prior comparable period
- Q3 revenue fell 8.5% year over year; nine-month revenue fell 5.1%. Management attributed the decline chiefly to lower order activity and fewer customers served amid COVID-19-related economic uncertainty.
- Q3 unique product developers and engineers served declined 12.5% to 18,796; the nine-month count declined 8.1% to 37,504.
- Q3 CNC Machining revenue declined 17.7%, Sheet Metal 24.5%, and Injection Molding 3.5%; 3D Printing grew 2.5%. For the nine months, CNC Machining declined 14.7%, while 3D Printing increased 1.8% and Injection Molding was essentially flat.
- Q3 gross margin held at 50.8%, but nine-month gross margin fell 1.3 percentage points, to 50.2%, as lower utilization and revenue mix weighed on results. Operating income and net income declined in both comparison periods.
- Nine-month operating cash flow was broadly stable despite lower net income. Capital spending and net securities purchases drove investing cash outflow higher than in 2019.
Outlook, commentary and risks
- Management said it expects customer volumes to grow over the long term, but stated that near-term conditions and the outlook were difficult to predict. The filing gives no quantified revenue or earnings guidance.
- All global manufacturing operations remained open, and the company was deemed an essential business. It implemented employee safety measures and monitored customer and supplier conditions.
- Management expects ongoing investment in technology and personnel over the long term. It anticipated cost of revenue to increase in dollars but remain relatively constant as a percentage of revenue; operating expenses were also expected to rise over time to support growth.
- COVID-19 and related restrictions could continue to suppress customer projects and orders. The company increased its bad-debt reserve by $0.9m during the first nine months. Prolonged weakness or other indicators could require impairment charges on goodwill or other assets.
- Foreign exchange affects results; the company does not hedge currency exposure. Management said a hypothetical 10% adverse currency move could materially affect operating results, though it generally would not materially affect financial position.
- The CARES Act tax correction reduced income taxes payable by $2.6m and increased deferred tax liabilities correspondingly. Employer Social Security tax deposits were deferred, with payment to begin in 2021. No litigation was identified as reasonably expected to have a material adverse effect.
Important facts for investors to verify
- Whether customer counts and order activity recover as COVID-19-related disruption eases.
- Whether CNC Machining and Sheet Metal declines stabilize and 3D Printing growth continues.
- Whether gross margin can recover from the nine-month decline despite fixed facility and equipment costs.
- How capital spending, marketable-security purchases and cash generation evolve, and whether the company maintains its substantial liquidity.
- Whether the higher doubtful-account allowance, tax items, foreign-exchange exposure or potential asset impairment lead to material future charges.