Protolabs Reports Financial Results for the Third Quarter 2020

Rhea-AI Summary

Proto Labs, Inc. (NYSE: PRLB) reported an 8.5% decline in revenue to $107.5 million for Q3 2020 compared to Q3 2019. However, there was a sequential increase of 0.9% over Q2 2020. GAAP net income was $14.7 million ($0.55 per diluted share) while non-GAAP net income stood at $17.9 million ($0.67 per diluted share). Gross margin improved to 50.8%, up from 49.2%, and operating expenses decreased to $37 million. The company plans to launch its new Protolabs 2.0 platform in Europe this November and in the U.S. in Q1 2021.

Positive

• Revenue increased by 0.9% sequentially over Q2 2020
• GAAP net income of $14.7 million indicates profitability
• Gross margin improved to 50.8% from 49.2% in Q2 2020
• Operating expenses decreased to $37 million, enhancing profitability
• Strong cash flow generation with $29 million from operations

Negative

• Revenue decreased by 8.5% compared to Q3 2019

MAPLE PLAIN, Minn.--(BUSINESS WIRE)--Proto Labs, Inc. (NYSE: PRLB), a leading online and technology-enabled, quick-turn, on-demand manufacturer, today announced financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Highlights include:

• Revenue for the third quarter of 2020 was $107.5 million, representing an 8.5 percent decrease compared to revenue of $117.5 million in the third quarter of 2019, and a sequential increase of 0.9% over the second quarter of 2020.
• GAAP net income for the third quarter of 2020 was $14.7 million, or $0.55 per diluted share.
• Non-GAAP net income was $17.9 million, or $0.67 per diluted share in the third quarter. See “Non-GAAP Financial Measures” below.

“We delivered third quarter revenue and non-GAAP earnings per share above expectations driven by improved productivity and disciplined cost management,” said Vicki Holt, President and Chief Executive Officer of Protolabs. “As the challenges and uncertainty of 2020 continue, we are focused on executing the areas in our control while continuing to invest in our future. Our new Protolabs 2.0 ecommerce digital manufacturing platform will go live in Europe in November, followed by a US debut in the first quarter of 2021. Our new platform will enhance our already strong customer experience and extend our position as the leader in digital manufacturing.”

Additional Third Quarter 2020 Highlights include:

• Gross margin was 50.8 percent of revenue for the third quarter of 2020, up from 49.2 percent for the second quarter of 2020.
• Operating expenses were $37.0 million or 34.4 percent of revenue for the third quarter of 2020, down from $38.1 million or 35.8 percent of revenue in the second quarter of 2020.
• GAAP operating margin was 16.4 percent of revenue during the third quarter of 2020, up from 13.5 percent for the second quarter of 2020.
• Non-GAAP operating margin was 20.8 percent of revenue during the third quarter of 2020, compared to 17.6 percent for the second quarter of 2020. See “Non-GAAP Financial Measures” below.
• Adjusted EBITDA margins were 27.9% in the third quarter of 2020, compared to 27.5% in the third quarter of 2019.
• The company generated $29.0 million in cash from operations during the third quarter of 2020, compared to $31.0 million in second quarter 2020.
• Our cash and marketable securities balance exceeded $200.0 million at the end of the third quarter.

“Our increased focus and execution on managing costs resulted in significant sequential margin improvement in the third quarter,” said John Way, Chief Financial Officer. “Protolabs’ digital manufacturing model continues to produce very strong cash flows even with the challenges presented in 2020, allowing us to reinvest in our business and position us to capitalize on the opportunities as the economy continues its gradual recovery.”

Non-GAAP Financial Measures

The company has included non-GAAP revenue growth that excludes the impact of changes in foreign currency exchange rates (collectively, “non-GAAP revenue growth”). Management believes these metrics are useful in evaluating the underlying business trends and ongoing operating performance of the company.

The company has included earnings before interest, taxes, depreciation and amortization (“EBITDA”) and EBITDA, adjusted for stock-based compensation expense and unrealized (gain) loss on foreign currency (collectively, “Adjusted EBITDA”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has included non-GAAP operating margin, adjusted for stock-based compensation expense and amortization expense (collectively, “non-GAAP operating margin”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has included non-GAAP net income, adjusted for stock-based compensation expense, amortization expense, and unrealized (gain) loss on foreign currency (collectively, “non-GAAP net income”), in this press release to provide investors with additional information regarding the company’s financial results.

The company has provided below reconciliations of GAAP to non-GAAP net income, non-GAAP operating margin, non-GAAP revenue growth and Adjusted EBITDA, the most directly comparable measures calculated and presented in accordance with GAAP. These non-GAAP measures are used by the company’s management and board of directors to understand and evaluate operating performance and trends and provide useful measures for period-to-period comparisons of the company’s business. Accordingly, the company believes that these non-GAAP measures provide useful information to investors and others in understanding and evaluating operating results in the same manner as our management and board of directors.

Conference Call

The company has scheduled a conference call to discuss its third quarter 2020 financial results and financial guidance today, October 29, 2020 at 8:30 a.m. EDT. To access the call in the U.S. please dial 877-709-8150 or outside the U.S. dial 201-689-8354 at least five minutes prior to the 8:30 a.m. EDT start time. No participant code is required. A simultaneous webcast of the call, and accompanying presentations will be available via the investor relations section of the Protolabs website and the following link: https://edge.media-server.com/mmc/p/hpno43bk. A replay will be available for 14 days following the call on the investor relations section of the Protolabs website.

About Protolabs

Protolabs is a leading digital manufacturing source for rapid prototyping and on-demand production. The company produces custom parts and assemblies in as fast as one day with automated 3D printing, CNC machining, sheet metal fabrication, and injection molding processes. Its digital approach to manufacturing enables accelerated time to market, reduces development and production costs, and minimizes risk throughout the product life cycle. Visit protolabs.com for more information.

Forward-Looking Statements

Statements contained in this press release regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors which may cause the results of Protolabs to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in the “Risk Factors” section within reports filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on Protolabs’ future results. The forward-looking statements included in this press release are made only as of the date hereof. Protolabs cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, Protolabs expressly disclaims any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

Proto Labs, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
				September 30,			December 31,
				2020			2019
				(Unaudited)
Assets
Current assets
	Cash and cash equivalents			$	118,254		$	125,225
	Short-term marketable securities				30,993			35,437
	Accounts receivable, net				61,250			57,450
	Inventory				10,402			10,075
	Income taxes receivable				16			-
	Prepaid expenses and other current assets				10,198			8,232
		Total current assets			231,113			236,419
Property and equipment, net					281,895			263,712
Goodwill					128,752			128,752
Other intangible assets, net					15,107			17,369
Long-term marketable securities					51,369			12,960
Operating lease assets					10,485			11,425
Finance lease assets					2,087			-
Other long-term assets					5,318			3,030
		Total assets		$	726,126		$	673,667
Liabilities and shareholders' equity
Current liabilities
	Accounts payable			$	15,452		$	16,804
	Accrued compensation				13,539			15,058
	Accrued liabilities and other				19,047			11,057
	Current operating lease liabilities				3,330			3,340
	Current finance lease liabilities				325			-
	Income taxes payable				-			1,322
		Total current liabilities			51,693			47,581
Long-term operating lease liabilities					8,003			8,565
Long-term finance lease liabilities					1,758			-
Long-term deferred tax liabilities					32,849			26,283
Other long-term liabilities					6,002			5,448
Shareholders' equity					625,821			585,790
Total liabilities and shareholders' equity				$	726,126		$	673,667

Proto Labs, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
				Three Months Ended							Nine Months Ended
				September 30,							September 30,
				2020			2019				2020			2019
	Revenue
		Injection Molding		$	53,257		$	55,167			$	165,927		$	165,935
		CNC Machining			33,115			40,219				99,760			116,979
		3D Printing			16,294			15,898				46,478			45,644
		Sheet Metal			3,988			5,280				14,306			15,777
		Other			850			891				2,716			2,504
		Total revenue			107,504			117,455				329,187			346,839
	Cost of revenue				52,861			57,839				163,988			168,127
	Gross profit				54,643			59,616				165,199			178,712
	Operating expenses
		Marketing and sales			16,705			17,604				51,821			55,466
		Research and development			7,915			8,359				25,550			24,541
		General and administrative			12,354			12,380				38,983			38,411
		Total operating expenses			36,974			38,343				116,354			118,418
	Income from operations				17,669			21,273				48,845			60,294
	Other income, net				728			228				2,549			1,566
	Income before income taxes				18,397			21,501				51,394			61,860
	Provision for income taxes				3,700			4,709				10,106			13,391
	Net income			$	14,697		$	16,792			$	41,288		$	48,469
	Net income per share:
		Basic		$	0.55		$	0.63			$	1.54		$	1.80
		Diluted		$	0.55		$	0.62			$	1.54		$	1.79
	Shares used to compute net income per share:
		Basic			26,736,709			26,846,030				26,724,715			26,894,420
		Diluted			26,886,433			27,005,341				26,861,647			27,072,873

Proto Labs, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
					Nine Months Ended
					September 30,
					2020				2019
Operating activities
	Net income				$	41,288			$	48,469
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				23,891				22,658
		Stock-based compensation expense				10,617				9,738
		Deferred taxes				6,578				1,599
		Amortization of held-to-maturity securities				202				(5	)
		Other				(865	)			(133	)
		Changes in operating assets and liabilities				664				1,453
	Net cash provided by operating activities					82,375				83,779
Investing activities
	Purchases of property, equipment and other capital assets					(40,489	)			(46,151	)
	Purchases of other assets and investments					(3,000	)			(4,000	)
	Purchases of marketable securities					(90,596	)			(17,443	)
	Proceeds from maturities of marketable securities					56,428				54,352
	Net cash used in investing activities					(77,657	)			(13,242	)
Financing activities
	Proceeds from exercises of stock options and other					5,674				2,486
	Purchases of shares withheld for tax obligations					(3,367	)			(2,420	)
	Repurchases of common stock					(14,686	)			(33,521	)
	Net cash used in financing activities					(12,379	)			(33,455	)
Effect of exchange rate changes on cash and cash equivalents						690				(560	)
Net (decrease) increase in cash and cash equivalents						(6,971	)			36,522
Cash and cash equivalents, beginning of period						125,225				85,046
Cash and cash equivalents, end of period					$	118,254			$	121,568

Proto Labs, Inc.
Reconciliation of GAAP to Non-GAAP Net Income per Share
(In thousands, except share and per share amounts)
(Unaudited)
			Three Months Ended								Nine Months Ended
			September 30,								September 30,
			2020				2019				2020				2019
Non-GAAP net income, adjusted for stock-based compensation expense, amortization expense and unrealized (gain) loss on foreign currency
	GAAP net income		$	14,697			$	16,792			$	41,288			$	48,469
	Add back:
	Stock-based compensation expense			3,945				3,212				10,617				9,738
	Amortization expense			754				859				2,262				2,593
	Unrealized (gain) loss on foreign currency			(84	)			449				(1,020	)			391
	Total adjustments 1			4,615				4,520				11,859				12,722
	Income tax benefits on adjustments 2			(1,368	)			(882	)			(3,030	)			(2,875	)
	Non-GAAP net income		$	17,944			$	20,430			$	50,117			$	58,316
Non-GAAP net income per share:
	Basic		$	0.67			$	0.76			$	1.88			$	2.17
	Diluted		$	0.67			$	0.76			$	1.87			$	2.15
Shares used to compute non-GAAP net income per share:
	Basic			26,736,709				26,846,030				26,724,715				26,894,420
	Diluted			26,886,433				27,005,341				26,861,647				27,072,873
1 Stock-based compensation expense, amortization expense and unrealized (gain) loss on foreign currency were included in the following GAAP consolidated statement of operations categories:
			Three Months Ended								Nine Months Ended
			September 30,								September 30,
			2020				2019				2020				2019
	Cost of revenue		$	989			$	872			$	2,788			$	2,402
	Marketing and sales			865				760				2,233				1,923
	Research and development			638				560				1,766				1,486
	General and administrative			2,207				1,879				6,092				6,520
	Total operating expenses			3,710				3,199				10,091				9,929
	Other income, net			(84	)			449				(1,020	)			391
Total adjustments			$	4,615			$	4,520			$	11,859			$	12,722
2 For the three and nine-month periods ended September 30, 2020 and 2019, income tax effects were calculated using the effective tax rate for the relevant jurisdictions. Our non-GAAP tax rates differ from our GAAP tax rates due primarily to the mix of activity incurred in domestic and foreign tax jurisdictions and removing effective tax rate benefits from stock-based compensation activity in the quarter.

Proto Labs, Inc.
Reconciliation of GAAP to Non-GAAP Operating Margin
(In thousands)
(Unaudited)
				Three Months Ended								Nine Months Ended
				September 30,								September 30,
				2020				2019				2020				2019
	Revenue			$	107,504			$	117,455			$	329,187			$	346,839
	Income from operations				17,669				21,273				48,845				60,294
		GAAP operating margin			16.4	%			18.1	%			14.8	%			17.4	%
		Add back:
		Stock-based compensation expense			3,945				3,212				10,617				9,738
		Amortization expense			754				859				2,262				2,593
		Total adjustments			4,699				4,071				12,879				12,331
		Non-GAAP income from operations		$	22,368			$	25,344			$	61,724			$	72,625
		Non-GAAP operating margin			20.8	%			21.6	%			18.8	%			20.9	%

Proto Labs, Inc.
Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA
(In thousands)
(Unaudited)
			Three Months Ended								Nine Months Ended
			September 30,								September 30,
			2020				2019				2020				2019
GAAP net income			$	14,697			$	16,792			$	41,288			$	48,469
	Amortization expense			754				859				2,262				2,593
	Depreciation expense			7,282				6,820				21,629				20,066
	Interest income, net			(255	)			(489	)			(1,183	)			(1,535	)
	Tax expense			3,700				4,709				10,106				13,391
EBITDA				26,178				28,691				74,102				82,984
Add back:
	Stock-based compensation expense			3,945				3,212				10,617				9,738
	Unrealized (gain) loss on foreign currency			(84	)			449				(1,020	)			391
Total adjustments				3,861				3,661				9,597				10,129
Adjusted EBITDA			$	30,039			$	32,352			$	83,699			$	93,113

Proto Labs, Inc.
Comparison of GAAP to Non-GAAP Revenue Growth
(In thousands)
(Unaudited)
			Three Months Ended September 30, 2020										Three Months Ended September 30, 2019			%			% Change Constant
			GAAP			Adjustments1				Non-GAAP			GAAP			Change2			Currencies3
Revenues
	United States		$	85,608		$	-			$	85,608		$	92,916		(7.9	)		(7.9	)
	Europe			18,897			(828	)			18,069			20,721		(8.8	)		(12.8	)
	Japan			2,999			(36	)			2,963			3,818		(21.5	)		(22.4	)
	Total Revenue		$	107,504		$	(864	)		$	106,640		$	117,455		(8.5	)		(9.2	)
			Nine Months Ended September 30, 2020										Nine Months Ended September 30, 2019			%			% Change Constant
			GAAP			Adjustments1				Non-GAAP			GAAP			Change2			Currencies3
Revenues
	United States		$	262,507		$	-			$	262,507		$	271,877		(3.4	)		(3.4	)
	Europe			56,413			237				56,650			62,915		(10.3	)		(10.0	)
	Japan			10,267			(153	)			10,114			12,047		(14.8	)		(16.0	)
	Total Revenue		$	329,187		$	84			$	329,271		$	346,839		(5.1	)		(5.1	)
1 Revenue for the three and nine-month periods ended September 30, 2020 has been recalculated using 2019 foreign currency exchange rates in effect during comparable periods to provide information useful in evaluating the underlying business trends excluding the impact of changes in foreign currency exchange rates.
2 This column presents the percentage change from GAAP revenue for the three and nine-month periods ended September 30, 2019 to GAAP revenue for the three and nine-month periods ended September 30, 2020.
3 This column presents the percentage change from GAAP revenue for the three and nine-month periods ended September 30, 2019 to non-GAAP revenue for the three and nine-month periods ended September 30, 2020 (as recalculated using the foreign currency exchange rates in effect during the three- and nine-month periods ended September 30, 2019) in order to provide a constant-currency comparison.

Proto Labs, Inc.
Product Developer Information
(Unaudited)
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2020		2019		2020		2019
Unique product developers and engineers served		18,796		21,471		37,504		40,791